Peak Oil Review – Sept 1

September 1, 2014

1.  Oil and the Global Economy
Oil prices moved higher last week resulting in the first weekly gain in more than a month on an increasingly serious Ukrainian situation and better US economic data. At week’s end NY futures were back up to $95.96 a barrel and London’s Brent was up to $103.19. Prices on both markets, however, are still about $10 a barrel lower than last June when the IS was threatening to overrun much of Iraq and the Ukrainian crisis was starting to heat up again.
The sustained price drop this summer was occasioned by increasing US shale oil production which is largely offsetting disruptions elsewhere; weaker demand for oil from China; and the growing belief that neither the worsening Middle Eastern situation nor the Ukrainian – EU standoff would lead to disruptions in oil supplies in the immediate future. In the past week, however, some traders are beginning to say that the summer’s selloff was overdone.
OPEC production in August increased to a one-year high of 31.0 million b/d due to increased output from Nigeria, of all places, Angola and Saudi Arabia. Iran and Venezuela registered production declines.
Lower crude prices have resulted in a drop in US retail gasoline prices over the Labor Day weekend to the lowest in four years.  The average price for regular last week was $3.45 a gallon which is 25 cents lower than at the end of June.  The decline in Brent crude from $115 a barrel to $102 has resulted in considerably cheaper oil imports for US refiners.
US natural gas futures which have been climbing since mid-August rose to $4.06 last week on the off-again, on-again prospects for warmer weather in the northern US which affects air conditioning demand. The Marcellus Shale, which is the only US formation with increasing natural gas production, saw a jump in its rig count to a five-month high last week. Contributing to the price increase last week was a smaller-than-expected surplus available for storage the week before last. Energy consultant Wood Mackenzie issued a glowing report on the prospects for the Marcellus last week. The report says that drillers are expected to spend $110 billion drilling 25,000 more wells in the deposit during the next 20 years. Some outside analysts, however, are saying that at $4 per million, shale gas is still not profitable for drillers who need considerably higher prices to make money.
2.  The Middle East & North Africa
The problems may still be years away, but concerns are rising about stability of the Gulf Arab states that make up the Gulf Co-operation Council. These countries, which include Saudi Arabia and Kuwait and which produce the bulk of the region’s oil, are becoming increasingly ensnared in the region’s problems, such as the Arab Spring unrest and the rise of the Muslim Brotherhood, not the mention the increasing brutality of the Sunni-Shiite conflict. As hereditary  monarchies they all face succession problems and are beginning to fight among themselves about a unified response to external threats such as the IS who would like to topple them all. The possibility of a Washington-Tehran rapprochement is also a major policy problem. For the immediate future, oil exports will continue, but such may not always be the case.
Iraq: Despite the increasing violence across the region, the oil continues to flow at close to normal rates from Kurdistan and southern Iraq.  Last week the IS solidified its control over recently captured towns and military facilities in Syria and Iraq, but met increasing resistance from US-assisted Kurdish and Iraqi forces who are pushing back against the IS in northern Iraq. Despite the talk of “mission-creep” the US is now flying surveillance missions over Syria, and is bombing IS forces that are still besieging towns in northern Iraq regularly.
The political situation in Baghdad is still in turmoil. The Kurds say they will join the Shiite government, but only under terms that would amount to independence. We have not heard much from the Sunnis about joining a coalition since a mosque-full of Sunni worshipers were massacred by Shiite militiamen a couple of weeks ago.
The row over separate Kurdish oil exports seems to be coming down in favor of the Kurds despite threats of legal actions by Baghdad. With the only effective military force that can fight the IS, the Kurds clearly has the upper hand in the export struggle.
Libya: Fighting among the various militias in the country evolved into a civil war between Islamists and nationalists in June when the Islamists suffered defeats in the parliamentary elections. Going on the offensive they captured Tripoli and set up a rival parliament. They have also burned what was left of the airport, the homes of 200 of their opponents in Tripoli, occupied the vacated US embassy, ransacked the government ministries, and are out in the streets kidnapping people with surnames from tribes they do not like.  The elected parliament is hiding out in Tobruk and is calling for foreign intervention. All this says a prolonged civil war leading to partition is in the offing.
Despite the turmoil oil flows to a key Libyan export terminal have resumed and the acting oil minister says he has been reinstated. Just how much oil is going to get exported from all this and just who will receive the money it is sold for is still much in the air. Until things settle down, Libya will likely be out of the oil export business.
Iran:  The US imposed a new round of sanctions on Tehran last week in hopes of exerting more pressure and deterring efforts to circumvent the various embargos. There are growing concerns that Iran is not yet willing to make the necessary concessions to conclude a nuclear agreement later this year.  In the meantime, Tehran has agreed to start working on designs to modify the under-construction Arak nuclear reactor to lower its capability to possibly produce plutonium. The IAEA says it has also agreed to provide much delayed information on their nuclear weapons program.
Tehran is still hopeful that the sanctions will be lifted soon so that it can contract with Western oil firms to upgrade its infrastructure. However, plans to start signing contracts in anticipation of reduced sanctions have been put on hold. Given all the complexities of Iranian involvement in Syria, Iraq, and Lebanon, it is impossible to predict where all this, including the nuclear talks, is going.
3. Ukraine
The situation clearly worsened last week. With Ukrainian forces on the verge of retaking the last cities held by pro-Russian separatist forces, Moscow had to act or accept an ignominious defeat in its support for the separatists. The Kremlin’s response was to send units of its regular armed forces into Ukraine to reverse the military situation. The Kremlin still denies that it has done this despite overwhelming evidence that regular forces at in Ukraine.  Moscow claims it is not interested in annexing the Russian speaking provinces of Ukraine in the manner it took over Crimea in March, but instead seems to be seeking more autonomy for ethnic Russians who would remain part of Ukraine. President Putin is asking Kyiv to open direct negotiations over increased autonomy with the dissidents in return for resumption of Russia’s natural gas sales to Ukraine.
EU officials met over the weekend and announced that they were prepared to stiffen sanctions against Moscow within the week unless there was some resolution of the situation. The exact nature of the new sanctions has not been announced, but for now are unlikely to involve oil and gas as both Russia and the EU are heavily dependent on these commodities for their economic well-being.
During talks on Friday, the EU failed to in an effort to broker a settlement in the long-running natural gas dispute between Russia and Ukraine. Moscow is insisting that Kyiv give up thoughts of closer integration with the EU and join a Russian-sponsored trade pact with countries that were part of the former Soviet Union. Moscow also wants to sell its natural gas at a price related by energy content to oil which sells for considerably more than world natural gas prices.
Considering what is a stake here and the possible risk to the global economy, the oil markets, so far, have been remarkably relaxed about the situation.
4.  Quote of the Week

“As I’m sure many of you in this room already know, a few tens of [billion cubic feet] of LNG will not make much difference, given that OECD-Europe production continues to fall by similar quantities.”

                        — Maria van der Hoeven, executive director of the International Energy Agency
5.  The Briefs

  •  The Kurdistan Regional Government can bring $100 million of crude ashore in Texas after a US. judge threw out a court order that would have required federal agents to seize and hold the cargo for the Iraqi Oil Ministry until a court there decided which government owns it. This may open the way for Kurdish oil exports to be marketed in the US. Given Baghdad’s dependence on the US and the Kurds at the minute, Iraq is unlikely to complain too loudly. (8/26)
  • Norwegian energy firm Statoil will only raise its U.S. shale oil and gas output slightly in the near term due to spending curbs. Shale oil production must compete for investment within the company against conventional projects which may prove more attractive during a time of contracting investment budgets. (8/26)
  • The natural gas pipeline that will supply Iranian gas to Iraq for electric power generation is ready for testing and will initially be able to deliver 176 million cu ft per day. All this of course depends on the security situation along the Iran/Iraq border. (8/26)
  • The EIA expects that the recent changes in Mexico’s energy laws allowing direct investment could increase the country’s long-term oil production by 75 percent. (8’26)
  • The decision by India’s Supreme Court that all coal-mining licenses issued since 1993 are illegal has thrown the industry in turmoil. The decision came after it was revealed that the government had lost as much as $31 billion in revenue by simply selling the licenses rather than depending on competitive bidding.  Only a few working mines are involved in the cancellation, but they provide 20 percent of India’s coal production. (8/26)
  • Saudi Aramco’s CEO is worried that rising cost of oil production and global turmoil could lead to the lack of sufficient oil down the line, if oil companies do not make sufficient investments. The executive cited cost overruns on mega-projects, climate change, and low demand growth amid economic weakness. (8/26)
  • Platts says the rapid growth on oil production in the Permian Basin is outrunning the ability to move the oil to markets. This in turn will depress oil prices until next year. (8/26)
  • High purchase prices, completion from new more-efficient diesel engines, and the lack of fueling stations is dampening the demand for natural gas powered trucks. (8/26)
  • The EIA’s CEO said last week that Europe has limited options for finding natural-gas supplies from outside of Russia despite tensions over Ukraine. About a third of Europe’s gas supply comes from Russia and a fifth is supplied by Norway, while other key sources include imported liquefied natural gas and producers like the Netherlands and the U.K. “You can’t change that overnight.” (8/26)
  • Norway’s Statoil will continue to work with its Russian partners to develop Arctic oil despite Western sanctions which do impose obstacles. Under the sanctions, existing contracts may be completed. Statoil’s CEO said the sanctions may delay some projects and hopes that diplomacy will resolve the Ukrainian crisis.(8/26)
  • A new report by Wood Mackenzie says that Norway still has some 10 billion barrels of oil yet to be developed. About 60 percent of this resource could be developed economically given the current economic environment. (8/26)
  • This isolation of Jordan from Iraq, its best trading partner, by the IS offensive is causing major economic dislocation in the country. Iraq previously received 20 percent of Jordan’s total exports, some $1.2 billion a year. (8/26)
  • A Royal Dutch Shell-led consortium is close to selling several Nigerian oilfields for about $5bn to domestic buyers, as foreign companies retreat from sub-Saharan Africa’s oldest oil industry. The price tag for the four oilfields and a key pipeline co-owned by Shell, France’s Total and Eni of Italy has doubled since initial estimates towards the end of last year. The sales are the latest move by international oil companies to reduce their onshore oil presence in Nigeria, in the face of theft and sabotage and long delays to a government bill setting out new terms for operators. (8/27)
  • The Obama administration is working on a sweeping international climate change agreement to compel nations to cut their planet-warming fossil fuel emissions, but without ratification from Congress. The agreement would be signed at a United Nations summit meeting in 2015 in Paris.(8/27)
  • Norway will probably cut its long-term forecast for crude production as companies reduce spending to counter rising costs and improve shareholder returns. As investments in Norway’s oil industry fall after a peak this year, production beyond 2015 will be lower than expected(8/27)
  • Maria van der Hoeven, executive director of the International Energy Agency, said the glut of natural gas from North American shale is changing the dynamics of a global energy sector where demand centers are pivoting toward Asian economies. Van der Hoeven said time will tell how much of an impact exports in the form of liquefied natural gas will have on the global marketplace. For the European market, more LNG from North America is not the panacea “talked up by some” in Washington, she said. (8/27)
  • Britain’s oil industry is facing the threat of North Sea rig closures, unless aging platforms can urgently find more natural gas to help squeeze out the remaining barrels. To lift more oil from these depleted reservoirs, producers need to inject vast quantities of water — a power intensive process that requires a reliable source of energy, known as fuel gas. Some platforms are not able to generate enough of their own fuel. (8/27)
  • Last year, energy consultant group Wood Mackenzie published a report saying Tanzania was a part of a growing number of emerging producers in East Africa. The report said output from Tanzania could help regional production increase from the current rate of 500,000 barrels of oil equivalent per day to 1.5 million barrels of oil equivalent. Last week an appraisal well at the Mzia discovery off the coast of Tanzania yielded a sustained gas flow rate of 101 million cubic feet per day providing support for the development of an LNG hub in the country. ((8/28)
  • For exports from the Novoportovskoye field in the arctic, Russia says it would accept rubles rather than dollars, while China could use its own currency for oil delivered from the Eastern Siberia-Pacific Ocean pipeline. The switch could help the Russian economy reduce its dependency on the U.S. dollar in an era when Western economies are imposing tough sanctions on Moscow in response to the ongoing crisis in Ukraine.(8/28)
  • China’s apparent oil demand, a reflection of how much oil goes into domestic refineries combined with net oil product imports, decreased 2.1 percent in July year-on-year. From June, apparent oil demand dropped 6.2 percent to 9.61 million barrels per day. “The weakness in China’s oil demand reflects the ongoing slowdown in its economy,” James Bourne, Platts associate editorial director for Asia news, said in an emailed statement. (8/28)
  • The fight over fracking is taking a different course in Texas and Colorado. In Texas, drillers are doing their noisy in-your-face fracking as usual. In Colorado however, oil companies are responding to a rising tide of resentment as local communities and environmental activists vie to impose measures to ban fracking or restrict drilling.  The oil industry there is talking about giving fracking a makeover, cutting back on rumbling trucks and tamping down on pollution. (8/28)
  • Shell’s Canadian unit said the company may not be able to meet promised targets for reducing toxic wastes from oil sands and called for greater regulatory flexibility. Shell, which operates two major oil-sands surface mines in northern Alberta, had committed to cutting the amount of waste generated by its heavy-oil extraction projects in Canada. (8/28)
  • The Texas Railroad Commission said crude oil production in July averaged 2.15 million barrels per day, up from the 1.68 million bpd reported in July 2013. The rise in production reflects a 31 percent increase in the number of drilling permits issued year-on-year. For natural gas, the commission said production of 602 billion cubic feet in June is an 8 percent increase year-on-year. Texas is the No. 1 oil producer in the nation. (8/28)


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