Quote of the Week

“It will likely be years before the oil and gas industry can start drilling off the Atlantic coast, even in the best-case scenario. But even then, it is unclear if there will be any interest. The Atlantic has not been explored very much, and as a result, the exact nature of the oil and gas reserves in place is unknown. That likely means that development costs will be high. If oil prices fail to rise much from current levels, it is not at all clear that the Atlantic will be very competitive.”
Nick Cunningham, Oilprice.com

Graphic of the Week

Note what has happened to primary energy consumption in the USA since the year 2000:

1.  Oil and the Global Economy

It likely will take several weeks to assess the impact that Hurricane Harvey will have on the US oil industry.  As of Monday morning, the storm is still dumping large amounts of rain on Houston and its refineries. Weather forecasts are predicting that the storm will continue to cause heavy flooding along the Gulf Coast and will move further east, possibly closing or damaging additional oil production facilities in Louisiana.

So far, the storm has knocked out about 11 percent of US refining capacity and reduced crude production from the Gulf by about 22 percent. Production from the Eagle Ford shale field in Southern Texas is down by about 300,000 b/d. The Houston Ship Channel remains closed as do four marine terminals in the Corpus Christi area.

It will be the end of the week before we know how much damage has been done to oil installations and how long it will be before they can resume production. If refinery drainage pumps are submerged in the next few days, it could take several weeks to resume production. Some 5.6 million b/d of US refining capacity is located in Texas and another 3.3 million b/d in Louisiana.

So far, the hurricane’s major price impact has been to drive up gasoline which was up 7 percent on Monday to a two year high. US crude futures are weaker as US refinery shutdowns are reducing the demand for crude. The flooding and damage to vehicles is likely to reduce the demand for gasoline for many weeks.

Again, it is too early to assess the full impact of Hurricane Harvey, but it could easily turn out to be of lasting significance depending on how the next few days go.

The OPEC Production Cut: As usual, mixed messages came out of OPEC’s production cut compliance meeting last week. Some see signs that the markets are starting to rebalance as commercial oil stocks are shrinking, but others believe the cut has a long way to go before it can force prices significantly higher. The latest mantra is “all options are on the table” which includes extending the production freeze beyond next March. OPEC fears that ending the cut prematurely would drive prices much lower.

Shale Oil Production:  There have been a growing number of reports suggesting that the shale oil industry is facing more financial trouble than had been expected. The industry was supposed to have adapted itself to a $50 a barrel market, but there are growing indications that this is not the case. Profitability of the Permian Basin which is beginning to show a higher gas-to-oil ratio than expected is leading investors to look for other places to invest in the oil industry. While it too early to tell, production of shale oil may be showing signs of peaking, years in advance of what many had believed.

2.  The Middle East & North Africa

Iran: Tehran is doing its best to restore its crude oil exports and attract foreign investments in its energy sector. Companies are still cautioned not to rush into deals with Iran, but many European, Russian, and Asian firms have signed preliminary agreements or letters of intent with Iran that would turn into billions of dollars of investments. The pledged and potential investments could help Iran cushion the impact of any move by President Donald Trump to end the nuclear deal with Iran.

Iraq: In a bid to increase oil revenues and possibly set the stage for its benchmark crude grade, Iraq has told customers it may change the way it prices Basra crude for the Asian market. Baghdad’s proposal to change the way it prices crude oil, however, faces resistance from refiners who fear that longer lead times between pricing and deliveries will expose them to more risk. Iraq’s state oil marketer surprised traders last week by announcing plans to switch its Basra crude benchmark in Asia to pricing based off the Dubai Mercantile Exchange starting in January 2018, dropping quotes based on assessments by oil pricing agency S&P Global Platts. The move would affect the price of about 2 million b/d of crude oil supplies to Asia, mainly shipped to India, China and South Korea.  This move represents a potentially seismic shift in the way that more than 12 million b/d of crude is bought and sold in the Middle East.

The political situation in Iraq may be on the verge of shifting radically. Iraq is facing possible turmoil due to the pro-secession vote in Kurdistan. The call for independence by Iraqi Kurdish parties is not surprising, but it is only the first step towards independence. The majority of Iraqis, however, are against the independence of the Kurds, as it could lead to further instability in the rest of the country.

The unexpected visit of Shi’ite cleric Muqtada Al Sadr to Saudi Arabia and the UAE has stirred unrest in the region. On the 30th of July, Al Sadr and Saudi crown prince Mohammed Bin Salman met in Jeddah, discussing possible cooperation between the Sunni Wahhabi Kingdom and Shi’a led Iraq. These meetings are significant, as they could lead to a change in Iraq’s pro-Iran political military position. This would signal a major success for the anti-Iran GCC front, but it would threaten Tehran in its quest to construct a Shi’a land bridge between Iran, Iraq, Syria, and Lebanon. A political thaw between Baghdad and Riyadh has occurred in recent months with a number of high-ranking ministers and officials meeting regularly. Still, official diplomatic relations remain very cold.

Saudi Arabia:  Riyadh plans to surpass its commitment to generate 9.5 gigawatts of energy from solar to boost its commitment to green energy and climate-friendly initiatives, according to a government official.  The Saudis plan to meet its 9.5 GW goal by 2023 by investing between $30 billion and $50 billion in 60 green energy projects. The end goal is to generate 30 percent of the Kingdom’s electricity from renewable sources by 2030, with the remainder to come from natural gas.

It has been two months since Prince Mohammed Bin Salman became heir to the Saudi Arabian throne, and the preliminary effects of his aggressive economic diversification and anti-Iran platforms are beginning to show. Emirati and Saudi politicians are making their rounds in Baghdad, rekindling relations that have been moribund since Saddam Hussain invaded Kuwait in the 90s.

Libya:  A local Libyan brigade has closed valves on a pipeline to Sharara oilfield, the country’s largest, to make demands for more fuel supplies and better economic conditions for the Zintan region. Another field, El Feel, has also been shut because of the pipeline blockade. The National Oil Corp has declared force majeure on Mellitah crude exports due to the closure of Sharara, which was producing around 280,000 barrels per day, engineers said, and NOC declared force majeure on loadings of Sharara crude from the Zawiya oil terminal.

In recent weeks, the National Oil Company has been pretty good in settling these incessant disputes rather quickly as opposed to the months or years seen in previous disputes.

3.  China

Russia held its spot as China’s top crude oil supplier for a fifth month in a row in July, with shipments up 54 percent over a year earlier.  Russian shipments last month came in at 4.97 million tons, or about 1.17 million b/d.  For the first seven months of the year, Russia’s volumes to China grew nearly 16 percent year-on-year to 34.22 million tons, or 1.18 million b/d.  China bought a total of 34.74 million tons of crude oil in July, or about 8.18 million bpd, down from June but still up about 12 percent from a year earlier.  Imports in the first seven months grew 13.6 percent year-on-year to 247 million tons, or 8.51 million bpd.

Saudi Arabia was China’s second biggest supplier in July, with volumes at 3.99 million tons, or about 940,000 b/d, down 0.8 percent from a year earlier.  Supplies from the Kingdom rose only 0.4 percent in January-July from the same period a year earlier to 30.59 million tons, or 1.05 million b/d.  Shipments from Angola, China’s third-largest supplier in July, fell 17.1 percent from a year earlier to 3.91 million tons, or 921,520 b/d.

July’s coal output of 294 million tons was the lowest since October and down 4.5 percent from June, with environmental restrictions, safety checks and a crackdown on illegal mines cited as reasons for the drop.  The rise in coal output this year has largely been matched by increasing demand from electricity producers. Thermal power generation has grown 7.8 percent in the first seven months of the year.  This was largely because hydropower was curtailed earlier in the year, with hydro generation dropping 3.4 percent in the January-July period.

The decline in hydro isn’t a structural change, and its likely recovery, together with rising output from nuclear and renewables such as wind and solar, may result in growth in thermal generation slowing in coming months.

China’s coal industry is being subjected to competing structural influences.  On the one side are attempts to limit domestic output by closing inefficient mines and stopping illegal mining. On the other are efforts to limit consumption by more stringent environmental requirements and moves to cut excess capacity in coal-consuming industries such as steel and cement.

China has been building a strategic crude oil reserve for the last decade, but the size of that reserve remains undisclosed, with analysts making estimates based on China-bound cargoes and satellite imaging.  Last year, Orbital Insight suggested that China may have stored as much as 600 million barrels of crude. This was the highest reserve estimate at the time. Since then, the reserve has in all likelihood grown, possibly exceeding the U.S. SPR, which stood at 678.9 million barrels. As domestic production declines, Beijing is clearly fortifying itself against possible turbulence in the oil markets.

5. Venezuela

Washington imposed sweeping financial sanctions on Venezuela on Friday, dramatically ratcheting up tensions between the two countries and making it harder for embattled President Nicolas Maduro to raise badly needed cash to prevent a debt default. The sanctions, which Trump signed by executive order, prohibit American financial institutions from providing new money to the government or the state oil company, PDVSA. They also restrict the Venezuelan oil giant’s US subsidiary, Citgo, from sending dividends back to Venezuela and ban trading in two bonds the government recently issued to circumvent its increasing isolation from Western financial markets.

This decision is highly controversial in that Venezuela cannot afford to import enough food to feed its population and the imposition of sanctions will only make the situation worse. Caracas’s oil production is bound to take another hit and societal collapse now seems to be only weeks away.

6.  The Briefs (date of article in Peak Oil News is in parentheses)

Norway’s Statoil said it signed an agreement with Argentine company YPF to explore parts of the Vaca Muerta shale basin. Statoil under the terms of the agreement took a 50 percent stake in the Bajo del Toro exploration permit in the Neuquén Basin alongside YPF. The Norwegian company said it would fund all of the costs associated with activities in the region. (8/26)

LNG breaking ice: A commercial LNG tanker has sailed across the colder, northern route from Europe to Asia without the protection of an icebreaker for the first time. The specially-built ship completed the crossing in just six-and-a-half days, setting a new record. The ship was carrying gas from Norway to South Korea. Rising Arctic temperatures are boosting commercial shipping across this route. The Christophe de Margerie is the world’s first ice-breaking LNG carrier; it is capable of traveling through ice up to 2.1m thick. On this trip, it was able to keep up an average speed of 14 knots despite sailing through ice. (8/25)

France’s Total SA has agreed to acquire Danish conglomerate A.P. Moeller-Maersk A/S’s oil unit for $4.95 billion, the latest sign activity is returning to the sector following a three-year slump in oil prices. Total will also assume $2.5 billion of Maersk Oil’s debt. (8/21)

In Russia, Royal Dutch Shell plans to double the number of its retail gas stations from the current 227. Shell views Russia as one of its priority regions. Apart from the downstream business, Shell is active in Russia with major natural gas projects.

In Saudi Arabia, Prince Mohammed Bin Salman’s Vision 2030 plans depend on an extra couple hundred billion dollars from the Saudi Aramco initial public offering (IPO) in 2018. The IPO, the largest of its kind in financial history, would make just a five percent portion of the oil giant accessible to private investors. (8/23)

In Qatar, new estimates by Bloomberg’s economic survey predict that 2017 will be the country’s slowest year of GDP growth since 1995. But while Qatar’s economic expansion has been slowed, their GDP growth is ahead of Saudi Arabia by 0.5 percent and the United Arab Emirates by two percent. (8/22)

Dubai shift? There is little doubt that Iraq’s mooted shift to using Dubai crude futures from long-standing price assessor Platts will shake up the trading of Middle East oil, but is it a once-off shock or the first of the dominoes to fall? (8/25)

China exodus? A flurry of departures across the Canadian units of Chinese state energy firm PetroChina have sparked speculation that the oil trader is reducing its presence in North America, even though the company says it is committed to the region. (8/23)

India’s Essar Group announced closure of $12.9 billion deal to sell its refining arm Essar Oil to a consortium led by Russian oil major Rosneft, boosting ties between the world’s top oil producer and the fastest growing fuel consumer. The purchase is the biggest foreign acquisition ever in India and Russia’s largest outbound deal. (8/21)

In Libya, Royal Dutch Shell is said to have loaded its first crude in five years over the weekend, adding to evidence of the OPEC nation’s comeback. (8/21)

Angolans are buying up affluent parts of Portugal—a major role reversal whereby the former colonizer is being colonized.  From seaside high-rise apartments to Lisbon’s premier shopping district, Angolans are a growing force.  Leading the way is Africa’s richest woman, Isabel dos Santos, a billionaire from Angola who has become one of Portugal ’s most powerful figures by buying large chunks of the country’s banking, media and energy industries. (8/22)

In Brazil last year, Brazilian construction firm Odebrecht and affiliated petrochemical company Braskem pleaded guilty to bribing officials in 12 countries to secure high-paying contracts. The firm agreed to a payment of at least $3.5 billion, the largest penalty in history for a foreign bribery case. Now, months later, the scandal continues to escalate as new allegations pop up. The latest addition to the scandal is Mexican state oil company Pemex, which has now been swept up in the widespread accusations of corruption. (8/22)

The economy of Brazil has been struggling lately. Weighed down by the collapse in oil prices, and a massive corruption scandal — which this week saw the former CEO of state oil company Petrobras formally indicted, Brazil’s government is striking back: announcing a sweeping slate of asset sales that may open up some of the biggest opportunities the country has ever seen in energy and mining. (8/26)

Venezuela’s PDVSA on Thursday said on Friday it was negotiating the continuation of its lease of Curacao’s Isla refinery but was open to Chinese partners following a preliminary deal between the island and China’s Guangdong Zhenrong Energy to operate the complex. PDVSA has for decades operated the refinery, which opened in 1918, under a lease agreement. But the cash-poor company has been reluctant to invest some $1.5 billion that Curacao authorities requested several years back to modernize the 335,000 barrels-per-day facility. (8/26)

Colombia’s oil production has been falling for the last four years. It’s not just the 2014 price crash that pressured output: The country’s fields are depleting and new discoveries are hard to come by because of high production costs, security challenges, and opposition from the population. Colombia’s oil and gas is difficult to extract, so Ecopetrol and foreign field operators need prices to be higher than US$50 to turn a profit. At this year’s end, daily crude oil output in the Andean nation is seen at 872,000 bpd, down from a peak of over 1 million b/d in 2013.  Expert estimates put the country’s recoverable shale oil reserves at between 2.5 and 7 billion barrels, making them the third-largest in the western hemisphere, after the U.S. and Argentina. (8/22)

The Caribbean has suddenly become a point of interest since ExxonMobil discovered major reservoirs in nearby Guyana in 2015. ExxonMobil announced last month that they’ve discovered more oil in the Payara reservoir off the coast of Guyana, increasing the total discovery to approximately 500 million barrels. (8/23)

In Cuba, Aussie-based Melbana Energy said it started the preliminary work necessary to clear a site for eventual production. Their plan is to drill two exploration wells in mid-2018. (8/23)

In Canada, the list of oil majors selling off assets and withdrawing from high-cost oil sands is long. ConocoPhillips, Royal Dutch Shell, Marathon Oil, Murphy Oil and Statoil have sold upwards of $25 billion worth of oil sands assets this year. ExxonMobil also wrote down more than 3.5 billion barrels of oil reserves in Canada at the beginning of 2017. The companies viewed Alberta’s bitumen and heavy oil as no longer competitive in a $50 market, and many of them are focusing on other types of production, such as shale. (8/21)

The oil rig count decreased by 4 to 759, while the gas rig count declined by 2 to 181, according to Baker Hughes.  Canada lost 6 oil rigs again this week, with the number of gas rigs increasing by 9—bringing Canada’s total to 217 oil and gas rigs. (8/26)

In Alaska, the US Geological Survey is in the process of generating updated assessments of the oil and gas resources on the state’s North Slope in what could be the precursor to an exploration and development boom on federal lands that have mostly been off-limits to the industry. (8/24)

Atlantic slowdown: President Trump has tried to move quickly to open up the Atlantic for exploration. But the President can’t just open up the Atlantic at the stroke of a pen – there is a protracted legal and regulatory process that the Department of Interior must go through. Opposition is growing and it is coming from a lot more places than the Trump administration likely expected—most state governors from South Carolina up through Virginia now oppose offshore drilling, both on concerns that an oil spill will foul the coastline and because of the federal government’s stance on revenue sharing. (8/21)

Chevron CEO John Watson is planning to step down as the energy giant seeks new leadership for a changing oil world.  The transition is expected to be announced next month, although Mr. Watson’s successor hasn’t yet been finalized by the board and plans could change. (8/23)

Grid report: A widely anticipated federal report suggests minor market reforms can help ensure a reliable electric power grid and shies away from handouts to struggling coal and nuclear-power producers. The Energy Department study of the electric grid says cheap natural gas is the primary culprit behind dozens of coal and nuclear plant closings in recent years. Renewables and expanding regulations are only secondary factors, says the study, which suggests more research investment can help the grid better adapt to increasing wind and solar power. (8/24)

Eclipse yawner: Monday’s solar eclipse had no major impact on electricity demand in affected areas of the US according to grid operators and utilities, many of which had lined up alternative power supplies. Customers who left their homes and offices to enjoy the celestial display used less power and cooler temperatures in regions of the total eclipse helped lower demand for air conditioning. PJM Interconnection, which coordinates power among 13 states from Michigan to North Carolina, said power demand declined rather than increased as expected across its territory during the eclipse. (8/23)

In the Ukraine, when the first shipment of coal arrived from the U.S., the Ukraine’s energy secretary said it could help his country address energy security issues.  The first shipment of coal came from a Pennsylvania facility.  (8/23)

Germany’s E.ON said Thursday it laid the first of the 60 foundations for a wind farm development 25 miles offshore in national waters of the Baltic Sea. Foundations for a common substation were installed last month and the entire project could start generating energy for German consumers by 2019. (8/25)

In China late last month, executives from more than a dozen top European companies met in Beijing to discuss their concerns about the growing role of the ruling Communist Party in the local operations of those foreign firms. (8/24)

Water squeeze: It is now a well-known fact that humans are depleting vital groundwater resources across the globe. But a new study shows one of the biggest causes of disappearing groundwater is the international food trade. About 70 per cent of freshwater around the globe goes toward irrigation. A third of the freshwater is drawn from the world’s aquifers — non-renewable underground pockets of groundwater — and 11 per cent of that nonrenewable groundwater is used to irrigate internationally-traded crops. (8/26)