After jumping several dollars higher early last week as the Ukrainian crisis unfolded; then falling rapidly at mid-week as no immediate threat to oil supplies developed; oil prices finally rebounded a bit at week’s end closing largely unchanged for the week. Some of the mid-week decline was attributed to the weekly stocks report which showed US crude inventories continuing to climb by 1.4 million barrels, and a surprise jump in distillate inventories as temperatures began rising. Stocks at Cushing, Okla. continued to fall — down by 2.7 million barrels the week before last — and are now at their lowest level in two years.
The Ukrainian crisis, which has the West in the most serious confrontation with Russia since the end of the Cold War, dominated the week with threats of sanctions and asset confiscations being thrown about by both sides. Russia is the world’s largest energy exporter when both oil and gas are considered and Europe gets about 25 percent of its natural gas from Russia. So far there has been no reduction in Russian exports, but the situation still has a long way to play out.
US gasoline futures which spiked early in the week in reaction to the Ukrainian crisis began to rise again after the EIA reported a 1.6 million barrel decline in US gasoline inventories. The annual switchover to the more expensive summer gasoline is underway so that gasoline prices are expected to increase during the next few months.
Platts reported that OPEC had a good month in February with production climbing by 240,000 b/d to 30.1 million b/d mostly because of the jump in Iraqi production. The EIA reported that US exports of petroleum products in December rose to 4.3 million b/d which is a new record. The Administration commented that since 2008 US oil product exports have climbed by 1.7 million b/d which covered about 25 percent of the global increase in demand for petroleum products during the period. This report confirms that much of the increase in “demand” for US petroleum products in recent months has been exported rather than consumed inside the US.
The current status of US oil and gas production is unclear as to the effects of the extremely low temperatures which have slowed production in North Dakota and likely done the same in the Appalachian shale gas fields. Oil production in North Dakota during December was down by 5.3 percent and we know that there have been at least three more months of severe weather this year. More low temperatures are forecast for the northern states later this week so that it is likely to be April before drilling and fracking activities can return to normal levels. North Dakota reported that during December it took an additional 18 days to drill the average well and that the backlog of wells that had been drilled but not yet fracked had increased by 125 during the month to 635. Producing wells in North Dakota only increased by 40 in December. It will be mid-June before we have a clearer picture of the damage the winter of 2013-2014 did to Bakken shale oil production, but it likely to be considerable. Whether we will see substantial increases in Bakken oil production this year as we have in recent years seems problematic as it may be mid-year before production exceeds November 2013 levels.
The US’s natural gas situation does not look much better. In recent years our natural gas stockpile has been varying between roughly 3.7 trillion cubic feet at the end of the summer refilling season and about 1.7 trillion at the end of the winter heating season. This year it looks like the stocks will bottom out at around 850 billion cubic feet which is about half of normal. Inventories usually begin building again in the first week of April and currently it looks as if inventory drawdowns will continue through the rest of March. With spring only a few weeks away, there are unlikely to be shortages this year, although natural gas prices have risen considerably in recent weeks. Stockpiles in the eastern region of the US are in worse shape than in the rest of the country. If the cold weather continues into April, or if next summer sees a high demand for air conditioning which is largely fulfilled by burning gas, natural gas stocks may not be adequate to get the country through the winter of 2014-2015 without much higher prices or rationing.
2. The Middle East & North Africa
Iran: The struggle between Iranian President Rouhani and the anti-western forces that have dictated Iran’s foreign policy for the last 35 years continued last week with the President criticizing hardline forces for continuing to shut down newspapers and arrest journalists they do not agree with. The outcome of this domestic struggle will ultimately determine whether an agreement restricting Tehran’s nuclear program and at least partially lifting the sanctions can be achieved later this year. Iran’s Foreign Minister said last week that the West “cannot entertain illusions” that his country will completely end its nuclear enrichment program. Such statements, however, are largely intended to reassure domestic opponents of the nuclear talks who hope to maintain the status quo indefinitely.
Baroness Ashton, the EU’s foreign policy chief, visited Tehran over the weekend for discussions of a variety of issues dealing with improving Iran’s relations with the EU. UN nuclear inspectors report the Iranians are reducing the stocks of highly enriched uranium as required by the current nuclear deal, but also warn that there is a long way to go before a treaty can be signed.
Last week Israeli forces intercepted a ship carrying long range missiles from Iran to Gaza, once again showing the complexity of the relationships involved in the nuclear/oil sanctions question,
Iraq: Baghdad announced last week that its oil exports in February rose by 550,000 b/d to a 35-year high of 2.8 million b/d. The increase came with the completion of work at the Basra export terminal and the success the major international oil companies have had in raising production at Iraq’s southern oil fields in the last few years. These fields are among the last in the world where, by today’s standards, it is easy and cheap to produce oil. Unless the Sunni insurgency reaches the southern oil fields, which are deep in Shiite populated territory, or the government completely collapses, the increase in production is on track to continue to increase during 2014. Foreign observers say that an average of 2.9 million b/d of exports is possible this year with exports going above 3 million by the end of the year.
Elsewhere in the country, things are not going so well with Sunni bombings of Shiites taking place daily. The UN reported that more than 1,400 were killed in January and February in addition to an unknown number killed in Anbar where the fighting between Sunni insurgents and government forces continues. Prime Minister Maliki is charging that Saudi Arabia and Qatar are making war against his government by openly funding the insurgents. Iraqi parliamentary elections are scheduled for April 30th — the first without the presence of US troops. Whether these elections decide anything or simply lead to more chaos in likely to determine the course of Iraq and its oil exports in the next few years.
The Turks report that 1 million barrels of crude from Iraqi Kurdistan is now being held at Turkey’s Ceyhan export terminal in the name of the Kurdistan Regional government until a decision is reached on selling the oil and who gets the money. At some point storage capacity at Ceyhan, which currently is about 10 million barrels, may become an issue if the negotiation between Baghdad and the Kurds are prolonged. In the meantime the Turks seem reluctant to damage extensive economic relations with an increasingly revenue-rich Iraq and will not allow the oil sold until a solution is reached. Ankara has invited both sides to a meeting to discuss the issue next month.
Libya: In one of the more bizarre developments of the Tripoli-militia oil standoff, a North Korean oil tanker, which are rarely seen in the Mediterranean, docked at the Es-Sidar oil terminal and has loaded oil under contract with the protestors who have seized the port. Needless to say, the government in Tripoli is outraged, and has ordered the armed forces to use force against the tanker. At last word, militiamen still loyal to the government have blockaded the tanker to keep it from leaving the terminal.
While Tripoli’s position, that oil shipments without its blessing is a theft of state property, is backed by most of the western powers including the US, shipping firms have been unwilling to challenge the “blockade.” Sinking a loaded tanker would be a major environmental catastrophe for the Libyan coast so it is unlikely the government will carry out its threat to bomb the tanker. This incident suggests that the situation in Libya continues to deteriorate, the Prime Minister has almost no power, and that a partition of the country is growing closer.
The nexus between worsening air pollution and economic growth were at the top of the agenda when Premier Li Keqiang gave China’s equivalent of the State of the Union address to a meeting of the Chinese Parliament last week. The Premier pulled no punches in saying that the country must “declare war” on pollution which is “nature’s red-line warning against the model of inefficient and blind development.” On the sidelines of the meeting China’s vice-minister of environmental protection, Wu, said that 71 of 73 major Chinese cities did not meet environmental standards last year and that Beijing had serious pollution problems for 189 days. He noted that three industrial regions, Beijing, Hebei, and Tianjin produce 30 percent of the country’s pollution and that emissions there are five times higher than in the rest of China. These regions produce 55 percent of China’s steel, 40 percent of its cement and 52 percent of its petroleum products. Although it has not received much attention in the West, pollution in Beijing was particularly bad in February. The pollution being developed in China is starting to affect neighboring countries. Beijing has agreed to meet with Japanese and South Korean representatives in May to discuss the situation.
At the same time as announcing the war on pollution, however, the Premier announced that China was going to retain the target of 7.5 percent for GDP growth this year. Although this has been the official target for many years, annual growth has often been in double digits until recently. Most observers believe that China will have more trouble achieving its targeted growth this year due to a maturing economy and declining exports. Indeed data from the last two months show industrial production slowing.
While China is making large investments in pollution controls, by closing older inefficient facilities and investing in more control devices, the fact is that economic growth on the order of 7-8 percent requires coal consumption to continue to grow despite the emphasis on nuclear, wind, and hydro power. China is also selling itself some 20 million new vehicles a year with minimal scrappage, so by the end of the decade on the order of 100 million new motor vehicles will be spewing out pollution. Beijing has had many pollution control programs over the years, but most fall victim to the influence of the large state-owned corporations whose number one goal has been growth at all costs.
The pollution problem is clearly getting worse with the continuing increase of coal consumption which stood at 3.6 billion tons last year, nearly 4 times US consumption, and up 2.6 percent over 2012 but down from the 10 percent annual growth rates seen for the most of the last 30 years. For a country burning 3.6 billion even a 2.6 percent increase amounts to a lot of additional pollution. So long as China’s car inventories increase and its economic growth stays remarkably high by world standards, its demand for more oil, coal, and natural gas is likely to continue increasing.
4. Quote of the Week
- “All of us are facing new realities and pressures. Labor and capital costs have doubled over the last decade. The $100 barrel [for global oil] is the new $20.”
— John Watson, CEO of Chevron Corp.
5. The Briefs
- Underneath their swagger and bravado, global energy chiefs gathered in Houston for an annual US conference expressed a palpable sense of dread over the soaring costs of their signature oil and gas projects. To pay for the rising price of extracting fossil fuels, the industry needs triple-digit oil prices, Chevron’s CEO warned. Where once concerns focused on the apparent shortage of new elephant-size oil and natural gas fields, this year’s CERAWeek produced a lot of anxiety over soaring costs. (3/7)
- Oil prices are likely to fall to around $90 a barrel as global supply rises and demand falls back thanks to a shift to more natural gas usage and increased fuel efficiency, the CEO of Italian oil and gas major Eni SpA Paolo Scaroni said Thursday. (3/7)
- Kazakhstan is suing foreign oil majors developing its huge Kashagan oilfield in the Caspian Sea, a tactic similar to those that secured the government large stakes in two of the three multinational energy projects on its territory. Repeated delays at the $50 billion 13-year-old project, targeted to produce as much oil as OPEC member Angola from a reserve almost as big as Brazil’s, have infuriated the Kazakh government. (3/8)
- With Iraq, the Jordanian government said both sides expected an oil pipeline from Iraq would be able to deliver about 1 million barrels of oil to the Jordanian coastal city of Aqaba by 2018. (3/8)
- In Nigeria, the current fuel scarcity in the country may worsen this week as more filling stations ran out of supply at the weekend. (3/4)
- Egypt is enhancing exploration terms and striving to repay nearly $5 billion it owes to foreign oil and gas producers as it struggles to prevent them fleeing to more promising prospects elsewhere in Africa. (3/7)
- Brazil’s worst drought in decades is decimating crops but breathing new life into battered commodity markets. It hardly has rained in some of the South American country’s top farming regions since the start of the year, a period when precipitation is usually the heaviest. Parched sugar cane fields indicates less ethanol production from Brazil this year. (3/6)
- The project description for TransCanada’s Energy East oil pipeline has been submitted to the National Energy Board. It involves the construction of a new 930-mile segment and converting 1,800 miles of gas line for oil service by the end of 2018. The pipeline is designed to carry 1.1 million b/d from Alberta and Saskatchewan to eastern Canadian refineries. This would offset the estimated 700,000 b/d imported for eastern refineries from overseas markets. (3/6)
- Shell has waded into the debate over Scottish independence, saying it needed political stability in the UK to back up its investment decisions. Shell favors Scotland remaining in the UK and the UK remaining in the EU. (3/6)
- The Panama Canal Authority now expects the expanded canal "should be in operation by January 2016.” The upgrade, which will significantly widen and deepen the 50-mile waterway, will allow many more very large LPG tankers, known as VLGCs, to use the 100-year old canal. (3/7)
- Exxon Mobil Chairman Tillerson said the company plans to start production from 10 separate projects this year, adding approximately 300,000 net barrels of oil equivalent per day to its portfolio. (3/7)
- The US drilling rig count jumped 23 units to 1,792 rigs working during the week ended Mar. 7, Baker Hughes reported. All 23 of those rigs were land-based, bringing that total to 1,719. A 13-unit rise in oil rigs to 1,443 outdid a 10-unit increase in gas rigs to 345. Canada’s rig count, meanwhile, dropped 39 units to 587, but still remained 7 rigs higher than its tally from a year ago this week. A vast majority of those units lost were oil rigs, which droped 34 to a total of 389. Gas rigs declined 5 units to 198. (3/8)
- US refiners haven’t built a major new fuel-processing plant since 1976, in part because of environmental regulations. Now a flood of oil from Texas, Oklahoma and North Dakota has companies rushing to expand existing plants and build small new processors around the country. Refiners also are engineering ways to expand fuel-making capacity at their aging plants without the cost of building entirely new refineries to take advantage of the increase in light sweet crude flowing from US wells. (3/3)
- Proponents and critics of the Keystone XL are unleashing a final flurry of pleas to persuade the government on the pipeline, which has become a flash point in a debate over energy development versus climate protection. The public had until the end of the day on March 7th to be part of the official review of whether Keystone is in the national interest. After that Secretary of State John Kerry will weigh in and President Barack Obama will decide whether to approve or scrap the long-delayed $5.4 billion plan. (3/7)
- More than 500 protesters marched to the White House Sunday, demanding that President Obama stop construction of the Keystone XL pipeline extension that would daily carry 830,000 barrels of crude oil from Canada to the Gulf Coast. About 200 were arrested. (3/3)
- The US EIA is “quite prepared” to review how American exports of crude oil would affect global markets as domestic production is expected to reach about 10 million b/d by 2017. It said a review should consider how crude exports would affect U.S. refining operations and foreign sales of other petroleum products. (3/5)
- Increased congestion across the US rail network due to several weeks of extreme winter cold has forced some utilities to pull coal-fired units out of service in order to preserve dwindling stockpiles. The cold weather has increase coal burn significantly by many utilities and a number of them are very concerned about their ability to get coal supplies. (3/7) [Note: this will increase natural gas consumption.]
- US railroads are rerouting ethanol shipments to avoid bottlenecks in Chicago, particularly for delivery to the East Coast, where supplies are running low, rail company officials said Thursday. (3/7)
- Canadian regulators said the crude oil on a train that derailed in a Quebec town last July and killed 47 people was as volatile as gasoline, highlighting the potential danger of crude shipments by rail. The report by Canada’s Transportation Safety Board marked the first time that government officials have reported comprehensive test results from the train’s oil, which was shipped from North Dakota’s Bakken Shale formation. (3/7)
- In the event of a complete stoppage in Russian natural gas transit via Ukraine, Europe will experience a gas deficit of as much as 56 billion cu m during 2014, said Moody’s Investors Service. Such a shortfall would predominantly affect Italy, Turkey, France, the Czech Republic, Slovakia, and Austria. (3/7)
- Recent progress at China’s shale gas projects suggest the country is on track to meet the 2015 production target set by the central government, analysts said Monday. China is targeting shale gas output of 6.5 billion cubic meters/year (0.5 Bcf/day) by 2015 and 60 billion-100 billion cu m/year (5.8-9.7 Bcf/day) by 2020 under its official plans. (3/3)
- The British economy needs to outline plans to enhance energy security as it starts to rely more on imports to meet gas demands, the head of Centrica said. Natural gas production from the British waters of the North Sea has declined substantially during the last three years. By 2020 the UK will be reliant on imports to meet 70 percent of the country’s gas needs. (3/7)
- In Brazil, the hydropower-dependent country has just recorded the second-driest January in 80 years, and the prospect of electricity rationing looms. As reservoir levels run low, costly LNG imports appear to be the country’s last resort for the second consecutive year, during the run-up to the upcoming World Cup soccer tournament. (3/8)
- A chorus of voices said LNG from the US could help European consumers. By 2019, Europe is expected to diversify its energy market by bringing in substantially more natural gas from Azerbaijan. (3/7)
- A federal judge ruled that a record $9.5 billion environmental-damage award against Chevron Corp. was tainted by the misdeeds of a lawyer leading the lawsuit, giving the oil giant a boost in its battle against a global effort to seize its assets. (3/5)
- BP said Tuesday that it would create a new business to manage its onshore oil and natural-gas assets in the US’s lower 48 states. The decision is an attempt to reverse the struggles that BP—along with other large oil companies—has had trying to coax profits from the North American shale boom. By operating its US onshore assets through a separate, wholly owned company, BP hopes to “compete more effectively with the independents”—the kind of smaller, nimbler producers that have profited on the shale boom. (3/5)
- A federal appeals court rejected BP’s efforts to stop Gulf Coast businesses from collecting payouts from the Deepwater Horizon settlement fund, even when they can’t directly trace their losses to the 2010 oil spill. (3/4)