Quote of the Week

“Keep it in the ground’ has been the mantra of environmental groups worried about climate change. But it could be low oil prices and the lack of competitiveness of Canada’s oil sands that keep those reserves in the ground.”
Nick Cunningham of Oilprice.com

Graphic of the Week

1.  Oil and the Global Economy

On Thursday last week NY oil prices fell to near the bottom of the $52.50-$54.50 trading range they have been stuck in since early January. On Friday a falling dollar pushed prices higher to close at $53.33 in New York and $55.22 in London.  There was much discussion last week about the status of OPEC’s production cuts and how they were being achieved. Much of the cut seems to be coming from the Saudis whose production was down by 90,000 b/d during February to 9.78 million. Overall OPEC production, however, only fell by 65,000 b/d during February. Ecuador, Venezuela, Angola, the UAE, and Iraq are still well below their targets under the production cut agreement. The Saudis finished February with a production cut of 157 percent of their target which was enough to bring all of OPEC close to its goal. The non-OPEC exporters participating in the cuts seemed to have implemented around 66 percent of their targeted cut.

The news that the OPEC/NOPEC production cut was nearing its goal has many hedge fund managers convinced that there would soon be a surge in oil prices as supplies begin to dry up. Market analysts said last week say that investors were preparing to shift some $2 billion from long term to short term contracts in anticipation of a significant price rally this year. American crude producers, who use the futures market to hedge their production and lock in prices, are not so sure as the financial speculators there will be a price rally shortly.

In the meantime, US domestic production continues to grow. During the past week, there has been much discussion in the financial press as to whether the combination of higher US shale oil and offshore production could offset the impact of the OPEC/NOPEC production cut. The US oil-rig count continued to grow last week. Eagle Ford shale oil production is now up to 1 million b/d, and observers are anticipating that its output will continue to grow this year. Total US crude production has increased by about 500,000 b/d since September, and some are predicting it could grow anywhere from 400,000 to 900,000 b/d this year.

Price cuts by the Saudis for their light crudes going to the Asian markets last week suggest that demand is being fulfilled and that there is still an oversupply in the region. There are now reports of tankers full of US oil bound for Asia because of the difference between US and world prices. Although more than 100 US firms that were participating in the shale oil boom have gone bankrupt, those that are left are much leaner and better able to grow production in an era of $50 rather than $100 a barrel oil prices.

A new factor in the shale oil story was the announcement by Exxon that it was making a “dramatic” shift from investing mainly in multi-billion dollar offshore platforms to expand its drilling for shale oil. Shale oil drilling can be turned on and off much more quickly than complex offshore projects but may result in costlier oil from short-lived shale oil wells in the long run. Exxon says it will invest about of quarter of its 2017 capital investment, some $5.5 billion, into drilling for shale oil in the US. Such an investment would pay off many years earlier.

On the downside of the shale oil news is a new analysis saying that the decline in Bakken shale oil production that began in 2015 is probably not reversible no matter how much effort is made in drilling new wells in the region.  Over the last two years, production has declined by 285,000 b/d in the Bakken despite an increase in the number of wells which reached an all-time high of 13,520 in November. Oil well performance in the field is declining despite improvements in technology and efficiency. The increasing gas-oil ratio indicates that the Bakken is going into depletion. The water cut, which is the percent of water contained in the oil output, is increasing, another indication that decline has set in.

Independent geologists who have looked at US shale oil production have been saying for several years that peak shale oil production in the US could come around 2020. When the prospects of finding vast quantities of shale oil in California went up in smoke a few years ago, most US shale oil could only come from the Bakken and Eagle Ford fields, and the Permian Basin. In the past year, we have heard claims that there is still much oil to be recovered from newly discovered portions of the Permian Basin, but these claims have yet to be proven.

Whether Eagle Ford, the Bakken, and the Permian basin can grow substantially is an open question. It is too early to declare that US shale oil production will be in terminal decline around 2020, but we are starting to get indications that this could be the case. Given the significant drop in expensive offshore drilling, there is a growing case that global oil production will be unable to continue growing in the next decade.

2.  The Middle East & North Africa

Iran:  Not much news from the Iranians last week. Moscow is still in talks to take some of Iran’s crude output, possibly in exchange for weapons. France’s Total says it is in talks to buy a multi-billion-dollar stake in Iran’s partly built LNG export facility. Total was the first oil major to strike a deal with Iran after the sanctions were lifted. By reviving Iran’s stalled LNG exports project, the French hope to gain cheaper access to a new source of natural gas.

Iraq: Despite promises to cut production, Iraq’s crude oil exports rose by 1 percent to 3.85 million b/d in February thanks to a 9 percent increase from fields in Kurdistan. These fields are not under the direct control of the Iraqi government. Baghdad and its province of Kurdistan have major concerns about the OPEC production cuts due to their urgent need for cash to prosecute the war with ISIL.

Iraq’s internal problems are on the rise as the offensive against Mosul continues. A Kurdish paramilitary group took over the offices of the North Oil Company in Kirkuk. This is being seen as a sign that there is still much disagreement as to oil policies among the various Kurdish political factions. A spokesman for the paramilitary group said that the action was aimed at preventing Baghdad from exploiting the region and sending its oil to Mosul and the south while the Kurdish people are in desperate need.

Iraq says it is about to start offshore exploration for oil and gas to increase its official reserves. Last week Baghdad announced that its oil reserves had increased from 143 to 153 billion barrels. Iraq still has considerable on shore reserves to exploit and does not need to take on the added expense of offshore drilling.

Libya: The situation in Libya appears to be deteriorating again as an armed group from the Benghazi Defense Brigades attacked Libyan oil terminals of Ras Lanuf and Es Sider on Friday. The port had been under control of the eastern-based Libyan National Army since September which allowed the Libyan National Oil company to restart exports. The eastern forces immediately began bombing the Benghazi brigades, but it is currently unclear who is in control. Libya’s oil production only recently reached 700,000 b/d with aspirations to go much higher. If fighting continues, Libya is likely to have trouble increasing its oil exports.

Saudi Arabia: King Salman is on a month-long tour of Asia to improve ties with Asian nations to increase oil sales in the area and possibly to sell shares in Saudi Aramco. While in Malaysia, the Saudis promised to take a $7 billion stake in Petronas’ new refinery and petrochemical project. The tour will go on to visit Indonesia, Brunei, Japan, China, and the Maldives. The Saudis have been losing market share to Russia of late as Moscow shifts its exports from Europe to Asia. In addition, the Saudis are concerned about deteriorating relations with the US and are seeking new friends.

The value of Saudi Aramco is still an issue. The Saudis say it is worth $2 trillion. They seem to get to this figure by multiplying the 261 billion barrels of oil reserves by $8 a barrel to come up with a value of the reserves. Analysts are more interested in rates of production, depletion and the government’s plans for taxing the company. Some are coming up with values closer to $400 billion for the firm. Government policies could leave the firm with little money to pay dividends no matter how high the price of oil climbs.  This question is unlikely to be answered until an IPO takes place and we see what investors are willing to pay for 5 percent of the company.  Estimates as to the demand for oil in coming years is likely to be a major ingredient to this question.

3.  China

A new study by Greenpeace shows that Beijing cut its emissions of greenhouse gasses by about 1 percent last year. This is the fourth year in a row that China has been able to cut its emissions of the face of an ever-worsening air quality situation. China’s emissions policies stand in sharp contrast with those of the Trump administration which is dedicated to increasing the production of oil, coal, and natural gas in order to spur economic development.

Business bankruptcies have surged in the last two years as Beijing has started letting unprofitable industrial firms simply fail and close rather than propping them up to maintain employment. The government has acknowledged that it has built highly wasteful overcapacity in many industrial sectors which will only drag down the economy in coming years.

4. Russia

Moscow’s oil production remained unchanged in February at 11.11 million b/d. The failure to cut oil output leaves production down by only about 100,000 b/d out of the 300,000 b/d the government has pledged to cut.  Russia’s finance minister said that Moscow expects its oil and gas revenues to bounce back in March after revenues fell short in February.  This announcement raises the issue as to whether oil production will continue to fall.

5. Nigeria

The country’s economy contracted for the first time in 25 years as a combination of low oil prices, and lower production due to sabotage of oil facilities, cut oil revenues in half and reduced the money available to import refined fuel and raw materials for factories.

Nigeria’s anti-graft agency filed new charges against oil majors Shell and Eni. The companies were charged with paying a former oil minister $801 million to acquire an offshore oil lease. In January, a Nigerian court ordered Shell and Eni to temporarily give up control over the lease until the investigations are complete. Eni has denied any improprieties and Shell has not yet been heard from.

6. Venezuela

The country continues to teeter on the edge of a total meltdown. People continue to starve. The country is down to its last $10 billion in foreign exchange reserves. Imports are down 50 percent from last year which accounts for the food shortages. A default is imminent as the country has already hocked its last assets to lengthen repayment times.

7.  The Briefs

Oil majors’ costs: According to new research from Apex Consulting Ltd, the oil majors are still spending more to develop a barrel of oil equivalent than they were before the downturn in prices – in fact, much more. Apex put together a proprietary index that measures cost pressure for the “supermajors” – ExxonMobil, Royal Dutch Shell, Chevron, Eni, Total and ConocoPhillips. Dubbed the “Supermajors’ Cost Index,” Apex concludes that the supermajors spent 66 percent more on development costs in 2015 than they did in 2011, despite the widely-touted “efficiency gains” implemented during the worst of the market slump. It is important to note that this measures “development costs,” and not exploration or operational costs. (3/1)

The collapse of oil prices forced the majors to slash spending on exploration, cut employees, defer projects, and look for efficiencies. That allowed them to successfully lower their breakeven price for oil projects. However, some of that could be temporary, with oilfield services companies now demanding higher prices for equipment and drilling jobs, in some cases upping prices by as much as 20 percent. (3/1)

In Norway, consent was given to Exxon Mobil to extend by five years the life of a natural gas field in the North Sea because of new production calculations, the government said. Exxon started production at the Sigyn natural gas field in the Norwegian waters of the North Sea in 2012 and estimated only a five-year lifespan for development. (2/28)

Rig company Seadrill Ltd., based in Norway, said it was looking at restructuring options after noting it didn’t expect improvements in lease rates this year. Seadrill, which counts dozens of deepwater and ultra-deepwater drillships in its fleet, said it was struggling with mounting debt and may have trouble staying afloat. (3/1)

UK review: Despite capital investments coming in at an all-time high, a British survey of oil and gas activity found few projects were delivered on time and under budget. The official British Oil & Gas Authority published its five-year review of oil and gas activity for the period ending in 2016. It found less than 25 percent of oil and gas projects were delivered on time, with most running about ten months behind schedule.

BP lifted the outlook for its core oil and gas divisions on Tuesday, saying it would be able to balance its books with crude prices as low as $35 to $40 a barrel by 2021 thanks to its tough spending cuts. BP said its upstream business, which includes its main oil and gas production fields, is expected to generate free cash flow of $13 billion to $14 billion by 2021. (3/1)

For Israel’s offshore Leviathan gas field, Wood Group said it had completed its seven-month front end engineering design work. Noble and its other partners reached a final investment decision in February. The Leviathan partnership envisions spending about $3.75 billion on the development of the first phase of the field, which outlines a production capacity of about 1.2 billion cubic feet per day. (3/3)

Saudi Arabia wants crude oil prices to rise to around $60 a barrel this year, five sources from OPEC countries and the oil industry said. This is the level the OPEC heavyweight and its Gulf allies – the United Arab Emirates, Kuwait and Qatar – believe would encourage investment in new fields but not lead to a jump in U.S. shale output, the sources said. (2/28)

Kuwait Energy Plc is planning an initial public offering in London that could value the oil and gas exploration business at as much as $1 billion. The independent energy firm, with assets across Oman, Egypt, Iraq and Yemen, is working with Bank of America Corp. on the IPO. (3/2)

In China, Dongming Petrochemical, the country’s largest independent refiner, has signed a deal with privately run CEFC China Energy and a local port authority to build a crude oil terminal in Shandong province, seeking to ease a logistics bottleneck gripping the country’s teapot oil sector. The $566 million project with conglomerate CEFC China Energy and Rizhao port authorities comes as China’s independent refiners emerge as a catalyst in the global oil market, ramping up Russian and U.S. imports. (3/3)

China’s GOM buy: US oil that’s pumped in the Gulf of Mexico has found a new buyer in China. Shandong Dongming Petrochemical Group, a Chinese independent refiner, has bought U.S. Southern Green Canyon crude for the first time. The arrival of crude drilled off the southern U.S. coast is a more recent phenomenon spawned by output curbs in the Middle East. (3/2)

In Malaysia, Saudi Aramco will buy an equity stake in Petronas’ refining and petrochemicals project in the southeast Asian country, the companies confirmed on Tuesday, investing a total of $7 billion. (2/28)

South Africa is known for its resources such as platinum, gold, diamonds, copper and coal. But its waters may be hiding future giant oil and gas discoveries potentially capable of changing the country’s power generation mix by reducing its use of coal. Dr. Anongporn Intawong, Team Leader Geoscientist at seismic surveys provider Spectrum, believes there could be a giant future discovery off South Africa’s coast. (3/2)

In Brazil, French energy company Total announced alongside its Brazilian counterpart, Petrobras, that both sides were teaming up in a $2.25 billion joint venture agreement. The Brazilian company handed over enough of a stake in some of its more lucrative fields so that Total is a minority partner. (3/2)

In Mexico, Pemex on Monday reported a much smaller fourth-quarter loss, due in large part to higher crude prices. The loss narrowed to $1.58 billion from $9.8 billion a year earlier. (2/28)

Canadian heavy crude is a cornerstone of global oil supply now and into the next decade. But growth is likely to be increasingly affected by investor sentiment soured by environmental concerns and competition for capital from tight oil. (2/28)

In Canada, the breakeven cost for oil sands is dramatically higher than most other places in the world. Obviously, costs vary from company to company and project to project, but a 2016 estimate from IHS put the average breakeven price at a new greenfield oil sands mine at between $85 and $95 per barrel. A steam-assisted gravity drainage (SAGD) project could cost between $55 and $65 per barrel just to break even. With those figures, it is easy to see why very few, if any, greenfield projects could move forward in the near- to medium-term, particularly when companies could look elsewhere for oil. (2/27)

The US oil rig count increased by seven during the week to March 3, bringing the total oil rig count to 609, said Baker Hughes Inc. That’s nearly a doubling from the low of 316 during May of 2016 though still well off the high of 1,609 during October 2014.  Oil rigs increased for the seventh week in a row, extending a recovery into a tenth month as energy companies boost spending plans for 2017. Gas rigs declined by five to 146. (3/4)

Royal Dutch Shell has given the go-ahead to develop its Kaikias deepwater field in the Gulf of Mexico, the first such project the oil and gas company has approved in 18 months. Shell said the oil and gas project, located some 130 miles from the Louisiana coast, will start production in 2019. (3/1)

Quakes: Federal scientists forecast that Oklahoma will continue to have the nation’s biggest man-made earthquake problem this year but it probably won’t be as shaky as recent years. Seismologists say Oklahoma’s problem is triggered by underground injections of huge volumes of wastewater from oil and gas drilling. The USGS says Oklahoma’s recent regulation wastewater injection is starting to work, so scientists slightly reduced Oklahoma’s quake risk. (3/2)

Nearly 20 states have raised gas taxes or recalculated gas-tax formulas in recent years to generate additional revenues. The ease with which higher gas taxes have been passed through state governments over the past two years have emboldened at least a dozen more states, all of which are now actively considering additional gas taxes. (3/2)

Biofuels: Billionaire investor Carl Icahn and the leading U.S. biofuel trade group struck a deal to revamp a law that mandates oil refiners to either blend petroleum-based fuels with ethanol and biodiesel or buy blending credits called RINs and shares of biofuels stocks rose earlier in the day on the news. They slipped after the White House said there was no deal. (3/1)

The US EPA said Thursday it is withdrawing an Obama-era request that oil and natural gas companies provide information on methane emissions at their operations. (3/4)

The Trump administration is expected to begin rolling back stringent federal regulations on vehicle pollution that contribute to global warming essentially marking a U-turn to efforts to force the American auto industry to produce more electric cars. (3/4)

The Trump administration is seeking to slash the budget of the National Oceanic and Atmospheric Administration, one of the government’s premier climate science agencies by 17 percent, delivering steep cuts to research funding and satellite programs. (3/4)

Regulations: President Donald Trump signed an order on Tuesday directing regulators to review an Obama administration rule that expanded the number of federally protected waterways as the new president targets environmental regulations conservatives label as government overreach.

The Keystone XL oil pipeline does not need to be made from US steel, despite an executive order by President Donald Trump days after he took office requiring domestic steel in new pipelines, the White House said on Friday. (3/4)

Lifting offshore limits? Despite White House support for the oil and gas sector, a trade group said more than 90 percent of the reserves offshore remain off-limits to producers. In particular, Arctic basins hold about 22 percent of the world’s undiscovered conventional oil and natural gas resources, though developing them is costly to the point that work is prohibitive. (3/2)

Federal Reserve Chairwoman Janet Yellen and her top deputy signaled the central bank is on course to raise short-term interest rates as soon as this month and will seek to pick up the pace as the year wears on. Boosting the benchmark federal-funds rate at the Fed’s mid-March meeting would signal greater confidence in the global economic backdrop. (3/4)

Li-ion batteries: The co-inventor of the lithium-ion battery has developed the first all-solid-state battery cells that could lead to safer, faster-charging and longer-lasting rechargeable batteries. John Goodenough, at The University of Texas at Austin, believes the development of a low-cost all-solid-state battery that is non-combustible with a high volumetric energy density and fast rates of charge and discharge could be used for handheld mobile devices, electric cars and stationary energy storage. The new batteries have at least three times as much energy density as the lithium-ion batteries currently being used. (3/2)

The top United Nations climate change official continues to wait for a response to her request to meet with U.S. Secretary of State Rex Tillerson over whether the U.S. will remain in the landmark Paris environmental accord. (3/2)

In China, environmental advocacy group Greenpeace said its review of government data shows a decline in emissions of carbon dioxide of around 1 percent, the fourth year in a row for either zero growth or a decline. (3/1)