Quote of the Week
The U.S. Geological Survey estimates the Chukchi and Beaufort seas hold 26 billion barrels of recoverable oil. “It’s probably fair to say, this [Shell’s drilling effort in the Chukchi sea] is the most scrutinized, analyzed project — oil and gas project — probably anywhere in the world. I’m actually sure of that. We can’t afford to have a problem here.”
Marvin Odum, CEO Shell Oil Co.
1. Oil and the Global Economy
The three day, nearly 30 percent, price surge which began the week before last continued through last Monday, then slowed as the week progressed with New York crude closing Friday up 1.8 percent and Brent down by 0.9 percent. New York futures settled on Friday at $46.05 and London at $49.61.
Among the most interesting developments of the week was the release of a new EIA report series based on direct surveys of oil producers. The first such report showed the Administration has been overestimating US domestic production by a considerable amount. US production in February, March and May was 80,000 to 125,000 b/d lower than previously reported and June production was 250,000 b/d lower than what the EIA had been estimating. The release of this information contributed to the continuation of the price surge on Monday, with some traders concluding that the oil glut would soon be over and that prices would be going higher.
The rest of the week’s news was mixed for oil prices with US rig count falling by 13 units, mostly wiping out six weeks of small increases; US employment figures coming in lower than expected; and the Chinese economy still not doing very well. The general sentiment seems to be that the drop in US domestic oil production will not be enough to offset the current pace of worldwide global production and the prospects for lower demand in Asia. The Saudis cut their monthly selling price for many of its customers on Thursday, suggesting that there is still pressure on the markets.
OPEC production in August was down from record production in July largely because of lower Iraqi exports due to Kurdish separatist attacks on the pipelines through Turkey. A Reuters survey shows OPEC output falling from 31.88 million b/d to 31.71 million, still way above the targeted 30 million. The Saudis and other Gulf states continued producing at high levels last month.
Some US private-equity firms are continuing to pump money into the US shale Industry despite the industry having lost some $18 billion in market value in the past year. These firms believe that oil prices will soon return to much higher levels and that current markets present a buying opportunity to participate in the next price rally.
The US Congress is preparing a bill to remove controls on US crude exports. The bill is expected to pass the House this month, but may have more trouble in the Senate. Last week the EIA released a new study on effects of removing the current restrictions. Proponents of the bill hailed the study as confirming their assertions that removal would be a net positive for the industry and for consumers who would have lower oil prices. Actually the study was more circumspect, concluding that the effect would actually depend on assumptions about prices and production and certainly is not as clear cut as proponents of removal are saying.
2. The Middle East & North Africa
Syria/Iraq: In the news last week were reports that Moscow is stepping up its military support for Syria. The main evidence seems to be increased activity at the Latikia airfield which is in the heartland of President Assad’s Alwaite region. Press speculation varies from increases in the numbers of Russian advisors and military equipment to the arrival of Russian ground forces to do battle with the insurgents. In Moscow, President Putin has denied that there has been any change in policy as yet, but says the situation is under review.
Russia and Syria have had a close military relationship for the past 50 years and many Russian women have married Syrians studying in Russia and moved to the country. This history is behind Moscow’s unprecedented support for the Assad government during the last four years of insurrection. Despite conflicts between the various insurgent groups, the whole insurgency seems to be slowly moving closer to driving the Assad government from power. While Syrian oil production currently is close to zero, the collapse of the Assad government is likely to trigger another round of instability; more refugees as Alwaites flee the country; and yet more Sunni-Shiite turmoil that threatens regional oil production.
The political situation in Iraq is becoming more confused with sentiment in parts of southern Iraq turning against the Iranian influence in Baghdad. Many Shiites are now blaming Tehran’s influence on the Maliki government for the success ISIL has had in taking over large parts of the country with little hope of driving the Islamic State out in the near future. ISIL’s success came after the remaining US forces were forced out of the country on Iranian advice; the firing of competent Sunni military officers and their replacement with loyal Shiites; and antagonizing the Sunnis in northern Iraq with needless confrontations. While at the time the Iranians saw these developments as beneficial to their cause, the rise of ISIL has galvanized and organized radical Sunnis, worldwide, into a force to be reckoned with for many years to come.
Iraq oil revenue in August was nearly $1 billion lower than in July. Part of this came from lower oil prices and part from reduced exports via the northern pipelines which are being sabotaged by Kurdish rebels in retaliation for Ankara’s new offensive against the PPK. A recent World Bank study shows that Iraq’s economy is shrinking as ISIL is disrupting much economic activity outside of the oil industry. Some are wondering if Iraq will have enough revenue to continue fighting the ISIL threat over the long term. While US and allied air strikes against ISIL targets continue, many are starting to question their efficacy in defeating the Islamic State as acceptable high-value targets for the strikes are becoming scarce.
Libya: The confrontation between the two Libyan governments over control of the oil revenues rolls on. Foreign buyers of Libyan oil continue to do business with the Libyan National Oil Company which has offices in Tripoli. The company seems to the taking in the oil revenues and disbursing them to employees of both governments. The Internationally recognized government in Tobruk is attempting to break this system by convincing oil buyers to make payments to offshore accounts controlled by Tobruk, thereby cutting off the Tripoli Islamist government from the revenue. The Tobruk government hopes that by cutting oil revenue to Tripoli, the government there will be pressured into joining the UN sponsored reconciliation talks that are going on in Geneva without much progress.
The issue is also wrapped up in the EU refugee crisis. The EU seems willing to put forces into Libya to prevent refugees from boarding boats to Italy and to keep the ISIL offshoot in Libya from gaining more strength. However European nations are unwilling to move into Libya until there is a single Libyan government that is willing to accept foreign troops. Until something breaks the current stalemate, we are unlikely to see much increase in Libyan oil production.
Iran: While the administration remains confident it has the votes to keep the nuclear agreement from being torpedoed in Congress, numerous individuals and groups keep announcing opposition or support for the agreement. Among the more notable voices of support last week were the King of Saudi Arabia, Iran’s Ayatollah Khamenai, and former Secretary of State Colin Powell. Senator Ben Cardin, top Democratic member of the Senate Foreign Relations Committee, became the third Democratic Senator to oppose the deal.
Iran’s Oil Minister Zangeneh said last week that his country will increase oil production next year by 1.5 million b/d to 4 million b/d – which is higher than when sanctions began. Many outside observers are skeptical that Iran can ramp up its oil production that quickly after years of sanctions and neglect of its oilfields. While European energy companies are rushing for a piece of the action after the sanctions are lifted, US oil companies say that US law still prohibits them from talking with Tehran. Decades of US-Iranian animosity make it unlikely there will be much US involvement in growing Iran’s oil and gas industries. Tehran is now talking about becoming a major supplier of natural gas to the EU by building a pipeline from the giant South Pars field through Turkey to the EU.
At the G20 meeting last week Chinese officials tried hard to convince the world that their economic situation is not as bad as it seems and that the country will be able to maintain a GDP growth rate of 7 percent. Many outside observers, however, remain skeptical, and say that a 5-6 percent growth rate for the year might be more realistic. While there has been much “happy talk” about the growing relationship between Beijing and Moscow that is supposed to open new markets and investment opportunities for both sides, undercutting Western sanctions, in reality little has happened. Trade between the two is dropping due to the economic problems both are experiencing and the expected surge in Chinese investments in Russia’s economy is not being realized.
Beijing is making numerous financial moves in an effort to stabilize its economy. Last week it placed a $2.5 trillion cap on local debt. The latest estimate of the debt that has been assumed by China’s many local governments was made in 2013 and is believed to be about $2.6 trillion, up from negligible levels in 2007. Most of this debt was created in projects designed to help the country weather the 2008 recession. It is these massive debt loads that have many outside observers worried about the stability of China’s economy. Beijing’s mixed capitalist/state managed economy is not directly comparable with what happens in many other countries so there are many unknowns as to how well the current situation can be managed.
China seems to be backing away from direct intervention to support its stock markets that has left the government and its “national team” of stock purchasers with billions of dollars worth of stock that was bought at the top of the market. Many observers do not believe that Beijing’s stock market crash is yet over. However, it has been noted that participation in the stock market involves a very narrow segment of China’s economy so that falling prices may not have as much consequence as many fear.
From a peak oil perspective, the course of China’s economy over the next few years will have a major impact on the demand for oil, prices, and investment in the oil industry.
Bowing to reality, Moscow announced last week that it will base next year’s budget on $50 a barrel oil and will only budget for one year at a time given the volatility of oil prices. Russia has seen the value of its currency slump by over 45 percent in the last year as oil prices fell. Some 50 percent of Russia’s budget depends on oil revenues. The prices of other minerals which Russia exports, such as nickel, have also slid compounding the economic problems. Last week the ruble which had been doing better the week before last due to the surge in oil prices fell to 68 to the dollar, a three percent drop. Despite many calls for the country to diversify its economy away from reliance on the export of agricultural commodities and minerals, the country still produces little besides military hardware that is exported.
In an effort to buck up morale, the CEO of Rosneft, Igor Sechin, said last week that Russia has the potential to increase its oil production to 14 million b/d from the current 10 million and export 300 billion cubic meters of gas to China annually. Russia’s oil industry continues to benefit from the weak ruble and export sales in dollars which means that after the dollars are converted to rubles Russia’s oil companies have very low costs of production and the cash to expand oil output. Given that most of Russia’s legacy oil fields are in decline; and that it does not have the technology to exploit possible shale or deep arctic finds; and the likelihood that the Western sanctions will continue for some time; it seems unlikely that a 40 percent increase in oil production can be accomplished in the foreseeable future.
Moscow said last week that it will not cut production to prop up production as some of “fragile” OPEC members have asked, but may be forced to reduce output if oil prices remain low for extended periods.
There was little movement in the Ukrainian situation last week. Despite the sanctions, Gazprom signed an agreement with the German chemicals giant BASF that gives Russia greater access to gas trading and storage in Europe, while BASF gains a greater stake in Siberian gas fields. The company said the agreement which has been on hold for months because of the sanctions will contribute to the energy security of Europe.
6. The Briefs
In Norway, German energy company Wintershall said its development plans for the Maria oil field in the Norwegian Sea were approved by the government in Oslo so the company will be moving ahead despite the current challenging price environment for oil. (9/4)
OPEC’s strategy review is due for completion later this year. The previous edition produced in 2010 estimated crude would trade in a range of $70 to $86 a barrel through to 2020, and then climb to $106 by 2030. (9/2)
In Israel, after posting strong second-quarter results, the CEO at Israeli energy company Delek said growth should continue through future investments with Houston-based partner Noble Energy. (9/1)
China’s state-owned refiners could export up to 16.9 million mt (869,000 b/d) of refined products over August-December — 44% more than the volume exported in the first seven months of the year. (9/2)
Indian Oil Corp. is seeking to build a $3 billion petrochemicals plant in Iran, according to people with direct knowledge of the matter. The plan hinges on assurances from Iran that the 1 million-ton-a-year project will have access to cheap natural gas as feedstock. (8/31)
Venezuela’s government, facing a cash crunch amid a slump in oil prices, signed a deal to receive a $5 billion loan from China. The funds will go to increase oil production in Venezuela in the coming months. (9/2)
In the Caribbean, demand for crude storage in one of the world’s most important oil hubs is rising as producers and traders try to ride out the worst price crash in six years by holding onto more barrels or making blends that can be sold for premiums. The last time tanks in the logistically-important islands were this full, during the price collapse of 2009, companies started leasing vessels to use as floating storage. (9/2)
Canadian Oil Sands Ltd., the largest owner of the giant Syncrude oil-sands project, said Wednesday that production of synthetic crude would be “minimal” for two weeks after a weekend fire at Syncrude’s main plant, and that the lost production would impact its annual output. (9/3)
Oil sands losers: In one of the costliest places on the planet to produce oil, half a dozen oil sands operators from Suncor Energy Inc. to Brion Energy Corp. have development investments judged too far along when the oil game suddenly moved from offense to defense. These projects will add at least another 500,000 barrels a day — roughly a 25 percent increase from Alberta — to an oversupplied North American market by 2017. For companies stuck spending billions in a downturn, the time required to earn back their investments will lengthen considerably. (9/4)
More oil sands issues: ConocoPhillips and Husky Energy announced key milestones in bringing two new oil sands projects online on Tuesday, underlining how some producers in the high-cost sector are boosting production even as crude prices tumble. The two projects will add around 178,000 barrels per day to the 2.3 million bpd already being produced from the oil sands. The Canadian Association of Petroleum Producers forecast in June that oil sands production would hit 3.1 million bpd in 2020. That forecast may be overstated, however, due to recently announced slowdowns and layoffs in some projects. Even though many oil sands projects are close to losing money on every barrel at current prices, new production is still coming online because projects were mostly paid for before the price crash. (9/2)
Penn West Petroleum, a Canadian oil and gas producer, said it would cut more than 400 jobs, or around 35 percent of its workforce, to endure a weak oil market. The company said it was cutting capital spending, suspending dividends and “significantly” cutting costs through the layoff. (9/2)
The US oil rig count decreased a sharp 13 oil rigs this week, the first drop in seven weeks, as a renewed slump in prices this summer forced drillers to make a second round of cut-backs. The decline erases weeks of small gains and brings the total to the week ending Sept. 4 down to 662. The gas rig count was unchanged at 202. (9/4)
In Utah’s oil sands, MCW Energy Group reports that its Asphalt Ridge project—which uses solvents to separate oil from sand—is producing 250 barrels a day right now at a production cost of $30 per barrel, with plans to build a 5,000/bpd plant that they say could bring costs down to $20 per barrel. (9/3) [NOTE: in the article’s comments section, a geologist who worked on the Asphalt Ridge project wrote as follows: “The bitumen here is impossible to sell even after separation. It makes great asphalt, that’s it, period – full stop. There was nothing to crack, and upgrading was out of the question. Futhermore, the asphalt wasn’t marketable.]
More US gas? The U.S. may have even more—and much cheaper to get—supplies of natural gas than previously imagined. The trick is applying supersize versions of the horizontal-drilling and fracking techniques that worked successfully elsewhere to an area that hasn’t seen this approach yet. If the approach works across the giant Haynesville Shale, which spans 120 miles across Texas and Louisiana, the era of low American gas prices could extend for decades into the future, experts say. (9/2)
President Barack Obama was in Alaska touting the dual agenda of taking the steps needed to slow the impacts of climate change while ensuring state revenue from the oil and gas industry remains durable. Obama’s plan to cut greenhouse gas emissions while at the same time signing off on arctic drilling permits for Royal Dutch Shell has earned both praise and condemnation. (9/2)
Arctic oil: President Obama is expected to say that the government should buy a heavy icebreaker by 2020, when routine Arctic marine transit is expected, instead of the previous goal of 2022. He also will propose to start planning for additional icebreakers. The White House said the move is required for safety in the changing Arctic and to keep up with Russia. (9/2)
Oil prices will remain stuck at $40 to $60 a barrel into 2016 as rising crude supplies overwhelm demand, according to the Vitol Group, the world’s largest independent oil trader. The oil-production surplus means stockpiles will keep expanding for “the next few quarters” and excess inventories won’t clear until 2017 at the earliest. (9/1)
The US average retail price for regular gasoline was $2.51/gallon on August 31, the lowest price for the Monday before Labor Day since 2004, and 95¢ lower than the same time last year. (9/4)
US August car sales registered their highest annualized rate since 2005, according to Autodata Corp. And consumers are not buying just anything: truck sales surged by 8.6 percent versus a year ago while passenger car sales fell, reflecting the sharp swing this year toward gas-guzzling models. This is one of several U.S. economic factors indicating that the resurgence in American gasoline demand is here to stay. (9/4)
In North Dakota, a grant from a federal safety regulator will help the state invest in the infrastructure needed to transport oil safely and efficiently. The state will be better able to respond to incidents involving rail or pipeline transportation of crude oil and other hazardous materials. (9/2)
Oil quakes? The Texas Railroad Commission, the state’s regulatory agency overseeing oil and gas industry, has determined that a series of small earthquakes in North Texas likely wasn’t caused by drilling operations by an Exxon Mobil subsidiary. The preliminary findings mark the first decision by the TRC since it was authorized last year to consider whether seismological activity was caused by injection wells which store briny wastewater from hydraulic fracturing. The commission ordered hearings after a university study suggested two companies’ wells were responsible for quakes that shook Reno, Texas, in 2013 and 2014. (9/2)
The cost of producing electricity from renewable sources such as solar and wind has dropped significantly over the past five years, narrowing the gap with power generated from fossil fuels and nuclear reactors, according to the International Energy Agency. IEA reports these technologies are no longer cost outliers. Since 2010, solar power generation has dropped from $500 to $200 per megawatt hour, compared to baseload natural gas which costs $100 per mwh.