Peak Oil Review – Feb 17

February 17, 2015

1.  Oil and the Global Economy
The oil markets remained volatile last week with New York futures cycling between $48 and $54 a barrel while London cycled between $55 and $61. In general, news of increasing stockpiles sent the markets down while news of cutbacks in drilling and capital investment sent the markets up. There is little agreement on where the markets are going before summer. Some see a lack of storage capacity for the growing surplus as sending prices down into the $30s or perhaps even the $20s in the next few months while others believe that cuts in drilling will translate into cuts in production faster than is generally believed so that economic growth coupled with stagnant or even falling oil production will send prices higher.
As was to be expected, last week’s US stocks report showed another substantial gain in the US crude inventory of 4.9 million barrels and a 74,000 b/d increase in lower 48 oil production the week before last.  These numbers sent prices down on Tuesday and Wednesday; however, the prices recovered on Thursday and Friday as optimism took hold when London oil closed above $60 a barrel for the first time this year.  Hopes that better economic news from the EU will soon lead to an increase in demand coupled with the deluge of announcements of cutbacks in oil industry drilling programs were responsible for the price increase.  A weakening US dollar also contributed to higher prices.
Last week saw the release of North Dakota’s February oil production report, which gives December production and some more recent data giving a better insight into just what is happening to the state’s shale oil production. Output rose by 40,000 b/d to 1.23 million b/d in December, but the rig count has dropped to a current 137, the lowest since July 2010.  While most observers expect that oil production will continue to rise in the state until the middle of the year, the Director of the state’s Department of Mineral Resources suggested in a conference call that December may have seen the highest production number until prices rebound. The Director said that the number of active drilling rigs in the state may soon fall below 130 which is the number he believes is necessary to maintain stable, but not grow, oil production.
At the end of December, however, North Dakota had a backlog of 750 wells that have been drilled and are awaiting completion (fracking).  The February report, however, noted that in January drillers received an average of $31 a barrel for their oil at the wellhead.  These prices are well below any realistic production costs so some companies may see that it is in their interest to leave the oil in ground until prices recover. If enough drillers can wait for higher prices rather than selling their oil at a substantial loss, the generally accepted scenario that US oil production will continue to increase until the middle of the year may be optimistic and a substantial price rebound from lower production may come sooner than expected.
Goldman Sachs, however, continues to forecast that US shale oil production will rise by over 600,000 b/d by the end of December, which could be enough to offset any increase in global demand. One fact that seems certain in all this is that so many oil companies all over the world are cutting back on exploration and drilling, it seems inevitable that oil production will be substantially lower within a few years.
2.  The Middle East & North Africa
In addition to those countries with significant oil exports and are wracked with geopolitical problems such as Iran and Iraq, there are other places across the region which could eventually pose threats to oil exports. The Shiite coup against the ruling Sunnis in Yemen now seems likely to turn into a civil war on the border of Saudi Arabia and at the entrance to the vital Suez oil-shipping lane.  Yemen was producing some 450,000 b/d 15 years ago, but in recent times this has dropped to about 150,000 b/d and then completely halted last month. Another major Shiite/Sunni civil war, with al Qaeda right in the middle, is not what the region needs right now.
In Egypt, the uprising against Cairo is slowly increasing in the Sinai with terrorist attacks becoming more frequent. The Egyptian government is worried that the Islamic State will establish a firm foothold in Libya and threaten its western border. In North Africa, Boko Haram, which already holds some 14 towns in northern Nigeria, seems on the verge of spreading its turmoil across the region threatening oil and gas production in southern Nigeria and Chad. Similar radical groups are already making trouble in Algeria.
An even more insidious threat may be the growing water shortage across the Middle East.  While the Gulf Arab states can get along with desalinization for a while, nearly all the other countries in the region are starting to feel the pinch of shrinking water supplies. Last week there were reports of a major water shortage emerging in Pakistan, but at least half a dozen other countries, ranging from Egypt to Iran, are in trouble as global temperatures continue to rise and water tables drop.  Within the next 5-10 years, these shortages could well spark troubles comparable to the current problems in Syria, Iraq, and Libya as water and food supplies run short and mass migrations on a scale hitherto unknown start to engulf the region.
Iraq/Syria:  The fighting continues with ISIL forces making gains in some areas and being forced back in others. Coalition bombing of ISIL forces continues to grow. There are reports of US helicopters taking part in the fighting in Anbar province which some are calling “mission creep.” The oil export situation has become cloudier in recent weeks. The EIA reported that Iraqi oil production averaged 3.4 million b/d in 2014, which is 330,000 b/d higher than in 2013, but exports seem to have slowed this year. The slaying of a moderate Sunni sheik and seven of his associates, allegedly by out-of-control Shiite militia, has raised the possibility of the Sunnis pulling out of the parliament, adding more fuel to the ever-increasing turmoil.
The state of the relationship between Erbil and Baghdad is back in the news with reports that Baghdad has not paid its obligations to the Kurds since November. Baghdad says it is waiting parliamentary action on the budget.
In Syria, government forces and Hezbollah militia are driving non-ISIL insurgents from towns in the south. Coalition airstrikes on ISIL in the north are freeing up government forces to deal with the other insurgent groups.  The move is of concern to Israel as Hezbollah, with its own agenda moves closer to the Golan Heights. The New York Times points out that after five years of fighting, large swaths of Syria have been turned into piles of rubble.
Libya: Fighting continues in several areas and attacks on oil facilities are on the rise. The Bahi and Mabruk oil fields were struck late last week and some group blew up the main oil pipeline leading from the 200,000 b/d El Sarir oil field, Libya’s largest, halting the oil flow to the export terminal at Hariga. These oil fields are in the center of the country  some 300 miles east of Tripoli. The National Oil Company says the 25,000 guards it employs to protect its facilities are not enough and threatens to completely shut down production if these attacks continue.  Before the recent attacks, the country was thought to be producing about 300,000 b/d. About 100,000 b/d is coming from safe offshore fields and another 100,000 b/d is being exported from a smaller terminal close the Egyptian border, which has been isolated from most of the turmoil.
Iran:  There were few new developments in the nuclear negotiations last week. Iran’s Supreme Leader is said to have responded to a letter from President Obama saying that he is willing to approve a nuclear deal provided it is in Iran’s interests. Hardliners in Tehran, Washington, and Jerusalem continue to warn that any agreement would only be a sell-out to the other side.  Most of the attention last week was focused on Prime Minister Netanyahu’s planned speech to the US Congress in early March and the damage such a speech might do to Israel’s relations with the White House. The nuclear talks are supposed to reach some sort of agreement by the end of March. Beijing, for one says, it is opposed to a third extension of the talks.
The outcome of these negotiations remains critical to the future of Middle Eastern oil production so long as Israel says it will use military force to halt Tehran’s uranium enrichment programs. Recent rhetoric in the Israeli election campaign is taking the line that Prime Minister Netanyahu does not have the courage to order an attack on Iran’s nuclear facilities while his rival Isaac Herzog would. So far the polls seem to say that Netanyahu is comfortably ahead.
3. Russia/Ukraine
The ceasefire, which went in at midnight Sunday, was pretty well observed the next day; however shelling by the rebels continued around the hotly contested town of Debaltseve where the local rebel commander refused to observe the ceasefire. Ukrainian troops are under orders not to fire back unless directly attacked or civilian areas are shelled.  The US says that Russia joined separatist forces in the all-out attack on Debaltseve just before the ceasefire and is increasing the flow of arms and munitions to the rebels. In the meantime Germany warned Moscow of the high price it will have to pay for violating the ceasefire.
Last week the IMF announced a new $17.5 billion bailout for Ukraine so it can shore up its public and private finances. The IMF has already loaned $4.5 billion to Ukraine bringing the total given and pledged to $22 billion. Gazprom has already asked for the $3 billion that it says is owed to it by Ukraine.  Moscow has published a list of 199 companies that it says will be eligible for state bailouts during the current economic crisis. Included on the list are Rosneft and Gazprom, the country’s largest oil and gas producers. 
There was little news of the Russian oil industry last week. Rising oil prices have given a boost to the ruble, which is now back up to 63 to the dollar.
4.  Quote of the Week

  • “The decline in the U.S. rig count likely remains well short of the level required to slow U.S. shale oil production to levels consistent with a balanced global market. Lower oil prices will be required over the coming quarters to see the U.S. production growth slowdown materialize.”
                    — Goldman Sachs, from a note on Tuesday, in which they forecast a likely 615,000 b/day increase in oil production by 4thQ from the Big 3 shale basins: Bakken, Eagle Ford, Permian.

5.  The Briefs
The IEA’s Chief Economist Fatih Birol will replace Maria Van Der Hoeven as Executive Director in September. Birol, 56, who joined the IEA 20 years ago, has responsibility for its annual World Energy Outlook, which makes long-term forecasts on global energy supply.  He has been the agency’s chief economist since 2006. (2/14)
Big oil companies had a poor record of finding and producing oil and gas last year, according to figures out in the past week – and big cuts in spending in response to falling crude prices could undermine their plans to turn that around. Four of the world’s six biggest oil firms by market value – Royal Dutch Shell, Chevron, BP and ConocoPhillips – released provisional figures showing together they replaced only two-thirds of the hydrocarbons they extracted in 2014 with new reserves. Combined, those four and industry leader Exxon Mobil posted an average drop in oil and gas production of 3.25 percent last year. (2/9)
Offshore rig owners are having to make tough decisions on whether to continue to market or cold stack currently active rigs in addition to retiring older or long-idled rigs. Of the world’s current fleet of 861 jackups, drillships and semi-submersibles, there is little doubt that the idle and retired rig counts will increase dramatically during the remainder of 2015.  Some of it will be due simply to existing contracts coming to an end and/or options not being exercised, but early rig releases will also be responsible for adding to the numbers. Additionally, 87 new-build offshore rigs will be added to the fleet during the remainder of 2015. (2/12)
Shale gas and oil: The United States, Canada, China, and Argentina are currently the only four countries in the world that are producing commercial volumes of either natural gas from shale formations (shale gas) or crude oil from tight formations (tight oil). The United States is by far the dominant producer of both shale gas and tight oil. Canada is the only other country that produces both shale gas and tight oil. (2/14)
Total SA plans to eliminate 2,000 jobs by 2017 and sell assets worth $5.5 billion this year as the French oil and gas group adapts its business to a world of sharply lower oil prices. The company, one of Europe’s biggest oil producers, said it would freeze the hiring of new staff at its production, refinery, and petrochemicals operations as part of plans to cut costs by $4 billion this year.  The company said it can turn a profit when oil prices are at $70/barrel. (2/12)
In the Middle East, the startup of two huge oil refineries earlier this year is set to shake up fuel markets from Asia to Europe as the oil-producing region expands its influence beyond just exporting vast amounts of unprocessed crude. The projects, together with a third large refinery that began operating in Saudi Arabia last year, are expected to process 1.2 million barrels of oil a day at full capacity in the next few months, equivalent to slightly more than 1% of the world’s total oil-refining capacity. (2/9)
Somalia may start producing oil and gas by 2020 after exploration work showed the potential for “huge” deposits of the resources in the Horn of Africa country, outgoing Petroleum Minister Da’ud Mohamed Omar said. Somalia is considering its first bidding round for oil blocks since 2009 as increasing stability begins to attract more foreign investors. (2/12)
South African President Jacob Zuma said his priority is to solve the energy crisis in the country that’s curbing output at mines and factories and stifling economic growth, including adding more nuclear power by 2023. Zuma delivered the remarks in his annual state-of-the-nation speech in Parliament in Cape Town. (2/13)
Petroleo Brasileiro SA halted drilling at its largest oil discovery in deep waters, underscoring the technical challenges it faces. An unplanned procedure to retrieve equipment stopped work for more than a week at a well in Libra. Commercial production is expected to start in 2020. While Petrobras expanded output to a record in December at the so-called pre-salt region that holds Brazil’s largest deposits, it has also run into drilling disruptions in the past. In 2010, it abandoned the first well it started at Libra. (2/11)
Deadly explosion: Norway’s BW Offhore Ltd. Thursday said five people were killed and four are still missing following an explosion on a Petroleo Brasileiro SA vessel off the coast of southeastern Brazil. There were a total of 74 people onboard the platform. (2/12)
Venezuela is considering a request from oil companies to cut taxes as a way of coping with a crash in prices and encouraging investments. The proposal is to lower royalties and extraction taxes to 20 percent from 30 percent.  Venezuela is looking at ways to attract more investment from the national oil company’s joint venture partners. (2/14)
Venezuela had its credit rating lowered by Standard & Poor’s, which said the government would struggle to implement changes needed to shore up the economy. Venezuela’s gross domestic product could shrink as much as 7 percent this year after the 60 percent plunge in prices for oil since June, S&P said. The commodity accounts for 90 percent of exports and the decline in prices means the government has less room to adjust policy and avoid a default. (2/10)
Total Canadian crude oil production increased 8 percent to 3.8 million b/d for 2014.  However, the heavier grade of crude oil that comes from tar sands held more or less steady at 1.7 million b/d on average during the last six months of 2014. Production of heavy Canadian crude oil increased 1 percent from June to December. During the same period in 2013, production of heavy Canadian crude oil increased 10 percent.  The slowdown reflects the fact that Canadian oil output is expensive to produce. (2/12)
Talisman Energy Inc., the Canadian producer being acquired by Spain’s Repsol SA, reported about $1.37 billion in one-time charges for the fourth quarter as it reduced the value of certain assets because of slumping crude-oil prices. Values for its investment in the Eagle Ford, in the Kurdistan region of Iraq, in its North Sea assets and in a joint venture with Colombia were all reduced. (2/10) 
TransCanada Corp, despite the years-long fight over Keystone XL, will apply to the US State Department to build a 200-mile pipeline from North Dakota’s booming oil fields across the border into Canada to connect to TransCanada’s planned pipeline Energy East. The company will announce it is proposing the $600 million Upland Pipeline Project, which aims to transport up to 300,000 barrels a day of North Dakota crude to a connection in Saskatchewan. (2/13)
U.S. oil drillers idled rigs for the 10th straight week, extending an unprecedented retreat in drilling and dragging the nation’s total rig count down to the lowest level in almost five years. Rigs targeting oil in the US dropped by 84 to 1,056 while those drilling for gas slipped by 14 to 300, Baker Hughes Inc. said. The total U.S. count fell by 98 to 1,358. More than 400 rigs have been shut down within the past two months, erasing tens of thousands of jobs and shrinking estimated exploration and production spending by more than $116 billion. (2/14)
Arctic access: The US Interior Department said it’s closer to opening the Chukchi Sea off the Alaskan coast to energy explorers after a lengthy court battle. The federal government published its final environmental impact statement on a lease plan first unveiled in 2008. The lease was tied in up the court system amid complaints about the extent of environmental vetting. (2/14)
Imports of light sweet crude oil into the southern United States have gone from around 1.3 million barrels per day to a trickle, U.S. government data show Tuesday. (2/11)
In Oklahoma, analysis from Wood Mackenzie finds the South Central Oklahoma Province, or SCOOP, to be economical with a price to produce West Texas Intermediate crude oil, the US. benchmark, as low as $41 per barrel, more than 15 percent below the current price. Wood Mackenzie said the shale area was on par with the Eagle Ford basin in Texas and Bakken. The area has some of the largest producing wells in the Lower 48. Wood Mackenzie expects production to surpass 1 million barrels of oil equivalent per day by 2020.
North Dakota: A combination of low oil prices and tumbling rig counts is assisting operators in complying with a state mandate to reduce flaring of associated natural gas production. (2/14)
Tax relief: The countdown has begun on North Dakota’s oil tax relief trigger. When West Texas Intermediate (WTI) stays below $52.58 (2015) for five consecutive months, then the state waives its 6.5 percent oil extraction tax. Since January crude prices averaged $47.98 per barrel, the trigger took effect February 1st. As long as the price stays below $52.59 for the next four months, the incentive will be the law. (2/12)
In Pennsylvania, Governor Tom Wolf proposed a severance tax on gas extraction in the state to help right the state’s economic ship. He said taxes on shale gas will help schools, but an energy coalition working in Pennsylvania said it will discourage capital spending. The state hosts the Marcellus shale natural gas formation, which accounts for almost 40 percent of all shale gas produced in the United States. (2/13)
In Alaska, Exxon Mobil said it submitted a draft environmental report to federal regulators for a $500 million liquefied natural gas project. The Alaska LNG project has foundations in production from Prudhoe Bay and Point Thomson fields in the state, which combine for an average 3.5 billion cubic feet of natural gas per day. Exxon says it represents the largest investment in Alaska’s history, with roughly 1,000 permanent jobs expected from the facility. (2/13)
Steelworkers strike: Equipment failures have occurred at three refineries amid the biggest strike of U.S. oil workers since 1980. United Steelworkers union members have walked out of nine U.S. refineries since Feb. 1 that account for about 13 percent of the country’s processing capacity. (2/12)
Building bust: In Houston, the need for more office space is drying up, thanks to a drop in oil prices that has spun energy companies from an outlook of optimism and growth to anxiety and cutbacks. Oil prices have fallen by more than 50% since June. Demand for office space is “going to basically stop.” (2/11)
Halliburton/BHI: Ahead of a planned merger, oil services companies Halliburton and Baker Hughes said they’ve received “expected” and “standard” anti-trust queries from the Justice Department. Separately, the two companies are the largest of their kind. Both companies are facing pressure from low oil prices. Last month, services companies Baker Hughes, Halliburton, along with rival Schlumberger, all announced staff reductions. On Tuesday, Halliburton announced plans to lay off up to 6,400 of its 80,000 worldwide work force. (2/12)
Crude exports: A public opinion survey on foreign trade in U.S. crude oil, conducted for a pro-export group, was criticized as shoddy by those backed by a refinery coalition.  FTI Consulting was hired by the Producers for American Crude Oil Exports to gauge public opinion on trade policies governing the US energy sector. It found 69 percent of those likely voters supported policies that would allow “producers to sell crude oil to customers in countries who are trading partners” with the United States. (2/12)
Oil train cars: The Obama administration revised its proposal to prevent oil trains from catching fire in derailments, giving companies more time to upgrade their fleets but sticking with a requirement that new tank cars have thicker walls and better brakes. (2/13)
Oil on rails: A $325 million commitment from BNSF Railway Co. will help meet the growing needs in the oil-rich state of North Dakota, one of the state’s senators said. BNSF early this week said it was investing in continued construction and upgrades to its rail network in North Dakota, including a centralized traffic control center meant to improve traffic efficiency through the state. (2/13)
Natural gas prices: EIA reduced its Henry Hub spot price estimate for the first quarter of 2015 by 34 cents to $2.89/MMBtu. EIA noted that the Henry Hub spot price for January averaged just $2.99/MMBtu, a decline of 49 cents from December and the first monthly average price under $3/MMBtu since September 2012. (2/11)
US regular gasoline retail prices are expected to average $2.33 a gallon in 2015, down from $3.36 in 2014, according to the EIA. As a result, the average household is now expected to spend about $750 less for gasoline in 2015 compared with last year. (2/11)
Japan, previously one of the world’s largest producers of nuclear-generated electricity, has relied heavily on fossil fuels following the meltdown at Fukushima Dai-ichi and subsequent shutdown of all the country’s nuclear power stations. The Japanese government anticipates bringing online a few nuclear facilities in 2015. Nuclear reactor restarts could begin as soon as May. (2/12)
Fukushima fallout: As reports from individuals talk about exploding rates of thyroid cancer in children, as well as an epidemic of leukemia, heart attacks, and other health problems, the Abe-led government and US continue to sweep the fallout of the Fukushima disaster under the rug. Cancer rates have exploded at an increase of almost 6000 percent in areas near the reactor meltdown. Mainstream media stays completely silent. (2/9)
In Japan there are more electric-car charging points than there are gas stations. That surprising discovery comes from Nissan Motor Co., which reported that the number of power points in Japan, including fast-chargers and those in homes, has surged to 40,000, surpassing the nation’s 34,000 gas stations. (2/13)
US droughts: Several independent studies in recent years have predicted that the American Southwest and central Great Plains will experience extensive droughts in the second half of this century, and that advancing climate change will exacerbate those droughts. But a new analysis released today says the drying will be even more extreme than previously predicted—the worst in nearly 1,000 years. (2/14)
In Brazil, the metropolitan area of Sao Paulo, the world’s 12th-largest metro population at more than 20 million, is served by two main natural water systems — the Cantareira and Alto Tiete reservoir networks, which barely have any water in them. The Cantareira is only 5 percent full, and the Tiete is at less than 15 percent of capacity. This is an issue that water conservation advocates and scientists have warned about for decades. (2/14)
More water problems: Energy-starved Pakistanis, their economy battered by chronic fuel and electricity shortages, may soon have to contend with a new resource crisis: major water shortages, the government warned this week. A combination of global climate change and local waste and mismanagement have led to an alarmingly rapid depletion of Pakistan ’s water supply. (2/13)
Nigeria’s election agency put off a closely contested presidential election after weeks of pressure to postpone it from the ruling party, which analysts say was facing potential defeat for the first time in more than 15 years. The move is sure to anger the opposition, which has been arguing against a postponement, and inflame its supporters in a volatile electoral environment. (2/9)
Nigeria’s currency fell to a record low after the decision by Africa’s largest oil producer to postpone elections increased risks the continent’s worst performing currency will be devalued. (2/10) 

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, Oil, tight oil