Peak Oil Review – July 6

July 6, 2015

Quote of the Week

“The initial [round of layoffs] was an absolute bloodbath to get rid of all the people who were not core, but if things don’t improve, they’re going to have to start cutting again. If the price of oil – or when the price of oil comes back—the question is whether we are going to have sufficient folks out there to meet the increased demand [for well completion services].’ 

Bob Gray, a partner in the transactions practice at Mayer Brown LP

1.  Oil and the Global Economy
The gradual down trend in oil prices which began in early May continues with New York futures closing the week at $55.52 and London at $60.32 – down about 13 percent from the spring highs. The Greek crisis; the Iranian nuclear negotiations; reports of near-record oil production by Russia and OPEC resulting in a circa 2 million b/d global surplus; the steep decline in the Chinese equity markets; and the announcement that the US drilling rig count increased last week after 29 consecutive declines all contributed to weak prices.  At $55 a barrel, NY futures have now broken out of the $57-62 trading range that has obtained since early May.
The coming week could have an impact on where oil prices go in the next couple of years as the results of the Greek referendum and the possible conclusion of the Iranian nuclear talks play out. Both of these events are generally perceived as lowering oil prices, as Iran will eventually be able to bring more oil to market and troubles in the Eurozone could lead to lower economic growth and less demand for oil.
Despite the increase in US drilling rigs last week, concerns are rising as to the profitability of the shale oil industry. Many observers have noted for years that the industry as a whole had a large negative cash flow and that it was not fully accounting for the costs involved in producing shale oil – even when oil was selling above  $100 a barrel.  In the last week there have been numerous stories about how new “efficiencies” in the shale drilling industry are allowing producers to resume drilling with prices below $60 a barrel. Most of these newfound “efficiencies,” however, are lower wages for industry workers and fire sale prices for drilling equipment and oil service contracts. There also has been a upsurge in financial press stories in the last few weeks warning that still more bankruptcies and layoffs in the oil industry are coming.
Questions are starting to arise about some of the US oil production estimates that the EIA has been releasing recently. Some see major discrepancies between what the EIA is saying about US oil production in its weekly and monthly publications and the differences between EIA estimates and what Texas, North Dakota, and the Bureau of Safety and Environmental Enforcement, which follows offshore production, are reporting.  In the long run the EIA will straighten these numbers out, but for the time being the administration may be estimating that US production is several hundred thousand b/d higher that what is actually being produced.
While most observers are predicting lower oil prices in the next six months to a year as the oil glut continues, concerns are starting to arise over the prospects for the industry later in the decade.  Observers note that there have been “massive” downward revisions to estimates of future Iraqi and Brazilian oil production. Prospects for Arctic oil do not look at good on either side of the North Pole as Russian and North American drillers have announced major contractions in their plans to drill in the region.
2.  The Middle East & North Africa
Iran: This may be the week when we learn the outcome of the 18-month long Iranian nuclear negotiations. However, with the “final” deadline set for Tuesday, there are still serious issues concerning the pace at which sanctions will be removed and the intrusiveness of the inspections to which Iran would be subjected under the agreement. There are still powerful forces in the US Congress, Israel, and Tehran opposed to the agreement that seems to be taking shape, so the ultimate outcome of the negotiations may not be determined until all the post-agreement posturing is over. The US presidential elections may play a role as some Presidential candidates are attempting to play this contentious issue to their political advantage.
The bottom line, however, is that Washington, Tehran, and most world capitals would like to see at least a ten-year settlement of the issue and a relaxation of the tensions/sanctions. In recent days, even the Ayatollah seems to have come around to the point of view that a relaxation of the sanctions that are choking his economy may be worth sacrificing a little national pride. It will be an interesting week ahead.
Syria/Iraq: The pace of fighting picked up in Syria last week with the heaviest US air raids yet on ISIL’s capital at Raqqa; heavy fighting around Aleppo as both sides attempt to drive the other out of what is left of the industrial capital of Syria; and a government/Hezbollah push to drive the rebels out the last rebel-held town of Zabadani in the Qalamoun region near the Lebanese border. The loss of Zabadani would be a major setback for the rebels.  The US is becoming increasingly concerned about the Assad government’s use of chlorine gas against any available target as part of its efforts to force the rebels back from its strongholds in the capital and the northwest. The British are talking about joining the air war against ISIL in Syria in retaliation for the slaughter of British tourists in Tunisia last week.
In Iraq, the oil deal between Erbil and Baghdad seems close to collapse after six months, adding to Baghdad’s problems of low oil prices, financial collapse, and ISIL. The Kurds have now reduced the amount of oil that it has been selling through Iraq’s Oil Marketing Company, known as SOMO, and increasing the amount of oil it sells unilaterally through Turkey. As part of the deal, the Kurds were to get 17 percent of Iraq’s total oil revenue, but the cash-strapped Iraqi government has been sending the Kurds only a fraction of what was called for under the agreement. In addition, the Kurdish Regional Government is preparing to sell bonds without permission from Baghdad.
Despite record oil exports from the southern terminals, the situation in Iraq continues to deteriorate. The UN says the number of displaced persons in Iraq could reach 10 million by the end of the year and 3,000 a week are fleeing from Anbar province, which is largely under ISIL control. Hopes are fading that the government in Baghdad can muster the forces, even with the help of US airpower, to drive ISIL out of the Iraqi cities it has occupied. To a large extent the viable military forces available to undertake offensive action are the Shiite militia who are mostly despised by the Sunni inhabitants of the areas they are trying to liberate.
Last week the oil being exported via Turkey from the northern oilfields around Kirkuk, which are under control of the Kurds, ceased to flow as Erbil cut exports from the fields, which are nominally not in Kurdistan. Despite the loss of the northern oil, Iraqi exports are still doing well thanks to increasing production from the south. Exports from Basra hit a record in June of 3.187 million b/d – the fifth straight monthly increase.  The outlook over the long run is not so good however.  Baghdad cut the development for its West Qurna 1 oil field by $500 million to this year’s $1.1 billion.
Libya: Prime Minister Thinni says he hopes to sign a peace deal at the UN sponsored talks in Morocco this week, but many are doubtful this can be achieved. The discovery that the slaughter of European tourists in Tunisia last week was launched from Libya has increased awareness that something has to be done about the rise of the Islamic State in Libya. This coupled with the flood of refugees using Libya as a jumping off place to get into the EU may result in foreign intervention.
The National Oil Company say negotiations are underway to reopen pipelines leading from the El Feel and El Sharara oilfields to the port of Zueitina that have been blocked for weeks by various protests. One recent estimate puts current Libyan oil production at 500,000 b/d. These negotiations often drag on for months as protestors seeking jobs or armed militias try to pressure one of the governments.
Saudi Arabia/Yemen: Concerns are rising about the ever-increasing share of Saudi oil production that is going to domestic consumption. The kingdom’s oil production hit a near-record 10.3 million b/d in May and some say this could increase to 11 million b/d this summer as global warming drives the temperatures to record highs. The Kingdom’s population is up by 17 percent in the last ten years, and domestic oil consumption is increasing at 8 percent a year. Some are forecasting that at this rate, the Saudis will be importing oil by 2030.
There was little change in the Yemeni situation last week with Saudi bombs continuing to fall on rebel positions or Yemeni civilians depending on whose word you want to take. The UN says some 2,800 have been killed in the fighting and bombing since March and some 13 million are facing food shortages. The UN continues its efforts to broker a ceasefire with little success. For now the major concern over the Yemini situation is some sort of backlash into Saudi Arabia which would threaten the monarchy.
3.  China
The repercussion from the ongoing stock market crash was the top story from China last week. Since June 12th, the Shanghai Composite Index has fallen 29 percent, erasing $3.2 trillion in value, despite numerous interventions on the part of the government to stem the decline.  With some nudging from the government, China’s top brokerage firms pledged to buy and hold at least $19.3 billion in shares to stabilize the markets. On Sunday the Central Bank said it would provide liquidity to help stabilize the markets and China’s sovereign wealth fund said it would continue to purchase exchange-traded funds. The State Council has halted new IPOs. The government is clearly worried that the market crash will spread to other areas of the economy and is taking all possible steps to avoid such a calamity. 
Factory activity in China expanded slightly in June, but not as much as expected. The economic outlook still is not good as the property market is still weak, and the global demand for China’s exports is erratic. Beijing is due to release its 2nd quarter GDP data on July 15th. Some analysts expect growth in the quarter to be below 7 percent.
EU leaders are urging Beijing to take serious steps to cut emissions now rather than in 2030, which is China’s current target for an emissions peak. During a visit to France last week, Premier Li said a new policy for post 2020 emissions will be announced by the end of the month.
4. Russia/Ukraine
The war of words between Russia and the West continued last week.  Conventional wisdom is saying that for now Moscow has no interest in annexing eastern Ukraine as it did Crimea, but is content to keep a low intensity conflict going until Kyiv collapses economically; is forced to give up notions of becoming closer to the West; and surrenders part of its sovereignty to a Russian sphere of influence.  Ukraine says there are some 9,000 Russian troops with 200 tanks currently in its country and Russian generals are orchestrating the on-going struggle.Last week the natural gas talks between Russia and Ukraine broke down and Kyiv suspended its natural gas purchases from Moscow. Most of the recent natural gas trouble has stemmed from a hike in gas prices that Moscow instituted after Ukraine ousted the pro-Moscow Viktor Yanukovych in February. Moscow has long used natural gas prices as a political weapon.
Falling oil prices have led to more economic problems for Moscow. The ruble is now back down to 56.11 to the dollar after having been as high as 50 and (35 before the current crisis) during the oil price rebound in May. Most observers foresee continued ruble weakness in the 3rd quarter as Moscow is planning to sell $5 billion of debt in the quarter.  Any further decline in oil prices coupled with the looming foreign debt payments will lead to further pressure on the ruble.
5. Greece
The voters have said a resounding NO to the acceptance of the latest creditor financial austerity proposals despite the fact that they were withdrawn before the vote.  Some say the vote indicates that Greece will now have to leave the Eurozone, while Athens insists that the vote only strengthens its hand in negotiations with the creditors and that new EU bailouts will be forthcoming soon.
Europe is already in a frenzy over what will happen this week. The Greek banks are flat broke and unless some sort of bailout is arranged on Monday, the Greek banking system could collapse on Tuesday when it is scheduled to reopen. High level EU meetings are scheduled for this week which will determine Greece’s fate.
It is much too early to tell what will happen to the oil markets. Obviously a stronger dollar will depress oil prices in the short term. Beyond this what happens to the Greek and the wider EU economies will be important to the oil markets, with a prolonged recession dampening the demand for oil. In the worst case, the situation could have worldwide repercussions with impossible to predict consequences.
5.  The Briefs
Big/slow vs. small/nimble: Crude oil’s plunge is leaving drilling rigs idle from Africa to Latin America as the world’s biggest energy companies curtail spending and stall projects. Their smaller rivals are seizing the opportunity to gain ground. Drilling fees, which typically lag big oil cost movements by six months, have dropped by about half in the past year, prompting junior oil companies to lock in contracts before rates rebound. The big players such as Royal Dutch Shell and Exxon Mobil have had to rely on refining and trading to buoy profits as they rein in spending and sell assets. (6/30)
Norway’s Johan Sverdrup field: Statoil, the field’s operator and the company with the largest share (40%), estimates Johan Sverdrup could generate $200 billion in revenues over the next 50 years. Once in full swing, the field should account for as much as 25 percent of all Norwegian petroleum production. Peak production is expected to be as high as 650,000 barrels of oil equivalent per day.  Production is currently scheduled for 2019. (7/3)
In Slovakia, the oil industry is tiny.  Imports make up 99 percent of supply.  Small amounts of crude oil have been extracted each year in Slovakia for the last century.  But existing oil deposits are running out, according to the Slovak government.  Total exhaustion of oil deposits is expected by roughly 2020. (6/30)
Russia is set to strengthen its position as the biggest oil supplier to China in the coming decade with a planned second pipeline link to Chinese refineries, according to a unit of Fitch Group. A construction contract was signed between two units of state-run China National Petroleum Corp. for a 600-mile domestic pipeline carrying Russian crude from Mohe to Daqing.  Russia in May surpassed Saudi Arabia as China’s leading crude supplier for the first time in almost a decade as a global fight for market share intensified. (7/1)
Iran’s biggest oil shipping company has amassed the world’s largest fleet of super tankers and is in talks to sail back into western waters should they strike a nuclear deal. NITC, the privatized Iranian shipping company, says it has 42 very large crude carriers, known as VLCCs, after buying 20 China-built vessels in the past 2½ years. (7/3)
The National Iranian Gas Company said the measured reserves of natural gas in Iran have increased to above 34 trillion cubic meters (tcm), which is about 1.4 tcm more than the reserves of Russia. The report further adds that Iran’s gas production saw an increase of 5.2 percent in 2014 to reach a total of 172.6 bcm. (6/30)
In Israel, a framework for their gas sector, released Tuesday, would allow neighboring countries to receive offshore gas within 2-3 years by allowing exports from Tamar prior to the Leviathan field coming on line in 2019. Egypt and Jordan need gas and it is in Israel’s strategic interest to supply them. (7/1)
Looming LNG glut? China’s weakening appetite for super-cooled natural gas is raising concerns that the industry is facing a glut as global supply grows. Downside risks appear to be growing for Australia, which is predicted to become the world’s largest supplier of liquefied natural gas later this decade with the start of six new projects. Lower demand for gas in China and more supply moving into the country from Russia and Central Asia, on top of a downturn in the oil market, are weighing on LNG prices. (6/30)
The New Zealand government said a long-term investment by Austrian energy company OMV in the country’s largest oil field has paid off. OMV started producing oil from the Maari field, the largest offshore oil field in New Zealand, in 2009. It’s so far produced a total 15 million barrels and the company has since embarked on a campaign to double the expected rate of production. (7/3) (NOTE: New Zealand’s production peaked in 2007 at 72,000 b/d and has steadily declined to 33,000 b/d.)
In Soweto, South Africa, residents of this sprawling township famous for its resistance to white-minority rule are fighting a battle they thought consigned to history: keeping the lights on. National power company Eskom Holdings Ltd. is reeling from years of underinvestment and poor management, surrendering to power outages that frequently plunge Soweto’s 1.3 million residents into darkness. (7/3)
Petrobras, Brazil’s state-owned oil company and one of the world’s most heavily indebted oil companies, has slashed its five-year investment plan and production forecasts as it seeks to adjust to a devastating corruption scandal and the fall in oil prices.  Investment has dropped by 37% compared to the previous plan. (6/30)
Mexico announced it would tender a new round of 24 energy infrastructure projects totaling $10 billion, including a $3 billion underwater pipeline bringing U.S. natural gas from Texas to Tuxpan, Veracruz. Amidst a grand national “gasification” strategy that has promoted Mexican imports of U.S. natural gas, this may be one of the most ambitious projects yet. Of course there are concerns around potential risks associated with the project – whether there is the local capacity to carry it out, and whether it’s really necessary – all of which must be resolved if the pipeline is to begin transporting the proposed 2.6 billion cubic feet of natural gas per day by 2018. (7/20)
The Arctic’s 83 billion barrels: That’s how much oil could be present in the Arctic, according to a high-profile US geological survey report released in 2008. But the wave of excitement from the report is now receding, as some harsh realities sink in. The challenges associated with finding, extracting and transporting Arctic oil are considerable due to ice, severe weather and a dearth of infrastructure, services and search-and-rescue capability across most of the region. Drilling for a month or two in the Arctic costs more than a similar year-round endeavor elsewhere. (6/30)
USA fossil fuels: While the energy history of the United States is one of significant change, three fossil fuel sources—petroleum, natural gas, and coal—have made up at least 80% of total U.S. energy consumption for more than 100 years. The predominance of these three energy sources is likely to continue into the future. (7/3)
The US oilrig count jumped by 12 to 640 during the abbreviated week ended July 2, its first rise since Dec. 5, 2014.  Gas rigs, meanwhile, lost 9 units to 219 following two straight weeks of gains. (7/3)
U.S. crude oil production rose 9,000 barrels a day to 9.701 million barrels a day in April, the highest since May 1971, the US EIA said. The EIA reports that production has continued at high levels even as drillers have shut in rigs in an attempt to scale back production. EIA expects that crude production will decline on a monthly basis starting in June. (7/1) (NOTE: some analysts say production has already peaked.)
Shale oil fight: the fight over the financial health of America’s shale-oil industry has turned nasty. In one corner are short-sellers, including David Einhorn, a hedge-fund manager. They argue that “fracking” is a bottomless pit into which too much cash has been thrown. In the other corner are America’s oil pioneers, who say that shale can thrive even though the benchmark American oil price has dropped from over $100 a barrel last year to $56 today. The oilmen are backed by plenty of other investors who are still pumping money into shale firms: some $35 billion of equity and bonds has been raised since December. Both sides have a point. (7/4)
The U.S. Supreme Court refused to hear two separate cases filed by BP and Anadarko Petroleum challenging fines related to the 2010 oil spill in the Gulf of Mexico. The nation’s highest court let stand a decision from a circuit court of appeals in New Orleans, which in June 2014 said the companies are liable for penalties under the Clean Water Act. (7/1)
Cutting losses: Some oil and gas companies fight the wisdom to sell assets or consider a merger during a profound downturn; instead they take on more debt they can’t afford in an effort to stay afloat. In the end, they lose everything. As a consequence in the oilfield services side, as many as half of those businesses could end up restructuring. (6/30)
Royal Dutch Shell announced it made a final investment decision to move forward with development of the Appomattox deep-water project in the U.S. Gulf of Mexico.  Shell said it would build what it says will be the largest floating platform in the Gulf of Mexico to tap Appomattox. Average production is expected to be about 175,000 barrels of oil equivalent per day. At a time of low oil price, Shell says the project will break even at $55/barrel for Brent crude. (7/2)
Cheniere Energy is moving ahead with a $550 million export terminal in Texas that will ship processed condensate to international markets, a top executive said on Monday. In addition, the terminal will be able to export any type of domestic oil if the decades-old U.S. crude export ban is ever lifted. (6/30)
In North Dakota, MDU Resources Group and Calumet Specialty Products Partners announced the completion of the Dakota Prairie refinery, characterized by the state as the first environmentally friendly refinery built in the country in nearly 40 years. (7/1)
Second wind? Located above the Marcellus Shale in the Appalachian Basin, the Burket-Geneseo Shale “could be the next super giant field,” but the play is still well in its infancy and the current Marcellus development could jeopardize the ability of operators going back in down the road to pull those additional reserves, according to Gregory Wrightstone of Wrightstone Energy Consulting. (6/30)
New York formalized its ban on high-volume hydraulic fracturing for natural gas on Monday, concluding a seven-year environmental and health review that drew a record number of public comments—more than 260,000.  New York is the only state with significant natural gas resources to ban fracking. (6/30)
Montana’s Board of Oil and Gas Conservation is considering a proposal that will require buffers zones around homes to protect them from oil and gas drilling. The Northern Plains Resource Council is asking for a quarter-mile setback between well pads and inhabited buildings. This is much greater than the 500 feet required by neighboring states. (6/30)
Seattle activists said Monday they took to the water off the Washington state coast in kayaks to try to slow progress of a Shell drilling rig bound for arctic waters. “We know we can’t stop them,” Carlo Voli, a campaigner from advocacy group 350 Seattle, said in an emailed statement. “But we can’t just watch them go; we have to do all we can to slow them down, and get people to focus on what a disaster Arctic drilling would be.” (6/30)
Demand growth fade: The initial consumption stimulus from lower oil prices may be fading, at least in the United States, according to the latest round of official data on traffic volumes and fuel sales. Nationwide gasoline consumption is running 300,000 b/d higher than last year, but the year-on-year gains have stabilized in the last three months. (6/29)
Vehicular transition: Researchers at Carnegie Mellon University have published two new policy briefs about the benefits of electrified vehicles and the potential for their adoption in the US. To achieve the best outcomes, the brief suggests, plug-in vehicle adoption should typically be focused on HEVs and PHEVs by city drivers in mild-climate regions with a clean electricity grid, such as San Francisco or Los Angeles. (7/2)
California led the way to cleaner transit buses fifteen years ago with strict tailpipe emissions standards that effectively ushered out diesel as the primary fuel for buses in the state and replaced it with natural gas. Now, California is poised once again to take the lead, this time by mandating a switch to so-called “zero-emission” buses by 2040. 7/3)
Weekly US coal production totaled an estimated 15.5 million tons in the week that ended Saturday, down 4.7 percent from the prior week and down 17.8 percent from the comparable week a year ago, US EIA data showed. Coal output continues to fall because of low natural gas prices. (7/3)
U.S. railroad stocks are slumping into a bear market amid a three-way squeeze from plunging coal, crude oil and grain shipments. An index of the four largest publicly traded US carriers has dropped 20 percent from its peak in November. (6/29)
Rule overturned: In a 5-4 decision, the Supreme Court found that the U.S. Environmental Protection Agency should have considered the compliance cost of the Mercury and Air Toxics Standards rule. The EPA has estimated it would cost the power industry $9.6 billion a year to comply with the rule. Industry sources say the ruling has little meaning, as the transition from coal to natural gas for power generation is well under way. (6/30)
US offshore wind first: if all goes according to plan, five towering wind machines will begin generating power off the coast of Block Island (CT) late next year. That would make it the nation’s first offshore wind energy, moving it ahead of the Cape Wind project, a much larger turbine farm planned in the waters off Cape Cod in Massachusetts that has been on the drawing boards for 14 years. (7/3)
In China, solar is taking over the Gobi Desert in Gansu province. There’s no doubt that the Chinese PV market is growing at unprecedented speed. But determining its overall health is more of an art than a science. (7/4)
Saudi Arabia’s Prince Turki is quietly helping Saudi Arabia—the quintessential petro state—prepare to make what could be one of the world’s biggest investments in solar power. Near Riyadh, the government is preparing to build a commercial-scale solar-panel factory. (6/29)

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