Quotes from CERAWeek
“I want the states to see the EPA as a friend, as a partner, and not an adversary. Regulators ought not to use their authority to pick winners and losers.”
EPA Administrator Scott Pruitt
U.S. crude oil output “could go pretty high. But it’s going to have to be done in a measured way, or else we kill the market.”
Harold Hamm, CEO Continental Resources
“As an industry, we’re not investing enough for supply growth to keep up with demand growth. Decreased spending, particularly in the resource-rich (but expensive) offshore, may cause supply to plateau or decline as global demand is rising A supply deficit is possible as soon as three years, and within five, when the reductions in capital investments should begin to show up in falling offshore supply. We’re not investing enough to keep the offshore investment pipeline full.”
John Hess, CEO Hess oil
“People might have drilled [the Eagle Ford} up very fast in the last two to three years, and they had to because they were measured on multiples of growth and had to grow very quickly. They probably regret it because they learned so much more about how to complete these wells more efficiently today than even what we knew two or three years ago.”
Ryan Lance, CEO ConocoPhillips
Graphic of the Week
1. Oil and the Global Economy
Last week was the most active in many months as oil prices, widely believed to be stuck in a narrow trading range for the foreseeable future, plunged some 8 percent in the last three days of trading. The price decline was triggered by an unexpected build of 8.2 million barrels in US crude stocks along with growing concern about increases in the US oil rig count. The week was highlighted by the annual “CERAWeek” conference in Houston which was attended by oil ministers and CEOs of oil companies from around the world. Many took advantage of the meeting to express opinions or issue warnings about where the global oil industry was headed.
The week began with much discussion of the effect that the rebounding US shale oil industry will have on prices in the face of OPEC efforts to force prices higher through production cuts. Until last week market sentiment balanced between the notion that the production cuts are working, with higher oil prices just ahead, and concern about US shale oil. However, the stocks report on Wednesday tipped the balance leaving the market in a more confused state than usual as speculators closed out near-record long positions.
The CERAWeek conference opened on a lighter note than last year when oil prices were hovering around $30 a barrel, but numerous speakers and side line commentators expressed concerns about where the precipitous drop in investment in new oil supplies that has occurred in recent years will leave the industry in the next decade. Former EIA director, Adam Sieminski, warned that a decade of disorder is ahead. Sieminski noted that a drop in long-term supply projects, global populism, trade wars and geopolitical issues could upset market fundamentals and cause a severe market imbalance. Harold Hamm, the CEO of Continental Resources, warned that a US shale oil spending binge could destroy the oil market.
The IEA added to the growing concerns that there might be trouble ahead. The agency warned that unless the drop in oil industry investment is reversed, there could be shortages when it comes to meeting global demand. This demand is seen as growing by 7.3 million b/d between now and 2022 while supply is not likely to grow enough to meet it. In a report entitled Oil 201, the IEA says that much of what will happen to US shale oil production in the next five years will depend on whether prices stay around $50, $60, or $80 a barrel. As US shale oil can respond to price signals more rapidly than other producers, the Agency believes that $80 oil could increase production by as much as 3 million b/d in the next five years. Conversely, $50-dollar oil could lead to production declines. It should be noted that these observations conflict with estimates of some independent experts who believe that US shale oil production will be in decline five years from now due to the lack of sites to drill profitably for shale oil.
The IEA is now forecasting that OPEC will be able to increase its production by nearly 2 million b/d by 2022 which is a major jump from the 800,000 b/d of production growth predicted last year. Much of this jump in production is to come from Iraq, up by 700,000 b/d, and Iran, up by 400,000 b/d.
The oil markets are becoming increasing difficult to sort out. In the short run, we have the issue of whether oil prices will stay below $50 a barrel, which could put a lid on further growth in US shale oil production. There is also the issue of whether OPEC will extend its production cut which is to expire at the end of June. The possibility of a US border tax that would make imported oil much more expensive and would likely cause disruption in current trade patterns is another concern for the coming year.
The only trend that seems solid is that there is insufficient investment taking place in developing new oil sources at current prices. Although there is optimism that deepwater oil production might become cheap enough to revive again, this has yet to be seen. For now, the major oil companies seem to be concentrating on increasing US shale oil production which is rather cheap and quick to do in comparison with deepwater production. Nobody seems to be talking about a return to $100 oil in the next couple of years, and it is an open question as the whether the global oil industry can become “efficient” enough to ramp up production with oil around current prices.
2. The Middle East & North Africa
Iran: Crude oil exports briefly touched 3 million b/d in February for the first time since the Islamic Revolution 35 years ago. Overall, however, Tehran is exporting about 2.45 million b/d out of production which is running about 4 million. The country is still hoping to increase this to 5 million b/d in the next five years with the help of foreign investors. The French government says it is working on plans to make direct loans to French companies that want to invest in Iran. There has been some movement on restarting deals that were in effect before the sanctions, but so far no major deals to exploit Iranian oil have been announced.
Iraq: Official figures show that Iraqi crude exports from Basra dropped from 3.32 million b/d in January to 3.27 in February. These figures do not include exports from Kurdistan which is causing some controversy on just how well Iraq, as a whole, is complying with the OPEC production cut. The Kurds are now exporting some 600,000 b/d which makes them large enough to qualify for OPEC. The Kurdish regional government says it has reserves of some 45 billion barrels of cheap-to-exploit oil and relative political stability, which make it a good place for foreign investment.
The Iraqis are in no hurry to extend the OPEC production cap as they are continuing efforts to increase production. The IEA now says that Baghdad should be able to increase its oil production to 5.4 million b/d by 2022. This, of course, is if all goes well politically. The Iraqis have signed an agreement with Iran to build a pipeline that would allow oil from the northern Iraqi oil fields to be exported through Iran, by-passing the problem with the Kurds and the insurgency in the south.
Saudi Arabia: The Saudi oil minister, Khalid Al-Falih, said on Tuesday, before the price drop, that oil market fundamentals were improving due the OPEC/NOPEC supply cuts. He also said that OPEC would not let rivals such as the US shale oil industry take advantage of the higher prices to invest in more production, but noted that the market intervention that is currently taking place would only be effective for a limited period. Long-term structural imbalances must be dealt with in another manner.
OPEC is expected to meet again in May when it will consider extending the production cuts for another six months. The minister warned that there would be no free rides for non-OPEC producers and that OPEC would be working with the US shale oil industry to control the oil glut. He also expressed admiration for the new US administration for its oil-friendly policies and noted that peak oil demand is a “misguided” concept as worldwide oil demand will continue to grow.
International bankers are saying that the market value of Saudi Aramco is probably below $1.5 trillion, in contrast to the $2 trillion number the Saudis and their bankers have been throwing around. Some banks are saying that the value could be below $500 million considering the uncertainties of the Saudi government allowing a sufficient share of the profits to go for dividends.
Libya: Prospects for increased exports fell last week as heavy fighting erupted between the forces loyal to Field Marshal Haftar representing the eastern government and Islamists militias. Last September, Haftar’s forces captured Libya’s two major oil terminals and opened them for exports giving the Tobruk government control of much of Libya’s oil. Then in early March, the militias seized them back, halting oil exports and setting off a round of heavy fighting. In recent months Haftar has been allying himself with Moscow and Russian advisors and possibly logistic support for the offensive.
The political situation is chaotic with a government in Tripoli, along with a UN-backed “government” holed up in a military base, and the eastern Tobruk government which is made up of members of the last parliament that were forced to evacuate Tripoli due to an Islamist uprising. The Islamist militias are talking about a drive to take Benghazi from Haftar’s forces, while Haftar is talking about a military campaign to take over the country for the Tobruk government.
In the meantime, oil exports are likely to drop. Last week a tanker scheduled to load 630,000 barrels of crude was forced to divert to a terminal further west because of the fighting. Until this situation is settled, talk of Libyan exports reaching 1 million b/d this year seems premature.
Beijing’s crude imports rose in February to 8.28 million b/d, the second highest monthly import on record and 3.5 percent higher than in February 2016. Much of the imported oil seems to be going to China’s independent, “teapot,” refiners who have been refining and exporting the oil products. In December the government clamped down on export licenses so that the teapots are no longer allowed to export as much as they did last year. Large imports by the teapots in the spring of 2016 are believed to be responsible for the price increase from the $30 a barrel low they reached last year.
China’s exports in February were up by only 4.2 percent year over year while imports were up by 44.7 percent. These numbers resulted in China’s first monthly trade deficit in three years, leaving economists confused as to what is going on with the Chinese economy.
Some are starting to question whether the outlook for China is as good as the media generally portrays. Beijing has achieved spectacular increases in its GDP in recent years by exploiting its massive reserves of cheap labor to become the world’s manufacturing center. This string of successes may be running out as the country faces growing pollution problems and the increased use of robots which will likely return more manufacturing to countries with higher labor costs. China also has a very large aging population to contend with. All this suggests that economic growth and the demand for oil in coming decades may not be so spectacular.
Moscow reaffirmed at CERAWeek that it is committed to lowering its oil production by 300,000 b/d before the end of April. Although there are no official figures as yet, Russia’s Central Bank is saying that Moscow’s economy as been rebounding of late and has been in the black for the past year. Obviously, the increase in oil prices in the past year has helped, but so has the method of integrating Russian military hardware production into the GDP figures. Moscow is in the midst of its biggest boost in its armed forces since the end of the cold war which is bound to contribute to GDP without doing much for its economy.
President Buhari returned from a seven-week medical leave in London. The details of his medical problems have not been released, but the President walked off the plane unaided but said his condition will require more rest and medical tests. Buhari who led the country after a military coup from 1983 to 1985 is a northern Muslim while the vice president is a Christian from the south in an political arrangement designed to accommodate a badly divided country.
The Nigerian economy is in serious trouble due to the collapse of oil prices and the disruption of oil production due to insurgent attacks. Many fear that should the president die in office, chaos — which would obviously be bad for oil production — would result.
The biggest news of the week was that an order from a World Bank arbitration panel to pay Exxon $1.4 billion in compensation for nationalizing several Exxon properties had been annulled. Naturally, Venezuelan officials are delighted as this will allow their economy to stay afloat for a few more weeks while Exxon is evaluating its legal rights and considering its next step. Exxon was originally asking for $16.6 billion in compensation, but may not get more than a few hundred million, if anything.
No good news from Venezuela last week, crime rates are spiraling as hungry people fight for enough money to buy food. The opposition has all but given up trying to fight the government, and police and para-military forces have mass demonstrations well in hand. Not much to do now but watch the country collapse taking oil exports with it.
7. The Briefs
Global oil supply may struggle to match demand after 2020 when the pinch of a two-year decline in investment in new production could leave spare capacity at a 14-year low and send prices sharply higher, the IEA said Monday. The contraction in global spending in 2015 and 2016 and growing global demand means the world could well face a “supply crunch” if new projects are not soon given the go-ahead. Most supply growth is expected to come from the United States, from 1.4 million b/d to double that, depending on the price of oil. (3/7)
Global oil markets are facing down a “decade of disorder” if long-term supply projects aren’t put into the pipeline, a former chief of the EIA Adam Sieminski, who headed EIA from June 2012 until January, said Tuesday. (3/9)
When OPEC in November joined with several non-OPEC producers to agree to a historic cut in output, the group called time on a fight for market share that drove oil prices to a 12-year low and many shale producers to the wall. Oil prices are about 70 percent higher than they were the last time oil ministers and the chief executives of Big Oil met in Houston a year ago at CERAWeek. (3/6)
OPEC once decried hedge funds as a malign influence on the oil market. Now it is seeking their opinion. Mohammad Barkindo, secretary-general of the oil exporters’ cartel, said on Tuesday he was meeting fund managers while in Houston for the CERAWEEK energy conference, giving them his time along with US shale executives and other senior figures in energy circles. (3/8)
UK oil and gas production will continue to grow through 2018, putting it on course for the longest expansion in almost two decades, amid project startups and productivity gains. The current production increase bucks a 15-year trend of decline, and should continue to rise over the next two years, Oil & Gas U.K. said in a statement on Tuesday. Output in the U.K. Continental Shelf rose to 1.73 million barrels of oil equivalent a day last year and will peak at between 1.8 million and 1.9 million barrels in 2018. (3/7)
BP’s shares surged the most this year after a London newspaper reported on rumors that Exxon Mobil Corp. sounded out major shareholders over a potential takeover. While a bid for BP can’t be ruled out, reports about Exxon’s interest have been around for years and analysts from Macquarie Capital Ltd. to Canaccord Genuity said a deal was unlikely. (3/8)
Saudi Arabia’s top oil official dismissed the notion that global demand may soon peak and leave billions of barrels of untapped crude stranded in fields that will never be drilled. Energy Minister Khalid Al-Falih called talk about peak demand among energy executives, analysts and activists “misguided,” and predicted worldwide demand will reach 100 million barrels a day “very soon.” Assumptions that demand will stop growing or even atrophy could discourage investment in new oil exploration projects, crimping future supplies and triggering price shocks that would endanger economic growth (3/8)
Saudi Aramco will pay Royal Dutch Shell $2.2 billion to finalize the breakup of their two-decade Motiva Enterprises refining partnership in the US. The deal gives Saudi Arabia sole control over the largest refinery in the US, a 600,000-barrels-a-day facility in Port Arthur, Texas. (3/8)
China’s strong appetite for Brazilian crude has set off alarm bells among various producers in Oceania and the Middle East, prompting Australian and key Persian Gulf crude suppliers to slash their selling prices in an effort to remain competitive and protect their market share in Asia. (3/8)
Aussie tiff: After splurging $200 billion building the world’s biggest gas export plants, producers in Australia are now locked in legal battles with contractors over who should shoulder billions of dollars in liabilities sparked by delays and cost blow-outs. Chevron Corp., owner of the $54 billion Gorgon facility, Australia’s largest resource development, along with Inpex Corp. and Santos Ltd., are among energy heavyweights trying to claw back funds. The number of disputes is growing weekly in a chain reaction of litigation. (3/7)
In Ghana, the operator of the country’s sole oil refinery said the planned capacity of a proposed second plant could be doubled as the West African nation targets exports to neighboring countries. Tema Oil Refinery will complete studies next year to build a 200,000 barrel-a-day plant in the port city, 30 kilometers (19 miles) east of the capital. (3/7)
Offshore Senegal, Cairn Energy, which has headquarters in Edinburgh, said it’s reviewing the results from its fifth appraisal well at the SNE offshore basin. Cairn is assessing data from a reservoir estimated to hold more than 2 billion barrels of oil. (3/8)
Colombia’s oil industry continues to face bombings and other security challenges even after last year’s peace deal that ended a long-running guerrilla conflict, a top Colombian oil official said Tuesday. (3/8)
The Canadian oil patch’s half-century bond to the U.S. market is loosening one tanker load at a time in Donald Trump’s “America First” era. Last month, a ship loaded oil off Newfoundland and set sail on a 10,000-plus nautical mile journey to China. The shipment represents a baby step in efforts to wean Canada off the almost exclusive dependence on the US market. (3/11)
The future of the Canadian oil sands is looking a lot more Canadian. Calgary-based Canadian Natural Resources said Thursday it will spend $9.4 billion, its biggest purchase ever, to buy Alberta oil fields and facilities that process the sticky bitumen from oil sands from Royal Dutch Shell Plc and Marathon Oil Corp. The deal comes less than a month after two major U.S. producers removed billions of barrels of Canadian oil from their stated reserves because the lower prices made the crude uneconomical. (3/10)
Oil sands pullback: Canadian Prime Minister Justin Trudeau on Friday dismissed a recent string of major oil companies selling their holdings in the heavy oil sands of Western Canada and moving investments to shale fields. Royal Dutch Shell and Marathon Oil this week disclosed sales of operations that largely removed both firms from the carbon-heavy oil reserves. Shell is selling its interests to Canadian Natural Resources. Last month, Exxon Mobil wrote down all of its oil reserves from its Kearl project in northern Alberta, saying extracting the oil was no longer economic at current prices. (3/11)
The US oil rig count rose by eight in the past week to 617, according to Baker Hughes Inc. Gas-directed rigs rose five units to 151, up 70 since Aug. 26 in their own rally. (3/11)
In Alaska, Repsol and Armstrong Energy say they made the largest US onshore oil discovery in three decades. The conventional hydrocarbon oil was found in the Horseshoe-1 and 1A wells initially drilled during the 2016 to 2017 winter campaign in the Nanushuk, an area located in Alaska’s North Slope. According to Repsol, the contingent resources identified in the region comprise approximately 1.2 billion barrels of recoverable light oil. (3/11)
Marathon Oil Corp. has agreed to acquire 70,000 surface acres in the Permian basin from BC Operating Inc., Midland, Tex., and other entities for $1.1 billion in cash. Primary targets on the acreage are in Wolfcamp and Bone Spring areas. The leasehold has one operated rig drilling, and there are plans to add a second rig midyear. (3/10)
US crude exports hit record highs in January and February, as domestic crude price discounts to Brent and Dubai widened significantly, according to Global Platts. US crude exports rose to 746,000 b/d in January and averaged 900,000 b/d in the four weeks ending Feb 24. (3/9)
US exports: Vitol Group, the trader that shipped the first cargo of U.S. crude after export restrictions ended in late 2015, predicts the country’s oil exports will grow “a lot more” because of rising production in Texas. US crude shipments briefly surged to a record 1.21 million barrels a day in mid-February, up from 32,000 in 2010, when most of the country’s production couldn’t be sold overseas because of a 40-year-old ban. (3/10)
US refined product exports are rising, reaching over 3 million b/d during 2016. From major producers such as Chevron to specialized refiners including Valero Energy, the US refining industry has shifted its game over the last five years, taking advantage of gaps left by struggling refiners in Latin America, Africa, and Asia…Yet the U.S. is still a net importer of crude oil and refined products of 4.8 million barrels a day. (3/6)
Sand men: Most Silicon Valley companies would kill for the sorts of gains made by sellers of plain old silicon. Even after a recent selloff, leading producers of sand used by oil and gas producers—companies like Hi-Crush Partners and US Silica Holdings—are up between 170% and 380% over the past year. Their gain is turning into oil producers’ pain, though, and could affect the global energy market. (3/7)
Warmer than normal weather throughout much of the US resulted in the first recorded weekly net natural gas injection since storage data has been collected. For the week ending February 24, the amount of natural gas in storage in the Lower 48 states increased 7 billion cubic feet (Bcf). (3/10)
Natural gas rebound? The EIA on Tuesday projected dry natural gas production would rise in 2017 after falling in 2016, while gas consumption would decline in 2017 after rising to a record high last year. (3/8)
Biofuels $$: Oil refiners shelled out a record over $2 billion to meet U.S. biofuels requirements in 2016, a 70 percent surge that helps fuel a growing debate over who should shoulder the costs for meeting environmental regulations. That was 68 percent more than in 2015 and well above the previous record of $1.3 billion reached in 2013. (3/11)
EPA Administrator Scott Pruitt extended a hand of friendship to the energy industry Thursday, expressing his desire to reshape the office he heads into one that cooperates with stakeholders instead of one that creates economic uncertainty through its rulemaking. (3/9)
Reining in regulations: Last week, the House of Representatives passed a bill which would effectively repeal future standard setting under every important environmental, public health, consumer protection, labor standards, occupational safety and civil rights law on the books. The bill is called the REINS Act. (3/7)
Electricity sales in 2016 fell, the sixth year in the past ten in which America’s electricity users managed to do with less. Industrial firms made the sharpest cuts in their electricity usage. Their consumption fell in seven of the past ten years. The 1.3 percent drop in total consumption in 2016 looks small but it comes despite economic growth and lower real price of electricity. (3/7)
Coal exports from terminals in Virginia’s Hampton Roads region totaled 2.8 million tons in February, up 8.2 percent from the prior month and up 50.7 percent from the year-ago month. It was the highest monthly total since March 2015, and the fifth straight month of higher exports, as higher seaborne prices increased demand for US thermal and metallurgical coals. (3/7)
The US solar market had its best year on record in 2016, according to the Solar Energy Industries Association. In a study published by the industry, researchers note the solar market nearly doubled its previous record. Some 14 gigawatts of solar production capacity were installed last year and the group claims that output is set to triple over the next five years. (3/10)
China’s fastest growing battery maker is Contemporary Amperex Technology Ltd. Its plant looks like lots of others dotted across the country. But with a valuation of $11.5bn, CATL is anything but mundane. It is set to become China’s Panasonic — a national champion — and a key part of Beijing’s ambitious plan to remake the global battery market and exploit rising demand for electric cars. (3/6)
Fukushima: Six years after Japan’s nuclear disaster, popular resistance has stymied efforts to rebuild an atomic energy industry that was once among the world’s biggest, as mysteries endure over the calamity. (3/10)
Pollution deaths: In 2015, 5.9 million children under age five died. The major causes of child deaths globally are at least partially caused by the environment, the World Health Organization (WHO) reports. WHO estimated in 2012 that 26% of childhood deaths and 25% of the total disease burden in children under five could be prevented through the reduction of environmental risks such as air pollution, unsafe water, sanitation and inadequate hygiene or chemicals. (3/6)