Quote of the Week
“President Trump is trying to erase all the climate and environmental progress we’ve made. We aren’t about to go down without a fight, and by joining this litigation, we are signaling to Congress our resolute and growing commitment to defending the Arctic and Atlantic permanent protections and halting the expansion of risky offshore drilling.”
Gene Karpinski, President of the League of Conservation Voters
Graphic of the Week
1. Oil and the Global Economy
The price slump which began in early April continued last week with NY futures falling below $46 a barrel on Thursday, down from nearly $54 last month. Behind the move are fundamentals saying that a combination of higher US crude production and rebounding Libyan output are offsetting the 1.8 million b/d OPEC/NOPEC production cut. In the past week, several oil ministers supporting the production cut have issued reassuring statements as to how well the cut is being observed; that the cut likely to be extended until the end of the year; and that the 3rd quarter will see substantial progress in easing the oil glut. Outside analysts continue to say that deeper cuts and extending on into 2018 will be necessary to offset booming production in countries not subject to the cut.
Among the new factors impacting oil prices last week was a weak manufacturers’ survey from China, a growing gasoline glut in the US caused by stagnant demand, and the announcement of the lowest US jobless rate in 10 years. While decreasing unemployment should be good for gasoline demand, many of the newly created jobs are not paying that well, and the overall US labor force participation rate continues to slip.
The most important factor in the supply/demand equation is the increasing US oil production from both shale and offshore sources. From a low of 8.56 million b/d last September, US production is now over 9.2 million nearly offsetting the OPEC/NOPEC production cut. Although OPEC continues to trumpet its compliance with the cuts, in several countries the cuts were made from artificially high levels and do not reflect a decline in base production levels.
There is nothing in sight, short of a geopolitical upset such as the total collapse of Venezuela, that will change the outlook for oil prices in the immediate future. The US rig count continues to rise, and many observers including the EIA are forecasting that US oil production will continue to increase in the next few months. However, these predictions do not consider the possibility that oil prices could fall below $40 a barrel in the next few weeks making the profitability of many shale oil producers a dubious proposition.
2. The Middle East & North Africa
Iran: Political developments will likely overshadow the oil news for the next few weeks. The presidential election, scheduled for May 19th, could determine where Iran and its oil production go from here. Despite the nuclear agreement and the lifting of the sanctions, Iran’s economy is still not in good shape. While the recent price bump has helped a bit, the expected boom with foreign companies investing billions to increase Iran’s oil production has not yet materialised. The advent of the Trump administration, which is skeptical of the nuclear agreement and keeps issuing war-like threats against Tehran and its policies complicates the situation. A major political upset involving Iran is not out of the question in the next year or so.
In the meantime, Iran says it will go along with whatever OPEC decides about extending the production cut through the remainder of the year. Since the sanctions were eased in January 2016 Iran’s oil production has increased by 34 percent. However, the rapid increase registered last year has slowed, and production in 2017 is only up one percent. Some of this slowdown is likely due to the production freeze while squeezing out more oil from aged fields without substantial foreign investment as we see in Iraq is not likely.
Iraq: To compensate for the revenue loss by the OPEC production cut, Baghdad has increased its refining into crude and has stepped up exports of lightly processed “fuel oil” nearly doubling exports of the stuff. This increase in fuel oil exports, some of which can be further refined into gasoline and other products is one reason for the growing oil glut in Singapore. This in return has reduced shipment from the EU to the far east and is causing record fuel oil inventories at the Amsterdam-Antwerp hub.
The Norwegian oil company, DNO, says it plans to double its activity in the Kurdish oil fields.
Saudi Arabia: The Saudis are right in the middle of the “have-the-OPEC-cuts-failed” issue. Ever since the Saudis decided last fall that cutting production was the way to a more profitable future, they have taken the lead in cutting production to drive up prices. For a while, this plan seemed to have been working, but now it seems that the cuts will be overtaken by increased production by countries not in the agreement. Riyadh has made several cuts in its selling price but seems to be losing its share of the Asian market to Iran and Iraq. Part of the Saudi concern over the need to push up prices is the coming IPO of 5 percent of Saudi Aramco which is due to reach the market next year.
Although the Saudis hope to earn $100 billion from the sale without giving up much of anything, that is still an open question. As the Saudi government has been taking nearly all Aramco’s earnings, it is obvious that it would be impossible to sell shares in a company that could not pay out earnings. To get around this, the Saudis lowered the ostensible “taxes” so that dividends would be possible. The Saudis also have made it clear that the IPO does not involve selling any oil reserves; only the production, refining and marketing would be available for partial private ownership.
Concerns are rising that the major overhaul of the Saudi government that is currently underway may lead to political instability when, or even before, King Salman dies. Prompted by the massive fall in oil revenue over the last three years, the Saudis have been forced to burn through the foreign reserves they have built up over the decades to finance their foreign policy objectives and to maintain political stability. To stabilise the situation and consolidate his power the king has been moving members of his branch of the royal family into key positions threatening the intra-royal family balance that has kept the kingdom stable.
So far, the signs of political trouble of the House of Saud have been subtle. However, serious trouble could be brewing below the surface. Generous subsidies to Saudi citizens from the massive oil revenues have kept the situation quiet for decades, but we are still dealing with a form of government based in the middle ages so that at some point, the passions we saw in the Arab Spring could rise to the fore. This could ultimately have serious implications for the world’s oil supply.
Libya: The announcement last week that Libya has been able to increase its oil production to 760,000 b/d helped to drive prices. If recent history is any guide, it will not be long before some armed group seizes an export terminal or shuts the valve on an oil pipeline to extort more money for themselves or their community. The chairman of the National Oil Corporation also said that the company has plans to increase oil production to 1.1 million b/d in the next few months. Although Libya was producing 1.6 million b/d before the uprising in 2011, damage to facilities and lack of maintenance has reduced the country’s productive capacity by about 500,000 b/d. To get production up to earlier levels will require investment and technical assistance from foreign oil companies. Some of these companies are back in Libya now but are keeping a low profile.
Since the uprising, Libya’s problem has been a lack of a strong central government with enough power to keep local tribes and militias from interfering with the country’s oil industry which is the only institution worth blackmailing. There are currently three governments in Libya that have been trying to undercut each other for the last two years. The situation is complicated by an offshoot of the Islamic State that was only recently driven out of its stronghold and into the desert.
Negotiations on a political settlement have been going on, and last week there were indications that the two main adversaries – the Eastern government which is effectively led by General Haftar, and the UN-backed government of national unity – have made progress on reaching a settlement. The next few weeks may be critical in determining if such a deal comes to fruition. If stability comes in the next year or so, Libya, which has the largest oil reserves in Africa may again become a major contributor to the world oil supply.
Pollution – air, water, and soil—is still a major topic of conversation in China. While the government has made serious efforts to cut particulate matter in the air it still has a way to go. The air in northeastern China has been well below standard for years. This was compounded last weeks by sandstorms that have blown through Beijing and other major cities causing the latest “airpocalypse.” Air quality readings in Beijing last week were off the charts readings “beyond index.” Residents of several cities were warned to stay indoors. A recent study from the Nanjing University’s School of the Environment says the bad air is linked to about one-third of all deaths in China, putting it about equal to deaths caused by smoking. The situation is worse in cities around Beijing. A RAND study says pollution cost the Chinese economy about $535 billion last year.
After making progress in reducing air pollution in and around Beijing in recent years, during the last six months there has been a major slowdown in improving the air in the region. This has been due to the ramping up of industrial production around the city to counter the effect of slowing GDP growth.
The Chinese government is still ambivalent about its pollution problem. While it is starting to feel the outrage of Chinese citizens, it is unwilling to take the necessary steps to reduce pollution so long as economic growth will be harmed. Unless there are major changes in the technology of producing energy, this problem is likely to go on for many years.
We may be starting to see an impact on China’s oil industry. In recent years, there has been rapid growth in the Chinese oil refining capacity. This situation has resulted in the government’s issuing more fuel export quotas so that Chinese refiners can import more crude oil than is needed for domestic consumption and then export the rest to Asian markets. The problem is that the pollution created by refining all this crude ends up in China’s air and not in that of its oil product customers. One of the first things the Chinese could do is to stop refining other peoples’ gasoline. It should be noted of course that much of the world’s stuff is being made in China today which is why its air is becoming unbreathable.
Moscow announced last week that its oil production on May 1st was 300,790 b/d lower than it was in October. Under the agreement with OPEC, the Russians agreed to cut their daily oil production from its October high of 11.247 million b/d to 10,947. Moscow has been coy about whether it will agree to another six months of cuts, saying that it must consult with the country’s various oil companies first.
Gazprom Neft, the oil arm of the natural gas company Gazprom, announced that it is making good progress in developing its Novoportovskoye oil field north of the Arctic Circle. The field now has 85 active wells which have produced about 35 million barrels thus far.
The government announced last week that there had been no pipeline or oil infrastructure vandalism during the last three months. This seems to be in line with what the media has been reporting. If the government has worked out a settlement with the various militant groups and the oil companies are making progress in repairing damaged facilities, then there is a possibility that we could see an increase it Nigeria’s oil production of several hundred thousand barrels per day in the next few months.
In the meantime, the various audits, investigations and court cases covering many aspects of the massive corruption in the Nigerian oil industry continue.
Daily anti-government demonstrations are taking place across the country. So far, the death toll from the demonstrators’ clashes with security forces is around 40. Some 700 have been injured, and 152 of the hundreds that have been arrested are still being held. President Maduro is setting up a group to write a new constitution for the country, presumably giving himself more power and likely avoiding the need to hold an election soon. The food and medicine situation remains dire. There is no recent reporting on how oil production or exports are going. Much of the oil production, refining and exporting is taking place in areas away from the demonstrations.
Last week there was a report that Russia has begun shipping large quantities of oil to Cuba to replace supplies that had been coming from Venezuela. Rosneft announced it had signed an agreement with Cuba to supply 250,000 tons of oil to the Island. From 1960 until 1989 Cuba received nearly all its oil from Russia. The agreement between Caracas and Havana had Venezuela supplying Cuba’s oil needs on very favorable terms. Given today’s situation, Caracas can no longer afford such generosity. Reports that the US has been exporting record quantities of oil products around the Caribbean suggest that other countries that had been importing Venezuelan crude are having similar troubles.
General Motors announced last week that it was taking a $100 million write-off on the manufacturing plant it has operated in the country since 1948. The factory was seized by the government three weeks ago in settlement of a judgment against the country. All the local workers have been let go while GM appeals the ruling through the Venezuelan courts.
Venezuelan oil production is probably dropping due to the National Oil Company’s inability to purchase dilutants for its heavy oil and parts to keep its production equipment operational. How long this will last is difficult to say, but a default on government and oil company bonds before the end of the year is likely.
7. The Briefs
In Malaysia, oil industry leaders meeting next week to discuss extending production cuts won’t have to look far for evidence the market remains awash in supply. Just off the coast, in the Straits of Malacca, dozens of tankers loaded with record amounts of unsold fuel show an OPEC-led agreement to cut production in the first half of 2017 has yet to tighten the market. (5/5)
PetroVietnam’s joint venture with Venezuela’s state-run oil company PDVSA remains stalled but the Vietnamese company hopes ongoing talks will lead to reactivation of operations. Vietnam’s state-run oil company and PDVSA operate the PetroMacareo extra-heavy crude project in Venezuela’s vast Orinoco Belt. After PetroVietnam halted oil production in 2014 due to tough economic conditions, the firm considered selling its 40-percent stake, but did not. (5/4)
Re Venezuela: The US Supreme Court on Monday ruled against an American oil drilling company that claimed Venezuela unlawfully seized 11 drilling rigs in 2010. Siding with Venezuela, the justices ruled 8-0, with Justice Neil Gorsuch not participating, to throw out a 2015 decision by the US Court of Appeals for the District of Columbia Circuit that allowed one of the claims made by Oklahoma-based Helmerich & Payne International Drilling Company to move forward. (5/2)
Panama Canal: The number of LNG carrier transiting the canal could average one a day by 2021 as more US supply comes on stream and targets demand in North Asia, according to Panama Canal Authority. (5/3)
In central Mexico, armed exchanges between troops and suspected fuel thieves have left 10 people dead, including four soldiers. Officials said the series of clashes with suspected oil smugglers in the town of Palmar de Bravo, just outside Puebla, also left 11 soldiers wounded. Six alleged oil thieves, among them a female suspect, were killed in the shooting. Officials said drug smugglers are diversifying their operations, sometimes stealing from pipes belonging to the state oil concern Pemex in a lucrative sideline. (5/5)
In Canada, Suncor Energy said on Monday that pipeline shipments from the Syncrude Mildred Lake Oil Sands facility had resumed after completing repairs following a fire at the upgrader on March 14. Over this past weekend, Syncrude completed the necessary repairs and start-up activities, and shipments had begun, Suncor said. Currently, pipeline shipments are at around 140,000 bpd (gross), and are expected to increase as additional units complete turnaround activities. Production at the facility is expected to return to full rates in June. (5/2)
Alberta’s Premier Rachel Notley, during a recent trade visit to Asia, signed an agreement with the Japan Oil, Gas and Metals National Corp. to collaborate on components related to oil and gas exploration and production. (5/6)
The US oil rig count increased by six, bring the total count to 703, Baker Hughes Inc. said. The stretch of gains increased for the 16th week in a row, extending a drilling recovery into a 12th month even as the pace of those additions has slowed in recent weeks as crude prices have held below $50 a barrel. While the oil rig count is more than double the same week a year ago when there were only 328 active oil rigs, the pace of those additions has declined over the past four weeks. (5/6)
GOM growth: As rapid growth in US shale production grabs headlines and threatens to upend attempts by OPEC to balance oil markets, a more unsung sector of the US industry is also hitting new output highs – the offshore Gulf of Mexico. While attention and investment is focused on shale, the Gulf is the among the most prolific oil source in the United States, producing more than Alaska, the West Coast and Rocky Mountains combined. The region churned out a record 1.76 million barrels per day of crude in January, trailing only Texas onshore production, which includes the growing Permian Basin.
In the Gulf of Mexico, BP has adapted in the deepwater environment, according to Richard Morrison, BP plc’s regional president for the GOM. Despite the low oil price environment during the oil and gas industry downturn, operational safety hasn’t suffered, said Morrison, adding that there hadn’t been an increase in accidents in the GOM or elsewhere within the company. (5/2)
Royal Dutch Shell reported a sharp increase in profit in the first quarter, rounding off a bumper set of results for the world’s biggest oil companies as years of cost-cutting and a fragile recovery in oil prices begin to pay off. (5/4)
US refiners are flooding the market with gasoline, intensifying oil prices’ spring decline. Refiners are turning crude oil into gasoline and diesel at the highest rate in at least 34 years, according to data from the US EIA. (5/5)
Jobs killer? The US will shoot itself in the foot if it quits the Paris climate accord because China, India and Europe will snap up the best power sector jobs in future, U.N. Environment chief Erik Solheim said on Thursday. US President Donald Trump is expected to announce as early as next week whether he will take the United States out of the climate pact. (5/5)
Twelve state governors, including those rich in shale natural resources, signed a letter to President Donald Trump requesting continued alignment with the global climate agreement. In the letter, they remind the president that, because it’s a multilateral accord, other developing economies like China and India will capitalize on the economic benefits of renewable technology if the United States leaves. (5/5)
DOD vs. Trump: A letter viewed by Florida lawmakers from the Pentagon said maintaining a moratorium on drilling in parts of the Gulf of Mexico was in the nation’s interest. A letter from the Department of Defense to US Rep. Matt Gaetz, D-Fla., expressed concern about recent executive action from President Donald Trump that could open more offshore areas for drilling. Anthony Kurta, acting undersecretary of defense for personnel and readiness, said in the letter that keeping parts of the Gulf of Mexico off limits beyond 2022 was essential for developing future combat readiness. (5/4)
In Alaska, 10 environmental groups—including the League of Conservation Voters, The Wilderness Society and the Sierra Club—filed suit in federal court. They are challenging President Donald Trump’s attempt to restore oil and gas leasing on more than 125 million acres in the Arctic and Atlantic oceans, arguing that a warming world doesn’t need the fossil fuels they contain. (5/4)
In Ohio, four conservation groups on Tuesday sued the US Forest Service and Bureau of Land Management to halt fracking plans in a portion of Ohio’s only national forest. (5/3)
Ohio legislators took a step toward allowing fracking in state parks, adding a provision in a pending budget that would strip the governor of the ability to control the issuing of licenses for the oil and gas drilling practice that has raised environmental concerns. (5/4)
Gasoline tax? President Donald Trump said on Monday he would consider raising the federal tax on gasoline to fund infrastructure development “earmarked toward the highways,” Bloomberg News reported. (5/2)
Fence straddling: A directive requiring US pipeline companies to use American steel and iron in their projects is testing President Donald Trump’s ability to keep his promises to two industries on opposing sides of the issue. In comments to the US Department of Commerce, which is crafting the so-called “Buy American” plan, pipeline companies and their trade groups argued the change would increase costs and disrupt operations. Steel companies, meanwhile, embraced the policy as an opportunity to take advantage of the country’s surging oil and gas production. And Trump has vowed to support both. (5/2)
Pipeline protest redux: The growing protest movement against US oil and gas pipelines has so far focused on stopping or delaying new construction, with some high-profile successes. Now, in Michigan, a broad coalition of opponents is entering a new frontier: Pushing to rip out and reroute an existing pipeline – Enbridge Inc.’s aging Line 5, which crosses the Straits of Mackinac. They fear the pipeline will leak into the Great Lakes. (5/1)
Wind boom: An annual report from a wind energy trade group in the United States found the sector is in the midst of extraordinary growth and Texas is leading the way. Tuesday’s report from the American Wind Energy Association found first quarter US installations reached 2,000 megawatts, triple the capacity from one year ago, for one of the strongest quarters on record. (5/3)
Wind generators accounted for 8% of the operating electric generating capacity in the United States in 2016, more than any other renewable technology, including hydroelectricity. Wind turbines have contributed more than one-third of the nearly 200 gigawatts (GW) of utility-scale electricity generating capacity added since 2007. The increase in wind development in the United States over the past decade reflects a combination of improved wind turbine technology, increased access to transmission capacity, state-level renewable portfolio standards, and federal production tax credits and grants. In three states—Iowa, Kansas, and Oklahoma—wind makes up at least 25% of in-state utility-scale generating capacity. (5/3)
India’s aging power stations will miss a government deadline to slash their emissions, the country’s power minister has admitted, as he reiterated the country’s longstanding position that the responsibility for tackling global pollution rests squarely with the west. (5/3)
South Africa’s state owned utility has gotten some of its major problems behind it and has launched an ambitious generation building program that could add 9,500 megawatts to the presently installed electric generating capacity of 46,300 MWs. In 2014, South Africa and Russia signed an agreement whereby Russia’s state-owned Rosatom would supply the country with eight nuclear power plants at a cost of $76 billion. Critics of this significant nuclear new build have claimed that given diminishing prospects for load growth the units are not necessary and represent an undue financial burden for a fiscally constrained South African economy. (5/2)
In the UK, experts have said that if Britain leaves Euratom, there is a risk of new-build projects being delayed or put on hold while new stand-alone nuclear cooperation treaties are negotiated with countries in the EU and outside it. (5/2)