Quote of the Week
“If we stay at this [sub-$50 oil] price longer, then a third to a quarter of the [US] industry will go bankrupt. More activity could drive production, but that takes money and the US industry doesn’t have it anymore. We don’t believe that US production can grow at $50, $60, or even $70. It will likely take $80 per barrel cash flows to return the US from decline to growth.” Walker Moody, Managing Director of Energy Investment firm Tudor, Pickering, Holt & Co.
1. Oil and the Global Economy
Oil prices closed out the week about in the middle of the range where they have traded for the past month — $45.70 in New York and $48.60 in London. During September, prices bounced a dollar or two on news suggesting that demand for oil could increase or production might decline. Conversely, news suggesting that demand might sink or production might increase sent prices back down about the same amount. It appears we could be stuck in this trading range until there are better indications that the oil glut is shrinking; or more definitive news about the course of the global economy – particularly China’s; or there is some major geopolitical upheaval.
Although US oil production has been falling since spring, it is not clear just how fast this is taking place. Some analysts are questioning whether a decline in US shale oil production will be enough to make much of a dent in the global glut. While the US economy had a better-than-estimated second quarter, the economic news out of China has been generally bad and many are questioning how fast its economy is growing.
The only trend that is clear at the minute is that sub-$50 oil prices are causing a contraction of the global oil industry. Hardly a day goes by without news of bankruptcies, falling profits, or the dumping of assets at low prices. It is clear that Wall Street’s infatuation with the prospects for the shale oil industry, which as a whole has never made a profit, is ending, so that loans and lines of credit are closing down. Even the perennially optimistic EIA is talking about much lower investment in upstream oil production over the next five years.
The newest mantra of the oil industry is “lower for longer” meaning that there is a growing acceptance of the idea that there is not going to be a sharp price rebound to profitable levels in the immediate future. Some note that “longer” after the 1985 price collapse was 15 years, but we are living in a different age. Conventional oil, meaning $10 – $20 cost-of-production oil ran generally stopped growing about ten years ago and the “new” oil that has been coming to the market since then has costs at least $75 a barrel to produce and in some many cases well in excess of $100.
During the next 15 months, the probable return of Iran to unfettered exporting with an additional million b/d plus coming to the oil markets means that any drop in US high-cost shale oil production is likely to be offset by Middle Eastern oil. There is talk that OPEC – read the rich Gulf Arab oil exporters – believes that it is winning the battle to drive shale oil producers into bankruptcy, or at least into hiding for a while. The Gulf Arab’s next target is expensive deepwater oil production, which takes years to come on line and is harder to slow once in production as most of the costs are upfront. Recent reports, however, suggest that investment in new deep water production efforts has been reduced considerably, but it will be several years before current deepwater production itself slows significantly.
In addition to the OPEC effort to maintain its “market share” with high production and low prices, we have other global trends that could overtake the fundamentals of oil in determining where prices and production are going. The Middle East is becoming increasing unstable with Russia now intervening militarily in the Syrian conflict and tens of thousands of refugees trying to get to the safety of Europe. There are numerous ways this conflict could affect oil production from the region over the coming years.
Then we have the climate problem, which could affect the Middle East sooner than the rest of the world. Last summer we saw parts of the region shut down because of extremely high temperatures. If the heat and food shortages do make not make parts of the region uninhabitable, then the lack of water may. Southern Iraq is especially vulnerable to water shortages.
For now, it looks as if we are going to have low oil prices at least through 2016. After that there are too many forces at work to predict where the world is going.
2. The Middle East & North Africa
This week most of the world leaders involved in the Middle East will be making speeches at the UN on the increasingly complicated situation in the region. Whether any shift in policies that could lead to more stability for the region remains to be seen, but for now there is little reason for optimism.
Iran: Work on implementing the nuclear agreement continued last week with IAEA inspectors visiting Iran as part of their responsibility to delve into the details of Iranian efforts to build nuclear weapons in the past. Tehran is spending a lot of energy denouncing the Saudis for allowing hundreds of pilgrim deaths in the stampede during the the Hajj last week.
A London conference on investment opportunities in Iran for foreign oil companies was postponed at the request of the Iranian National Oil Company. The Iranians are working on a new type of oil sharing contract for foreign firms to enter into joint ventures with Iran and be paid in oil.
Syria/Iraq: Iraq, Russia, Syria, and Iran have announced a new agreement to cooperate in the fight against ISIL further complicating the questions of enemies and allies in the region. The US Intelligence Community now believes that the Russian intervention in Syria came because Moscow had concluded that the Assad government was losing the military struggle and Moscow did not want to be excluded from its influence in the region. The US is pushing for Iran and Moscow to bring Assad to the negotiating table, but many believe this is now a lost cause.
The military struggle in Iraq and Syria is stalemated at the minute, with ISIL unable to go on the offensive in the face of Western airpower, and Baghdad/Damascus unable to garner the strength to make military progress against ISIL or the other insurgent groups.
The oil export pipeline from Iraqi Kurdistan to Ceyhan, Turkey opened again over the weekend after being closed by sabotage. Exports via the pipeline had fallen to 472,000 b/d in August from 516,000 b/d in July by the interruptions. The Kurdish insurgents in Turkey who have renewed their fight against Ankara have agreed to leave the pipeline alone as its closure only hurts their fellow Kurds in Iraq. Kurds in Turkey, Iran, Syria, and Iraq are hoping to have their own independent state someday with the oil in Iraqi Kurdistan being the center of their economy.
Saudi Arabia/Yemen: The fighting goes on as the government forces attempt to retake the capital at Sanaa. The UN says some 4,900 people, mostly civilians, have been killed by the fighting and Saudi airstrikes. About 70 people have been killed in Saudi Arabia during border skirmishes and Houthi cross-border shelling into Saudi Arabia.
Saudi tactics of indiscriminate bombing and helicopter attacks against civilians is raising an international outcry. The Saudis are fighting to fend off a UN Human Rights Council inquiry into the tactics they are using against the Yemeni people and the high rates of civilian casualties. The Dutch who are asking for the inquiry are also concerned about Saudi efforts to keep humanitarian supplies from reaching the Yemeni people.
Beijing made news on several fronts last week. First its economy continues to shrink with its manufacturing in September contracting at the fastest pace in more than six years. Although the government talks about an annual growth of 7 percent this year and the IMF is saying it will be 6.8 percent, there is a school of thought among knowledgeable western economists that says the growth rate is much lower than official figures and that China is headed for a recession with a growth rate of less that 3 percent.
There is no mystery as to what is happening. China has a mature economy that can no longer borrow technology from more advanced countries and is developing a labor shortage from 30 years of reduced birth rates and the inability to move more productive workers from the countryside into the industrial economy. It has overinvested in infrastructure and heavy industry and can no longer ignore the consequences of environmental degradation. In short, China may not be increasing its demand for more and more oil at anywhere near the pace we have seen in recent decades.
During a meeting with President Obama last week, President Xi announced new initiatives to reduce emissions. This is the third such announcement in the last three years. Among the steps that China will take are a new cap and trade program for carbon emissions; priority for renewable energy when purchasing electricity; steps to reduce truck emissions; and a common position with the US at global climate change talks. At the UN Xi announced programs to support the development of poor countries. In recent years most such programs have been associated with efforts to get access to oil from poor African nations.
The US and China are both facing serious consequences from climate change. In the US California is facing a major drought, while the air, soil, and water in much of China has become dangerously toxic. China’s coasts are being hit by by ever stronger hurricanes and its coast is endangered by rising seas. Both countries have a major incentive to work together. As critics of US environmental polices are quick to point out, there is little use in the US making economic sacrifices to clean up carbon emissions unless Beijing does the same.
The top news of the week was the growing Russian buildup of military forces in Syria and its joining into a partnership with Syria, Iraq, and Iran to exchange information on ISIL. The movement of Russian forces into the region gives the Assad government a new lease on life but will likely extend the civil war indefinitely, and increase the refugee flow to Europe. A series of meetings at the UN this week may clarify Russian intentions, but for now any hopes of a settlement in the near future seem to be fading.
Facing a severe revenue deficit, Moscow seems to be on the verge of increasing taxes on crude production as the only sector of its economy that is still healthy. The fall of the ruble has offset lower oil prices to leave Moscow’s oil export industry in good financial shape – at least in terms of rubles. Russia’s Economy Ministry has already criticized the proposal, saying that it will result in a decline in oil production and hurt the budget in the long-term. Supporters of the tax increase say it will raise another $9.1 billion in its first year of operation, but the Economy Ministry says this is an overestimation. There is no final decision as yet.
Gazprom is attempting to settle the EU antitrust case in which the company is accused of charging unfair prices to several East European countries – Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia. Moscow has been using its near monopoly on natural gas in the region as a political tool for many years to reward its friends and punish its enemies. If accepted, the settlement could avoid billion-dollar fines that the the EU is threatening to impose on Gazprom, but could also force Moscow to change the way it sells natural gas in the EU.
By tying natural gas prices to oil prices, Moscow has been able to get more for its gas than in other markets. The Kremlin has used gas prices and its prohibitions on re-exporting gas extensively in its ongoing conflict with Ukraine.
Moscow remains concerned that international oil prices might take yet another dip. There is already talk in Moscow of curtailing production if prices fall below $40 a barrel.
5. The Briefs
Plunging investment: Industry operators expect capital spending on new projects to decline between 20 and 30 per cent on average in the wake of the price slide, says Wood Mackenzie, the energy consultancy. It calculates that $220 billion of investment has been cut so far, about $20 billion more than it estimated two months ago and much of it the result of projects being deferred. (9/21)
The Nigerian National Petroleum Corporation has secured $1.2 billion to drill wells offshore and onshore under a joint venture with Chevron Nigeria. The package will finance the development of 23 onshore and 13 offshore wells. (9/21)
Europe’s oil refiners are adopting the flexible ways of traders to ensure survival as the sector faces further shrinkage. Hard times have pushed them to pick and choose from a wider range of crudes, ferry feedstock between their own refineries to get the optimal mix of products and seek out deeper discounts from suppliers. (9/21)
“Dragon ships” will transport ethane from Marcellus Shale gas to European markets as an alternative to Russian gas. The ethane is being shipped via the Mariner East I Pipeline, which recently opened, to the Marcus Hook facility in Philadelphia, where “dragon ships” will be loaded. INEOS partnered with Danish Shipping Company Evergas in 2013 to transport ethane to keep European chemical plants in operation. (9/21)
Price Fixing in the EU: Major oil companies including Royal Dutch Shell and Platts were told by regulators to redact business secrets from documents obtained during antitrust raids in a sign the European Union may be moving ahead with a two-year-old probe. Amid a climate of distrust toward global price benchmarks, EU antitrust officials turned their attention to market data for crude oil and biofuels in May 2013. (9.21)
Widespread adoption of electric transportation could lead to substantial reductions in greenhouse gas emissions and could modestly improve air quality, according to a new analysis released by the Electric Power Research Institute and the Natural Resources Defense Council. The report,Environmental Assessment of a Full Electric Transportation Portfolio, is based on a projection that by 2050 electricity replaces traditional fuels for approximately half of light- and medium-duty transportation and a significant portion of non-road equipment. (9/21)
Food Costs: Countries in the Middle East and North Africa that subsidize food for their citizens are catching a break, even as the global oil slump hurts the region’s economy. From Iran to Morocco, the cost of importing basic grains such as wheat and barley will plunge by as much as a third to the lowest in at least five years. (9/22)
The Iraqi Kurds can’t sell crude oil in the US under a court decision that puts a hurdle in the path of Kurdish efforts to achieve financial independence from Baghdad. The US Court of Appeals in New Orleans dismissed an attempt by the Kurdistan Regional Government to overturn a judge’s earlier decision against its planned sale of oil to an unidentified buyer in the US. (9/22)
US inventories of propane and propylene reached 97.7 million barrels as of September 11, the highest level in the 22 years that EIA has collected weekly propane inventory statistics. In the first six months of 2015, US propane and propylene inventories were 24.3 million barrels higher on average compared to the same period in 2014. (9/22)
Tar Sands: Suncor Energy’s bargain on buying a further 10 percent stake in its Fort Hills oil-sands project shows how the energy market crash is reducing asset values in one of the most expensive places on earth to extract crude. Canada’s largest energy producer will pay Total $234 million for an additional 10 percent share in the C$15 billion oil sands mine being built in northern Alberta. (9/22)
Fracking Sand: In what is a little-known offshoot of the shale oil revolution, the market for sand — the grit that props open the rocks and makes fracking possible — exploded too. So when the shale boom went bust, it took down the sand industry with it. Prices have sunk almost a third to under $40 per ton. (9/22)
Investigations into Volkswagen’s alleged manipulation of US emissions tests should widen to include the entire auto industry, German and French officials said Tuesday. For more than a year, Volkswagen executives told the EPA that discrepancies were the result of technical issues, not a deliberate attempt to deceive. But early this month, Volkswagen executives finally said that the diesels it sold in the US used software designed to cheat on the tests. (9/22)
Oceans Rising: Nowhere are the risks of climate change more evident than in the tiny island nations of the Pacific, where countless communities face inundation. Tuvalu has lost four islands since 2000. Islets have slipped beneath the waves in the Marshall Islands and Papua New Guinea. And in Palau, some houses — still occupied — flood daily. The islanders’ plight gives them a powerful moral voice at a December meeting in Paris. (9/22)
Investment Falling: One of the biggest drilling contractors in the world, Weatherford, abandoned its efforts to raise about $1 billion in cash, a sign that Wall Street’s love affair with energy finance is cooling along with hopes that oil prices will rise anytime soon. (9/23)
Offshore: Much of the growth in offshore exploration and production is expected from Nigeria and Angola. The U.S. Energy Information Administration said the Gulf of Mexico’s share in the global offshore rig mix has declined from about half the world total in 2000 to less than 20 percent in the years since 2008. (9/23)
Oilsands: The Athabasca river that provides water to the oilsands industry is much more prone to multi-year droughts than modern records show, suggesting that the industry’s current level of water use may not be sustainable. The industry needs 3.1 barrels of fresh water to produce a barrel of crude oil from oilsands mining and 0.4 barrel of fresh water to produce a barrel of crude oil from oilsands drilling. (9/23)
Natural Gas: American regulators have accused French oil company Total of manipulating the price of natural gas in the US southwest. From 2009 to 2012, the French company’s Houston-based subsidiary is charged with making money-losing gas purchases intended to move prices in a way that helped it make money on other trading positions on at least 38 occasions. (9/23)
ConocoPhillips, the third-largest North American oil and gas producer, is nearing a deal to sell several Western Canadian assets to various buyers including Canadian Natural Resources Ltd. Production from the properties, located in Alberta, British Columbia and Saskatchewan, represents about 20 percent of the Houston-based company’s Canadian volumes outside of oil sands. (9/23)
Levees: The prolonged drought may have weakened California’s more than 13,000 miles of levees, which could result in floods and affect the quality of water for millions of Californians. Parts of the state could get doused with torrential rain this winter, thanks to an El Niño weather front triggered by unusually warm Pacific Ocean temperatures. (9/23)
Gas Leaks: A new study reveals that US cities with programs calling for the replacement of aging natural gas pipelines have 90% fewer leaks per mile than cities without such programs. Researchers studied programs to replace pipelines made of cast iron and other outdated materials in three US regions, the cities of Durham, North Carolina, Cincinnati, Ohio, and Manhattan Island in New York City. (9/23)
Total SA, Europe’s second-biggest oil company, scaled back its production target for 2017 as it announced a further round of investment cuts and project delays to protect its dividend. Total expects to produce 2.6 million barrels of oil equivalent a day, compared with a previous forecast of 2.8 million. (9/23)
Nord Stream II: Funding and market challenges could get in the way of further progress in Russian plans to add on to an existing Nord Stream gas pipeline in Northern Europe, Fitch Ratings says. The existing twin Nord Stream pipeline through the Baltic Sea to Germany carries about 1.9 trillion cubic feet of gas per year to the European market, but Western sanctions that have significantly hindered international funding to Russian corporations may delay the project. (9/23)
Oil Prices: West Texas Intermediate crude-oil prices won’t likely climb back to $100 a barrel this year, or next, according to Tom Kloza, global head of the Oil Price Information Service. “Generally, it is difficult to make a case for $100 a barrel oil through the next few years.” “Anything beyond the realm of the next 18 months smacks of witchcraft rather than real analysis.” (9/24)
LNG: The year-long decline in oil prices has taken its toll on new liquefied natural gas projects worldwide. Currently, at least 46 major projects – holding approximately 20 billion barrels of oil equivalent in resources – have been deferred due to the market downturn. (9/24)
OPEC’s Strategy: OPEC members believe they are winning against US shale producers in a short-term market share contest. However, the cartel is looking for a longer-lasting impact on other high-cost oil sources, many in deep oceans, with longer time scales, even if that means a period of cheap oil prices lasting for years. OPEC’s core Gulf members have resigned themselves to the idea that the U.S. shale industry’s high-tech flexibility means it will respond quickly when prices start rising again. (9/24)
Keystone XL: The White House said on Wednesday that the State Department continues to consider the Keystone project. White House spokesman Josh Earnest said he was not sure if there were many people surprised by Clinton’s comments. (9/24)
Methane: Over-regulating methane emissions could discourage the use of environment-friendly natural gas, an energy industry representative told the Environmental Protection Agency on Wednesday. However, a former Colorado air quality official countered that such controls would be a cost-effective way to fight climate change. (9/24)
Wind Generators: The federal government plans to lease nearly 344,000 acres of the ocean floor off the coast of New Jersey to companies interested in building offshore windmills to generate electricity. (9/24)
Coal: The number of new and reactivated coal mines that began production in 2013 fell to the lowest level in at least the past 10 years. The addition of 103 mines in 2013 came as 271 mines were idled or closed, resulting in a 14% decline in the total number of producing coal mines from 2012 to 2013. (9/24)
LNG Powered Ships: A growing number of ship owners are turning to natural gas at a time of record output, stringent emission rules and churning oil prices. About 70 vessels of all sizes worldwide are now powered by LNG, up from 42 in just two years, according to DNV GL, which certifies ships for safety. By 2020, the number may pass 1,000. (9/24)
Emissions Tests: The emissions cheating scandal at Volkswagen has initiated a reconsideration of how pollution tests are carried out worldwide. In the US, automakers conduct their own emissions tests and submit the results to the government, while in Europe, automakers pick who conducts the tests and where they are done. Questions about the wisdom of allowing automakers so much sway in how air pollution standards are enforced are increasing. (9/24)
Brazil: Transocean, the world’s largest offshore rig contractor, is being linked for the first time to the corruption probe of Petrobras, the state-owned energy company at the center of Brazil’s biggest corporate scandal. A former executive at Petrobras has testified to receiving what he says were payments made by someone claiming to be a Transocean agent in exchange for a rig-operation contract. (9/25)
LNG Exports: Just as gas export-terminals are preparing to start up along America’s Gulf Coast, the oil-price crash has made it unprofitable to send the US fuel abroad, according to the North America head of power and natural gas supplier Engie. It costs about $2 to liquefy gas and another $3 to take it from the U.S. to Asia. Those costs used to leave plenty of profit margin when the gap between LNG prices in Asia and natural gas in the US was more than $14 per million BTUs. Now, the spread is less than $5, according to data compiled by Bloomberg. (9/25)
Gas Flaring: The North Dakota Industrial Commission approved an industry proposal to delay further cuts to associated gas flaring until at least October 2016. The proposal, from the North Dakota Petroleum Council, is needed due to the lack of new gas capture and pipeline infrastructure. Under a state mandate the commission approved in 2014, operators were required to reach a set of benchmarks to limit flaring over time, including 15% by 2016 and 10% by 2020. (9/25)
TransCanada Pipelines: First Nations women and supporters sent a clear message to TransCanada that the Energy East pipeline is not welcome through First Nations lands. “What we want TransCanada to understand is that no means no. This is Kanien’ke, this is Mohawk Land and we are tired of occupation, we are tired of environmental disaster.” (9/25)
Europe’s commodities traders are warning that new regulations set to be released within days could roil markets and push up costs for a range of essentials from crude oil to chocolate. A final draft of expanded rules governing the European Union’s oversight of financial markets is expected to extend its authority over firms that focus on trading in oil, farm products, industrial metals like copper and a host of other commodities. It would add a new layer of scrutiny for an industry that has historically operated with limited oversight. (9/25)
Climate Change: By 2020, the amount of funding to support the fight against climate change will double to $6 billion, the president of the Asian Development Bank said. World leaders gathering in New York this weekend are expected to announce commitments to more than a dozen sustainable development goals. (9/26)
Russia: Schlumberger’s $1.7 billion bid for a 45 percent stake in EDC, Russia’s largest drilling rig company, with an option to buy the rest of the company at a later date, is an unusually large investment by a U.S.-listed company in Russia’s oil industry. ECD accepted the proposal in January, but the deal has slowed due to concerns about the sanctions. (9/26)
Gasoline sales to U.S. motorists rose by more than 5 percent in July compared with the same month a year before, according to the U.S. Energy Information Administration (EIA). Gasoline sales are rising at the fastest year-over-year rates for more than 14 years as demand surges. (9/26)
Great Lakes: Two Michigan senators introduced legislation aimed at banning vessels from carrying oil through the Great Lakes and mandates studies on the Straits of Mackinac pipeline. Pipeline company Enbridge is conducting emergency response drills on Line 5, a twin 60-year oil oil line running through the Straits of Mackinac dividing the two Michigan peninsulas. (9/26)
Volkswagen: Government regulators said Friday that they planned to step up the testing requirements of cars in the wake of the Volkswagen scandal. (9/26)
Rig Count: The US drilling rig count fell 4 units to 838 rigs working during the week ended Sept. 25, marking the fifth straight week of declines. Since the recent peak during the week ended Aug. 25 that followed a small summer rebound, the count has dropped 47 units. It’s now down 1,093 units year-over-year. (9/26)
California regulators on Friday voted to reinstate a rule to require a 10 percent cut in the carbon content of transportation fuels sold in the state by 2020, despite oil industry objections that it would raise gasoline prices. The California Air Resources Board voted 9-0 to move forward with the state’s low-carbon fuel standard, which was the first regulation of its kind in the U.S. when it was established in 2007. (9/26)
Volkswagen: Some of Europe’s struggling refineries could get an unexpected boost from Volkswagen’s diesel emissions scandal if once-dominant gasoline regains its popularity. Europe’s refineries, many of which were built in the 1950s to support booming petrol demand, have been hit over the past 20 years by shrinking fuel demand and government incentives that skewed car sales toward diesel engines. (9/26)