Peak Oil Review – July 13

“The Economist has examined the books of the 62 largest listed exploration and production firms in America whose collective output is mainly from shale.  The results suggest many first are more vulnerable than the bullish noises from their bosses suggest.  There are three sets of concerns: the juicing-up of the results announced for the first quarter of 2015; high leverage; and the industry’s returns on capital.”
 
The Economist, July 4^th issue
 
Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia/Ukraine
5.  Greece 
6.  The Briefs
 
1.  Oil and the Global Economy
 
Last week US oil prices had their biggest weekly decline since March as concerns about over supply, the Greek debt crisis and China’s stockmarket plunge all came together to force prices down. Most of the decline came on Monday and Tuesday in the wake of the Greek Austerity referendum with New York futures trading below $51 a barrel, down $10 from where they had been in the previous week and London got close to $55 a barrel before a rebound set in. By Sunday night the Greeks reached a deal with the other Eurozone members over a bailout and Beijing “stabilized” its equity markets using draconian measures. New York futures closed out the week at $52.74 and London at $58.57.
 
The IEA weighed in to a volatile week with a forecast that markets were “massively oversupplied,” that demand would fall next year, and that oil prices may continue to fall well into 2016 before the growth in supply slows. Hedge funds have cut their exposure to a decline in oil prices by the most since 2012. 
 
Problems also arose in the Iran nuclear talks which were supposed to be settled last week allowing for more Iranian oil to eventually come onto the markets. The talks have been extended to Monday and seem to be moving towards a climax.
 
So far the Greek debt problem and the Chinese stock market collapse do not seem to morphing into a general worldwide contagian such as happened in 2008. US equity markets are calm and while EU bond yields in the weaker coungtries have edged up, the increase has been far less than in Greece.
 
North Dakota’s oil production unexpectedly rose by 3 percent in May despite the large decline in oil rigs. Producers in the state deided to frack more recently drilled wells which are almost all being drilled in the most productive “sweet spots.” This has increased the initial output from newly fracked wells by 10-20 percent. The current rig count in North Dakota is now down to 78 from 91 in April and the well head price of Bakken crude is currently $40.75 a barrel, down from $47.73 in June. At the end of May, North Dakota had 925 newly drilled wells waiting to be fracked. During May, 114 wells were completed which is consistent with the 110-120 wells that North Dakota says need to be completed each month to maintain production level at 1.2 million b/d.
 
In recent years, many US producers had bought hedges which guaranteed them a high price, on the order of $90 a barrel, for their oil no matter what the markets brought. Most of the these hedge contracts, however, are running out in the next six months and can only be replaced with contracts guaranteeing $60 a barrel. It has been the revenue from the hedge payments that has allowed many producers to remain in business. With oil prices now in the $40s and $50s, $90 hedge contracts are no longer available raising questions as whether many marginal oil producers will be able to stay in business in 2016.
 
Refracking of existing shale oil wells that have undergone a major drop in productivity resurfaced in a story by Bloomburg touting the technique. Bloomberg cites a study by the ever-optimistic Wood Mackenzie & ITG Investment Research claiming that refracking of existing shale oil wells could extend the life of the shale oil fields to 50 years.  The EIA is talking about another five years and independent geologists even less before a decline in US shale oil production sets in. 
 
The refracking technique is controversial. Proponents say a well can be fracked up to ten times and that there are 100,000 existing horizontal shale oil wells that could be restimulated. So far only a few hundreds refracks have been undertaken and these are obviously being done to the most promsing wells so the data on how cost-effective the technique is remains unsettled. Proponents are saying that at least 3,000 wells will be refracked over the next two years, after which the oil companies should have better data.  The relatively recent technique of horizontal drilling wells much closer together may make such wells unsuited for refracking as these wells would only be stealing each other’s oil.
 
The US EIA reported last week that US petroleum product exports averaged 4.1 million b/d in the first four months of the year which is up 500,000 b/d over the same period last year. As the US imports considerable quantities of gasoline and some distillates each day, the net product exports are closer to 2.5 million b/d. The US has only been a net exporter of petroleum products for the past 4-5 years raising the question of how much increasing demand for US domestic consumption, presumably stimulated by US economic growth,  is actually being shipped abroad.
 
The EIA says that by the end of the summer it will begin releasing information on state by state oil production gained by direct survey of the oil producers rather than massaging the data it obtains from state governments. The Administration has been using the direct survey methodology  for natural gas production and believes it has been capturing about 95 percent actual production data.  The current method of massaging and estimating around large gaps in state reported production has been raising many questions of late as to how accurate EIA production reports actually are. The new methodology should help quell these concerns.
 
2.  The Middle East & North Africa
 
 
Syria/Iraq: The fighting across Syria continues apace. The US continues to bomb ISIL targets and the struggle for Aleppo continues. There are reports that Iran and its Lebanese surrogate Hezbollah are taking more of a leading role in the fighting as the Assad regime, which has suffered heavy casualties runs out of new recruits. Iranian officers are reported to be in command over Syrian troops in some sectors. This of course is feeding into the controversy over the Iranian nuclear agreement as Iran would immediately gain access to billions of dollars in frozen assets that could be used to prop up the Assad government. The UN says the number of Syrian refugees is now over 4 million. There is no end in sight to all this.
 
Despite the civil war with ISIL, Iraqi oil production hit an all-time high of 4.1 million b/d in June showing once again what a great resource the abundant and cheap-to-exploit oil underlying Iraq really is. Trouble is arising over a new oil grade, Basra Heavy, that Iraq is trying to market. This grade, which is thicker and more sulfurous, and is making up much of the increased production, is having difficulty finding a market. Foreign oil companies receive Basra Heavy as payment in kind for their work in Iraq. The companies are complaining that Iraq is valuing Basra Heavy above what they can sell it for as refineries are refusing to take the stuff before each tanker load is tested and evaluated.
 
Air strikes by US and by Iranians flying older Russian planes continue to keep ISIL in check. ISIL keeps blowing up Shiites with car bomb attacks in Baghdad, and the struggle for Anbar province continues. Baghdad keeps talking about the coming offensive to liberate Anbar and Mosel from ISIL, but for most the situation looks like an endless stalemate. Whether US precision bombing of whatever ISIL targets it can find eventually degrades the military effectiveness of the organization remains to be seen.
 
The biggest oil news last week was the growing rift between Baghdad and Erbil over the revenues from Iraqi Kurdistan and the northern Iraq oil fields, which the Kurds seized last year to keep them out of ISIL hands. As Baghdad has been failing to deliver the agreed-upon share of the oil revenues to Erbil, the Kurds have been taking matters into their own hands and have been selling the oil themselves rather than directing it to Baghdad’s oil marketing organization. The Kurds say that in June 571,000 b/d was delivered to the export terminal at Ceyhan, Turkey, but that only 150,000 b/d was turned over the federal State Oil Marketing Co.  Erbil is pushing to control all of the oil that is being pumped from Iraq’s Northern Oil Company fields around Kirkuk and pumped to Turkey through Kurdistan. For the last two weeks, none of this oil has been passed to Baghdad for sale. Clearly the cooperation between the two governments is breaking down. At this point, there is probably little Baghdad can do as the fields and pipelines are under Kurdish control and Baghdad has enough problems contending with ISIL to threaten or use force against the Kurds. With ISIL in the way, they can’t even get close to the Kurds.
 
Iran: The nuclear negotiators will announce Monday that they have reached an agreement in the talks with Iran. All of the details have not yet been worked out and the terms of the agreement still have to be approved by Tehran, Washington and the other capitals involved in the negotiations. In recent weeks, Tehran has been playing brinkmanship with the Ayatollah announcing redlines that would not meet his personal approval. However, in the end the appeal of no sanctions was too much. Tehran is said to be preparing for massive celebrations of their “victory” over western negotiators.
 
If an agreement is reached this week, it likely will take many more weeks to get through the US Congress where anti-Tehran political posturing has already begun. From the perspective of the oil markets, we do not as yet know how soon Tehran will be allowed to export oil freely nor the impact of the agreement on world oil supplies and prices; increased exports would obviously add to the surplus and lower prices.
 
Libya:  A unity government agreement, brokered by the UN, was signed last week, with the major problem being that Libya Dawn, the group that took over Tripoli and declared its own parliament, refused to attend the meeting held in Morocco, or sign the agreement. For now the agreement is only between the recognized Tobruk government and various other minor factions, so it does not cover the capital and its oil ministry. The agreement, which sets up a one-year government with a prime minister and two deputies includes many diverse factions. The UN is still hopefully that Libya Dawn will eventually join the “unity government.”
 
Hopes that Libya’s third largest export terminal, the 220,000 b/d Ras Lanuf, would be reopened last week broke down after the militia guarding the terminal refused to allow tankers to land. Much of the troubles with Libya’s exports in the last few years have been with terminal “guards” who forever are demanding more pay or a bigger piece of the pie. The most recent numbers in an ever changing situation say that Libya currently is producing 430,000 b/d of which at least 120,000 b/d are going for domestic consumption.
 
Saudi Arabia/Yemen:  The kingdom has issued its first sovereign bonds since 2007 to cover the increasing deficit caused by low oil prices and its war. The Saudis also agreed to lend Russia some $10 billion from its sovereign wealth fund thereby undercutting the effectiveness of the Western sanctions on Moscow. The Saudis clearly are displaying their displeasure with the US’s failure to overthrow the Assad government and negotiating a nuclear agreement with Iran which would leave Tehran with more resources to further its foreign policy goals.
 
Last week’s UN brokered ceasefire, designed to let relief supplies into Yemen, failed to take hold as the Saudis and their allies continued air strikes on the country. The Saudis say they received no request from the Yemeni government, holed up in Riyadh, to stop the bombing.
 
Relief officials say that millions of Yemenis are facing famine as virtually all food shipments into the country have been halted. There are no medicines left and there is no fuel to run the country’s water pumps. This is shaping up to be one of the worst humanitarian crises in recent memory, affecting millions. It seems likely that at some point hundreds of thousands will start making their way into Saudi Arabia is search of food and water adding to the Saudis’ troubles.
 
3.  China
 
The Chinese stock markets were the focus of world attention last week as fears arose that the collapsing bubble could trigger the next global depression. Beijing was well aware that it had a major problem and has been trying for weeks to stem the decline. Early last week as the markets plummeted, the Chinese government did everything short of making it illegal for stock prices to fall to stem the tide. IPOs were halted; trading was suspended from some 75 percent of the listed shares; selling large blocks of stock was forbidden for the next six months; margin requirements were relaxed; police were sent to the offices of short sellers to persuade them to withdraw their orders; and brokerage houses were given $20 billion of state funds with which to buy up falling stocks. At the end of the week China’s stock markets, which in no way resembled what they were at the beginning of the week, “rebounded” and the world breathed a sigh of relief.
 
Unlike those in the rest of the world, the stock markets in China were designed to suck money from Chinese citizens and use it to finance the growth of state-owned enterprises. To help this program along, the government encouraged its citizens to invest in stocks and some 90 million mostly unsophisticated investors responded.  The Communist government has clearly lost much face in this debacle as it was in a panic for much of the week. This story is not over as yet nor is China’s falling rate of growth and, by implication, its demand for oil. The much touted economic reforms that are supposed to revive economic growth are on hold awaiting developments.
 
China represents some 25 percent of the expected growth in the demand for oil in the next five years. Should the economy slow further, it will be a good question as to how much of this demand will actually occur. Moreover, China’s economy supports those of many other nations which are unlikely to increase their demand for oil should China’s imports decline.
 
This may be the year that China’s oil production peaks. Domestic oil production has stagnated in the last two years and production from its premier oilfield, Daqing, is scheduled to drop from 800,000 b/d in 2014 to 640,000 b/d by 2020. While heavy drilling onshore and offshore continues, China is susceptible to the economics of the recent price drop. Just to slow the pace of Daqing’s decline last year required the drilling of 4,500 new wells. Although China is supposed to have 32 billion barrels of technically recoverable shale oil reserves, so far shale oil production has not gotten off the ground as it did in the US. Chinese shale drilling efforts are not producing anywhere near the results expected. Given a 4 percent natural decline in oil production China must come up with 170,000 b/d of new production. Many observers do not see this happening and suspect that this may be the last year that China’s domestic oil production grows.
 
4. Russia/Ukraine
 
Moscow’s efforts to distract the Russian people from their economic problems by reviving the cold war are moving along nicely.  The Putin government is cutting off Russia’s political, cultural, and communications contacts from western influences. Visa and MasterCard will be replaced by a Russian credit card. Provocative military actions, large increases in defense spending, and meddling in ways to damage western interests continue. Last week it was announced that the Saudis will invest $10 billion in the Russian economy – a way for both sides to snub their noses at Washington. Moscow is looking at ramping up arms sales to Iran as a way to thank Tehran for its help with Syria and to deter Israel from striking Iranian nuclear facilities.
 
Last week there were stories that Moscow was going to stick it to the EU by taking on Greece as a client state, until some observers figured out they can’t afford it. Russia is looking around for new ways to sanction the West and are now looking at what they can do to Finland.
 
Last week’s drop in oil prices certainly did not do the Russian economy any good and if forecasts of further price declines come to pass, Moscow may have a long summer. A survey of analysts suggests that Russia may be the biggest loser if Iran increases its oil sales as the result of a nuclear agreement.
 
Ukraine is doing its best to cut itself off from any dependence on Russian natural gas. In the wake of the collapse of the talks with Moscow two weeks ago, Kyiv has stopped purchasing gas directly from Moscow, but is still taking in gas that has transited Ukraine on the way to other East European countries. In the long term Ukraine may be able to get the necessary quantities of gas from LNG imports, or non Russian sources, but for the immediate future the economic situation does not look good.
 
5. Greece
 
Eurozone heads of state met in Brussels over the weekend and reached a general agreement with Athens that should prevent the collapse of Greece’s banking system this week. Details of the agreement have yet to be worked out, however, the announcement will give the European Central Bank authority to start supply cash to Athens immediately. The agreement will provide Greece its third bailout package in five years, which will be on the order of $90 billion, but this time will be accompanied by much harsher terms including an agreement that Athens will sell off state-owned assets to partially pay off back debts.
 
The agreement did not do much for the euro which fell following the announcement sending oil prices still lower. This agreement may end the immediate crisis, but Greece’s economy is still in very bad shape. Following the announcement, the zone’s leaders mostly expressed the sentiment that bailing out Greece again was a minor problem as compared to letting the Eurozone start to unravel.
 
 
5.  The Briefs
 
OPEC output increased, helped by gains from Iraq, Saudi Arabia and the United Arab Emirates, to a three-year high, the IEA said Friday. IEA said in its market report for June production from the 12-member OPEC reached 31.7 million b/d, an increase of 340,000 bpd from May and the highest level in three years. (7/11)
 
Refinery profits boom ending? A brief period of high profitability for the world’s oil refineries is likely to come to an end as quickly as it began, the IEA said on Friday. Weak crude oil and relatively high prices for gasoline, diesel and petrochemical feedstock have pushed up refining profits sharply over the last six months, helping oil companies cope with much lower profits from upstream production. In the first quarter of this year, combined profits for the likes of BP, Royal Dutch Shell, Exxon Mobil, Total and Eni from refining and trading represented 60 percent of total earnings, compared with 18 percent last year. (7/11)
 
In Oman, the Persian Gulf sultanate’s repertoire now includes a technology not generally associated with oil pumping: solar power. One of the world’s largest solar plants will be constructed to coax Oman’s heavy oil out of the ground, according to Oman and its partners, Royal Dutch Shell and French energy company Total SA. (7/8)
 
Sudan’s oil and gas minister has revealed that Sudanese security forces have dug trenches around oil fields on the border with South Sudan to fend off acts of sabotage. (7/11)
 
Even as Nigeria struggles to fight against Boko Haram insurgents in its northeast, a dangerous but forgotten conflict on the other side of the country—in the oil-rich Niger Delta—is resurfacing. Violence in the south has been at a low ebb since 2009, when Nigeria’s former President Goodluck Jonathan bought off rebel leaders with a generous package of stipends. But those amnesty payments are set to expire in December, and with oil prices lower, the new president will have less room to maneuver. (7/11)
 
In Nigeria, one of the first major tasks the administration of Gen. Muhammadu Buhari will have to contend with will be how to finance the 2015 budget in the wake of low oil prices and declining revenue. Nigeria’s government plans to draw down its oil savings account by $1.7 billion, of $2 billion in the account, to offset revenue shortfalls and pay debt, such as salaries for state workers.  (7/7)
 
In the Falkland Islands, oil producer Premier Oil has increased its 2015 exploration budget by $20 million to account for higher investments in its drilling campaign. (7/9)
 
Offshore West Africa: With the right investment strategies, the emerging offshore oil prospects in West Africa could be the industry’s next big deal, an executive leader said.  Tullow Oil is among the early players in West African basins, tapping into prospects off the coast of Ghana. The region’s deep-water TEN project should deliver its first oil by 2016 and should peak at about 80,000 b/d. The Jubilee field off the Ghanaian coast could eventually produce more than 125,000 bpd. Cairn in November announced its discovery in the deep waters off the coast of Senegal could hold as much as 670 million barrels of recoverable reserves.  (7/9) 
 
Uganda has failed to attract a major company into its oil industry. By most measures, all the 19 international companies that have expressed interest are what one would call junior firms, which are more willing to take risks with exploring for oil in wildcat wells. (7/7)
 
In Brazil, British energy consultant Douglas-Westwood said the prospects of turning 16 billion barrels of potential barrels of oil into reality may be dubious in a number of its deep-water projects. They cite Petrobras having to revise downwards their production target for 2020: domestic oil output to increase to 2.8 million barrels per day – 40 percent lower than its projection 12 months ago. (7/7)
 
Off the coast of Venezuela, Italian energy company Eni said Monday it started production at the Perla gas field. Considered among some of the largest gas discoveries in the world, Eni said the Perla field holds an estimated 17 trillion cubic feet of natural gas. (7/7)
 
Pemex said Monday it has planned “additional volumes of gasoline imports in order to regularize supplies” in several states following what one analyst described as a “perfect storm” of shortages involving red tape and crime. Long lines have formed in recent weeks at the pumps of the service stations that still have gasoline on sale in the six affected states. (7/7)
 
Canada imported a record 573,400 b/d of US crude in May, Statistics Canada data showed. As US crude exports are heavily restricted, the lion’s share of US exports often goes to Canada as much of the refined product produced eventually feeds into US Northeast demand. (7/9)
 
The U.S. oil rig count increased by five to 645 last week, Baker Hughes Inc. said Friday, following a rise of 12 the previous week. That said, there are still about 59% fewer rigs working since a peak of 1,609 in October. Natural gas rigs fell by two to 217 and miscellaneous rigs dropped by two to one, bringing the total count up one to 863. The biggest regional growth came in the Permian Basin of West Texas, where eight oil rigs were added to 239. The Eagle Ford shale in South Texas saw a drop of five rigs to 81. BHI also reported this week that the average US rig count for June was 861, down 28 from May and down 1,000 from June 2014. (7/11)
 
Total US crude oil production dropped 50,000 b/d in May compared with April, when onshore production began declining, according to the US EIA in its July Short-Term Energy Outlook. (7/11)
 
Oil exports hearing: Rural US communities generally have benefited from the nation’s crude oil production renaissance, and potentially could be helped more if restrictions on exports of crude were eliminated, witnesses told a US House Agriculture Committee hearing on July 8.  (7/10)
 
Fracking rule fracas: Two days after North Dakota filed an injunction to delay new federal fracking rules, a district court granted a temporary reprieve, saying that permitting of oil and gas wells on federal land will proceed under current regulations until July 22nd. The case before the court combined a challenge from North Dakota, Wyoming and Colorado with one from industry groups who believed the Bureau of Land Management (BLM) did not follow federal rule-making law and exceeded their authority. (7/9)
 
in the Marcellus shale gas play, work on a pipeline capacity expansion project slowed natural gas production during May and June, but output is expected to kick back into high gear in July and keep pace with a projected 5.7 percent increase in production from last year. (7/8)
 
Shell Oil, the U.S. unit of Royal Dutch Shell, may soon drop the word “oil” from its name in a move that would signal its transition to other sources of energy. With Shell Oil Co.’s parent focusing more on natural gas and looking at other energy alternatives, the “oil” in the name “is a little old-fashioned.” (7/10)
 
Royal Dutch Shell is days away from drilling in the Arctic Ocean—betting it can find enough oil to justify the huge risks that keep almost every other competitor out of those icy waters. The company is hauling two massive rigs—the Polar Pioneer and the Noble Discoverer—more than 2,000 miles up and around the Alaska coast to the Chukchi Sea, where it plans to begin work the third week of July. Accompanying the rigs are 30 support vessels and seven aircraft, a large entourage even by big oil-company standards. (7/8)
 
Royal Dutch Shell confirmed an icebreaker carrying a piece of safety equipment to a drilling site in arctic Alaskan waters suffered a minor hull breach.  Shell would need the capping stack positioned near drilling sites under the terms of federal permits. (7/9)
 
Church vs. Arctic drilling: Oil companies need to do more to tackle climate change, the Archbishop of Canterbury said Tuesday, noting he was particularly concerned about the recent push to drill in Arctic Ocean waters. Archbishop Justin Welby didn’t speak about the most immediate foray being made into the Alaskan Arctic by Royal Dutch Shell. But he mentioned some of the same arguments made by environmentalists who oppose Shell’s drilling campaign, which begins this month in the Chukchi Sea. (7/8)
 
Hilcorp Energy, as part of its goal to become a dominant player in Alaska’s energy industry, is reportedly buying the Cook Inlet assets owned by XTO Energy, an Exxon Mobil subsidiary. The sale will transfer 29 producing wells from two platforms and an onshore facility to Hilcorp Alaska. Altogether, the assets produced about 2,000 barrels of oil per day in 2014. (7/8)
 
Recycling drilling wastewater: California’s epic drought is pushing Big Oil to solve a problem it has struggled with for decades: what to do with the billions of gallons of wastewater that gush out of wells every year. Drillers have pumped much of that liquid back underground into disposal wells. Now, amid a four-year dry spell, more companies are looking to recycle their water or sell it to parched farms as the industry tries to get ahead of environmental lawsuits and new regulations. The state’s 50,000 disposal wells have come under increased scrutiny this year, after regulators said they’d mistakenly allowed companies to inject wastewater near underground drinking supplies. (7/11)
 
Mega power surge: Germany’s fivefold increase in wind and solar energy in the past decade has outpaced investment in power lines to move it across the country. Germany is producing so much electricity that it’s spilling over into neighbors’ grids and increasing the threat of blackouts. Poland and the Czech Republic are spending $180 million on equipment to protect their systems from German power surges, while Austria is curbing some trading to prevent regional networks from collapsing. On a windy day, the overflow east can exceed the output from four atomic reactors. (7/8)
 
Solar projects in Israel—a nation with an excellent solar resource—are permitted, financed and ready to build but not getting permission to hook up to the grid.  Without that step, the economics don’t work and the projects remain in limbo.  In dozens of communities across Israel, solar project backers blame an unlikely culprit: natural gas. Two big offshore gas finds in 2009 and 2010 shifted priorities and resources away from solar projects, they say. Shortly after, the government stopped approving the hookup of new solar projects to the grid. (7/7)
 
Accessible solar: The Obama administration announced an initiative to help low- and middle-income Americans gain access to solar energy, part of a series of steps President Obama is taking to tackle climate change.  The administration intends to triple the capacity of solar and other renewable energy systems it installs in federally subsidized housing by 2020, make it easier for homeowners to borrow money for solar improvements and start a nationwide program to help renters gain access to solar energy. (7/8)
 
New energy storage offerings from Tesla and other manufacturers are widely expected to enhance the attractiveness of rooftop solar power and other renewables. However, recent analysis from the Brattle Group shows that even with rapid cost reductions, grid-independence will remain beyond the reach of most consumers. (7/11)
 
Testing a prototype wave energy device at a US Navy site in Hawaii will provide information needed to determine commercial possibilities, the government said. Developer Northwest Energy Innovations tested an earlier prototype off the coast of Oregon in 2014. With more than half the US population living within 50 miles of a coastline, the government said marine and hydrokinetic technologies could provide an untapped renewable energy resource. (7/8)
 
Europe’s heat wave has pushed the mercury to its highest level in Germany since measurements began in 1881. The country’s national weather service says an automated measurement station recorded a temperature of 40.3 degrees Celsius (104.5 Fahrenheit) in northern Bavaria. (7/6)