Quote of the Week

“I think the question, a little bit in the longer term is – is this the last big rise in US production?… If you look at the economics on most of the big Permian players, not many of them make a lot of money.”
Ian Taylor, chief executive at Vitol, which trades more than 7 percent of global oil. 

Graphic of the Week

Prices climbed last week with Brent up almost 3 percent to $57.17 a barrel and WTI up over 4 percent to close the week at $51.45. The major developments affecting prices was an unexpected jump in Chinese oil exports of 1 million b/d in September to 9 million and the announcement that the President would not certify Iranian compliance to the nuclear accord. Statements by OPEC and Russian officials concerning a possible extension of the production freeze and the growing concerns that there will be hostilities in the aftermath of the Kurdish independence vote also supported prices.

The 2.7-million-barrel decline in the US crude inventory the week before last was also supportive. US crude oil exports hit an all-time high of nearly 2 million b/d at the end of September, and are poised to climb even more hitting unprecedented levels in the coming two or three weeks. The circa $6-7 a barrel spread between US and world prices, which is more than enough to offset shipping costs to Europe and Asia, is attracting foreign buyers to US crude stockpiles causing part of the drawdown.

The recent surge in exports led net US imports to plunge to levels never seen in EIA data going back to 2001. Over the last few years, weekly net imports tended to fluctuate between 6 and 8 million b/d.  September was a highly unusual month. Net imports fell to 5.7 million b/d in the week ending on September 8 before recovering a bit mid-month. By September 29, however, net imports plunged to 5.2 million b/d, the lowest weekly total on record.

Arguments continue to be made on both sides of the issue as to whether oil prices will be significantly higher in the next year or stay in a trading range around $50 to $60 a barrel. While there is general agreement that the large drop in investment in the last few years will result in higher prices three or four years ahead, there is still much confusion about what will happen in 2018. Global inventories have been dropping of late, but some, including Goldman Sachs, are saying that the decline in inventories likely ended in the third quarter and will not continue into 2018. The IEA said in its monthly report that while the demand for crude will increase by 1.6 million b/d this year, it will moderate back to grow by 1.4 million b/d next week. A recent survey of US oil executives reported that most US oil executives see oil prices remaining below $60 a barrel through next year and believe they will not hit $70 a barrel until after 2020.

Art Berman of Labyrinth Consulting Services points out that while drilling has increased significantly in the past year, the number of drilled but uncompleted wells has increased due to a shortage of well-completion crews and equipment. Berman maintains that this shortage will not be overcome quickly and that well completions will remain below that required to grow the US shale oil supply significantly next year. Overcoming the 30 percent annual decline in legacy shale oil well production is very difficult to cope with through drilling new wells.

The OPEC Production Cut: The cartel forecast higher demand for its oil in 2018 last week and said its production-cutting deal with rival producers was getting rid of a glut, pointing to a tighter market that could move into a deficit next year. OPEC said the world would need 33.06 million b/d of its crude next year, up 230,000 b/d from its previous forecast. That is its third consecutive monthly increase in the projection from its first estimate made in July. OPEC economists say the price of WTI could be in a range between $50 per barrel and $55 per barrel for 2018. “A rise above that range would encourage US oil producers to expand their drilling, otherwise, lower prices could lead to a reduction in their capital expenditures.”

In reaction to the price of WTI falling below $50 a barrel the week before last, OPEC began talking about taking “extraordinary measures” to balance the markets. As usual, OPEC is vague on specifics, but likely is talking about extending the production freeze to the end of 2018. OPEC’s Secretary General Mohammed Barkindo on Tuesday called on US shale oil producers to help curtail global oil supply. “We urge our friends, in the shale basins of North America to take this shared responsibility with all seriousness it deserves, as one of the key lessons learned from the current unique supply-driven cycle,” said Barkindo.

US Shale Oil Production: The arguments over the profitability of shale oil in the US continues. A new analysis of the Bakken shows that the oil producers there continue to outspend net cash flows from operations and for 2017, a deficit is expected. Since January 2009 through July 2017 an estimated $100 billion was spent drilling wells in the Bakken.  By the end July 2017 an estimated $35 billion in positive cash flow still needed to be recovered to pay past debts. It is this large debt load that has be repaid before Bakken oil can become profitable. Wellhead prices in the Bakken are still about $10 a barrel below WTI or around $40 a barrel.  With few prospects for more efficient production, it is unlikely Bakken oil will be profitable until oil prices spike to over $100 a barrel and stay there for years.

There was an interesting development relating to shale oil production last week when France’s biggest bank, BNP Paribas, said it would no longer do business with companies whose main business is exploration, production, trading, or marketing of oil and gas from shale or tar sands projects.  The new policy is part of the Bank’s efforts to support energy transition. The bank will no longer finance LNG terminals that predominantly liquefy and export gas from shale projects, and choke off funding for pipelines that carry oil and gas from shale or tar sands.  Whether this begins a trend among the investors that have been pumping money into unprofitable shale oil companies for the last eight years remains to be seen.

2.  The Middle East & North Africa

Iran: President Trump Friday officially renounced the Iran nuclear agreement, but urged Congress to remain in the deal as he asked lawmakers to ultimately decide its fate. There are many consequences, most of them bad or very bad, that seem likely to come out of this decision by the President. If, as seems likely, the Congress re-imposes sanctions and designates Iran’s Revolutionary Guard a terrorist organization, Iran almost certainly will renounce the treaty. It likely will go back to developing its nuclear program, and with the help of many countries seek ways around the US sanctions.

The EU nations that are planning to make large investments in developing Iran’s oil will have to contend with US sanctions on companies that do business in the US and invest in Iran. European governments could introduce “blocking legislation” in an attempt to insulate their businesses operating in Iran from US sanctions. Without the aid of the EU, China, Russia, and many other nations that are not particularly upset by Iranian policies, so long as they do not start building nuclear weapons and force a dangerous confrontation with Israel, are unlikely to cooperate.

In the short term, the US move is likely to result in higher oil prices due to trader perceptions of the dangers ahead. US restrictions on banks prohibiting financing oil trade transactions are seen as a major risk to Iranian exports. A substantial loss of these exports in the next year or so could force prices higher. This time around, however, there will be many nations trying to actively circumvent the sanctions, which many not be as effective as Washington hopes.

Should President Trump use his existing powers to designate Iran’s Revolutionary Guard a terrorist organization for its support of various Shiite causes across the Middle East, Tehran has promised a “crushing” response. This saga is only beginning, and there are many dangerous pitfalls ahead which could easily pose a threat to Middle Eastern oil exports.

Iraq: In the aftermath of the Kurdish independence referendum, and with ISIS forces forced out of their most important strongholds, the Iraqi army is now freer to use force against the Kurds. Erbil fears that the central government is planning to move against the northern oil fields around Kirkuk that were occupied by the Kurds in June of 2014 to keep them out of ISIS’s hands. Last week there were clashes around Kirkuk between government and Kurdish forces. The Kurds are saying that Baghdad has issued an ultimatum that the Kurds must pull their forces out of what are largely Kurdish Kirkuk provinces in the next 24 hours. With so many outside powers involved, Iran, Turkey, Syria, Russia, and the US, this situation could easily deteriorate. Many are saying that a major civil war is about to begin.

Despite Turkish threats to close the pipeline the Kurds have been using to export oil, the line still seems to be open and foreign oil companies say they continue to receive payments for the oil Erbil is exporting. Baghdad announced last week that it plans to open the old northern export pipeline to Ceyhan, Turkey that would allow it to export oil from the northern fields without going through Kurdistan province. The old northern pipeline has been closed since ISIS took over much of northern Iraq in 2014. The remnants of the old northern pipeline are in bad condition so that it may take much time and money to get it working again.

If Baghdad is to achieve its goal of boosting oil production from its southern field by millions of barrels per day, it will have to spend billions to build new oil pipelines, storage facilities and a seawater supply project to inject water from the Gulf into reservoirs to improve production. Last week it was announced that the government has been in talks with Exxon to design and finance the “southern project” to boost oil production.

Saudi Arabia: After two years of hype concerning the upcoming IPO for 5 percent of Saudi Aramco, Riyadh is said to be considering giving up on selling shares to the public and selling off a piece of Aramco to private investors instead. This move would eliminate the problems of listing the shares on either the London or New York stock exchanges and revealing much confidential information about the company’s plans and profitability. As this news is still in rumor stage, there is no official word on the new partner, but most attention is focused on the Chinese as the only ones that could afford the billions a share of Aramco would cost.

Asian crude buyers say the Saudis are planning to export only 7.2 million b/d in November which is 650,000 below what its customers are requesting. Even China, the Saudis biggest customer in Asia is getting less than requested. This may explain some of what is behind the increased demand for US oil from Asian refiners.

3.  China

There was much news from Beijing last week concerning to its energy industry. Chinese crude imports rose by 1 million b/d in September, month over month, to 9 million b/d. The news eased concerns that demand in the world’s largest crude importer might be waning amid faltering economic growth. The IEA suggests that the recent Chinese surge in crude buying may have more to do with oil depletion in China, a continuing buildup of a large strategic stockpile, and opening of new oil product export refineries.

People are starting to say that China may be on its way to building a 1-billion-barrel strategic stockpile to guard against disruptions in oil exports around the world. Beijing is vulnerable to the collapse of Venezuela and increased conflicts in the Middle East.  In a recent report, the IEA says that Beijing may still have about 150 million barrels of spare strategic reserve capacity to fill. If so, we will see high Chinese crude imports for the next six months. The Chinese have always been good at adding to its strategic reserves when prices were low.

Six small Chinese “teapot” refiners have registered a $5 billion joint venture to pool funds and investments to compete with state-owned giants in the domestic fuels market. The refineries that the alliance members own have combined government-approved crude oil import quotas of about 460,000 b/d, while the combined refining capacity is some 661,000 b/d.

A new round of environmental inspections has led to the closure of tens of thousands of businesses producing commodities from industrial chemicals to cement and rubber. This move shows Beijing’s willingness to sacrifice some economic growth in its “war” on the country’s continuing air, water and land pollution. A third of Chinese cities saw worsened air pollution this spring compared with the previous year. Critics blame this situation on Beijing’s historic focus on meeting economic growth targets, insufficient enforcement of pollution rules, and insignificant fines that fail to discourage polluters. More than 7,000 factories have been closed — at least temporarily — in Sichuan province.

Taiyuan, the capital of China’s northern province of Shanxi, which is known for its coal production, has banned the sale, transport, and use of most coal as it tries to cut air pollution. The ban is expected to cut coal use by more than 2 million tons, or 90 percent of the city’s total consumption.

Beijing’s announcement that it is planning to switch from internal combustion to electric vehicles as a way of combatting domestic pollution and reducing oil imports is creating quite a stir. The Chinese, who have the world’s largest market for motor vehicles, could eventually force the rest of the world to follow suit no matter what other countries want to do.

4. Russia

Last year, Russia surpassed the Saudis as China’s largest source of oil. Now, the Russians plan to double their crude exports to China through Kazakhstan. The Chinese recently agreed to a 14 percent in Russia’s giant Rosneft oil company for some $9 billion.  Chinese refiners are preparing to receive more Russian crude via the Eastern Siberia Pacific Ocean pipeline starting in January next year when the expansion of the pipeline will be complete. Rosneft will increase its deliveries to PetroChina to 600,000 b/d next year, up by 50 percent compared to 2017.

Rosneft is buying from Italy’s Eni a 30 percent stake in the offshore concession near Egypt where the giant Zohr gas field is located, for $1.1 billion.  Zohr has a total of 850 billion cubic meters of gas in place and is the largest natural gas field ever discovered in the Mediterranean, according to Eni, which has also divested an additional 10 percent in the concession to BP. This purchase will give Rosneft a foothold in one of the world’s most important emerging natural gas areas: the eastern Mediterranean. Rosneft is also interested in buying Sinopec’s interest in Argentina.

Last week Russian Prime Minister Medvedev signed 11 bilateral agreements with Morocco covering cooperation in such areas as customs, agriculture, the military, culture, energy efficiency, and nuclear energy. Medvedev talked a “very promising project to supply liquefied natural gas (LNG) to meet the needs of the Moroccan economy.” Russia’s energy minister, on a visit to Morocco last month said an LNG regasification terminal is under construction and the two countries discussed gas deliveries by the Russian groups Gazprom and Novatek.

5. Nigeria

The government has ruled out the possibility of building new refineries to compliment the four existing ones in Nigeria. Instead, the Government is planning to refurbish the existing ones, which have a capacity of 450,000 b/d. Nigeria has long been plagued by insufficient refining capacity as the existing refineries deteriorate due to lack of adequate maintenance. Most oil products sold in Nigeria are imported amidst endless scandals over import contracts.

In the Niger Delta region, the state of Bayelsa will search for non-oil natural resources to diversify away from its main commodity—oil. This is what the state’s new commissioner in the Ministry of Mineral Resources said after taking office.

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

The world’s top trading houses, among the nimblest entities in oil, say even they aren’t sure how to stay a step ahead of a coming cut in shipping fuel sulfur. The new rules come into force in just over two years and threaten to upend markets from heating fuel to crude oil. (10/14)

The adoption of electric vehicles will lead to global peak oil demand as soon as in 2023-2025, which will result in oil prices crashing to $10, Chris Watling, CEO & chief market strategist at Longview Economics. (10/14) (NOTE: Dartboard alert)

Nord Stream 2—Gazprom’s pipeline project to twin the existing Nord Stream pipeline between Russia and Germany via the Baltic Sea, is dividing European nations and European Union (EU) institutions—with one group cheering on the resultant cheap gas, and the other group fearing Russia’s increased grip on the region. (10/11)

In India, liquefied natural gas could help satisfy growing energy demands, especially if commodity prices continue to improve, Wood Mackenzie found. Recently the Reserve Bank of India predicted inflation would hold steady at 4.5 percent through 2019 and economic growth should increase from 6.7 percent through 2018 to 7.4 percent in 2019. The growth translates to a stronger energy appetite and nearly half of India’s energy comes from oil and natural gas. (10/10)

Offshore Australia, US oil major Chevron Corp has abandoned plans to explore the deep waters off the south coast, long seen as a promising prospect, as weak oil prices are making the work hard to justify, the company said on Friday. Chevron’s move follows a decision by BP a year ago to walk away from the waters known as the Great Australian Bight. (10/13)

Offshore the Republic of Guinea, France’s Total said it was expecting a big oil pay off from the under-explored deep waters, where the company signed an evaluation agreement for deep and “ultra-deep” areas. (10/10)

In Argentina, Gas transporter TGS, controlled by Pampa Energia, has proposed an $800 million pipeline and gas treatment plant in the Vaca Muerta shale fields, aiming to address a key barrier to increasing production. So far, this year, Exxon Mobil, BP Unit Pan American Energy, Wintershall, Total, and Statoil have announced investments in Vaca Muerta, yet in the short term, the capacity to move oil to markets is not sufficient to handle projected production increases. (10/14)

At the Panama Canal, since the start of the year transiting tonnage has increased by nearly 23 percent. The widened waterway means importers as far inland as Tennessee could find it cheaper to bring in Asian goods to ports like New York, Savannah, Ga., and Charleston, S.C., rather than move them by rail and truck from West Coast ports, which handle about two-thirds of Asia-to-Americas trade. The Panama Canal is also helping US exporters of natural gas send bigger loads to Asian markets. (10/9)

The US oil rig count fell by five to 743, according to Baker Hughes. Gas rigs also fell, by two, to 185. (10/12)

Spending decline: A majority of oil and natural gas company executives polled in a survey released Wednesday expect a net decrease in rig deployment next year compared with 2016 levels, as spending by operators slides amid a forecast that US commodity prices will remain cheap. Half of the executives surveyed expect up to a 10 percent decline in capital expenditures next year versus last year. (10/12)

2018 peak? US oil output could be set for its last spike in 2018 before growth flattens for a number of years as rising costs make a big chunk of production uneconomic, the head of top oil trader Vitol, Ian Taylor, told Reuters. (10/11)

Import/export oddity: Last week, as the US reported a record 2m b/d in crude oil exports, refineries located on the east coast imported about 900,000 b/d, mainly from Africa. A big reason is the Jones Act, a 97-year-old US law that requires all ships starting and ending their voyages on US coasts to be American-flagged, built, and crewed. (10/12)

An offshore drilling act that critics said was “wish list” legislation for the oil and gas industry was hailed as a strategic win by House Republican leadership. (10/13)

Two 2017 surveys from EY–one targeting American adult consumers and one targeting oil and gas executives based in North America–explore the topic of regulation. The surveys reveal clear disparities between the two cohorts in how much regulation is too much as well as what industry regulations are most important. Nearly 80 percent of consumers of all ages and political beliefs are not in favor of reduced regulation in oil and gas. But 53 percent of oil and gas executives believe the industry has too much regulation. (10/12)

Anti-coal campaign: Former New York mayor Michael Bloomberg’s charity gave another $64 million to a campaign that aims to slash the number of US coal-fired plants by two thirds by 2020. Bloomberg Philanthropies donated to the Beyond Coal campaign run by non-profit Sierra Club. (10/12)

Pumping nuclear: The US energy secretary defended his plan to reward nuclear plants with incentives against criticism it would manipulate markets by telling a congressional hearing on Thursday that a strong domestic nuclear industry boosted national security. (10/13)

Offshore wind: In a study published on October 9 by researchers at the Carnegie Institution for Science and Stanford University, it’s estimated that deepwater offshore turbines could produce three to five times as much energy as land-based turbines, due to the higher speeds and consistent force of the wind at sea. At the moment, these findings are necessarily speculative. Construction of deepwater wind turbines that don’t need to be fixed to the ocean floor is in its early stages. (10/12)

In Canada’s boreal forests above the Gulf of St. Lawrence, Hydro-Quebec is building a series of dams that will generate enough electricity for more than one million homes. The $5.2 billion project on the Romaine River is part of a sweeping expansion the government-owned utility began in 2007, with the intention of selling power to the US where nuclear reactors are closing. It’s not clear that Americans will buy; natural gas and solar are also jockeying to meet future needs. (10/14)

Battery initiative: The European Union is beginning efforts to establish a full value chain of advanced batteries in Europe, with large-scale Li-ion battery cell production, and the circular economy, at the core. A recent high-level meeting of EU players agreed that large-scale manufacturing of Li-ion cells with highest possible control of intellectual property (IP) is crucial for EU economy and job creation for the future. (10/14)

Shell goes EV: In one of Big Oil’s most significant deals in the electric vehicles market yet, Shell said on Thursday that it had signed an agreement to buy one of Europe’s biggest EVs charging networks, Netherlands-based NewMotion. The company, launched in 2009, now has more than 30,000 private charge points across the Netherlands, Germany, France, and the UK. (10/13)

Norway, the government of the global leader in EVs adoption proposed on Thursday to trim some of the tax breaks for the heaviest electric vehicles (EVs) in a move that—if implemented—would affect owners of cars such as Tesla Model X, for example. (10/13)

The British government said Thursday it would invest and spend around $3.1 billion through 2021 on new energy systems, nuclear power and renewable energy strategies to help meet its greenhouse gas emissions target for 2050. (10/13)

Picking your poison: Investments necessary to reduce climate change risks may be less than what’s needed to rebuild after related disasters, U.N. leaders said from Tehran. (10/11)