Quote of the Week
“Deepwater is going to be playing a much-reduced role on the global oil-supply stage relative to what the industry expected as recently as three years ago.”
Thomas Curran, an analyst at FBR Capital Markets in New York.
Graphic of the Week
1. Oil and the Global Economy
Oil prices were little changed last week with New York futures trading around $52 a barrel and London around $57. Numerous factors continue to affect oil prices: Baghdad’s seizure of the Kirkuk oil fields and the consequent reduction in exports; a stronger US dollar brought on by the prospect of a tax cut; a falling US oil-rig count; a large drop in US crude inventories due to the recent hurricanes and unprecedented exports; the brightening prospects for a nine-month extension of the OPEC production freeze; and finally a warning that the China’s economy may not be doing as well as many believe. When all these forces pulling in various directions were netted out, there was little change.
Many traders are saying that the markets are tightening due to the OPEC production cut and increased demand. The issue remains as to just how quickly this “tightening” will result in a substantial price increase that would produce enough revenue to make OPEC well again and to support increased drilling for oil. Some are saying there is one more surge left in the US shale oil production that will send oil prices lower next year. The world’s largest oil trader, Vitol Group, sees the price of the Brent barrel falling to $45 in 2018. This drop in prices will be caused by a final US production spike that will push the selling price of oil so low that production will slump again.
While many see an increase in shale oil production coming in the next six months, there are considerable doubts that it will be strong enough to force price above $60 a barrel.
The OPEC Production Cut: With the next OPEC meeting not scheduled until November 30th there is not much hard news. A consensus seems to have formed to extend the production freeze until the end of 2018. The Secretary-General of OPEC continues the party line that a balanced oil market is in sight. There is now talk of expanding OPEC either formally or informally so that the oil-exporting countries that have the most to gain from higher prices can all work together on a permanent basis.
OPEC currently has a compliance rate with their output cut pledges of about 86 percent, Fatih Birol, the executive director of the International Energy Agency said on Tuesday. Kuwait’s Oil Minister, Essam al-Marzouk, said last week that OPEC and its partners might not need to extend the November 2016 crude oil production cut agreement beyond its March 2018 deadline if everyone fully complies with their quotas.
US Shale Oil Production: The financial press continues to contain many with stories about the future of US shale oil production. The EIA now is forecasting that US shale oil production will rise in November for the 11th straight month. Shale oil production is forecast to rise by 82,000 b/d next month to 6.12 million b/d. Bakken production is forecast to rise by 7,600 b/d to 1.1 million; Eagle Ford by 2,500 b/d to 1.2 million; and the Permian to increase by 50,000 b/d to 2.7 million.
The evidence is starting to accumulate that the rapid increases that shale oil drillers have made in increasing their productivity are coming to an end. Use of new techniques such as drilling multiple wells off a single pad; longer horizontal runs; more fracking stages; and increasing the amount of sand used to fracture new wells has been very successful in increasing initial per-well production in the last three or four years. Now that these techniques have become the norm, productivity per 1000 feet of fracked well has flattened out. Drillers are running out of sweet spots, and future wells are likely to be less productive.
Most of the US shale oil industry has never been profitable and has depended on drillers convincing outside investors that the spectacular increases in productivity and output meant that profitable days were soon ahead. If it becomes apparent in the months ahead that this is not to be the case, then it is probable that the steady injections of fresh cash into the shale oil industry may come to an end. If this is the case US shale out output is likely to drop and possibly faster than optimists are predicting. Concerns are rising that while using larger amounts of fracking sand may increase productivity at first, over the life of the well a smaller amount of oil may be recovered.
Changes in per well productivity in the next six months should give some insight into just when the shale oil boom will peak out and like all other sources of oil begin a show
2. The Middle East & North Africa
Iran: The fallout from President Trump’s decision not to support the Iranian nuclear agreement continues to be the major topic. Little has happened as yet, but many are predicting serious consequences. The hardliners in Tehran are using the decision in their struggle with Iranian moderates and their attempt to modernize the country. President Rouhani, a moderate, could face a backlash from the decision.
The US President has backed himself into a corner by tossing the problem to Congress which is ill-equipped to negotiate with Tehran. The most likely outcome is that the Congress does nothing and Iran refuses to back down. It this event, escalation of the crisis seems inevitable.
In the meantime, Iran continues to call for more investment to expand its oil and gas industry while Western firms continue to fret over the implications of expanded sanctions. Many are saying that new US-only sanctions would take many months or even years to have a significant effect.
Syria/Iraq: Baghdad seems to have succeeded in taking control of the northern oil fields around Kirkuk with little opposition from the Kurds. Although there were some scattered clashes and the Kurds are outraged at Washington for not supporting them, it seems to a fait accompli. The Iraqis have warned foreign oil companies operating in the area that they are now in charge of the oil exports from Iraq, not the Kurds. Many foreign oil companies are worried that the Kurds will no longer be able to pay back the billions they have loaned Erbil that was to be paid out of the 600,000 b/d that the Kurds were exporting to Turkey.
At the end of last week exports from and through Kurdistan to Ceyhan, Turkey were down to 196,000 b/d from the normal 600,000. The two major oil fields near Kirkuk that were producing 275,000 b/d remain closed. There are reports that the Kurds managed to do at least some damage to equipment in the oil fields so that it may be a long time before production is resumed. Iraqi plans to reopen the old northern pipeline directly to Ceyhan that has been closed since the ISIL uprising will likely take a long time to accomplish – if ever.
Iraq has asked BP to redevelop the Kirkuk oil field that are now back under Baghdad’s control and to increase production to 1 million b/d. Baghdad has also threatened to sue the Kurds if they do not continue to export oil from the northern fields through the existing pipelines.
Baghdad’s seizure of the Kirkuk oil fields has changed the political situation in northern Iraq dramatically. The Iraqi Kurds still dream of setting up an independent state and recently voted in favor to doing so. Kirkuk, which was historically populated by Kurds until Baghdad started moving in Arabs and Turkmens, was the centerpiece of a new Kurdish state and the oil riches of the region were to be enough to make an independent Kurdistan economically viable.
Last week, the Kurdish dreams of forming an independent state were crushed. Whether this situation remains or results in years of conflict remains to be seen. The situation is highly unstable and could easily result in the loss of oil exports from the region.
Saudi Arabia: There are conflicting reports as to whether the Saudi Aramco IPO will take place or whether the project will be abandoned in favor of a private sale to the Chinese or some other wealthy investor. The Saudi oil minister played down reports that the IPO had been abandoned, but many other sources are saying that numerous actions that were preliminary to the IPO have been shut down.
A new report by the EIA on the state of the Saudi oil industry points out that net Saudi oil export revenue in 2016 was only $133 billion as compared to $301 billion in 2014. Although oil prices have been higher in 2017 the loss of revenue is still significant and bodes ill for the years to come.
Libya: Tripoli is believed to have exported about 923,000 b/d last month down from 1 million in July due to various temporary interruptions as one large oil field. A new report from Wood Mackenzie says that Libyan export may be limited to a maximum of 1.25 million b/d due to accumulated damage to its oil export facilities during the last six years.
Chinese refineries increased their production by 12.7 percent to 12 million b/d in September as a major new state-run oil refinery came on stream, and numerous smaller refineries completed their annual maintenance. China has opened two new large refineries this year as it seeks to increase its share of the Asian oil product export market.
Fighting smog vs. growing the GDP remains the top issue for China. The Chinese continue to close down coal mines and pollution-intensive industrial plants while insisting they are on track to reach their growth goals of 6.5 percent this year.
Beijing continues to forge ahead with its efforts to increase renewable and phase out internal combustion engines. In the last ten years, the Chinese have increased their solar photovoltaic capacity from 100 megawatts to 77 gigawatts and 800-fold increase in capacity.
Concerns are rising that effort to slow coal burning in many northern cities and replaceing coal furnaces with natural gas could result in an unpleasant winter for many as cutting coal production is easy in comparison to increasing the infrastructure to supply natural gas.
Discussions are starting as to whether Chinese efforts to replace internal combustion engines could trigger a worldwide effort that would crash oil prices over the next decade or so.
Moscow continues its efforts to gain more influence in the Middle East through its oil industry. Last week Rosneft announced that it has agreed to take control of Iraqi Kurdistan’s main oil pipeline increasing its investment in the province to $3.5 billion. The firm had previously loaned the Kurds some $1.2 billion to build the pipeline and would be paid off in oil exports. With the loss of the Kirkuk oil fields, the Kurds are now in a much worse financial position so apparently, have agreed to turn the pipeline over to the Russians. It seems possible that Bagdad may be willing to use the pipeline controlled by Moscow to export oil from around Kirkuk. In the meantime, Rosneft also has agreed to invest $400 million in five oil blocks inside Iraqi Kurdistan increasing Moscow’s exposure in the vulnerable reason.
Rosneft is in talks with Iran to set up a supply chain to deliver oil from Iran and Central Asia to the world market. Such an arrangement would be a way for Tehran to bypass any new US sanctions that are imposed as the result of recent US policy changes.
Moscow has warned Ukraine to stay away from oil rigs that were left off the Crimean coast after Moscow annexed the province in2014. Russian TV has been showing pictures of how easily the Russian air force could bomb the rigs should the Ukrainians attempt to recover them.
The Nigerian senate announced that it has begun talks with Russian oil companies for a partnership to develop Nigeria’s oil and gas sector. The Russians and Chinese are moving quickly all over the world to get a hold on oil production as the US and other Western interest falters.
Nigeria has lifted the latest force majeure off its Bonny Light exports that had been in effect for the past month after a leak occurred in one of the two pipelines supplying the Bonny export terminal. As usual, it is unclear if the leak was caused by insurgent sabotage or oil thieves cutting into the line. Shell normally exports 230,000 b/d of Bonny Light from the terminal. It is as yet unclear as to how much oil exports have been affected.
The $3.8 billion Egina Floating Production Storage and Offloading (FPSO)vessel being built in Korea by Samsung Heavy Industry is expected to arrive in Nigeria in the first quarter of next year. The ship is being built for Total using a large force of Nigerian workers under the supervision of the Koreans. Giving the decades of trouble maintaining oil production in the unsettled Niger Delta, several oil companies have decided that Nigerian oil is better exploited from offshore locations that are easier to secure from thieves and insurgents.
PDVSA’s troubles continue to mount. Last week it was blocked from continuing to use the NuStar Energy storage terminal on St. Eustatius island due to $26 million in unpaid bills. NuStar is refusing to ship Venezuelan oil stored in the terminal until the debt is settled. Even more serious is the deteriorating quality of the oil that PDVSA is shipping to refiners in the US, India, and China. Recent shipments have contained high levels of water, salt, and metals that cause problems if brought into refineries. Phillips oil canceled at least eight crude cargoes because of poor oil quality in the first half of the year and demanded discounts on other deliveries. The canceled shipments – amounting to 4.4 million barrels of oil – had a market value of nearly $200 million.
The unacceptable quality of the exported oil stems from shortages of chemicals and equipment to properly treat and store the oil, resulting in shutdowns and slowdowns at PDVSA production facilities, along with hurried transporting to avoid late deliveries.
The IMF has begun examining what it would take for a rescue of Venezuela that could require $30 billion or more in international help annually and a restructuring of Venezuela’s bonds. For now, the examination is purely theoretical as the fund has had no official relationship with Venezuela since Caracas cut off relations in 2007. Officials insist no rescue is imminent and publicly say they have had no meaningful contact with the government other than occasional low-level responses to requests for data.
7. The Briefs (date of article in Peak Oil News is in parentheses)
Pollution is the largest environmental cause of disease and premature death in the world today, according to the newly released report on global health by the Lancet Commission on Pollution and Health. Diseases caused by pollution were responsible for an estimated 9 million premature deaths in 2015—16% of all deaths worldwide. In the most severely affected countries, a pollution-related disease is responsible for more than one death in four. (10/21)
Big oil company executives asserted that fossil fuels would remain the central part of their business for decades, despite recent investments in renewables and other energy sources made in response to efforts to curb carbon emissions. At the Oil & Money Conference, CEOs defended the industry’s traditional work at a time of growing pressure from investors and activists to manage their risks related to climate change. (10/19)
Norway disappoints: Encouraged by recently opened areas and potentially huge yet-to-be-discovered resources, oil companies launched a record exploration drilling campaign in Norway’s Barents Sea this year. But as the summer and the drilling progressed, one dry well after another spelled the end of a disappointing 2017 campaign in which just two viable oil discoveries were made. (10/19)
Russian TV on Friday aired a video of an air strike on a decommissioned boat in the Black Sea to warn Ukraine against attempts to recover oil rigs off the coast of Crimea, which Russia annexed in 2014. (10/21)
Off the coast of Gambia, African Petroleum said it was now pursuing legal routes to protect its offshore assets, after hinting of trouble earlier this week. (10/19)
Offshore Cuba: Australian energy company Melbana said it was positioned for an early start to an oil drilling program next year. Melbana is one of the few foreign companies with a footprint in Cuba. (10/21)
In Canada, a modest rebound in oil and gas prices in international markets has given Calgary and Alberta the distinction of being the fastest growing metropolitan areas in the country this year. (10/18)
Cross-border pipeline permitted: After years of regulatory delays, the US on Monday issued a presidential permit to a three-mile segment of Enbridge’s Alberta Clipper crude oil pipeline from Edmonton, Alberta to Superior, Wisconsin. This will enable the company to nearly double capacity on the cross-border conduit, from 450,000 b/d to 890,000. (10/17)
The US oil rig count fell seven to 736 in the week to Oct. 20, Baker Hughes energy services firm said on Friday. The gas rig count fell by eight to 177. Over the past two months, the trendline for both types of rigs is distinctly downward. (10/21)
US petroleum product demand averaged more than 20.2 million b/d in September, 2.4% more than a year earlier and the highest level for the month since 2007, the American Petroleum Institute reported. Crude oil production, meanwhile, remained robust at an average of more than 9.5 million b/d during September, 2.3% more than in August and 11.3% higher than a year earlier. (10/21)
Bakken and China: Continental Resources CEO Harold Hamm said the sale of oil from the Bakken shale basin in North Dakota to China represents the “new normal.” Early sales should average 33,500 b/d for the first month. (10/19)
Alaska is pursuing foreign investors for its oil and gas industry, hoping to advance recent discoveries while struggling to compete with lower-cost shale projects and reverse a decades-long output decline. Alaskan crude production has fallen by three-quarters since 1988, a decline that has contributed to budget deficits and jeopardized the operation of the Trans-Alaska Oil Pipeline, which runs from the North Slope to the southern port of Valdez. (10/21)
The Haynesville natural gas play is enjoying a second wind. The recent uptick in production is a story of advancements in drilling technology, a renewed interest from major financial institutions, as well as its proximity to new demand centers. Natural gas production in the Haynesville is up 20 percent so far this year. The rig count currently stands at 44, up from just 16 at this point last year. (10/20)
LNG export boost #1: Japanese press reports that government agencies are about to launch a $10 billion funding program for international liquefied natural gas (LNG) projects — specifically aimed to import US exports. (10/18)
LNG export boost #2: Virginia energy company Dominion Energy Inc said Tuesday its $4 billion Cove Point liquefied natural gas export facility in Maryland was about 96 percent complete and was expected to enter service by the end of the year. (10/18)
LNG export boost #3: Cheniere Energy Partners said Friday that the fourth train at its Sabine Pass liquefied natural gas plant was substantially complete, boosting output from the first LNG export terminal in the United States by a third. (10/13)
US LNG: Much of the Trump administration’s hope for achieving dominance requires increasing exports of liquid natural gas (LNG) from six new liquefaction and export facilities. One of these, Cheniere Energy’s Sabine Pass plant in Louisiana, is now being expanded, while the rest are approved and scheduled to be completed in the next three years. When they’re all in service, they’ll be able to export about 9 billion cubic feet of gas a day, which is about 12 per cent of US natural gas production. Meanwhile, investors are looking at a second wave of about 20 more proposed U.S.-based LNG plants. However, it’s unclear whether any of these proposed projects will be able to reach a final investment decision and get built in the coming years. If more are not built, then long-term US LNG export growth will likely stall after 2020. (10/18)
Offshore scrap: Transocean Ltd. is finally sending Pathfinder to its grave, after two years in storage that cost about $15,000 a day. The move by the world’s biggest offshore-rig operator signals just how bleak the future looks for deepwater drilling. Pathfinder is the most famous of six floating rigs the company is scrapping that will add up to a bruising $1.4 billion write-off. The offshore-drilling business enjoyed the highest of highs when oil topped $100 a barrel a few years ago. Companies including BP and Anadarko could lease out an advanced ship for more than $600,000 a day. (10/19)
In Pennsylvania, a special committee of the House passing a bill Wednesday to impose a new tax on natural gas production in the state. Under the legislation, producers would be charged 2 cents tax on every million cubic feet of gas produced — when prices are below $3/million. With that rate escalating to as much as 3.5 cents per million if the gas price exceeds $5.99 million. At the same time, another measure being considered in Pennsylvania could have a greater effect on shale production: new and tougher rules on fracking operations in the state. (10/21)
Ethanol edgy: Iowa Governor Kim Reynolds said President Donald Trump and the head of the US Environmental Protection Agency both promised to protect the US biofuel mandate in calls to her Wednesday, despite recent signs the administration may want to weaken the law. (10/19)
Improving cold batteries: Main Researchers at Penn State, with a colleague from EC Power, have devised a new control strategy that can rapidly restore EV battery power and permit full regeneration while driving at temperatures as low as −40 °C. The strategy involves heating the battery internally during regenerative braking and rest periods of driving. (10/18)
Volkswagen is developing an all-electric race car for the Pikes Peak International Hill Climb in Colorado on 24 June 2018. The all-wheel-drive prototype’s goal is to set a new record for electric cars at the finish line, 14,000 feet above sea level. The new project is part of Volkswagen’s process of transforming itself into the leading producer of electric vehicles. By 2025, the Volkswagen brand will offer 23 all-electric models. (10/20)
Asian EV battle: India faces a wide chasm between Prime Minister Narendra Modi’s campaign to make sure all new vehicles sold in India are electric by 2030 and actual sales numbers. According to IEA, China registered 336,000 plug-in vehicles last year while India only saw 450 of these new vehicles hit its roads. (10/18)
NYC testing: General Motors plans to become the first company to test self-driving cars in New York City, in some of the world’s worst traffic, as traditional automakers battle technology titans to take the lead in the development of autonomous vehicles. GM will test Chevrolet Bolt fully autonomous electric cars, developed in conjunction with Cruise Automation, the autonomous car developer bought by the Detroit icon last year. (10/18)
NOAA on Thursday forecast a warmer winter from California through the Midwest to Maine. A colder than normal winter is predicted for southern Alaska, the Pacific Northwest, and the Northern Tier states. Normal temperatures are forecast for a thin swath of states from Indiana to Idaho. The big driver in the forecast is a La Nina weather event that is likely to develop next month. (10/20)
Planting more forests and managing land use better could be the biggest natural climate solution, because nature could deliver more than 30 percent of the emissions reduction needed to curb dangerous levels of global warming—equal to the world completely stopping the burning of oil, according to a new study. (10/18)