Peak Oil Review – June 15

June 15, 2015

Quote of the Week

"We were on stage in a panel at an Oslo energy forum and we were pressed by people in the panel to talk about our views on climate and what our positions were…On stage, Ben [van Beurden, Shell CEO], Patrick [Pouyanne, Total CEO], Eldar [Saetre, Statoil CEO] and I said we should speak with a common voice – why don’t we do that? It came about as simple as that." 

–BP CEO Bob Dudley (Reuters, June 13)

CEOs of Eni and BG joined the initiative in the weeks that followed. The bosses of ExxonMobil and Chevron opted not to join the initiative, much to the ire of their European counterparts . 
1.  Oil and the Global Economy
For the last two months Brent crude has been trading in a $7-8 range between $62 and $69 a barrel.  New York futures have been trading about $6-7 below Brent. Much of the volatility has come in sudden jumps as the markets interpreted and reacted to news relating to the oil market. Many traders seem to be convinced that prices are still too low and that one day there will be a rebound into triple digits despite market fundamentals – oversupply of crude and generally weak economic conditions – that seem to say that prices have rebounded too much from the lows seen last winter.
This past week was no exception with Brent jumping up to $65.70 Wednesday on minor, and perfectly normal for the time of year, drops in the US crude inventory, and the perpetual hope that an economic rebound is near, while the major oil tracking organizations continued to report, perhaps wrongly, that large crude surpluses are still being produced and going into inventory.  Thursday and Friday prices fell amid concerns about the possible 2-3 million b/d oversupply, closing out the week at $59.96 in New York and $63.87 in London.
The IEA continues to be optimistic about the world oil industry, saying in its most recent Oil Market Report that global demand for oil will be up by 1.4 million b/d this year to 94 million. This increase is supposed to be due to lower prices and the illusive “economic recovery.” The Agency does say that the recent price increase could dampen demand.  The IEA also noted “exceptionally high” growth in global supplies, forecasting that OPEC crude production would remain near May’s multi-year high and boosting its projection of supplies this year from other producers
The Agency, however, acknowledged in its monthly report that world energy statistics, many of which are simply extrapolation of trends, could be missing rapid changes that are taking place in the oil markets. The bottom line is that surpluses that the IEA and EIA are estimating may not be as large as numbers allege and that the increased drilling “efficiencies” which are supposed to be keeping US production moving ever upwards at lower costs with many fewer drilling rigs, may not be as productive as some are telling us.
North Dakota, which seems to have the most accurate recent data on oil production around these days, reported that its production in April fell by 20,488 b/d from March. This is down 59,000 b/d from the high hit in December and the fourth consecutive month of declining production. These numbers are raising eyebrows as to the size of US production. The EIA says that between December and April US production was up by 256,000 b/d. This means that without North Dakota, US production between December and April would have had to be up by 315,000 b/d at a time when rig counts all over the country were plummeting.  Although this is possible, it seems far more likely that the EIA will be doing some serious revision to its 2015 domestic production numbers in the months ahead.  Since April the EIA estimates that US production has grown by another 237,000 b/d to 9.61 million at a time when rig counts continued to shrink. 
 At the G7 meeting last week the world’s leaders agreed to phase out fossil fuels by the end of the century – 85 years from now. This seems like a meaningless agreement as resource depletion, better and cheaper sources of energy, or climate change are more likely to markedly reduce the use of fossil fuels long before the end of the century.
2.  The Middle East & North Africa
Iraq/Syria:  There is growing recognition that Iraq and Syria are just one big problem that continues to deteriorate. The latest word is that US generals who have spent 12 years fighting in Iraq see no clear military way out of the mess which is likely to last for decades and are not enthusiastic about deeper US involvement. However, the US is sending another 450 advisers to train the Iraqi army though seems reluctant to send forward observers to enhance the effectiveness of air strikes.
The only bright spot at the minute are the Syrian Kurds who are making progress by liberating towns from ISIL’s control in northeastern Syria. Elsewhere nothing is going well for either the Damascus or Baghdad governments — and in the long run oil exports from the Middle East. The progress the Syrian Kurdish militia, the YPG, is making could be significant as they are cutting off access to the Turkish border from the “caliphate’s capital” in Raqqa making it more difficult to bring in volunteers and conduct trade with the outside world.
Heavy fighting has resumed near the Beiji refinery, which is no longer operational and is unlikely to be so for years to come. New ISIL attacks on the facility suggest an interest in getting hold of the large quantities of crude and oil products in storage there. Despite robust exports, Iraq’s oil revenues are lower than projected. The Kurds are still complaining that they are not receiving enough of the revenue from Baghdad to run their province, which is inundated with refugees, fight ISIL, and increase oil production.
Iran: Tehran is insistent that a nuclear agreement will be signed soon and is willing to extend the negotiations if a deal is close. President Rouhani said Saturday that he expects relief from the sanctions within a couple of months after the agreement is signed.  The pace of sanctions relief is a sticking point as is intrusiveness of the inspections. Rouhani said that Iran is willing to negotiate an “additional protocol” concerning the inspections. In recent weeks, the Ayatollah and hardliners in Iran’s power structure have been carrying on about protecting state secrets, saying other NPT signatories are not being subjected to such indignities. France is particular has been demanding that Iran come clean on its past efforts to develop nuclear weapons. To do so however would run up against Tehran’s mantra that they do not want nuclear weapons.
In the meantime, Tehran is hard at work making deals with Russia and China to ensure that it can start selling its oil as soon as restrictions are lifted, or even before. Last week a deal was announced to increase Iran’s sales to China to 1 million b/d from the current 440,000. The other deal in the works is for Moscow to market Iran’s oil in return for goods – no cash transfers involved.  This deal, however, sounds more like a Russian effort to curry favor with Tehran by offering a path around the sanctions should the negotiations fail.
Tehran is still optimistic than it can increase its current 2.8 million b/d of oil production by another million within months of the sanctions being lifted and increase its capacity to 5 million b/d by 2020. Outside experts on Iran’s oil industry are skeptical, saying that 800,000 b/d is possible but that to get much beyond that will take years.
Iran is deeply involved in Iran, Syria, Lebanon, and is now supposed to be sending cash and arms to the Taliban in Afghanistan not to mention Yemen.  With Iraq and Syria falling further in chaos, the costs to Iran are bound to increase. This week the body of an Iranian Major General is being returned from Syria, where he was killed directing the fighting against rebel advances.  All is not going well for Tehran these days.
Saudi Arabia/Yemen: The Saudi Oil Ministry issued a statement last week saying that its higher oil production over the last three months was driven by the higher demand of its customers and was not just an attempt to maintain revenues as alleged in a Wall Street Journal story. The ministry said that its production decisions were made by a team of experts in oil marketing and were approved by the nation’s senior leadership.
Despite 11 weeks of bombing by a coalition of Arab countries led by the Saudis, the Iranian-allied Houthis continue to expand the territory they control. The UN sponsored peace talks which open Monday are not expected to yield any results. The humanitarian crisis continues to grow with some 80 percent of the population, 20 million people, in desperate need of aid. The coalition blockade is not only keeping out food but also the fuel needed to run the water pumps, which keeps people alive in the arid country.
President Hadi, who was installed by the Saudis after a coup in 2011, has no real power base in the country. Most of the Army is loyal to former President Saleh, who is allied to the Houthis. Saudi bombing is unlikely to do much good and without large ground forces, which the Saudis were unable to recruit from Pakistan or Egypt, the fighting seems destined to continue until the Saudis tire of dropping bombs or the humanitarian situation becomes so dire that world pressure forces the Saudis to back off.
From the perspective of Middle Eastern oil exports the possibility of some sort of backlash from this conflict falling on the House of Saud is the real danger.
Libya:  Heavy fighting is taking place at the IS controlled city of Derna. Local militia joined with non-IS Islamists to drive the IS militia out of parts of the town and claim to have captured the city hall and police station. The IS commander, a Yemeni, was captured and an Egyptian was killed in the fighting.  Derna was the first target of the Islamist state who gradually recruited members and took over the town. Fighting started last week after a local non-Islamist commander was killed and his group declared a holy war against the IS. The anti-IS jihadists are linked with al-Qaeda.
Libya’s official government with a capital in Baida/Tobruk controls most of Libya’s oil output, but the revenue continues to flow to the Libyan National oil company in Tripoli, which distributes the revenue to both sides. Recent efforts by the Tobruk government to divert the money to its own accounts have been unsuccessful.
The National Oil Company announced Sunday that its oil production is now at 500,000 b/d up from 460,000 the week before last week.
3.  China
May oil imports fell some 11 percent from May of 2014, the steepest drop in the last 18 months. The 5.5 million b/d that Beijing imported last month were down 26 percent from the record 7.37 million b/d imported in April. Larger than normal imports earlier this year may have gone into Beijing’s strategic reserve or into commercial storage – purchased when prices were very low last winter.  With prices higher now, Chinese refiners may be pulling the less expensive oil from commercial reserves lowering requirements for imports.
Consumer price inflation last month fell to 1.2 percent, another clue that China’s economy is slowing.
 4. Russia/Ukraine
After a year of Western sanctions, many Russian companies and their suppliers in the West are finding work-arounds to bypass sanction regulations. There are many legal and semi-legal tactics being used such as establishing companies in third countries to supply the needed equipment or rerouting goods through Turkey or Brazil, which are staying out of the conflict. This suggests that it is oil prices rather than the sanctions that are doing the most damage to Russia’s economy.
Moscow is working hard to get its natural gas to the EU without passing through Ukrainian territory. The EU gets about a third of its gas from Russia and is also working hard to cut this dependency mainly by importing LNG. About half of Russia’s gas exports transit the Ukraine and Moscow has no way of cutting off the Ukrainians without hurting its customers in Europe that provide badly need foreign currency especially in the time of sanctions. Russia is working on building a “Turkish Stream” pipeline that would move the gas through Turkey and Greece.
An alternative Trans-Anatolian Pipeline would connect with the Trans-Adriatic Pipeline, which would run from Azerbaijan through Turkey and into southern Europe.  The issue is complicated by a EU lawsuit against Gazprom for charging different prices to its European customers depending on their friendship with Moscow. The EU is considering a “gas purchasing union” under which all natural gas coming into the EU would be purchased by one entity at one price rather than through individual contracts with each state. BP’s new statistical review says that Russia’s gas production declined by 4.3 percent last year as compared to a 9.8 percent decline by gas-producing members of the EU.
5. Greece
Talks between Greece and the EU failed over the weekend, although Athens says it is willing to negotiate so long as it does not have to cut pensions or raise taxes.  The official crisis will begin on June 18th if Greece fails to make a $1.8 billion loan repayment. The decision on whether Greece is in default will be up to the EU’s finance ministers. If Greece defaults, it would still be in the zone, but the EU central bank could cut liquidity to Greek banks to the point they would have to leave the zone. For a short time, there would be chaos as Greece switches currencies and establishes new economic relations. Together Germany and France stand to lose  €160 billion on their direct loans to Greece.
How this will affect the euro and ultimately the price of oil is still an open question. Presumably the euro would fall against the dollar taking oil prices lower, but markets are reacting in strange ways in recent years.
6. The Briefs
BP’s Statistical Review: An eventful 2014 in the world oil and gas markets was headlined by the US overtaking Saudi Arabia as the world’s biggest oil producer and surpassing Russia as the world’s largest producer of both oil and gas, BP PLC said in its 64th Statistical Review of World Energy released June 10. The US last year recorded the largest oil output growth in the world at 1.6 million b/d, becoming the first country ever to increase production by at least 1 million b/d for 3 consecutive years. (6/11)
In the U.K. North Sea, 67 percent of the companies working in the region have been forced to shelve projects and half have been forced to cut staff in the depressed crude oil market. (6/12)
Russia’s Gazprom said Tuesday it has been granted six extra weeks to respond to antitrust charges from the European Union. The extension gives Gazprom until mid-September to go through the case file and work on disproving some of the EU charges, or propose a settlement. (6/10)
In Russia, state oil producer Rosneft will be forced to postpone drilling a second well in the Kara Sea for at least two more years, three sources told Reuters, as a result of Western sanctions over the Ukraine crisis.  The delay will be a blow to Rosneft, which is key to President Vladimir Putin’s goal of lifting output and securing Russia’s energy dominance by exploring the Arctic. (6/12)
Russia, China’s currency and dollars: Western economic sanctions on Russia have pushed their domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman’s projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly created infrastructure funds in renminbi. (6/11)
The China National Offshore Oil Corporation is the largest producer of offshore oil and gas in China. Production statistics should therefore be pretty much indicative of what is happening along China’s coastline.  CNOOC had problems growing oil and gas production in the Bohai Bay since 2011 due to geological and environmental limitations in the Bohai Bay, its main producing area. This has resulted in the company expanding overseas. (6/11)
Egypt’s petroleum sector is currently implementing projects worth $9.4 billion, in addition to projects that have been recently completed, Egypt’s petroleum minister said on Monday. The minister described petrochemical projects as a “fundamental pillar” to maximizing the value of the nation’s petroleum wealth. (6/9)
Offshore Cyprus, a group of Israeli energy partners said they were declaring a natural gas reservoir discovered off the coast a commercial prospect. Delek Group said evaluation of drilling data led it to believe there may be as much as 6 trillion cubic feet of natural gas in the entire Cyprus A region, one of the third largest fields ever discovered in the Levant basin. (6/9)
Bribes in Africa? When British oil company SOCO began prospecting for oil in Africa’s oldest national park, drawing worldwide concern and inspiring an Oscar-nominated documentary last year, the company was adamant in denying any wrongdoing. But according to documents obtained by Global Witness, an advocacy group, SOCO appears to have paid over $42,000 to a Congolese Army officer who has been accused of leading a brutal campaign against those objecting to the company’s oil exploration in Virunga National Park. (6/10)
Nigeria’s crude oil production for May increased by 230,900 bpd, pushing the total to 1.881 bpd, according to OPEC’s monthly oil market report. (6/12)
In Nigeria, the Extractive Industries Transparency Initiative called on President Muhammadu Buhari to consider making it a priority of his government to recover the $18.1 billion unremitted oil and gas funds from oil and gas companies operating in Nigeria. (6/11)
In Colombia, the Transandino oil pipeline has been attacked three times in the last 15 days in rural areas, most recently near Cordoba city. (6/13)
Mexico’s Pemex has announced its biggest discoveries in five years, unveiling new shallow water oil fields in the southern Gulf of Mexico, off the states of Tabasco and Campeche, that could produce 200,000 b/d by mid-2018. The total proven, probable and possible reserves of the fields could be as high as 350m barrels of crude-oil equivalent. The new finds include three fields of light crude and one of heavy crude. (6/12)
The growth in Canada’s heavy and light oil production by 2030 has been revised down 1.1 million b/d, primarily due to the near 50% drop in global prices in the past several months, a senior official at the Canadian Association of Petroleum Producers said Tuesday. Low prices seem to have taken a toll, and output by 2030 will now be 5.3 million b/d, compared with a forecast of 6.4 million b/d made last June. (6/10)
In Canada, brisk demand along with supply disruptions due to Alberta’s wildfires have propelled Canadian heavy crude oil prices to their highest this year. Recent prices for Western Canadian Select heavy crude, a blend of bitumen from the oil sands and conventional heavy oil, reflect an unusually narrow discount to North American benchmark oil. (6/10)
In Alberta, Canadian Natural Resources Ltd. and Cenovus Energy Inc. said Thursday that oil-sands projects threatened by a wildfire have returned to normal operations after nearly two weeks offline. (6/13)
In Canada, oil companies have quietly agreed to pay tens of millions of dollars into a compensation fund for deaths and damage caused by a 2013 oil-train explosion in Quebec, though the energy industry has maintained it wasn’t responsible for the disaster. (6/11)
Northwest Territories: The financial pages of Canadian newspapers have been full of headlines lately announcing the potential of two large shale oil fields—Canol and Bluefish—in the Northwest Territories said to contain enough oil to rival the Bakken Formation of North Dakota and Montana. But a string of problems show the chances of turning that Canadian Arctic shale into another Bakken appear rather remote. Lack of infrastructure, low oil prices, a difficult regulatory environment, and a population that has traditionally opposed the expansion of oil and gas pipelines, are all factors working against this monster resource from ever moving beyond “in place” to anything resembling a set of producing fields. (6/12)
The US drilling rig count declined 9 units during the week ended June 12 to settle at 859 rigs working, according to Baker Hughes Inc. After 22 straight weeks of double-digit and near triple-digit declines, the count over the past 5 weeks has dropped by an average of just 7 rigs/week. It has now fallen in 27 consecutive weeks overall, during which time it has lost 1,061 units. Some 635 rigs are drilling for oil, 221 for gas. Canada’s rig count stands at 127, down 117 year-over-year. (6/13)
U.S. oil output will peak at a 43-year high in 2015 as producers work through a backlog of uncompleted wells before trailing off in the second half of the year, according to the US EIA. Production will increase to 9.43 million barrels a day this year, the most since 1972. That’s 240,000 barrels higher than last month’s estimate. Monthly output will fall in June through early 2016.  Total output next year is forecast to average 9.27 million barrels a day. (6/10)
Alaska’s crude oil production has declined from 1.8 million barrels per day (MMb/d) in 1991 to 0.5 MMb/d in 2014, and it is expected to continue declining through 2040. Almost 75% of Alaska’s crude oil production from 1990 to 2012 was from the Prudhoe Bay and Kuparuk River fields in the central North Slope, which respectively produced 4.9 billion and 1.7 billion barrels of crude oil over this period. (6/13)
Arctic drilling: A divided federal appeals court on Thursday rejected an effort by a coalition of environmental groups to revoke federal approval of Royal Dutch Shell’s oil spill response plans related to drilling on Alaska’s remote Arctic coast. By a 2-1 vote, the 9th U.S. Circuit Court of Appeals said the Bureau of Safety and Environmental Enforcement, which is part of the Department of the Interior, acted lawfully in approving the plans, which relate to Shell oil leases in the Beaufort and Chukchi seas from 2005, 2007 and 2008. (6/12)
Seattle activists opposed to Arctic drilling have vowed to launch a kayak blockade to prevent the departure of Shell’s drilling rig, and said they have hundreds of protesters standing to hit the water as soon as the Polar Pioneer departs. (6/11)
Tradeoffs: a recent report from Harvard Business School (HBS) and The Boston Consulting Group (BCG)–America’s Unconventional Energy Opportunity–offers a plan to overcome the “false trade-offs” between reaping the economic benefits of developing unconventional gas and oil, minimizing environmental impacts, and making progress towards reduced greenhouse gas emissions. (6/13)
Oil exports: The United States must lift an “outdated” ban on oil exports to take full economic and geopolitical advantage of its hydraulic fracturing boom, according to the HBS/BCG) study released on Wednesday. (6/13)
Oil exports: Heidi Heitkamp, US Senator from North Dakota, is urging lawmakers to repeal a 1970’s era ban on oil exports. (6/10)
Texas’s oil-and-gas regulator on Wednesday begins a series of hearings in Austin to assess some oil companies’ role in causing earthquakes in the Dallas-Ft. Worth area. A growing body of scientific research from federal, state and academic researchers suggests that disposal wells, often used to get rid of the dirty water leftover from fracking and brine from oil-and-gas production, may be linked to increased seismic activity. (6/8)
In Santa Barbara, Calif., a local official rejected Tuesday an emergency request by Exxon Mobil to use large trucks to haul its crude oil along a scenic highway until a pipeline that recently ruptured and caused a large spill is fixed. (6/10)
Exxon is at a crossroads: buy a rival or shrink. But the company’s focus on cash distributions to shareholders, and the fact that its oil and gas production is lower now than immediately after Exxon bought Mobil back in 1999, certainly look like evidence that it has given up on long-term revenue growth. (6/9)
TX strike over? A tentative agreement has been reached to end a strike at a large Texas refinery that, if finalized, would mark the conclusion of a broader walkout at refineries across the U.S. that at its height included 15 plants and 6,500 striking workers. (6/10)
Fracking fracas: Energy industry groups and states that oppose new U.S. rules for hydraulic fracturing on public lands are headed to court this month to try to block the regulations a day before they are to take effect. Foes of the regulations will go before a federal judge on June 23 to seek a preliminary injunction. The Interior Department rules, slated to take effect on June 24, would require companies to provide data on chemicals used in hydraulic fracturing, or fracking, and to take steps to prevent leakage from oil and gas wells on federally owned land. (6/12)
For US natural gas consumption, the US EIA Tuesday lowered its estimate in the second quarter by 1.47 Bcf/d to 64.49 Bcf/d. Consumption growth in 2015 is largely driven by demand in the industrial and electric power sectors. (6/10)
LNG: Cheniere Energy Inc. plans to add 19 million tons/year of incremental production capacity to two LNG projects, bringing the company’s aggregate nominal production capacity to 60 million tpy by 2025. The company is developing 9 million tpy of incremental LNG production capacity through the addition of two liquefaction trains adjacent to the existing site of the Corpus Christi liquefaction (CCL) project. Expected nominal production capacity of each of these trains is 4.5 million tpy, which would increase the expected aggregate nominal production capacity to 22.5 million tpy. (6/12)
Energy-propelled growth: During 2014, each of the top five fastest-growing U.S. states—North Dakota, Texas, West Virginia, Wyoming and Colorado—had growth ranging from 6.3% down to 4.7%.  The Commerce Dept. said that mining, which includes oil and gas drilling, was a large contributor in all five states, though mining “was not a significant contributor” to the nation’s overall 2.2% growth.  The Dept. said energy-driven growth could be reversed this year. (6/11)
US coal consumption for the power sector will total an estimated 792.9 million tons in 2015, the lowest amount since 1991, the EIA said Tuesday. (6/10)
Nuclear problem: A professor from Japan’s Fukushima University Institute of Environmental Radioactivity told Kyodo in April that the West Coast of North America will be hit with around 800 terabecquerels of Cesium- 137 by 2016. EneNews notes that this is equivalent to 80% of the cesium-137 deposited in Japan by Fukushima. (6/11)
Big oil and climate: For an industry used to cautious, long-term evolution, the speed at which leaders of Europe’s biggest oil and gas companies moved to take a joint stand in the climate debate speaks volumes. Discrete talks in the eyrie of Davos in January led to a spontaneous, light bulb moment on a stage in Oslo in February. (6/13)
G-7 on climate:  Leaders of the world’s top economies Monday (8 June) gave a boost to global talks on tackling climate change by saying the global economy should be decarbonized by the end of this century. The high-level backing by G7 countries – Canada, France, Germany, Italy, Japan, the UK and the US – increases the likelihood of almost 200 countries agreeing to a long-term goal when they meeting for climate talks in Paris in December. (6/10)
7 major droughts: World Resources Institute’s Aqueduct project’s forthcoming projections for global water stress in 2020, 2030 and 2040 indicate that the global water picture is likely going to get worse over the next few decades. Larger populations and growing economies demand more water, and in some places, climate change will likely reduce available water supply.

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