Peak Oil Review – Oct 6

October 6, 2014

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3. Ukraine
4.  Quote of the Week
5.  The Briefs
1.  Oil and the Global Economy
The petroleum complex fell yet again last week as supply outpaced demand. Brent crude has now dropped 20 percent from its June highs, closing Friday at $92.31. New York oil futures are down to $89.74.  New York gasoline futures are down to $2.37 a gallon, the lowest since January 2011. The factors seen as contributing to the continuing slump last week were: a stronger dollar stemming from better-than-expected US employment data; concerns that the Saudis will not lower production to support prices; reports of a 413,000 b/d increase in OPEC production during September; and forecasts of lower global demand during the next 12 months.
Financial institutions such as Goldman Sachs are losing confidence that oil prices will move back above $100 a barrel in the next year. Traders expect that New York futures will establish a floor around $85 a barrel which would leave Brent trading around $88. Although the US economy has been doing better lately, partly due to increased domestic oil and gas production, lower crude imports, and increased crude and oil product exports, global demand has been generally weak. Economic difficulties are appearing for various reasons in the EU, China, Russia, to name a few. The increased turmoil in the Middle East and the need to counter the effects of climate change are taking a toll on global demand.
What is seen as increasing discord among OPEC members emerged last week with the announcements that the Saudis and Kuwait were unilaterally lowering prices in order to maintain their market share amidst faltering demand. Most OPEC states need every cent they can get from oil exports and have formulated budgets on the $100+ prices we have seen in recent years. Arab Spring and the various uprisings that are taking place across the Middle East as a result have contributed to animosities among Middle Eastern OPEC members as they side with different, sometimes warring, factions.
Evidence is growing that there will be considerably less money for exploration and development of new oilfields in coming years. Overall investment is seen as growing by only 5 percent this year as compared with 11 percent in recent years. Next year the growth is expected to fall to 4 percent, and giving the rapidly rising costs of exploration and development, this increase will result in less new oil production than would normally be expected. Much of the spending will be directed towards exploiting shale oil deposits in North America. Revenue from seismic explorations, which is an essential first step to finding new oil deposits, is expected to be off by 20 percent next year – a harbinger of what is to come.
The fight in Washington as to whether the US should allow greater exports of domestic crude continued last week with Exxon weighing in on the side of more exports and the refiners opposed. Some are saying that support for lifting the ban seems to be gaining in the Congress. The newest argument in favor of lifting the ban is that the US will gain more political influence over other countries if they become dependent on our oil exports.
Natural gas futures had a volatile week, climbing to nearly $4.20 per million and then falling to close at $4.03 Friday after trading below $4 on Thursday. Increasing production which is refilling the storage caverns at a faster-than-expected rate is competing with forecasts of a colder winter ahead.
2.  The Middle East & North Africa
Iraq: Fighting continues as government forces aided by coalition air strikes move against IS-held towns outside Baghdad and at the same time IS forces creep closer to Baghdad.  There are mixed reports and claims as to how much progress is being made coming from both sides. No political settlement has been reached in Baghdad on establishing a coalition government. Terrorist bombs continue to go off in Baghdad, mostly in Shiite districts.
Iraqi crude exports increased slightly in September to 2.54 million b/d as production in the southern oilfields continues to increase and progress is being made in overcoming infrastructure bottlenecks. There is little or no production from the northern fields due to the IS advances in the region last summer.
Production from Iraqi Kurdistan, which is still subject to a dispute with Baghdad, seems to be going well. Foreign oil companies are reporting that their workers are returning to Kurdistan as the security situation has improved and US intervention makes it unlikely the IS can overrun the province. The Kurds are talking about increasing their oil production to 500,000 b/d by the end of the year and 1 million by the end of next year from the current 320,000. They are also talking of renewing negotiations with Baghdad over who gets what share of the province’s oil revenue. The Kurds are in a much stronger negotiating position than ever before as their armed forces are the recipient of much Western aid against the Islamic State.
Libya:  Amidst the chaos that is Libya today, reports continue of major increases in oil production and maybe exports. The parliament, which remains in the city of Tobruk in eastern Libya, talks much, but seems to control little.  The Islamist group “Libya Dawn” is in control of Tripoli, but it is unclear just what authority they are exercising. Turkish and Qatar airlines are still flying into a military airbase near Tripoli after the main airfield was destroyed by fighting last summer. It is unclear who is in charge of Libya’s central bank which has access to $100 billion in foreign assets. The head of the bank was fired by the parliament recently after refusing to come to Tobruk and remains at the bank in Tripoli.
Benghazi is surrounded by forces loyal to the rogue general who is anti-Islamic militia, but the center of the city is under control of the Islamists. Heavy fighting took place around Benghazi last week as Islamist militias attempted to capture a key airbase.
Efforts are underway to move the National Oil Company’s headquarters to Tobruk where it will be under the eye of parliament and closer to most of the oil production. People are still being kidnapped across the country and there are very few official foreigners still resident there.
While the local militias previously blocking the export terminals seem to have backed off, oil company spokesmen issue the occasional assertion that oil production is now over 900,000 b/d, and the financial press is taking this at face value, it is difficult to find information on how much oil is actually being exported. Until this situation clarifies, it seems wise to view the claims that Libya is back as a major oil exporter with caution.
Iran:  The nuclear negotiations, which now have a Nov 24th deadline, will continue in the next week or so amid mixed reports of whether or not progress is being made. Iran seeks a swift ending to the sanctions which are slowly strangling its economy, while the six major powers seek safeguards that will insure that Tehran cannot quickly build nuclear weapons. The overriding concern is to satisfy the Israelis who continue to maintain that if a satisfactory agreement is not reached, they will use military force against Tehran’s nuclear facilities setting off a chain of events that would likely lead to serious damage to regional oil exports.
In addition to concerns from Israel, some 350 members of the US House of Representatives signed a letter expressing unease over Tehran’s foot dragging on its cooperation with IAEA.
The possibility of oil swaps between Iran and Russia was back in the news as a way Tehran could bypass the sanctions. The latest wrinkle involves Tehran getting an oil refinery in return for its oil.
3. Ukraine/Russia
Fighting continued across the Eastern Ukraine last week with no end in sight. Relations between Russia and the West continue to deteriorate as Moscow seems unwilling to rein in the separatists who continue to attack government forces and positions in an effort to better their situation.
As winter begins, and the need for heating increases in Europe, negotiations among Russia, Ukraine, and the EU over gas supplies continue. Russia is already sending less-than-requested amounts of natural gas to Poland, Slovakia, Austria, and Hungary to prevent them from having enough to send some on to Ukraine. In the meantime direct negotiations between Moscow and Kyiv continue on how much of its overdue gas bill it must pay Gazprom before supplies are resumed.
Moscow is doing its best to put the best face on the economic sanctions the US and EU have imposed on its economy. However, evidence continues to mount that constraints on capital flows from the West is beginning to make problems for Russia’s economy. The head of Russia’s Central Bank noted that the sanctions are interfering with efforts to control inflation.  Exxon is winding down work on an Arctic well, but says that it continues to work gas and oil projects on Sakhalin in the Far East which it claims are exempt from the sanctions. Schlumberger said it is withdrawing employees who are citizens of the US and EU from Russia.   
Washington maintains that the sanctions ball in is Moscow’s court and that the sanctions will be lifted when Russia ceases its blatant intervention in the Ukraine. Moscow says it has the financial resources to go-it-alone without money and contractor help from the West. In the meantime, the 20 percent drop in world oil prices in the last few months may be causing the Russians more troubles than the sanctions.
4.  Quote of the Week

  • “Energy to me combines everything from geopolitics and how nations behave to technological innovation and entrepreneurship.  It’s a great window to look at the world…There are still plenty of risks out there.  One thing you learn…is that things do not stand still.”

— Daniel Yergin, oil historian and business founder, commenting when
                               he was awarded the inaugural Schlesinger Medal for Energy Security
5.  The Briefs

  • Subsidies in Persian Gulf states that keep gasoline prices as low as 45 cents a gallon are proving difficult to dismantle amid growing regional turmoil. Ministers from six Arab Gulf nations delayed action to curtail the support when they met Sept. 11 in Kuwait. (10/1)
  • In Israel, the national consensus holds that the discoveries of huge offshore natural gas fields amount to an economic revolution, one that will put the economy on easy street for generations to come. A leading British energy expert, however, says it’s an illusion.  Exporting gas as LNG is very expensive. Israeli gas isn’t competitive enough to compete with LNG from other countries. (9/29)
  • Nigeria has become the first country to completely stop selling oil to the US due to the impact of the shale revolution – a strong reversal as the African nation was only four years ago one of the top-5 oil suppliers to America. At its peak in February 2006, the US imported 1.3m b/d from Nigeria.  (10/3)
  • In Algeria, Statoil and Shell obtained a license to explore for shale gas with state energy company Sonatrach which holds the controlling interest. Algeria has the tenth-largest natural gas deposits in the world and is the third-largest gas supplier to Europe. Its exports have been in decline, however, because of lagging foreign investments. (10/1)
  • When it comes to new oil and gas frontiers, today it’s all about Africa. And more specifically, it’s all about the eastern coast, with Kenya outpacing neighboring Uganda, because despite some political instability hiccups and the threat of militant al-Shabaab, it’s still one of the safest venues in the region. (9/29)
  • Venezuela’s oil basket fell 76 cents to $85.89/b for the week of September 29-October 3. In a country struggling on a number of fronts, the prices of the country’s main crude grades continued to fall, affected mainly by signals of a slowdown in the global economy and an abundant supply of crude oil in the market. The monthly average for September was $89.27/b, compared with $103.75/b in September 2013. (10/4)
  • Brazil’s Petrobras needs at least a 10 percent increase in gasoline and diesel prices in order to reduce the cost of subsidizing fuel imports, though that wouldn’t be enough to completely eliminate subsidies. A weaker Brazilian real compared with the US dollar has increased the cost of importing gasoline and diesel and put a strain on the Rio de Janeiro-based company’s finances. (10/4)
  • Canadian shale oil dud: A Chinese real-estate mogul’s acquisition of 100,000 acres in southeastern Saskatchewan near the North Dakota border has little output to show for his money. Mr. Ni Zhaoxing in 2007 hoped for production of 20,000 b/d from Canada Capital Energy Corp.’s first five years of business. Yet his company pumped only 567 barrels of oil a day last year. (10/1)
  • China’s announced cuts in the retail price of gasoline on Monday.  The cut has marked the fifth consecutive drop in oil prices, which declined by 0.6 yuan since the beginning of July. (9/29)
  • US oil exports: ConocoPhillips is shipping a cargo of Alaska North Slope crude to Asia, making rare use of a Bill Clinton-era exemption to US oil export restrictions. (9/30)
  • US oil exports: A group of refiners that support a four-decade-old ban on oil exports today sought to debunk a key argument of opponents: that the U.S. can’t process all the light sweet crude being produced. (10/3)
  • US production of oil and related liquids such as ethane and propane was neck-and-neck with Saudi Arabia in June and again in August at about 11.5m barrels a day, according to the International Energy Agency. With US production continuing to boom, its output is set to exceed Saudi Arabia’s this month or next. (9/30)
  • The US shale revolution is changing the flow of oil and challenging the influence of traditional suppliers. Saudi Arabia, the biggest exporter, is cutting premiums to attract more Asian buyers, according to the IEA. South Korea is taking the first Alaskan export cargo since 2004, Japanese traders are purchasing U.S. shipments of ultra-light oil from the Gulf of Mexico and India is buying more Latin American output. Asia will account for more than half of global demand growth this year.  (10/2)
  • The BridgeTex pipeline designed to transport as much as 300,000 b/d from the Permian shale basin in Texas to the Houston refinery market is now in service, two years after construction started. (9/29)
  • The US drilling rig count lost 9 units to settle at 1,922 rigs working during the week ended Oct. 3, Baker Hughes reported. Gas rigs dropped by 8 units to 330. Oil rigs edged down a unit to 1,591. Canada’s rig count moved in the opposite direction compared with its southern neighbor, nudging its overall count up 1 unit to 430. (10/4)
  • BP wants a formal review of a Louisiana court decision that found the company was negligent in the 2010 oil spill in the Gulf of Mexico. (10/4)
  • US industrial demand for natural gas will continue through 2015.  The EIA expects consumption to average 21.3 bcfd in 2014 and 22.1 bcfd in 2015, a 4% increase, boosted by newly proposed chemical plants. (10/4)
  • A spike in ethanol supplies has sent US prices tumbling to four-year lows.  Ethanol futures plunged 28 percent last month as falling domestic demand left US producers with the largest inventories in more than a year.  While demand for the biofuel, along with the gasoline into which it is blended, typically declines after the summer driving season, this year’s downshift was pronounced. (10/3)
  • Oil companies and railroads have united to fight some proposed federal rules on oil-train safety after a year of pointing fingers at each other over explosive accidents. Industry groups told the DOT that they need more than two years to build safer railcars to haul crude. They are urging federal regulators to allow them as long as seven years to upgrade existing tank cars. (10/1)
  • Declining gas prices and lower borrowing costs are paving the way for a resurgence in US sales of sport-utility vehicles, a turnabout from six years ago, when rising fuel costs stalled SUV demand. For the year, SUV and crossover sales are up 12 percent, more than double the industry’s overall gain of 5.5 percent.   (10/2)
  • Fracking liquids: oil services company Baker Hughes said Wednesday it implemented its policy of fully disclosing the chemicals it uses in hydraulic fracturing. The company in March started the implementation process needed to reveal fracking fluid ingredients. (10/2)
  • LNG exports: US federal regulators approved construction of Dominion Resources’ liquefied natural gas export project in Cove Point, Maryland. This is the fourth US LNG export project to get the green light to begin construction from the Federal Energy Regulatory Commission. It will be able to export up to 5.75 million metric tons of LNG a year when fully operational. (9/30)
  • Coal: The Asian owners of a billion-dollar Canadian coal mine are in talks to sell a majority stake of the mine for $2 (that’s not a misprint), underscoring the impact of slumping coal prices world-wide. (10/2)
  • Emissions: for the oil and natural gas sector, the second largest stationary source of emissions, greenhouse gas output was 1 percent lower than the previous year. Emissions from the oil and gas sector declined 12 percent from its 2011 levels. The largest reduction came from hydraulically fractured natural gas wells, where emissions were down 73 percent from 2011. (10/2)
  • Climate change: The savage heat waves that struck Australia in 2013 were almost certainly a direct consequence of the human release of greenhouse gases. It is perhaps the most definitive statement climate scientists have made that ties a specific weather event to global warming. (9/30)
  • The volcanic eruption in Japan of Mt. Ontake over the weekend may strengthen the argument of activists campaigning to keep the country’s 48 reactors shut. Japan’s atomic plants are off-line for safety checks as a result of the earthquake and tsunami that caused the meltdown of three reactors at Fukushima more than three years ago. (9/30)


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.