Peak Oil Review – Nov 11

November 11, 2014

1.  Oil and the Global Economy

Oil prices fell sharply on Monday and Tuesday last week taking New York futures down from $81 a barrel to touch above $76 on Tuesday. Prices then recovered leaving NY oil to close out the week at $78.65, down 2.4 percent for the week and 27 percent since June. London futures performed similarly dropping from $86 to $83 on Monday andTuesday and then rising to close out the week at $83.39, down 2.9 percent for the week and 28 percent since June. The price drop on Monday and Tuesday came as the Saudis cut prices for shipments to the US. The rebound later in the week had a number of causes including much colder weather due to engulf the US this week and better jobs numbers. 

As could be expected, forecasts that the polar vortex will return to the US this winter sent natural gas prices sharply higher – climbing from $3.65 per million BTUs in late October to a close of $4.41 on Friday. US natural gas production continues to break records with production in October running at 7.9 percent above last year with expectations that total US production will be above 72 billion feet per day by the end of the year. Robust production of gas this summer combined with mild weather have left US natural gas stocks only 7 percent less than the five-year average as the winter heating season starts. 

As most world LNG prices are tied to the price of Brent Crude, the 28 percent drop in crude has done the same thing to world LNG prices. Some writers are beginning to question the economic viability of the multi-billion dollar LNG processing plants if oil prices do not recover shortly.

Needless to say the rapid drop in crude prices has led to endless discussion of what is going on and what are the prospects for the oil industry. The generally accepted root cause of the price decline is that too much US shale oil production has combined with weakening economies in China, the EU, and their trading partners to restrict the demand for oil. In addition traders have become so accustomed to people blowing each other up in the Middle East without much effect on oil exports that there is no longer much of a “war risk” premium built into world oil prices.

Then we get to the question of why isn’t OPEC restricting production to the point where we have $100+ oil again. Now things get interesting. A handful of OPEC countries have small or relatively small populations in comparison to their oil incomes and massive “sovereign wealth funds” so they really don’t need all that money. Many others have large populations, sagging oil production, no fiscal reserves and need every last cent of oil income they can get to keep their countries stable.

The next part of this story is that widespread perception that the Saudis are trying to drive some US shale oil producers out of business. As the Saudis can likely produce oil for circa $20 a barrel while US shale oil costs production are likely upwards of $60-70, a prolonged period of low oil prices could easily restrict shale oil drilling in the US which requires that thousands of new wells be brought online just to keep production stable.

Here opinions vary as to what is going to happen. Some cite the history of oil prices, which seem to say that dips usually last only a few months and we will soon see $100 oil again. This thesis has been accompanied by much brave talk from shale oil drillers along the lines that they have the ability to weather any temporary dip in prices and that all will be well in a few months.  This argument, however, has been accompanied by announcements from some shale oil drillers that they are cutting capital expenditures in the next year.  What will happen in the next few months, could be masked by the very cold weather that is expected in engulf the US this winter. Bakken oil production is likely to fall due to the cold as it did last winter, so that it may be next summer before we get a better appreciation of what is happening to our shale oil production.

Much commentary has been directed towards the plight of the more needy OPEC members as Nigeria, Venezuela, Libya, and Iran who are expected to pressure the Saudis and the other Gulf Arabs to lower production so that needy states can increase their revenues without increasing production.  This thesis is being propounded by US shale oil interests. The next OPEC meeting is to take place on Nov 27th.

The other major issue of the past week is the impact of the Republican takeover of the Senate for US energy policies. There is general agreement that it will be very difficult to pass legislation to deal with climate change for a while. Others expect the Keystone XL pipeline will be quickly approved, as a number of mid-western democratic senators will join Republicans to get approval out of the Senate. Whether the President would be willing to veto such a bill is open to question. The Republicans are also likely to move quickly to ease as many restrictions on drilling and emissions as possible. Ironically this likely change in US policy is coming at time when scientists are becoming more strident in their assertions that something must be done to limit carbon emissions to avert disaster.

2.  The Middle East & North Africa

Saudi Arabia:  An attack on a Shiite Mosque is Eastern Saudi Arabia last week by Sunni extremists, which killed at least 5 worshipers, is the first indication that the Sunni-Shiite conflict which is raging across Syria and Iraq is finding its way into the kingdom. Although the Shiites only constitute 10-15 percent of the Saudi population, they mostly live in the sensitive Eastern Province where most of the oil refining and exporting takes place.  The Saudis have very effective security forces, so this incident is unlikely to affect oil production, but it is a harbinger of what radicalized Saudis are capable of once they gain experience in northern wars. The Saudi royal family is clearly not one of ISIL’s favorite institutions. 

Iraq/Syria:  In the wake of the mid-term elections, Washington announced that the US military presence in Iraq was being increased to 3,100 advisors and technicians in an effort to drive ISIL forces out of western and northern Iraq. Heavy fighting is taking place around the key oil-refining town of Baiji that has been held by ISIL forces since June. The large refinery there, although surrounded, has remained in government hands, but has not been functioning. The steadily increasing effectiveness of US and coalition airpower has generally put ISIL on the defensive and they are no longer able to mass the troops and vehicles for large offensive operations. Most attacks from ISIL these days are bombings carried out against government convoys and installations and Shia communities in Baghdad.  As the air strikes continue and more foreign advisors arrive to push what is left of the Iraqi Army and the growing Shiite militias into offensive action against ISIL-held towns, the ISIL threat to southern and Kurdish oil fields is diminishing. 

The Kurds seem to be making progress in efforts to market their oil abroad over Baghdad’s vehement objections. The companies producing Kurdistan’s oil are expected to receive an initial $75 million payment for their efforts this month.  The Kurds have had serious budget problems ever since Baghdad cut them off from their share of national oil revenue.  The Kurds, however, expect to be producing on the order of 500,000 b/d by next spring if they can find reliable markets. 

In Syria the Assad government continues to drop barrel bombs on insurgent towns and is pushing forward against non-ISIL insurgents. ISIL is still trying to take Kobani, but with the help of 150 heavily armed Iraqi Kurds and US air strikes, local Kurdish forces are keeping them out. The UN says there are now 15,000 foreigners in Syria fighting for somebody or other. The newest wrinkle is to make one’s way into Turkey via cruise ships to avoid the closer scrutiny that is taking place at Turkish airports.  

ISIL says it captured two Syrian natural gas fields last week in Homs province from government forces. Unless ISIL can sell the gas to the Assad government, it is not likely to find much use for it. 

Libya: Last week Libya’s supreme court, with heavily armed Islamic militiamen standing outside their door, unsurprisingly declared the internationally recognized government in Tobruk unconstitutional.  

The oil production/export story has had its ups and downs this week. While the press was touting Libya’s 800,000 b/d of oil production, a 200,000+ b/d oilfield, Sharara, which supplies crude to the Zawiya refinery, was closed down after gunmen attacked the facility. It was then announced that the gunmen had gone and oil production would resume shortly.  This was followed on Friday by a report that the gunmen had returned, that the guards had fled, and that the field may be in Islamist hands. In the meantime, unpaid security guard stopped exports from the eastern oil export terminal at Hariga, near Tobruk. So maybe the Libyans are producing/exporting 400,000 b/d or maybe 800,000 or somewhere in between. 

The civil war to control Benghazi continues apace with the death toll now at 300. In general the situation continues to deteriorate. Qatar and Turkey are supporting the unelected Islamist parliament in Tripoli, while Egypt and the UAE are supporting the Tobruk parliament. These divisions are along ideological grounds depending on country’s attitude toward the Islamist movement. Washington and EU governments are too preoccupied with Iraq and Syria to pay much attention to Libya so foreign intervention is unlikely. Given the chaos, oil exports are more likely to shrink rather than grow in the near future.

Iran:  Another round of nuclear talks are scheduled for Nov 9th in Oman and may include a top advisor to the Supreme Leader, Ayatollah Khamenei.  Tehran, however, is saying the advisor will not attend. Iran is suffering badly from the sanctions, the falling price of oil and the existential threat of ISIL who are beheading many of the Shiites that fall into their hands. Reaching an agreement with the West would solve many problems for Iran.  In the meantime, the Israelis are very concerned that the US and EU will sell them out by reaching an agreement that would allow Iran to remain a nuclear “threshold” with the ability to quickly build nuclear weapons.

There was a report last week that the idea of having Iran store its enriched uranium in Russia as a means of assuring it was not being made into nuclear weapons has resurfaced and has been tentatively agreed to by Tehran. Under the agreement, the Russians would convert the enriched uranium into fuel rods for nuclear plants.  Once the uranium has been converted, it is very difficult to refine back into weapons grade uranium. This has always been one of the most promising pathways to a solution, for it would allow Tehran to enrich as much as it likes and build as many power reactors as it can afford without drawing a preemptive attack by the Israelis.

Tehran’s economic minister says that low oil prices are not a problem. The minister insists that if oil continues to fall all Iran has to do is to adjust its budget. The World Bank, however, says that because Iran’s economy is so dependent of oil revenues, it is “intrinsically volatile.”

3. Russia/Ukraine

A perfect storm is threatening to send Russia into a serious financial crisis. The ruble is now down 30 percent against the dollar since the beginning of the year; the inflation rate is 8.4 percent; interest rates are 9.5 percent; no growth forecast for next year; $30 billion in external payments due this year, and the Central Bank has spent $68 billion defending the ruble.  The European Commission reported that the sanctions were clearly taking a heavy toll on Russia’s economy and that the reduced trade with EU members was hurting some EU states. 

Although President Putin and his policies regarding Ukraine remain popular, some are starting to wonder just how bad things have to get before there are changes.

Fighting in Ukraine resumed last week in the wake of separatist elections to form a new government in Eastern Ukraine. Some 4,000 have now been killed. Heavy artillery firing continued over the weekend and there were reports of Russian armored columns back in eastern Ukraine to support rebels.

Over the weekend, Russia and China signed a second major gas supply deal just a few months after a similar $400 billion deal was signed. The new agreement envisions some 30 billion cubic meters of Russian gas going to China through a new pipeline from western Siberia, whereas the previous agreement had gas coming from eastern Siberia. The new deal allows Russia to keep exporting gas for an indefinite period as Europe does its best to diversify its gas supply away from Russia. For China, the deal allows a reduction in coal burning.

4.  Quote of the Week

  • “Oil prices in the low-to-mid $80 range will allow a lot of US unconventional oil activity to continue, but a further drop could start to have a significant impact on the market and industries associated with it.”  

                    — Bob George, executive director, Gaffney Cline & Associates

5.  The Briefs

— Norway’s Statoil said on Monday that the giant Johan Sverdrup oil field in the North Sea could produce up to 650,000 barrels of oil a day at its peak. (11/4)

— The Ukrainian government extended the terms for a shale exploration license by five years, JKX Oil and Gas announced Thursday. London-based JKX said its exploration permit for was extended through December 2019. JKX said its production in Ukraine for 2013 averaged 9,731 barrels of oil equivalent per day, an 18 percent increase from the previous year. By the government’s estimates, there may be enough natural gas in shale reserve areas to meet the country’s needs without imports. (11/7)

LNG: Asia needs market reforms to capitalize on the “golden opportunity” represented by liquefied natural gas, the IEA said Thursday. The IEA says natural gas prices in Asia may be as much as four times as high as in other markets. Asian demand for gas, meanwhile, is expected to grow by as much as 8 trillion cubic feet, while 5.3 trillion cubic feet of new supplies of liquefied natural gas come on stream by 2020. (11/7)

 East Africa is the new “hot spot” for the energy market, with natural gas positioning the region as the new premier player, analysis from IHS finds. Analysis released from Nevada finds East Africa is expected to add another 1 million barrels per day in production by 2025, led by Mozambique and Tanzania. (11/8)

 Canadian LNG exports: Royal Dutch Shell, the lead partner in the consortium planning the LNG Canada facility on British Columbia’s remote northern coast, said on Friday the project to liquefy natural gas for export to Asia could cost as much as C$40 billion ($35.3 billion) when fully complete. Shell’s cost estimate for the LNG Canada facility near Kitimat, British Columbia, was included in the environmental assessment filed with provincial regulators on Friday. (11/8)

— Transocean Ltd., owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an industry-wide glut in the expensive vessels just as crude-oil prices tumble. The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts-drilling business and a drop in rig-use fees.  (11/8)

— Analysis by Gaffney Cline & Associates found operators drilling in shale oil areas of favorable geology and reservoir properties (aka “drilling sweet spots”) were likely to continue operations as they have been doing and remain above the economic threshold even at an oil price of $70/bbl. However, this might not be the case for companies operating outside of these sweet spots or in basins where production performance and the net-back value of oil is much lower, they said. Those companies “are more likely to feel the pinch, leading to marginal or negative economics for wells drilled at $80/bbl oil and in some places even up to $100/bbl.” (11/5)

— Bakken slowdown? Emerald Oil, Inc. could cut its 3-rig Bakken drilling program during the first quarter of next year if the price of oil continues to drop. With WTI now below $80, drilling rates could slip among a number of Bakken producers. According to the consultancy Wood Mackenzie, breakeven oil prices range from $60 to $80 per barrel in North Dakota’s Bakken. (11/7)

— Growth of jobs in oil and natural gas extraction, drilling, and support activities has outpaced the national average of private sector job gains over the last decade. Overall, oil and natural gas production jobs in the United States increased from 292,846 annual jobs in 2003 to 476,356 in 2008, a 63% increase, declined 12% during the 2008-09 recession, then increased another 28% from 2009 to 2013, from 422,033 to 586,884. Additionally, average wages of oil and natural gas production jobs were $108,000 in 2013, more than twice the average wage for all private sector industries. Most of the job growth has occurred in Texas, along with significant contributions from Oklahoma, New Mexico, and North Dakota. (11/5)

— U.S. monthly data: rigs actively exploring for or developing oil or natural gas are up 10 percent from last year, Baker Hughes said. For October, there were 1,925 rigs active, five less than the previous month, but 181 more than in October 2013. The U.S. government says it’s producing more oil than it imports for the first time in nearly two decades. (11/8)

— U.S. weekly data: rigs drilling for oil dropped to a fresh three-month low, shifting more rigs in favor of natural gas as crude prices dive and gas prices soar, data showed on Friday. The number of rigs drilling for oil fell by 14 to 1,568 in the latest week, down for five out of the past seven weeks, according to data from oil services firm Baker Hughes on Friday. (11/8)

— U.S. natural gas production has risen for the 10th consecutive month, analysis from Platts finds. Bentek Energy, the forecasting unit of Platts, found gas production in the Lower 48 states averaged 69.9 billion cubic feet per day in October, breaking the previous record. Gas production in October was 7.9 percent higher year-on-year. Projects slated to come online in the U.S. northeast should push the US gas output above the 72 billion cubic feet per day mark by the end of the year, Bentek said. (11/8)

— Crude oil prices are likely at the bottom of their recent slide, Continental Resources CEO Harold Hamm said Thursday, adding that prices will probably return to the mid-$80s to low $90s/b in the near term. Hamm said he believes the oil price drop will be “short lived” based on global supply and demand fundamentals that “[haven’t] changed in the last three months.” (11/7)

 At the US’s largest oil-import hub, things are slowing down. Just six years after importing more than 1 million barrels a day from countries including Saudi Arabia, Nigeria and Iraq, the Louisiana Offshore Oil Port (LOOP) is receiving just half of that from overseas, highlighting a nationwide trend at harbors from Mississippi to Pennsylvania. (11/5)

— US oil exports: The US is expected to export more than 1 million barrels a day of crude oil and condensates by early next year, including roughly 200,000 b/d in light-for-heavy crude exchanges with Mexico, analysts with Citi said in a new report. According to Citi’s estimates, US crude oil exports to Eastern Canada will grow 500,000 b/d, exports from Alaska will climb to 100,000 b/d, exports of processed condensate will hit 200,000 b/d and exports to Mexico will grow to 200,000 b/d from zero. (11/8)

— BHP Billiton Ltd. plans to export condensate from the U.S., the first company seen to ship the fuel abroad without express permission from federal regulators. The shipment shows how companies are increasingly finding ways around a four-decade-old law prohibiting most oil from leaving U.S. shores. (11/5)

 California received the least oil by rail in 17 months as cheaper in-state supplies and imports eliminated the need for Canadian supplies. Shipments from Canada, which made up 76 percent of California’s oil-by-rail receipts last November, tumbled to zero; this highlights how competition is growing to supply the western U.S. as refining markets elsewhere in the nation drive out imports by processing more domestic shale oil. (11/8)

— Surging railroad tank-car orders at companies owned by billionaires Warren Buffett and Carl Icahn are defying an oil price drop that threatens to slow the US drilling boom. Even with crude falling to a post-2011 low, manufacturers including Buffett’s Union Tank Car and Icahn’s American Railcar Industries Inc. (ARII) can’t meet demand. (11/7)

— Illinois lawmakers signed off Thursday on long-awaited rules regulating high-volume oil and gas drilling, clearing the way for companies to get “fracking” permits and unleash what they hope will be an energy boom in the southern part of the state. But a number of key details were not disclosed including how the state plans to fund the hiring of new workers to oversee the practice. (11/8)

— The Texas Oil and Gas Association said it filed a case against the city of Denton after voters backed an initiative to ban hydraulic fracturing. By a vote of 59% to 41%, Denton voters passed a special measure on the midterm ballot that prohibits hydraulic fracturing within city limits. It’s one of the first such local measures in the country to get voter approval. Denton sits on top the Barnett shale play. (11/7, 11/6; 11/5)

— Chesapeake Energy Corp has received subpoenas from states and the U.S. Department of Justice seeking information on its royalty payment practices to mineral owners. Chesapeake faces a slew of lawsuits from landowners and others who allege the company has underpaid royalties for produced and sold natural gas and natural gas liquids through the use of improper deductions or below-market pricing. (11/7)

— Marathon Oil said in its quarterly report 27 percent year-on-year production growth from North American shale basins wasn’t enough of a buffer against low oil prices, with year-over-year earnings down 24%. (11/5)

— U.S. coal producers mined 983,849 tons in 2013, the lowest since the 1980s, according to the Energy Information Administration. Yet coal generates about 40 percent of the world’s electricity and is the fastest-growing source of power by volume, according to the IEA. Coal producers argue that cheap and abundant coal should be used to drive economic growth and help the world’s impoverished improve their lives. (11/6)

— Cold winter? About 14.1 million square kilometers of snow blanketed Siberia at the end of October, the second most in records going back to 1967, and the speed at which snow has covered the region is the fastest since at least 1998. Taken together they signal greater chances for frigid air to spill out of the Arctic into more temperate regions of North America, Europe and Asia. (11/6)

— A high-level official with Volkswagen sees great potential in solid-state batteries, which possibly could boost electric vehicle range to as much as 700 km (435 miles), representing a volumetric energy density of about 1,000 Wh/l. (11/8)

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: Middle East conflicts, oil prices, oil production