Quotes of the Week
“There isn’t a viable alternative to fossil fuels on the horizon. We’re not buying into the long-term demand destruction for oil.”
 Alasdair McKinnon, portfolio manager at Scottish Investment Trust

“Vehicles of the future will no longer be driven by humans because in 15 to 20 years — at the latest — human-driven vehicles will be legislated off the highways. The tipping point will come when 20 to 30 percent of vehicles are fully autonomous. Countries will look at the accident statistics and figure out that human drivers are causing 99.9 percent of the accidents.”
Bob Lutz, former executive with major auto company

Graphic of the Week

1.  Oil and the Global Economy

Oil prices leveled off last week with New York futures closing at $56.74, up more than $20 a barrel since June.  Brent closed about $7 higher at $63.52. As has become normal these days, multiple factors impacted the oil prices last week pulling the markets in both directions. While the arrest of over 200 important princes, ministers and industrial leaders in Saudi Arabia on charges of corruption early in the week roiled the markets for a few days, by the end of the week the markets were largely ignoring what could morph into a major Middle East crisis or even hostilities.

The US rig count reversed, climbing by nine oil rigs, the largest increase since June.  As reactivating rigs takes several weeks, the decisions to do so were undertaken after oil prices started moving higher in August. US stockpiles unexpectedly increased by 2.2 million barrels in last week’s stocks report. This was largely due to a sudden drop in US oil exports from a record of 2.1 million b/d to 870,000 b/d. The EIA also reported that US production rose last week by 67,000 b/d to 9.62 million – the highest weekly figure on record since the EIA started collecting data in 1983.

On Wednesday, Beijing reported that its crude imports slipped to the lowest this year. However, these imports have become volatile as the government keeps fiddling with export quotas for the private sector which pushes demand up and down.

With crude prices having moved to two-year highs in the last few weeks, the pundits are starting to ask how much higher will they move and how soon. With demand coming back, inventories shrinking and geopolitical crises in Venezuela and the Middle East seemingly growing worse, many are talking about higher prices soon. Even though there are forecasts of higher US shale oil production next year, this may not be enough to offset the factors pushing prices higher.

The OPEC Production Cut: In recent weeks, there was a consensus that the OPEC/NOPEC production freeze would be extended at the November 30th meeting, but now that international prices are pushing $70 a barrel, some are saying that this may not be a sure thing. Many parties to the agreement would be quite content to see oil prices settle around what some call a “fair price” of $70 a barrel and let their production grow. Citigroup for one thinks US shale oil production will surge next year balancing the freeze. If the OPEC/NOPEC consortium suddenly shuts down its freeze and starts exporting another 1.8 million barrels of crude each day, we would likely see another price decline.

OPEC is not concerned about the advent of electric cars forecasting that it will be the 2030s before they reduce the demand for oil by a significant amount. The group sees the demand for oil continuing to grow into the 2040’s.

US Shale Oil Production: Last week OPEC released a new forecast in its World Oil Outlook that forecast US shale oil production will grow faster than previously expected and will reach 7.5 million b/d by 2021 from what OPEC calculates is now 5.1 million b/d. Total US production is to grow by 3.8 million b/d by 2022. The cartel sees US shale oil production leveling off in 2025 and declining by 2030. OPEC is suggesting that there will be competition between shale oil producers and the cartel for at least the next seven years.

Last week Baker Hughes reported that active US rigs drilling for oil increased. Given that prices have been moving higher recently, we could be seeing the start of a new surge in shale oil production. In the last year or so there have been shortages of fracking crews and equipment, but if oil prices continue to climb, these shortages could be overcome in 2018 allowing for a faster increase in production.

The debate over whether fracking of oil wells could be hazardous is largely over with the needs of the industry and the desire for more oil overcoming protests by environmentalists. However, the concerns seem to be coming back again this time from the companies that are doing the drilling. In recent years, Oklahoma has been plagued with dozens of small earthquakes that seem to be linked to the injection of used fracking water into deep underground wells. To mitigate this problem, restrictions were placed on where and how much highly contaminated fracking water could be injected into the ground.

This time the complaints are coming from companies that drill vertical wells. The horizontal drillers are fracking their wells too close to the vertical ones causing the fracking fluids to leak away from the ground around the horizontal pipes, damaging nearby vertical wells and in some cases lowering their production. In the worst case, some believe that the damage caused by the fracking is contaminating groundwater. If this proves to be the case, even the most pro-fracking regulators will have to impose regulations and restrictions that do not exist today.

Although production from the Bakken shale has been stagnant in recent months, the director of North Dakota’s Department of Mineral Resources believes that production will soon resume growing by 10-15,000 b/d each month. This could increase production to about 1.1 million b/d by the end of the year. If prices reach $60 a barrel, the director believes the Bakken’s production could grow to 1.6-2 million b/d.

Peak Oil: In the last few years, the meaning of the term has shifted in the minds of most to mean the time when oil production peaks because of falling demand and not from a shortage of oil that can be produced at affordable prices.  The falling demand is usually seen as being due to the widespread adoption of electric cars or perhaps harsher regulations on the combustion of fossil fuels.

A few observers, however, are still concerned that the 34 billion barrels of oil we consume each year may lead to shortages of affordable oil in the next decade. The approaching end of onshore conventional oil, the lack of sufficient investment in deepwater oil in the last few years and the rapid depletion of the dwindling supply of shale oil sweet spots all suggest that the oil may come into short supply and be more expensive in the next five to ten years. Five years go by very fast and the carbon from other pollutants continue to accumulate in our atmosphere.

2.  The Middle East & North Africa

Iran: The National Iranian South Oil Co., which produces about 80 percent of Iran’s oil, announced that its production is up by about 1 million b/d in the past year.  Tehran is also pleased that last week the selling price of its heavy oil, which is sold at a discount, passed $6 per barrel. The government says it is prepared for whatever happens at the OPEC meeting at the end of the month but would prefer a formula that maintains stability in the oil markets.

Although there has been little effect on oil production or prices as yet, the deteriorating relations between the Saudis and Iranians could have serious consequences. The attack on Riyadh by a missile fired from Yemen has caused the Saudis to accuse Iran of an “act of war against the kingdom.” The Saudis are said to be opening a new front in the struggle with Iran by threatening Hezbollah, Iran’s Shiite ally in Lebanon. All this could lead to troubles not too far ahead.

Syria/Iraq: Shell has agreed to hand over its stake in Iraq’s Majnoon oil field to state-held Basra Oil Company by the end of next June. The oilfield started production in 2014 and now produces an average of 210,000 b/d. Shell is currently the operator and holder of a 45 percent stake in Majnoon, with Malaysia’s Petronas owning 30 percent, and Iraq’s Missan Oil Company holding the remaining 25 percent.

The relationship between Iraq and its province in Kurdistan remain volatile. Since the independence referendum and Baghdad’s re-capture of the Kirkuk oil fields which have been held by the Kurds for the last three years, the prospects for an independent Kurdistan have fallen precipitously. The Iraqis have stopped the flow of Kirkuk oil into Kurdistan for export by pipeline to Turkey. Last week the Kurds offered to turn over all their oil operations to the central government in return for a long-agreed 17 percent share of Iraq’s budget. Baghdad has not transferred any money to Erbil since 2014 citing the need to fight ISIS first.

Last week, Baghdad announced that in the 2018 budget, the Kurds would be entitled to only 12.6 percent of the budget, a move interpreted as punishment for attempting to declare independence. In the new budget, Baghdad would distribute the money in three separate shares to different parts of Kurdistan, thus reducing the power of the central government. This dispute which has gone on for decades is far from over. In the meantime, much of the oil from the Kirkuk oil fields is not being produced or exported.

Saudi Arabia: It is hard to overstate the implications of what happened in Saudi Arabia last week. The impact of the crown prince’s anti-corruption campaign and the jailing of hundreds of his relatives, ministers, and leading businessmen could easily have the impact that the US invasion of Iraq had in 2003. This time the political upheaval is smack in the center of Middle Eastern oil production which covers much of the world. Should the upheaval metastasize to involve Saudi oil exports, the situation could easily slow oil exports from the other Gulf Arab states or even all the exports through the Straits of Hormuz.

Behind the last week’s many events is the desire of the young crown prince to consolidate his power and eliminate opposition in advance of replacing his father as king. The move marks a major shift from a country governed by a large family of collegial princes to one-man rule. How the crown prince can continue after imprisoning many of the nation’s leading personalities is an open question. There are already reports that the number arrested is far higher than the 200 officially acknowledged and that some are being subjected to harsh treatment. Some are noting that the government is now in a position to confiscate some $800 billion in private wealth held by those arrested. Such a move would go a long way in financing the crown prince’s modernization plans.

There are many ways this situation could develop ranging from executions of princes for corruption to the assassination of the crown prince or his father, King Salman. While many in the country hail the effort to suppress corruption within the royal family and its allies and to modernize the country, these are largely powerless. The real question will be whether those threatened by the crown prince still have enough support within the security services and military to instigate a coup.

The Saudi’s domestic situation is further complicated by the growing conflict with Iran which seems to be engulfing the Lebanese and Yemeni situations. This too is fraught with danger of increasing hostilities in the region.

For now, there is nothing to do but wait and to be aware that a major geopolitical upheaval could be brewing that could have a major effect on the world’s oil supplies.

3.  China

Winter has arrived early in China this year. Beijing and its environs are already being hit by hazardous air pollution. This time, however, there is a new twist. In an effort to cut coal burning across the region, many buildings have recently been converted to burn cleaner natural gas. This is fine, but there is not enough natural gas available to fuel the newly installed gas furnaces. Chinese gas imports including pipeline imports and LNG shipments reached 5.81 million tons, up from only 3.82 million tons last year. Meanwhile, Beijing has been scouring the world to find spot cargoes of LNG that can be used to get the country through the winter.

Chinese crude imports in October dropped to the lowest levels in more than a year, 7.3 million b/d. This development is being attributed to independent refineries running out of their crude import quotas for the year.  China raised the crude oil import quotas for independent refiners—by 55 percent for 2018 compared to 2017 suggesting that it could be relaxing the rules for the so-called teapots and giving them more share of China’s oil imports.

Russia’s Rosneft and Chinese energy company CEFC, which has agreed to buy 14 percent in Rosneft, have agreed to study the possible construction of a petrochemical facility in China’s Hainan province.

China’s biggest oil company Sinopec, one of the country’s top banks, and its sovereign wealth fund agreed to develop a $43 billion natural gas project in Alaska. Beijing is clearly desperate to find more sources of natural gas before the capital is done in by polluted air.

4. Russia

Rosneft chief executive Sechin announced that his company signed a plan to invest some $30 billion in the Iranian energy sector following his and President Putin’s visit to Iran. It appears that Putin is doing his best to replace the US as a major influence in the Middle East.

Russian oil companies don’t expect sanctions to be scrapped anytime soon. These companies have overcome many of the lending obstructions US sanctions present by finding new partners in Asia. Were it not for the OPEC/NOPEC production freeze, they would ramp up production even more than the 4-5 percent that has occurred since the sanctions began. Given the higher price of oil recently, Moscow should have a pretty good year ahead.

5. Nigeria

Another militant group in the Niger Delta has vowed to break its truce against the government and start attacks on oil and gas infrastructure in the area. A spokesperson from the Niger Delta Revolutionary Crusaders ordered workers on floating production storage and offloading facilities to evacuate the area. Other platforms operated by Chevron, Total, Mobil, Shell, and Agip are also under threat. The Niger Delta Avengers announced its plan to rescind its participation in the ceasefire last week.

Nigeria’s Bonny Light crude has seen its price rise to its highest levels since February, as the grade began to trade in a more regular fashion in the spot market following several months of disruption due to loading delays and force majeure.

6. Venezuela

The country’s long-running financial crisis may be coming to a climax soon. Last week Venezuela’s power company defaulted on a $28 million bond payment. The government and state-owned companies have defaulted on some $350 millions of interest payments in the last month and the grace period on many will end this coming week. This Monday could be decisive as a panel of the International Swaps and Derivatives Association will meet to discuss the Venezuelan situation. Should they decide that the payments that were due last week constitute a “credit event” then the bondholders could seek payment through the courts. The creditors could attempt to confiscate Venezuelan assets abroad such as oil tankers or even the refineries owned by the PDVSA subsidiary Citgo.

President Maduro announced last week that he would seek to restructure some $63 billion in bond debt and has invited investors to meet with a committee led by his vice president. It is uncertain how or if investors will take part in any restructuring since US sanctions restrict any negotiation or purchases of new bonds by American-regulated financial institutions. Some believe that Maduro is undertaking a scheme to force the value of the country’s outstanding bonds to near zero at which time he would buy the bonds back and no longer have any bond debt or be forced to make further payments.

In the meantime, Venezuelan oil production is expected to slump to 1.8 million b/d next year, the lowest in 30 years. There is some evidence that production may have already slipped below this level. Venezuela’s rig counts hit a 14-year low in October, as foreign drilling companies reduce their exposure due to unpaid bills.

The current government along with its oil production may not last much longer. If what is left of the country’s oil production is markedly reduced, we could be seeing higher oil prices soon.

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

Peak demand…when? Royal Dutch Shell and Norway’s Statoil, predict demand could reach its high as soon as 2025 or 2030. But Exxon Mobil Corp. and Chevron Corp. argue peak demand isn’t in sight, and OPEC’s demand forecast is largely in line with that of the IEA, which argues that global oil demand will grow slowly past 2040. (11/8)

World demand growth: The US EIA on Tuesday raised its 2018 world oil demand growth forecast by 80,000 barrels per day to 1.66 million b/d. The agency also cut its oil demand growth estimate for 2017 by 40,000 b/d to 1.31 million bpd. (11/8)

The European Union proposed Wednesday to extend its natural-gas regulations to offshore pipelines, marking the latest effort to derail an energy link between Russia and Germany that is fueling tensions within the bloc. The Baltic Sea link would enable Russia’s state-owned PAO Gazprom to double its natural-gas transit via Germany to Europe. (11/9)

In Turkey, construction for the Turkish Stream pipeline slated to transport Russian gas moved into official Turkish waters; the pipeline’s route would mirror the now-abandoned South Stream project and run under the Black Sea to Turkey and then to the European market. Turkey aims to capitalize on its geographic position by becoming an energy bridge between Central Asian and Middle East suppliers and the European market. (11/7)

The UK and Norway are both at or approaching the tail end of their petroleum production curves, but with slight upticks in the nearer term. Some Norwegian gas production still has a multi-decade plateau to come and there are a couple of large oil projects due on-line in each country which will run for twenty to thirty years. (11/8)

German H2 trains: Alstom will build 14 Coradia iLint fuel-cell trains for the Local Transport Authority of Lower Saxony. The trains will replace the diesel multiple units of a transport authority and will reduce the pollutant emission in daily service to zero. The hydrogen for the trains will be provided by the Linde Group. (11/10)

In France, gasoline containing up to 10 percent of ethanol has become the top-selling petrol, its largest market in the European Union, helped by a tax break that made the crop-based fuel more attractive to drivers.  Sales of unleaded SP95-E10 accounted for 38.5 percent of total petrol sales in France in September. (11/7)

Italy’s government unveiled on Friday a new national energy strategy aiming to phase out coal in electricity generation by 2025, and significantly boost the share of renewables in total energy and electricity consumption. Italy plans to have 28 percent of its total energy consumption covered by renewable energy sources by 2030, compared to 17.5 percent in 2015. (11/11)

Lebanon’s Energy Minister on Friday called on companies bidding in its first round of licenses to explore for oil and gas in its Mediterranean waters to begin technical discussions, suggesting the process would continue despite the political crisis. Prime Minister Saad al-Hariri resigned in a speech from Saudi Arabia last Saturday and had yet to return to the country, sparking a political crisis. (11/11)

In Delhi, the government in the Indian capital has reintroduced car rationing to curb alarming levels of pollution. Private cars with even and odd number plates will only be allowed on alternate days from 13 to 17 November. Indian officials on Wednesday took the unprecedented step of closing 4,000 schools for nearly a week. Pollution levels are 30 times the World Health Organization’s recommended limit in some areas. Delhi’s chief minister has called the city a “gas chamber”. (11/10, 11/11))

The global toll of chronic kidney disease (CKD) attributable to PM 2.5 pollution is significant, according to an analysis presented at American Society of Nephrology’s Kidney Week. In recent research, investigators used the Global Burden of Disease study methodologies to estimate the burden of CKD attributable to fine particulate matter: more than 10.7 million cases per year. (11/6)

Algeria’s state energy firm Sonatrach on Monday started $2 billion of new investments into the Hassi Rmel gas field to keep production stable at the country’s biggest gas field. Hassi Rmel gas field represents 60 percent of Algeria’s total gas output. Sonatrach needed to invest into the field’s compression facilities to maintain output. (11/7)

West-African explorer Tullow Oil said Wednesday it raised its expectations for production following a string of successes off the coast of Ghana. The company said it now expected to produce between 85,000 and 89,000 barrels of oil per day from its portfolio, an upward revision of about 9% on the low end. (11/10)

In Cuba, oil development plans moved one step closer to operation with the naming of an on-site planning coordinator, Australia’s Melbana Energy Ltd. said.  The appointment builds the company’s organizational capability to progress through the permitting, procurement and logistics phases in preparation for the drilling of up to two wells during mid-2018. (11/10)

Canada’s other pipeline battle: Support for the expansion of the Trans Mountain pipeline from Alberta to British Columbia is support for the economy, the premier of oil-rich Alberta said. The country’s National Energy Board approved Kinder Morgan’s plans to triple the capacity of the existing pipeline to around 890,000 barrels of oil per day in 2016.  The project, however, continues to face stiff opposition from western Canadian leaders and members of the aboriginal community. (11/8)

US oil rig count: energy companies added the most oil drilling rigs in a week since June as crude prices traded up to their highest levels since the summer of 2015. The oil rig count climbed by nine last week to 738, said Baker Hughes Inc. The number of gas rigs stayed the same at 169. Canada, too, saw an increase, with oil rigs climbing by 8 and gas rigs climbing by 4. (11/11)

ConocoPhillips said on Wednesday it will boost oil and natural gas output for the rest of the decade but vowed it would do so only when it was financially prudent and that it would strictly adhere to shareholder returns. The largest US independent oil and natural gas producer plans to spend an average of $5.5 billion annually for the next three years as long as oil prices stay above $50 per barrel. (11/9)

Tax bill winners and losers: So far, the House tax bill, passed wholly by the Republican party, picks the winners and losers in the energy industry. Wind power and other green energy actors are the losers in this new economic model, according to leading economic analysis. Oil, gas, and nuclear power are proffered, on the other hand, making either energy source preferred to hydropower or any of its green cousins. (11/6)

Budget pickle: After a downgrade on its credit rating, Oklahoma’s governor urged House leaders to move quickly to pass a measure meant to close a looming budget gap caused in part by lower revenues from the state’s major petroleum sector. Shale states like Oklahoma faced economic hardships last year because the low price of oil made it expensive to work in the cost-intensive basins in the state.  (11/8)

Alaska’s state government and the Alaska Gasoline Development Corp. signed an agreement with Chinese lenders and China Petrochemical Corp., or Sinopec, to advance discussions on the LNG potential in Alaska. (11/10)

Enviros worry: As leaders in the US House take up an offshore drilling bill, pressure has mounted on the US government’s lack of oversight for protection of public lands. Energy policies under President Donald Trump have been decidedly pro-oil. His Interior Department, meanwhile, has moved to shrink national monuments and recently backed out of a transparency initiative meant to monitor oil and gas revenue. (11/8)

MPG slips: The average emissions emitted per individual driver in the US is getting worse, a report Friday from the University of Michigan found. That change reflects a slight decrease in vehicle mileage efficiency.  While the gain from a decade ago was impressive—from 20.4 to 25.5 mpg—the fleet efficiency has declined since August 2014 by 0.3 mpg. (11/11)

LNG cruise ships: Carnival Cruise Line, a unit of Carnival Corporation, signed an agreement with Shell NA LNG to be its supplier of marine liquefied natural gas to power North America’s first fully LNG-powered cruise ships. Shell will supply Carnival Cruise Line with fuel for its two new LNG-powered ships expected to launch in 2020 and 2022. (11/10)

The first truly autonomous cars — vehicles that cruise the public streets with no one sitting behind the wheel to take over in case of emergency — have finally arrived. Waymo, which began life as Google’s self-driving car project, disclosed on Tuesday that it had let its driverless cars loose in parts of Phoenix, Arizona, with nobody in the front seats. (11/8)

EV deal: UPS and the New York State Energy Research and Development Authority announced that new technology will be developed to convert UPS package delivery vehicles from diesel to electric. (11/10)

EV corridor: German utility company E.ON and a mobility service provider said Friday they would work to establish an electric-vehicle corridor linking Norway to Italy. With $11.6 million in funding from the European Commission, the German company and service provider CLEVER said they’d link the countries connecting Norway to Italy with a network of 180 charging stations for electric vehicles. (11/11)

In Norway, a pit stop on a highway between Oslo and the Olympics town of Lillehammer will soon offer a glimpse of the future for the global gas station industry. At the Circle K in Dal, 30 minutes north of the capital, owners of the next generation of electric cars will within months be able to charge their battery in as little as 10 minutes — about one-third the time it now takes. (11/7)

RE costs: A new study, entitled Global Energy System Based on 100% Renewable Energy Power Sector (including storage), makes the claim that not only is this transition feasible but would actually end up costing less than business-as-usual too. According to the study’s modeling, the total leveled cost of energy would come down to 52 euros per MWh by 2050, compared to 70 euros today. (11/10)

Big Oil shunning RE: Even as governments and environmentalists forecast a peak in oil demand within a generation – and China and India say they may eventually ban gasoline and diesel vehicles – leaders of the world’s biggest oil firms are not buying the argument that their traditional business faces any imminent threat. A Reuters analysis of clean energy investments and forecasts by oil majors, along with exclusive interviews with top oil executives, reveal mostly token investments (3%) in alternative energy.

Exxon Mobil’s green: Warnings regarding climate change and peak oil have not fallen on deaf ears, and as a result, at least one major oil and gas corporation is pursuing green energy projects. Exxon Mobil revealed that it is dedicating at least $1 billion each year towards alternative energy projects. (11/7)

POET-DSM Advanced Biofuels says it has achieved a breakthrough in cellulosic biofuels production at its Project LIBERTY plant in Emmetsburg, Iowa. (Earlier post) The company has solved the critical challenge in pretreatment, overcoming what has been the primary hurdle to commercialization for producers around the world. (11/7)

EU renewables: Some of Europe’s largest energy companies have accused the EU of lacking ambition in the fight against climate change and urged more aggressive targets for growth in renewable power. The declaration came as negotiators gathered in Bonn for the latest round of international talks on tackling global warming. A proposed target for renewables to meet 27 per cent of EU energy consumption by 2030, up from 16.7 per cent in 2015, “lacks ambition and would slow down the current rate of renewables deployment” in Europe, the companies said. (11/6)