Peak Oil Review – Nov 3

November 3, 2014

1.  Oil and the Global Economy
Oil prices were little changed last week but settled a lower on Friday, down about 25 percent from mid-June highs, to set records for a fourth consecutive month of losses, and the largest monthly decline since May of 2012. London’s Brent crude closed Friday at $85.69 – down 0.4 percent for the day, 0.3 percent for the week and 9.3 percent for the month. New York futures closed at $80.54 after dipping below $80 — down 0.7 percent for the day, 0.6 percent for the week and 12 percent for the month. $80 a barrel is considered a major barrier, and should oil close below this number, many believe that breaching this barrier will contribute to further weakness.
While the usual factors of too much supply and weak demand were held to be largely responsible for falling prices, the stronger dollar which usually moves inversely to oil price also contributed to weaker oil.
US crude production is estimated by the EIA to have hit 8.97 million b/d the week before last which is the highest since 1986. US crude inventories have increased by 23 million barrels in the last four weeks, but the inventory is expected to begin shrinking as more refineries come out of maintenance and ramp up winter heating oil production.
So far the two major reactions to the precipitous decline in oil prices have been the price war which seems to have broken out within OPEC as some members move to retain their market share, and the issue of whether some of the higher-cost US shale oil production remains an economic proposition.  A new survey shows that OPEC’s production increased by 53,000 b/d in October at the time when it should be declining to counter falling prices. Some members are unhappy, but the indications suggest that there will be no major changes at the 27 November OPEC meeting.
The issue of whether the drop in oil prices will curtail US shale oil production is beginning to attract more attention. Initially shale oil production operators were running around denying that there was a problem and that prices could drop another 20 percent and and shale oil would still be profitable. The people who are saying this are already running at a cash flow deficit and need constant infusions of new Wall Street capital to keep drilling. Other larger oil companies which are now exclusively in the shale oil business, however, are beginning to suggest that some planned production may be curtailed next year. Transportation difficulties and the requirement to reduce natural gas flaring are adding significantly to production costs on Bakken shale oil so that we may see some production curtailment in the coming year if oil prices remain lower than they have been in recent years for an extended period.
US average gasoline prices are now below $3 a gallon, the lowest in nearly four years. US consumers should be saving about $250 million a day in lower gasoline prices as compared to early last summer.
US natural gas prices climbed steadily last week as winter weather began to slide down into the US. Snow in parts of South Carolina over the weekend was the earliest ever recorded. Some forecasters are seeing hints that the polar vortex could return this winter.  New York natural gas futures began the week at circa $3.65 per million BTUs, and finished at $3.87 after having traded as high as $3.95.
2.  The Middle East & North Africa
Iraq/Syria: There was little “progress” in the region last week. US and allied aircraft continue to bomb ISIL positions and assets in Iraq and Syria. Reports of numerous atrocities continue to filter out of ISIL-held territory. The Islamic State seem to be executing everybody they don’t like that they can get their hands on. In return we are getting scattered reports of Shiite militias summarily executing the few ISIL fighters they can capture and an occasional batch of Sunni civilians. This is becoming one of the more brutal wars of modern times. No progress as yet in establishing a viable coalition government in Baghdad. The oil still flows from southern Iraq with no new reports of troubles from the major oilfields. The Iraqi Kurds continue to make headway in securing and expanding their oil production.
There are mixed reports whether as yet the Kurds have had much success in selling the oil they have been exporting through Turkey. Baghdad has been very active in filing lawsuits against the Kurds which seem to have been scaring away potential customers. Given the glut in the world oil markets at the minute, buyers do not seem interested in getting involved in a dispute with Baghdad over Kurdish oil.
Libya: There was little solid news from the country which is still supposed to be producing some 800,000 b/d of crude. Reuters reports that the group controlling the major eastern export terminals which are supposed to be exporting have rejected an offer from the Islamists who control Tripoli to join them in return for more money. Libya’s sovereign wealth fund where some $60 billion accumulated under Muammar Gaddafi acquired a new head this week as part of the power struggle between the two Libyan governments in Tripoli and Tobruk. Since the fund’s offices in Tripoli were taken over by Islamist militias last summer, the fund has been run from Malta.
Meanwhile fighting continued in Benghazi where pro-Tobruk forces are reported to have made some progress against the Islamists. Cairo is warning that Islamist forces are preparing to capture the major oilfields in Eastern Libya thereby turning the oil revenues from the fields into a massive source of funding for ISIL. The Egyptians have been concerned for some time that the Islamic militias in Libya pose a threat and have been asking the western powers to become more actively involved in Libya for many months.
Iran:  As the nuclear negotiations enter what is supposed to be their final month, there have been few signs of progress except for an occasional reassuring word from negotiators. The head the of UN’s IAEA says that Tehran is no longer responding to his questions about their past efforts to design a trigger for a nuclear weapon. This is happening despite recent assurances from Iran’s President that Tehran is willing to “clarify any ambiguity” about weapons design.
Iran’s President Rouhani told his parliament that revenue from Iran’s oil sales are down 30 percent in recent months due to declining prices. Given the precarious state of Iran’s economy, the government likely will be facing a considerable budget shortfall next year.  With Tehran’s deep involvement in the Iraqi, Syrian, Lebanese, and other insurgencies, it is impossible to see clearly how all these factors will play out and whether there will be significant changes in their policies to the nuclear negotiations in the immediate future.
3. Russia/Ukraine
Russia agreed to resume natural gas supplies after Ukraine pays the first installment of its $3.1 billion debt to Gazprom this week. The size of the debt has been controversial as Moscow uses below-market natural gas as a way to win and retain the political loyalty of some of its customers that were part of the former Soviet Union. If all goes well, the dispute should be over – at least for this winter. The deal, which was brokered by the EU, came after several failed rounds of talks that have been going on since last June. Over the weekend pro-Russian separatists in Eastern Ukraine held elections to set up their own government separate from Ukraine in a apparent attempt to establish an independent state that could eventually become part of Russia. Kyiv has protested the move as a violation of the ceasefire agreement.
Low oil prices and the Western sanctions are continuing to take their toll on Russia’s economy. Moscow’s central bank raised a key interest rate to 9.5 percent in an attempt to shore up the ruble. Russia’s currency has dropped by 23 percent against the dollar since the beginning of the year, losing 9 percent in the last three weeks. On Thursday the ruble fell to a record low of 55 to the Euro. In Russia thousands of currency conversion stands display current conversion rates on every city block – encouraging many Russians to convert their rubles into safer foreign currencies. This situation could lead to chaos on the foreign exchange markets as Russian households flee the ruble en masse. Since the beginning of October, the central bank has spent some $20 billion supporting the ruble.
The lack of access to the foreign banking system is also becoming a problem. Last week Rosneft, the state-owned oil company, asked for $47 billion from the state’s reserves to help it through the current financial storm.
4. China
The slowdown in China’s economy continues with manufacturing growth declining further in October. Beijing’s economy registered a 7.3 percent growth, well down from the double digits of the last two decades. Some are suggesting that annual growth could be as low as 4 percent by the end of the decade. The slowdown is causing problems among China’s trading partners which have become highly dependent on exports to feed Beijing’s need for raw materials. Ironically, the US economy is largely insulated from China. The GM cars sold in the country are made there and contribute little to the US’s GDP. Only 6.5 percent of US exports go to China and much of this consists of agricultural products that are not as susceptible to a falling Chinese GDP.
Beijing has been on an oil-buying spree during October in an effort to take advantage of low prices. China usually buys its oil imports on long term contracts. In October, however, Chinese buyers bought at least 36 cargoes of crude on the open market, the largest ever in a single month. Chinese oil consumption in 2014 has been weak – up only 2 percent from last year. Most of the imported oil is likely going into its newly-built strategic oil tank farms which are thought to contain only about 10 percent of annual demand vs. the IEA’s recommended 30 percent.

5.  Quote of the Week
“Nigeria has two to three months of rainy day savings to cushion it while contingencies are put in place should world oil prices continue to fall” [below $78].  
            — Ngozi Okonjo-Iweala, Coordinating Minister for Economy

6.  The Briefs
— A new forecast of up to 12 billion people by 2100 raises large questions about the capacity of current energy technologies to meet future global needs. (10/31)
— Saudi policy: While international oil prices have plunged this month, Saudi Arabia’s normally talkative oil minister Ali al-Naimi has been on vacation.  Mr Naimi’s absence from the fray—people familiar with his agenda say he was on vacation from the end of September and only returned to his office in recent days—is one symptom of the unusually high level of dissent within the secretive kingdom that has left it uncertain over how to respond to oil’s downturn.  (10/31)
— In Iran, sanctions imposed on the economy in response to their controversial nuclear program means oil exports are at about half of their 2.2 million barrel per day rate in 2012. (10/30)
— Abu Dhabi, the largest and wealthiest of the seven states in the United Arab Emirates, is shaking up its oil industry. It has allowed the expiration of some longstanding concessions to major Western oil companies and is considering replacing at least some of them with partners from Asia and elsewhere. (10/30)
— The Yemeni government said the formation of a new government would put the troubled country on the path to economic stability and peace. Control over the Oil Ministry was allocated to the Houthi movement, a Shiite group. In mid-October, Norwegian energy company DNO International declared force majeure in Yemen, meaning it was freed from contractual obligations because of circumstances beyond its control, due to lingering violence in the country. (10/28)
— Spanish energy company Repsol announced a major oil deposit about 200 miles off the coast in Louisiana in the ultra-deep waters of the Gulf of Mexico.  Repsol’s declaration comes less than a week after claims of a similar significant discovery of oil from Chevron in the same Keathley Cameron reserve area. (10/28)
— Even as Shell’s oil production slumped and prices fell since June, a mix of better refining margins, lower spending and higher earnings from selling natural gas around the world bolstered profit from $4.5 billion during the 3rd quarter of 2013 to $5.8 billion in 2014. (10/31)
— In China’s oil sector, the plunge in crude may cause PetroChina’s profit margin to shrink and lead Cnooc, the country’s biggest offshore oil and gas producer, to stop some high-cost projects. (10/30)
— Hijackings of small oil tankers by armed gangs are increasing in Southeast Asia, home to the shortest sea-trade route between the Middle East and China. Yet the trend elsewhere is down; there have been 178 global piracy incidents so far this year, down from 352 in 2011. (10/29)
— Australia LNG: The Prelude, a floating LNG processing facility, is scheduled to start producing LNG during 2016 in the Browse basin off the coast of Australia. The largest floating manmade object in the world, the Prelude is roughly 1,600 ft long, 250 ft wide and weighs 600,000 tons, more than five times with weight of the world’s largest aircraft carrier. (11/1)
— LNG exports: Oil’s price collapse is eroding the appeal of potential US LNG exports to Asia as it cuts the cost of competing supplies linked to the price of crude. Brent’s 22 percent drop this year outpaced the 8.9 percent decline in natural gas at Henry Hub, the benchmark for U.S. liquefied natural gas shipments that are scheduled to begin in 2015. When the cost of processing and shipping American supplies to Asia is taken into account, the price advantage over oil-linked cargoes from producers such as Qatar has more than halved. (10/31)
— Nigeria’s declining crude oil earnings due to dropping prices will hit its government budget. Nigeria ranks fourth among OPEC exporters in terms of revenue earned from oil exports. (10/30)
— In Nigeria, subsidies for petroleum products in particular and the downstream sector in general cost $20 billion a year.  Legislation to end the subsidies is being urged by the federal government. (10/29)
— Venezuela shelved a planned sale of about $10 billion in US refineries as surging North American crude output pushes down energy prices and profit margins. (10/27)
— TransCanada Corp. said it filed a formal application for its Energy East pipeline project for eastern Canadian oil refineries. The Energy East oil pipeline involves the construction of a new 930-mile segment and converting 1,800 miles of gas line for oil service. It’s designed to carry 1.1 million barrels of oil per day from Alberta and Saskatchewan to eastern Canadian refineries. (10/31)
— The planned Trans-Canada Corp. oil pipeline designed to ship crude from Western Canada to Eastern Canadian refineries could also be used to access the Gulf Coast, creating an end-run around U.S. permitting delays for the Keystone XL pipeline, according to the company’s chief executive. (10/29)
— TransCanada’s proposed Energy East pipeline can expect considerable opposition, according to advocacy group National Resources Defense Council. (11/1)
— Rigs targeting oil in the U.S. dropped by 13 this week after crude futures traded below $80 a barrel for the third time in a month. Rigs drilling for crude declined to 1,582, according to Baker Hughes Inc. Gas rigs were up 14 to 346. The $20 slide in prices threatens to slow a drilling boom in U.S. shale formations that has helped drive down prices at the pump to the lowest levels since 2010. (11/1)
— Average US crude oil imports for the first nine months of the year (7.4 million b/day) are down 15 percent from two years ago (8.7 mb/day), EIA data show. (10/30)
— US oil exports? Global crude oil markets drive prices at the U.S. pump, meaning it’s time to end the ban on oil exports, a consortium of US oil companies said. (11/1)
— US oil exports:  The new head of French energy major Total challenged Europe to fight Washington over the U.S. oil export ban in his first public appearance since his predecessor Christophe de Margerie was killed in a Moscow plane crash last week. (11/1)
— EIA report on US oil exports: The push to end a four-decade limit on exporting U.S. oil may get a boost from a government study that explains the relationship between crude oil and domestic gasoline prices. If U.S. oil exports increase, “We don’t have to prove gas prices are going to go down. We just have to prove they aren’t going to go up,” said Robert Dillon, a spokesman for Senator Lisa Murkowski. (10/31)
— Alaskan Arctic drilling: Shell is asking the Obama administration for five more years to explore for oil off Alaska’s coast, saying set-backs and legal delays may push the start of drilling past the 2017 expiration of some leases. Shell has spent eight years and $6 billion to search for oil in the Arctic’s Beaufort and Chukchi seas. (10/28)
— Crude oil production for Texas was up more than 20 percent year-on-year to just over 2.2 million barrels per day, according to the Texas Railroad Commission. (10/31)
New Bakken pipelines: Energy Transfer Partners announced a joint venture to build two pipelines that will move crude oil out of North Dakota’s Bakken Shale field. The pipelines are scheduled to be completed by the end of 2016. The Dakota Access Pipeline is expected to deliver in excess of 450,000 b/d of crude. (10/31)
— API report: Innovations in hydraulic fracturing and horizontal drilling that have driven the energy renaissance in the US were responsible for about 48% of the nation’s crude oil production and shaved as much as 94¢/gal off fuel prices in 2013, according to a recent report commissioned by the American Petroleum Institute. (10/31)
— Fracking technology: Knowing where to place perforations and individual hydraulic fracturing stages remains a challenge for the oil and gas industry. As a result of incorrect hydraulic fracturing, approximately 25 to 30 percent of zones in unconventional wells don’t produce. Tools are now available to help deduce the wasted perforations per well. (10/28)
— In Texas, new regulations covering disposal wells from fracking operations go into effect in Texas beginning in November 2014. The new regulations by the Texas Railroad Commission are centered on the possible linkage between seismic activity and disposing wells. There are four main components of the new regulations. (10/30)
— In Pennsylvania, Congressman Matt Cartwright has opened an investigation into how toxic wastes from fracking are regulated, in light of an increasing number of studies showing that fracking produces toxic emissions that have serious human health impacts throughout the entire process.  (11/1)
— The US EPA’s proposed regulations on toxic air emissions from oil refineries would cost the industry $20 billion and roll back environmental progress, according to trade groups representing oil producers and refiners. (10/30)
— ConocoPhillips reported higher third-quarter profit after the sale of its Nigerian unit and said overall spending would decline next year, partly in response to falling crude oil prices. Conoco expects to spend less than $16 billion next year, down from the $16.7 billion projected for 2014. (10/31)
— Continental Resources, the Bakken’s second largest producer, will not change its course on new drilling immediately due to falling oil prices, according to its CEO Harold Hamm. Hamm said prices would have to fall another 20% before Continental would significantly cut back its operations. (10/29)
The US economy expanded at an annualized rate of 3.5 per cent in the third quarter of 2014, ending years of mediocre domestic growth and shaking off the more recent weakness in other major global economies. The figure came in well ahead of analysts’ expectations. (10/31)
— Gasoline’s energy decline: EIA has decreased its estimates of the energy content of retail motor gasoline by 3 percent since 1993. Ethanol and other oxygenates, which have lower energy content than petroleum-based gasoline components, have seen their share of total gasoline volumes increase from 2% in 1993 to nearly 10% in 2013. (10/28)
— United Steelworkers leaders, representing employees at two-thirds of US refineries, want a share of the US shale bounty from the next three-year contract with refiners including Exxon Mobil. The USW wants a substantial increase in wages, stronger rules to prevent fatigue and measures to preserve the share of union workers rather than contract employees. (11/1)
— Japan quickened the pace of restarting its idled atomic reactors after local officials voted to resume operations at Sendai’s nuclear plant on the nation’s southern island. Council members for the town of Satsumasendai on the island of Kyushu voted 19 to four to restart the reactors as soon as possible in a meeting interrupted frequently by the shouts of protesters opposing the measure. (10/28) 

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: Chinese economy, Middle East conflicts, oil prices, shale oil production, Ukraine conflict