Peak Oil Review – July 28

July 28, 2014

1.  Oil and the Global Economy
Oil prices remained remarkably stable last week despite increasing violence across the Middle East and the standoff between Russia and the West over the Ukrainian situation. New York oil which traded between $102 and $103 a barrel last week closed at $102.09.  In London oil prices, which are likely to be more affected by the Ukrainian and Middle Eastern situations, closed at $108.39 on Friday following a $1.32 price jump as the EU considered implementing harsher sanctions on Moscow. The fears are that new sanctions eventually could lead to a reduction in Russian crude exports, which at 7 million b/d, are the second largest in the world. The EU also relies on Russia for a third of its natural gas supply.
Last week’s US stocks report showed gasoline supplies increasing to a four-month high as refinery operations continued at an unusually high level. Supplies at the Cushing, Okla. depot fell to their lowest since 2008 raising fears that there may not be enough WTI compliant oil around to deliver on futures contracts.
Oil traders are concerned that US gasoline demand is weakening in the middle of the summer driving season as US refineries are running at record levels.  US average retail prices for gasoline are down to $3.54 a gallon, the lowest since March, and gasoline futures closed on Friday at $2.86, the lowest since February.
US exports of diesel and heating oil to Europe have grown to their highest levels in eight months. Increasing production of cheap US crude coupled with cheap natural gas for refining, means that US distillates are highly competitive in the European market. This has resulted in the highest level of US refining ever recorded, and more gasoline than the US domestic and export markets can absorb. Fears of a reduction in Russian natural gas supplies to the EU next winter may also be factor in increased EU demand for heating oil.
The IMF has cut its 2014 forecast for global economic growth to 3.4 percent from 3.6 due to slowdowns in the growth of the Chinese and US economies and the increased possibility of military conflicts. The Fund sees the possibility of “sharply higher oil prices” because of Middle East unrest.
US natural gas prices fell to an eight-month low of $3.78 per million BTUs last week as unseasonably cool weather dampens the demand for air conditioning and robust natural gas production is leading to good progress in restocking US natural gas reserves in time for next winter.
2.  The Middle East & North Africa
While the fighting between Israel and Hamas in Gaza has little direct bearing on Middle Eastern oil exports, the asymmetrical nature of the fighting in which most of the casualties are Palestinian civilians is further increasing tensions in a region already beset with numerous sectarian conflicts. When Hamas was headquartered in Syria, it decided it could not support the Assad government against Sunni insurgents and moved out. This decision, which lost it support in Tehran, coupled with the downfall of the Hamas-friendly Morsi government in Egypt, left Hamas in a weak position with few friends. When the Israelis figured out Hamas’s tunnel-into-Israel strategy and appeared to be moving against the tunnels, the organization could do little but shoot rockets at Israel in hopes that the retaliation would generate so much sympathy it would be able to negotiate a relaxation of the Israeli blockade. With the Israeli Army currently sitting on the supply and infiltration tunnels while vigorously searching for arms caches, Hamas can only continue to fire off its remaining rockets and then ask for a ceasefire. In the meantime passions across the region will be further inflamed.
Iraq: It was a mixed week for Baghdad. Some political progress was made when the parliament named a Kurdish politician to the nearly powerless post of President. However, this accomplishment was a step towards the formation of a stable government, which may or may not include the reelection of the al Maliki to the powerful post of prime minister. Outside of some political movement and the continuation of oil exports through the southern port of Basra, there was very little good news.  UN Secretary-General Ban Ki-moon traveled to Baghdad last week to urge the parliament to settle its differences so it could meet the challenge of the new Islamic State to the existence of Iraq.
Bombs continue to go off and fire fights continue to take place in and around Baghdad. Some of these are resulting in dozens of deaths. The ISIS, which now seems to be known simply as the IS (for Islamic State), continues to repel government/Shiite militia attacks on cities it holds north of Baghdad. The IS is tightening its grip on the territory it controls by imposing harsh Sharia law, blowing up Shiite shrines, and driving out Christians and other minorities. These are fleeing to Kurdistan which seems to be the only pocket of sanity and stability left in the country.
Iraq’s oil exports were down in June largely due to the complete lack of exports from the northern oil fields which are no longer in government hands. The pipeline to Ceyhan, Turkey has been closed since May after exporting a peak of 9.2 million barrels in November; the Kurds have occupied the northern oil fields around Kirkuk; and the major oil refinery at Baiji is under siege by the IS and no longer operating. Exports for June were down to 72.8 million barrels from 80 million in May.
In further bad news for Baghdad, the US seems to have reversed its position that oil exported by the Kurds through its own pipeline to Turkey was stolen from Baghdad and could not be purchased on the open market without invoking the wrath of Washington. Now a tanker of Kurdish oil seems to be on its way to Galveston. If the Kurds are able to freely sell oil without reference to Baghdad, the province could soon be exporting as much as 500,000 b/d from inside the province and the fields it has taken over around Kirkuk. Such an income would put the province on its way to declaring independence, if, of course, it does not have to fight the IS for the oil fields first.
In general, the Iraqi situation continues downhill and talk of eventual partition is growing. Exports from the southern oilfields are still going well but little else is. Although the IS does not have the military strength to overrun Baghdad, it can raise all sorts of havoc by cutting water supplies and harassing attacks on the outskirts. Given that the Iraqi army is a disappointment and the key prop for the government is untrained and ill armed Shiite militia, who are being killed in droves during confrontations with the IS, the prospects for Iraq do not seem good.
Foreign intervention still remains an outside possibility if IS outrages become too much for world leaders to take.
Libya: A tanker arrived at the Brega oil export terminal on Thursday to take 750,000 barrels of Libyan crude to Italy. Outside of this it has been all downhill this week. Fighting between militia groups continues around Tripoli’s airport which will remained closed indefinitely as its infrastructure is torn up by the fighting. The US embassy pulled out to Tunisia over the weekend and others are likely to follow. Foreign oil companies and governments are pulling out their foreign nationals, which does not bode well for the resumption of crude exports. There is reluctance by crude buyers to take Libyan oil as terminals are being open and closed in accordance with political goals making the arrival of shipments uncertain for refiners.
It seems unlikely that the optimism that oil traders have expressed in recent weeks about the return of larger Libyan oil exports will pan out. Talk of partitioning the country continues. When oil revenues start going exclusively to local entities we could see some revival of exports. However, a partition will not be easy as some sections will lose and some will gain. Moreover, there is the Islamist vs. secular aspect to the fighting which will not be solved by partition.
Iran:  The US announced that the relaxation of the sanctions on Tehran will last through the extended nuclear negotiations which will end in November. In the meantime, the EIA noted that Iran is still being badly hurt due to the restrictions on foreign investment. Iran’s oil exports to six main buyers are expected to remain steady until November at 1.2 million b/d.
Tehran is becoming increasingly burdened by its efforts to protect the Shiite religion in Syria, Iraq, and Lebanon as well as aid the Palestinians who are in a direct confrontation with Israel. As Washington is showing little interest in confronting the Islamic State and its goal of wiping out the Shiites, this burden has fallen to the Iranians. Tehran has military advisors in Iraq and is helping to arm and train Shiite militiamen to confront the IS. In Syria, its Hezbollah surrogates are becoming more heavily involved in the fighting. 
Sometime soon the combination of wars, sanctions and confrontation with the US, Israel, and much of the West is likely to become too much for country with serious economic problems that is also running out of water – no matter how much 2000-year-old national pride it has. Then we could see some policy changes.
Syria: While the world has been focused on the fighting in Gaza, fighting in Syria has increased to record levels. In the last ten days some 1,700 people were killed in the various battles that have taken place.  Flush with several billion dollars’ worth of US military hardware, captured when they overran much of northern Iraq, the IS launched an offensive against regime targets as well as other Sunni militias fighting the Assad government. Last week the IS was reported to have overrun the Shaar gas field near Homs, which supplies much of the fuel for central Syrian power plants including those serving Damascus. Hundreds were said to have been killed in the fighting or executed by the IS after taking over the field. Interestingly, there are persistent stories that the Assad government has been paying the IS for oil taken from captured oil fields and there was even a story that the government would pay the IS for natural gas from the Shaar field to keep the lights on in Damascus.
Over the weekend the government said it had recaptured the Shaar field killing “large numbers” of IS militants. However the IS said it pulled out after destroying the field’s equipment and capturing 15 tanks that were guarding the field rather than becoming targets for government air strikes. The IS also captured an army base at Raqaa on Friday killing 85 soldiers. Many of the defending troops were said to have been decapitated after surrendering.  
It is clear that the Syrian and Iraqi insurgencies are being merged into one with IS personnel and equipment being moved wherever they are needed across the non-existent Syrian-Iraqi border. The wars are becoming more brutal. Last week it was revealed that a Syrian soldier had defected bringing photographs of some 10,000 Syrians who had been tortured to death by Assad’s security services. Decapitations of prisoners by the IS are becoming more common.
3. Ukraine
Heavy fighting continued over the weekend as Ukrainian government forces moved against the major separatist stronghold of Donetsk. Washington released satellite photos showing Russian artillery firing across the border on Ukrainian forces. In addition the US says Russia is transferring still more heavy military equipment to the separatists. Foreign investigators have yet to reach the site of downed Malaysian airliner to search for more bodies and examine the wreckage.
The EU has been meeting to formulate a new list of sanctions on Moscow for its role in the Ukrainian situation and its failure to cooperate with investigators in the downing of the Malaysian airliner.  The new list is said to be a mixture of meaningful sanctions such as closing access to European capital markets for Russian state banks and embargo on arms sales, and useless ones banning travel to the EU by named Russian officials.
EU members have widely differing economic relations with Russia and varying vulnerabilities to the loss of Russian natural gas. France has a contract to supply Russia with two aircraft carriers worth $1.6 billion; however, it now appears that the arms embargo will only apply to future contracts leaving France free to build and sell the carriers.  There are reports that Russian business leaders are becoming increasingly worried about the damage Western sanctions could do to their economy.
The most important sanctions issue is Moscow’s oil exports of some 7 million b/d and the large amounts of gas it sends to the EU. Together they account for 68 percent of Moscow’s export revenues. The loss of these revenues would seriously harm Russia’s economy and might even bring down Putin, but removal of such a large amount of oil and gas would cause worldwide economic chaos.  Moscow is already hinting that oil prices would be above $200 a barrel should its oil exports be embargoed.
The next few weeks could be significant in this situation. Ukrainian armed forces, which like Moscow’s are descended from the Soviet Army, seem to be making progress against the dissidents which are  a combination of Russian speaking Ukrainians and Russian “volunteers” or military personnel masquerading as Ukrainians. Moscow is unlikely to send high performance anti-aircraft missiles into the Ukraine again, but may be having its own armed forces shoot at Ukrainian military aircraft attacking dissident positions from inside Russian territory. It also seems to be sending more heavy military equipment to the dissidents in Ukraine.
Should the Ukrainian armed forces threaten to overrun the dissidents, Moscow may become more directly involved with its own armed forces – a very serious step now that Ukrainian armed forces are deployed in the field.  This is clearly still a dangerous situation that could easily get out of control as happened with the Malaysian airliner. For now nobody is seriously talking about restricting Russian oil exports, but this could change if Moscow takes a still more active role in the fighting.
4.  Quote of the Week


“When the shale oil bubble bursts, won’t that only mean we will still stay on that bumpy plateau? No, for several reasons. First, the bursting of the shale bubble will likely cause a decline in US production of perhaps half a million barrels per day per year for three to four years. Second, Russia, whose production increase of over 1.5 million barrels per day over the past ten years has kept us on this bumpy plateau, is now in decline. And third, five nations that have shown considerable increase over the past few years—China, Colombia, Oman, Kuwait, UAE—now seem to have peaked.”
— Ron Patterson, (7/26)
5.  The Briefs

  • In Angola, Petroleum Minister Jose Maria Botelho de Vasconcelos is counting on eight new offshore projects to help raise production to 2 million b/d by next year from 1.66 million last month. That compares with Nigeria’s 2.15 million barrels daily.  Italian oil producer Eni is on track to cut in half the eight years it usually takes for output to begin after a discovery, according to the minister. (7/23)
  • Russia receives 68 percent of its export revenues from sales of oil and natural gas, but four times as much revenue from oil and petroleum products as from natural gas sales.  European leaders are working to break Russia’s control over the regional natural gas market. (7/25)
  • Russia’s crude exports by tanker are poised to fall to the lowest in at least six years as President Vladimir Putin pushed Russian refiners to spend billions of dollars modernizing plants in order to expand the export of petroleum products like diesel rather than crude oil. Seaborne crude shipments via the state-run pipeline system in August will fall 9.2 percent from July to 2.215 million b/d, the lowest since Bloomberg began tracking the data in 2008. Output of diesel and fuel oil are the highest since at least 2009. (7/25)
  • Oil and natural gas production in Poland increased during the second quarter of the year. The state energy company said it produced roughly 2.2 million barrels of oil during the full second quarter of the year [or 24,000 b/day], a 33 percent increase year-on-year. For natural gas, the company said its second quarter production volume was nearly 40 billion cubic feet, a 3.7 percent increase over the same period last year. (7/23)
  • Norway’s Statoil said Friday its second-quarter net profit more than doubled as higher prices offset a 9% production drop on the year, adding it was limiting its gas output on low prices in Europe. (7/25)
  • China ’s gasoline inventories rose by 2.7 percent to a record high for a third month in June as an expanding fleet of new-energy vehicles limited demand for conventional supplies in the world’s second-largest oil consumer. (7/24)
  • South Korea’s ambition to become a regional storage and trading hub is being stoked by melting Arctic ice that is widening a path for ships to deliver European oil to Asia. The country, whose proximity to China, Russia and Japan makes it an ideal conduit for oil arriving via the Arctic, plans to add tanks for storing almost 60 million barrels of crude and refined products by 2020. The nation also seeks to leverage its energy infrastructure, which includes five refineries, to become Northeast Asia’s oil hub. (7/23)
  • Piracy: the International Maritime Bureau expressed serious concern over the rise in hijackings of oil tankers in Southeast Asia. At least six known cases of coastal tankers being hijacked for their cargoes of diesel or gasoil have been reported in Southeast Asia since April this year, sparking fears of a new trend in attacks in the area.  The attacks in Southeast Asia constituted the bulk of the incidents of piracy reported globally so far this year. (7/24)
  • In Mexico, Pemex cut its output forecast to the lowest in at least 24 years as mature fields are shrinking faster than it had previously expected. The forecast was lowered to 2.41 million barrels of oil a day from a prior projection of 2.5 million. This will be the company’s lowest annual output since at least 1990. (7/26)
  • Oil sands: the Alberta Energy Regulator released results from an independent review of an assessment made by Canadian Natural Resources Ltd. of last year’s seeps at its Primrose project, near the Cold Lake Air Weapons Range in Alberta. The regulators said four so-called flow-to-surface events were reported last year, spoiling about 50 acres of land.  While potentially safe, the energy regulator said it’s not ready to lift a ban on a controversial steam-injection method for accessing bitumen. (7/24)
  • In the Albertan oil sands, the costs of producing bitumen and synthetic crude have increased over the past year, says the Canadian Energy Research Institute. Estimated costs of production before blending and transportation are up 4.4% for steam-assisted gravity drainage, 1.6% for mining without upgrading, and 5.9% for integrated mining and upgrading. The new estimates of plant-gate supply costs: $50.89 per barrel (Can.) for SAGD, $71.81 per barrel for stand-alone mining, and $107.57/bbl for integrated mining. CERI estimates the cost of stand-alone upgrading at $40.82/bbl. When the price of West Texas Intermediate crude is $100 per barrel, the only economic production technology when blending and transportation are included in the estimate is SAGD, CERI points out. (7/26)
  • The US rig count increased by eight last week according to data from Baker Hughes.  The number of rigs drilling for natural gas rose by three to 318, while oil rigs rose by eight to 1,562.
  • In Texas, continuing expansion in the energy sector propelled oil production to new levels in the second quarter of 2014, as evidenced by Karr Ingham’s Texas Petro Index (TPI), which hit a record-high of 308.4 in June. The TPI is a composite index that is derived from a comprehensive set of upstream indicators, including the price per barrel of oil, rig count, drilling permits and completions, oil and gas production volume and other indicators. The June 2014 TPI is 7.4 percent higher than it was in June 2013. Compared with the January 1995 base of 100 percent, the June 2014 TPI is up 213.7 percent. Texas oil production has been increasing for last 54 months. (7/26)
  • Offshore oil drilling limits: Oil companies have yet to reach the point that technology is limiting access to offshore oil. John Hollowell, Shell’s vice president in charge of deep waters in the Americas, said there were few limitations to how deep or how far offshore oil companies can drill. “How far you can go is really technology based. When we can’t overcome the technical barriers, that will be the end, but we have yet to reach that stage.” (7/22)
  • California officials have ordered an emergency shut-down of 11 oil and gas waste injection sites and a review more than 100 others in the state’s drought-wracked Central Valley out of fear that companies may have been pumping fracking fluids and other toxic waste into drinking water aquifers there. (7/22)
  • The US Department of Transportation on Wednesday proposed an overhaul of safety standards for transporting crude oil and ethanol by rail, after a number of explosive accidents over the past year. The rules follow an 18-month period which saw more than a dozen derailments of trains carrying crude oil, six of which led to major fires and one of which caused the death of 47 people in Quebec. (7/24)
  • North Dakota’s governor said new proposals for oil train safety need review, while the industry itself said concerns over North Dakota’s oil are without merit. (7/25)
  • Albany (NY) may join the ranks of US energy hubs such as Houston and Cushing, Oklahoma, as oil-terminal operator Global Partners pushes a rail-terminal expansion plan after already quadrupling its capacity. For the last two years, more oil from the Bakken shale formation has rolled 1,800 miles by rail across North Dakota and around the Great Lakes to Albany. There, companies including Global Partners and Buckeye Partners load barges bound for New Jersey and New Brunswick refineries. (7/24)
  • Oil from a spill or oil well blowout in the Arctic waters of Canada’s Beaufort Sea could easily become trapped in sea ice and potentially spread more than 1,000 kilometers to the west coast of Alaska, a World Wildlife Fund study showed on Friday. (7/26)
  • Tanzania has a good chance of becoming a major producer and exporter of natural gas over the next decade, according to the IMF. Significant offshore discoveries have been made over the last two-to-three years and further exploration is underway. Estimates of discoveries indicate recoverable offshore gas resources of at least 24 trillion-26 trillion cubic feet, potentially sufficient for a four-train Liquid Natural Gas plant.  Total investment during the development phase could amount to $20 billion-$40 billion, depending on the scale of the project. (7/26)
  • Pakistan doesn’t import LNG yet, but said Monday it was getting China’s help with the construction of a LNG terminal and associated pipeline infrastructure at the port city of Gwadar near the Iranian border. Islamabad estimates the pipeline could cost $1 billion, with another $2 billion need for the LNG terminal. The poor state of the nation’s energy infrastructure is leaving it short on energy supplies. (7/25)
  • Lebanon is likely to delay again the first auction of oil and natural gas licenses in its coastal waters until 2015 because of political gridlock over decrees needed to start the bidding process. (7/22)
  • LNG exports:  The Sierra Club announced it filed comments with the Department of Energy on the impacts of exporting LNG. The advocacy group said LNG exports would lead to more domestic gas production, which may cause an increase in greenhouse gas emissions and inhibit the development of renewable energy projects. (7/23)
  • The EPA is failing to control leaks of methane, a potent greenhouse gas, from the nation’s natural-gas pipelines, the agency’s inspector general said Friday. A report calls on the EPA to do more to control inadvertent emissions of methane, which has a more intense—though shorter—warming effect on the planet than carbon dioxide. (7/26)
  • The US Navy’s growing interest in biofuels is part of its goal to generate 50% of its energy from alternative sources by 2020: nuclear energy, electricity from renewable sources, and biofuels. The Navy currently sources about 17% of its energy supplies from renewable and nuclear sources of electricity. No biofuels are currently included in that percentage. (7/26)
  • China-based Fund Connell USA Energy and Chemical Investment Corporation is considering Texas City, Texas, as the site for a $4.5 billion methanol facility that would be one of the largest methanol facilities in the world. The company will make a final investment decision during the second quarter of 2015. (7/24)
  • European Union countries will have to strive to make energy savings of 30 percent by 2030, according to controversial proposals unveiled by the European Commission on Wednesday. The proposal follows weeks of fierce lobbying and counter-lobbying by governments and industry, and though it is more ambitious than expected, it was immediately derided by green groups as lacking teeth since the targets would not be legally binding. (7/24)
  • Germany’s new renewable energy law, which aims to help the country shift away from nuclear- and fossil fuel-generated power, was approved by European Union antitrust authorities on Wednesday. (7/24)
  • Carbon capture: The U.S. Department of Energy said construction started on a $19.5 million carbon capture research project at a coal power station in Kentucky. The facility is designed to strip carbon dioxide from the flue gas at the power station. The project was selected to receive the majority of its funding by the US DOE. (7/23)
  • Capturing carbon from coal-fired power plants is enormously expensive—from $1.2 billion to upgrade an existing plant in Saskatchewan to $5.5 billion for a new plant in Mississippi.  The industry has known for years how to do it, but the technology is so expensive that few are investing without large government subsidies.  As subsidies have begun to dry up, several efforts have been delayed or canceled. (7/22)
  • NYC power problem:  Business groups and the operator of the Indian Point Energy Center have aligned against a proposal by New York State to close the nuclear power plant in spring and summer months to protect fish in the Hudson River, an idea drawing tentative support from some environmental advocates. Indian Point produces about 25% of the electricity consumed in New York City and the lower Hudson Valley. The state Department of Environmental Conservation hasn’t specified how the loss of power produced by Indian Point would be made up. (7/22)
  • Fukushima: There is broad disagreement over the amounts and effects of radiation exposure due to the triple reactor meltdowns after the 2011 Great East-Japan Earthquake and tsunami. (7/21)
  • Venezuela’s auto industry, once the third largest in South America, is seizing up as manufacturers struggle to produce a few vehicles a day. Car makers, including global giants like Ford, Fiat-Chrysler, General Motors and Toyota, have cut output by more than 80% in the first six months of the year compared with a year earlier because of a lack of dollars to pay parts suppliers. (7/22)

Tom Whipple

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the long-running Energy Bulletin (formerly "Peak Oil News" and "Peak Oil Review"). Tom has degrees from Rice University and the London School of Economics.  

Tags: Geopolitics & Military, Natural Gas, Oil, peak oil