Quote of the Week

“Just like Florida, our states are unique with vibrant coastal economies. Providing all of our states with the same exemption from dangerous offshore oil and gas drilling would ensure that vital industries from tourism to recreation to fishing are not needlessly placed in harm’s way.” Letter from 22 Democratic US senators to Interior Secretary Ryan Zinke, after Florida was granted an exemption from the opening of 90% of US federal offshore areas for drilling

Graphic of the Week

1.  Oil and the Global Economy
New York oil futures closed up 4.7 percent last week despite a ten-rig increase in the number of active US oil rigs.  London and New York futures closed with biggest weekly gains since October. On Thursday Brent crude briefly traded above $70 a barrel for the first time since 2014, before closing out the week at $69.78. New York futures closed the week at $64.30, some $5.50 below London. As has been the case for several weeks, shrinking crude inventories, high rates of OPEC/Russian compliance with the production freeze and what is seen as strong demand continued to drive prices higher last week.

The brief crossing of the $70 price barrier has started a discussion as to whether prices will move substantially higher this year.  While bullish sentiments have been pushing oil prices steadily higher for the last four months, the EIA continues to say that US shale oil production will top 10.3 million b/d this year and will reach 11 million b/d by the end of 2019.  Asia is showing signs that it will be consuming less oil in the immediate future.  A Reuters survey of 7,000 energy market professionals says that these people expect oil prices to continue averaging around $60-70 a barrel through the end of the decade but widening to $60-80 by 2020.

In the last five years, we have seen oil prices fall from $110 a barrel to $26 and now back to $60; each of these movements triggers counterforces such as more or less drilling and more or less consumer demand. Some are suggesting that this sort of gyration may go through another cycle or two in the next five years. The wildcard in this rather neat hypothesis is the number of geopolitical upheavals, mostly in the Middle East, but also Korea and Venezuela that could remove anywhere from one to many millions of barrels of oil from the markets during the next five years.

The OPEC Production Cut: The future of the cut came in for much discussion last week. While the UAE oil minister continues to talk about the production deal extending beyond 2018, others including the Russian and Goldman Sachs see the recent price surge as leading to higher than expected US shale oil production and a return to more surpluses. These concerns assume that the US shale oil industry can find enough shale oil that can be extracted at market prices. The most interesting report was that Russian oil minister Novak said he would raise the issue of Moscow’s exit from the pact at the meeting in Oman this week. Should the Russians pull out, it could start a stampede to higher oil exports from those countries that are anxious to increase oil revenues. Most of OPEC’s spare export capacity, however, lies with the Gulf Arab states who are likely to follow the Saudi lead.

A new survey shows that OPEC production climbed by about 50,000 b/d to 32.4 million despite the problem of sinking production in Venezuela. A new report notes that the OPEC/Russian production freeze has caused considerable hardships for the supertanker industry that is finding itself in a severe case of overcapacity on the Middle East to Asia route.

US Shale Oil Production:  A story in “Rigzone” suggests why US shale oil production could surge in the next two years while utilizing less than half the number of drilling rigs that were active in the middle of 2014 before the crude market crashed. According to people in the business, it is a combination of faster horizontal drilling and more “intense” fracking that is enabling more production. It is these developments which explain why the simple “rig count” can no longer explain where the shale oil industry is going.

At 7,500 feet, the average shale oil well lateral’s length is 50 percent longer compared to three years ago, and a rig can drill 25 wells a year, compared to 15 just two years ago. The number of fracking stages in a shale oil well is expected to increase 14 percent this year to an average of 28.5, more than double the number in 2014. The total amount of sand crammed into wells this year is expected to grow 20 percent to more than 100 million tons. If the numbers that “Rigzone” researched are close to true, it could explain much of the reason why more wells can be drilled with fewer rigs. It does not, however, answer the question of costs as longer laterals, more fracking stages, and more sand will push up the cost of each well. It also does not answer the question of whether there is enough oil in “sweet spots” that will pay back the higher costs of longer wells.

The recent US cold snap is bound to slow shale production in the Bakken and possibly other oil fields. It will be another six weeks before there is enough information to assess just how fast the US has been able to grow its oil production this winter. Texas reports that it issued 885 oil and gas drilling permits in December which is down 12 percent from December 2016. In December, Texas had 11,000 more active wells than the same month in 2016, for a total of 317,864 wells, with 96 percent of the increase coming from wells producing less than ten b/d. The decline in drilling permits may be due to the drilling of longer wells with more fracking stages. It is going to be a while before we know whether the US can increase shale oil production by over a million b/d in the next year or two.

2.  The Middle East & North Africa

Iran:   The Trump administration extended sanctions relief under the 2015 Iran nuclear agreement, keeping the deal intact for at least another few months, but said it would issue no more such waivers as it tries to negotiate a new deal with European allies. The U.S. Treasury at the same time imposed new punitive actions meant to pressure Tehran over ongoing missile tests and a recent crackdown on Iranian protesters. Tehran reacted sharply to this move, saying there would be retaliation for the new sanctions and that it would never sign a new treaty imposing the limitations on Iran’s freedoms that the Trump administration is demanding.

It is clear that Tehran will never negotiate over the demands that Washington is making. The current move may move the crisis a few months down the road, but it is still there.

Iraq: Oil Minister al-Luaibi said on Saturday that Baghdad’s oil production is close to 5 million b/d, but the country will remain in compliance with its output target under OPEC pact to cut supplies.

After Iraq’s federal forces recaptured the oil fields in Kirkuk in October, the Iraqi Parliament voted on to ban Kurdish engineering company Kar Group from operating Kirkuk’s oil fields. The Oil Ministry is downplaying the non-binding Parliament directive that seeks to bar the Iraqi government from working with the Kurdish company KAR Group.  This suggests the order will not have an immediate impact on government policy.

Iraq will start exporting oil from the northern Kirkuk fields to Iran before the end of January. About 30,000 b/d of crude will be trucked to Iran’s Kermanshah refinery. Trucking crude to Iran comes under a swap agreement announced last month by the two countries to allow a resumption of oil exports from Kirkuk. The two countries have agreed to swap up to 60,000 barrels per day of crude produced from Kirkuk for Iranian oil to be delivered to southern Iraq.

Royal Dutch Shell has sold its 20-percent stake in Iraq’s West Qurna-1 oil field to Japan’s Itochu Corporation, and Iraq has approved the transaction. Shell also said that it wants out of the Majnoon oil field in Iraq and has agreed to exit the venture and transfer its operation to the Basra Oil Company by the end of June 2018. Currently, Shell is the operator and holder of 45 percent at Majnoon, with Malaysia’s Petronas owning 30 percent, and Iraq’s Missan Oil Company holding the remaining 25 percent.

Saudi Arabia: Saudi Arabia has shortlisted New York, London, and Hong Kong for the initial public offering of Saudi Aramco, with the three exchanges considered either singly or a combination of two or even three of them.  The government still plans to have Aramco listed in late 2018, according to Reuters’ sources. The final decision will be made by Saudi Crown Prince Mohammad bin Salman, who is in charge of supervising Saudi Arabia’s oil and economic policies.

US investment banks Goldman Sachs and Citi are lined up to lead the initial public offering. The IPO would be one of the largest share offerings ever if Aramco’s target valuation of $2 trillion is achieved. The appointment of advisors would mark an important step before the float after Aramco officials were forced to reiterate their plans for a 2018 listing at the end of last year.

3.  China

China imported 12 percent less crude oil in December than in November, when oil imports had hit a record high. This development is sparking concern about demand from one of the world’s top consumers. While some say the slump is due to Beijing’s aggressive stance on fighting pollution, others say it is merely a seasonal decline. The record-high November oil shipments to China were stockpiled, and used by refiners during December, suggesting that the latter explanation is likely and that China’s stockpiles are quite hefty. Despite the December lull, for full-2017, crude oil import figures show a 10.1-percent increase from 2016, at 8.43 million b/d. This is largely due to a decline in China’s domestic production in the last few years.

The pace of Beijing’s strategic petroleum reserves growth slowed over mid-2016 to mid-2017, compared to the previous two years. The country did not bring any new SPR storage site on stream in that period. But the country’s implied crude stocks growth over the same period hit a record high, suggesting more crude barrels went into commercial storage. Some analysts expected China to need more crude to build its SPR in H2 2017, and also in 2018, because of more SPR storage sites coming online.

Natural gas imports into China reached an all-time high in December as the country fought a cold spell amid efforts to reduce its dependence on coal and replace it with gas. At 7.89 million tons —including pipeline flows and LNG shipments—the December figure beat the previous record, booked in November, by 20 percent. This record-high import rate marks the end to a year that saw natural gas imports into the country soar by 27 percent annually to 68.57 million tons. Beijing’s drive to reduce coal consumption and increase gas consumption was a bit hurried: winter hit northern China hard and led to gas shortages in certain regions, sending domestic LNG prices to a three-year high despite the global glut.

China’s steel production growth is expected to slow sharply in 2018 as state-mandated factory closures and policies to protect the environment begin to bite.  Steel is often viewed as a barometer of economic activity because it is used for automobiles, construction, and manufacturing, which means a significant price move could have repercussions for the broader economy.  The Chinese slowdown could have positive effects, however. A modest increase in production from China, which accounts for about half the 1.7 billion tons produced worldwide, could restore balance to a global market that was badly hurt two years ago by a collapse of prices due to oversupply.

4. Nigeria

An explosion ruptured a major Nigerian gas pipeline on Thursday, days after the same line was repaired following damage from a fire that shut it down earlier this month. The Escarvos-Lagos Pipeline was hit by an explosion in the Warri region of Delta state. The Nigerian National Petroleum Corporation did not say whether gas distribution had already been hit but added that supplies from other sources would be increased to offset any shortfalls as repair works commence. The pipeline supplies gas to plants producing about one-sixth of Nigeria’s power, as well as the West Africa Gas Pipeline System.

Barely a week after the fuel scarcity across Nigeria subsided in major cities, long queues of motorists have resurfaced at filling stations in Abuja, Lagos and other parts of the country. Although things appeared to return to normal in Lagos and Abuja after the Christmas celebrations, motorists in many other states have been forced to buy petrol at prices far above the official N145 per liter. Last Thursday, the Nigerian National Petroleum Corporation made frantic efforts to assure Nigerians all was well.

The state oil company has issued a tender to buy up to 1.55 million tons of gasoline from January to April in its latest effort to stave off shortages. The tender, issued last week, is seeking 42 cargoes of gasoline, each of 37,000 tons, on top of the volumes NNPC is taking via ongoing crude-for-product swap contracts.

5. Venezuela

Oil production fell in December to one of its lowest points in three decades, further depriving the country of its only major source of revenue and adding to the suffering of its people. Venezuela produced 1.7 million barrels of oil a day, according to S&P Global Platts, which polled industry officials, traders and analysts, and reviewed proprietary shipping data. That’s the lowest since 2002, when a failed coup temporarily took control of the state oil company, PDVSA. Other than that, oil production is the lowest in 28 years.

Venezuela’s crude oil sales to the United States fell for the second month in a row in December, knocking the year’s average to 593,047 b/d, the lowest annual level since 1991, according to Thomson Reuters trade flows data.  Financial sanctions on Venezuela imposed last year by the Trump administration have affected PDVSA’s oil flows to and from the US as the company and its customers struggle to get commercial credit for transactions.

The International Energy Agency and several analysis firms expect Venezuela’s crude output to lose another 500,000 b/d this year due to lack of investment, mounting debts, sanctions, a brain drain caused by low salaries and new management with no experience in the oil industry.

The government has forced more than 200 establishments to lower prices in the middle of a hyperinflationary spiral. Venezuela’s opposition-controlled legislature said Monday that inflation in the economically struggling nation reached a staggering 2,600 percent last year. The figures underline the problems besetting Venezuela, where food, medicines and other basic goods are in extremely short supply.

6.  The Briefs (selections from the press – date of article in Peak Oil News is in parentheses – see more here: news.peak-oil.org)

Which source of oil demand will account for the largest source of growth over the next two decades? Most people might assume transportation, with hundreds of millions of people in the developing world acquiring cars for the first time. However, according to the International Energy Agency, the petrochemical industry will represent the largest demand for additional oil consumption through 2040. (1/8)

In Scotland, the shale division of British business group INEOS said it was petitioning for a judicial review of a Scottish decision to sideline onshore oil and gas work. Scotland has one of the more robust low-carbon programs in the world and its government in 2015 ruled that natural gas derived from underground coal deposits would have no place in a greening economy. (1/11)

From Russia, with love? The potential first delivery of Russian LNG to US shores is ruffling some feathers, due to sanctions in place on Novatek, one of the partners in the Yamal LNG terminal – the apparent origin of the LNG heading to the Everett LNG terminal in Boston. While sanctions may still be in place with certain Russian entities, the US is a regular recipient of Russian oil and products. (1/13)

China’s launch of domestic oil futures trading is looming.  Graticule’s Adam Levinson calls it a “wake up call” for the West that seems to happily be ignoring this potential bombshell. Levison warns Washington that besides serving as a hedging tool for Chinese companies, the contract will aid a broader Chinese government agenda of increasing the use of the yuan in trade settlement… and thus the acceleration of de-dollarization and the rise of the Petro-Yuan. (1/8)

The East African Crude Oil Pipeline is nearly complete. The export pipeline will serve the East African Community (EAC) states. The 1445km long and 24-inch diameter pipeline is set to be the world’s longest heated crude oil pipeline, which will effectively serve the region’s waxy oil. (1/10)

Kenya has decided to allocate 20 percent of future oil revenues to the communities where crude oil has been discovered, cutting the share from an initial proposal to give local counties and communities 30 percent of future oil income. (1/13)

In Nigeria, 4,501 trucks filled with petroleum are reported “missing”—another sign of the corruption and theft that have plagued the country for years.  (1/9)

For offshore Brazil, a consortium of Japanese energy companies said Tuesday they agreed to invest in a long-term agreement involving floating production options for the Sepia area. By the end of August, Brazil had already produced an average of 3.3 million barrels per day in oil and other petroleum liquids. The Libra field alone holds between 8 billion and 12 billion barrels of recoverable reserves. (1/10)

In Canada, energy firms almost doubled the oil rig count last week to the highest level in 10 months as producers returned seasonally en masse and crude prices remain around three-year highs. Drillers added 87 oil rigs during the week ended Jan. 12 bringing the total count up to 185, the highest level since March 2017. (1/13)

Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of the North American Free Trade Agreement, sending the Canadian and Mexican currencies lower and hurting stocks. The comments cast further doubt on prospects for talks to modernize NAFTA. (1/11)

The US oil rig count increased by ten last week and now stands at 752, according to Baker Hughes data.  Ten was the largest increase since June. The number of gas rigs in the US now stands at 187, up 136 over a year ago.  Total US rigs hit 939, up 280 year over year. (1/13)

Pipeline push? US Chamber of Commerce Pres. Thomas J. Donohue said oil and gas pipelines and electricity transmission systems must be included as he listed US infrastructure improvements as a top priority in 2018 in his annual State of American Business address on Jan. 10.  Donohue’s observation came a day after American Petroleum Institute Pres. Jack Gerard made similar points during his keynote address at API’s State of American Energy event. (1/12)

Offshore pushback: 22 Democratic US senators from 12 states on Thursday joined the chorus of local representatives seeking exemptions from Interior Secretary Ryan Zinke’s newly proposed offshore drilling plan, after his surprise move on Tuesday to shield Florida. Only the governors of Alaska and Maine support the expanded drilling declaration. (1/12)

In New Jersey, some Republican state leaders have joined Democrats in expressing frustration with an offshore drilling program proposed last week by the US Interior Dept. Coming after the watering-down of safety measures enacted after the Deepwater Horizon oil spill in 2010, the lease proposal drew fire when it put waters from Florida to Maine on the table after President Barack Obama called for a ban on drilling in some territorial waters in one of his last executive actions. The proposal was criticized further when Interior Secretary Ryan Zinke pulled Florida from consideration after a brief meeting with Florida Gov. Rick Scott. (1/13)

The Trump administration has opened up considerable new lands in Alaska and the shallow offshore for drilling. This is good policy for a lot of reasons, but the least obvious is that it will help the environment. Despite howls from the green lobby, the truth is that it’s less hazardous to drill for oil on land and in shallow waters using conventional rigs. BP’s Deepwater Horizon was drilling in about 5,000 feet of water when it exploded in 2010. If the accident had occurred on land or in shallow seas, the spill could have been contained in three days. (1/11)

NYC suing Big Oil: On Wednesday, New York City announced that it would sue the five oil majors—ExxonMobil, Chevron, ConocoPhillips, Royal Dutch Shell and BP—over their role in fueling climate change. Also, NYC Mayor Bill de Blasio said that the city’s $189 billion pension fund intends to divest itself of fossil fuels stocks. (1/12)

Gasoline prices to rise: GasBuddy predicts that the US motorists will pay more to tank up for the second consecutive year. In its 2018 Fuel Price Outlook, the crowdsourced smartphone app forecast a yearly national average gasoline price of $2.57 per gallon – a 19-cent increase from last year and the highest price since 2014. (1/12)

Coal-nuke proposal nixed: The Federal Energy Regulatory Commission (FERC), which regulates the US electricity market, shot down a proposal from the Department of Energy that would have essentially subsidized aging coal and nuclear power plants. The effort, pushed by Secretary of Energy Rick Perry, was billed as move to shore up the electric grid and improve “resilience” by rewarding power plants that held a 90-day supply of fuel on site. Only coal and nuclear met that definition. FERC unanimously rejected the proposal, despite President Trump having appointed four of the five members on the commission. However, the FERC also said it had embarked on a new plan to determine whether the power grid is reliable. (1/11, 1/9)

Coal complains: Robert Murray, the chief executive one of America’s largest coal mining companies, criticized US regulators on Tuesday for rejecting the Trump administration’s proposed subsidies for aging coal and nuclear power plants – saying the decision could lead to higher electricity costs for consumers. (1/10)

While coal crept closer to natural gas in total US electricity generation share in 2017, gas will widen the gap between the fuels this year and though 2019 on expected lower prices and new capacity, the US EIA said Tuesday. The EIA predicts gas’ generation share will increase to 33.1% this year, up from 31.7% in 2017, and rise again to 34.3% in 2019. At the same time, coal’s generation share will fall to 29.6% this year, down from 31.7% in 2017, and dip further to 28.1% in 2019. (1/10)

Renewables costs dropping: In Colorado, power company Xcel Energy issued a request last fall for proposals for wind, solar, natural gas, and storage. Wind alone was bid at an astonishingly low median price of $18.10/MWh, smashing previous records. The big surprise, however, was the very low bid for wind and solar plus storage.  Wind and solar plus battery storage had seven bids for a total of 4,048 MWh at a median bid of $30.60. The energy storage projects ranged from 4 to 10 hours in duration. (1/12)

Renewables gaining: Of the 25 gigawatts of new utility-scale power added to the grid during 2017, about half came from renewables and most of that was in the fourth quarter, the government said. (1/11)

Batteries beachhead: The US electric power industry has installed about 700 megawatts (MW) of utility-scale batteries on its electric grid. As of October 2017, these batteries made up about 0.06% of US utility-scale generating capacity. Batteries, like other energy storage technologies, can serve as both energy suppliers and consumers at different times, creating an unusual combination of cost and revenue streams and making direct comparisons to other generation technologies challenging. (1/9)

Tesla began manufacturing its solar-powered shingles for mass market release, according to CEO Elon Musk. Hugh Bromley, with Bloomberg New Energy Finance, said that opting for the Tesla roof is more expensive than using traditional materials, but not by an overwhelming margin. In Australia, Bromley estimates that a 2,000-square foot home would require $57,000 worth of Tesla tiles, whereas a terra cotta roof with solar panel add-ons would cost $41,000. Plain asphalt roof panels for a similarly sized home would cost roughly $22,000. The solar roof and the energy storage Powerwall will combine with Tesla’s electric vehicles to create what Musk argues is a complete package for everyone to shift to clean energy. (1/10)

Foreign cars winning: In the first quarter, foreign automakers will produce 1.4 million cars and trucks in the U.S., roughly equal to domestic output, projects WardsAuto.com. Toyota Motor Corp.’s choice of Alabama as the new home for a shared factory with Mazda Motor Corp. marks a major shift in US vehicle manufacturing, with foreign automakers soon set to build more cars and trucks in America than the Detroit giants. (1/11)

EV edge: A study at the University of Michigan’s Transportation Research Institute found the average annual cost to drive a gasoline-powered vehicle last year was $1,117. The average annual cost to drive a typical battery-electric vehicle, by contrast, was $485 last year. (1/12)

EV boom coming? Last year was big on announcements from automakers, and suppliers, and tech giants regarding electric vehicles, robotaxis, and autonomous vehicles. We also heard from countries like China, India, France, Great Britain, and Norway—all pledging to ban the sale of fossil fuels to power vehicles on their roads. How will this affect auto sales, gasoline, diesel…? Morgan Stanley has long sounded the warning bell to the auto industry. A study last year forecasted that electric vehicles would make up 90 percent off all vehicle sales globally by 2050. (1/9)

GMC’s CEO Mary Barra has made a bold promise to investors that the Detroit automaker will make money selling electric cars by 2021. What Barra has not explained in detail is how GM intends to do what, so far, no major automaker has done. The answer is a big bet on combining proprietary battery technology, a low-cost, flexible vehicle design and high-volume production mainly in China. (1/9)

In the UAE, a water crisis is looming for the nation and its neighbors in the Persian Gulf region, one of the most water-stressed in the world. So far, Gulf Arabs have relied on fossil fuel-burning desalination plants to produce most of the water their swelling populations and expanding industries consume. Now they’re adopting cleaner technologies and starting to harness their abundant sunshine to make drinkable water from the sea. (1/8)

Netherlands H2 buses? AkzoNobel Specialty Chemicals and Gasunie New Energy are partnering to investigate the possible large-scale conversion of wind and solar electricity into green hydrogen via the electrolysis of water. Intended for Delfzijl in the Netherlands, the installation would use a 20-megawatt water electrolysis unit, the largest in Europe, to convert sustainably produced electricity into 3,000 tons of green hydrogen a year—enough to fuel 300 hydrogen buses. A final decision on the project is expected in 2019. (1/10)