Peak Oil Review – Nov 17

November 17, 2014

1.  Oil and the Global Economy
Oil prices fell steadily last week dropping from $80 a barrel in NY to trade below $74 before rebounding on Friday to close at $75.82. The rebound probably was due to profit taking before the weekend, although the financial press attributed the move to hopes that the Saudis would soon see the light and make serious production cuts. London followed a similar pattern, dropping from $84 to trade below $78 before rebounding on Friday to close at $79.41.  Much of last week’s decline was prompted by pessimistic forecasts of the prospects for oil prices.
Most observers are convinced that OPEC (read the Saudis) will not make significant production cuts at the Nov 27thmeeting. US shale oil production continues to surge and the IEA released a new report saying that demand for oil is expected to fall sharply in early 2015. The Agency noted that “economic development no longer spurs oil demand” and that “a return to price highs may not be a close prospect.” The new report, however, maintains the current estimates for demand in 2014/2015, but the IEA has already cut these forecasts sharply in recent months.
As has been the case for several weeks, the debate continues over whether the Saudis will cave in to the pressures from the weaker OPEC members and cut back significantly on their oil production — likely ceding a few customers to Libya and the US for a while.  Last week Saudi Oil Minister al-Naimi addressed the issue. The minister rejected talk of an oil war to drive US shale oil producers out of business and said that he was “working with other producers to ensure price stability for the interest of producers, consumers and the industry at large.” In the meantime, the US press has been filled with stories of the benefits that are accruing to consuming economies, particularly the US, from lower oil product prices. With oil down $25 a barrel and gasoline now around $2.90 a gallon, the US has received a bigger economic stimulus than Congress or the Federal Reserve could ever craft.
The downside of price decline, should it last for a while, is the effect it will have on expensive US shale oil and deep-water production. There are already some signs that a contraction is underway with the rig count dropping in North Dakota and some drilling rigs being moved to drill in more productive “sweet spots” which may still be economical. Officially, most producers of expensive oil are saying they will tough it out until prices rise again, but unofficially, insiders are saying that production is likely to be curtailed by financially weaker producers who do not have other sources of income such as refining.  The general thinking seems to be that there will be some curtailment in production if prices remain in the $70s, but there will be a more dramatic cut if prices slip into the $60s.  North Dakota, which really likes its oil boom, is saying that it can keep producing all the way down to $42 a barrel.
Several major reports were issued last week commenting on the oil situation. The IEA warned that the shale oil glut will not last forever and that the US shale oil bubble will likely burst in the 2020s. The Agency said in its annual report that it expects global oil supplies to increase to 104 million b/d by 2040.  Given the pace of events these days, it seems rather foolhardy to say anything about 25 years from now. The EIA issued a short term forecast predicting that the average price of US crude will fall from $95 a barrel this year to $77.75 in 2015. This is sharply lower than what the Administration was saying last month.
OPEC reported that its members received an average of $77.27 a barrel for their oil last month, down 10 percent from September. Several OPEC members are already in considerable fiscal trouble which could lead to political instability in the coming year.
US natural gas prices that had been trading around $4.50 per million BTUs the week before last closed last week at only $4.02 due to increased production and mixed forecasts of temperatures for the remainder of November.
2.  The Middle East & North Africa
Iraq/Syria:  Fighting intensified last week as the US and allies increased air strikes and Iraqi forces drove away ISIL insurgents who have had the Baiji refinery surrounded for several months. As the pace of the airstrikes increases and more US advisors arrive, ISIL will find it difficult to conduct offensive operations and to maintain fixed military positions and facilities in open terrain of Iraq and Syria.  The war seems to be taking on a new character in which ISIL hunkers down in the cities and towns it controls and continues to conduct terrorist bombings against the government and Shiites. In this situation, Iraqi oil production is beginning to look more secure at least for the immediate future.
The first steps towards settling the long-standing dispute between Baghdad and the Kurds over who owns the oil produced in semiautonomous Kurdistan was reached last week.  Under the 2006 Iraqi constitution, Baghdad owns and can sell all the oil, but must transfer 17 percent of the oil revenues to the Kurds. Baghdad ceased making these payments some months back as part of the dispute. Under the new and temporary agreement, Baghdad will make an initial payment of $500 million to the Kurds who in turn will let Baghdad have 150,000 b/d, about half of current production. Many important issues remain, including the arrears on the 17 percent Baghdad was supposed to be paying the Kurds, who own the disputed Kirkuk oil fields now under Kurdish control, and what happens as Kurdish oil production continues to grow.  In the current situation, both sides need each other badly and it is hoped that the new Iraqi government can work out a permanent solution.
In the meantime, the Kurds are planning to move ahead and set up their own oil exploration and production company that would be independent from Baghdad and are also planning for their own sovereign wealth fund. The Kurds hope to increase their oil production from the current 320,000 b/d to 700,000 by the end of March and 1 million by the end of the year. There are reports that the Kurds have begun exporting oil from the Kirkuk oil fields that were taken over by the Kurds after the defeat of Baghdad’s army in northern Iraq. After the Kurds took over the oilfields, employees of Iraq’s Northern Oil Company, which had been running the fields were expelled, although BP technical personnel remained on the job. The dispute over whether the Kirkuk fields belong in Kurdish territory has been going on for years.
Libya: Despite the ever-deteriorating political situation, Libya’s oil production is said to be going so well that some are saying its return to nearly 1 million b/d is partly responsible for the drop in oil prices. Over the weekend new clashes broke out in Tripoli, which has been relatively calm since it was taken over by the Islamists during the summer, forcing Tripoli’s only operating airport to close. Somebody blew up car bombs next to the Egyptian and UAE embassies in Tripoli last week. These governments have been supporting the Tobruk parliament against the Islamists. Fighting in Benghazi has left 365 dead in the last month. In general most observers, including the UN, are saying the country is on the verge of collapse.
In contrast to all this gloom, Libyan oil production is now said to be back on the order of 900,000 b/d after a dispute at an export terminal was settled. Last week a brigade from the Islamist militia that has occupied Tripoli moved south and took over the country’s largest oil field. The field was briefly closed but has reopened.  Both sides seem happy to keep the oil flowing through Libya’s National Oil Corporation to foreign buyers. The oil company seems to be the only thing working in Libya these days, although there have been reports that it has moved much of its headquarters operation to Malta after Tripoli was taken over by the Islamists. It is unclear as to who is getting how much of the revenues from the oil exports. While exports may be going well this week, the situation keeps changing.
Iran:  Optimism seems to be growing that some sort of nuclear agreement might be reached in the coming week or at least enough progress made to justify an extension beyond the Nov 24th deadline. Last week a deal was announced between Russia and Iran for Moscow to build 8 new power reactors for Tehran. There are reports of a deal under consideration whereby Tehran would ship its enriched uranium to Russia to be converted into nuclear power plant rods. After this is done, it would be very difficult to covert the rods into nuclear weapons grade uranium. An agreement along these lines, with proper inspection and verification, might be enough to satisfy the world that Tehran could have all the nuclear power stations it wants, while keeping some future Iranian government from quickly building an undetected stockpile of nuclear weapons.
Tehran is becoming increasingly desperate to have to sanctions lifted as the plunge in oil prices has badly damaged state revenues. The reverse to all this is just what a surge in Iranian exports would do to oil prices with the current glut of oil on the market.
Saudi Arabia: Riyadh has been much in the news during the last week for its alleged attempts to sabotage the US shale oil industry by cutting prices rather than production. Dozens of articles were published last week accusing the Saudis of trying to kill the Keystone pipeline and bankrupting US shale oil producers with unnaturally low prices. Most writers took the stance that America was too strong and brave to be done in by such machinations. Other writers accused the Saudis of trying to do in Russia and Iran using the same stratagem.  To all these accusations, the Saudis maintained they were following a “balanced” oil policy and hoped that the world’s leaders would move to settle the various crises facing the Middle East.
A more ominous note arose this week when the Islamic State called on the peoples of Saudi Arabia to rise up against their government. The Saudis have joined the US in the air campaign against ISIL. The issue is a complicated one, as many Saudis believe there is nothing wrong with ISIL killing off the infidel Shiites and the Saudi government has long supported a fundamentalist brand of Islam which many believe has contributed to ISIL’s ideology.  The deteriorating situation in Yemen is also seen as a long-range threat to stability in the Kingdom.  While ISIL does not present a direct military threat to the Saudis, with so many supporters inside the conservative Sunni country and some 2000 Saudi citizens believed to be in its ranks, the long term threat is one of more bombings, assassinations, and possibly sabotage of oil installations.
3.  China
The second Sino-Russian natural gas deal, worth $400 billion, signals Moscow’s desire to rid itself of its European customers as soon as possible and tie itself to Beijing, which has far less scruples about what Russia does along its borders. The Russians seem to have given the Chinese very good terms for its natural gas, which will help with China’s dirty air problems and lower Asian natural gas prices – possibly to the detriment of US LNG exports. President Putin announced that the dollar will not be used for bilateral transactions between Russia and China in the pending natural gas deals as Russian companies are increasingly shifting to direct renminbi-ruble transactions to settle their imports and exports.
China seems to be taking every possible opportunity to stock up on cheap oil while the prices remain low.  The number of oil tankers sailing toward China set a record in mid-October and is still close to that record. The shipping industry now consumes about 3.5 million b/d of bunker fuel for its ships and is currently paying about $15 per barrel less than it was at this time last year for savings of some $50 million a day.
Under the terms of the announcement by presidents Xi and  Obama , China will increase its share of non-fossil fuels in total energy consumption to around 20 percent by 2030, and carbon-dioxide emissions will peak — or start decreasing in annual absolute volume — around that year. But the goals themselves will be relatively easy to hit as they hew closely to the economic trajectory Beijing has charted under existing environmental policies. Some environmentalists are saying the agreement does little to stop global emissions and slow climate change.
4. Russia/Ukraine
Moscow’s economic problems received a lot of attention in the global press last week as a combination of lower oil prices, the economic sanctions, and a worsening Ukrainian situation are leading to what looks like major economic troubles ahead. Last week Moscow allowed the ruble to float in order to mitigate the problem of trying to defend it using foreign reserves. Numerous current and former Russian officials are warning that Moscow’s economy cannot withstand the economic shocks to which it is being subjected and that using the sovereign wealth fund as a substitute for foreign banks to finance Russia’s oil industry is a bad idea.
Fighting is continuing in eastern Ukraine amid reports that large numbers of Russian troops and heavy weapons are entering the country to support the ethnic Russian dissidents. President Putin got a chilly reception at the G20 meeting over the weekend and left early as President Obama and other Western leaders condemned the latest Russian incursions.  Discussions of new sanctions on Moscow took place at the meeting, but as these sanctions cut both ways, there does not seem to be much appetite for imposing new ones. Many believe the current restrictions of financing Russian businesses will be all that are needed.
5.  Quotes of the Week

  • The U.S. shale boom masks threats to global oil supply including Middle East turmoil, conflict in Ukraine and the difficulty of unconventional oil production beyond North America, the International Energy Agency said. “The global energy system is in danger of falling short of the hopes and expectations placed upon it.“

— IEA, 2014 World Energy Outlook.

  • “The apparent breathing space [in meeting world oil supply] provided by rising output in the Americas over the next decade provides little reassurance, given the long lead times of new upstream projects.”

— IEA Chief Economist Fatih Birol

6.  The Briefs

  •  The Islamic State controlled as many as seven oil fields at one point and was said to be generating as much as $2 million per day in oil revenue. A US Treasury official said the group is probably now earning several million dollars per week from smuggled oil. A counter-terrorism specialist at RAND Corp. testified it was difficult to understand the full complexity of the IS smuggling ring in the region. (11/15)
  • China will overtake the U.S. as the world’s biggest oil consumer within two decades, according to the International Energy Agency. (11/12)
  • In Nigeria, crude oil export accounts for about 83 per cent of total exports.  With declining production and dropping world prices, Nigeria’s economy is suffering the consequences. (11/15)
  • Falkland Islands: Premier Oil, a British oil explorer, said it will develop a smaller portion of its Falklands project as it seeks to cut costs. The initial phase will yield 160 million barrels of oil with costs for first output estimated at less than $2 billion. Premier plans to sink a well in March and one in April and will continue to seek a partner. (11/14)
  • A plan by Mexican state-owned Pemex to build a $6-billion natural gas liquefaction plant at Salina Cruz on the country’s Pacific Coast–linked by a 120-mile pipeline to production on the Gulf of Mexico–has been met with skepticism by analysts. (11/11)
  • Oil sands Exxon’s Canadian subsidiary said Monday that it has shut down one of its largest oil sands operations (92,000 barrels per day) for “several weeks” due to a problem in its core processing plant.   (11/11)
  • Delays of the Keystone XL pipeline are providing little obstacle to Western Canadian oil producers getting their crude to the US Gulf Coast, with shipments set to more than double next year. The volume of Canadian crude processed at Gulf Coast refineries could climb to more than 400,000 barrels a day in 2015 from 208,000 in August. The expansion shows Canadians are finding alternative entry points into the U.S. while the Keystone saga drags on. (11/14)
  • The US House of Representatives on Friday passed the latest bill to approve the stalled Keystone XL pipeline, setting up a much-anticipated vote in the Senate next week. (11/15)
  • The EIA now expects US production to rise by 850,000 bpd to around 9.4 million bpd, according to its monthly short-term energy outlook.  That’s down 100,000 bpd from one month ago—a rare downgrade from the EIA, which, like many forecasters, has been consistently underestimating booming US shale oil growth. (11/13)
  • US rigs targeting oil rebounded from a three-month low as drillers homed in on the most profitable fields as they faced the lowest crude prices in four years. Rigs targeting oil jumped by 10 to 1,578 after sliding to the lowest level since August last week, Baker Hughes said on its website today. Those drilling for natural gas declined by six. (11/15)
  • Hess Corp, after a successful Bakken down-spacing pilot program in 2014, told investors it would increase its net peak production guidance in the play to ~175,000 boe/d by 2020. (11/12)
  • After drilling rigs in North Dakota dropped from 195 in September to 186 currently, following a high of 218 rigs in May 2012, Lynn Helms, director of North Dakota Department of Natural Resources said, “The number one reason for the rig count drop is the lower oil price.” (11/15)
  • With oil prices low and showing no sign of an immediate rebound, the industry is beginning to pull back on spending. But while steep declines in oil prices may hurt big oil’s production sectors, with lower priced oil as an input, their refining assets become more profitable. (11/13)
  • Offshore drilling companies say they are mothballing or even scrapping some of their aging drilling rigs as energy companies respond to a global glut of oil that has sent prices tumbling. The moves by the companies that lease and operate drilling rigs are among the first concrete signs that the energy industry does not think the 25% price drop since June is temporary. (11/13)
  • The offshore oil industry has gone into a “cyclical downturn” as a result of the fall in crude prices, one of the world’s largest drilling contractors has warned. Switzerland-based Transocean said on Monday the industry faced “challenging” conditions that were likely to create an oversupply of offshore drilling rigs. (11/11)
  • A pullback by US energy companies in Asia such as Apache Corp. and Murphy Oil Corp. is opening the door for competitors looking to snap up unwanted oil and gas assets in the region. US producers are facing pressure to cut spending, reduce exposure overseas and focus on the domestic market, where oil production is forecast to reach the highest in 45 years in 2015. (11/13)
  • US Gulf of Mexico oil production will enter a period of decline after peak output is reached in 2016, according to Wood Mackenzie. Overall production, including the expansion of older fields, will pass a GOM peak first set in 2009. After that, the analyst group said a steady level of investment will be needed to sustain production from the gulf basin. Capital spending next year will be 30 percent higher than in 2013. After hitting a peak production rate in 2016, production should at best plateau for the rest of the decade. (11/15)
  • No government approval for U.S. condensate exports? No problem, says the lawyer who has been instrumental in poking a hole in the 39-year-old ban on most crude oil shipments. By early next year, most companies will be following the lead of BHP Billiton and export processed condensate without explicit approval from the Bureau of Industry and Security. That would allow a larger chunk of the 650,000 b/d of US condensate to be exported. (11/14)
  • LNG exports: An increase in natural gas production from U.S. shale basins should support export growth, but the economic benefits will be modest, the U.S. Energy Information Administration said. EIA expects LNG exports to reach 2 billion cubic feet by next year, and eventually surge to as high as 20 billion cubic feet per day. (11/13) [Editor’s note: US consumption during 2013 was roughly 65 bcf/day.]
  • North Dakota officials decided Thursday to require energy companies to treat the crude they pump from the Bakken Shale to make it less volatile before shipment by pipeline or train.  The decision comes amid growing public concern about the safety of oil-laden trains crisscrossing the country. (11/14)
  • US rail traffic, including car loadings of all commodity types, has increased 4.5% through October 2014 compared to the same period in 2013. Crude oil and petroleum products had the second-biggest increase in car loadings through the first 10 months of this year, with these shipments occurring in parts of the country where there is also strong demand to move coal and grain by rail. (11/14)
  • Oil rail tanker cars: Regulators set to decide on crude-by-rail shipping rules are relying on testing methods that may understate the explosive risk of the crude, according to a growing chorus of industry and Canadian officials. (11/13)
  • Without fracking sand the US drilling boom would stop.  It’s a crucial ingredient in the hydraulic fracturing process. That is why Halliburton Co. set up a “war room” to track sand shipments by trains and trucks.  More than a dozen employees hunker down daily on the first floor of Halliburton’s north Houston office in front of massive screens with real-time maps of railcars transporting sand, live camera feeds of sand mine loading and unloading operations, constantly updated weather conditions and data about sand levels in the company’s storage silos. (11/14)
  • In a survey of consumer optimism by the National Association of Convenience Stores, the industry group found a high level of confidence going into the holiday season, which corresponds to the long trend downward for gasoline prices. It said that, for every 1-cent gas price decline, US consumers are saving a collective $3.7 million per day at the pump, which should translate into more holiday spending. (11/13)
  • Decommissioning: The bill for closing down and cleaning up the world’s aging nuclear reactors will exceed $100bn over the next 25 years alone, the IEA said in its annual report, warning that governments risk underestimating the cost. With almost 200 reactors due to be shut down by 2040, the IEA says are “considerable uncertainties” about decommissioning costs, reflecting governments’ limited experience in safely dismantling nuclear plants. In the last 40 years, only 10 reactors have been closed down. (11/12)
  • Fukushima: Very small amounts of radiation—Cesium 134 and other trace radioactive elements—from the 2011 meltdown at Japan’s Fukushima nuclear plant have been detected off the California coast, a scientist who has been monitoring the fallout said this week. (11/15)
  • Australia continues to frustrate efforts by fellow G20 members to include climate change on the agenda at the upcoming leaders’ summit in the eastern city of Brisbane this weekend. Prime Minister Tony Abbott has described the science on climate change as ‘crap.” (11/11)


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, IEA WEO report, Oil