“The shortcoming of oil replacement by the drill bit has been quite drastic … Discoveries are not keeping up with production.”
Per Magnus Nysveen, head of analysis, Rystad Energy. Last year, 10 billion barrels of oil were discovered, around one third of global consumption, including well-appraisal activity, said Nysveen. He added that supply could fall short by up to 2 million barrels per day within seven to eight years.
Graphic of the Week
1. Oil and the Global Economy
After climbing steadily since March 27th, oil prices stabilized at the $53-55 level late last week. As usual, prices got a boost from various oil minister’s comments about how well they were doing in meeting their production cut goals and how they are considering extending the cuts until the end of the year. The monthly OPEC report shows that the cartel’s production jumped by about 1.2 million b/d after production cuts were first seriously discussed last fall, and then fell about the same amount after cuts started in January. The net result was to leave OPEC’s production about where it was through most of 2016.
Breakeven prices for oil are plunging across the industry with large reductions in costs for conventional as well as shale wells. This information casts doubt on industry claims that technological innovation in shale oil production is the primary reason that the cost of producing this oil has fallen in the last three years. In reality, lower costs of production are primarily due to oil service companies working at or even below profitable levels to stay in business.
The issue of whether the OPEC cuts will reduce the global crude surplus continues to be discussed endlessly. Some believe that oil prices will remain anchored in the mid-$50s for an extended period and bounce around that number by ten or so percent in response to the latest news. Everybody seems to agree that oil prices climbing into the $60s will simply result in increased production of shale oil more quickly. A few optimists see the global oversupply being eliminated by the end of year and prices moving higher due to the shortages from underinvestment in new production. Both sides of this debate are throwing around numbers to back up their claims.
Last week the IEA, the EIA, and OPEC all released their monthly appraisals of the global oil situation. In a wide-ranging assessment, the IEA notes that OPEC has done a good job cutting production and that the Non-OPEC adherents to the agreement seem to be falling in line. The Agency notes that the oil market will likely tighten throughout the year due to the production cut. Assuming the cut is extended until the end of the year prices are likely to creep higher and encourage US shale producers and others to increase production. Even if the cut is not extended, the Agency expects that US production will grow by about 680,000 b/d during 2017.
There are several wild cards that could change the oil supply/demand situation markedly before the end of the year. Libyan production has been bouncing between 500,000 and 700,000 b/d because of militia groups shutting off and turning on oil pipelines for their own purposes. The Libyan National Oil Company keeps saying that if everybody leaves it alone, it could be producing on the order of 1.1 million b/d by the end of the year though this would still be 500,000 b/d below what the country was pumping before the troubles began.
Nigeria has recently been pumping about 900,000 b/d below its “normal” 2.2 million. Part of the lower production has been due to maintenance on two major oil facilities and part due to sabotage by militants. The government announced last week that the maintenance will be completed with the next two months and that oil production should be rising again. If we ever see Libya and Nigeria pumping near declared intentions, the increase in production would be on the order of 1.3 million b/d, largely offsetting the OPEC/NOPEC production cut when increased US production is thrown in.
On the other side of the list is Venezuela where the political/economic situation continues to deteriorate. Oil production there is sliding slowly, but there is little speculation about what will happen to oil prices if there is a total societal collapse. Taking this much oil off the market at once could give prices a substantial boost.
Then we have the increasing tensions in the Middle East and Korea. Syria produces so little oil these days that it is no longer a factor, but the possibility of wider fighting that threatens oil supplies grows all the time. Another Korean War would be so fraught with dangers that there is no way to even contemplate the effect on the oil business. China is already threatening to cut off North Korea’s oil supply if it tests another nuclear weapon. As the country does not consume much oil, the impact on the oil markets would be minimal, but North Korea’s economy would be devastated.
The IEA also notes that the demand for oil is not as robust as previously estimated. The agency sees weaker-than-expected demand growth in Russia, India, several Middle Eastern countries, Korea, and the US, where demand has stalled in recent months. There are so many variables at work, that making a responsible estimate of where prices are going is nearly impossible at this time. Over the next five years it is likely that oil will come into short supply, but much is likely to happen before then.
2. The Middle East & North Africa
Iran: Tehran’s exports fell to 2.35 million b/d in March from 2.41 million in February as the country continued to empty out the crude it had been holding in floating storage since days of the nuclear sanctions. Most observers believe that that the Iranians no longer have much crude in storage that could be quickly exported and from here on must increase production. The Iranians are still optimistic that more foreign investment will be flowing into the country now that the sanctions have been eased.
Thanks to years of wars, turmoil, and embargos, Iran has some of the world’s last remaining oil that can be exploited quickly and cheaply using conventional techniques. To attract foreign investment, Tehran has been working for many months on a new model contract that it hopes will attract investors.
Under the production freeze agreement, Iran fell into a special category that allows it some small increases in production rather than actually cutting output. Tehran announced last week that it has a goal of surpassing Qatar by increasing production from the South Pars oil and gas field which it shares with Qatar across the Gulf. The Iranians say the field may contain as much as 14 billion barrels of oil.
Syria/Iraq: Independence for Kurdistan has been a top priority for the Kurds since the end of the Ottoman empire a century ago. Now the Kurds are planning a referendum to determine if there is support among the Kurdish people who are now are living in Turkey, Syria, Iraq, and Iran. Needless to say, none of these countries are anxious to give up territory and in some cases oil reserves to a newly independent country. The Kurds have a century-old claim on much of the oil in northern Iraq. Sorting out these issues after the ISIL and Syrian situations are settled will likely be difficult.
Saudi Arabia: The kingdom’s oil production in March slipped by 111,000 b/d to 9.9 million, the lowest since January indicating the that Saudis are doing their best to support the production cut agreement. The CEO of Saudi Aramco warned last week of a looming oil shortage in the next decade due to the $1 trillion drop in global investment in finding and developing new oil fields that has happened in the last few years. The executive also said that the Saudis are likely to support extending the production cuts until the end of the year.
The Saudis are seeking bids for 700 megawatts of wind and solar projects. This is part of a $50 billion program to boost electricity production and free up more oil for export. Currently the Saudis burn large quantities of crude each summer to support air conditioning. This results in major losses of revenue as crude is far too valuable a resource to burn directly in power plant furnaces.
Libya: Last week Libya’s oil production fell to 490,000 b/d as the country’s largest oilfield, Sharara, was closed down for the second time in 3 weeks. The closure of Sharara was followed by the closure of the Wafa field as the two share a single pipeline feeding crude to the Zawiya export terminal. With the closure of Wafa, Libya’s oil production could be less than 450,000 b/d. Given that numerous groups with varied grievances have the power to close pipeline valves to draw attention to their complaints, it is starting to appear that higher Libyan oil output is not going to be realized in the immediate future.
General Haftar who has been in extensive conversations with Russian officials of late said the possibility of Russia establishing a military base in Libya, similar to the one in Syria, is not going to happen. Moscow is likely too sensible to get involved directly in the Libyan mess, but could be sending military aid to Haftar’s forces in an effort to gain influence should Haftar and the eastern government ever succeed in taking over the country.
China’s record crude imports in March, up 11 percent over February, confirms its position as the number one oil importer in the world. During the 1st quarter, Chinese imports averaged 8.5 million b/d as compared with 8.15 million b/d for the US. Much of the surge in buying during the 1st quarter was by small independent refiners or “teapots” that moved the oil into storage. Many analysts expect that April will see less buying as the small refiners are running out of space to store the excess crude, and the demand for oil products across Asia has been weaker lately.
Despite all the efforts in clean up its air, China continues to increase its thermal power generation which was up by 7 percent year over year in the first quarter. As domestic coal production only increased by 4 percent during the quarter, the result is a surge in demand for imported thermal coal which is expected to be 30 million tons higher this year than in 2016. Some in the Chinese coal industry are predicting a bright future for coal with imports growing to over 1 billion tons by 2030. They acknowledge, however, the urgent need to burn coal more efficiently and reduce emissions. It seems that some in China, as in the US, have not yet gotten the message.
The government expects that production will revive this summer from the current 1.27 million b/d to 2.2 million as repairs are completed on the Forcados pipeline that was damaged by militant sabotage and maintenance is completed on the Bonga offshore oil field. There have not been any significant militant sabotage operations of late and the government claims it has patched things up with, or more likely bought off, the militants. President Buhari’s new tactic of negotiating with the militants rather than engaging in an all-out-war may be working.
If Nigeria, which is not under any OPEC production constraints, can increase its production by a million b/d in the second half of the year, then it would take a large bite out of the OPEC production cuts. In conjunction with increases in US and other Non-OPEC production, the OPEC production cut may not produce the desired results.
Royal Dutch Shell said it knew that some of the $1.3 billion paid to the Nigerian government in 2011 for an exploration license would go to a company linked to the country’s former oil minister, changing its previous stance on a deal that’s under investigation for alleged corruption. This seems to be the first time that Shell has admitted it knew that some of their payment for the license was going to middlemen rather than the government. The Anglo-Dutch oil company reiterated that its joint purchase with Eni SpA of the license was “fully legal.”
Nigerian newspapers are filled with stories alleging that former President Goodluck Jonathan received as much as $200 million to approve the license for Shell. Stories of widespread corruption in Nigeria have been rife for years, but nothing ever seems to come out of them. This time we have the US’s FBI questioning Russian middle-men who seem to have gotten into the deal.
Violence increased across Venezuela as hungry people took to the streets in protest against government policies. So far the demonstrations seem to be rather small but numerous. To strain security forces, demonstrations were said to have taken place in each of the country’s 335 municipalities. The demonstrations spread as far as the normally pro-government slums that have been the backbone of the government’s support. There were scattered reports of protestors being killed during clashes with police. The opposition’s acknowledged strategy is to wear the government down by keeping up the pressure until the government caves. Some observers, however, are saying the opposition has no coherent plan beyond bringing down the government through violence.
The national oil company, PDVSA, and the government managed to scrape together the $2.2 billion in bond payments which came due last week. It will be interesting to see if the payments came from the dwindling state foreign currency reserve, which is now down to $10 billion, or if the government was able to obtain additional loans from Russia in return for pledging an unknown share of the country’s oil reserves and other assets as collateral. It seems that the Maduro government takes its credit seriously for it would have been easy to declare a default in the midst of the ongoing demonstrations. The government likely fears that a default on its debts would so entangle its financial system that selling oil and importing food would become even. more difficult.
The next big test comes in October and November when some $3.5 billion in bond payments comes due. It is difficult to see how Venezuela’s current government and indeed its economy can last that long.
6. The Briefs
In the North Sea, a large oil find has been declared 60 miles west of Shetland, off the north coast of Scotland. It’s being described as the UK’s “largest undeveloped discovery.” The discovery was made by Hurricane Energy, a specialist exploration firm, which announced that its Halifax well had found large amounts of oil. It said it had also successfully undertaken a production test in which oil flowed at an impressive rate. This find may even be connected with a previous discovery nearby (the Lancaster field) and hence be part of one large accumulation of nearly a billion untapped barrels. (4/11)
$60 target: Some of OPEC’s biggest oil producers, including Saudi Arabia, Kuwait and Iraq, are now targeting $60 a barrel as the level where they want to push crude prices, OPEC officials said, signaling they will support additional production cuts next month. (4/15)
Oil majors face a dilemma as crude oil prices recover – how quickly should they seek to replenish reserves? It’s the same question the cyclical oil industry has tackled many times before: go too fast and risk spending too much for little reward, go too slowly and your rivals will be better positioned to grab market share should oil prices rise. New data revealed by a Reuters analysis shows the oil and gas reserves of global majors have fallen sharply. (4/13)
Saudi Arabia will begin seeking bids next week from renewable-energy companies to build wind and solar plants with a combined capacity of 700 megawatts as part of the kingdom’s $50 billion program to boost power generation and cut its oil consumption. The energy ministry qualified 27 companies to bid for a 300-megawatt solar plant and 24 firms for a 400-megawatt wind farm. (4/11)
In southwestern China, a crude pipeline through its neighbor Myanmar began operations after years of delays, allowing China to receive supplies faster from the Middle East and Africa. The link allows China to import crude from the Middle East and Africa without having to ship through the Straits of Malacca. (4/12)
China is considering a suspension of its crude oil exports to its neighbor should North Korea conduct a sixth nuclear test. North Korea depends on China for 90 percent of its crude oil supply, and stopping these will wreak havoc on the dictatorship. (4/14)
Australian-based mining giant BHP is the fourth-largest oil producer in the US Gulf of Mexico and the eighth-largest in US shale fields. Last year, BHP pumped the equivalent of 650,000 barrels a day of oil and natural gas. Its US assets alone are so valuable that activist investor Paul Singer urged the company to spin them off — a suggestion BHP rejected Monday, setting the stage for a tussle with the billionaire. (4/11)
The US oil rig count climbed another 11 rigs the week of April 14, according Baker Hughes Inc. A majority of the growth occurred in the Permian Basin in Texas and New Mexico. The number of active oil rigs in the United States now stands at 683 – 332 rigs higher than the figure one year ago. Gas rigs declined this week by 3—after five consecutive weeks of growth—bringing the total oil and gas rig count to 847, or 407 more than a year ago today. (4/14)
GOM gaining: With two oil fields in the Gulf of Mexico starting production this year, and five on tap for 2018, offshore production is set to increase. Eight new fields in the US GOM started producing oil last year, leading to a high-water mark of 1.6 million b/d, beating the previous record set in 2009 by 44,000 b/d. By January, regional offshore production was up another half million barrels on a daily basis. Since 2014, Wood Mackenzie estimates the average cost to develop deep water projects has dropped more than 20 percent. (4/14)
Surging West Texas oil production has pushed the value of the region’s spot crude to its lowest discount to the US oil benchmark in nearly two years, as an exuberant shale industry pumps more to take advantage of higher prices and demand from refiners who have seen supplies cut by top global producers. (4/12)
The Texas Railroad Commission issued 1,310 new oil and gas drilling permits to shale producers last month, up from just 511 a year ago. Most of these were issued for the Permian, cementing further its top spot among most desirable drilling destinations in the shale patch. (4/12)
In Alaska, January brought a glimpse of the anxious future facing the state’s once-mighty oil pipeline. The 800-mile Trans Alaska Pipeline System was built for extreme conditions. But as the state’s oil production declines, the pipeline faces a new challenge: flows so sluggish operators worry the line may become unusable, cutting off access for hundreds of North Slope oil wells. Alyeska’s technical fixes, such as adding oil heaters up and down the line, should allow the pipeline to keep operating at volumes as low as 300,000 barrels a day, a threshold that could be reached by the middle of the next decade. (4/15)
North Dakota crude oil production rose back above the 1 million b/d threshold in February for the first time since November, but output could drop as low as 950,000 b/d in March or April as frozen roads thaw and force the state to impose weight restrictions on service trucks. (4/14)
The Dakota Access Pipeline will begin interstate crude oil delivery on May 14, according to a filing with the US Federal Energy Regulatory Commission. The $3.8 billion, 1,172-mile project runs from western North Dakota to Patoka, Illinois and as currently designed will have a 470,000 barrels per day capacity. (4/14)
Gas pipeline boom: US energy firms are scrambling to finish a slew of pipelines that will unleash rich reserves of shale gas in Pennsylvania, West Virginia and Ohio as the nation prepares to become one of the world’s top natural gas exporters. The pipelines are expected to boost output from shale fields in the three states by giving producers access to new domestic and international markets. Those states could supply about a third of all US natural gas once the pipeline expansion is complete, up from about 25 percent now. (4/13)
ConocoPhillips said on Thursday it would sell natural gas-heavy assets in San Juan basin to privately held Hilcorp Energy Co for about $3 billion. ConocoPhillips has been selling assets to reduce its exposure to profit-sapping natural gas assets and shore up its balance sheet. The assets produced 124,000 barrels of oil equivalent per day, about 80 percent of which was natural gas (4/14)
Wall Street banks’ growing optimism about the energy industry is the latest boost for US oil and natural gas producers already enjoying higher prices. JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. said on Thursday in their first-quarter earnings results that rising oil prices have helped them free a combined $370 million they previously set aside to cover bad loans. If the optimism turns into an increase in lending, it would be a boon to shale firms from Texas to North Dakota that rely on borrowed money to finance their drilling and fracking. (4/14)
Rules do-over: The Trump administration is moving to rewrite Obama-era rules limiting water pollution from coal-fired power plants. Scott Pruitt, the administrator of the Environmental Protection Agency, sent a letter announcing his decision to a coalition of energy companies that lobbied against the 2015 water pollution regulations. The rule would have required utilities by next year to cut the amounts of toxic heavy metals in the wastewater piped from their plants into rivers and lakes often used as sources of drinking water. (4/15)
Florida Senator Bill Nelson pushed bipartisan legislation in 2006 that banned oil drilling in the state waters of the Gulf of Mexico through 2022. A measure introduced in January 2017 calls for an extension of that moratorium for another five years. Nelson’s original bill was enacted in part to ensure the coastal environment in Florida is protected from oil spills. (4/13)
$3/gal = pain: The US national average price for a gallon of gasoline would need to move close to $3 before it starts having a negative economic impact. Consumers in some parts of the country, like California, home to about 10 percent of total US gasoline consumption, and big cities like Chicago and New York, are used to high gas prices and would likely have a muted reaction to gas above $3 per gallon. Other parts of the country where public transportation options are limited and gas prices are typically low will likely flinch. (4/14)
AAA says the average price for a gallon of regular unleaded gasoline in the US is $2.39, up more than 4 percent, or about 10 cents per gallon, from one month ago. (4/12)
Year-to-date US coal production appears to be mirroring last year, which started with a surge at the beginning of the year then dipped through spring as low natural gas prices curtailed coal demand. This year, natural gas prices are higher but coal demand remains low due to more-moderate temperatures. (4/14)
In Texas, more than one in four megawatt-hours consumed in March in the Electric Reliability Council of Texas was supplied by wind power, the biggest share ever—25.4%–for renewables in the Lone Star State’s main grid operator.
Solar panels are more affordable than ever for US homeowners, and that is bad news for the biggest players in the industry. The price of solar panels dropped by 20% in the past year thanks in part to a global glut of panels and better technology, according to GTM Research, accelerating a shift among homeowners to buy panels rather than lease them, thereby cutting into solar business profits. (4/14)
China and EVs: Ford Motor Co. just announced an ambitious electrification strategy for China. The global Mondeo sedan will see the Mondeo Energy plug-in hybrid launched there early next year, followed by an all-electric small SUV a few years later that will go about 280 miles on one charge. The Detroit automaker sees 70 percent of all Ford nameplates coming with an electrified option to China by 2025. (4/14)
Methane hydrates: Until now, production of natural gas from methane hydrate has been completely theoretical. But it’s about to get real — with Japanese officials saying that a drill ship is poised to begin commercial testing of a big deposit in the Pacific Ocean off south-central Japan. Officials say this “crucial” step will be completed in April or May. This effort should give the strongest indications yet on whether this unconventional energy source is a go. The test is far from a lock — with a previous flow test of the same Japan project in 2013 having yielded flows of just 700,000 cubic feet per day–far from commercial for this kind of project. (4/12)