Quote of the Week
“Here’s a little economics lesson, supply and demand: You put the supply [more coal] out there and the demand will follow that.”
US Energy Secretary Rick Perry, who was criticised by economists who point out that, typically, supply follows demand
Graphic of the Week
Above, Art Berman points out the interplay between resource scarcity, resource supply and other factors in the U.S. shale gas sector over the past four decades.
1. Oil and the Global Economy
Last Monday, oil prices rose for the eighth consecutive session closing in New York at $47 a barrel and setting a record for the longest gaining streak in nearly eight years. This surge came on speculator concerns that increases in US shale oil production were starting to slow. The rest of the week was mostly downhill with NY futures closing at $44.23. The slide came among reports that OPEC was not interested in further price cuts; a resumption of the increase in the US oil-rig count of seven rigs, adding to the run of 23 weeks of steady gains before the count fell by one the week before last; US crude production and exports continuing to gain; and OPEC exports increasing by 220,000 b/d in June to 32.49 million b/d.
It is becoming apparent that the nine-month extension of the OPEC production freeze will not be enough to balance the markets this year. The Executive Director still believes that the oil markets will rebalance in the next six months but is starting to hedge his forecast with the possibility of higher prices spurring more US shale oil production.
By week’s end, there was talk that Moscow’s opposition to further OPEC/NOPEC production cuts may be waning. The Russian’s, of course, continue to claim that they will be just fine with $40 oil and their booming natural gas business with the EU and Asia will revive their economy. The recent surge in production from OPEC-members Libya and Nigeria has revived talk that these two countries should not be completely exempt from the production freeze. Another OPEC/NOPEC meeting is coming up in St. Petersburg in late July to discuss the status of the production cut. There are reports that the Saudis are maintaining their exports to Asia by taking oil from reserves. There are also reports that Iranian tankers are turning off their tracking beacons, a sign that there may be some cheating going on.
There were several developments last week pertaining to the argument over whether peak oil demand will impact the industry in the next 20 years. Volvo’s announced that all its automobile production from 2019 onward would have some sort of electric power, greatly cutting their fleet’s demand for gasoline. France joined in by saying it would ban sales of all gasoline and diesel-powered vehicles by 2040. China has been somewhat ambivalent of late on its electric vehicle policy but given their pollution problems they sorely need one. Last week Bloomberg forecast that by 2040 electric vehicles would be 54 percent of total vehicle sales and would displace 8 million barrels of oil demand a day.
This assessment conflicts with one made by OPEC last year predicting that electric vehicles would be only 6.7 percent of the global car fleet which would double in the next 25 years, increasing the demand for and price of OPEC’s crude.
Climate change is another important factor in the future demand for oil. Most see the Trump administration’s denial of climate change as just a minor and temporary bump in the road to reduced fossil fuel consumption. Last week the CEO of Shell said that companies must be more open about the risk of climate change to the energy business. A think tank estimated last month that energy companies could be wasting some $2 trillion by 2025 on projects that could become stranded assets if the demand for oil and other fossil fuels drops significantly in the coming decade. Last year fossil fuel companies wrote off some $185 billion in the value of fossil fuel reserves from their books due to declining energy prices.
Several respected energy analysts, not beholden to Wall Street or energy companies, are sounding alarms of serious trouble ahead for the energy industry and the global economy. Gail Tverberg of Our Finite World warns that we could see a financial crisis within the next few months due to the inability of the energy industry to keep growing per capita energy production which is necessary to keep economic growth growing.
Chris Martenson of the Peak Prosperity blog believes there is a nasty and long-lasting spike in oil prices coming between 2018 and 2020 due to a shortfall in global oil production. This shortfall will come from low oil prices and insufficient investment.
Art Berman writing for oilprice.com says that the shale gas revolution is a myth and that the assumption that low gas prices and abundant US natural gas will define the next few decades is wrong. Berman points out that the total of US LNG export applications already approved would allow the US to export 75 percent of current natural gas production, leaving us only 25 percent to keep us warm, generate our electricity, supply industrial needs, and export via pipeline to Mexico and Canada. Industry optimists continue to publish studies showing that cheap US natural gas production is likely to continue increasing for decades, justifying the investments in expensive LNG export terminals. Berman says that spectacular increases in natural gas will simply not happen and that billions in assets will be left stranded when lower production sets in a few years from now.
2. The Middle East & North Africa
Iran: Last week France’s Total signed a major deal with Tehran to develop the South Pars field which Iran shares with Qatar. Total will be the operator with a 50.1 percent stake, China’s CNPC with 30 percent, and National Iranian Oil Co subsidiary Petropars with 19.9 percent. The first stage of the South Pars development will cost around $2 billion and the project will have a production capacity of 2 billion cubic feet per day or 400,000 barrels of oil equivalent per day including condensate. The gas will supply the Iranian domestic market starting in 2021.
Iran has invited verified oil companies to bid on the development of the inland Azadegan oil field along the Iraqi border. Tehran wants to get started on oil and gas fields shared with its neighbors before they are depleted.
Suspicions are growing that tankers chartered by oil traders responsible for a significant share of Iran’s fuel exports last year failed to transmit their location and the origin of their cargo. The ships’ radio-signal tracking systems were often not in use and occasionally indicated the ships had sailed from countries other than Iran. Iran’s adherence to the production freeze has always been half-hearted due to the lingering effects of years of nuclear sanctions.
Iraq: Iraq started drilling the first well in the Huwaiza oil field near the Iranian border, which may contain one billion barrels in reserves. Like Tehran, Baghdad is eager to start work on jointly controlled oil fields. OPEC’s second largest producer, after Saudi Arabia, Iraq seeks to boost its production capacity to 5 million barrels per day by the end of the year, from about 4.7 million b/d now.
Iraqi Oil Minister Al-Luaibi said he would wait for the outcome of OPEC’s upcoming committee meeting before deciding on whether the group of producers needs to cut crude output more deeply or not.
Saudi Arabia: Saudi Aramco said last week its recoverable crude oil and condensate reserves slipped to 260.8 billion barrels at the end of 2016 from 261.1 billion a year earlier. Its gas reserves rose to 298.7 trillion standard cubic feet from 297.6 trillion. The Saudis are notorious for claiming that their reserves never decline despite pumping out billions of barrels of oil each year.
The new heir to Saudi Arabia’s throne has launched a crackdown on dissent in recent weeks, attempting to silence activists and critical clerics as well as his deposed predecessor, according to US and Saudi officials familiar with the events.
A recent article in oilprice.com reminds us that the Saudis are using about one-third of their 10 million b/d of oil production internally. Much of this goes into power plants to produce electricity which sells for 3 cents a Kilowatt hour vs. the US retail average of 12 cents. The cost of using 3.2 million barrels of oil worth $45 a barrel is nearly $125 million each day. By the end of the year, this will have cost the Saudis some $45 billion in potential export revenue. There is much talk of solar, wind and natural gas to replace this massive waste of resources but to realise this objective may take more time than the Saudis have.
The Qatar crisis which was instigated by Riyadh and supported by President Trump continues with no sign of compromise in sight. The 350,000 Qataris are so rich that they can weather any sanction regime with the help of Iran and Turkey. Qatar announced last week that it plans to increase its LNG output by 30 percent over the next seven years making it still richer. Given that there is a 10,000 man US Air Force base smack in the middle of Qatar that is vital to US air operations in the region, it is unlikely that the Saudis or anybody else can use military pressure on the country.
Libya: Platts says that Libya produced 810,000 barrels of oil per day in June and should be producing around 1 million by the end of July.
Libya’s eastern commander Khalifa Haftar said his forces had taken full control of Libya’s second city Benghazi from rival armed groups after a three-year campaign. This victory marks a major advance for Haftar who has slowly gained ground in eastern and southern Libya in defiance of a U.N.-backed government in the West that is struggling to extend its influence. Haftar has already announced that the Tripoli-based government had better come to terms with the Eastern government by the end of the year or he will move against it. Some see the possibility that Haftar could become Libya’s new strongman by defeating the various tribal militias that arose after the defeat of Gadhafi.
Unprecedented floods in south China have forced hundreds of thousands to evacuate and have triggered a large reduction in electric power production from hydro dams in the Yangtze watershed. The output from the world’s largest dam, the Three Gorges, has declined by two-thirds as water managers are reluctant to send any more water into the river below the dam. Similar outages have been reported at several other dams in the watershed. It looks as if China will be burning more coal in the next few weeks if it wants to keep the lights on and industrial production growing.
China is also suffering from a severe drought in the northern part of the country which may explain why Beijing is taking climate change more seriously than Washington these days.
The Chinese recently claimed that they have made a breakthrough in extracting natural gas from methane hydrate. Beijing is hailing this accomplishment as a historic breakthrough that ushers a new era for the energy industry, but many prominent analysts around the globe regarded the celebration as premature.
The Power of Siberia, a 3000-km pipeline, which is slowly making its way to the Chinese border is scheduled to open in 2019. The pipeline which will cost Gazprom some $55 billion to build is part of 30-year, $400 billion gas pact to supply with about 12 percent of its natural gas requirements. Gazprom currently provides about a third of Europe’s gas requirements and is opening new pipelines to ensure that it retains its share.
Germany is anxious to get the Nord Stream II pipeline open to guarantee that the country will have sufficient energy after it shuts in coal-fired and nuclear power plants. Some are saying that the Germans have become addicted to Russian gas.
Oil production in June was 1.78 million b/d, the highest since January 2016. Platts estimates that it could be producing another 250,000 b/d soon.
Fishermen have blocked Lake Maracaibo’s navigation channel leading to the country’s two most important refineries, Amuay and Cardon. These refineries currently have some 20 tankers loading and discharging cargoes including crude and refined products destined for export.
Venezuela has offered Indian oil company Videsh a 9 percent stake in the San Cristobal oil field. Videsh already owns a 40 percent stake in the field. PDVSA is desperate for more cash as its business goes into a death spiral.
7. The Briefs
Offshore Norway, more natural gas is expected to come out of the Norwegian Sea within the next two years or so, Statoil said Thursday. Statoil said it has agreed on a development solution for the Snefrid Nord gas discovery, located near the Aasta Hansteen field in the Norwegian Sea. (7/7)
France-based Total S.A. is one of the elite seven “supermajor” oil companies in the world. One would think that the company’s primary goal would be to do everything they can to continue the reign of oil in perpetuity, and yet on their website, Total states that “We are doing our part to diversify the global energy mix by investing in renewables, with a strategic focus on solar energy and bioenergies.” (7/4)
Russia’s largest natural gas producer Gazprom will start supplying fuel to China through Siberia on Dec. 20, 2019, Gazprom Chief Executive Alexei Miller told reporters on Tuesday, after a meeting with China National Petroleum Company (CNPC). The deal is the latest sign that Russia is tightening its ties with China, a major gas buyer. (7/5)
Just a day after Russia’s Energy Minister Alexander Novak said that the OPEC/non-OPEC production cut pact was working and that there was no need to make immediate additional moves, an energy minister official told Russian reporters on Friday that Moscow was ready to review proposals from partners in the deal, including changes to production cuts. (7/9)
Russian President Vladimir Putin says his country is committed to a multilateral effort to stabilise the energy markets through coordinated production declines. (7/9)
Balancing OPEC’s oil output has already become harder because of the resurgence in output from OPEC members exempt from cuts, while there are no signs yet that Saudi Arabia, the group’s de-facto leader, is willing to cut as deeply as it did earlier in the year. (7/9)
Saudi Aramco: The world’s most valuable company is not Apple, Google, or Amazon. It’s an oil company, and it’s about to go public. Saudi Aramco, the Saudi Arabian state energy goliath, is preparing for an initial public offering in 2018. Depending on who you ask, its valuation will be somewhere between $250 billion and $2 trillion. The discrepancy in estimates stems, at least in part, from oil and predictions of its long-term future as the world’s foremost energy source. (7/9)
In Australia, Tesla has agreed to build the world’s largest lithium-ion battery system, an ambitious project that CEO Elon Musk hopes will show how the technology can help solve energy problems. The plan is to build a 100-megawatt storage system in the state of South Australia—which has been hit by a string of blackouts over the past year—that will collect power generated by a wind farm. (7/7)
Venezuela is experiencing fuel shortages. In a country where necessities such as drugs and food are scarce, it would not be surprising that there was also a shortage of fuel. Even though Venezuela is an oil country with 18 refineries throughout the world and six within the country, the financial difficulties of Petroleos de Venezuela to import enough fuel compromises the supply of gasoline in the domestic market. (7/9)
Regarding Venezuela: The Trump administration is unlikely to ban imports of Venezuelan crude even as it considers a slate of sanctions on the country’s energy sector. The administration’s caution comes as the refiners’ lobby in Washington is against the move, which would choke off supplies to US refineries reliant on Venezuelan crude, including those owned by Valero Energy Corp., Phillips 66 and Chevron Corp. (7/9)
Mexico: In dollar terms, since mid-2015 Mexico has been a net importer of hydrocarbons (oil, natural gas, petroleum products and petrochemicals combined). To date it has been a relatively small and constant amount, but with their oil production declining, and oil prices apparently continuing to fall while natural gas prices may be on the rise, the net cost could now start to increase. (7/4)
Mexico is planning to hold four more oil and gas block tenders by November 2018 as part of efforts to ensure the sustainability of its energy industry and make better use of its hydrocarbon reserves. November 2018 marks the end of President Enrique Pena-Nieto’s six-term, and he cannot seek reelection. (7/9)
In Canada, the idea of sunsetting the tar sands industry is about as polarising as it gets. The problem is that people have been led to believe that a managed decline undercuts a booming oil industry that is on the cusp of bouncing back after a few bad years. It’s not. The only real alternative to a managed decline is something much worse: an unmanaged decline. Almost everyone understands that the world will eventually wean itself off fossil fuels. A rarely discussed consequence of this is that there is no reasonable scenario in which the high-cost tar sands sector remains the last man standing as the transition takes hold. (7/5)
Suncor strategy: While many oil companies doubled down on debt to maintain or even increase dividends while profits were hard to come by in the ‘lower-for-longer’ oil price world, Canada’s biggest oil producer—Suncor Energy—is winning the hearts and minds of investors and stock analysts by not making capital investments in new projects in its core business: Canada’s oil sands. Suncor is currently finishing two major growth projects, Fort Hills and Hebron, slated for first oil at the end of 2017, but following years of investment in oil sands projects, Suncor is now pausing spending into new company-built projects and is channelling more of its cash into shareholders’ pockets. (7/6)
XL pipeline fading? Canadian producers and US refiners are just not interested in the pipeline that is supposed to carry 830,000 barrels daily of Alberta heavy crude to Gulf Coast and Midwest refineries. This lack of interest seems to be driven by TransCanada’s quest for long-term commitments, with producers and refiners seemingly unwilling to make such commitments in the current price environment. Also, Canadian crude comes at a higher cost than alternative heavy crude blends, which is contributing to the lack of enthusiasm for long-term commitments. That is likely to change over the long term, however, when declining imports from Mexico and Venezuela will benefit Canadian crude. (7/4)
The US oil rig count rose again last week, this time by 7, resuming what was the US shale patch’s impressive run of 23 weeks of steady gains before last week’s small decline, Baker Hughes Inc. reported. With the gas rig count up by five, the combined increase puts to rest lingering optimism that last week’s minor decline was a sign of a new downward trend. The combined total now stands at 952 rigs, 512 more than a year ago. (7/9)
US strategic crude stockpiles have dropped to the lowest level in more than 12 years as the shale boom reduces the nation’s fraction of imports and thus the need for an emergency buffer against shortages. Inventories declined by about 13 million barrels over 17 consecutive weeks. That brought stocks down to 682 million as of June 30, down from a high of 727 million barrels in 2011. (7/7)
US crude oil exports reached 1.02 million barrels per day in May, slightly higher than the 1.00 million bpd in April. (7/7)
Tight oil winning: The world’s biggest energy traders are betting shale oil production is here to stay. European trading houses from Trafigura Group Pte. to Mercuria Energy Group Ltd. and Vitol Group have invested in US infrastructure and struck supply deals to secure flows of shale oil and gas. The agreements show the traders see long-term opportunities in an industry that has already upended global energy flows, particularly since the US lifted a four-decade old ban on exports at the end of 2015. (7/9)
Chemical industry: Thanks to the growth is US natural gas production, chemical companies in the US now use the affordable ethane—a natural gas liquid derived from shale gas—as a feedstock. Abundant and cheap, shale gas and ethane are now feeding the next US chemical revolution, with 294 new projects in the chemical industry—due to shale gas—that were completed, started, or planned as of March 2017. (7/4)
General Electric on Monday completed its buyout of Baker Hughes, merging it with its own oil and gas equipment and services operations to create the world’s second-largest oilfield service provider by revenue. The new company will be called “Baker Hughes, a GE company.” With headquarters in London and Houston, the combined company will have roughly $23 billion. (7/4)
Faster permitting: US Interior Secretary Ryan Zinke on Thursday signed an order to hold more lease sales and to speed up approving permits to explore for oil and gas on federal land, a process he said got bogged down under former President Barack Obama. The Interior Department’s Bureau of Land Management is supposed to take 30 days to review applications for permits to drill but Zinke said the average time for processing in 2016 was 257 days. (7/7)
Seismic input: A US decision to extend the comment period for seismic survey work tied to oil and gas development in the Atlantic was a response to public outrage, Greenpeace said. (7/7)
A federal appeals court ruled on Monday that the EPA cannot suspend an Obama-era rule to restrict methane emissions from new oil and gas wells. The 2-to-1 decision from the United States Court of Appeals for the District of Columbia Circuit is the first major legal setback for Scott Pruitt, the E.P.A. administrator, who is trying to roll back dozens of Obama-era environmental regulations. (7/4)
Biofuels: The EPA has proposed a reduction in the amount of biofuels required to be added to gasoline in what could be a first step towards a wider reform of the authority’s biofuel rules. The Renewable Fuel Standard was introduced back in 2005; it requires that gasoline in the US must be blended with biofuels. The amount of biofuels was planned to gradually increase on an annual basis, to reach 36 billion gallons in output in 2022. The EPA’s head Scott Pruitt announced the authority will be revising all future biofuel production and use targets, which naturally draw praise from the oil industry, but drew attacks from irate corn farmers as corn-based ethanol is the dominant biofuel of its type in the US (7/7)
RE vs. nukes: For the first time since 1984, the US got more electricity from renewable sources than nuclear power in March and April. The growth in renewables was fueled by scores of new wind turbines and solar farms, as well as recent increases in hydroelectric power because of heavy snow and rain in Western states last winter. More than 60 percent of all utility-scale electricity generating capacity that came online last year was from wind and solar. In contrast, the pace of construction of new nuclear reactors has slowed in recent decades amid soaring costs and growing public opposition. (7/7)
A new wind farm in Norway will begin providing electricity to tech giant Google by early September. The 50-turbine Tellenes wind farm will produce 160 MW of power – making it the biggest facility of its kind in Norway, and Google’s largest in Europe. Last year, Google contractually agreed to buy 100 percent of Tellenes’ output to partially power its data centers in Finland, Belgium, the Netherlands, and Ireland. (7/7)
Solar EVs? A Dutch startup is planning to bring a completely solar-powered electric car to market, which could theoretically let some drivers go for months without plugging it in. A team of alumni from Solar Team Eindhoven has been developing prototypes of 4-seater solar family cars for the Bridgestone World Solar Challenge since 2012. According to the company, its Lightyear One model will not only be capable of driving between 400 and 800 kilometers (~248 to 497 miles) per charge, but also “In sunny conditions it can drive for months without charging.” Those are both bold claims. (7/7)
Algae fuel: Exxon earlier this month said that it had found a way to make algae ‘fatter’, and those algae could become part of the (distant) future energy mix. But the US oil supermajor has been quick to note that, referring to the fatter-algae strain, technology is still many years from potentially reaching the commercial market. (7/3)
An enormous iceberg, more than 2,000 square miles in area — or nearly the size of Delaware — is poised to detach from one of the largest floating ice shelves in Antarctica and float off in the Weddell Sea, south of the tip of South America. (7/6)
Collapse? A Spanish group called “Ecologist in Action” asked for a presentation on what kind of financial crisis we should expect. They wanted to know when it would be and how soon it would take place. The answer for the group is that we should expect financial collapse quite soon–perhaps in the next few months. (7/4)