Quotes of the Week

“There’s going to be a lot of excitement around batteries in the next five years. And I would say that the country will get blanketed with [battery] projects.”
Spencer Hanes, Duke Energy business development managing director 

“In today’s low-price energy environment, providing the offshore industry access to the maximum amount of opportunities possible is part of our strategy to spur local and regional economic dynamism and job creation and a pillar of President Trump’s plan to make the United States energy dominant.”
Ryan Zinke, US Secretary of the Interior, after announcing a record 77 million acres for lease in the Gulf of Mexico

Graphic of the Week
1.  Oil and the Global Economy

London futures closed above $60 a barrel last week for the first time since 2015. New York futures are now about $6 a barrel lower than London, increasing the incentive for foreign refiners to buy and export more US oil.  The main impetus for the price surge on Friday was comments by Saudi Crown Prince bin Salman that he backs an extension of the OPEC production freeze until the end of next year. Coupled with the Prince’s statement were upbeat OPEC pronouncements about the increasing demand for its oil and the dubious proposition that compliance with the production cut was now at 120 percent of the agreed numbers. Beyond the hype, however, are real concerns that the Iraqi, Iranian, and Venezuelan situations could deteriorate and lead to lower exports.

Despite prices crossing the $60 threshold, many are skeptical that this bump will last for long. These skeptics cite increasing US shale oil production, and the possibility that even higher US exports will cut into the price of Brent oil as US oil is now so much more attractive. Some are saying that exports of US shale oil and condensates could move closer to 3 million b/d shortly. There now seems to be an agreement between the Iraqis and the Kurds to keep oil flowing through the Kurd-controlled pipeline to Turkey, reducing concerns that the 300,000 b//d of Kirkuk oil would remain shut in for an indefinite period.

US oil prices slipped on Wednesday after a surprising increase of 856,000 barrels in US crude inventories the week before last. However, US gasoline stocks fell by 5.75 million barrels at the same time. The decline in gasoline stocks is at least partially due to seasonal refinery maintenance and higher exports. Large exports of US gasoline to replace rapidly declining production of Venezuelan gasoline is likely another factor.

The OPEC Production Cut: In addition to discussing the extension of the production freeze at the November 30thOPEC/NOPEC meeting, the group is likely to start discussing an exit strategy from the agreement.  Without such a strategy, there is likely to be surge in exports immediately after the agreement is concluded which could push prices lower again

Last week, OPEC’s Secretary-General, whose main job these days is issuing encouraging statements that drive oil prices higher, said that “the fog has been cleared” now that Russia and Saudi Arabia have stated that they favor an extension of the production freeze for another nine months.

US Shale Oil Production: The CEO of Encana told a group in New York last week that in recent months there has been a change in the philosophy behind the US shale oil industry. Since shale oil production started some ten years ago, the focus of the industry and the people managing it has been growth at any cost.  During these years the profitability of shale oil extraction was a minor issue as investors were dazzled by the amounts of oil being produced and were willing to fund still more growth despite the lack of profits. Managers and industry workers were well paid for their spectacular results so that only investors were left holding the bag. This situation is unsustainable in the long run. Unless there is a substantial increase in oil prices in the next few years, the shale oil industry is unlikely to be able to attract large amounts of capital on hype and deceptive numbers.

There may already be early signs of change in the industry. The number of active rigs has been dropping since early August and complaints from shareholders who have seen mostly losses on their investments and loans are beginning to rise. The change in approach to shale oil production could be a major factor as to whether US oil production will continue to grow in the coming year or whether we might be seeing another peak in shale oil production, albeit a temporary one.

2.  The Middle East & North Africa

Iran:  While the world waits to see what the US Congress is going to do about increasing “pressure” on Iran by imposing new sanctions, there has been little news. Tehran signed its first agreement to ship LNG. The gas will be processed into LNG by the floating liquefaction unit Caribbean FLNG, owned by Belgium’s Exmar, which can produce 500,000 tons of LNG annually.

Some believe that Iran’s Revolutionary Guard Corps stands to benefit the most from new tensions between Washington and Tehran. Should foreign investors be forced to leave Iran due to new sanctions, the Guard would take over and run whatever assets they leave behind as they did during the UN sanctions on Tehran.

Syria/Iraq: Late last week Baghdad’s North Oil Company resumed pumping oil to regional refineries and exporting it through the Kurdish-controlled pipeline to Ceyhan, Tukey. The Bai Hassan and Avana oil fields near Kirkuk have been shut since October 19th, keeping at least 275,000 b/d offline. The flow rate was reported as being 90,000 b/d day on Wednesday. This crude will be sold through Iraqi government’s main oil marketing company and not by the Kurds. It seems the Kurds now are reconciled to the rapid movement by Baghdad to seize Kirkuk and its oil fields and are willing to put measures to gain independence aside for the time being. While there is much resentment towards Baghdad and Washington, it now seems that we may not be losing the Kirkuk oil from the world markets in the immediate future.

Iraqi troops attempted to gain control over a strategically important piece of territory at the intersection of the Iraqi, Syrian, and Turkish borders on Thursday, sparking a fight with Kurdish Peshmerga forces. If the operation succeeds, Baghdad will gain the power to sever the oil pipeline link between the Kurdistan and Turkey, which would further undermine the KRG’s prospects for economic independence.

Iraq has started using a fourth single point mooring buoy and brought back online the Khor al-Amaya Oil Terminal after ten months of construction, thereby adding more than 1 million b/d of potential export capacity. However, onshore bottlenecks suggest that only a fraction of that potential will be immediately available. The new mooring buoy alone could increase southern Iraq exports by 200,000 b/d.

Saudi Arabia:  The CEO of Saudi Aramco, Amin Nasser, has joined the chorus warning that an oil supply crunch is imminent.  Nasser said, “Not enough investments have been going into the energy sector… $1 trillion has been either deferred or canceled. This will have an impact on the future of energy if nothing happens.”  “Of the $1 trillion investment, $300 billion was earmarked for oil exploration and another US$700 billion for project developments.”  Nasser made the same point in a speech at the World Petroleum Congress in July.

Due to the continual slashing of investments, global oil discoveries fell to a record low in 2016, and the number of sanctioned conventional oil projects hit their lowest level in more than 70 years, the IEA said in April, warning that the trend could continue this year.

The Saudi Aramco IPO seems to be back again on according to Saudi Arabia’s Crown Prince Mohammad bin Salman.  The sale of around 5 percent of Aramco next year is a centerpiece of Vision 2030, an ambitious reform plan to diversify the Saudi economy. “We are on track in 2018… but the listing details are still under discussion,” Prince Mohammad told Reuters in an interview on Wednesday. The crown prince declined to discuss specific details of the IPO, which could be the biggest in history and is expected to raise as much as $100 billion.  Foreign observers, however, have long debated whether Aramco could be valued anywhere close to $2 trillion, the figure announced by the crown prince.

At the same time, Saudi Arabia’s finance minister said that the kingdom is exploring a private stake sale in Saudi Aramco, with plans for an international listing just one option for a privatization billed as the largest initial public offering in history. The Financial Times earlier this month reported that the Saudis were considering shelving the IPO in favor of a private stake sale to strategic investors, alongside a domestic listing on the local stock exchange. For now, we can only wait to see what happens.

Saudi Aramco CEO Nasser also believes that the new electric cars will not comprise a significant portion of on-road vehicles. “Electric vehicles will continue to grow,” Nasser said. “They will take good market share, but it will be decades before they shoulder a significant percentage of the energy mix.” Still, the rise of fuel-efficient cars could wipe out crude consumption equal to Iran’s annual output by the year 2025, a new analysis by Barclays shows. The Saudis, who are completely dependent on oil exports, have as much to lose as anybody should the demand for oil drop in the next ten years.

3.  China

Incremental gains in overseas production weren’t enough to offset the declines in Chinese oil and gas production, state-owned CNOOC reported last week. Third quarter production of 116.2 million barrels of oil equivalent marked a 1.3 percent decline from last year. Offshore production from Chinese waters yielded 73.8 million barrels of oil equivalent, a 2.3 percent decline from last year, while overseas production of 42.4 million marked a 0.7 percent gain from third quarter 2016. CNOOC said the drop in offshore China was because its fields were in decline,

Global natural gas consumption is expected to grow from 340 billion cubic feet per day (Bcf/d) in 2015 to 485  billion cf/d by 2040, primarily in countries in Asia and the Middle East.  According to the IEA’s latest projections, China will account for more than a quarter of all global natural gas consumption growth between 2015 and 2040. The projected growth in natural gas consumption in China is driven by air quality problems that are becoming increasingly serious.

Beijing says it is planning to pay less attention to growth side of the equation in its struggle to balance rapid development vs. the increasingly serious environmental problems. By de-emphasizing numeric goals, the government will have more room in managing the economy. “It’s not that we don’t want speed in growth, but that we must generate growth with quality, efficiency, and dynamism.” These comments came after the conclusion of the Communist Party congress that granted President Xi a level of authority unmatched in recent decades. But in recent years, China’s leaders have returned to strategies fueled by debt and state investment to keep growth stable. Its target for this year is for growth of around 6.5 percent.

4. Nigeria

The government is making yet another effort to reduce its reliance on imported oil products which are costly and causing considerable financial difficulties in this time of low oil prices. The country’s four refineries are in terrible condition and are producing only a fraction of the nameplate processing capacity of 445,000 b/d. It has been four years since any repairs were undertaken on the refineries.

The government recently announced a plan to shut down three of the plants while extensive overhauls are undertaken. Last week the government disclosed that 26 firms had expressed interest in bidding on the $2billion project. A new refinery with the capacity to produce 650,000 b/d is under construction and is due to come online by the end of 2019.  If all these plans are ever completed, Nigeria would be able to refine some 1 million b/d; however, given Nigeria’s abysmal record in maintaining its infrastructure, it is doubtful that this goal will be reached.

5. Venezuela

Caracas appears to have avoided default on an $842 million bond payment that was due on Friday without a grace period. A $108 million interest payment was also due Friday, but that payment has a 30-day grace period. PDVSA has an additional $1.2 billion due next Thursday and another $500 million due by the end of the month. The Maduro government is holding back on paying other bills to make the bond payments. A formal default would put the country’s financial system in great jeopardy.

The situation in Venezuela continues to deteriorate. Refineries are running at half capacity; oil output is well below 2 million b/d, and tanker loads of Venezuelan crude are being rejected by customers for not meeting quality standards. Crude shipments to the US have fallen to 56 percent of their 2016 average. Some of this is due to US sanctions. The lack of US sales is a serious problem as US customers pay quickly in hard currency. Much of Venezuela’s oil production is going to China and Russia to pay off old loans and produces no revenue to keep the oil industry running or to import food.

The 225,000 Venezuelan-born immigrants now living in the US have started programs to send food to starving relatives back home. Nearly 75 percent of the population lost an average of 19 pounds last year due to insufficient food. Shipping food into the country has become a major problem as many shipments are being stolen. Private courier services have sprung up to get food shipments past customs officials and thieves.

This situation is getting too serious to last much longer and it seems likely that Venezuelan oil exports will shrink considerably in the coming year.

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

Russia’s Yamal LNG, set to be the world’s biggest Arctic producer of liquefied natural gas, plans to send its debut cargo to China as thanks for its support. (10/28)

Ukraine: Amid spats with Russia over natural gas, Ukraine’s prime minister said Wednesday the economy for the former Soviet republic is on pace to grow at a decent clip—3 percent, though he said it should be closer to 5 percent.   Ukraine serves as an energy bridge to Europe, hosting the pipelines that carry about 20 percent of the Russian natural gas headed west. (10/26)

Iraq last month become the second-largest crude oil exporter to the United States (18.8 million barrels), overtaking its southern neighbor, Saudi Arabia (15.9 million barrels), and is on track to repeat this performance this month as well, according to Bloomberg and EIA data. (10/28)

Southeast Asian demand for oil will keep growing until at least 2040 as emerging nations there rely on the fossil fuel to transport their rapidly growing populations, ship goods and make plastics, the IEA said. Oil usage in the region will expand to around 6.6 million barrels per day by 2040 from 4.7 million b/d now, with the number of road vehicles increasing by two-thirds to around 62 million. (10/24)

Southeast Asia faces a growing deficit of fossil fuels including oil, natural gas and coal up to 2040. The deficit of primary energy sources will be triggered by a combination of declining production and reserves in the region, ballooning demand due to rising population and regulations that curb exploitation of natural resources. (10/25)

Asia has turned to the US for supplies of gasoline blending components as tanks in Europe are running dry. A rare cargo of mixed aromatics, also known as reformates, set sail from the US East Coast last week and will head to China after topping off in Europe. Reformates are used to upgrade gasoline produced in refineries to meet increasingly stringent government fuel requirements in China to fight pollution. (10/25)

India posted the highest growth in demand for oil products in 13 months in September at 9.9 percent as the effects of some key economic reforms started to fade, while an uptick in manufacturing and robust auto sales boosted consumption of industrial and transport fuels. (10/26)

Sub-Saharan African oil producers may be among the more promising emerging players, though a downturn in investments is striking a blow, analysis finds. In Nigeria, at least three new projects are expected to start production within the next three years and, according to Wood Mackenzie, new developments from Sub-Saharan Africa could commercialize 13 billion barrels of oil equivalent reserves before the end of the decade. (10/23)

Equatorial Guinea, OPEC’s newest member country, is seeking to lift its crude production after smaller oil companies acquired stakes in offshore oil fields operated by US Hess Corporation. The sale is part of Hess’s strategy to invest in higher-return assets and divest more mature, higher-cost assets. (10/25)

Colombia production is holding a plateau over the past year after a large decline in the last part of 2015 and first half of 2016. August value was 858,000 b/d.

Mexico: after a stable plateau for the first six months of 2017, Mexico’s C&C production dropped in July and had another big drop of 56,000 b/d in August.

Brazil: decline rates in the mature deep-water wells are very high, but the new development should mean new production records are continually set for a couple of years (barring accidents). (10/23)

Offshore Brazil, Royal Dutch Shell won three blocks awarded in Brazil’s deepwater oil auction on Friday, while rival BP took two blocks and Exxon Mobil Corp took one in a historic opening of the pre-salt play to foreign operators. President Michel Temer said development of the blocks would lead to 100 billion reals ($30.84 billion) in investment from the winning companies and 130 billion reals in royalties and other revenues for the cash-strapped state. (10/28)

Offshore Brazil, Shell is confident that it can produce oil from the promising pre-salt layer for less than $40 per barrel. The pre-salt layer holds high-quality and prolific oil reserves, and recent Brazilian reforms have made them more attractive assets. (10/26)

In Brazil, vastly expanding sugarcane production for conversion to ethanol could reduce current global CO 2 emissions by as much as 5.6 percent, according to a new study from the University of Illinois. This would be a massive undertaking, involving the conversion of hundreds of thousands of square miles—at its most ambitious, more than the combined land area of Texas and California—to sugarcane fields. (10/25)

In Mexico, crude production averaged 1.884 million barrels per day (b/d), down nearly 12 percent compared with the July-September period last year and marking three consecutive months of output below 2 million b/d for the first time in decades. Pemex attributed the fall in oil and gas output largely to natural disasters that struck Mexico during the quarter, including storms and two major earthquakes in September that forced production at some facilities to shut down temporarily. (10/28)

In Mexico, three pipelines connecting the Permian Basin to northern Mexico came online with the total capacity of 3 billion cubic feet per day in early 2017, but flows have been at a paltry 0.2 billion cf/d. Distribution capacity within Mexico appears to be a big part of the problem. (10/25)

In Canada, despite the government’s efforts to curb carbon emissions and expand the adoption of renewable energy systems, the country’s crude oil production will only continue to grow in the next couple of decades, a report from the National Energy Board found. (10/28)

The US oil rig count gained one last week to 737, while the gas rig count declined by five to 172, according to Baker Hughes.  Canada saw a decline of 11 in the number of active oil and gas rigs. (10/28)

Refinery rebound: Despite the temporary devastation Harvey wrought in the heart of the Western Hemisphere’s refining heartland, most plants escaped long-term damage and were back in action quickly enough to capture swelling margins created by fuel shortages. (10/26)

Central US refineries from Ohio to Minnesota are capitalizing on access to cheap crude from Western Canada and North Dakota oilfields, helping their region break a historic dependence on fuel from the Gulf Coast while redrawing oil trade maps. (10/23)

ExxonMobil and Chevron, the two largest US oil and gas groups, are continuing to lose money on oil and gas production in the US in spite of the rise in commodity prices since last year. The losses raise a question over the companies’ forecasts of strong growth in US production, particularly in the Permian basin of Texas and New Mexico. Reporting earnings for the third quarter, Exxon said it lost $238m on oil and gas production in the US, while Chevron lost $26m. (10/28)

Trucks vs. EVs: Wall Street may love the shares of Silicon Valley electric carmaker Tesla, but Americans love big, fuel-thirsty trucks like Ford Motor’s bestselling F-Series pickups and are paying ever higher prices to buy them. (10/27)

The Aliso Canyon gas storage field, the source of the largest US natural gas leak two years ago this week, has been used for natural gas storage since 1973 and is the fourth largest facility of its kind in the US. The 112-day-long leak released 109,000 metric tons of methane into the air shed. On July 31 this year, reinjection of natural gas by SoCalGas was allowed to start up again.  (10/25)

In Alaska, the US Bureau of Land Management will be accepting oil exploration bids for more than half of the land on a Northern Alaska petroleum reserve that’s the size of Indiana. A total of 900 tracts are up for bid, compared with the 145 tracts offered last year. The land up for lease was guided by industry interest in the past. (10/28)

Interior Secretary Ryan Zinke said the next auction of more than 75 million acres of federal waters in the Gulf of Mexico, announced on Tuesday, will be the largest ever in the national history of offshore development. (10/26)

In Oklahoma, lawmakers are working to make up for any losses from vehicle taxes after courts ruled against electric ($100) and hybrid fees ($30), the governor said. Slated to enter into force next year, the high court found the measure to be unconstitutional. (10/26)

King Corn: Farm-state interests just conquered Big Oil in a fight over biofuels, proving that in Donald Trump’s Washington, King Corn still reigns. After three weeks of frenzied lobbying by both sides, the president ordered his EPA administrator, who was working to reduce ethanol requirements, to back off — handing an unalloyed victory to the farm belt. (10/25)

Ethanol reprieve? Pennsylvania’s governor asked US President Donald Trump to ease up on the state’s oil refiners by waiving a rule requiring them to add renewable fuel to their products, following a week of pressure from farm-belt politicians not to change the rule, according to a letter released to the public on Monday. (10/24)

EV revolution: A science-led revolution is in the making in transportation. Leading this revolution is the electric car. All manufacturers are now making or investigating electric cars. But the electric car is only a beginning: buses, trucks, trains, boats ships and even airplanes are in the mix. China is throwing government and private resources into an electric future. France, Britain and eight other countries have declared that they will ban the internal combustion engine by mid-century. (10/25)

V2G pilot: Mitsubishi has launched a Vehicle-to-Grid (V2G) pilot, with the first charge point already being utilized with Mitsubishi Outlander PHEV’s in-vehicle storage batteries. Using V2G-technology, peak demand on the electricity grid can be better balanced, by allowing electric vehicles to not just take power from the grid, but also return it to the network and expect to introduce a new potential earnings model for electric drivers. (10/25)

Betting on batteries: North Carolina-based utility provider Duke Energy is betting on the rise of increasingly efficient battery technology to propel the rise of solar and wind power over the next five years, according to a new report by Forbes. The cost of generating and storing solar power has dropped from $800 per kilowatt hour to $281 over the past four years. Steeper drops are ahead, experts said at the Solar Power Midwest conference. (10/24)

China and EVs: A team of researchers conclude that attitude factors such as network externality, price acceptability, government subsidies, vehicle performance, concerns about smog, and demographic characteristics such as gender, age and marital status have significant impacts on respondents’ willingness to purchase electric vehicles. (10/25)

Chinese coal: Datang Corp has 28 days of coal stocks for its power plants, enough for winter consumption, the company’s general manager told Reuters on Monday, brushing off concerns that utilities could not secure coal supplies for winter. That amount of supply is higher than China’s five major utilities were storing at this time last year (less than 20 days). (10/23)

Wind booming: The US production tax credit program continues to have a strong pull on wind energy activity in the country. There was just over 29,600 MW of wind capacity under construction or in advanced development in the US at the end of the third quarter, the highest level ever reported. That total represents a 27% increase over Q3 2016. The country’s wind capacity has more than tripled over the past 10 years. (10/27)

NY wind: The state of New York aims to become a new hub for the wind energy industry with its unique geographical position and ambitions goals, a state leader said. New York ranks 11th in the nation in terms of installed wind energy capacity and is the 15th windiest. As of 2014, the state had 20 wind energy projects in service, with a total capacity of 1.8 gigawatts of capacity. (10/28)

Mini-nukes: The UK could soon give Rolls Royce and a consortium of companies the go-ahead to build “mini” nuclear power plants, according to a new report by The Telegraph. London’s Department for Business, Energy and Industrial Strategy is due to issue a study on the matter soon, and industry sources said the Rolls Royce consortium’s plan should succeed over its competitor to win the government’s approval. (10/25)

The Oil and Gas Climate Initiative (OGCI)—the voluntary alliance of some of the biggest oil companies in the world— said on Friday that it had made its first three investments in supporting the low-carbon industry and more efficient engine technology, in its first specific action aimed at supporting the growth of low-carbon technologies. (10/28)