Peak Oil Review – Nov 24

November 24, 2014

1.  Oil and the Global Economy
Oil prices fell for three days last week and then rebounded a little on Thursday and Friday to close at $76.51 in New York and $80.36 In London, amid indications that the 30 percent price slide that began last June is stabilizing. The late week rally left NY crude with its first weekly gain since September and Brent had its biggest weekly percentage gain since June putting the world benchmark back above $80. There was little news that would support oil prices last week. The Iranian negotiations seem to be going into a second overtime, eliminating the possibility that another 1 million b/d or so of Iranian exports would soon be flooding the markets. Beijing cut interest rates by 0.4 percent last week prompting much chatter in the financial press that Chinese oil imports would be increasing in a newly revived Chinese economy. Beijing’s surprise rate cut and late week short covering were said to have caused the price jump. The European Central Bank, however, weighed in with a pledge to revive Europe’s sagging economy using quantitative easing if necessary.
The coming week is likely to see price movements as the long-awaited OPEC meeting opens on Thursday in Vienna. The cartel (read Saudi Arabia) must decide on whether to cut its output or let the status quo remain. OPEC pumped some 30.97 million b/d in October which is well above its official target of 30 million b/d.
Analysts are all over the map as to what is going to happen in Vienna. Bloomberg published a story last week that for the first time in history, its 20 expert analysts were evenly split as to whether OPEC’s quotas would be lowered.  Some believe the Saudis will succumb to pressure and announce a major cut, while others believe the Saudis are still remembering the bad things that happened to their economy when they made major cuts back in the 1980s. In recent years, OPEC output targets have meant little except for a handful of Gulf Arab states as all the others pump as much as they can anyway. Conspiracy theories abound as to whether the Saudis could be trying to harm the Russians, the Iranians, or the American shale oil producers.  Goldman Sachs is asserting that an OPEC production cut would only help the US because it would increase the likelihood of an increase in US shale oil production which in turn would force OPEC into further production cuts.
The bombast as whether the rapid increases in US shale oil production will be slowed by lower prices continues. As has been well established, many if not most shale oil producers are cash flow negative from their shale operations, meaning that they are dependent on Wall Street for a constant infusion of new capital or they will quickly run out of money to keep drilling. With the price of oil falling by some 30 percent in the last six months their cash flow is obviously much worse, despite claims of new operational efficiencies that will make up for the lower oil prices.  Increasing government regulations to curtail natural gas flaring and dangerous train wrecks containing highly volatile “shale oil” will add to production and transportation costs. Given this situation all the industry and its friends, both paid and unpaid, can do is continue to assert as loudly  as possible that all is well and that they can weather oil prices at current levels.
Goldman’s is saying that US oil prices will average about $75 a barrel in the first quarter of next year. While the IEA, who has turned rather optimistic in recent years, maintains that 96 percent of US shale oil production is profitable above $80, Stanford Bernstein says that fully a third of the new shale oil is uneconomic below $80. Still others maintain that the industry’s accounting has become so distorted that the real costs of production are considerably above $80 a barrel and the financial underpinning of the whole industry is a sham. None of this accounts for the billions of dollars in road damage being done by the 1,200 heavy truck loads of materials it takes to drill each well. Road repair costs are falling on taxpayers as taxes paid by the industry fall far short of paying for the damage they are doing.
2.  The Middle East & North Africa
Iraq/ Syria:  ISIL insurgents were driven away from positions around the Baiji refinery last week, which was supplying 40 percent of Iraq’s oil products. While the plant was surrounded for five months, it was never overrun and defenders were resupplied by air. Lines feeding the plant with crude still need to be cleared of insurgent forces so it is unlikely the plant can be reopened in the near future. In the meantime, the country must continue to import petroleum products to keep the country running.
The threat posed by ISIL and western pressures are forcing the Kurds and Baghdad to find solutions to the decade long dispute over who owns how much of Iraq’s oil and who gets how much of the pie. Neither the Kurds nor the Shiite government can survive without foreign military support and both sides need each other to confront ISIS. At the heart of the issue is the Kurds’ desire for independence from Iraq which they believe can be attained once they have large oil export revenues and foreign guarantees of their security.  Another issue is the Kirkuk oil fields, which are in a disputed area between Kurdistan and Iraq proper. BP is currently operating the fields under contract with Baghdad, but after Kurdish forces occupied the fields earlier this year, Baghdad’s representatives managing the field were sent home. Now the Kurds are allegedly exporting some of Kirkuk’s oil to Turkey through Kurdistan.
Pressure from increased foreign bombing raids on ISIL targets in Iraq and Syria is forcing the insurgents to carry on their campaign to take over the region in other ways. Last week a suicide car bomber struck in the heart of Erbil, the Kurdistan’s capital, causing considerable damage. Kurdish officials are saying that ISIL is forcing tens of thousands of young men living in occupied territory to join their ranks under threat of death and that ISIL forces are now considerably larger than the 30,000 estimated by Washington.
Libya: There was little news from the country last week. We can assume that the country is still exporting oil somewhere above 500,000 b/d although there is no direct confirmation.  The newest fuss seems to be whether or not ISIL is becoming a force to be reckoned with inside Libya. Some are saying that a local offshoot of ISIL had already taken a coastal city and is moving to take other towns. The Islamist government in Tripoli denies this is happening and says the allegation is a fabrication to justify western intervention.  Egypt’s President Sisi says Libya is vulnerable to being taken over by ISIL and that the West should intervene before the situation degenerates into a Syria/Iraq situation.
Iran:  With the deadline for the nuclear negotiations set for Monday, 24 November, it seems likely there will be another extension. Much of the current controversy centers on Tehran’s efforts in the past to build nuclear weapons secretly and the Iranian government’s refusal to fully confess to these activities and allow inspectors to interview those involved. Such an admission is seen as too much for Iran’s national pride, so the West has tiptoed around the issue to avoid killing any hope of an agreement. The issue is that without much expanded inspection, there is nothing to stop Tehran from reestablishing a covert weapons program – some are saying even with technology supplied by North Korea.
The crux of the matter is balancing Iranian national pride against the demands of hawks in the US Congress and Israel that there be ironclad guarantees that Iran does not have the capability to quickly and secretly develop nuclear weapons. While the agreement with Tehran was once about avoiding an Israeli military strike on known Iranian nuclear facilities which in turn would likely lead to confrontations slowing gulf oil exports, the newest issue is that sudden lifting of the sanctions on Iran would send oil prices still lower.  For now it looks like these negotiations are going to continue, as neither side wants to see the consequences of failure.
3.  China
The Central Bank announcement on Friday that China is cutting interest rates is seen as a sign that the government is increasingly concerned about the economic slowdown. Despite slowly deteriorating economic conditions, until now the government has seen fit to resort to partial measures rather than an across the board cut in interest rates as the proper way to stimulate the economy. In wake of evidence that these measures were not working, the government resorted to a more drastic measure.  The economic slowdowns in China, the EU, and Japan as well as many smaller nations with economic ties to these countries has been partially responsible for the drop in oil prices during the last six months.
Beijing announced the heretofore state-secret size of its strategic petroleum reserve, which turns out to be 91 million barrels or about nine days supply. Given major disruptions in Middle Eastern oil exports, China could keep going for about 3 weeks with the current reserve. Beijing has been taking advantage of current low oil prices to build its strategic reserve as fast as possible and is planning to build storage facilities to hold some 500 million barrels by 2020. The US strategic reserve is currently 727 million barrels.
Beijing also announced last week that it would set a cap on coal consumption of 4.2 billion tons per year starting in 2020.  This move is seen as important step in stopping the rise in China’s carbon emissions by 2030, although most environmentalists see this as too little too late.
4. Russia/Ukraine
Despite the appeals to Moscow by Venezuela to help shore up oil prices by cutting exports, there is little the Russians can do. Most Russian oil comes from fields with harsh climatic conditions that are very difficult and expensive to close down. As in Alaska, Russian pipelines would freeze without sufficient warm oil to keep them functioning. Russia does not have sufficient capacity to store large amounts of oil so that which is produced must be used or exported immediately.  Instead of cutting production, Moscow will send a high-level delegation to the OPEC meeting in an effort to talk the Saudis into cutting oil production to drive up prices for the benefit of Russia, Venezuela and other states that are being squeezed.
Some are saying that Moscow may need to see oil prices as high as $115 a barrel in order to balance its budget. Russia has increased military spending in recent years, is heavily engaged in the Ukraine situation, and is suffering from the lack of access to Western capital due to the sanctions.
The sanctions continue to take their toll on Russia’s economy. With Russia’s largest oil company, Rosneft, facing some $21 billion in debt maturities, which it cannot refinance, President Putin has stepped in to reassure investors that the government will provide the necessary financing to keep the company solvent.
Ceasefire violations continue in Ukraine. Kyiv is saying that some 7500 regular Russian troops are now in the country supporting the pro-Moscow insurgents.  Ukraine’s economy continues to deteriorate and Europe is facing one of its most serious security crises since the fall of the Soviet Union.  Some are calling for a political settlement using the damage the sanctions are doing to Moscow as leverage. For the time being the situation remains dangerous and in the long run will wean Europe from dependence on Russian natural gas as Moscow opens up more pipelines to send its gas to Asian Markets.
5.  Quote of the Week

  • “Everybody is trying to put a very happy spin on their ability to weather $80 oil, but a lot of that is just smoke.  The shale revolution doesn’t work at $80, period.”

 — Daniel Dicker, president of MercBloc Wealth Management Solutions
6.  The Briefs

  •  Royal Dutch Shell may close its Draugen oil field in the Norwegian Sea a decade earlier than in a prior assessment of the area’s potential lifespan because of rising costs and a slump in oil prices. Europe’s biggest oil company expects production in the field to extend until 2024 to 2027 after previously estimating a potential of as long as 2036. (11/21)
  • In the UK, Ineos Chairman Jim Ratcliffe unveiled preliminary plans to give momentum to the fledgling British shale natural gas industry. The emerging industry in the country has been met with opposition from environmental activists concerned about the fallout from the controversial drilling practice known as fracking. (11/21)
  • Israel has proposed that EU countries invest in a multi-billion euro pipeline to carry its natural gas to the continent, noting that the supply from Israel would reduce Europe’s current dependence on natural gas from Russia. (11/21)
  • Turkmen gas pipeline: The governments of Turkmenistan, Afghanistan, India and Pakistan last week created a joint venture project to build a pipeline that would send natural gas eastward from Turkmenistan. (11/21)
  • Russia and China have signed two large natural gas deals in the last six months as Russia turns its attention to China, in reaction to sanctions and souring relations with Europe — currently Russia’s largest energy export market. But the move has implications beyond Europe. US natural gas producers may be seeing their dream of substantial liquefied natural gas exports suffer fatal injury because of Russian exports to the Chinese market, a market that was expected to be the largest and most profitable for LNG exporters. (11/21)
  • Indonesian President Joko Widodo raised fuel prices to reduce state energy subsidies, moving on an election pledge less than a month after taking office. The price of subsidized gasoline was increased to 8,500 rupiah ($0.70) a liter from 6,500 rupiah effective today. The rupiah and local stocks rallied today on optimism that Widodo is taking steps to overhaul Southeast Asia ’s largest economy. (11/18)
  • Venezuela’s president told state television that he was coordinating with Russia to hold a meeting “very soon” with countries that aren’t members of OPEC, as well as those within the group, to defend the price of oil. (11/19)
  • Oil sands: Canadian holding company MCW Energy Group hopes to economically separate petroleum from oil sands and then sell it at market rates of double to triple the processing costs. The company uses a patented closed-loop technology that treats the sands with a solvent that helps remove the oil. The oil and solvent are separated, with the latter recycled for the next batch of production. (11/21)
  • In the US, crude oil and lease condensate production exceeded 8.6 million b/d in August, the highest since July 1986, according to EIA’s latest data. More than half of total U.S. production was accounted for by record production from three basins—the Eagle Ford, the Permian and the Bakken. (11/18)
  • A bill to force approval of the Keystone XL pipeline failed in the US Senate on Tuesday, sparing President Barack Obama from an expected veto of legislation that several fellow Democrats supported. The measure fell 59 to 41, just short of the 60 votes needed for passage. (11/19)
  • Giant new oil projects and multi-billion platforms are returning to the Gulf—bigger and more expensive than ever, some four years after the Deepwater Horizon disaster.  The resurgence could be short-lived if the decline in crude-oil prices, down about 30% since June, continues and prompts companies to delay substantial investments in the Gulf.  In 2001, the waters produced about a quarter of all American oil and gas. Since then, production has fallen by half as wells petered out and the government issued fewer permits in the aftermath of the 2010 Deepwater Horizon oil spill. Last year, the Gulf accounted for less than 10% of the country’s energy production. (11/22)
  • McClintock No. 1, the world’s oldest continually producing oil well, is still going after 153 years, quietly churning out about 1/10 of a barrel each day from a clearing of trees about 70 miles north of Pittsburgh. Crude bubbles up from this 625-foot chasm regardless of the swings in oil prices. (11/22)
  • The US EIA is using an oil import tracking tool to assess the impact of a possible relaxation of crude oil export restrictions. (11/22)
  • Freeport LNG Expansion announced it received final authorization from the Department of Energy to send gas from its planned facility on Quintana Island off the coast of Texas to countries that don’t have a free-trade agreement with the United States. The first two trains — facilities that cool gas into liquid  — should enter into service before the start of the next decade. (11/19)
  • The recent sharp drop in oil prices is clouding the Houston region’s economic forecast, potentially threatening to curtail employment growth across industries and perhaps even slow down the multifamily real estate segment, a prominent local economist said. (11/22)
  • Crude oil prices have weakened considerably in recent months, generating jitters about how far they might fall, and what lower crude oil prices could do to the overall economy, particularly in energy states like Texas. However, even a protracted period with prices at current levels is unlikely to put the Texas economy in a major tailspin the way it would have in the past, according to a new report by BBVA Compass. (11/21)
  • Halliburton Co. said it would buy Baker Hughes Inc. in a $34.6 billion stock-and-cash deal to combine two of the world’s largest oil-field services companies. (11/18)
  • Apache Corp. will sell non-core assets in southern Louisiana and the Anadarko Basin for $1.4 billion as part of its strategic focus on its growing liquids production. (11/21)
  • Low US gasoline prices mean those traveling for Thanksgiving will save more than $650 million collectively over last year, price watcher GasBuddy said. Its survey of more than 81,000 holiday travelers found more than 90 percent plan to drive at least 200 miles for the upcoming Thanksgiving holiday. (11/19)
  • Biofuels quotas: The Obama administration’s decision to put off issuing quotas for the use of renewable fuels this year sets up fights in Congress and the courts over a program that’s been bitterly contested for nearly a decade. The delay, announced Friday by the EPA, follows months of fighting between refiners and ethanol producers over a proposal by the agency to lower the quotas for ethanol, biodiesel and cellulosic fuels. (11/22)
  • Biofuels regulations: The US EPA announced it will not finalize 2014 biofuel quotas under the federal Renewable Fuel Standard (RFS) before yearend. Petroleum industry representatives said EPA’s Nov. 21 announcement demonstrates again that it’s time for Congress to repeal or dramatically reform the RFS. (11/22)
  • Electricity reliability: Two findings in the winter report by the North American Energy Reliability Corp. are that "prolonged and extreme cold weather in parts of North America may cause an increase in generator unavailability due to natural gas and coal constraints," and an increasing reliance on gas-fired generation requires new approaches for assessing grid reliability. (11/22)
  • Offshore Rhode Island, the Interior Department said it offered a right-of-way to renewable energy company Deepwater Wind to connect a wind farm to the grid. The eight-nautical mile corridor allows Deepwater Wind to connect its planned 30 megawatt Block Island wind farm to the mainland. Construction begins in full swing next year.
  • In a new trade agreement between China and Australia, the removal of the tariffs designed to protect struggling Chinese mines will help bolster margins of producers in Australia, the biggest coal exporting nation. (11/17)
  • In 2013, average residential electricity rates in European Union countries were more than double rates in the United States. Regulatory structures—including taxes and other user fees, investment in renewable energy technologies, and the mix and cost of fuels—all influence electricity prices. In 2013, average EU residential prices were 0.20 euro per kilowatt-hour, which translates to about 26.57 cents per kilowatt-hour, a 43 percent increase from the average 2006 price of 18.80 cents/kWh. In that same time, U.S. prices increased only 17 percent, from 10.40 cents/kWh to 12.12 cents/kWh.
  • In northern India, the villagers of Dharnai had been living without electricity for more than 30 years when Greenpeace installed a microgrid to supply reliable, low-cost solar power. Then, within weeks of the lights coming on in Dharnai’s mud huts, the government utility hooked up the grid — flooding the community with cheap power that undercut the fledgling solar network.  Such efforts to damage competition from other green power sources have happened elsewhere in the country. (11/20)
  • A new pact between the U.S. and China to tackle greenhouse-gas emissions has raised the question: Could India be next to set targets? After all, the two most-populous countries in the world have long acted together in climate-change talks.  Indian officials say, however, that Beijing’s deal has only highlighted the vast gap between a surging China and an India struggling to catch up. India appears unwilling to take steps that could burden its economy as it strives to build modern manufacturing industries. (11/18)

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