Peak Oil Review – Aug 3

August 3, 2015

 Quote of the Week

"A steady supply of gas from Iran would not be a silver bullet for Pakistan’s energy crisis. Woeful energy sector governance is perhaps an even more debilitating factor than supply, with risks including rampant theft, poor maintenance, and transmission and distribution losses of around 20 percent."
Oliver Coleman, deputy head of Asia programs at analytical firm Verisk Maplecroft [Note: Pakistan is the world’s sixth most populous nation with roughly 190 million inhabitants]

1.  Oil and the Global Economy
Last week started with the China’s stock markets suffering the biggest one-day loss in eight years. After that it was mostly down hill for the oil markets. There was a bounce after the Wednesday stocks report showed a larger-than-expected, 4.2 million barrel, drop in the US crude inventory, but by the end of the week prices were falling again. At the close Friday New York futures were down to $47.12, the lowest close since March 20th, and London was down to $52.26. The week’s losses left US oil futures down 21 percent during July and Brent down 18 percent, the largest one-month losses since last December.  The price drop in July was the largest since the 2008 financial crisis.
As usual the losses were precipitated by traders’ perceptions that there is no end in sight to the roughly 2 million b/d of global overproduction. A strong US dollar, an increasingly dysfunctional Chinese economy, and an another increase in the US rig count contributed to the decline.  OPEC weighed in with the assertion that the price drop would soon be over and hinted that no major cutbacks in OPEC production are in the offing.
On Friday, the EIA released a new report showing that US oil production hit a 44 year high of 9.7 million b/d in March, but that production had declined to 9.5 million b/d by the end of May. Last week’s stocks report which is more of an estimate than an actual count of production showed production in the lower 48 falling by 151,000 b/d the week before last.
The Commodity Futures Trading Commission reported that hedge funds and other large speculators have reduced their long positions in oil markets to the lowest in five years indicating that they expect further price declines.
The sharp decline in prices since last summer is killing profits in the oil industry. Although the smaller firms have been under pressure for many months, last week several oil majors such as Exxon, Chevron, and Shell reported a large decline in profits. Exxon, thought to be the best insulated from a price crash, reported its worst quarterly profit since 2009 and Chevron reported that its profits were down 90 percent. The upshot is that there have been some 70,000 job losses in the industry and and some $200 billion in spending on new oil and gas projects has been suspended.  The Wood Mackenzie energy advisory firm says that the bulk of the cutback in spending will be on the very expensive deep water projects that were expected to provide the bulk of new oil production in the next decade. Most observers seem to be expecting that oil prices will remain low for several years. Distant futures contracts have now slipped to below $60 a barrel, suggesting that speculators are not expecting a price recovery anytime soon.
There is always some room for hope. Last week the North Dakota Department on Mineral Resources announced that its drillers have become so efficient that the breakeven price for oil in one of its counties was now down to $24 a barrel – which is about a third or less of what outside observers say it costs to produce Bakken crude. The state is likely ignoring the costs of drilling and fracking the well, leasing the land, and paying taxes in its estimate. Two weeks ago North Dakota reported that its oil production was 1.2 million b/d of oil in May as compared to 1.17 in April.
US natural gas prices, which have been bouncing around between $2.60 and $3.10 for the last two months, fell to a three-week low of $2.71 per million BTU’s last Friday.  Weather forecasts showing that it is likely to be cooler than normal in large parts of the country next week were the reason for the decline.
President Obama will announce a new plan this week imposing stricter-than-expected regulations on the release of greenhouse gases.
2.  The Middle East & North Africa
Iran: Tehran remains optimistic that the sanctions will be at least partially lifted before the end of the year and is pushing ahead on several fronts to sell more oil and gas. Last week it announced that the pipeline is nearly ready to start exporting natural gas into Iraq. Negotiations have started for Tehran to start supplying natural gas to the EU by pipeline and via LNG. The Iranians are also getting ready to revive the project to export natural gas to Pakistan and India.  Given the relations between Pakistan and India, a pipeline to the latter likely have to be separate and under the sea. Even the the proposed pipeline into Pakistan would be highly vulnerable to dissident attacks. The pipeline from Iran to Turkey was blown up in Turkey last week, likely in retaliation for Ankara’s new policy of attacking the Kurds.
In Washington, the Congress went on vacation last week leaving work on the nuclear treaty until September.
Syria/Iraq: The situation in Syria is becoming more of a confused mess all the time. With the Turkish Air Force attacking Kurds, the US and allies attacking ISIL, the various rebel groups attacking each other and occasionally the Assad government forces, it is hard to say if anybody is making any progress. President Assad did admit last week that he is having trouble finding troops for his army.  The Turkish air strikes on the the Turkish Kurd’s camps in Iraq continue. The Iraqi Kurds have asked the Turkish Kurds to get back into Turkey as they are only getting Iraqi Kurds killed in the airstrikes.
Turkey’s Kurds retaliated for the airstrikes by blowing up the Kirkuk-Ceyhan oil pipeline last Wednesday halting the flow of oil from northern Iraq and Iraqi Kurdistan to the export terminal in Turkey. The Norwegian oil company, DNO, says its oil production in Kurdistan continues as normal with output being redirected to local sales.
Kurdistan received its June payment from Baghdad of only $139 million this time – the smallest to date. The dispute over the division of the oil revenues continues with the Kurds continuing to sell much of their production by themselves, bypassing Baghdad’s marketing organization which collects the revenue.
There are mixed reports on how well Iraq’s southern oil exports did last month. The South Oil Company says exports were up slightly to a record 3.06 million b/d in July, while other reports say they slipped a bit. Small changes in the exports from the southern terminal are largely irrelevant, however, so long as the northern export pipeline which can move 300,000 b/d is out of service.
It was very hot in southern Iraq last week. Riots broke out to protest power cuts after temperatures reached 122o F (50o C) and the government declared a four-day holiday because of the heat. Increasing summer temperatures and falling water supplies will almost certainly have a major effect on the region in coming years.
Libya: Foreign oil producers have started to write off assets in Libya saying that it is no longer possible to produce oil in the country. Last week BP wrote down $600 million. Total had already written down $755 million. The moves raise questions as to whether Italian oil company Eni and Spain’s Repsol will do the same.
Libya’s crude production fell below 400,000 b/d last week due to power cuts at the oilfields. The Libya Herald says the eastern power grid is about to collapse.
There are reports that a military force consisting of troops from Italy, the UK, France, Spain, Germany, and the US will be sent to Libya to stabilize the situation and contain the Islamic State as soon as a unity government is formed in Tripoli.
Saudi Arabia/Yemen: The humanitarian crisis continues to grow in Yemen as the various ceasefires have not been effective. The UN says that 80 percent of the 27 million population need help. Hundreds of Yemeni fighters have now been secretly trained in Saudi Arabia and returned to fight against the Houthis who have largely been driven from the southern city of Aden. The Houthis are tough and determined fighters so this civil war is likely to continue for some time increasing humanitarian problems.
The Saudis are likely to reduce oil production in September as temperatures fall and there will no longer be a need for extra oil production to support the generation of power for air conditioning. Production will likely drop by 200,000-300,000 b/d next month but exports will not be affected.
3.  China
The state of the economy remains the number one issue in China. The sharp, unexpected, drop in the stock markets last week has many worried that the government is losing interest in controlling the markets now that an immediate collapse has been avoided.   A debate has begun as to whether Chinese stock markets have any real meaning as a way of raising capital or are simply creatures of the state designed to entice Chinese citizens into investing their excess cash largely in state industries.
There is no question that the decline in China’s stock and many other indices has contributed to the decline in oil prices. Although the official Chinese statistics have the economy expanding at 7 percent a year, private estimates based on a variety of numbers such as growth in electric power consumption place the expansion at closer to 3 percent. If this is true, we could be seeing a major decline in the rate that Chinese oil imports are increasing, especially after Beijing finishes its current round of expanding its strategic oil reserves.
4. Russia/Ukraine
It was a bad week for the Russian economy. The government cut its key interest rate by 50 basis points on Friday as the ruble fell to 61.73 to the US dollar, closing above $60 for the first time since March. Oil prices have been falling so quickly that the decline has been enough to offset the various fiscal measures that Moscow has been using to support the ruble. Pessimism about the immediate future of the Russian economy continues.
The Ukraine situation was quiet last week
5.  The Briefs
European motorists eyeing the recent bear market in crude oil aren’t seeing price cuts at the pump. Energy analysts are pinning the blame on a stronger U.S. economy, saying it’s pulling more cargoes of the fuel than normal across the Atlantic in America’s driving season. (7/31)
The UK Oil and Gas Authority announced 41 new licenses Monday to explore the U.K. Continental Shelf in the North Sea. An additional 134 licenses were awarded in November 2014. The total of 175 licenses makes the round of applications among the largest since the licensing process began in 1964. (7/28)
A Scottish delegation on an official trip to Beijing said they wanted to draw Chinese investors into the North Sea oil and natural gas sector. (7/30)
Royal Dutch Shell is to ax 6,500 jobs this year and step up spending cuts to deal with an extended period of lower oil prices which contributed to a 37 percent drop in the oil and gas group’s second-quarter profits. The company also said it was planning more asset disposals as it pushes ahead with its proposed $70 billion acquisition of BG Group, bringing total asset sales between 2014 and 2018 to $50 billion. (7/31)
BP on Tuesday swung to a loss in the second quarter, as earnings were hit by lower oil prices and a multibillion-dollar charge relating to the deal it reached earlier this month to settle U.S. federal and state claims over the 2010 Deepwater Horizon disaster. (7/28)
Russia’s $400 billion deal to supply natural gas to China National Petroleum Corporation sounds like a coup for Moscow. But recent analysis shows the deal is strongly tilted in China’s favor. Gazprom will be lucky to break even on the contract and may even lose substantial amounts of money. While the deal may not make economic sense for Gazprom, it does fit with Vladimir Putin’s broader geopolitical “tilt to Asia” strategy. (7/29)
Iranian risk: Western and Middle East insurance specialists see Iran as an appealing $8 billion (£5 billion) market in the wake of its nuclear deal with world powers, though uncertainty over when sanctions on Tehran will be lifted means they are treating the country with caution. (7/27)
After India left the IP Gas Pipeline project, a consortium of Indian companies headed by South Asia Gas Enterprise expressed willingness to import Iran’s natural gas. The company is waiting for the termination of anti-Iran sanctions to fund the construction of a 3000 km underwater (deep-sea) pipeline. (7/27)
Any attempt by Iran to sell to China millions of barrels of ultra light crude built up in tankers over the last 2-1/2 years of sanctions is likely to be thwarted by poor refining margins and an outage at a major importer of the oil. (7/30)
Iran’s quest to rejuvenate its energy industry after decades of sanctions is attracting renewable energy developers eager to plant wind turbines on windy ridges across the country.  The government plans to bolster wind as a way of preserving crude oil for export, and feeding the electricity needs of its more than 80 million people. (7/31)
In Pakistan, completing a natural gas pipeline from Iran won’t be the “silver bullet” expected by the government in Islamabad.  Analyst Oliver Coleman said Pakistan’s woeful energy sector governance is perhaps an even more debilitating factor than supply, with risks including rampant theft, poor maintenance, and transmission and distribution losses of around 20 percent. (7/31)
India’s oil product exports plunged nearly 30% to six-year lows in June as refiners diverted diesel to the domestic market to meet surging summer demand, while growing preference for petrol-driven vehicles supported gasoline consumption and triggered unusually high imports of the fuel. The sharp drop in exports occurred despite record runs at state-run and private refiners. (7/27)
South Korea’s Big Three shipbuilders ventured into offshore oil rigs starting around 2010. With oil prices climbing toward $100 a barrel, offshore rigs seemed like a savvy bet. Today, the plunge in oil prices has discouraged offshore exploration. Korean vessel makers are racking up debt and could show billions of dollars in losses when they report earnings starting Monday. (7/27)
Libya has become a major headache for European oil companies as a four-year conflict forced BP to join Total in writing off millions of dollars in investments in the North African country. BP has written off almost $600 million after Total wrote off $755 million. (7/30)
OAO Rosneft and Exxon Mobil Corp. bid for licenses in Mozambique, forging ahead with a partnership strategy even as U.S.-Russia relations remain tense. Rosneft is Russia’s largest oil producer. Rosneft and Exxon Mobil already produce oil together off the coast of Russia’s Sakhalin Island. They also have explored Russia’s arctic seas. (7/31)
In Venezuela, riots occurred in the midst of high inflation and food shortages as a result of the economic crisis in the oil-rich nation.  One man was killed and up to dozens arrested during the looting of businesses and attacks on state-owned vehicles. (8/1)
In Mexico, Norway’s Dolphin Geophysical said it was surveying Gulf waters for the reserve potential in anticipation of a “new era” in the nation’s oil sector. The company said Tuesday it started a seismic survey campaign off the western Mexican coast, saying the campaign coordinates with the nation’s recent sector reforms. (7/29)
Mexico has delayed by two months the auction for its prized deepwater oil assets and sweetened bid terms after its inaugural tender to open its oil sector to private investors flopped two weeks ago.  The energy ministry is also revising rules that the oil industry had viewed as being too onerous. (7/30)
Mexico’s Pemex posted its 11th consecutive quarterly loss as a series of accidents combined with a collapse in oil prices to batter the state-run producer’s earnings. The company’s net loss widened to 84.6 billion pesos ($5.2 billion) in the second quarter from 53 billion pesos a year earlier. Output fell to the lowest level in 24 years. (7/29)
New oil-sands pipeline projects are tough to get approved, and Alberta’s worst spill since 1980—31,500 barrels of bitumen, waste water and sand—will probably make it tougher. The leak during July is bolstering opposition that has stalled every major crude export project from Canada in recent years and may lead to more stringent regulations. (7/28)
Suncor Energy, Canada’s largest oil producer, cut its spending plan for 2015 for a second time. The company now plans to spend between C$5.8 billion and C$6.4 billion, down from an earlier range between C$6.2 billion and C$6.8 billion. Suncor has already cut about 1,000 jobs and previously lowered its 2015 capital budget by C$1 billion while delaying projects to weather collapsing prices. Still, it’s pressing ahead with the C$13 billion Fort Hills oil-sands mine. (7/30)
The US oil rig count increased by five this week to 664 after putting 21 oil rigs into service last week, despite a collapse in U.S. crude prices from recent highs in June, data showed last Friday. That was a sign some drillers followed through on plans to add rigs announced in May and June when US crude futures were averaging $60 a barrel. There are still about 59% fewer oil rigs working since a peak of 1,609 in October. The overall rig count declined by two units to close at 874 on July 31. (8/1)
In Texas, economist Karr Ingham projects the state’s crude oil production will reach an all-time high in 2015, exceeding the record set back in 1972. 
US oil companies are increasingly tweaking and mixing fracking technologies as they scramble to squeeze more out of wells and eke out profits after rounds of cost-cutting. Shale oil firms need the experiments to pay off now more so than before given that oil prices have resumed their slide to trade around $49 per barrel this week. (7/30)
Breakeven price buzz: US crude prices would still need to drop significantly before falling below breakeven prices in North Dakota’s four most prolific counties, according to recent government data. Breakeven prices for rigs in Dunn, McKenzie, Mountrail and Williams counties range from $24/b in Dunn to $41/b in Mountrail. Those four counties accounted for 63 of the state’s 68 oil rigs on Monday. The breakeven prices ranged from $28/b to $42/b in the four counties when the DMR published its last such data in October 2014. At the same time, breakeven prices have fallen dramatically in counties with far less drilling activity. The breakeven price is $62/b in Divide County, which has three working rigs. Previously, the breakeven price in Divide was seen to be $85/b. (7/28)
Shallow fracking study: The fracking of oil and gas less than a mile from aquifers or the Earth’s surface now takes place across North America with few restrictions, posing increased risk for drinking water supplies, says a new Stanford study. (7/30)
Wastewater earthquakes: The Oklahoma Corporation Commission says two oil and gas wastewater injection wells are voluntarily shutting down and one is reducing operations in the Crescent area following several earthquakes between 4.1 and 4.5 magnitude. An Oklahoma Geological Survey report in April said it was "very likely" the practice of wastewater injection prompted most of the state’s recent earthquakes. (7/29)
Chevron said on Tuesday it would lay off 1,500 employees, about 2 percent of its global work force, as it trims costs to offset declining crude prices. Nearly all of the layoffs will be in Texas, where the company has expanded in recent years to develop land in the Permian shale formation, and California, where Chevron is headquartered. (7/29)
The U.S. natural gas market is waking up after years of languishing in a shale-induced coma. Seasonal price swings will intensify as the country begins shipping liquefied natural gas cargoes to Asia and Europe later this year. While that’s good news for traders yearning for volatility, it could be bad news for consumers. Exports will help prices rebound from the slump caused by the U.S. pumping record amounts from shale formations. (7/31)
The EIA reports that the productivity of natural gas wells in the Marcellus Shale and the neighboring Utica Shale is steadily increasing because of ongoing improvements in precision and efficiency of horizontal drilling and hydraulic fracturing occurring in those regions. (7/29) [Note: recent data show a modest decline in production from the Marcellus.]
In Florida, natural gas is easily the main source of energy, offering up 1,300 Trillion Btu in 2014. Gas is 62% of Florida’s power generation, compared to 47% in 2008, when the “shale revolution” really took off. Florida is second only to Texas in terms of natural gas burned to provide electricity. (8/1)
The eurozone remained on the edge of deflation in July after inflation across the bloc held steady at 0.2 per cent, according to a flash estimate from Eurostat, the EU’s statistical agency. (7/31)
Fukushima: A Japanese citizens’ panel ruled on Friday that three former Tokyo Electric Power executives should be indicted over their handling of the 2011 Fukushima nuclear disaster. Tokyo prosecutors in January rejected the rarely used panel’s judgment that the three should be indicted. But the 11 unidentified citizens on the panel forced the indictment after a second vote, which holds sway over the prosecutors’ decision. (7/31)
Building nuclear reactors out of factory-produced modules was supposed to make their construction swifter and cheaper, leading to a new boom in nuclear energy. But two US sites where nuclear reactors are under construction have been hit with costly delays that have shaken faith in the new construction method and created problems concerning who will bear the added expense. (7/28)
Coal’s demise: The destructive force of a collapse in world coal prices has been underscored by the sale of a mine in Australia valued at A$860 million three years ago for just a dollar. Brazilian miner Vale SA and Japan’s Sumitomo Corp. sold the Isaac Plains coking-coal mine to Stanmore Coal Ltd., the Brisbane-based company said. A slump in the price of coking coal, used to make steel, to a decade low is forcing mines to close across the world and bankrupting some producers. Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday. It was valued at $7.3 billion in 2008.
Arch Coal has seen its stock slump some 99.7% in the past five years to 20 cents recently. Big Coal is at once a faint shadow of itself yet still vital economically. Mainly used for power generation and metallurgy, the percentage of U.S. electricity from coal-fired plants recently fell to 30%, just below the share from natural gas. Five years ago, coal had twice the share of gas at 44%. But years of cheap, abundant shale output and tightening environmental standards have led many utilities to shut coal plants. (7/27)
Arizona, the epicenter of a nationwide fight between solar companies and utilities, is introducing new rules for firms that offer solar panel leases. Some solar companies say the regulations are a new effort by traditional utilities to try to stop the spread of residential solar in the state. (8/1)
New research from climate scientist James Hansen and 16 of his colleagues concludes that many of the world’s coastal cities could become "uninhabitable" in just 50 years due to a rapid, nonlinear rise in sea level. This is far sooner than previous findings suggested. (7/27)

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