Quote of the Week
“Any changes that disrupt energy trade across our North American borders, reduce investment protection or revert to high tariffs and trade barriers that preceded NAFTA could put at risk tens of millions of jobs.”
From top oil and gas trade groups from the US, Canada. and Mexico, in a joint position paper released last month prior to new NAFTA-related talks.
Graphic of the Week
1. Oil and the Global Economy
As the severe flooding spread further east last week, closing down numerous refineries and causing widespread devastation, it is becoming apparent that it will be several weeks before the full impact on the US oil industry and indeed global oil markets can be assessed. At one point last week the hurricane shut down a quarter of US refining capacity, some 4.0-4.4 million b/d, but oil production outages mostly from Gulf production came to less than 1 million b/d. With a lot of oil going into storage and refinery demand well below normal, US oil prices have moved very little in the past week, while Brent has remained stronger in anticipation that Europe will be called on to replace the missing US barrels in the next few weeks.
Refineries in Corpus Christi are already resuming production. Over the weekend, Exxon and Phillips 66 said they had begun work to reopen their major Houston refineries, while the Motiva’s Port Arthur refinery, the largest in the US, may be out of service for at least two weeks. Other refineries in the Port Arthur/Lake Charles region are likely to be out of service for at least weeks. Several major pipelines were totally or partially closed last week, but they are starting to be brought back into service.
Gasoline shortages are just a part of the problems caused by the hurricane. US ethylene production which is vital to the plastics industry is reported as being down by 61 percent. Unless production resumes quickly, shortages of this important raw material are likely to develop across US industry, slowing production in many industries.
Some are concerned that the damage around Port Arthur could take months rather than weeks to repair reducing demand for crude by 700,000 b/d and eventually leading to oil production being closed down due to lack of storage space.
Flooding continues, and it may be two weeks until the water recedes in some flooded areas. Estimates of the numbers of cars and trucks ruined by flood waters are now more than 500,000 vehicles. In Houston alone, some 100,000 homes have been flooded out and tens of thousands other in East Texas and Louisiana may have suffered the same fate. Hundreds of thousands have been made homeless suggesting that reviving the East Texas economy could take many years.
It is still too early to say whether Hurricane Harvey will mark a turning point in US energy and environmental policies. Press reports have been stressing all week that high water temperatures in the Gulf of Mexico and slower movement of atmospheric pressure patterns were responsible for the severity of what would otherwise have been a normal fall hurricane.
Similar devastating hurricanes in the past have been brushed off by politicians more interested in fostering economic growth than seeing any real dangers stemming from global warming. At some point, damaging weather will become too serious to ignore and to deny that carbon emissions from the combustion of fossil fuels are likely to be behind the devastation. Whether that day has arrived has yet to be seen.
The OPEC Production Cut: Hurricane Harvey has led to some of the biggest disruptions to US energy infrastructure, yet it has failed to boost crude prices. Harvey has seen oil prices edge down as traders have focused more on demand from damaged US refineries than knocked-out production. That is deeply frustrating for OPEC countries currently restricting oil supplies in an attempt to push prices higher.
OPEC production fell by 300,000 b/d in August to 32.6 million. Libya leads the drop with a 170,000 b/d decrease to 840,000 b/d. The Saudis decreased production by 30,000 b/d to 10.05 million. However, they also reduced crude exports to 6.6 million b/d. For Iran and Nigeria, August marked the highest daily export rate year-to-date. Despite the decline in OPEC crude oil exports, oil prices continue to fall, with WTI losing 6 percent during August.
Russia and the Saudis have announced that they favor an extension of the OPEC production cuts through June of next year and a decision on this issue is expected to be taken in November.
US Shale Oil Production: While Hurricane Harvey did little actual damage to the Eagle Ford shale oil fields in south Texas, some production has been shut-in by the damage and flooding of oil pipelines, export terminals, and other means of moving the oil to refineries.
Observers are beginning to note that the US shale oil industry, which is being touted as the route to energy independence, is nothing more than a giant Ponzi scheme that consistently loses money no matter the price of oil. US shale oil companies have collectively lost money from 2008 through 2016 no matter what the price of oil was. Production from shale oil wells depleted by approximately 85 percent in three years leaving little behind for multi-million dollar investments. Despite the hype about new efficiencies, the 60 largest shale oil firms collectively have been losing about $9 billion per quarter for the last five years and with the well-head price of shale oil still running about $40 a barrel, it is doubtful the situation will get better in the near term.
The secret of the shale oil revolution that has increased US oil production by millions of barrels per day is that shale oil costs too much to produce. Unless shale oil starts selling for well above $100 a barrel and stays there — a situation that the US economy likely could not stand – the industry is living on borrowed time.
To expect that shale oil will lead to US into a new era in the next decade is wishful thinking given its record of profitability during the last ten years. While there may be some short-term gains in production at the expense of investors, at some point Wall Street will stop pouring billions into what was always a losing proposition.
2. The Middle East & North Africa
Iraq: Baghdad has decided the best solution to its revenue problems is to change the way it prices the oil it sells to Asia. The Iraqis plan to price the oil being sold to Asia using Dubai Mercantile Exchange futures rather than using S&P Global Platts average of Oman and Dubai quotes that have been used for decades by the Saudis and other Middle Eastern exporters. Baghdad is seeking to squeeze the most possible revenue from their oil sales by using a new pricing standard. Most observers are saying the Saudis and other in the region are unlikely to go along with this scheme.
In reaction to the Iraqi scheme, Platts Global is planning to begin new price assessments for Iraqi crudes being shipped from Basra. The plan is meeting resistance from Asian refiners who fear that longer lead times between pricing of oil shipments and taking deliveries will expose them to more risks.
The Iraqis are claiming that they are currently producing 4.32 million b/d which is below the 4.35 million it had pledged as part of the production cut deal. The problem is the amount of oil being exported through Kurdistan which Baghdad says is between 300,000 to 350,000 b/d. The trouble with this is that tanker trackers say that in August 581,000 b/d was exported through Kurdistan including some oil that was produced in fields governed by the central government. Some are saying that Baghdad continues to cheat on the agreement.
Libya: There was no change in the status of Libyan oil production last week with some 360,000 b/d still being shut-in by militants. National Oil Company Chairman Mustafa Sanalla said a militia calling itself the Rayayina Patrols Brigade shut down some of the pipelines tied to the Sharara oil field, Libya’s largest. As long as there is divided government with a weak central power, small inconsequential groups with a handful of armed men can shut down significant amounts of oil production. The post-Gadhafi era of Libyan politics still has a long way to go until some semblance of stability resumes.
China Guodian Group, among the country’s top five state power producers, will merge with coal giant Shenhua Group in a deal that will create the world’s largest power utility. The new company will be called National Energy Group. The combined company would have an installed capacity topping 225 gigawatts, to become the world’s biggest power company by capacity. The union may spark jealousy elsewhere. Other power companies fear they will lose critical thermal coal supplies just months ahead of winter and face a bigger rival with an outsized role in the market. Beijing has merged 15 state owned enterprises since 2015 and currently manages 103 – a number that could eventually fall to about 40 as mergers continue.
Moscow is moving to gain a bigger role in the LNG market with the opening of a new $27 billion facility on the Yamal Peninsula in the Kara Sea. Russia has been thinking about getting into the LNG market for years, but the time has never been right. Currently, Russian LNG is produced from a facility on the Far East island of Sakhalin and holds about 5 percent of the global LNG market.
The Yamal facility will eventually have three LNG trains and will be capable of producing 5.5 million metric tons per year. Most of the gas is due to be exported through the Arctic Sea route which should be navigable by new ice breaking LNG tankers from July to November.
Moscow says the $11 billion Nord Stream 2 project to add a second trans-Baltic gas export pipeline will be implemented regardless of how new US sanctions are interpreted. The newly imposed sanctions will not bar the company from borrowing abroad.
As the Assembly of loyalists to President Maduro rewrites the Constitution in the government’s favor, the country’s economic collapse continues, leaving the president, his loyalists, and the country in an increasingly precarious position. PDVSA, the state oil company that is the government’s main source of income, reported in August that its revenue fell by more than a third last year amid production declines — part of a long collapse that chokes the country’s supply of dollars needed for imports of food and other goods. As Venezuela plunges deeper into a crisis, some Miami-Dade schools are filling with students fleeing from the country.
The latest product to disappear from the market is propane which most Venezuelans rely on for cooking fuel. In its absence, there are few options but to scrounge for wood – difficult to find in crowded cities.
Almost no tankers sailed from Texas for Latin America last week as terminals and refineries closed by the storm are unlikely to fully recover for several weeks. The United States is the world’s largest net exporter of refined petroleum products, shipping around 5.05 million b/d. Latin America received almost half of that, or 2.5 million b/d. Most of it loads from the US Gulf Coast. Latin America’s top recipients of US fuel shipments are Mexico, Brazil, and Venezuela, where refineries are in such poor repair that the country cannot meet its domestic fuel needs.
Some two dozen tankers loaded fuel products are waiting off Venezuela to be paid before they will unload. On Tuesday, a trading firm with two cargoes of diesel waiting to discharge in the port of Curacao notified Venezuela’s state-run oil company PDVSA it plans to suspend its delivery contract and divert the shipments to Ecuador. Mexico, which normally imports two gasoline cargoes per day, is among the countries looking to buy the fuels. If trading firms that control the tankers “offer to divert a cargo from Venezuela, the Mexicans are going to take it”. Peruvian oil company Petroperu launched a tender to buy up to five cargoes of diesel for delivery in September and October, according to a document seen by Reuters. Colombia’s state-run Ecopetrol has called trading firms to find gasoil cargoes for prompt delivery, a source said.
6. The Briefs (date of article in Peak Oil News is in parentheses)
Ethylene: Texas alone produces nearly three-quarters of the country’s supply of one of the most basic chemical building blocks. Ethylene is the foundation for making plastics essential to US consumer and industrial goods, feeding into car parts used by Detroit and diapers sold by Wal-Mart. With Harvey’s floods shutting down almost all the Texas’ plants, 61 percent of US ethylene capacity has been closed. Production may not return to pre-storm levels until November. (9/4)
Offshore Norway, Statoil’s highly anticipated Korpfjell prospect in the Arctic Barents Sea contained only non-commercial quantities of natural gas, and no oil, the company announced on Tuesday. Korpfjell was the first exploration well drilled in the Norwegian section of a formerly disputed area between Norway and Russia, where Statoil and its partners had hoped to make a major discovery. (8/29)
The future of Norway’s oil sector is emerging as a key issue for voters in a Sept. 11 parliamentary election, nowhere more so than in the oil capital of Stavanger. The right-wing bloc of Conservative Prime Minister Erna Solberg is neck-and-neck in opinion polls with an opposition grouping led by Jonas Gahr Stoere’s Labour. Should neither secure a majority, the smaller Green party – which pledges to stop oil exploration and phase out production within 15 years – could become kingmakers. (9/1)
Denmark’s majority state-owned energy company Dong Energy is selling off its last oil and natural-gas fields in a deal expected to close this month or next. The billion-dollar-plus sale is part of a broader plan to significantly reduce its exposure to fossil fuels and produce energy primarily from renewable sources. (8/31)
Refiners across Asia are cranking up output to send fuel to the United States, where fallout from Hurricane Harvey has left around a quarter of the nation’s refineries shut down. (9/1)
Offshore Brazil, Total’s study on the environmental impact of drilling in one of the Amazon’s basins hit a roadblock on Tuesday when Brazilian regulator Ibama said it rejects the validity of the efforts. The subject of the study is an area that could contain up to 14 billion barrels worth of oil reserves. Total has spent four years trying to validate the estimates to determine the commercial viability of a venture in the area, but the discovery of a sensitive coral reef near the blocks that would be up for tender has put the environmental approval process in limbo. (8/30)
In Peru, indigenous leaders will obstruct the government’s access to one of the country’s largest oilfields if an indigenous rights law does not take effect in the next 20 days. Tribal leaders from four separate Amazon basins will collude in blocking Lima from current production areas after the government negotiated a 30-year contract with Frontera Energy to explore block 192 without consulting local indigenous people. (8/28)
Canadian protest practice: On Lopez Island in Washington state’s San Juan archipelago, a three-day training camp for environmental activists marks the opening of a new front in the campaign to stop Kinder Morgan’s Trans Mountain pipeline expansion, a C$7.4 billion ($5.90 billion) project through British Columbia that gained Canadian government approval last year. The proposed project would triple capacity on an existing pipeline to 890,000 barrels/day. (8/30)
The US oil rig count was flat last week while active gas rigs increased by three. This largely dispelled earlier analyst notions that Hurricane Harvey would delay as much as 10 percent of upcoming fracking work, and suspend roughly half the rigs in Eagle Ford. (9/2)
SPR release: The US Energy Secretary has approved the release of up to 4.5 million barrels of crude oil from the Strategic Petroleum Reserve in response to the impact from Hurricane Harvey, the Department of Energy said on Friday. These were the first tappings of the reserve for an emergency since Hurricane Isaac in 2012. As of Wednesday, there were 678.9 million barrels stored in the US Strategic Petroleum Reserve. (9/2)
Alaska, after years of steady decline in production and bottomed-out oil prices, is in a rough spot. They’re over a billion dollars in debt, in large part thanks to unfulfilled cash incentives to oil companies, and now many of their remaining oil producers are pulling out at the same time that the North Slope and Cook Inlet oil fields face thousands of layoffs. Yet after an executive order, the USGS is looking into areas that have been protected from drilling since the 1980s, and re-evaluating whether they should be opened anew for petroleum exploration. For the first time in a long time, Alaska is now anticipating the very real potential of a major energy industry comeback. (8/30)
NAFTA redoux: The Trump administration is easing environmental regulations and opening up territory for drilling as part of the president’s bid to unleash the “vast energy wealth” of the US. Yet Donald Trump’s push to rewrite the North American Free Trade Agreement could have the opposite effect. (9/2)
Houston area car retailers and automakers are rushing to reopen dealerships and beef up inventory to replace many hundreds of thousands of vehicles damaged in flooding from Hurricane Harvey. Pete DeLongchamps, vice president for manufacturer relations at Group 1 Automotive, the third-largest US auto dealer group, said the company prepared for the storm with a plan designed after Hurricane Katrina in 2005. This included moving inventory to higher ground and cleaning roof drains to avoid cave-ins. (9/1)
Meteorologists explain that Hurricane Harvey stalled off the Texas coast because two high-pressure atmospheric masses—huge bookends made out of air—have squeezed it in place, and there haven’t been any high-level currents to help steer it away. Harvey is yet another of several recent weather disasters marked by such extraordinary staying power, punishing whole regions for days or weeks on end—and longer. Others include a massive heatwave over Russia and flooding in Pakistan in 2010 and the Texas drought of 2011. (8/30)
Bunker fuel regs: On 27 October 2016, the International Maritime Organization (IMO) announced that beginning on 1 January 2020, the maximum sulfur content allowed in marine bunker fuel will be reduced from 3.50% mass by mass (m/m) to 0.50% m/m (35,000 ppm to 5,000 ppm)—five years earlier than many expected. The IMO fuel sulfur content regulation will have a significant global impact on both the refining and the shipping industries. Owing to uncertainty around the implementation date and the ultimate level of compliance, neither the global refining nor shipping industries have as yet made the necessary investments to comply fully with the IMO rules. (8/29)
The US Environmental Protection Agency will lift as soon as Monday additional gasoline and diesel fuel requirements for more areas of Texas and for Louisiana to address potential shortages caused by Tropical Storm Harvey. The waivers would allow the sale of gasoline that does not comply with regular environmental guidelines. (8/29)
EU car emissions: Starting Friday, all new car models in the European Union need to pass emissions tests in real driving conditions before they hit the road. (9/1)
EVs lagging? Over seven years, the state of California has spent $449 million on consumer rebates to boost sales of zero-emission vehicles. So far, the subsidies haven’t moved the needle much. To date, out of 26 million cars and light trucks registered in California, just 315,000 are electric or plug-in hybrids. The California Legislature is pushing forward a bill that would double down on the rebate program, pushing it to $3 billion. The plan could lift state rebates from $2,500 to $10,000 or more for a compact electric car. (8/28)
Weekly US coal production totaled an estimated 16.7 million st in the week ended August 26, down 1.7% from the prior week but up 9.6% from the year-ago week, Energy Information Administration data showed Thursday. It was the third highest weekly estimate this year, just below last week’s year-to-date high of 17.02 million st. Coal production continues to trend higher as natural gas prices hover near $3/MMBtu and utility stockpiles continue to decline. (9/1)
Nuclear energy has been moving away from power-rich countries to nations bereft of diverse power generation opportunities, all the more so after the 2011 Fukushima disaster. Europe has been particularly susceptible. Germany, for instance, announced its plans to phase-out nuclear power a day after Fukushima; France went along in a matter of several months; Switzerland and Belgium have also since voted to pull the plug on nuclear. (8/31)
Saudi Arabia has shortlisted 25 companies that qualify to bid for proposals to build a 400-MW wind power plant in the northern part of the Kingdom, in what would be the first utility-scale wind power project. The first round of bidding for renewable power projects also includes 300 MW of solar PV in Sakaka, in the same region as the Dumat Al Jandal project. (8/30)
Fusion progress: In a recent paper, a team of researchers from the MIT described how it tweaked the “recipe” for nuclear fusion in such a way that the output of power was ten times greater than with the original composition. (8/29)
China Guodian Group Corp, among the country’s top five state power producers, will merge with coal giant Shenhua Group Corp Ltd, in a deal that will create the world’s largest power utility. (8/29)
In China, Nissan Motor Co. and alliance partner Renault SA are teaming up with Chinese auto maker Dongfeng Motor Group Co. to make a battery-powered automobile in the world’s biggest car market, where electric-vehicle sales are expected to rise. Global car makers have been searching for local partners for EV production in China. (8/29)
Food long term: The world’s population, by 2050, is expected to reach 9.1 billion, and the United Nations’ Food and Agriculture Organization (FAO) predicts that at that point, the world would need to produce 70% more food than today to feed all those people. That 2050 deadline is the one usually cited by scientists and organizations like FAO and Oxfam as the year the world will run out of food. (9/2)