Peak Oil Review – July 27

July 27, 2015

 Quote of the Week

"Corruption in Nigeria has virtually developed into a culture where honest people are abused. The amount of money [involved] is mind-boggling but we have started getting documents where some of the senior people in government and former ministers have as much as five accounts and were moving about one million barrels per day on their own. We have started getting those documents."
Nigeria’s President Buhari
1.  Oil and the Global Economy
The slide in oil prices continued with New York futures closing Friday at $48.14, down 6 percent for the week, and London futures closing at 54.42, down 4.3 percent during the week.  This time the decline was aided by an increase of 21 rigs drilling for oil in the US suggesting that US shale oil production will increase or at least decline more slowly. The decision to reactivate these rigs was likely taken a month or more ago when prices seemed to be stabilized around $60 a barrel. In addition to the increase in rigs, the now normal factors of a stronger US dollar, a contracting Chinese economy, increasing inventories, and higher oil output from Saudi Arabia and Iraq contributed to the falling prices.  The prospect that more Iranian oil will be coming on the the market before the end of the year also keeps pressure on the market.
Prices are falling so fast this month, down 19 percent, that the decline may surpass the 19.4 percent drop seen last December which was the largest since the 2008 financial crisis. The decline is not limited to oil, but part of a 28 percent decline in the Bloomberg Commodity index which covered a wide range of commodities during the past year.  Much of this decline is attributed to China’s economic slump and lower imports. The World Bank says that the average price of fuels — coal, oil, and natural gas – will fall 39 percent from 2014 to 2015. The bank says commodities are now trading at their lowest in 12 years following a decade long boom occasioned by rapid growth in China and India.
US crude imports continue to rise as traders around the world seek storage capacity to hold the oil they cannot sell. The demand for storage is so high that the monthly cost of storing and financing a barrel at Cushing, Okla. has tripled in the last two months.
Obviously the precipitate decline in oil prices is causing all sorts of consternation in the oil industry and on Wall Street, which has been financing much of the shale oil boom, and is now faced with large losses as drillers go bankrupt. The market value of the companies in Bloomberg’s North America Independent Producers Index has declined by $100 billion in the last month. Stories are appearing frequently in the financial press concerning growing impatience on Wall Street with the US “shale revolution,” and questioning how much longer the Street will continue to finance an unprofitable industry. 
The major international oil companies will likely report another sharp drop in quarterly profits which in turn could lead to another reduction in capital spending for exploration and production. This, of course, has serious implications for production in coming years and is a harbinger of peak oil. Unless the oil industry can replace some 6-8 percent of its current output with production from new wells each year, a decline in production is obviously inevitable.
US natural gas prices have been volatile in the last two months, swinging between $3.00 and $2.50 per million BTUs, still well below what outside analysts say is profitability for shale gas which is becoming an increasing share of US production. Prices jump around these days based on the latest weather forecasts. As natural gas-fired electricity for air conditioning slowly replaces coal, summer heat waves become almost as important as winter cold snaps in determining the demand for natural gas.
As the shale gas industry continues to hum along, despite charges that it is massively unprofitable, the balance of supply over demand continues to grow. Last week the EIA reported that producers injected 68 billion cubic feet into storage. This was 30 percent above the normal for the week and sent prices down 8.1 cents to $2.816 per million BTUs. The addition to stocks put US natural gas stocks at 2.8 trillion cubic feet which is 28 percent higher than last year at this time and 2.9 percent above the five-year average.
At $3.00 per million, many power plants switch back to cheaper coal which keeps a cap on prices. This saga likely has several more years to run until US shale gas production starts to decline. The pace at which the decline will happen is becoming a matter of debate. The EIA is saying that the decline in production will be gradual and stretch over decades, while some outside observers believe it will be much faster.
2.  The Middle East & North Africa
Iran: Arguments over the Iranian nuclear deal continue in Washington where the Congress must decide whether or not to remove the legislatively imposed sanctions on Iran. Those opposed to the agreement believe that tightening the sanctions further will force the Iranians to give in to every demand. The administration and its supporters say the new agreement is the best that can be obtained; that Russia, China, and the EU will lift the sanctions no matter what the Congress does; the Iranians then will have their economic growth back and be free to continue enrich uranium or even develop weapons if they are not afraid of an Israeli preemptive attack. The ultimate disaster would be an attack on Iranian nuclear facilities which would send Middle Eastern geopolitics careening off in an entirely new direction.
For now, most believe the US administration has the votes and the veto authority to stop a Congressional effort to sink the agreement. However, the situation is volatile and no one is sure where it will go.
In the meantime, the Iranians are giddy with expectations as to all the good things that are going to stem from the agreement. They have outlined plans for $185 billion worth of investment in their oil and gas industry in the next five years that will significantly increase their production. They are expecting that most of this money will come from foreign investors and even seem willing to let foreigners purchase state assets if it will stimulate investment.
Many potential investors, however, have expressed caution about getting too deeply involved in Iran where hardline “revolutionaries” still control much power.  One only has to look at places like Russia and Venezuela where ambitious politicians kicked out foreign investors as soon as their projects were up and running.  Like Iraq, Iran still has extensive cheap-to-extract oil and gas deposits which would normally be of much interest to foreign investors, but the world is changing fast. Climate change, lower demand for oil, and new sources of energy may eventually trump Iranian hopes for a brighter oil export-supported future.
Syria/Iraq: The situation in Syria took an abrupt turn last week when Ankara, reacting to an ISIL attack inside Turkey which killed 32, essentially declared war on the Islamic State. Turkish aircraft bombed ISIL positions in Syria and more importantly granted long-standing US requests to use airbases in Turkey to conduct the air war against ISIL. As these bases are close to northern Syria, coalition aircraft will shortly be far more effective in attacking ISIL targets in northern Syria.
Of more importance to the course of the civil war may be the clamp down on the smuggling of would-be Jihadists and material into Syria and the clandestine export of Syrian oil into Turkey.   The Turks have been accused of secretly backing ISIL as a means of blocking Kurdish ambitions to incorporate a big piece of eastern Turkey into a new Kurdish state. Ankara also looked on ISIL as a means of defeating the Assad government in Syria. In the last week, however, the Syrian situation has become still more confused, so there is little indication as to what might happen next.
It addition to attacking ISIL targets, the Turks began bombing Kurdish forces in Iraq affiliated with the Turkey-based Kurdistan Workers Party that seeks to “liberate” part of Turkey. As the US relies on the Kurds to control ISIL in northern Iraq and is deeply involved in Iraqi Kurdistan this adds a new and possibly dangerous element to the multi-front regional struggle raging across the region.
There is nothing in last week’s developments which would seem to impact Middle Eastern oil flows in the near future, except a possible weakening of ISIL as airpower becomes more effective and the Turkish border becomes harder to cross. How the Turks bombing of Kurdish targets in Iraq plays out has yet to be seen.
There was not much news from Iraq last week. The government offensive in Anbar province continues, but seems to be making little progress. Oil exports from Basra are going well and may set a record this month.
Saudi Arabia/Yemen: Southern secessionist fighters, with Saudi backing, took control of most of Aden last week and were fighting the Houthi militia and army units loyal to former president Saleh for control of a major airbase north of the port city.  Some see the taking of Aden as a turning point in the war which the Gulf Arab states maintain is an Iranian effort to outflank them by supporting the Shiite Houthi. Efforts are also underway to break the alliance between military units loyal to former president Saleh and the Houthi. Without these units the Houthis would not be able to continue the fight against the Saudi-backed Sunnis in central and southern Yemen.
A five-day ceasefire was to come into effect on Sunday in order to move more humanitarian supplies into the country. For now there is no end to this conflict in sight. Several rounds of peace talks have collapsed, so the fighting will likely continue. In the long run, the advantage is with the well financed Saudi-backed forces; however humanitarian problems may become so great that both sides are forced to a compromise.
The decline in oil prices is hurting the Saudis as it does many other states dependent on oil exports for the bulk of their income. The Saudis currently have a government deficit that may run anywhere from $40 to over $100 billion this year if oil prices stay low.  In February of 2014, the Kingdom had currency reserves of $737 billion, but by February of 2015, this had dropped to $707 billion. Some observers are starting to note that at this pace, Saudi reserves could be exhausted by the end of the decade if oil prices remain low.
3.  China
Beijing’s economic troubles continue. China’s purchasing managers index for July dropped to 48.2 the lowest since April of 2014 and was the fifth straight month the index was below 50 which indicates economic contraction. Beijing continues to suffer from a massive $16.1 trillion corporate debt which continues to grow. Many speculate that this this debt will one day prove the undoing of China’s economic miracle.
China’s stock markets gained for the third consecutive week since massive government intervention began. A Reuters analysis shows that Beijing has thrown upwards of $800 billion into rescuing the market so far and severe limitations on the free trading of stocks remain in place.  Beijing had little choice other than to adopt draconian measures as the rapid drop in stock prices threatened to undermine the country’s economy and financial system.
The story is not over as yet. Many Chinese households invested heavily in the stock market boom and lost their money. These are the people that the government was counting on to help China switch from an export-oriented economy to one based on domestic consumption. China’s automobile sales in June were down by 3.4 percent year over year. Analysts say that new car sales this year may be up by only 1.7 percent after years of double digit growth.
Of more interest, however, are the deals to import large quantities of Russian natural gas that have been signed in recent years. In May the two countries signed a second agreement for a new “western route” pipeline that was to deliver 68 billion cubic meters per year to the Chinese economy.  Last week it was announced that the project has been postponed indefinitely due to the slowing Chinese demand for natural gas. China’s gas consumption had been growing at around 12-13 percent a year, but last year fell to 8.5 percent and to 2 percent in the first half of 2015. Building a new pipeline to China is expensive and Gazprom was demanding a relatively high price for its natural gas.
Last week the Chinese also announced that its direct investment in Russia had dropped 25 percent year over year in the first half of 2015 and that trade between the two countries had fallen by 30 percent in the same period.
Given the continuing deterioration of Moscow’s relations with the West and the EU’s efforts reduce its dependence on Russian gas, we may be seeing some concessions on the part of Gazprom shortly. In the meantime, there is plenty of Australian LNG around for China to import.
4. Russia/Ukraine
As the price of oil sinks, Russia’s economy sinks with it. The ruble closed Friday at 58.47 to the dollar, down for the fifth week in row. Inflation is soaring – up 16 percent in the first quarter while real wages fell 14 percent in May. The decline in wages has led to a 9.4 percent drop in retail sales in June. The IMF expects Russia’s GDP to shrink by 3.8 percent this year.  Official state reserves have fallen from $524 billion to $361 since late 2014 and some believe the true number is closer to $340 billion. Some are saying the state reserve fund will be depleted by then end of 2016. Roughly 25 percent of Russia’s regional governments are virtually bankrupt and Russian companies have to refinance $86 billion in foreign currency debt in the second half of this year.
Russia’s oil and gas industry is not in good shape. Except in western Siberia, there has been little or no investment in oil production and the depletion rates in Soviet-era oil fields are now running 8 to 11 percent a year. Without access to foreign technology some believe oil production could fall by 5-10 percent by 2018. In March Lukoil vice president offered an even more pessimistic forecast — an 8 percent or 800,000 b/d drop in production by the end of 2016.
So far this year, however, Russia’s oil production has been slowly moving upwards and recently hit a post-Soviet high of 10.7 million b/d. For Russian oil companies, the decline in the ruble has offset the decline in oil prices and as their expenses are in rubles, they have had the money to increase production a bit. They can only go so far by drilling in older oilfields with obsolete equipment.
Russia’s long-term strategy for increasing oil production by drilling in the Arctic and exploiting shale oil reserves are on hold due to the sanctions and inability to partner with western firms.  Without the technical know-how average well fracking costs in Russia are three times those in the US making shale oil clearly an uneconomic proposition. As we have watched Royal Dutch Shell blunder around off Alaska, it seems as if the future of drilling offshore in the Arctic is a dubious proposition.
If there is not much of an oil price recovery in the next few years, Russia’s economic situation will clearly become much worse. President Putin, who is still enjoying a 75 percent approval rating from citizens hankering for the “good old days” of Russia as superpower, is moving to ensure he has little meaningful competition in coming elections. He and his policies are likely to be around for some time unless there is a major economic collapse.
Press stories of a major Russian buildup along the Ukraine/Russia border have led to much speculation that Moscow is planning a push to seize more Ukrainian territory later this year. Western military officials continue to say that Russia is rapidly becoming a major threat to US and EU security,
5.  The Briefs
In the North Sea, oil firms trying to sell aging oilfields are considering shouldering hundreds of millions of dollars in future dismantling costs to help find buyers, industry sources say.  One of the world’s oldest and most important offshore oil and gas production basins, the UK North Sea faces dwindling output and a growing number of redundant platforms that require decommissioning in a scale and complexity never seen before. (7/22)
British shale pioneer Cuadrilla Resources said it planned to appeal June’s decisions by a county council to deny permits for a hydraulic fracturing campaign in the Preston New Road and Roseacre Wood sites. The council said it refused the applications because of noise and visual impact concerns, and “potentially severe” impacts on road infrastructure and traffic, respectively. (7/25)
French oil major Total is selling a 50 percent stake in its sole US refinery in Port Arthur, Texas. The company, which has been trying to reduce its downstream exposure for three years, intends to remain operator of the 225,000 b/d plant, which it has owned for more than 40 years. The move reflects Total’s efforts to shift more capital toward production. (7/25)
The Kurdistan Regional Government is hoping to attract private bids for three new refineries with a total capacity of 150,000 b/d, in an attempt to bridge the gap between uneven domestic fuel supply and rising demand. In tandem with these efforts, government officials hope to reform the structure of Kurdistan’s downstream sector, aiming to wean it from expensive subsidies. (7/24)
In Egypt, Italian energy company Eni it made what it considers to be an important discovery of natural gas in the Nile Delta, about 75 miles northeast of Alexandria. Preliminary estimates of the discovery account for a potential of 530 billion cubic feet of gas in place with upside, plus associated condensates. (7/21)
In Nigeria, Delta State’s Governor has appealed to communities to be vigilant against pipeline vandalism which he said led to the loss of three million barrels of crude oil during April. (7/25)
In Mexico, once oil industry reforms are in full swing, a consultant with IHS told a U.S. House Foreign Affairs subcommittee that the North American energy landscape could transform global oil dynamics. With high-end US production estimates of 13.3 million b/d and 4.3 million b/d from Canada, Mexico’s potential additions would position North America as a rival to OPEC. (7/25)[Editor’s note: dartboard alert about the notion that U.S. oil production could grow another 40%.]
Major pipeline leak: Nexen Energy apologized for an oil sands pipeline leak in the Canadian province of Alberta that is one of North America’s largest-ever oil-related spills on land, and said its cleanup crews were working around the clock. The pipeline leaked 31,500 barrels of emulsion. (7/20)
In Canada, weeks after a state-controlled Chinese oil company bought Nexen for $15 billion, its executives were in Calgary with a blunt message for the Canadian company, which had struggled for years to extract crude from the oil sands in the Alberta wilderness. Two years later, Cnooc is still trying to fix Nexen, its troubles compounded by low crude prices. And now Cnooc must explain an oil spill. (7/23)
Canadian oil sands producer Cenovus Energy cut operating expenses two years ago by halving the amount of instrumentation used to measure finicky temperature and pressure at its wells. But that turned out to be a costly mistake that cut into production volumes, so the company reversed course. Note: of the roughly two million barrels a day that Canada currently produces from its oil sands, about half is mined from the surface using giant excavators and the world’s largest dumping ponds. (7/23)
The US drilling rig count jumped 19 units to reach 876 during the week ended July 24, according to data from Baker Hughes. Rigs targeting oil jumped 21 units to 659. Gas-directed rigs, meanwhile, were down 2 units to 216. Canada’s rig count continued its upward climb, increasing 8 units to an even 200. Its count has now risen in 9 of the last 11 weeks. (7/25)  
Hercules Offshore, a US rig company, said low crude oil prices suggest activity in the exploration and production side of the energy sector will stay depressed. From U.S. operations alone, Hercules said revenue generated during the second quarter of the year dropped 71 percent year-on-year to $40.6 million. (7/24)
Offshore doldrums: Imagine parking your $300 million boat for months out in the open sea, with well-paid mechanics hovering around it and the engine running. The Gulf of Mexico and the Caribbean Sea have become a garage for deepwater drill ships — at a cost of about $70,000 a day each. It’s either that or send your precious rig to a scrapyard. The dilemma underscores how an offshore industry that geared up for an oil boom is grappling with a bust. Rig owners are putting equipment aside at unprecedented numbers as customers pull back from higher-cost deepwater exploration. (7/23)
Shallow GOM losing ground: Energy producers are abandoning the search for oil and natural gas close to shore in the US Gulf of Mexico as drilling budgets shrink and exploration migrates to land-based shale fields. The number of permits for new wells in seas less than 500 feet (152 meters) deep plunged 74 percent to nine during the first six months of this year from a year earlier. (7/21)
Weatherford International said Thursday that, responding to continued weakness in the North American oilfield services market, it would revise the number of planned layoffs to 11,000, up from the previously announced goal of 10,000 layoffs. (7/24)
Chesapeake Energy Corp. said it will eliminate its shareholder dividend starting in the third quarter and redirect the money to capital spending, the latest round of cutbacks for the U.S. shale driller. (7/22)
Arctic drilling: The US Interior Department granted Royal Dutch Shell two final permits to explore for crude in the Arctic this summer, but said the company cannot drill into the oil zone until required emergency equipment arrives in the region. Shell discovered weeks ago that the Fennica icebreaker that holds the required safety equipment had a three-foot (1-meter) gash in its hull. (7/23)
In northeast Pennsylvania, researchers comparing hospital visits in three rural counties found a higher rate of hospital visits in counties with a heavy gas industry presence. Residents of heavily drilled Bradford and Susquehanna counties were admitted to hospitals at higher rates than in neighboring Wayne County where drilling is banned, University of Pennsylvania and Columbia University researchers stated in a paper published last week. (7/21)
Oil exports: Lobbying over whether to scrap the four-decade-old US ban on exporting crude oil has almost doubled as proponents push to build momentum toward a showdown likely to come sometime after the 2016 election. Members of the House and Senate left the export ban out of bipartisan legislation most likely to move ahead in this session of Congress. While Representative Joe Barton, a Texas Republican, has introduced a House crude measure that has more than 100 co-sponsors, a similar Senate bill has just four co-sponsors. There probably isn’t enough backing to end the ban before the 2016 elections. (7/24)
The leaders of the US Senate energy panel released a bill Wednesday that includes measures to promote energy efficiency and protect the electric grid from cyber threats, but avoids the controversial issue of lifting a ban on exporting crude. The bill was drafted by both Senator Lisa Murkowski of Alaska, the Republican chairman of the Energy and Natural Resources Committee, and Maria Cantwell, the panel’s top Democrat. A similar bill is advancing in the Republican-led House. (7/23)
SPR:  Legislative proposals to sell upwards of 11 percent of the nation’s 695 million barrel Strategic Petroleum Reserve as a way to pay for unrelated government programs such as highways have drawn opposition from the Senate Energy Committee chairman, the US energy secretary and oil industry analysts as being shortsighted. (7/23)
Americans are driving record miles, raising consumption of gasoline and profit margins for refiners. The IEA said global oil demand is expected to increase 1.5 percent this year, the most since 2010. Surging demand and rising prices for gasoline in the US are luring about double the number of gasoline tankers from Europe compared with 2014, boosting shipping rates to the highest seasonal levels in seven years. With so much being exported, fuel prices in Europe have increased almost four times faster than crude since February to the equivalent of more than $6 a gallon. (7/24)
Gasoline prices: A stable national retail average price for a gallon of gasoline is masking volatility in some US states brought on by refinery issues, the AAA said. While the national average price for a gallon of gasoline Tuesday was $2.75 per gallon, the state average price in California for Tuesday was $3.87/gal. (7/22)
US diesel price dive: On July 13, the average diesel fuel retail price fell below the average regular gasoline retail price for the first time in six years. From August 2009 through June of this year, retail diesel fuel sold at an average premium of 34 cents per gallon over regular grade gasoline. (7/24)
Chicago Transit Authority expects two electric buses it bought will each save $300,000 in fuel costs and $660,000 in public health costs over their 12-year expected runs. That more than makes up for the $500,000 premium over the diesel buses that the electric ones replaced. They can run for 100 miles — a full day’s work — before needing to recharge overnight. (7/24)
Orders for railroad tank cars fell 29 percent in second quarter and 70 percent from the second quarter of 2014, reflecting lower shipments of crude oil amid falling prices. The decline comes amid a broad decline in energy shipments at railroads: down 20 percent from this week last year, and down 2.7 percent in year to date in 2015 over 2014. (7/23)
Coal carload volumes originated on US railroads reached to an 11-week high, according to data released Wednesday by the Association of American Railroads. Despite the increase, the latest total marked the 15th week this year coal volumes were below 100,000 carloads. It is the most times in a year weekly volumes have remained that low since the AAR began such record keeping in 1988. (7/23)
In China, nuclear power currently makes up slightly more than 2 percent of total power generation. However, the government has a stated goal to provide at least 15 percent of overall energy consumption by 2020 (increasing to 20 percent by 2030) from non-fossil fuel sources, including nuclear, hydroelectricity and other renewable sources. To help achieve this target, China plans to increase nuclear capacity to 58 gigawatts (GW) and to have 30 GW of capacity under construction by 2020. (7/21)
China could be on the verge of introducing a two-child policy, 35 years after enacting draconian birth control rules blamed for millions of forced abortions and the creation of a demographic “time bomb.” The new regulation, under which all Chinese couples would be allowed to have two children, could be implemented “as soon as the end of the year if everything goes well.” (7/25)
In Venezuela private companies say the government has ordered them to distribute food staples to a network of state-run supermarkets amid chronic shortages of basic goods. The food industry says there are 15 times as many private stores in the socialist South American country as state-run ones, and that the order could cause major supply problems. (7/21)
Israel signed a deal to build a $1.05 billion thermo-solar power plant in the country’s south, aimed at boosting electricity production from renewable energy sources. The 121 megawatt plant, to be built near a solar photovoltaic plant, is expected to come on line in 2018 and will also be able to store electricity. The two plants will provide 2 percent of total electricity production in Israel, which has a target of 10 percent coming from renewable sources by 2020. (7/20)
A solar-powered desalination project In California’s drought-stricken Central Valley farming region is turning salty, contaminated agricultural drainage into fresh water that can be re-used to irrigate crops. The solar-powered technology has the potential to shift the way water is used and managed in parts of the west, where agriculture accounts for 70-80 percent of water use. (7/23)
The present El Nino event, on the cusp of attaining “strong” intensity, has a chance to become the most powerful on record. The presence of a strong El Nino almost ensures that 2015 will become the warmest on record for Earth and will have ripple effects on weather patterns all over the world. (7/21)

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