Quote of the Week
“Even if the UK, France and the Western world, in general, will all go to 100 percent electric vehicles, that would be great, but that wouldn’t be enough…We still have less advanced economic economies that cannot do that switch.”
Ben van Beurden, CEO of Royal Dutch Shell (7/28)
Graphic of the Week
While the U.S. is a net exporter of petroleum products (in bright pink below), it remains a substantial net importer of crude oil (pale pink below). The net rough total is around 5 million barrels per day.
Sources: Energy Information Administration
By Han Huang | REUTERS GRAPHICS
1. Oil and the Global Economy
Oil prices were strong last week with New York futures closing about $4 a barrel higher for the week at $49.71 and London at $52.52. Behind the move was another unexpectedly large decline in US stockpiles of 7.2 million barrels. This decline was brought about by a high level of US refinery consumption of almost 17.3 million b/d of crude the week before last. This was 620,000 b/d higher than in the comparable week in 2016. A reduction in Saudi shipments to the US was also seen as responsible for the unusually large decline in inventories.
US exports of crude and oil products remain strong. Exports of the lighter shale oils from the Gulf ports are doing well, and there are plans to increase US oil-export capacity by allowing exports from Louisiana’s offshore LOOP terminal which can handle larger tankers. The higher demand for US oil products has been caused by refining problems in Mexico and Venezuela that has led to higher imports of finished products. The spread between Brent and WTI crude prices is making US exports more competitive, and US crude has started to be shipped to distant refineries.
Goldman Sachs said last week that the oil markets are rebalancing more quickly than it had expected a few weeks ago. The firm cited higher demand, the OPEC production cut, strong withdrawals from US inventories, and a declining rate of increases of rigs in the US rig count. If the trend in US stocks continues, Goldman expects the oil markets to be rebalanced by early 2018.
The OPEC Production Cut: The St. Petersburg OPEC meeting to discuss the OPEC production seems to have resulted in little change. There was no discussion of further output cuts and the pressure to include Libya and Nigeria that was being called for by several members remains under study. A cutback in Saudi exports to the US is taking place, but it is unclear whether this is being forced by higher summer domestic demand or a deliberate decision to push down US crude stocks.
US Shale Oil Production: The US oil rig count increased by only two rigs last week suggesting caution on the part of drillers, or perhaps problems in obtaining enough experienced personnel, fracking sand, or the investment capital needed to expand production. It takes several weeks to reactivate a rig after the decision to activate is made. In mid-June oil was trading at around $43 a barrel which is well below the breakeven point for many drillers. With the increase in prices in the last month, we could see increasing rig reactivations later next month.
The backlog of drilled but uncompleted shale oil wells has increased by nearly 1,000 this year to over 6,000. Some of this may be due to drillers holding back while waiting for higher oil prices, but many are saying that there simply are not enough qualified fracking crews left after the severe cutbacks in the last few years. Prices for fracking services have doubled in the last year which has created considerable pressure on drillers with US oil still under $50 a barrel.
2. The Middle East & North Africa
Iran: According to the New York Times, President Trump is said to be seeking a way to declare Iran in violation of the nuclear deal and to abrogate the treaty despite the unanimous opposition of the other parties to the deal and most of the US national security establishment. The US has already told the other parties to the treaty that they should be prepared to join in the reopening of discussions or face the US abandoning the treaty as it did with the climate accord.
The US wants more access to Iranian military facilities for outside inspectors. Should Tehran reject these demands, the US would leave the agreement. The results of such a move are difficult to determine. As no other parties to the agreement are likely to join the US, the likelihood of meaningful sanctions being reimposed on Iran is not great. As President Obama never wanted a formal treaty with Iran knowing that Senate Republicans would never ratify such an agreement, the nuclear accord is simply an executive agreement that President Trump could kill at any time.
The President seems to be convinced that the Iranians are violating the agreement and is saying that he is unlikely to sign off on the next review of the deal which comes up in 90 days. Most other US officials hold the position that the deal is largely working and there is no evidence the Tehran is working on nuclear weapons at the current time. Should the President go it alone in 90 days, there is likely be a major backlash in the US government and among the EU allies.
Last week Russia signed a deal with Tehran for Russia’s Gazprom Neft to explore for oil in Iran. The announcement came as both Moscow and Tehran face stiffer US sanctions from a bill which passed the US House of Representatives on a veto proof 419-3 vote. The bill also constrains the President’s power to lift sanctions on Moscow without Congressional consent.
Syria/Iraq: Oil Minister Jabbar al-Luiebi said last week Iraq intends to achieve a production capacity of 5 million b/d by the end of this year and appears to be well on its way. Oil production jumped by nearly 100,000 b/d – from 4.573 million b/d in May to 4.671 million b/d in June.
Iraq has entered negotiations with a Chinese consortium for the combined Nassiriya refinery and oil field development project. PetroChina and China National Offshore Oil, which have a large and well-established presence in Iraq, are offering to build a $9 billion refinery, according to two senior Iraqi oil officials involved with the negotiations. The ministry has rejected that proposal as too costly.
Saudi Arabia: Saudi Energy Minister Khalid al-Falih said after a meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its allies on Monday that his country would limit crude oil exports to 6.6 million b/d in August, almost 1 million b/d below levels a year ago. For the output restrictions to work by draining global oil inventories, the producers will also have to curb exports. Vessel-tracking data suggest that cuts to exports in the first half of 2017 by OPEC and its non-OPEC allies haven’t matched the reductions in stated output.
In May, Saudi Oil Minister Khalid Al-Falih said that ‘exports will drop measurably‘ as his country focused on reducing exports to the US, the world’s most transparent energy hub. Exports from Saudi take approximately seven weeks to arrive, so the US is now seeing the results of the policy change. Imports remained strong through May, averaging over 1.2 million b/d for the first five months of the year. June imports then slipped, falling to their lowest since last November. July imports have dropped even further. Saudi imports are down to their lowest level since February 2015.
The Saudi Arabia-led coalition and the Yemeni government blocked four oil tankers from entering the Hudaidah port on the Red Sea controlled by the Houthi rebels in a move that will likely worsen the health crisis occurring in the war-torn country. Yemen has over 400,000 cases of cholera due to polluted water and the lack of oil to run the pumps and power hospitals.
Saudi Aramco’s advisers have recommended London for the listing of the oil company, as US disclosure rules are a concern for Saudi authorities. A final decision on the venue for what is expected to be the world’s biggest IPO and is targeted to raise $100 billion will be taken by Crown Prince Mohammad bin Salman, who is overseeing Saudi Arabia’s radical economic reforms. King Salman is currently vacationing at his new palace in Morocco leaving his son in charge during an unsettled political situation in Riyadh. The IMF says that Saudi economic growth in 2017 will be close to zero due to low oil prices and reductions in exports contributing to the country’s problems.
Seven weeks after Saudi Arabia led a coalition of Arab states in cutting ties with Qatar over allegations that it supports terrorism, holders of both countries’ stocks and bonds are paying almost identical risk premiums. The Gulf dispute remains in stalemate after Qatar denied the charges and rejected the Saudi bloc’s demands, which include rolling back ties with Iran and shutting the Al Jazeera news channel. Meanwhile, the feud is taking a back seat to oil for investors. The price of crude still is around $50 a barrel, far below the level many Gulf producers need to balance their budgets.
Libya: The oil production recovery has put in the spotlight the chairman of Libya’s National Oil Corporation, Mustafa Sanalla, whom analysts see as a central figure in the oil sector, wearing the hats of both a diplomat and an oil minister. Sanalla led Libya’s delegation to the meeting of the Joint OPEC/Non-OPEC Ministerial Monitoring Committee in Russia last week, at which he presented his country’s position and shared production plans for the immediate future. So far, no results have been announced concerning the status of Libya’s production quota.
With the surge in Libyan oil production in the last four months, more and more tankers visiting Libyan ports are running into the problem of what do about packed refugee boats sitting off the coast and in danger of sinking. Under international maritime rules established after the sinking of the Titanic, any ship receiving a request for assistance must respond. Naturally, oil tankers on route to distant ports have little interest in rescuing boat loads of refugees and taking them to Italy where the Italians may be unwilling to accept them.
China’s crude oil imports will exceed 400 million tons this year, Zhang Haichao, vice president of Sinopec Group, told Reuters on the sidelines of an industry conference in Beijing on Tuesday as continuing low oil prices and declining domestic output sparked increased overseas purchases. China’s crude imports are also expected to grow by double digits in 2018. Zhang’s estimates would likely make China the world’s largest crude oil importer on an annual basis for the first time. For the first six months of 2017, China imported 212 million tons of crude, or 8.55 million b/d, up nearly 14 percent from the same period in 2016, according to customs data.
Chinese demand for diesel should rise again this year after contracting for the first time in over a decade in 2016. That could cap increases in exports of the fuel from the world’s second-biggest oil consumer. Diesel demand in China is expected to grow by up to 0.3 percent in 2017 and by 0.5 percent in 2018 after shrinking by 3.5 percent last year,
China’s import of US crude oil crossed 1 million tons for the first time in June, an eightfold rise year on year, as higher Dubai prices prompted both state and independent refiners to use it as an opportunity to diversify suppliers. While shipments from the US to China hit 268,000 b/d, in June, imports from Saudi Arabia fell to a six-month low of 940,000 b/d in the same month, a sign that China is more than willing to shed its dependence on OPEC supplies and widen its feedstock sources as much as it can. China’s imports from the US in the second half are likely to go up because of expectations that the supplying country will lift production, thereby boosting availability.
A Chinese economic official on Thursday indicated that policymakers would be willing to sacrifice some short-term economic growth to deal with systemic risks. “China can’t let smaller risks eventually lead to large systemic risks that would cause serious harm to China’s economy,” Yang Weimin, a senior economic official in the Communist Party, told reporters.
Last week, the US House of Representatives passed a bill writing the sanctions against Russia, North Korea, and Iran into US law. The house vote was an overwhelming 419 to 3 making the bill veto-proof. The US Senate has not yet taken up the matter. Should it pass by a large majority, the President would no longer be able to remove sanctions on Russia without Congressional approval.
The draft law stipulates that American oil and gas companies cannot do business in Russia or elsewhere if they partner with Russian companies that have a minimum of 33 percent in the venture. Given that Russian oil and gas companies usually hold much more than 33 percent in any joint projects in Russia, the ban makes it far more difficult to partner with Russian firms and would likely pull Exxon out of its efforts to help the Russians exploit the Arctic.
Moscow has reacted to the new bill by closing some peripheral properties owned by the US in Moscow and expelling 755 US diplomats.
Last week militants attacked a crude oil pipeline shutting down production of more than 150,000 b/d. In another incident, militants abducted dozens of contractors working for the Nigerian National Petroleum Corp. Security forces later rescued the contractors, but the federal government has decided to halt oil exploration in part of the Niger Delta due to security concerns. The head of Nigeria’s National Petroleum Corp said that production had reached 2.2 million b/d last week before the attacks.
A new national petroleum policy approved this week by the federal executive council says the country plans to cut its oil exploration costs and move away from reliance on revenues from crude oil exports. Its expectations are that oil prices will hover near $45 per barrel “for the foreseeable future”, necessitating a shift towards diversifying its economy and developing its refining and petrochemical sectors. “The most realistic line of action for any nation with oil as the backbone of its economy is to diversify because indices strongly point to the possibility that the era of oil booms may be over for good.”
In violation of its current constitution, which calls for a national referendum approving a new constitution before any changes are made, the Maduro government held an election for a new “Constituent Assembly.” The opposition says the new assembly will give President Maduro dictatorial powers and authority to crush any opposition to his government. The opposition is boycotting the election. Most observers say the Maduro will win the election as only his hand-picked candidates are running. Anyone protesting the election faces 10 years in prison. Columbia has already announced it will not recognize the authority of the new assembly to rewrite the constitution.
This time, it appears that Washington will react to the Venezuelan situation. The US has already sanctioned 13 Venezuelan officials and is preparing a ban on the import of Venezuelan crude into the US. Venezuela currently exports about 850,000 b/d of oil each month and is one of the country’s major cash customers. Much of the country’s exports are currently going to China and Russia to pay off loans and are not receiving cash for the shipments. Venezuela would also have a problem finding customers outside of the US Gulf coast with the capacity to refine the heavy oil it produces.
The US Treasury Department is drafting sanctions that would prohibit the import of Venezuelan oil but is not expected to impose them immediately out of concern for its effect on US refiners. In addition, a complete ban would bankrupt Venezuela within a few weeks and could lead to mass starvation due to the country’s inability to import food. Even a partial sanction could cause severe trouble as its economy is on the brink of collapse anyway. Barclays is predicting that oil prices could rise by $7 a barrel if the US imposes only limited sanctions on Caracas. A complete collapse of Venezuelan oil exports could drive prices even higher as China and Russia would have to replace the oil they are getting from Caracas. It should be an interesting few weeks ahead.
7. The Briefs (date of article in Peak Oil News is in parentheses)
World oil consumption could peak as early as the end of the next decade as electric vehicles become more popular, according to Royal Dutch Shell’s CEO. But oil will still be needed for decades to come as it is likely to remain the main fuel for planes, ships and heavy trucks. (7/28)
Britain will ban the sale of new petrol and diesel-powered cars from 2040 as part of a plan to get them off the roads altogether 10 years later, environment minister Michael Gove said on Wednesday. It follows a similar announcement earlier this month by the French government, while German cities including Stuttgart and Munich have also said they are considering banning some diesel vehicles. (7/27)
The UK Government unveiled its new plan to reduce roadside nitrogen dioxide concentrations in the shortest amount of time. Among the many policy and funding details is the cessation of the sale of all new conventional gasoline and diesel cars by 2040. (7/27)
In France, the CEO of Schlumberger Ltd. said that investors are driving down the price of oil by shovelling too much money into American shale companies. Paal Kibsgaard, an outspoken energy executive, blamed the surge in drilling for crude prices that are mired below $50 a barrel. (7/24)
In the Eastern Mediterranean, commercial natural gas prospects are starting to look good for all parties, yet a real military conflict is also brewing and may come to a head if Cyprus, Greece and Turkey are not able to find a solution soon. (7/28)
In the latest round of OPEC promises, Kuwait’s state-run oil company has pledged to cut “contractual sales volumes of oil for 2017” according to Bloomberg Markets. Kuwait Petroleum Corporation made the announcement just one day after fellow OPEC member UAE promised to cut its own oil exports by 10 percent starting in February, and just two days after OPEC conductor Saudi Arabia promised to curb oil exports starting in August. (7/27)
Australia exported a record volume of 51.4 million tons of LNG during the 2016-17 financial year. It is the first time the country has broken the 50-million-ton export barrier. The figure also is a 37 percent increase on the 2015-16 LNG export volume of 37.5 million tons. EnergyQuest forecasts higher-still exports in the next financial year, 2017-18, suggesting that the volume will reach 63 million tons by midyear 2018. (7/26)
In Mexico, thefts of gasoline cost Pemex, the state-owned oil company, more than $1 billion a year. But the country stands to lose a lot more if investors are spooked by the growing violence. Buying stolen gasoline in the central state of Puebla is easy. Pull off the main highway into a busy parking lot, and the black marketers are waiting in pickup trucks loaded with jerry cans. They’ll siphon the fuel into your tank—boasting as they do that unlike a lot of the country’s regular gas stations, they don’t cheat customers. (7/26)
BC loses LNG: A $27 billion energy project in Canada just became the latest casualty of a worldwide glut of natural gas. Malaysia’s Petroliam Nasional Bhd abandoned on Tuesday its plans for the Pacific Northwest LNG terminal, a plant that would have liquefied Canada’s gas and sent the fuel by tanker from the western shores of British Columbia to buyers in Asia. Petronas cited market conditions in its decision. (7/27)
The US oil rig count increased by 2 last week while the gas rig count grew by six, according to Baker Hughes Inc. The combined oil and gas rig count now totals 958 rigs, up 495 from last year. (7/29)
New peak coming: Crude oil production in the U.S. will reach an average of 9.9 million barrels a day in 2018, the EIA projects in its latest Short-Term Energy Outlook report. This would surpass the previous record of 9.6 million barrels per day, set in 1970. So much for Hubbert’s Peak. (7/29)
The largest energy companies reported robust earnings on Friday, continuing a quarter in which the world’s big oil firms have posted some of their strongest gains since a pronounced price crash began in 2014. Exxon Mobil nearly doubled its second-quarter profit compared with a year ago, to $3.35 billion, and Chevron jacked up its bottom line to $1.45 billion. (7/29)
Total US petroleum deliveries reached an average of more than 20.3 million b/d in June—their highest level for the month since 2007 and a 2.6% increase from June 2016, the American Petroleum Institute reported. The figure also was the highest monthly amount so far in 2017. (7/29)
ANWR’s tight hole: With oil development advocates again emboldened by the prospects of cracking open the Arctic National Wildlife Refuge, a big secret that could add to the continuing debate over exploration remains as cloaked in mystery as ever. Experts say data from the KIC-1 well — the only well ever drilled in the refuge — remains the tightest of North America’s “tight holes,” an industry term for top-secret wells. (7/24)
In Oklahoma, Devon Energy Corp. reported a production rate of 6,000 boe/d from a well drilled in southwest Kingfisher County. The company said it’s a record rate for initial production for a well in the STACK play (Sooner Trend, Anadarko, Canadian, Kingfisher), based on its comparison with publicly available data. (7/26)
Oilfield service companies do not expect their businesses will get a major activity boost from oil prices in the second half of this year, but demand is robust enough that they will be able to raise fees. (7/28)
Frack sand: Texas oil is booming, and so are the sand mines needed for fracking the wells. With several new mines proposed, frack sand production Texas could more than double within two years, adding about 30 million tons annually. The largest wells now consume up to 25,000 tons – 50 million pounds – of sand each, up from 1,500 just a few years ago. (7/27)
Fuel exports: refineries are producing more fuel than ever as they seek to meet rising demand – from overseas, rather than the drivers on nearby roadways. Last year, the U.S. became the world’s top net exporter of fuel, an outgrowth of booming domestic production since the shale oil revolution started in 2010. (7/27)
The Louisiana Offshore Oil Port plans to start exporting crude by early next year, in the latest indication there’s an oil export boom in the world’s top oil consumer. LOOP is not the only port eyeing exports as shale output continues to grow. Yet it is the deepest one: it is the only port on the Gulf Coast capable of handling Very Large Crude Carriers, or VLCCs, which have a capacity of up to 2 million barrels of crude. (7/27)
Arm twisting: Interior Secretary Ryan Zinke spoke with Alaska senators Lisa Murkowski and Dan Sullivan and threatened to block plans for more oil development in Alaska if they didn’t vote to repeal the Affordable Care Act (aka Obamacare). (7/29)
Sanction policy: With a vote of 419 to 3, the House of Representatives passed legislation envisaging firmer economic sanctions against Russia as well as a stipulation that would make it harder for the White House to weaken any future sanctions against Moscow. The future law stipulates that American oil and gas companies cannot do business in Russia or elsewhere if they partner with Russian companies that have a minimum of 33 percent in the venture. (7/27)
Pennsylvania’s Senate approved a tax reform bill with provisions to tax both natural gas production and consumption in the state. Oil and gas trade associations there strongly criticized the July 26 action, which passed by a 26-24 vote. (7/29)
Pipeline pipe dream: The Department of Commerce is due to submit a plan to President Donald Trump regarding a presidential memorandum on the use of American-made steel and iron products in pipelines. However, a report from the pipeline industry finds that in recent years around 77 percent of the steel used in line pipe was imported. Due to the reliance on imported goods, lack of immediate substitutes, and the fact that some materials and equipment are not currently manufactured in the U.S. “an immediate implementation of stringent domestic content requirement for line pipe, fittings, and valves would mean that most oil and gas pipeline construction projects would be delayed or stalled,” according to the report. The report also warns that jobs would be lost, and that restrictions on imports would incur economic costs for delayed or cancelled pipeline projects. (7/27)
In California, Gov. Jerry Brown signed a new law on Tuesday expanding the state’s cap-and-trade program, which is expected to play a big role in the state’s legislated goal of slashing warming emissions 40 percent below last year’s level by 2030. How will California pull this off? Cutting greenhouse gases this deeply will involve more than cap and trade. The state plans to rethink every corner of its economy. (7/27)
Biofuels bind: As a presidential candidate, Donald Trump spent a lot of time currying the favor of the ethanol industry, barnstorming its rural Midwest base and repeatedly expressing his support for biofuels made from corn and soybeans. Yet in early July, the EPA proposed a slight cut in the biofuels requirement, reducing the amount of renewable fuel that refineries must buy in 2018 to 19.24 billion gallons, from 19.28 billion gallons in 2017. But the signal it sends to the market—telling investors the renewable fuel industry will no longer grow—could be devastating. Biofuel quotas were scheduled to continue rising through 2022; now an industry that already struggles to make profits could be starved of fresh capital. (7/27)
Biofuels: The Trump administration may have to reconsider its proposal from earlier this month to curb biofuel use after an appeals court in Washington ruled that the EPA doesn’t have the authority to cut quotas while citing inadequate domestic supply. (7/29)
EPA chief Scott Pruitt’s frequent visits to Oklahoma—43 of 92 days during March-May—have raised concerns among critics that he is cultivating political relationships in the state at taxpayer expense, instead of focusing on his job as head of the environmental regulator. (7/24)
New nuke tripwire? President Trump’s March 28th Executive Order (EO) could harm the nuclear power industry. States like Ohio and Pennsylvania are facing the dilemma of aging, uneconomic merchant nuclear base load generation in often economically depressed regions. The pressure to keep these high-cost plants open will be considerable. But under the new EO they won’t be able to claim any financial benefit from the non-carbon emitting nature of nuclear power. (7/24)
US power burn: The amount of natural gas used for electricity generation, also known as power burn, reached its highest daily level so far in 2017 during the past week, exceeding 41 billion cubic feet (Bcf) on July 20, according to data from PointLogic Energy. Power burn reached a record daily high on August 11, 2016, surpassing 42 Bcf. Power burn from April 1 through July 25 averaged 27.1 Bcf/d, or 7% lower than last year’s consumption over the same period. (7/28)
Coal prices’ march to eight-month highs, driven by China’s huge appetite for power consumption, looks like an interlude in a longer-term decline and is seen losing traction later this year. Investors widely anticipate a slow demise for coal use due to policies encouraging cleaner natural gas and renewable energy generation, but the shorter-term outlook for the industry has seen a sharp reversal of fortunes. (7/26)
Wind boom: The American Wind Energy Association states there were 40 percent more wind energy projects ongoing during the second quarter than last year at this time. During the quarter, over two dozen projects totaling 3,841 megawatts started construction or advanced construction during the quarter. (7/29)
The Wind Catcher wind farm in Oklahoma, once operational, will be the second largest in the world and largest in the United States, the companies involved said. Construction is under way in the Oklahoma panhandle. At its peak, the facility will generate about 2,000 megawatts of power from 800 wind turbines from GE. (7/28)
The Electric Reliability Council of Texas was expected to set new load highs three days in a row from Wednesday, propelled by the continued heat in the region. Looking ahead to the end of the week, ERCOT forecast demand to peak at 69.4 GW Thursday and 70.3 GW Friday, both higher than the current all-time high for July. (7/27)