Quote of the Week
“Overall the idea that we have to go into the Arctic to find new resources I think has been dispelled by the enormous cheap, easier to produce and quicker time-to-market resources in the Permian onshore US. We think there is almost no rationale for Arctic exploration. Immensely complex, expensive projects like the Arctic we think can move too high on the cost curve to be economically doable.”
Michele Della Vigna, commodity equity business unit leader in EMEA at Goldman Sachs
Graphic of the Week
1. Oil and the Global Economy
Last week oil prices fell for the third time in a month, closing in New York at just below $48 a barrel. Increasing US crude inventories remain the chief motivation for the price drop as many traders now see higher US production as largely offsetting the OPEC/NOPEC production cuts. OPEC and its allies met in Kuwait last week to consider the situation and to talk about extending the cuts until the end of the year. In the meantime, the US rig count continues to grow amid some doubts as to whether all the new drilling will result in a concomitant amount of production.
It has been nearly six months since oil prices started to rise, first on talk of an OPEC production cut, and then on an actual agreement. Much of the increase was largely due to talk from various oil producers about what they planned to do rather than hard data on what was being achieved. Speculators, believing that oil prices were too low, jumped on all the “jawboning” and forced prices into the mid-$50s between last November and early March. Then a series of US inventory increases and steadily increasing US rig counts, coupled with higher Libyan production, raised doubts as to just how successful the production cut agreement would be. Doubts are increasing that another six months of restricted OPEC/NOPEC production would clear the backlog of excess oil production unless even larger cuts are implemented.
Whether an extension of the OPEC/NOPEC production cut is as simple as it would seem is up in the air. The Saudis cut production by more than their obligation while other adherents to the agreement such as Russia and Iraq have been dragging their feet. Rumblings from Riyadh suggest that the Saudis expect that all those benefitting from the agreement to do their part before they agree to an additional six months of cuts.
On the other side of the ledger, some observers are raising questions about whether US shale oil production will increase in the coming year as fast as the rapidly growing rig count suggests. These observers note that while the costs of producing shale oil have been falling for the last two years, most of the lower costs were due to markedly depressed prices for oil service contracts, rig rentals, labor, etc. rather than more efficient drilling techniques as the industry and the financial press claims. In recent weeks, the price of fracking sand has soared, and experienced oil field workers have been able to demand higher pay. Increasing costs of drilling combined with the drop in oil prices of some $8 a barrel in the last three weeks are raising questions as the whether bankers will extend their lines of credit to marginal drillers in the face of higher costs and lower oil prices.
The US shale oil story is becoming more complicated, however, as Exxon, Shell, and Chevron have announced their intention to spend as much as $10 billion this year on exploring for and producing shale oil. These companies have been attracted to the shale oil fields because of the quick return on investment in comparison to the expensive deepwater projects that take many years to complete. How all these forces will balance out remains to be seen.
Discussion of “peak oil” continues to appear in the financial press from time to time. Most writers continue to dismiss the idea that peak global oil production will arise from depletion of oil reserves that can be exploited at affordable prices and talk about the demand for oil peaking. This is usually seen as coming from electrically-powered motor vehicles reducing the demand for gasoline, or air quality becoming so bad in many countries they start regulating the use of fossil fuels. Analysis of this situation usually involves political values such as whether climate change is due to carbon emissions or whether motorists are willing to give up their current automobiles for less convenient versions. There is a lot to be sorted out in the next decade.
2. The Middle East & North Africa
Iran: Reports are circulating that the Saudis may not be willing to extend the production cuts for another six months unless Tehran gets on board and is willing to make actual cuts instead of pleading that several years of nuclear sanctions should make them exempt. The Saudis are getting tired of seeing their market share eroding to the Iranians. The meeting to sort all this out is scheduled for May 25th.
The South Pars oilfield on the Iran-Qatar border was officially opened last week. While this field is claimed to hold 14 billion barrels of oil, initial production will be only 35,000 b/d from seven wells. Prospects for the field are significant because of the large amount of crude it may hold but also for the advanced production techniques being used. The offshore wells will use floating production and storage ships which will allow the crude to be shipped directly from the well-head to market.
New energy agreements between Moscow and Tehran may be signed during President Rouhani’s visit to Russia later this month. Some of the deals are thought to involve swap arrangements whereby Iran receives goods from Russia in return for oil. Relations between Russia and Iran have been on the upswing ever since Moscow intervened in Syria to save President Assad from what looked like a defeat at the hands of the rebels.
Iraq: Oil Minister al-Luaibi said on Saturday the the market is the decisive factor determining whether to extend the production cut. The minister said Iraq is in full compliance with the agreement, although many note that there is a problem as to whether production in Kurdistan is properly accounted for and whether the agreement applies to production or only exports.
Saudi Arabia: Fitch cut the Saudis credit worthiness rating by one level last week saying it was concerned about low oil prices and the kingdom’s worsening public and external finances. The Saudis are losing their grip on the big oil markets during the current production cut as it tries to put a floor under oil prices. The country is slowly conceding ground to US shale oil producers and its pulling back from the US market to concentrate on Asia. Saudi exports to the US could fall by as much as 300,000 b/d in March.
King Salman’s lavish, three-week tour of Asia has resulted in numerous agreements with Malaysia, Indonesia, Japan and China as the kingdom seeks to diversify its sources of revenue by moving into downstream operations such as refining and petrochemicals. Among the agreements was one with China which will boost Saudi sales there after losing market share to Russia for many years.
Libya: Oil production is still believed to be on the order of 700,000 b/d as the political struggle between the Eastern government that under General Haftar now controls the terminals. On Sunday armed workers and facility guards shut down a natural gas facility that was supplying a major power station. This will quickly lead to rolling blackouts across the country.
Concerns are rising that Moscow is going to do “another Syria”, by moving troops into Libya on behalf of General Haftar and the Eastern Government.
In a sign that China’s demand for crude may soon slow, the independent refiners, known as teapots, have already used up their crude import quotas that the government allocated to them in January. Another round of import licenses is due to be issued in June. in recent months, these refiners have become notorious for importing large amounts of oil and then dumping it on the Asian oil-products market. The Japanese are already complaining that Chinese are exporting sub-standard oil products that are taking market shares away from Japanese refiners who must meet higher standards and are contributing to air pollution in the area.
A new Chinese research paper suggests that there may be more to China’s smog problem than simply too many coal-fired boilers pumping out smoke in the vicinity of its major cities. The new study puts part of the blame on global climate change which has shifted atmospheric patterns in Siberia causing less wind to blow across northern China taking the pollution out to sea. Heretofore China has not been particularly interested in climate change and has been concentrating on getting smoke particles out of its air. This new study may force the Chinese to take carbon emissions as seriously as they take particulate matter.
China’s Sinopec announced last week that it would spend $1 billion for a 75 percent stake in Chevron’s South African assets. The assets include a 100,000 b/d refinery in Cape Town, a lubricants plant in Durban and 820 gas stations and other oil storage facilities.
Russian Energy Minister Alexander Novak told reporters on Saturday that the country so far had reduced output by 185,000 b/d. Moscow still has a way to go to reach its commitment of cutting production by 300,000 b/d. The slow pace of the cuts clearly have the Saudis upset; however, many observers are saying that it is in Moscow’s interests to extend the production cuts until the end of the year.
Despite the government’s efforts to drive up oil prices, Russia’s central bank says it is still basing its forecasts on oil falling to the vicinity of $40 a barrel this year.
There was no news on the status of Nigerian oil production last week. Nigeria’s collapsing GDP and surging inflation have forced the government to keep its key interest rate at 14 percent. Foreign exchange policies are banning the import of non-essential goods and driving up prices.
A new consultants’ report says that “astonishingly high” levels of pollution remain in a Niger Delta fishing community after a 2008 pipeline breakage spilled some 500,000 barrels of oil into the local waters. This is roughly twice the size of the Exxon Valdez spill off Alaska. At the time, Shell disputed the size of the spill and settled with the community for $80 million at the time. Since the original spill, illegal refining has added to the problem. For now, little is being done about the situation as Shell and the community seem to be involved in an endless legal dispute.
There was no good news last week. A domestic gasoline shortage developed on Wednesday as the state oil company was not able to refine enough gasoline to meet demand. The situation was exacerbated by a government-mandated increase of 22,000 b/d in oil product shipments to President Maduro’s friends in Cuba and Nicaragua. Last month 88,000 b/d were shipped to these two countries.
There is a report that critical personnel are leaving PDVSA, the national oil company, as the political situation gets worse. The government has long been replacing the experienced professionals at the oil company with military officers and politically reliable people with little experience in the oil business. Among those who have left were people responsible for paying the company’s bills many of which are unpaid. There are currently ten tankers waiting for payment at PDVSA ports before discharging, vitally needed gasoline and blending fuels.
7. The Briefs (dates refer to when article appeared in the Peak Oil News)
Drilling the Arctic region for oil cannot be justified against the background of the major shift in the global oil production paradigm, Goldman Sachs’ lead European commodities equity specialist said on Thursday. (3/24)
OPEC’s supply cuts are providing a windfall for producers of heavy crude from Western Canada and the Gulf of Mexico. Prices for Western Canadian Select and Mars grades have strengthened relative to benchmark West Texas Intermediate since OPEC began implementing its reductions this year. (3/24)
A Saudi logistics company has just opened a Houston office to seize the opportunity to ship increased volumes of oilfield and plant construction equipment to the Port of Houston as the Texas and US drilling activity is gaining momentum. (3/23)
Saudi Aramco has signed a one-year crude supply contract with China National Offshore Oil Corp. for its upcoming Phase 2 Huizhou refining project, as Saudi Arabia steps up efforts to secure its share in its largest market, where its top supplier status was recently threatened. (3/24)
In Southeast Asia, nearly a decade in the making, a $1.5 billion project to pump oil 770 km (480 miles) across Myanmar to southwest China is set for imminent start-up, with a supertanker nearing the port of Kyauk Phyu, marking the opening of a new oil trading route. (3/22)
Japan’s top oil experts are poring over a problem plaguing its energy industry: how can they stop China from pushing its crude refiners into a corner? The task force, summoned by the trade ministry, needs a strategy to save oil refiners battered by years of declining demand at home. (3/22)
The world’s deepest oil well, located on the Sakhalin shelf in Far Eastern Russia, is the Z-44 Chayvo well at 40,502 feet. (3/24)
Algeria’s Sonatrach Group expects to invest $9 billion from 2017 to 2021 in its search for new deposits of oil and natural gas. Sonatrach will drill an average of 100 wells annually over the same five years and plans to invest more than $50 billion in all of its operations during this period. (3/23)
The Nigerian National Petroleum Corporation, NNPC, disclosed that it is committed to the Trans-Saharan Gas Pipeline, TSGP, and that the project was still on track. The $12 billion Trans Saharan Gas Pipeline is a 4,401 kilometers natural gas project to be constructed from Nigeria, starting from Warri, Delta State, to Algeria via the Niger Republic, and from Algeria to Spain. (3/25)
Gabon: Royal Dutch Shell, as part of an effort to streamline its portfolio after acquiring BG Group, said Friday it was leaving parts of Africa behind after 55 years. Shell announced it would sell its entire onshore interests in Gabon to Assala Energy Holdings, part of The Carlyle Group, for $587 million. (3/25)
Venezuela’s state oil company is replacing high-level managers at refining complexes and other divisions as it deepens a shake-up that began in January, according to people with knowledge of the situation. (3/21)
In Panama, Royal Dutch Shell agreed to lease capacity at a large oil terminal that has been used by US refiner Tesoro Corp, sources involved in the deal told Reuters, gaining much-needed storage for its crude operations. (3/23)
Offshore Mexico, Italy’s Eni said Thursday it confirmed the potential for oil in the first drilling campaign by a foreign company there since 2013. Eni said it confirmed the presence of oil in the Amoca-2 well, located in the shallow waters of the Campeche Bay near Mexico’s southern tip–the first by a foreign company since national energy reforms were enacted in 2013. (3/24)
The US oil rig count jumped by 21 this week, according to Baker Hughes Inc. The number of active US oil rigs now sits at 652, up 280 year over year. Gas rigs were down by two to 155, an increase of 63 over a year ago. (3/25)
Average US oil production for 2016 was 8.9 million b/d, lower than the 2015 level of 9.4 million b/d, though production varied regionally. Production in the Permian Basin increased from 1.9 million b/d in January 2016 to 2.1 million b/d in December. Production in the Federal Offshore Gulf of Mexico averaged 1.6 million b/d in 2016, the highest annual production ever recorded for that region. Although US crude oil inventories were already high in 2015, they rose even further in 2016, with end-of-year inventories reaching 484 million barrels, 35 million barrels higher than their end of 2015 levels. (3/21)
In the Gulf of Mexico, offshore energy companies ponied up more than $315 million in bids to lease 913,542 acres off the coast of Louisiana, Mississippi and Alabama on Wednesday. The lease sale is the final one in the GOM under the Obama Administration’s Five-Year Plan, which made available all offshore areas with the greatest resource potential from 2012 through 2017. (3/24)
Uncompleted wells: US shale producers are drilling at the highest rate in 18 months but have left a record number of wells unfinished in the largest oilfield in the country – a sign that output may not rise as swiftly as drilling activity would indicate. A record 1,764 wells were left unfinished in the Permian in February, according to US government data. In February alone, 395 wells were drilled and only 300 completed. Some operators are drilling because their leases require them to do so within a specified time limit to keep their leases. A new lease could cost the operator as much as five times more than a few years ago, so losing a lease would be an expensive proposition. Some leases actually require firms to produce a minimum volume of oil. On those leases, many firms will frack one well and leave others incomplete. (3/24)
The market for sand—a key ingredient in fracking—is surging once again as US oil production rebounds. American shale companies are using more sand to help supersize their wells. Sand props open underground fissures, which allows oil and gas to escape to the surface. But the millions of pounds of sand being poured down wells is pushing up sand prices, eroding some of the profits that energy companies have managed to regain since the oil bust ended. (3/24)
Pipeline promises? President Donald Trump vowed to win a “better deal” for Americans before approving the Keystone XL and the Dakota Access oil pipelines, promising to extract concessions and force the builders to use US steel. Now his administration has authorized both projects — with those conditions mostly unmet. The outcomes illustrate the limits of the president’s power and poke holes in the carefully crafted image of Trump as a dealmaker so good at twisting arms that he wrote a book about his negotiating prowess. (3/25)
Pipeline bumps? While presidential approval is a major step forward for the XL pipeline, the battle is far from over as the company still needs to secure some of the land rights with landowners, still needs a permit in Nebraska and is expected to be met with protestor opposition. (3/25)
Pipeline issues: After years of wrangling and what appeared to be a full stop by the Obama Administration in 2015, TransCanada Corp. has finally been granted approval from a US president to build its Keystone XL pipeline across the Canada-United States border. On Friday, Under Secretary of State for Political Affairs Thomas Shannon Jr. signed the permit. But to make its way across the country, individual states where the pipeline would be constructed still have to sign off. And that’s easier said than done. (3/25)
The US electric grid is old, with most transmission lines and power plants decades into their lives. The grid modernization debate and initiatives have been on the table for years, but now President Trump’s proposal for a $1 trillion investment in American infrastructure is reviving questions about how much investment the energy infrastructure needs, and how much it would cost to replace, upgrade, or simply maintain the aged and strained US electric grid. Defining the ‘grid’ as including power plants, transmission lines, distribution lines, substations, and transformers, UT researcher Joshua Rhodes has calculated that the replacement value of the US electric grid is $4.8 trillion. The total replacement value of the grid is divided into 56 percent for power plants, 9 percent for the transmission system, and 35 percent for the distribution system. (3/24)
Oil and wind: Royal Dutch Shell Plc, Statoil ASA, and Eni SpA are moving into multi-billion-dollar offshore wind farms in the North Sea and beyond. They’re starting to score victories against leading power suppliers including Dong Energy A/S and Vattenfall AB in competitive auctions for power purchase contracts, which have developed a specialty in anchoring massive turbines on the seabed. Fossil fuel executives want to get a piece of the clean-energy business as forecasts emerge that renewables will eat into their market. (3/23)
Cooling on coal: On the heels of the 250th coal-fired power plant retiring in the United States yesterday, the Sierra Club, Greenpeace, and CoalSwarm have released their third annual survey of the global coal plant pipeline. The report’s findings include a 62 percent drop in new coal plant construction starts globally, a 48 percent reduction in worldwide pre-construction activity, and an 85 percent decline in new Chinese coal plant permits. Central authorities in China and bankers in India have come to recognize overbuilding of coal plants is a major waste of resources. (3/24)
In Egypt, the opening of three major power plants in March was the latest in Egypt’s efforts to end its electricity shortage crisis. When they are operating fully in 2018 as expected, the three electrical power plants will produce 14,000 megawatts of electricity every year. In 2013, Egypt produced 24,000 MW. (3/21)
In China, Tesla reported earlier this month that its revenues in China topped $1 billion in 2016, more than triple the revenues it generated there in 2015. The Chinese market was only second to the US in terms of revenue generation for Tesla last year. (3/21)
The Japanese government should consider a fundamental change in its current nuclear energy policy if it wants to recover the public’s trust in nuclear power, writes Tatsujiro Suzuki, Director of the Research Center for Nuclear Weapons Abolition at Nagasaki University. (3/24)
Fukushima: Tokyo Electric Power Co (TEPCO) confirmed lethally high radiation levels inside the primary containment vessel of the heavily damaged unit 1 of the Fukushima Daiichi nuclear plant. Generally, radiation levels have been so high that every robot sent to explore the site has failed. Finally the PMORPH robot inserted into unit 1 managed to provide the TEPCO with the radiation and temperature measurements within it. The four-day inspection launched by TEPCO is part of preparatory work for the eventual removal of fuel debris. The primary mission of the robot is to investigate the bottom of the containment vessel to see whether it can capture images of the melted fuel. Finding the exact location and condition of the melted fuel is considered critically important to dismantling the reactors. (3/21)
Climate judgment: ExxonMobil lost a key decision in an ongoing climate change battle Wednesday when a New York judge ordered the oil giant to turn over correspondence from its executives on potential impacts of changing temperatures on the company’s business. That all comes out of an investigation launched by New York ‘s Attorney General. (3/25)
Local Siberian media has reported that the very ground that people stand on is moving under their feet in the Arctic regions of Siberia. Scientists have discovered 7000 gas filled bubbles according to the Siberian Times. These bulges were originally discovered last year by researchers in Siberia’s remote Bely Island. At that time only 15 of these bubbles had been identified, but a survey in the wider region of the Yamal and Gydan peninsulas has revealed the massive number of 7000 which some scientists fear may explode at any time. Scientists believe methane gas released by the thawing of permafrost, which is triggered by climate change, are causing eruptions. (3/23)
RE and EE: A dramatically increased share of renewables and higher energy efficiency have the potential to create benefits of up to $10 trillion annually by 2050, compared to estimated incremental system costs of decarbonisation of $1.8 trillion annually, according to a new report by the International Renewable Energy Agency (IRENA) and the IEA. Total US crude oil imports grew to 7.9 million b/d in 2016, nearly 515,000 b/d higher than in 2015. (3/20)
CA vs. Trump: California’s clean-air agency voted to push ahead with stricter emissions standards for cars and trucks, setting up a potential legal battle with the Trump administration over the state’s plan to reduce planet-warming gasses. The vote, by the California Air Resources Board, is the boldest indication yet of California’s plan to stand up to President Trump’s agenda. (3/25)
Emissions flat: The International Energy Agency last week said energy-related emissions were flat for the third year in a row as world economies move away from coal to cleaner-burning resources like natural gas. A new report, however, finds more work is needed to limit the rise in the global mean temperature. Nearly 70 percent of all new cars need to be electric and $3.5 trillion in annual investments are needed to keep global warming at bay. (3/21)
Water temperatures at the surface of the Gulf of Mexico and near South Florida are on fire. They spurred a historically warm winter from Houston to Miami and could fuel intense thunderstorms in the spring from the South to the Plains. In the Gulf, the average sea surface temperature never fell below 73 degrees over the winter for the first time on record. Galveston, Tex., has tied or broken an astonishing 33 record highs since Nov. 1, while neighboring Houston had its warmest winter on record. (3/23)