Quote of the Week

After the most recent missile launch and after the UN imposed fuel supply sanctions on North Korea: “We’ve been kicking the can down the road, and we’re out of road.”
H.R. McMaster, White House national security adviser

Graphic of the Week

1.  Oil and the Global Economy Oil prices continued to climb last week with US futures closing at $50.66 and London at $56.90. The $6 spread between NY and London is mostly due to the aftermath of the US hurricanes which have resulted in the growth of US crude inventories while elsewhere they have declined. Market sentiment has changed in the last few weeks with many now convinced that oil prices will be moving higher due to the OPEC production cuts and strong demand for oil products brought on by the relatively low prices. The IEA just upgraded its demand growth estimate for 2017 to 1.6 million b/d. If growth like this continues, it will eat through the global surplus rather quickly.

Crude prices should rise by about 16 percent or more this quarter which is bringing much hope to OPEC and its allies that oil prices will soon to recover to the level that brought them much wealth in the last decade. Crude stocks in developing countries have declined by about 74 million barrels or 28 percent this year which is the root of much of the optimism. Some, however, expect the recent price increases to be short-lived as the summer driving season is over and gas prices have risen sharply in recent weeks. The flood damage caused by the hurricanes is not helping demand in the southeastern US.

A different interpretation of the US oil price situation comes from oil billionaire Harold Hamm who is blaming the EIA for overestimating the prospects for the US shale oil industry this year. Hamm says that while the EIA is projecting that the US shale oil production will grow by 1 million b/d this year, the actual number will be closer to 500,000 b/d.  It is the prospect that the markets will be flooded with shale oil this year that is keeping the price of US crude around $50 a barrel while the world price is above to $56. Hamm may have a point, production growth in two of the three major shale oil regions, the Bakken and Eagle Ford, have grown very little in recent months.  Doubts are being raised about how fast the Permian Basin, the main hope for large gains in US shale oil production, can grow.

The IEA continues to warn of a major oil spike coming in about three years due to lack of investment in developing new oil production. Neil Atkinson, head of the IEA’s oil markets and industry division, said at a conference in Bahrain. “There is at least a possibility of going back to the situation we had ten years ago where oil prices were very, very high at a time when demand was growing.”  Unlike ten years ago, the industry today isn’t spending huge sums to develop new sources of supply. The IEA currently estimates that the industry would need to bring online an additional 21 million b/d of new supply by 2025 just to keep production flat, after factoring in depletion rates from existing projects plus higher demand levels. However, the industry only had about 5 million b/d of new supply in the pipeline, implying a gap of about 16 million b/d, a gap that shows little sign of being bridged. Some are saying the prospects of large increases in US shale oil production a few years from now are fantasy.

The OPEC Production Cut: At a meeting last week, OPEC decided to delay any extension or deepening of its production cut until next January, believing that the situation is moving its way.  The organization may make an effort to cut down on cheating by increasing monitoring of oil producers’ exports rather than just by each country’s following production. For now, the situation seems to be going OPEC’s way with the oil glut shrinking and prices increasing.

The global political situation and the increasingly harsh rhetoric between Washington and Russia, Iran, and North Korea is also keeping up pressure for higher prices.

US Shale Oil Production:  In 2016, the EIA told the Congress that by 2022 US shale oil production would reach 6 million barrels assuming a $50 WTI price and 10 million barrels per day assuming a price deck of $80 per barrel.  Currently, the Bakken oil play is producing around 1.1 million b/d, Eagle Ford is producing about 1.3 million b/d, and the Permian about 2.6 million b/d. The rest of the shale oil fields are producing about 1 million b/d. The total is about 6 million b/d, which is what caused the global oil glut. The Permian basin is continuing to grow rapidly while production in the other basins is growing slowly or not at all given the steep rates of decline found in shale oil wells. The decline in production from Legacy wells is now 60,000 b/d in the Bakken, 100,000 b/d in Eagle Ford, and 180,000 b/d in the Permian Basin.

Hope for the future of the US shale oil industry is centered on the Permian Basin where production has grown from 300,000 b/d in 2011 to 2.6 million today.   Should this rate of growth continue for another three years, production would be over seven million b/d. But close observers believe this is impossible. The rapid increase in production has been gained by drilling the sweet spots first. The history of oil production in the Bakken and Eagle Ford shows that only about 10-15 percent of a basin will yield most of the oil and gas.

A new study by Wood Mackenzie and another by a retired oil industry analyst cast serious doubts that US can reach the future production levels estimated by the EIA and others in the industry. These studies are saying that growth in shale oil production could come to an end in three or four years with the Permian peaking at about 3.5 million b/d unless there are all sorts of technological breakthroughs in drilling for oil.

Future shale oil production depends on oil prices and the number of active rigs. In recent months, the rig count has been dropping again; however, moving rigs in and out of service in normally delayed by several months after price changes. Given the recent price increases, the count could be moving up again this fall.

Combining the peaking of US shale oil growth with the effects of low investment during the last few years, we could easily be seeing a price spike worse than in 2008 in the next 3-5 years.

2.  The Middle East & North Africa

Iran: As the rhetoric between President Trump and Tehran grows more heated, attention focusing what will happen if Washington declares that the Iranians are not in compliance with the treaty. The President has until October 15thto decide whether he wants to leave the agreement in place.  There are many ways this situation could play out.  Most observers believe that Trump will declare non-compliance and then wait for Iran to capitulate by agreeing to the President’s “better deal.” This will not happen, so by the end of the year, the US will be back to imposing sanctions, this time without the help of Russian, China, or our EU allies.

The Trump administration will likely face significant challenges in effectively implementing major sanctions on Iran and in enforcing penalties on major foreign companies that violate US sanctions. While international financial services companies that are heavily reliant on the US may comply with the sanctions, international energy traders are unlikely to curb their dealings with Iran unless the United States has broad international backing for imposing sanctions once again.  The impact of US-only sanctions on the oil market could be significant and could remove much of the 1 million b/d that Iran has added since the sanctions were lifted. European energy companies that are major buyers of Iranian crude have significant economic exposure in the US and might be willing to obtain oil elsewhere rather than getting embroiled in sanctions disputes with Washington.

Iraq: The Kurdish independence referendum is the top issue in the Middle East this week. Except for Israel which has a separate agenda, every other country in the world with interests in the region opposes holding a referendum at this time. However, the referendum seems certain to pass. The US is strongly against a referendum at this time fearing that it will simply lead to more turmoil and fighting in a region which already has enough.

If the referendum passes, most believe it will lead to the Kurds issuing a declaration of independence. Oil is at the center of the referendum. Kurdistan is believed to have reserves of 45 billion barrels and currently is exporting some 600,000 b/d. Given that the Kurds’ ultimate goal is a Kurdish state encompassing parts of Turkey, Syria, Iran, and Iraq, it is obvious that there is a potential for an endless series of confrontations and wars lasting for decades.

In the meantime, Russia is becoming more heavily involved in the Kurdish situation. In the last year, it has pledged some $4 billion to fund oil and gas deals. Last week, Rosneft pledged $1 billion to build a natural gas pipeline from Iraqi Kurdistan to Turkey. The pipeline would allow Rosneft to sell natural gas in Turkey, undercutting Gazprom’s plans to get into the Turkish markets. Moscow is trying to supplant the US as the foreign power with the most influence on the Kurds.

This situation still has a long way to work out. It will take a week to count the ballots from today’s referendum.

Saudi Arabia: The Saudis are considering a plan to increase gasoline and jet fuel prices to bring them into line with global prices. The plan involves a one-time price increase which could be a much as 80 percent for some grades of gasoline. The price of other oil products is to be raised gradually between 2018 and 2019. The move is intended to help the national budget which has been suffering lately.

Saudi Aramco may be ready to disclose its audited financial figures in early 2018, according to Reuters. If so, it would be the first time the Saudis have released Aramco financials. Saudi authorities have been hoping for a US$2-trillion valuation of the company, and have plans to sell  5 percent next year to fetch roughly US$100 billion for funding the Vision 2030 program to diversify away from oil. Many outside observers and analysts still think that this target valuation is too high given low oil prices and the government’s ability to manipulate company earnings.

3.  China

China’s shale gas reserves dropped by 6 percent in 2016, the country’s Ministry of Land and Resources announced. Reserves now stand at less than 122 billion cubic meters, down from 130 at the end of 2015 according to a report released by the ministry. The numbers suggest China’s efforts to replicate the North American shale gas revolution and reduce reliance on energy imports are running out of steam.

Cnooc Ltd. is searching for partners to develop oil prospects in the Gulf of Mexico as the Chinese oil company extends its global reach. After bidding alone for exploration rights in Mexico’s first-ever deep-water auction in 2016, Cnooc is seeking deals known as “farmouts,” a common type of joint venture where a stake in an oil prospect is exchanged for help with drilling and production.

China’s announcement last week that it was considering setting a timeline for phasing out traditional fuel cars will likely have a more profound effect on the development of electric vehicles than elsewhere. China is already the world’s largest car market, producing over 28 million vehicles in 2016, according to the Financial Times. Significant changes in a market of that size can cause significant changes in the global automotive market. A centrally controlled command economy such as China’s has shown that policies that are robustly pursued by Beijing can achieve rapid change over short time frames. More than any other country in the world, with the possible exception of India, China has to address atmospheric pollution. The incentives in China to switch from traditional combustion engines to electrics has already made China the world’s leading electric car market, with 507,000 sold domestically in 2016.

4. Russia

Russia’s second-largest oil producer, Lukoil, expects its output to rise over the next 8-10 years as it brings new fields on-stream. Lukoil has suffered from sluggish production from its fields, located mostly in Western Siberia, which are mature and depleted. But it has been focusing on growth in new producing regions, such as the Caspian Sea and other countries, including Iraq. A 3-year and 10-year development plan is under deliberation which will hopefully increase Lukoil’s hydrocarbon production for the next 8-10 years.

Chinese oil refineries are gearing up to receive more Russian oil transported through the expanded Siberian pipeline network starting in January. The ramp-up in pipeline supplies was agreed in contracts signed in 2013 and comes amid a pledge by producers to cut output to tighten global markets. We shall have to see if Moscow makes cuts in its exports elsewhere.

Two US Senators are asking the Trump Administration to review the chances of Russia’s Rosneft acquiring Venezuela’s PDVSA and its US business, Citgo. In a letter to Treasury Secretary Mnuchin, the senators wrote that “Given Venezuela’s increasingly dire economic and humanitarian situation, we are seriously concerned about a possible acquisition by Rosneft of PDVSA and Citgo.” The possibility of Russia’s biggest oil company taking over Citgo first surfaced early this year, as PDVSA’s troubles with falling production and lower oil revenues deepened, bringing it closer to default on pending debts.

5. Nigeria

According to Oil Minister Kachikwu, Nigerian oil production remains below 1.8 million b/d and is in compliance with a quota set on the African nation by OPEC earlier this year.  Whether this is true or not remains to be seen.

Gazprom is interested in joint trading of liquefied natural gas (LNG) with Nigeria and development of underground gas storage facilities, Russian Energy Minister Novak said after the meeting with Oil Minister Kachikwu held in Vienna. “In the framework of bilateral cooperation, we discussed the implementation of joint projects, the interest of Gazprom in joint trading of liquefied natural gas, and in joint development of underground gas storage facilities,” Novak said.

Nigerian fuel truck drivers have begun a strike, their union said Wednesday, triggering fears of a fresh shortage of oil products.  In addition to seeking a pay rise and a better welfare package, the drivers are protesting the government’s neglect of the roads.

6. Venezuela

President Trump attacked Venezuela’s authoritarian government from the podium at the United Nations this week, but Latin American leaders say that behind the scenes he listened to them on how best to resolve the delicate regional crisis. Several Latin American leaders who dined with Trump last Monday said they told him that a military invasion, a threat he casually made last month, would be unacceptable in a region long-sensitive to intervention by Washington.  They pressed on him the need for a peaceful transition to democracy in Venezuela and argued against economic sanctions that would deepen its humanitarian crisis, which has already sent tens of thousands fleeing to neighboring countries.

U.S. Ambassador to the UN Nikki Haley said on Thursday a range of options remained on the table, including a possible oil embargo, if Venezuela did not move to restore its democratic processes. “There’s a lot of support in Latin America to see Venezuela start to respect its people and go back to the democracy it’s supposed to be,” she told reporters. “If things don’t improve, all those options are always there,” Haley added, saying specifically that the possibility of an oil embargo remained.

The situation continues to get worse, although Caracas did manage to scrape together $185 million to make a bond payment last week. An additional $4 billion in bond payments is due before the end of the year. Bond traders are saying there is a very high probability of default before the end of the year.

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

Gains undone: A decade’s worth of efforts to cut oil consumption in industrialized countries is at risk of being reversed, as low fuel prices boost demand and send motorists flocking back to larger gas-guzzling cars. Figures from the IEA and other forecasters show OECD oil demand, which declined between 2005 and 2014, has been growing rapidly for the last three years after oil prices crashed from above $100 a barrel to about $55 today. (9/21)

Norway’s Statoil said it reached its target of cutting 1.2 million tons worth of emissions of carbon dioxide from its portfolio three years ahead of schedule. In 2015, the company joined nine of the world’s largest oil and gas companies in pledging to play a constructive role in reducing the intensity of global greenhouse gas emissions. (9/23)

Emissions cuts: Oil majors, among the biggest corporate emitters of pollution, are reducing their greenhouse-gas footprints every year, actively participating in a trend that’s swept up most corporate behemoths. Sixty-two of the world’s 100 largest companies consistently cut their emissions on an annual basis between 2010 and 2015, with an overall 12 percent decline during that period, according to a report from Bloomberg New Energy Finance. (9/18)

In Lithuania, a state-owned port operator said it started work on a reloading station for support for maritime needs for liquefied natural gas. (9/20)

Russia’s Gazprom Neft, which operates the Badra field in southern Iraq, said the 1.78 million barrels dispatched to the United States on the New Solution tanker represents the largest maritime shipment ever to a foreign country from its Iraqi subsidiary. (9/21)

Kazakhstan’s Kashagan Field, the world’s largest offshore oil field and the largest discovered in the last 40 years, is on the verge of finally moving beyond the impediments that hindered its development. Kashagan currently produces 200,000 b/d; if the currently deployed gas re-injection doesn’t hit a barrier, NCOC intends to bring it to 370,000 b/d by the end of the year. The redesigned compression center project should bring Kashagan’s production to 450,000 b/d by 2019. (9/19)

In North Korea, gasoline and diesel prices rose sharply after its sixth nuclear test and as the UN Security Council imposed new sanctions capping fuel supply, market data analyzed by Reuters on Monday showed. (9/18)

In Nigeria, oil workers stopped on Monday the loading of oil products, natural gas, and aviation fuel as one union joined an indefinite nationwide strike of its current affiliate, demanding better conditions and pay as well as recognition of the ULC. Electricity union workers have also joined in the strike. (9/19)

In Mexico, things are currently looking up for foreign investments in the energy sector, but there’s one local political development that could scare investments off: the front-runner for the 2018 presidential election is a leftist populist candidate, Andres Manuel Lopez Obrador, who has pledged to hold a referendum on the 2014 oil reform. (9/18)

The US oil rig count declined by five to 744 during the week of September 22, according to Baker Hughes.  That makes three weeks in a row plus two consecutive months of declines, though the oil rig count is still much higher than one year ago when it was at 418.  (9/23)

US stocks of distillate fuel oil, which have been trending downwards all year, now look tight following disruption to major refineries caused by Hurricane Harvey. The position is a marked turnaround from the start of the year, when distillate stocks were at record levels following the second warm winter in a row and a prolonged slowdown in freight movements since 2015. (9/23)

Offshore axe falls: A subsidiary of Chevron terminated a contract for a rig working in deep US waters in the Gulf of Mexico nearly a year early, Transocean announced. The rig was last listed in Transocean’s fleet status report as deployed in the Gulf of Mexico at a day rate of $575,000. Transocean said it would realize a lump-sum $148 million for contract termination. (9/22)

E&P corporate boards have generally laid out compensation plans that encourage those companies to grow production at almost any cost — which builds the personal net worth of the CEOs, but does nothing for the shareholders for whom they are legally fiduciaries. (9/23)

Cities sue Big Oil: San Francisco and Oakland filed separate lawsuits against five oil companies on Wednesday seeking billions of dollars to protect against rising sea levels they blamed on climate change, according to public documents. The lawsuits, filed in state courts in San Francisco and Alameda Counties, alleged Chevron, ConocoPhillips, Exxon Mobil, BP, and Royal Dutch Shell, created a public nuisance and asked for funds to finance infrastructure to deal with rising sea levels. (9/21)

Senators have pressed the Trump Administration to review the chances of Russia’s Rosneft acquiring Venezuela’s PDVSA and its US business, Citgo. Marco Rubio and Bob Menendez believe a change in the ownership of Citgo’s assets would constitute a security risk. (9/21)

Judicial jujitsu: Both sides in the debate over hydraulic fracturing claimed victory with a federal appeals court in Denver ruling on federal powers. The 10th US Circuit Court of Appeals overturned a lower court’s ruling on overreach challenges against the US Bureau of Land Management, which wanted regulatory oversight from the states. (9/23)

In Colorado, landfills have begun to fill their space with unknown amounts of low-level radioactive substances from oil and gas activities, according to state health officials. Local authorities are currently trying to prohibit the practice altogether by strengthening their oversight mechanisms. (9/23)

Pipes for wastewater: Drillers typically get about seven barrels of water for every one of oil, and some struggle to deal with the overflow that is mostly sent by truck to disposal sites miles away. David Capobianco, a former managing director for Paul Allen’s Vulcan Capital, is trying to change that by building pipelines to get wastewater out. His newly formed WaterBridge Resources LLC aims to be a water-management company for oilfields. (9/19)

Diesel MPG: Freightliner says its new Cascadia truck gets 8% better fuel efficiency through such things as hubcap covers and door seals that cut down on wind resistance. The average big rig travels less than 7 miles on a gallon of diesel fuel, making it one of the least-efficient vehicles on the road. Truck manufacturers want to change that. Spurred by new pollution regulations and sluggish demand, truck makers are rethinking everything from engine design to the shape of the trailer to bump up fuel efficiency. (9/22)

Natural gas prices fell for the third straight session Thursday, as inventories grew more than expected for the second straight week. Futures for October delivery fell to $2.946 a million BTUs on the NYMEX. Prices extended losses after the latest US EIA report showed that inventories grew by 97 billion cubic feet in the week ended Sept. 15. (9/22)

EV push action: Mercedes-Benz owner Daimler is investing $1bn to produce electric cars in the US for the first time as it steps up its challenge to its leading rivals by establishing manufacturing bases to build new technology vehicles across three continents. The German group said it will invest the money to prepare its manufacturing plant in Tuscaloosa, Alabama, for producing electric cars, meaning it will have production locations for EVs and batteries in Europe, China and now the US.

EV push factors: It’s 10 years since Apple Inc. unleashed a surge of innovation that upended the mobile phone industry. Electric cars, with a little help from ride-hailing and self-driving technology, could be about to pull the same trick on Big Oil. (9/22)

A diverse energy mix including coal and nuclear power is a key requirement for US electricity generation if the country is to maintain a cost-effective power supply, IHS Markit said Tuesday. The analytical firm warned Tuesday“policy-driven market distortions” are creating a less efficient power supply that could cost the US economy 0.8% of gross domestic product and 1 million jobs. (9/20)

A court in Japan on Friday ordered Tokyo Electric Power (Tepco) to pay compensation to a group of former Fukushima residents, the second such ruling following the 2011 earthquake and nuclear disaster, Japanese media reported. However, the ruling by the Chiba district court, east of Tokyo, did not find the government liable for compensation, in contrast to a March ruling in another court that ordered both the government and Tepco to pay compensation. (9/22)

Germany’s Volkswagen is moving to secure long-term supplies of cobalt, a vital component of rechargeable batteries, as the group accelerates its ambitious shift to electric cars. The company aims to make up to three million EVs a year by 2025. (9/23)

Total’s solar step: In an announcement, ahead of the French president’s speech before the U.N. General Assembly, Total said it took a greater stake in a renewable power company. (9/20)

Dubai’s state energy utility awarded a $3.9 billion contract to build and run a 700-megawatt solar power plant to a consortium comprising Shanghai Electric and Saudi Arabia’s ACWA Power. The project will feature an 850-foot tower receiving focused sunlight, the world’s tallest such tower. (9/18)

Off the coast of Germany, with the start of construction of a new wind farm, officials said the nation’s economy was supported through low-carbon efforts. A regional Germany energy minister said the wind project represented an important economic milestone because of its new job creation potential. (9/23)

In Japan, as the sun sets on their solar energy boom, companies and investors are rushing into wood-burning biomass projects to lock in still-high government subsidies. More than 800 projects have already won government approval, offering 12.4 gigawatts (GW) of capacity — equal to 12 nuclear power stations and nearly double Japan’s 2030 target for biomass in its basic energy policy. The sheer number of projects has raised questions about how they will all find sufficient fuel, mostly shipped in from countries like Canada and Vietnam. (9/22)

Self-delivering new cars? About 80 million vehicles are produced around the world every year, but the logistics for transport from the factory to the end customer are extensive, costly and completely manual. A new vehicle is moved up to 30 times manually before it reaches the end customer. The Swedish research project Born to Drive has now developed a new software solution that lets the vehicles move themselves. (9/20)

Paris redux? The United States could remain in the Paris climate accord under the right conditions, Secretary of State Rex Tillerson said on Sunday, signaling a shift in tone from the Trump administration, which angered allies with its decision to pull out of the agreement. (9/18)