Peak Oil Review – Aug 25

August 25, 2014

1.  Oil and the Global Economy
Oil prices continued to fall last week with New York futures settling at $93.65 a barrel, the lowest since mid-January. Brent settled at $102.29, the lowest in 14 months. Despite what appear to be ever-increasing geopolitical risks that oil flows may be interrupted by events in the Middle East or the eastern Ukraine, the markets continue to ignore these developments and focus on weaker demand for oil and adequate supplies. US shale oil production continues to grow with North Dakota reporting that Bakken production was up by 53,000 b/d in June and is now over 1 million b/d. Some of this increase, however, is simply catching up with wells that could not be completed last winter due to bad weather.
Refining along the US’s Gulf Coast hit a record 8.75 million b/d the week before last, pushing up refinery utilization in the region to a record 96.9 percent of capacity. This record, however, may be due to a redefinition of operable capacity. US demand for distillate was over 4 million b/d for the third straight week; however much of this increase may be going to exports which the EIA now puts at 1.2 million b/d.
Last week’s count of drilling rigs showed a drop of 25 rigs drilling for oil, the largest drop since 2012. Some attribute the lower count to drillers moving more rigs to new locations, but others are suspicious that the drop in oil prices over the last seven months is forcing marginal drillers to slow down a bit while awaiting higher oil prices.
One answer to why oil prices have stagnated in the face of so much political unrest is that many large oil traders, particularly the investment banks, have pulled out of the market in recent years, markedly reducing the speculative dollars chasing oil prices. While this has kept prices relatively stable in the last two years, pressures will build as less investment by major oil companies is taking place, and production slows in Middle Eastern countries. This will eventually lead to shortages which will someday result in a spike in oil prices as was seen in 2008.  On the top of lower drilling expenditures by major oil companies and turmoil in the Middle East, we have the likelihood that the rapid growth in US shale oil production will come to an end before the decade is out, triggering higher prices if falling exports or reduced offshore drilling does not cause it first.
Natural gas futures rebounded a bit at mid-week, but settled lower after new forecasts showed cooler temperatures coming for the northeastern US. US natural gas stockpiles rose by 88 billion cubic feet the week before last, but are still well below the five year average.
2.  The Middle East & North Africa
The political situation across the Middle East has clearly deteriorated in recent months. The war of attrition between Hamas and Israel continues apace, with Gaza slowly being pounded into rubble. Atrocities by the Islamic State have drawn the US and several European countries into the Iraqi/Syrian conflicts with both military and humanitarian support. The refugee situation grows worse across the region with increasing numbers risking their lives to find sanctuary in Europe; Libya is nearing total collapse; the lights are barely staying on in Egypt; and several other countries such as Sudan, Yemen, Lebanon and Jordan are in the throes of or facing imminent anarchy.
For now the oil exports on which the world are so dependent are still flowing, though at a somewhat reduced pace, and the oil markets exhibit little concern. Some of the oil production from western Syria and northern Iraq seems to be financing the IS in its drive to conquer much of the region.  It won’t be long before somebody comes up with the idea of bombing the IS’s oil production in Syria as a means of slowing their advances. So far the major oil producers: Saudi Arabia, Kuwait, southern Iraq, and the UAE have been largely untouched by the turmoil. However, it seems to be only a matter of time, be it two, five, or ten years before significant interruptions of Middle Eastern oil exports occur.
Iraq: There was both good and bad news for oil production emerging from Iraq last week. Atrocities and military progress by the IS this summer has prompted Washington, Tehran, and several European governments to become directly involved in confronting them and some progress has been made in driving IS forces back in the north. The expansion of the US air campaign against the IS will make it very difficult for them to move motorized forces and heavy military equipment across the deserts of Iraq and Syria. However, driving them from populated areas will be difficult.  The Byzantine politics of the current situation with US and Iran both fighting the IS in Iraq, but with Iran firmly on the side of the Assad government in Syria is already causing much confusion and hard policy choices. In the meantime, Iraqi and Kurdish oil production seems to be relatively safe for the minute as IS forces are being held away from or driven back from major producing regions.
The worst news of the week came when what are believed to have been Shiite militiamen massacred 68 Sunnis during prayers in an isolated village north of Baghdad. This has prompted the Sunnis to pull out of negotiations to form a unified government which many see as the only long-term hope for the country.
Currently oil production from Iraq is a mixed story. Output from the northern fields that have been occupied or threatened by the Islamists has stopped, but production continues to grow in the south where the international oil companies are making progress in opening new wells and building pipelines to move the oil to export terminals.  The IEA, however, reports that Iraqi production last month was down to 3.1 million b/d from 3.6 in February.
Although several oil companies have pulled their people out of Kurdistan in the face of the IS threat, the Kurds say they are making good progress on expanding the capacity of their export pipeline to Ceyhan, Turkey. Last week the capacity of the pipeline was doubled to 300,000 b/d and work is underway to increase this to 500,000. The dispute over who owns the oil being exported from Iraqi Kurdistan continues. However, with the Kurds now being seen as the main military bulwark against the IS, it is likely that the new Iraqi government will reach some settlement under western pressure.
Syria: After a major battle, the Islamic State has succeeded in capturing a major government airfield in Raqaa province. Some 500 were reported as having been killed on both sides during the fighting. The base is reported as being the most significant in the region supporting several squadrons of fighter planes, helicopters, and considerable numbers of tanks, and artillery pieces. Some 1,000 government military personnel were reported to be stationed at the base. This loss is significant, for not only does it give the IS access to more arms and munitions but it is a major psychological blow against the Moscow and Tehran supported Syrian forces.  Unofficial Syrian spokesmen are already suggesting that the West will have to come to terms with the Assad government if the Islamic State is to be stopped.
Libya: At least one tanker carrying crude oil managed to leave Libya last week, but all the other news was bad. There are now a congress and a parliament both claiming to be the legitimate government of Libya. Over the weekend the weeks’ long struggle over Tripoli’s main airport came to an end when the Misrata militia which is pro the Islamic leaning congress drove off the Zintan militia.  The new parliament is holed up in Tobruk near the Egyptian border.  Tripoli has become a battleground – the gas stations are empty; foreigners, who can leave, have left; and there is little food. In Benghazi there is a similar situation. The big winners in all this seems to be the Islamists who are gradually gathering strength and now seem to be the most powerful force in Tripoli.
The rough balance of power amongst the various militias which has kept the country going since the downfall of Gadhafi has broken down and the country is in the midst of what is likely to be a prolonged civil war. The government occasionally announces that oil production is climbing and the export terminals are open for business, but very little oil seems to be making it out of the country. If current trends continue, even this will soon stop. There seems to be another failed state in the making, which may or may not be able to export oil.
Iran:  Iran’s involvement in the Middle Eastern turmoil continues to increase. As the world’s largest Shiite country, Tehran feels responsible for protecting fellow Shiites in other countries who are under attack by Islamic State forces with the objective of destroying the Shiite religion. As a badly outnumbered religion, (Sunnis comprising roughly 90 percent of the world’s Muslims) Iran is already bearing the brunt of the Shiite side in several conflicts across the region. Moreover, Tehran has been locked in conflict with Washington for over 30 years and has been the major supporter of the Palestinians in their conflict with Israel.
In the last few months Iran has been taking a more active role in supporting the Shiite government in Baghdad against the IS forces. In addition to military advisors to the Shiite government, pilots from the Iranian Air Force may be flying air strikes against the IS, and last week there was a report of an Iranian Army unit briefly crossing the border to help the Kurds drive IS forces out of a key town close to the Iranian border. Over the weekend however, the Iranian Foreign Minister said during a visit to Baghdad that Iraq has no need of Iranian troops as Baghdad’s Shiites are capable of defending themselves.
Also over the weekend, Tehran says that it shot down an Israeli drone over its Natanz nuclear enrichment facility, reminding us that the Israeli threat to bomb Iran’s nuclear plants is still on the table.  The Iranians have long said that, should they be attacked by Israel or anyone else, they would retaliate by closing the Straits of Hormuz throwing the world into economic turmoil and further escalation of conflict as the US and the West attempt to keep the oil flowing.
At present it is hard to see where the negotiations and the concomitant oil sanctions are going. Tehran clearly has a major internal debate underway over its nuclear policies, which is why there has been so little progress in the negotiations despite the heavy sanctions on its oil economy. Iran’s deepening involvement in a variety of conflicts such as the Gaza conflict could easily expand into export threatening confrontations. At some point the Israelis may tire of Iranian-supplied rockets falling on their cities. The key decision point will come this fall when the extension of negotiations comes to an end.  Events are moving so fast these days that we may have a completely different political situation this winter.
3. Ukraine
As Ukrainian forces continue to attack the remaining separatist strongholds in eastern Ukraine, Moscow sent its aid convoy into and out of Ukraine despite the stringent objections of Kyiv. As Moscow has been quietly moving military supplies and weapons into Ukraine for many months, the purpose of the convoy was to show than Russians as well as the West can provide help to suffering civilians. In the meantime, NATO spokesmen continue to insist that Moscow is giving artillery support to the separatists by firing on government positions from inside Russia.
The key moment in all this will come if and when the Ukrainian attack progresses to the point where it seems on the verge of wiping out the remaining dissident fighters. At this point Moscow will have to decide on whether to prolong the conflict indefinitely by directly intervening, allowing the dissidents to continue fighting from inside Russia, or agree on a settlement.
So far the massive Russian oil and gas trade with the West has been little affected. Russian natural gas to Ukraine has been shut off, but the sanctions imposed on Moscow in retaliation mainly cover future contracts to develop its oil and gas. Exxon for example is going right ahead and helping Moscow with its Arctic drilling as the contracts were already in place. Perhaps the most serious fallout from the confrontation is the deal that Moscow seems to be cooking up with Tehran to take a large quantity of Tehran’s unsellable oil in return for bartered goods, and then sell the equivalent amount of oil on the open market.
This could effectively undercut the Western sanctions on Tehran and encourage the Iranians to take a hard line position on the nuclear agreement complete with all the potential fallout that would incur.
4.  Quote of the Week

  • "A $5.00 decline in oil prices can roughly be offset by a 5 percent improvement in well productivity. But while oil prices have been relatively range-bound for the past five years, well productivity has been moving relentlessly higher. Accordingly, we believe oil and gas cash flows will move meaningfully higher as production growth and efficiency gains offset structurally bearish commodity price fundamentals."

            — John Freeman, J. Marshall Adkins and Praveen Nara,
                oil industry analysts with Raymond James & Associates
5.  The Briefs

  • Norwegian oil company Statoil said it launched Gudrun, its first new regional oil platform since 2005.  Statoil said the project cost $1.9 billion and the field should produce as much as 184 million barrels of oil and gas equivalent over its lifespan. Initial production from Gudrun is estimated at 30,000 barrels of oil equivalent per day. (8/20)
  • The Scottish and UK governments have repeatedly clashed over the future of the petroleum industry, particularly around forecasts from the UK Office for Budget Responsibility on the amount of cash it expected to be raised from the North Sea. The Scottish government argues the OBR forecasts are based on a “very low estimate of future total production”, while its own figures have been criticized by opponents who claim they are overly optimistic. (8/19)
  • Russian energy company Rosneft said it signed an agreement to acquire a stake in a Norwegian drilling company in exchange for drilling rigs. Rosneft, which signed a framework agreement with North Atlantic Drilling Ltd., was the target of sanctions imposed by Western powers in response to Russia’s stance on crises in Ukraine. Nevertheless, the Russian oil company has signed a string of agreements with its international counterparts. (8/23)
  • Rosneft also said it started an exploration program in the Barents Sea with Norwegian energy company Statoil. Its subsidiary RN Nordic Oil is working alongside Statoil at the Pingvin license area of the Barents Sea. Statoil last week received approval from the government to move the Transocean rig, Spitsbergen, to the area. (8/19)
  • Russian oil company Gazprom Neft said it scheduled an oil shipment from a northern arctic port to European consumers by using a sea tanker. The company said it would ship 80,000 tons of low sulfur blend of crude oil to Europe in September by two tankers during the 2014 ice-free season. (8/22)
  • Australia: In what would be one of the country’s largest oil discoveries in decades, US energy company Apache Corp. said an exploration well offshore Western Australia state had found as much as 300 million barrels of crude. Australia is in need of new sources of oil to replace fast diminishing reserves from existing fields. (8/18)
  • Mexico’s Pemex has revised its annual production target for the year to 2.35 million b/d from 2.44 million b/d, its lowest level for three decades. January-through-July production data has been reduced by 126,000 b/d, or 5%, because of miscalculations by antiquated measuring equipment. Produced water had been counted as oil in the calculations. (8/23)
  • Premier Oil plans to sell a 20 – 30 percent stake in its Sea Lion project in the Falkland Islands. The U.K.-listed oil and gas explorer, which wants to reduce its exposure to the $5.2 billion project, aims to launch the formal sale process in the fourth quarter and to have sold the stake by the middle of next year. (8/22)
  • Canada: Hydraulic fracturing is about to move into the Canadian Arctic, with companies exploring the region’s shale oil deposits. But many indigenous people and conservationists have serious concerns about the impact of fracking in more fragile northern environments. (8/21)
  • Canada’s transportation safety agency  said inadequate Canadian government oversight and a railway company’s “weak safety culture” were among a host of factors that led to last year’s devastating oil-train derailment in Quebec. It also recommended even more measures to strengthen safety in a North American rail network dealing with a surge in the transportation of crude by rail. (8/20)
  • Maersk Oil confirmed to Rigzone that it would let 54 employees go from its Houston office and relocate eight employees from Houston to its headquarters in Copenhagen. The challenges of growing a non-operated exploration portfolio in the Gulf of Mexico prompted Maersk to scale back exploration in the basin. (8/22)
  • The US oil rig count shrank this week by the most since 2012 as crude trades at a seven-month low and drillers redirect equipment to focus on the most profitable plays. Oil rigs tumbled by 25 this week to 1,564, the lowest level in a month, according to Baker Hughes Inc. Those targeting gas meanwhile jumped to the highest in five months. (8/23)
  • The Bakken Shale growth rate is beginning to slow while the Permian is beginning to boom, according to analysts with Raymond James & Associates. Since the beginning of 2007, initial production (IP) rates over six months per horizontal well drilled have risen by 2.5 times for an annual compound annual growth rate (CAGR) of 15%. (8/20)
  • Gulf of Mexico acreage up for auction in Lease Sale 238 could lead to the production of between 116 million and 200 million barrels of oil and 538 billion and 938 billion cubic feet of natural gas, the US Interior Department said. The auction in New Orleans attracted $109 million in high bids for 81 tracts covering more than 433,000 acres off the coast of Texas. (8/22)
  • Close down offshore: Friends of the Earth called on the U.S. government to halt offshore drilling in an effort to preserve the climate for future generations. The advocacy group said it was frustrated with the latest auction of 434,000 acres in the Gulf of Mexico to energy explorers. Campaigner Marissa Knodel said the sale comes despite the lack of comprehensive congressional action taken in response to the BP oil spill in 2010. (8/23)
  • Open all offshore: A coalition of U.S. petroleum industry players called on the Interior Department’s Bureau of Ocean Energy Management to open all U.S. territorial waters to drillers under a five-year energy plan ending in 2022. The group said offshore incident response has improved dramatically in the wake of the BP spill in 2010 from the Deepwater Horizon rig leased from Transocean. That incident was the worst of its kind and took nearly three months to contain. (8/21)
  • Siluria Technologies says it can produce large quantities of gasoline, diesel, jet fuel and chemicals from natural gas, at a cost of roughly $1 per gallon given today’s natural gas prices. The oil industry has taken notice. Siluria’s inexpensive process uses a chemical catalyst to take methane molecules from natural gas and combine them into ethylene, which can be processed with other catalysts to produce liquid fuels. (8/23)
  • U.K. anti-frackers hit the petroleum industry with protests at 12 sites scattered around the country last week. In some cases they locked themselves to gates and occupied fracking companies. They closed down PR companies and blocked government departments. The coordinated protests aimed to highlight what the protesters see as the dangers of fracking and the web of corporate and government power aggressively pushing the process forward despite widespread public opposition. (8/23)
  • The Ukrainian government confirmed that testing was under way for the reversal of gas flows from Slovakia to Ukraine. Russia’s Gazprom in June cut gas supplies to Ukraine because of lingering debt disputes. (8/19)
  • Russia’s Gazprom signed a natural gas deal with the Chinese National Petroleum Corporation in May. Under the first phase of the new 30-year contract, Russia will supply China 38 billion cubic meters (bcm), or 1.3 trillion cubic feet, per year of natural gas starting in 2018. Future phases could increase this volume to as much as 60 bcm. (8/21) Construction on the natural gas pipeline meant to feed the Chinese market is set for early September. (8/20)
  • In Egypt the electricity deficit reached approximately 6,180MW last week, resulting in power outages for periods exceeding five hours daily, said an official at the Ministry of Electricity. A 1900MW portion of the deficit resulted from a shortage of 8m cubic meters of gas. (8/21)
  • One-time enemies Egypt and Israel, in the midst of some of the worst Middle East tensions in a decade, are negotiating deals that may mean the sale of $60 billion in Israeli natural gas to liquefaction plants in Egypt. (8/21)
  • LNG: Iran said it will seek investors to help back the development of small-scale liquefied natural gas facilities.  The government is considering as many as four small-scale LNG facilities for domestic use. Storage facilities associated with the plants could store 3.1 billion cubic feet of natural gas. (8/21)
  • China’s shale gas: The government mandated a $275-billion crash investment in fracking to develop energy from China’s 30 trillion cubic meters of natural gas trapped in the world’s largest shale fields. But China’s effort to replicate America’s oil and gas fracking boom appears to have failed. (8/19)
  • The Bulgarian government said it was suspending all actions related to the planned Russian natural gas pipeline, South Stream, because it is not in compliance with legislation passed by the European Union.  European leaders are wary of allowing companies that produce gas to control the corresponding transit systems. (8/20)
  • LNG exports: The US Energy Department has finalized a plan to revamp its process for approving liquefied natural gas exports. The department will only issue final rulings on whether exports are in the public interest only after the Federal Energy Regulatory Commission has completed an environmental review of the project. The move will likely shift focus from the Energy Department, which has been criticized for moving too slowly, to the more costly FERC process, which assesses the safety and environmental impacts of LNG export facilities. Making an export application with the DOE costs about $20,000 but companies pay up to $100 million to complete the FERC process, an investment that separates serious projects to actually construct what are often multibillion-dollar facilities. (8/19)
  • South Asian economies will be badly squeezed by climate change within a few decades if no action is taken to reduce the greenhouse gas emissions responsible for global warming, according to a report published by the Asian Development Bank. The report calculates that the six countries studied – India, Bangladesh, Nepal, Sri Lanka, Bhutan and the Maldives – would on average lose 1.8 per cent of their gross domestic product by 2050. (8/19)

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, Oil, peak oil