Quote of the Week
[Advocating for U.S. oil exports:] "It is time to build policies that reflect our newfound [oil] abundance, that view the future with optimism, that recognize the power of free markets to drive innovation, and that proceed with the conviction that free trade brings prosperity and progress."
— Rex Tillerson, CEO ExxonMobil
1. Oil and the Global Economy
After holding relatively stable since early February, oil prices fell sharply last week. At the close Friday New York futures were down 9.6 percent for the week to $44.84, a six week low. London’s Brent was down 8.5 percent to close Friday at $54.67 after having been up to $63 in mid-February. When the decline in US rig counts quickened in mid-January, the markets assumed that US shale oil production would soon begin to fall leading to prices rebounding from lows of about $43 in New York and $45 in London. Last week new reports from the IEA in London forecast that US oil production will continue to increase for the next few months despite the drop in active drilling rigs. This is partly due to backlog of 2000+ wells that have been drilled but have not yet been fracked and could be brought into production relatively quickly. Horizontal drilling in shale has become more efficient as more multiple wells from the same drilling pad are being drilled and oil companies now are confining themselves to drilling mainly in the most productive “sweet spots” where they will get the highest initial yields.
The IEA was more forthright than usual in in its forecasts last week when it said the oil glut still had a ways to go and that prices would likely continue to fall. It also reported that US oil production was up by 115,000 b/d in February. This was enough to trigger the sharp sell-off on Friday. Although the IEA said that US crude stocks “may soon test storage capacity limits”, many analysts say this is unlikely. The US refinery strike is close to settlement and the late-winter refinery maintenance period is almost over. This means that demand for crude from refineries should be increasing shortly; and coupled with the likely drop in shale oil production later this year it seems doubtful that crude storage capacity in the US is going to run short. Cushing can still take another 20 million barrels or so. The EIA, however, reported last week that crude in US storage facilities was up by 50 million barrels since the beginning of the year, which is why some are worried about storage capacity. In addition, the US Department of Energy plans to buy 5 million barrels of crude to inject into the nation’s underground strategic reserve removing it from commercial storage tanks.
Another important factor in the decline of oil prices last week was the strength of the US dollar, which at one point last week hit a 12-year high against a basket of currencies.
The IEA also increased its forecasts of the growth in global oil demand this year and reported that consumption growth was up by 900,000 b/d in the fourth quarter of 2014 as compared with the same quarter in 2013 likely due to lower prices and Chinese stockpiling. The Agency increased its forecast demand increase for 2015 to 1 million b/d taking global demand to 93.5 million b/d this year. US production now is expected to grow by 760,000 b/d in 2015 as compared to 2014. This is rather small as compared with US production growth during 2014 which was 1.6 million b/d. Citigroup also expects US oil production to grow by 700,000 b/d this year.
North Dakota reported last week that its production in January, usually a bad month for production increases due to the weather, fell to 1.19 million b/d from the record 1.23 million in December. Well completions during the month were down to 47 from 183 in December. The state says it needs 115 new well completions a month to maintain the 1.2 million b/d pace of production as the older wells rapidly. Bakken crude was selling at the wellhead for an average of only $31.41 in January down from $40.47 in December. Even with the recent rebound, Bakken crude at the wellhead is still going for around $32 a barrel, which is well below what even the most optimistic say is the cost of production. Whiting Petroleum Corp., the largest producer in North Dakota, put itself up for sale last week. Exxon, which has large revenues outside of the shale oil business, is said to be interested in acquiring the firm at what is expected to be a good price.
The IEA had some new things to say in its Medium Term Oil Market Report that projects out five years. Previous IEA longer-term forecasts were made prior to the time when the full extent of the oil price decline became apparent. The agency now believes the current decline has little in common with previous major price drops in 1986, 1998, and 2008, in that the emergence of large quantities of expensive US shale oil has been a major feature of global oil production in recent years. The Chinese economic slowdown; phase-out of subsidies in several large countries; and currency depreciation vs. the price of oil are likely to dampen any large increase in global demand despite the low prices. A lot of the recent demand increase is thought to be temporary such as the Chinese filling their strategic reserve. However, the Agency expects that while the growth in US shale oil and Canadian tar sands production will slow in the next five years, it will remain an important factor in any growth in supply out to 2020.
US shale oil is seen as highly resilient in that production can slow down and speed up rather quickly in response to prices as compared with the massive offshore drilling platforms which take years to get into production and are difficult to halt during times of low prices. This suggests to the IEA that there will be a strong rebound for the shale oil industry when prices return to “economic levels.” It should be noted, however, that the IEA has become enamored with US shale oil production in recent years and sees the possibility of increasing production ahead despite the warnings of independent analysts that there is only a very limited amount of oil in the “sweet spots” where production even approaches being economical, and that most of the industry has had a negative cash flow since its inception.
2. The Middle East & North Africa
Iraq: While most attention has been focused on the government/Shiite offensive to retake Tikrit and eventually Mosel, troubles for Iraq’s oil industry have been growing rapidly. With its revenues cut in half by low oil prices and the growing costs of the war against ISIL, Baghdad no longer has the money to pay for the costs of growing its oil supply. The easy answer has been to delay payments to the Kurds for the oil they are producing and selling through Baghdad’s oil marketing authority and even for the share of Baghdad’s oil revenue earmarked for Erbil. This means that the recently negotiated revenue sharing agreement between Baghdad and Erbil is in danger of collapsing.
Foreign oil companies operating in Iraqi Kurdistan, which are having trouble getting paid, are cutting back on their drilling in the province due to the problems marketing their oil and low prices. In southern Iraq where foreign oil companies have had success in increasing oil production in recent years, there are still larger problems. The foreign companies are paid their “service fees” in barrels of oil. As prices are now roughly half of what they were last year, the government has had to double the number of barrels it pays the foreigners thereby cutting into its revenue still more than the decline in prices would suggest. Iraqi oil production may not be increasing very much if at all in coming years as the situation continues to deteriorate and the sectarian fighting increases.
The only good news is that the low oil prices and the coalition bombing campaign against its oil production facilities have cut ISIL oil revenues considerably. ISIL can live for a while on the loot it gained by occupying Mosel last year, but in the long run it needs revenues to maintain itself and the country it is trying to run. Revenues are hard to find for a desert “state” whose friends are mostly jihadists, and whose enemies are legion.
Libya: Despite UN efforts to get the two governments to settle their disagreements, little progress is being made. In the meantime ISIL in Libya is becoming more active and has begun to attack oil installations. Although ISIL does not have the manpower to seize oil facilities, it has been able to conduct hit and run raids with the objective of hurting the country’s oil industry. Last week in an attack on an Austrian-run oil field, ISIL captured nine foreign workers in addition to the three they captured in February.
The ISIL force now seems to be so firmly entrenched in the city of Sirte that a brigade sent to dislodge them is afraid to enter the city allowing ISIL forces can come and go as they please. The split government is clearly allowing ISIL to survive and grow in Libya.
It is hard to say just where Libya’s oil production is. Despite all the disagreements and attacks, much of what was once a 1.6 million b/d oil production infrastructure is still in place although disruptions for various reasons are constantly going on. From time to time the National Oil Company announces some production number. Last week it reported that the country exported 2 million barrels of oil from the eastern oil fields where production is said to be 245,000 b/d. The fields in the eastern part of the country are run by the Arabian Gulf Oil Company and are relatively isolated from the conflicts in the central and western parts of Libya.
Libya is still exporting some 80,000 b/d from offshore fields so that when other oilfields that come on and off line are counted, total production may be on the order of 400,000 b/d. In general the political/insurgency situation continues to deteriorate and with the continuing kidnapping of foreign oil workers, we are likely to see reductions in exports in coming months.
Iran: Although there is much optimism in Washington and Tehran that a nuclear agreement can be concluded, it is still unclear whether the nuclear negotiations will be successfully concluded before the end of March deadline. Most say the deadline will not be extended again. Sticking points seem to be how fast the sanctions would be lifted and how intrusive inspections of Tehran’s nuclear facilities will be. The Iranians are insisting that all sanctions be lifted immediately and the West is unlikely to accept an agreement without rigid inspections of all things nuclear in Iran and a clear indication that Tehran will not cheat or interfere with inspections. In the meantime, the atmospherics surrounding a possible agreement are raging in Washington where they have become a major point of political contention and Israel where they are a key issue in this week’s elections.
No matter what happens in the next month, the outcome of the talks is sure to have some impact on the world oil markets. It the sanctions are lifted quickly and to a significant extent, Tehran, after a period of ramping up, could bring as much as 1 million barrels of additional oil to saturated markets. This would be sufficient to offset any likely decline in US shale oil production or further disruptions in Libya and extend the period of very low prices.
Should the talks fail, there are numerous things that could happen. Additional US sanctions, as mandated by Congress, are unlikely to have a significant impact. Of more importance is what the EU and China do with the sanctions and the course of the Iraqi/Syrian situation. The Israeli elections this week also might be a clue as to future developments. While opponents of the treaty are calling for stepped up sanctions to force Tehran into giving up all nuclear activities, this does not appear to be a realistic option as Tehran is unlikely to give up its “right to enrich.” Any military action against Iran could easily grow in major disruptions of Middle Eastern oil supplies as Tehran would almost certainly retaliate. If oil exports from the Gulf were to be seriously reduced, it would be a catastrophe for the global economy given the share of would oil consumption that comes from there.
Faced with the twin problems of slowing demand and pressure to make significant progress in improving the air quality, China’s economy is facing a “new normal” of lower industrial growth, shuttered factories, large scale layoffs, and likely lower demand for imported oil. For now the country is on a buying binge, importing large quantities of oil and other commodities at what were not long ago considered unbelievably low prices. This is likely to be a temporary phenomenon as there is only so much that the stockpiles can economically hold. In the meantime, however, China is saving an estimated $200 billion a year on its oil import bill alone. These and other savings on imported raw materials are giving a major boost fully equivalent to some of the other stimulus measures Beijing have been taken recently. New figures on February imports released last week showed copper imports falling by the most in four years and imports of soybeans, oil, and iron were the weakest in recent months.
At the National People’s Congress last week, Premier Li pledged to get the economy moving, but said that it will be difficult to attain the goal of an “about 7 percent” growth rate this year. Li noted that China’s economy is now a $10 trillion operation so that a seven percent increase is larger than many middle-sized economies.
One piece of good news for China’s people, and the rest of us for that matter, is that the country’s carbon emissions dropped by 2 percent in 2014 as coal consumption slowed in favor of natural gas, nuclear and renewables. Beijing is clearly making progress in its efforts to clean up the environment, especially the unhealthy air quality that plagues most cities. Beijing has approved the construction of the country’s first new nuclear reactors in more that two years. China now has 24 operational reactors and has 25 reactors, out of a world total of 68, under construction. Following the Japanese nuclear disaster, China slowed approval of new designs following a safety review. Beijing is aiming to have 58 gigawatts of nuclear power online by 2020 as compared with 20 gigawatts today.
Not much oil news about Russia last week. The drop in oil prices sent the ruble back down to around 63 to the dollar again after a six-week period of better oil prices. Russia’s Energy Minister says his country expects to export more oil this year as a weaker economy is cutting domestic oil consumption. Moscow’s plan to bail out major corporations using its sovereign wealth fund money seems to be running into trouble. So far the requests for money total $37 billion, but this is likely to increase, as many Russian firms no longer have any other source of financing.
Russia’s economy is in serious trouble; new car sales in February were down 38 percent over last year. America is clearly not popular these days as Chevrolet sales were off by 74 percent. There has been a substantial increase in car prices, as many components have to be imported. Despite the trouble, the long suffering people who saw far worse back when the Soviet Union collapsed 25 years ago, still seem to be happy with the government’s position regarding Ukraine as they are getting little news other than what the Kremlin wants them to hear these days.
An EU summit is scheduled later this week to discuss the sanctions. Germany and other members will push for a declaration that will not allow the sanctions to be lifted until Russia complies with the Minsk agreement and ceases its aid to Ukrainian separatists. The fighting in the Ukraine has dropped off since the ceasefire, but both sides are accusing the other of treaty violations.
5. The Briefs
As OPEC ‘s refusal to curb oil production contributes to a nine-month plunge in prices, a new paper suggests the group’s days may be numbered. A paper by the World Bank Group shows how difficult it can be to maintain a commodities cartel in the face of market forces and technological advances. (3/11)
Saudi nuclear wrinkle: Saudi Arabia quietly signed its own nuclear-cooperation agreement with South Korea. That agreement, along with recent comments from Saudi officials and royals, is raising concerns that a deal with Iran, rather than staunching the spread of nuclear technologies, risks fueling it. Saudi Arabia’s former intelligence chief has publicly warned in recent months that Riyadh will seek to match the nuclear capabilities Iran is allowed to maintain as part of any final agreement reached with world powers. (3/12)
French oil refiners may close more than one plant as fuel demand weakens, following losses of as much as 3.5 billion euros over the past six years. (3/11)
In Egypt, BP said it has made a significant offshore gas discovery days after announcing plans to help invest around $12 billion to develop gas and condensate from its West Nile Delta project. The discovery and investment in Egypt’s energy sector is welcome news for the country, which is facing its worst energy crisis in decades amid rising demand and falling gas production. (3/10)
Balkan nations on the Adriatic Sea plan to build a new gas pipeline and connect their networks in a move that may help reduce Europe’s dependence on energy imports from Russia. (3/11)
Turkish gas hub? Russia says it will stop sending natural gas to Europe through Ukraine and will start sending it through Turkey. Some critics say Turkey is not prepared to play such a role. Ankara will need to understand the gas market, know the buyers, predict prices and build places to store natural gas. (3/12)
Operators at the Leviathan natural gas field off the Israeli coast said a Palestinian group canceled a $1.2 billion purchase contract. Leviathan is one of the largest regional gas fields, with an estimated 18 trillion cubic feet of reserves. Development was curtailed in late 2014 when the Israel Antitrust Authority said Delek Group and its partners at Noble Energy held a monopoly over the gas reservoirs off the nation’s coast. (3/13)
In Nigeria, Barclay’s energy analyst Miswin Mahesh sees a “huge risk” of the nation’s oil production being disrupted by political instability arising from elections scheduled for March 28. The vote is set to be the most closely contested since the end of military rule in 1999. (3/9)
In Venezuela, an association of South American countries urged the region to help the nation keep basic goods on the shelves, after a delegation met with President Nicolas Maduro. (3/9)
Mexico lowered the country’s estimates for proven oil reserves 3.1 percent to 13.02 billion barrels from a year earlier and Pemex cut its 2015 production forecast by 100,000 b/d to 2.288 million after crude prices collapsed and its budget was reduced. (3/13)
Mexico’s Pemex plans to take part in the first two public tenders of the Round One opening of the country’s oil and gas industry. Mexico has already announced terms and conditions for the first phase of the sector opening, which follows a reform finalized last year that ended Pemex’s 75-year-old oil and gas monopoly in a bid to attract more private investment. The first two tenders include one for 14 production and exploration areas and the second for five contracts spread over nine production fields. (3/13)
Canada’s oil-sands producers will be forced to reduce waste water and to clean up and restore mined land within a decade as Alberta seeks to reduce environmental damage. Regulations announced on Friday include limits on water withdrawals from the Athabasca River in the Canadian province’s north. Companies will also be required to slow the growth of tailings ponds. (4/14)
In Canada’s Northwest Territories, oil and natural gas production from frontier prospects is on a steady decline. The regional government estimates the western area may hold as much as 37 percent of the marketable light crude oil in Canada and as much as 35 percent of its gas. Yet production was down around 25 percent for oil and 17 percent for natural gas when compared with production figures from 2010. (3/12)
The US rig count for on-shore oil fields continued to shed rigs this week, falling by 56 to 866, Baker Hughes said. In the big three onshore basins, rig counts fell by 23 to 305 (in the Permian) for the week ending Friday, by two to 127 (Eagle Ford) and by four to 104 (Bakken). The country has sidelined 709 oilrigs in the last 14 weeks as a price collapse has prompted the nation’s energy producers to cut billions in spending and eliminate thousands of jobs. (3/14)
Drilling in the arctic waters of Alaska should proceed this year assuming timely approval from the US federal government, Royal Dutch Shell said Thursday. Shell’s preliminary drilling program in arctic waters off Alaska in 2012 was plagued by problems, including a grounded drilling rig, violations of air pollution limits, engine failures on a tow ship and an oil spill containment system damaged during testing. (3/13)
Keystone nyet? Facing re-election and $4 a gallon gasoline, President Barack Obama sounded like an enthusiastic supporter of the Keystone XL pipeline. Now when Obama describes the next proposed Keystone segment he says it will only create about 300 jobs. Last week, he said the process of extracting crude from the Alberta oil sands is “extraordinarily dirty.” While the White House insists Obama hasn’t made up his mind, some analysts say his rhetorical shift suggests otherwise. (3/14)
Exxon Mobil and Royal Dutch Shell may withstand the oil price collapse better than their rivals because they are closer to finishing expensive investment projects while others must keep spending. The near halving of oil prices since June is likely to send all the biggest listed oil companies into negative cash flow this year, and has sparked a rush to cut costs across the sector as a result. (3/11)
BP’s oil spill: The US is fighting a judge’s decision that shaved more than $4 billion off the maximum pollution penalties BP must pay for its 2010 Gulf of Mexico disaster. The spill size was set in January by U.S. District Judge Carl Barbier in New Orleans at 3.2 million barrels. The US estimated the spill at 4.2 million barrels, which could have triggered a maximum $18 billion fine. (3/14)
Oil on rails: Sarah Feinberg, the acting head of the Federal Railroad Administration, said the energy industry must do more to control the volatility of its cargo. “(We) are running out of things that we can put on the railroads to do,” she said. “There have to be other industries that have skin in the game.” (3/14)
Oil off rails: Lower speed limits for railroads may be ineffective at keeping oil trains on the tracks and preventing massive fireballs, such as those triggered in a series of recent derailments, the chief US railroad regulator said. (3/14)
Rail in Canada: Ottawa is strengthening proposed new safety standards for rail cars carrying crude oil, requiring thicker steel and other improvements after a 2013 derailment killed 47 people. The latest proposals go beyond earlier announcements by requiring rail cars carrying crude to have thicker steel, full “head shields,” mandatory thermal “jacket” protection among other upgrades. Canada continues to work with the U.S. on rail standards, the document said, adding the U.S. will make its own decisions. (3/12)
In California, the latest in the ongoing investigation into regulators’ failure to protect residents from toxic oil industry waste streams has led to the closure of 12 more underground injection wells. The 12 wells that were shut down this week are all in the Central Valley region, ground zero for oil production in the state. California has roughly 50,000 underground injection wells. (3/9)
California’s petroleum regulators acknowledged lax oversight by the state had allowed oil and gas industry contamination of protected water aquifers and other threats to public safety, and they pledged to intensify protection of water sources and public health. A scathing Senate hearing examined what regulators conceded were decades of improperly permitted injection by the oil industry into federally protected water aquifers, as well as state approval of what appeared to be illegal use of potentially dangerous high-pressure steam injection into oil fields. (3/11)
Oregon has become the first state to begin collecting truck and automobile taxes by the mile rather than by the gallon. The “pilot” program begins July 1 — and will be implemented by the Oregon DOT in partnership with something called Sanef ITS Technologies America and Intelligent Mechatronic Systems. Under the program your car must be fitted with some type of real-time monitoring device that keeps track of your mileage and reports it to the government who will then either send you a bill or perhaps automatically debit your account. Kind of like federal tax withholding on wheels. (2/14)
Offshore wind: One of the main barriers to a diverse energy economy in the US is an investment scenario that benefits oil and gas, an ocean advocacy group said. The European Commission this week announced some member states had already met their 2020 goals for renewable energy development. While solar power in the United States is gaining momentum, sectors like offshore wind have yet to reach commercial capacity. (3/12)
Dilemma in Pakistan: World leaders have fretted for years that terrorists may try to steal one of Pakistan’s nuclear bombs and detonate it in a foreign country. But some Karachi residents say the real nuclear nightmare is unfolding here in Pakistan’s largest and most volatile city. On the edge of Karachi, on an earthquake-prone seafront vulnerable to tsunamis and not far from where al-Qaeda militants nearly hijacked a Pakistan navy vessel last fall, China is constructing two large nuclear reactors for energy-starved Pakistan. (3/9)
In China, a sample of powdered tea imported from Japan had 9.3 times the legal maximum level of radioactive cesium 137 allowed in food, the Hong Kong government announced Thursday. (3/13)
Japan is continuing to re-embrace coal to make up for its lack of nuclear energy, with plans for another power station released Thursday bringing the number of new coal-fired plants announced this year to seven. Utilities in Japan are eager to take advantage of coal’s relative cheapness to give them a competitive edge at a time when other countries are seeking to reduce their greenhouse-gas emissions by moving away from coal. The liberalization of Japan’s power industry by 2020 will pit power companies against each other as rivals for the first time. (3/13)
Dehli’s modest effort to warn residents about unhealthy spikes in air pollution levels in real time may soon end, after a decision to first send the data to be authenticated by the central Indian government. Some experts and activists immediately questioned the need for such checks, accusing the government of trying to hide — or worse, alter — data that shows Delhi’s air to be the world’s most toxic at a time when Prime Minister Modi is pushing for greater industrialization. (3/12)
Ethiopia’s plans to build Africa’s largest hydroelectric dam on the Nile have sparked tensions with Egypt, which depends on the river to irrigate its arid land. In 2011, when Ethiopia began to dam up the river’s largest tributary, the Blue Nile, it looked like Egypt might carry out its long-standing threat to go to war to protect its lifeline. But after years of tensions, an international agreement to share the Nile’s waters may be in sight. (3/13)
California’s drought: Given the historic low temperatures and snowfalls that pummeled the eastern US this winter, it might be easy to overlook how devastating California’s winter was as well. There, paltry rain and snowfall have done almost nothing to alleviate epic drought conditions. January was the driest in California since record keeping began in 1895. Groundwater and snowpack levels are at all-time lows. We’re not just up a creek without a paddle in California; we’re losing the creek too. (3/14)