Quote of the Week
“It’s clear that wind energy’s time has come. My message is a very simple one: our government is committed to addressing climate change, and we know that wind power will play a critical role in those efforts.”
Canadian Natural Resources Minister Jim Carr.
Graphic of the Week
1. Oil and the Global Economy
After falling on Monday on the news that Libya was resuming production from its largest oilfield that was shut down the previous week, oil prices moved higher for the next three days on hopes that the OPEC production cut was having the desired effect. Some believe that oil traders have been too busy watching the well-publicized build in US crude stocks, while excess inventories in other parts of the world are shrinking away unnoticed. Futures prices, which were about $48 a barrel the US the week before last, climbed to over $51 a barrel by Thursday.
On Friday prices surged by 2 percent on the news that the US had launched missiles against a Syrian airbase in retaliation for Damascus’s use of poison gas against civilians. The price surge was mostly a knee-jerk reaction as Syria produces almost no oil these days; however, US missiles being fired at a Syrian military base in the midst of a civil war involving the US, Russia, Iraq, Iran, Turkey and various other powers immediately raised the specter that this attack could signal the opening of a wider war that could ultimately reduce oil shipments from the region. Whether “geopolitical” risk of a wider Middle Eastern war remains a part of the price of oil will depend on what happens in the next few weeks.
In the meantime, the US rig count and oil production continue to creep upwards, and there is still the prospect that more oil may be exported from Libya and Nigeria in the next few months. OPEC and its NOPEC friends still seem on track to extend the production cut for the rest of the year. However, it is unlikely to be clear for many months as to how much of the cut will be offset by increased production in other countries. US exports are surging, jumping by 35 percent to over 1 million b/d in February, while US crude imports have remained relatively constant. Most of this anomaly can be attributed to the US’s ability to process heavy crudes, while most of the recent increase in US production has been light crudes. As usual, the demand for oil products remains murky with some worrying that several major oil consumers are not growing as much as expected.
Fitch Ratings is forecasting that global oil will average $52.50 this year, up from $45.10 in 2016. This figure is still believed to be below the breakeven point for most Middle Eastern oil exporters. Only Kuwait, which is said to have a breakeven point of $45 a barrel is well below the $52 figure. All the others are either close to $52 or well above it Most, especially the Saudis, are slowly frittering away their currency reserves by operating at a loss. It may be a few more years before major changes happen in the oil markets that will drive prices higher. The current situation where oil is being sold below true costs of production simply cannot obtain indefinitely.
2. The Middle East & North Africa
Iran: Since the lifting of the sanctions last year, Tehran has been selling off oil from the 30 million barrels it accumulated in floating storage during the sanctions. Last week Iran ran out of its floating storage reserve and from here on must depend on new production to maintain and increase exports. Iranian exports topped 5 million b/d last month which is well above its production. Most analysts expect that Iran will have a very difficult time maintaining market share, especially if it adheres to the OPEC production freeze until the end of the year.
Last week Boeing said it has agreed to sell up to 60 Boeing 737s beginning in 2022. This is the first time since President Trump was elected that a major commercial deal between a US firm and the Iranians has been announced. After all the campaign rhetoric, this deal will be a test of the Trump administration’s tolerance of trade with Iran.
Iraq: Baghdad says it plans to increase its crude production by 600,000 b/d to 5 million by the end of the year. Iraq has been the most reluctant of the OPEC members to participate in the production freeze since 95 percent of its revenues to fight the war against ISIL comes from oil sales. Baghdad did report last week that its cut its oil production by 300,000 b/d to 4.5 million. The situation is complicated by the likely fall of Mosul in the next few months and the split of the northern oil field between Baghdad and the Kurds. The Kurds took control of much of the northern oil production back in 2014 to keep it out of the hands of ISIL. Although the bulk of Iraq’s oil production comes from the southern oil fields, a dispute over control of the northern fields could run counter to Baghdad’s plans to increase production.
Over the long-term, the disposition of northern oil fields after the defeat of ISIL will be important to Iraq’s future and whether the Kurds will be successful in reaching the goal of establishing an independent Kurdish state.
Iraq’s oil ministry is exploring a new kind of oil contract that will be offered foreign oil companies developing Iraqi oil. The current Technical Service Contracts do not allow foreign firms any interest in Iraqi oil and only pays the foreigners for drilling wells and producing oil. Most foreign oil companies are only working in Iraq in hopes that the contracts will be changed someday to make them more profitable as they are in the rest of the world.
Saudi Arabia: Low oil prices are taking a toll on the country. Foreign reserves have fallen from a peak of $737 billion in 2014 to just over $500 billion. At the current rate of decline, $6.5 billion a year, Saudi reserves could drop to zero in about 6-7 years. Moreover, Saudi crude reserves have dropped from 329 million barrels in October 2015 to around 260 million. In January reserves dropped b 10.6 million barrels as the country tried to maintain exports as it was cutting production to comply with the OPEC agreement.
To replace the lack of oil revenues, members of the Gulf Cooperation Council including the Saudis have turned to the bond markets. Bond sales by council members during the first quarter increased by 359 percent to $24.2 billion. This included an $8 billion issue by Kuwait and a $5 billion issue by Oman. Observers are predicting that large bond issues will become the norm for Gulf oil producers in coming years, unless there is a major surge in oil prices.
Libya: Oil production is on a roller coaster with the country’s largest field opening and closing in alternate as some unknown group opens and closes the pipelines to the coast. Last week Libya’s crude production rebounded to 660,000 b/d only to drop over the weekend when the 200,000 b/d pipeline from the Sharara oilfield in western Libya closed again. In the eastern parts of the country, General Haftar’s National Army seems to have the situation under control so that local militia, who usually want more money, are no longer able to shut down the export terminals. The reach of General Haftar’s forces does not extend into Western Libya, so there is no outside force able to prevent local entities from shutting oil production for their own purposes.
Beijing’s “apparent” demand for oil increased by 5.7 percent in the first two months year over year. In China, the first two months of economic data are lumped together because of the Chinese New Year celebration, during which the country nearly shuts down. The holiday moves back and forth between January and February leading to erratic economic numbers unless the two months are treated as a single period. China’s industrial production rose by 6.3 percent year over year during the first two months.
There was an Orange air pollution alert for much of northern China last week. Orange and red alerts are serious as not only are they extremely hazardous for the people living there, but they force the closure of many industrial establishments that normally pump out coal smoke. Concerns are increasing over rising waters and heavy rains that are causing damage in many Chinese cities. Much of the trouble is due to rapid urbanization that has changed farmland into cities and interfered with millennia-old drainage patterns. Unlike the hazardous air problem, which is largely due to burning too much coal, the flooding problem is related to climate change which cannot be mitigated simply by reducing coal consumption.
The ruble fell against the dollar last week in response to the US missile strikes on Syria. The thinking behind the move was that détente between Russia and the West was now further away than ever. Some observers, however, are making the case that Russia’s oil industry is better off with a weak ruble as oil sales abroad yield a higher return when converted to rubles. Moscow’s economy has not been doing well of late and even if oil prices climb to $60 a barrel, Russia’s GDP growth is unlikely to exceed 1 percent this year.
The question of how much longer, Russia can continue to grow its oil supply continues to vex analysts. Many forecast that the aging Russian fields would be in decline by now, but this has not happened. As there is not much room to expand conventional oil production, the future lies in what could be very large reserves of shale oil, Arctic, and deepwater oil. While Moscow’s oil industry has experience with conventional oil production, it has been dependent on foreign technology for shale, Arctic, and deepwater production. As these methods of production are expensive, they simply cannot compete with the $10-$20 cost of producing oil from conventional fields.
Nigerian oil production slumped to 1.67 million b/d in March down from 1.9 million b/d in February. The decline was largely due to maintenance at the Bonga offshore field, which should be over soon. Nigeria’s production is still well below its 2.2 million b/d capacity largely due to insurgent attacks. However, these attacks have fallen sharply since early January due to government peace talks with the insurgents.
In recent months, the government has taken a new tact with the insurgents, arguing that they cannot expect future economic progress without the oil revenues. Given that Nigeria has been exempted from the production which seems likely to run until the end of the year, the better relations between the government and the Niger Delta could result in a resumption of normal levels of oil production before the year is out.
The state oil company PDVSA announced last week that it plans to make its April 12th bond payment and avoid default. PDVSA has $2.55 billion coming due and the government an additional $437 million. Most analysts believe that the company and government will be able to scrape up the cash amidst the deteriorating economic situation and will make the payment.
In November PDVSA made a deal with Russia’ Rosneft that would give Moscow a 49.9 percent ownership in the US refiner and marketer Citgo. There are already complaints from the Congress that giving Russia a controlling interest in the 6th largest US refiner is a threat to national security.
Turmoil in Venezuela as more demonstrators take the streets in the aftermath of the Maduro government’s attempt to shut down the parliament. The revised deal still gives President Maduro total control of the oil industry including the ability to sell off parts of it to the Russians.
Exxon is the only major oil company currently without an interest in the Brazil’s deep-water oil. Last week it was announced that Exxon had expressed a “strong interest” in investing in Brazil oil. Petrobras, the Brazilian national oil company, has recently reported that yields from its deep-water, sub-salt oil fields have been above expectations. The company is eager to cut tis debt load which at $100 billion is one of the highest in the industry.
8. The Briefs
The world oil rig count for 2017 is on the rebound but in March was still lower year-over-year, despite significant gains in the North American rig count, according to Baker Hughes Inc. (4/8)
Norway granted Statoil a drilling permit for a well in the Snøhvit field in its northern territorial waters–the first well to be drilled in the related license area. The government confirmed a sizable discovery of oil and natural gas at the Snøhvit field in the Barents Sea three years ago. According to government estimates, there are roughly 18 billion barrels of oil equivalent yet to be discovered in Norwegian waters. Half of that is in the Barents Sea. (4/8)
Offshore U.K.: BP agreed to sell the Forties pipeline, one of the most important pieces of oil infrastructure in the U.K. North Sea, to Ineos AG for $250 million. BP is selling assets to help pay for the 2010 oil spill in the US Gulf of Mexico. (4/3)
Offshore Cyprus, an exploration campaign is planned by 2018 following a study of the reserve potential, a Qatari energy company said Wednesday. Qatar Petroleum and Exxon secured the rights to develop Cypriot waters in a licensing round last year. (4/6)
Most crude oil producers in the Middle East, Africa and the emerging economies of Europe won’t be able to patch up their budgets this year, Fitch Ratings warned, forecasting an average price of $52.50 a barrel for the commodity in 2017, up from $45.10 a barrel for 2016. The exceptions are Kuwait, Qatar, and the Republic of Congo. (4/7)
Kuwait’s in the best position of major oil exporting nations to have a balanced government budget this year, according to Fitch Ratings Ltd. Nigeria is worst off, needing an oil price of $139 a barrel to balance its budget. (4/7)
Qatar has lifted a self-imposed moratorium on development of the world’s biggest natural gas field, Qatar Petroleum’s CEO said Monday, as the world’s top LNG exporter looks to combat an expected rise in competition. Development in the southern section of the North Field will have a capacity of 2 billion cubic feet per day, or 400,000 barrels of oil equivalent, and increase production of the field by about 10 percent, when it starts production in five to seven years. (4/4)
In New Zealand, Royal Dutch Shell has taken a step toward an exit from its New Zealand assets with a deal to sell its 50% stake in a natural-gas field to its local venture partner, Todd Energy. The agreement will also see Shell take full control of a joint-venture company that operates two further gas ventures in New Zealand, simplifying Shell’s operating structure as it looks to offload the assets. (4/6)
In South Sudan, attacks on foreigners working in oil and gas facilities serve as a warning for multinationals to stay away from the new country’s national resources, just as oil prices recover enough for Juba to begin profiting from the oil sector. (4/4)
In Brazil, Exxon Mobil Corp expressed to state-controlled Petrobras “strong interest” in the exploration of deep-water oil fields off the Brazilian coast, Petrobras CEO Pedro Parente said on Tuesday. (4/5)
In northern Alberta, the Syncrude oil sands project has cut its production to zero for all of April following a fire last month. Syncrude, which is majority-owned by Suncor Energy, previously said shipments of synthetic crude were expected to restart at up to 50 percent of the plant’s 350,000 barrel-per-day capacity in mid-April. (4/4)
The US oil rig count increased by 10 to 672 last week, Baker Hughes Inc. reported. Gas rigs were up by 5 to 165. The number of oil and gas rigs currently active in the US now sits at 839, which is an increase of 396 year over year. (4/8)
Energy capital expenditure for 44 US onshore-focused oil production companies increased $4.9 billion (72%) between the fourth quarter of 2016 and the fourth quarter of 2015 based on their public quarterly financial statements. (4/4)
GOM: It may be more than a year before US Gulf of Mexico oil exploration begins to ramp up in any noticeable way, but several new deepwater fields are adding to production and there seems to be sparks of interest in developing recent offshore finds. Platts Analytics Bentek Energy is forecasting a rise in US offshore production to 1.868 million b/d by year-end and to 2.296 million b/d by end-2022 from 1.669 million b/d at end-December 2016. (4/4)
US crude oil exports are steadily growing and winning customers even in China, at the same time that OPEC is implementing production cuts. In February, China was the biggest buyer of US light crude oil, overtaking Canada as the top destination of US crude exports. (4/6) (NOTE: the US remains the world’s second-largest net oil importer; see chart above)
US crude oil exports reached a record high of 31.2 million barrels in February. Two of the main reasons for the high US exports and increased Chinese buying of US crude were the seasonal refinery maintenance in the US Gulf Coast, and the Dubai benchmark for Asia becoming more expensive due to the OPEC production cuts. This has opened an arbitrage window for US grades to be shipped to Asia. (4/5)
Offshore costs down: While US shale has been by far the most important topic when discussing US oil and gas production, Gulf of Mexico production is still a major factor. Oil production from the Gulf increased significantly in 2016, while nearly every state saw decreases in production. The offshore industry made major changes to drilling strategies and technology in the aftermath of the Deepwater Horizon disaster. These allowed operators to cut the average cost of projects by about 20 percent, making many projects profitable at $50 per barrel or even lower. (4/5)
Pipeline proposal: NAmerico Partners LP is proposing a multibillion-dollar pipeline to ferry natural gas from fast-growing fields in West Texas to the Gulf Coast, the company said on Monday, angling to match plans by rivals such as Kinder Morgan Inc. The pipeline, one of at least three being considered to ease a looming gas glut in the Permian producing region, would link to existing lines, including those that export gas to Mexico and to a Cheniere Energy Inc liquefied natural gas export facility under construction. (4/3)
More pipelines: Want to protect Pennsylvania’s environment and strengthen its economy? Build more pipelines. Despite the emotion-filled protests charging that pipelines will doom our future the facts tell a different story. Pipelines are safer than any other mode of transporting fuel. (4/3)
In shale-rich Oklahoma, gains in exploration and production activity are pulling the economy out of a slump, though recovery is slow, the state treasury said. Data for March show tax collections from oil and natural gas production more than doubled year-on-year to $47.9 million. (4/6)
Hiring: A recent spike in hiring announcements suggests oilfield services companies are hitting the ground running to ramp up a workforce to tap North American shales. (4/7)
The Trump administration is developing at least one order aimed at both a new five-year offshore oil and natural gas leasing plan and reversing an Obama administration decision to bar drilling in the majority of US Arctic waters and a large chunk of its Atlantic waters, according to industry sources. The details of the order, or separate orders or memorandums, are still being worked on, but are expected to be signed by President Trump before the end of April. (4/7)
Oil IPOs: The stream of US energy companies going public at the start of 2017 has dried up on concerns over the future direction of oil prices, but private buyers seeking mergers and acquisitions are ready to take advantage of the volatility to secure cheap deals. (4/8)
Bankruptcy? Seadrill Ltd., once the crown jewel of billionaire John Fredriksen’s business empire, is at the mercy of short-term speculators as the biggest funds shun the offshore driller amid a struggle to avoid bankruptcy. (4/5)
Bankruptcy bonanza: When Ultra Petroleum Corp. emerges from bankruptcy protection in the coming weeks, as expected, the natural gas producer’s chief executive is on track to be rewarded with roughly $35 million worth of its stock, more than 10 times his annual compensation in recent years. (4/4)
Bankruptcy CEOs: The oil price rout that sent several hundred US oil and gas companies under seems to be largely over, and in a somewhat surprising turn of events, some chief executives of companies that filed for bankruptcy protection in the last two years are doing better than they did when oil traded at over $100 a barrel. A Wall St. Journal study shows CEOs of a number of companies emerging from bankruptcy have earned, often through stock gains, single-digit and double-digit millions of dollars in increases. (4/7)
Gasoline prices: Maintenance at US refineries and a shift to a more expensive summer blend of gasoline is leading to a spike in retail gas prices, motor club AAA reports. AAA reports a national average retail price for a gallon of regular unleaded gasoline at $2.33. (4/5)
Wind + batteries: Denmark’s Vestas is keen to expand into areas such as energy storage to increase the global use of wind power and bring costs down. The wind industry is entering a phase of slower growth and steadier demand for turbines, prompting producers to look at alternatives to grow revenue. Storing over-production can take down total system costs. (4/7)
In Canada, with economic diversification on the agenda, the country’s natural resources minister said this may be the start of a growth era for wind energy. The Canadian government estimates it already has the eighth largest wind-energy portfolio in the world, with nearly 12,000 megawatts of installed capacity. (4/7)
EVs: Ford Motor Co. said Thursday that it would start building electric cars in China to tap into a state-sponsored boom in green-energy vehicles. In doing so, the Detroit-based company signaled that it had swallowed industry concerns about bringing proprietary electric-car technology to China, despite misgivings among foreign auto makers about intellectual-property protection there. (4/8)
States suing: A coalition of US states and municipalities has begun legal action against President Donald Trump’s administration, accusing it of violating federal law by delaying energy efficiency standards for several consumer and commercial products. The legal action was announced on Monday by New York Attorney General Eric Schneiderman. (4/4)
Ship fuel issue: Little more than 2 1/2 years from now, the global fleet of merchant ships will have to reduce drastically how much sulfur their engines belch into the atmosphere. While that will do good things, there’s a $60 billion sting in the tail. That’s how much more seaborne vessels may be forced to spend each year on higher-quality fuel to comply with new emission rules that start in 2020, consultant Wood Mackenzie Ltd. estimates. (4/5)