Quote of the Week

Shale oil is too expensive. Let’s concentrate on low-cost oil.  Don’t tell me I need to invest in the highest technology barrels because low-cost oil is the answer to volatility and peak oil.”
Patrick Pouyanne, CEO of Paris-based Total, explaining why he isn’t expanding assets in the hot US shale oil market.

Graphic of the Week

1.  Oil and the Global Economy

Oil prices continued to slide last week with Brent falling below $45 on Thursday and WTI falling below $43. Prices have now dropped by more than 20 percent since the start of the year, and Brent crude will likely post its worst first half since 1997. As normal of late, prices fell on increasing production in the US, Canada, Nigeria and Libya with little solid indication that the OPEC/NOPEC consortium is yet willing to make further production cuts.  While the sharp production gains in Libya and Nigeria are recoveries from geopolitical production outages, some are forecasting that the surge in US shale oil production could run on into 2018 provided oil prices remain high enough to support additional growth.

A few weeks ago, the IEA forecast that US oil production could end up 920,000 b/d higher by the end of 2017 and another 780,000 b/d higher in 2018. These projections, however, were based on US oil selling for $55 a barrel or more and not the $43 we saw last week.

Although the US rig count now has climbed for 23 straight weeks, the decisions to reactivate rigs was taken weeks ago when the market consensus saw oil prices moving higher as the OPEC production cut ate into the global oversupply. In the last few weeks, Libya and Nigeria unexpectedly have increased production by a combined 900,000 b/d sending prices plunging.

The claims and counter-claims about “break even” prices for US shale oil production continue. While costs to produce shale oil were believed to be near $80 a barrel a few years ago, lower costs brought about by the oil price collapse has forced much belt-tightening in the industry resulting in endless discussion of costs. Some of the cost reductions such as the willingness of oil workers and oil service companies to provide their services at a fraction of what they were getting a few years ago will not last as demand continues. Likewise, drilling in only the best locations is only a temporary solution as these “sweet spots” will soon run out, and drilling will have to move to poorer prospects.

Some companies are losing money at $45 oil and will soon stop growing or even declare bankruptcy, while some stronger companies can continue for a while. Just what the mix of stronger and weaker companies is today is unknown, but there are already indications that high costs of production in places such as the Permian Basin where land prices have soared may cause a slowing of oil production growth in the few months.

Opinions as to where production and prices are going seem to be all over the map. Some see prices falling into the $30s in the next year or so which would almost certainly cut back on new shale oil well drilling significantly, while others believe the major oil producers will get together and make large enough production cuts to drive prices higher allowing US oil production to grow.

In the meantime, the demand for increased oil production is easing, especially in Asia. The increasing turmoil in the Middle East centering around Qatar, the continuing pressure on ISIL, and the political upheavals inside the Saudi government could result in disruptions to Middle Eastern oil production at any time.

2.  The Middle East & North Africa

Qatar:  Three weeks after breaking diplomatic relations with Qatar and imposing a blockade, the Arab states opposing Doha sent a list of 13 demands that would settle the crisis. While the Arab states imposing the blockade, including the Saudis, UAE, and Egypt, insist that the underlying cause of the crisis is Qatar’s support for terrorism, Doha denies this and shows no indication that it will comply with the demands which it sees as intimidation by its jealous neighbors.  Supported by Turkey and Iran, Qatar seems capable of holding out against the blockade that is aimed at forcing major changes in its foreign policy indefinitely.

So far, the crisis has had minimal impact on oil prices. Qatar’s LNG exports have seen some interruptions, but these seem manageable. The problem will come if the crisis escalates to the point where hostilities break out. Between the situations in Yemen, Syria, Iraq, and Palestine, there are so many crises underway that the oil markets have become less likely to react to potential, rather than actual, threats these days.

Iran: Oil Minister Zanganeh to said last week that OPEC members are considering further oil output cuts, but should wait until the effect of the current reduced level of production is made clear. This is the first hint that some in OPEC may consider further cuts. Many remain skeptical noting the difficulty of getting OPEC members exempt from the cuts, such as Libya, and Nigeria, from participating. Even Iranian participation is sort of tenuous.

France’s Total said that it will invest $1 billion this summer in the development of the South Pars natural gas field that is shared with Qatar. This is the first large investment by a western oil company in an Iranian project since the sanctions were lifted.

Iraq: Baghdad will restart the Qayarah refinery, south of Mosul, which has about a 20,000 b/d refining capacity. This will bring economic development to an area devastated by the ISIL takeover of the city two years ago and the struggle to drive ISIL from Mosul.

In the wake of the withdrawal from Mosul, ISIL has been using its hold of Hawija, west of Kirkuk, to launch attacks on the Bai Hassan oil field. This field is currently producing about 175,000 b/d.

The Iraqi province of Kurdistan is planning to hold a referendum on September 25th to vote on whether the region will remain part of Iraq or become independent.

Saudi Arabia: The elevation of 31-year-old Mohammed bin Salman as Crown Prince of Saudi Arabia has opened a new era in Middle Eastern politics and has many serious implications for the oil markets. First is the question of the internal stability of the kingdom. The concentration of power within one branch of the family is unprecedented in recent times and raises the possibility of instabilities affecting oil production.

The new crown prince has already bought about several new, and for Saudi Arabia aggressive, policies such as stepping up the confrontation with Iran, intervention in Yemen, overhauling the economy, selling off a piece of Saudi Aramco, confronting Qatar, and heavy participation in the oil production freeze.

At the same time, the crown prince has rescinded the austerity measures imposed last year and has resumed generous handouts to civil servants and military personnel at a time when oil prices are falling rapidly.  While these moves obviously are intended to bolster the new crown prince’s support in important government circles, the bottom line is likely to be a more rapid decline in the massive foreign reserves the kingdom built up during the years of high oil prices.

It is too early to even speculate as to where all this is going, but ever increasing international turmoil and political instability does not auger well for the future of Middle Eastern oil exports.

Speculation has begun as the whether the new-found relationship between Moscow and Riyadh on the oil production cap could result in Russia joining the Saudis in forming a natural gas cartel to push gas prices higher.

Libya: Oil production reached 885,000 b/d last week as the National Oil Company resolved issues with the German energy company Wintershall. Government officials are saying that production could hit 1 million b/d by the end of July. Other plans envision Libyan production reaching 1.3 million b/d by the end of the year. This is getting very close to the pre-uprising production of 1.6 million b/d and would do considerable harm to OPEC’s efforts to raise oil prices.

For now, the easy-to-achieve production increases seem to be over and further increases will require more foreign support in investment. The key question is whether the various political entities now running Libya can get together for the common good and start sharing the revenues in some equitable manner. Otherwise, we are likely to see additional rounds of production shut-ins as various factions jockey to enhance their positions.

3.  China

To cope with an oversupply of refined products, China’s largest refiners are planning to cut refining in the third quarter by some 1.3 million b/d or nearly 10 percent of China’s 15.1 million b/d of refining capacity.  West African and North Sea crude suppliers are already feeling the effects of reduced Chinese demand and spot prices have fallen to the lowest since 2016. To reduce the surplus of refined products, China is expected to increase its exports of refined products putting still more pressure on global prices.

How long a slowdown in China’s imports will last is a good question and imports are expected to start rising once the oil product glut in cleared. Nineteen independent Chinese refiners have quotas to import 1.42 million b/d this year, and it seems possible that another eight companies will receive allocations for 340,000 b/d later this year raising the total to 1.83 million b/d this year.  While the independent refiners expect to increase exports of refined products later this year, a lot of factors will enter this calculation.

China’s fastest growing automobile manufacturer says that it plans to produce 500,000 cars this year and 1 million in 2020 with 20 percent of those being some type of electrical vehicle.  The company also plans to begin marketing cars in the US by 2019. The company’s president noted last week that consumers are still reluctant to buy electric cars. In China, however, government measures are currently aimed at discouraging conventional cars and subsidizing electric ones.

Tesla is said to be close to agreeing on a plan to produce its electric vehicles in China to bypass the 25 percent import tariff. Under existing rules, Tesla would have to set up a joint venture with a Chinese partner. Such an agreement would give Tesla access to the world’s largest market for cars in a country desperate to cut down air pollution.

4. Russia

According to tanker trackers, Russia’s seaborne crude shipments fell from 5.21 million b/d in April to 4.82 million in May, and are expected to fall to 4.2-4.4 million in June and possibly more in July. As Russia exports a lot of crude by pipeline, many analysts are reluctant to say that Moscow’s total exports are falling as fast as the tanker data suggests.

In December, the Italian company ENI sold to Russia’s Rosneft a 30 percent in Egypt’s Zohr gas field that ENI had discovered two years ago. At the time, ENI described the discovery as the largest discovery ever made in the region and possibly the largest natural gas field in the world. Now Rosneft says it will start exporting natural gas from the field making Egypt a regional hub for natural gas and LNG.

Rosneft also announced last week that it had discovered a major new oil field in the Arctic’s Laptev Sea which could hold at least a dozen promising reservoirs.

As the US steps up sanctions on Moscow for the Ukraine and election hacking, US oil companies are feeling they are being placed at a disadvantage in comparison with EU oil companies. The Europeans are finding ways around the sanction barriers to get access to Russian oil, while US companies, including Exxon, are being hampered by ever more onerous restrictions imposed by Congress.

5. Nigeria

Oil exports will hit a 17-month high of over 2 million b/d according to new data compiled by Reuters. The new high will be partially made up of oil shipments from previous production delayed by pipeline outages. Although the Forcados crude has resumed shipping, shipments of Bonny Light crude are still restricted by a pipeline leak.

A new group of militants says they plan to resume attacks on Nigeria’s oil infrastructure on 30 June. Last year such attacks did considerable damage and cut exports dramatically.

Arguments over possibly embezzled money continue. The most recent charge is that Nigeria’s National Petroleum Corporation has failed to turn over some $21.8 billion to government accounts that the company has earned from oil sales. Charges of missing billions have been going on for years with little progress in determining if they are true or where the money went. The last time US auditors were called in to examine the issue, they left in frustration saying they got no cooperation from local officials.

6. Venezuela

The situation continues to deteriorate. Last week the price Venezuela gets for its mix of medium and heavy crude oil fell below $40 a barrel, ending the week at $39.23. The country’s oil refineries are operating at less than half their installed capacity of 3.1 million b/d, meaning that the country cannot produce enough refined products for its own needs. There is not enough refined product to dilute all the heavy oil being produced, so imports have been increased in recent weeks to make up the difference.

We have not had a reliable number on Venezuela’s oil production lately. OPEC puts the number at 1.972 million b/d, but this is surely too high given the turmoil in the oil industry. The country faces $3.2 billion in debt payments this year, and the daily protests in the streets continue. Food shortages continue to grow worse. Tens of thousands are fleeing to neighboring countries.

All this must come to an end soon, likely with a near total collapse of the economy and government. If oil exports stop completely, there is likely to be some impact on world oil prices as companies scramble to replace the missing barrels of oil.

7.  The Briefs

Crude oil production from Norway, the region’s top supplier, was better than expected, a national energy regulator said Wednesday. Preliminary figures for May were lower than the previous month but better than expected. Based on preliminary data, the average production for May was 1.98 million b/d for oil, natural gas liquids and condensate. (6/22) [Editor’s note: Norway production peaked in 2001 at 3.4 million b/d]

In France, Total’s CEO Patrick Pouyanne told Reuters he can find an edge over rivals by going after cheaper reserves outside of the US’s hot shale oil play, including from shale in Argentina and deepwater wells in the Gulf of Mexico, as well as through new gas technology. Pouyanne has clinched strategic deals for Total in Brazil, the United Arab Emirates, Qatar and Iran since taking over as CEO at the end of 2015. (6/21)

Saudi oil attack foiled: After last week’s attack on several vessels in the Bab Al Mandab, Middle East offshore oil operations again have been hit. According to Saudi Arabia’s national news agency SPA, an attack on a major offshore oil field has been prevented. Saudi military sources have reported that the Al Marjan offshore oilfield was attacked by three boats “bearing red and white flags”. One boat was captured and two escaped. (6/20)

Iran has begun exporting gas to Iraq after several years of delays. The neighbors, both members of OPEC, initially signed a deal in 2013 for Iran to supply Iraqi power stations, but officials in the past blamed poor security in Iraq for hampering implementation. (6/22)

China’s Sinopec, on 22 March 2017, agreed on a deal to buy out Chevron’s downstream businesses in South Africa and Botswana, in China’s first major investment into the downstream oil industry in Africa. Although China already has an extensive footprint in Africa, most these operations have been confined to the upstream sector – in oil and gas exploration. (6/23)

Venezuela’s oil company PDVSA is seeking to buy up to 6.32 million barrels of fuel in one of its largest offers on the open market in recent years. The firm, whose refining network is working at record lows since March due to lack of light oil, equipment malfunctions and other incidents, has increased fuel purchases this year to avoid gasoline shortages in the country. (6/23)

Ecuador v. Chevron: The US Supreme Court on Monday denied an appeal by an American lawyer to try to collect US$8.65 billion in pollution damages from Chevron, handing a victory to the US oil supermajor over a pollution judgment issued in Ecuador, which lower US courts had earlier agreed had been obtained via corruption. (6/20)

In Canada, oil sands production has historically had some of the highest production prices in the industry due to the complexity of the process that turns bitumen into fluid crude oil. Like their peers in the shale patch, however, oil sands miners were motivated to increase their efficiency during the recent price crash. The results from this boost are now becoming evident.  Oil sands production should grow by half a million barrels/day this year, despite lower spending. (6/19)

In Canada, the newest elephant in the room which the oil and gas industry has not yet had to deal with is the commitment made by the governments of Canada, Alberta, and US to reduce methane emissions by 40 to 45 percent by 2025. The premise is the upstream oil and gas industry is so shamelessly profitable that governments and regulators can pile on more rules and costs that somehow this industry can accommodate, absorb and survive. And still provide fuel, taxes, and jobs. (6/20)

Proven reserves decline: Annual reports of 67 publicly traded oil companies indicated that their aggregate proved liquids reserves declined in 2016 for the second consecutive year. The decline in proved reserves was heavily concentrated in a few companies that reduced their estimated reserves from Canadian oil sands projects. Downward revisions of existing resources, relatively low extensions and discoveries, and relatively high production also contributed to a decline in proved reserves. Some companies specifically cited low crude oil prices in 2016 as a reason to revise their proved reserves base downward. (6/24)

The US oil rig count rose by 11 this week, the 23rd straight week of gains, according to Baker Hughes Inc. Gas rigs declined by three.  The total US rig count is now at 941; that’s up 520 rigs year over year. (6/24)

In today’s US shale fields, tiny sensors attached to production gear harvest data on everything from pumping pressure to the heat and rotational speed of drill bits boring into the rocky earth. The sensors are leading Big Oil’s mining of so-called big data, with some firms envisioning billions of dollars in savings over time by avoiding outages, managing supplies and identifying safety hazards. (6/24)

Offshore stall: Reports of a recovery in offshore rig demand have most definitely been overstated. The competitive rig fleet totaled 700 rigs comprising 431 jackups, 150 semisubmersibles, and 119 drillships. While this was down by 6.2 percent from 747 in September 2014 (generally recognized as when the current downturn began), the decline in rig demand during the same period was much more severe, falling by over 42 percent to 350 rigs in May 2017. At the time of this writing, the number of rigs under contract rose modestly to 353. (6/23)

Gross inputs to US petroleum refineries averaged a record high 17.7 million barrels per day (b/d) for the week ending May 26, before dropping slightly to 17.5 million b/d for the week ending June 2 and 17.6 million b/d for the week ending June 9. Weekly US refinery runs have exceeded 17 million b/d only 24 times since EIA began publishing the data series in 1990, and those instances have occurred since July 2015. Despite record-high inputs, refinery utilization (95% in late May) did not reach a new record, because refinery capacity has increased in recent years. (6/21)

Demand dilemma: The operator of the biggest US fuel pipeline system said on Thursday demand to transport gasoline to the country’s populous northeast is the weakest in six years, the latest symptom of a global oil market grappling with oversupply. (6/23)

Well wars: Supersized new oil wells are sometimes running into existing wells, a little-noticed consequence of the shale boom that has started to trigger complaints and lawsuits. The emerging problem is known as a “frack hit,” and it has flared up in Oklahoma, where a group of small oil and gas producers says more than 100 of their wells have been damaged by hydraulic-fracturing jobs done for companies like Chesapeake Energy Corp. and Devon Energy. (6/21)

Quakes: According to the USGS, the number of earthquakes east of the Rocky Mountains has increased dramatically since 2009. More earthquakes in these areas have coincided with the increase in oil and natural gas production from shale formations. Seismic events caused by human activity—also known as induced seismicity—are most often caused by the underground injection of wastewater produced during the oil and natural gas extraction process. (6/23)

Texas quakes:  A fresh report from the Academy of Medicine, Engineering, and Science of Texas has revealed that the shale oil industry’s activity in the Lone Star State has led to changes in seismic activity. The report found that while between 1975 and 2008 the average number of quakes above a magnitude of 3 was one or two, between 2008 and 2016 it increased to 12 to 15 a year. (6/20)

The coal doldrums: Far from the mines of Appalachia, the decline of coal is hitting communities that relied on coal-fired power plants for jobs and income. During the past five years, roughly 350 coal-fired generating units shut down across the U.S., ranging from small units at factories to huge power plants. (6/20)

“Clean coal” takes gas: A first-of-its-kind “clean coal” power plant that utility owner Southern Co. spent years constructing in Mississippi may end up burning no coal at all — and instead just run like a natural gas generator. The state Public Service Commission said in a statement that it’s looking for a solution that eliminates the risk to ratepayers “for unproven technology,” which involved converting coal into gas that could then be used to generate electricity — all while capturing emissions. (6/23)

Replacing coal-fired power plants with solar power installations could save as many as 51,999 lives every year, a study from the Michigan Technological University has found. This is the number of people who will likely not die of things such as asthma and congestive heart failure resulting from harmful emissions from coal-fired plants. (6/20)

Nuke retirement: At the end of May, Exelon, the owner of the Three Mile Island Nuclear Generating Station in southeastern Pennsylvania, announced its intention to retire the plant in 2019 unless the company is given assistance by the state to help keep the plant financially viable. Exelon’s announcement marks the sixth announced nuclear retirement in the past seven years. Currently, 99 nuclear reactors at 60 nuclear power plants operate in the US. Since the first commercial US nuclear reactor came online in 1957, more than 30 nuclear reactors have retired. (6/21)

South Korea no more nukes? One of the world’s largest producers of nuclear electricity is shifting away from the industry. South Korea’s President Moon Jae-in said Monday the country would scrap plans to build additional nuclear power plants and wouldn’t seek to extend the life of existing ones. (6/19)

Corporate energy buys: Major US corporations such as Wal-Mart Stores and General Motors have become some of America’s biggest buyers of renewable energy, driving growth in an industry seen as key to helping the US cut carbon emissions. Last year nearly 40 percent of US wind contracts were signed by corporate power users, along with university and military customers. That’s up from just 5 percent in 2013. These users also accounted for 10% of the market for large-scale solar projects in 2016. Just two years earlier there were none. Why the big move? Lower energy bills. (6/21)

Renewables boom: Bloomberg New Energy Finance projects that over the next two decades, the cost of solar power will still drop another two-thirds, onshore wind costs will be cut nearly in half, and offshore wind costs will drop a stunning 71 percent. By 2023, solar and onshore wind will be competitive with new US gas plants. By 2028, solar will beat existing gas generation. (6/22)

RE battle brewing: With the Trump administration expected to publish an analysis that could undermine the US wind and solar industries, two renewable energy lobbying groups on Tuesday released their own study saying new energy sources pose no threat to the country’s power grid. Wind and solar advocates have said the government study’s outcome appeared to be pre-determined to favor fossil fuel industries. (6/21)

Algae fuel: Synthetic Genomics and ExxonMobil’s partnership bore fruit on Monday, said a press release that announced the development of a modified algae strain that could push algae-based energy closer to being a commercially viable alternative energy source. (6/20)

Fat algae: Because fat is essentially oil, fatty algae could be the world’s most successful fuel crop. Researchers have spent nearly a decade tweaking an algae genome so it produces more than twice as much fat than wild versions of the same species, and Monday they described their efforts in an article published in Nature Biotechnology. (6/20)

Solar wall: President Donald Trump said he’s proposed building a “solar wall” on the Mexican border that would pay for itself by generating electricity. (6/22)

Tesla v. Mercedes-Benz: As Tesla prepares to jump into the electric truck market with its first “model reveal” this fall plus with pickup trucks in 18 to 24 months, Daimler, the parent company of Mercedes-Benz, is poised and ready to take on the competition. (6/19)

Carbon tax push: Some of the world’s largest oil companies and the country’s biggest auto maker are joining a group pushing the US government to tax carbon to slow climate change. General Motors Co., Exxon Mobil Corp. and BP PLC are among almost a dozen companies joining the Climate Leadership Council, a new organization that advocates replacing many environmental regulations with a simplified tax on businesses that release carbon. (6/20)

Air pollution remains high globally and urban areas are expanding, showing a more comprehensive effort is needed on the environmental front, the OECD said. (6/21)

Stranded assets? Oil giants including Exxon Mobil and Royal Dutch Shell risk spending more than a third of their budgets by 2025 on oil and gas projects that will not be feasible if international climate targets are to be met, according to a report by the Carbon Tracker think tank and a group of institutional investors. More than $2 trillion of planned investments in oil and gas projects by 2025 risk becoming redundant if governments stick to targets to lower carbon emissions to limit global warming to 2 deg. C. (6/21)