Quotes of the Week

“I’ve covered this industry since the late 70s and I would have to say I haven’t seen a situation like this, of this magnitude. We’ve concluded that this is not a normal cyclical downturn.”
Carol Cowan, a Moody’s senior analyst
"Shale was a hot growth area and companies made the mistake of borrowing too much. It’s amazing that so many people were willing to lend them money. Many are going to file for bankruptcy, and bondholders and equity are going to get wiped out en masse."
George Schultze, founder and chief investment officer of Schultze Asset Management in New York
1.  Oil and the Global Economy
Oil prices continued to move higher last week closing at $38.50 in New York and $40.39 in London, up 7.2 and 4.3 percent respectively for the week.  The two-month surge which has taken oil prices up some 45 percent started with reports in January that Russia and the Saudis were trying to bring major oil producers together to agree on a production freeze. This idea is now fading as Iran adamantly refuses to freeze production and no other exporters seem willing to cede current customers to Tehran. The impetus for the price increase now is focusing on forecasts that low prices could lead to a decline of some 750,000 b/d in non-OPEC oil production this year – mostly in the US. Some of this could, of course, be offset by increased Iranian exports. Tehran had hoped to increase production and exports by 1 million b/d this year but is having difficulty finding customers and increasing production. A weaker US dollar also contributed to the oil price increase last week.
Most major forecasters do not predict a sustained drop in global oil stockpiles until next year. Last week we had mixed views of what the rest of the year will bring. The EIA in Washington sees US shale production continuing to fall this year with output now forecast to be 8.67 million b/d, down slightly from last month’s estimate. The Wall Street Journal reported that the bonuses earned by the CEO’s of the major shale oil producers were tied to the level of production, not profits — which have never been that great in the industry. Even though the US drill rig count is now at its lowest since 1940, so long as oil companies can borrow enough money from Wall Street to keep solvent, they can continue to avoid a precipitous drop in oil production by finishing the hundreds of previously drilled, but uncompleted wells in their inventories.
Last week the IEA, in Paris, turned slightly more bullish on oil prices by declaring that they may have bottomed out. The Agency believes that global stocks may be down a bit in February. The optimism for prices, however, is based on projected drops in production later this year.  Although the Agency expects overproduction to continue until 2017, it now sees non-OPEC production falling by 750,000 b/d this year as compared to 600,000 b/d in its February estimate.
Goldman Sachs continues to warn that the price rally may be premature but is less worried about a shortage of storage space for crude developing in the next few months. The firm says that if oil prices go much higher, it will simply pull more US shale oil back into production and drive prices lower again.
The demand for oil and products is still an issue in determining where prices will go. Last week the EIA reported that US demand for gasoline and diesel was much higher than expected, offsetting a 3.9-million-barrel increase in crude stocks. Stocks at Cushing, Okla., where a storage of shortage capacity could strike first, was up by 690,000 barrels the week before last.
Chinese demand for oil this year is still an open issue. While Beijing’s imports were up in February, this could be a hangover from the extremely low oil prices that obtained in January. The economic news out of China continues to report industrial contraction and smaller imports and exports suggesting that the demand for oil will be lower than forecast this year.
2.  The Middle East & North Africa
Iran: The EIA reported last week that Tehran is having trouble increasing its oil exports in the seven weeks since the sanctions were removed. The Iranians had boasted they could increase exports by 500,000 b/d immediately after the sanctions were lifted and by 1 million b/d by the end of the year. It now appears the February exports were only up about 250,000 b/d from their level under the sanctions. Preliminary data, however, suggests that shipments in March may be up by an additional 150,000 b/d, an increase of about 400,000 b/d. Buyers say that the lack of more sales, especially to traditional customers in Europe, is due to difficulties in completing transactions under the remaining sanctions and by Iran’s refusal to cut prices to capture business from competitors.
Tehran is working to reassure potential investors that it still wants them to help develop Iran’s oil industry. Last month a long-awaited conference in London to explain the new terms for participating in Iran’s oil industry was canceled under pressure from hardliners in Tehran. The hardliners say that the foreigners would come to loot Iran’s oil and oppose any agreements designed to sweeten the terms. Iran, however, cannot raise the billions it will require to increase its oil production significantly with today’s oil prices.
The Revolutionary Guards spent last week shooting off test missiles, with “Death to Israel” inscribed on them, likely in violation of UN resolutions. Such long range and relatively inaccurate missiles are virtually useless without nuclear or chemical warheads. Thus their development raises issues as to just what the hardliners in Tehran are up to other than registering their defiance of the US sanctions still in place.
Syria/Iraq: The most significant development last week was the reopening of the oil export pipeline that runs from Kurdistan to the oil export terminal at Ceyhan, Turkey. The pipeline was closed for three weeks due to sabotage. The closure cost the Kurds and Iraq’s Northern Oil company at Kirkuk more than half their revenue for the month.  Elsewhere in Iraq, ISIL is feeling the pressure of being bombed by several of the world’s most competent air forces including those of Russia, several EU countries, and the US. Although most of ISIL’s military assets have ben imbedded amongst the civilian population in the cities and towns it controls, those that man frontline positions are constantly in great danger from airstrikes. To make matters worse for ISIL, the US now has special forces in the region that are conducting raids on isolated or poorly defended ISIL facilities with the objective of capturing or killing ISIL leaders and documents.
ISIL has been retaliating for its troubles by stepped up suicide bombings in Iraq and the use of chemical weapons against government-held towns. Increased security and the presence of Kurdish forces along the Turkish border is making it more difficult for ISIL move personnel and equipment in and out of the country. To make matters worse, Washington is said to be planning increases in air attacks on whatever facilities can be struck with minimal civilian casualties.
The fragile cease-fire in Syria is generally holding. Peace talks are supposed to begin shortly, but the Assad government has announced that his position as President is not negotiable. A key demand of the opposition is that Assad must go as part of any settlement. After five years of fighting, and millions of refugees, including hundreds of thousand trying to get into the EU, most of the world is tired of the mess and do not care if Assad stays or not so long as the fighting and the refugee problem goes away.  The original uprising which was a protest against the Assad government’s brutal suppression of demonstrations has morphed into ISIL and al-Qaida. The main protagonists and numerous foreign powers, including Russia, Iran, Turkey, the US, EU countries, Iraq, and the Gulf Arab states all are supporting one or another of the many factions involved in the fighting. Much of Syria has been reduced to rubble. Where this situation is going remains unclear. Outside of the Kurd’s export pipeline, there does not seem to be any significant threat to regional oil exports at this time, but this could change.
Libya: A new UN report says that the Islamic State has significantly expanded the territory it controls around Sirte and its influence in the cities of Sabratha and Tripoli. So far the Islamic State has not been able to take over any of the country’s oil assets, but has caused considerable damage by attacking oil installations, slowing the long-awaited recovery of Libya’s oil production.  The UN has been trying for many months to reconcile the two governments into an entity that can confront the Islamic State or, at least, arrange for foreign assistance. Foreign arms and fighters continue to make their way into the country.
The UN is becoming impatient with the lack of progress in forming a unity government and is preparing to sanction some of the Libyan politicians the UN holds responsible for the impasse.
Special forces from the US, France, the UK, and Italy are reported to be in Libya to train local forces for an offensive against the Islamic State with the aid of foreign airpower.  British special forces are already operating along the Libyan-Tunisian border in an effort the keep Islamic State infiltrators from staging attacks in Tunisia. Last week at least ten people were killed in clashes at a border post. Whether all this will eventually result in the restoration of the circa 1 million b/d of Libyan oil production that is shut-in remains to be seen
Saudi Arabia/Yemen: Supporters of President Hadi, backed by the Saudi-led Arab coalition, partially broke the Houthis siege around the strategic city of Taiz over the weekend. Secretary of State Kerry said there is a possibility of negotiating a ceasefire and a political settlement to the war that has killed 6,000 people and displaced millions. The Saudis believe they cannot make further gains without a large infusion of troops from Egypt or Pakistan who are not coming. A Houthi delegation is currently in Riyadh listening to proposals.
The Saudi economy continues to roll down hill due to the low oil prices. The country has maintained its stability for years through a maze of government subsidized government jobs that contributed little to the economy which is supported by oil revenue. As the government can no longer afford tosubsidize jobs for everyone, unemployment in growing and tens of thousands of new graduates are finding themselves unemployed. Cutbacks in the numerous forms of welfare payments that have been endemic to Saudi Arabia for years are coming. More commentators are starting to worry about the stability of the monarchy which has now gotten itself deeply involved in two foreign wars that are not going anywhere.  Most of the heavy work in the country is done by poorly-treated foreign workers. The situation where a heredity monarchy dominates a large and wealthy nation is unlikely to obtain indefinitely. At some point, Saudi oil exports will be threatened.
3.  China
As China’s economy continues to slide, some are raising questions as to just how long the spectacular growth in China’s oil imports and that of its trading partners will last. The major world oil watchers such as the EIA, the IAE, and BP continue to forecast that China’s demand for oil will continue to be strong for at least another 20 years supporting higher prices. Analysts at Deutsche Bank are challenging these forecasts saying that the annual increase in China’s demand for oil could be only half of its current pace by the end of the decade.
The rapid growth in China’s passenger car ownership in the last ten years is believed to have accounted for 66 percent of the increase in China’s demand for oil in the last decade. The bank’s analysts believe that such a rate will moderate sharply in the next few years as the streets become saturated with cars, air pollution grows worse, and the Chinese economy slows. By 2020, the growth in China’s demand for oil many only be half of what it has been in recent years.
New trade numbers released last week show that exports fell at the fastest rate since May 2009 on weak global demand. Exports were down by 25 percent from February 2015. Despite the drop in trade, Chinese crude imports set a record of 8 million b/d in February. Some of this surge may have been due to the extremely low prices that oil was selling for in January.
The National People’s Congress met in Beijing last week amongst some of the worst smog conditions that the capital has seen this winter. The Minister of Environment announced a new plan to clear up the air by burning coal, which is all the Chinese have in abundance. The new plan involved moving the coal furnaces out of individual buildings to central locations which can burn the fuel with less pollution.  The government did announce that it will establish a cap on energy consumption so that the country will not consume more than the equivalent of 5 billion tons of coal annually after 2020.
At the meeting, senior government officials asserted that the economic reforms are going well and that China will not experience a “hard landing” from the current downturn.  Some are concerned that the well-being of Communist Party control is still trumping economic reality and that the economy has become so large and diverse that it is starting to move out of the controls and economic tools that the government has to exercise.
China’s new Five Year Plan delays completion of its original plan to complete the storage for emergency petroleum stockpiles by 2020. Some believe the surge in oil going into strategic stockpiles in the last two years is coming to a close and that China’s demand for oil will shrink in the coming year.
4. Russia/Ukraine
Moscow had a good week, with the ruble back below 70 to the dollar as opposed to the 80 or so we saw two months ago. Russia’s economy is still far from recovering. The GDP is retracting and last week Moscow announced a 10 percent drop in military procurement at a time when the country is involved in two wars and is trying to build up its defense establishment to balance those of the EU and the US as we enter an era of increased confrontation.
The need for more control by the government and any effort to retaliate for the Western sanctions has forced Moody’s to withdraw from rating Russian companies. A new Russian law requires that financial ratings of Russian companies must be approved by the central bank. Such a situation is unacceptable to the idea of an independent assessment of a company’s financial stability. This is one more sign that Putin’s Russia is isolating itself from the rest of the world.
A new report on the future of Russia’s oil industry predicts that current output of 10 million b/d could drop anywhere from 1 to 46 percent in the next 20 years. Russia has a time worn oil industry with some fields going back over 100 years. Since production dropped following the fall of the Soviet Union, production has risen, first with considerable help from foreign oil companies, and more recently by a weak ruble which, when converted from euros has offset the price decline. The Ukrainian situation and the subsequent sanctions have eliminated the possibility of outside help to develop Arctic and shale oil. Outside observers have been expecting some sort of a peak in Russian oil production for several years now, but production keeps inching up slightly every year. It is no surprise that Moscow is willing to participate in a freeze agreement to raise international oil prices as it has few prospects for growing its oil production in the immediate future.
There ae reports that a major debate is going on inside the Kremlin as to how the treat its oil industry as a result of the collapse of oil prices which brought the country so much prosperity in the last decade. The government has been getting only about half its revenue and desperately needs these funds to plug a growing budget deficit. Taxing the oil industry too heavily would eliminate he funds for investment and likely result in falling production. Moscow has been careful in levying taxes on the oil industry, assigning higher rates to the older oilfields which have low costs of production and lower tax rates to expensive-to-produce offshore fields. 
Another option being explored is to sell off portions of the Russian oil industry to foreign companies, if buyers can be found these days. Whatever moves the government makes in the next year to secure more revenue for the oil industry or contract its national budget will be bound to have some sort of effect on production and exports.
5.  The Briefs
The Baker Hughes International Rig Count does not include the US, Canada, any of the FSU countries or inland China. It does include offshore China. That rig count peaked in July 2014 at 1,382 rigs and in February stood at 1,018, down a relatively modest 364 rigs or 26% from the peak. (3/8)
Market watchers are announcing the demise of the oil majors. Not for the first time. According to Jilles van den Beukel, former geoscientist with Shell, the oil companies are indeed seeing their world shrinking. But they are not dead yet: their reason for being – the world’s demand for oil and gas – is still there. Financial analysts are worried about high costs, future oil demand and low reserve replacement ratios. (3/10)
Aussie LNG game changer: Chevron has started up its massive Gorgon LNG project in Australia and will soon be shipping more of the super-chilled fuel into an oversupplied market, eroding producer revenues but also likely hastening the advent of a liquid Asian spot market. The $54 billion project, seen by many as symbolic of the era when high prices funded mega-projects of ever-increasing size, started production this week and may be the last piece required to establish a truly global natural gas market. (3/8)
Gorgon: Oil’s worst slump in a generation underscores the risk of investing in mega-projects like the $54 billion Gorgon project. Expected to cost $37 billion when construction began more than six years ago, Chevron’s development with partners Royal Dutch Shell Plc and Exxon Mobil Corp. has suffered from cost blowouts, delays and bad timing. (3/8)
Australian thermal coal prices have fallen since the beginning of the month, pulled down by weak demand from China, and analysts said there was little hope for a rise in prices if China’s imports do not pick up. China imported 13.54 million tons of coal in February, down 11.1 percent from January. (3/9)
In Australia, petroleum exploration activity has collapsed in the wake of the plunge in global oil prices over the last 18 months. The country’s crude production has fallen to its lowest level in 45 years. The total number of oil and gas exploration and development wells drilled in Australia almost halved in 2015 to 821 from 1,534 in 2014. (3/9)
In East Africa, construction of a $4 billion crude oil pipeline from Uganda to a Tanzanian port will start in August this year. The 1,403km pipeline will take three years to complete. Construction will involve the hiring of 10,000 workers. (3/9)
The South African government said Tuesday it was expecting to reap the rewards of shale gas, with exploration slated as early as 2017. Royal Dutch Shell is among the early entrants into the South African shale sector. (3/9)
In Angola, the crash in the price of oil has hit hard. Hospitals across the country are low on resources, including medicines. There are food shortages in the North, drought in the South. From Cabinda to Namibe, empty shelves in the stores attest to the government’s lack of response. If people are facing such serious difficulties in their day-to-day lives (in the so-called ‘micro’ economy) matters are no better on the macroeconomic scale where double-digit inflation is taking its toll. (3/10)
Nigerian unions on Thursday ended a day-old strike against the revamp of the beleaguered state oil firm—an event about which they had not been informed—after a minister promised there would be no job cuts. (3/11)
Growth in Nigeria, Africa’s biggest economy and oil exporter, slowed in the fourth quarter as crude revenue fell and manufacturers struggled amid a shortage of foreign-exchange for imports.  Gross domestic product expanded 2.1 percent from a year earlier, compared with 2.8 percent in the third quarter. (3/9)
The Latin American state-run oil companies whose largesse filled government coffers from Mexico to Brazil during the crude boom of the previous decade are quickly becoming dangerous liabilities as soaring debt levels spook investors. Regional leaders are being forced to shelve plans to spend petro-cash on popular projects and are instead grappling with mounting bills at their state-backed champions. The burden is being amplified as local currencies crumble against the dollar, driving up the cost to pay off foreign debt. (3/11)
Venezuela’s state-run oil company PDVSA has launched one of its largest oil tenders ever, seeking to buy some 8 million barrels of US or Nigerian light crude for delivery from April through June. That would be about 90,000 b/d, more than the 50,000 b/d of crude PDVSA bought last year. Then, it purchased mainly African and Russian grades as diluents for its extra heavy oil output. (3/11)
In Venezuela, the coalition Mesa de la Unidad Democrática, which controls the legislature, is planning to oust Mr. Maduro before his term ends in 2019 via a constitutional amendment to cut his term short, a recall vote on his mandate, and a national campaign calling for his resignation. (3/7)
Argentina: Nearly worldwide, oil and gas companies have sharply reined in drilling and thousands of workers are being laid off. But here, where the oil and gas industry operates inside a government-made, subsidized bubble, taxpayers and drivers spend billions of dollars to try to keep that from happening. A barrel of oil fetches more than twice what it does in the US, and prices for natural gas can be nearly four times higher. That is helping shield producers and their workers developing the vast shale oil-and-gas deposits buried under a desolate swath of western Patagonia called Vaca Muerta, or Dead Cow, from the vagaries of world markets. (3/10)
Offshore Uruguay, France’s Total SA is weeks away from drilling one of its most important offshore exploration wells in the Americas this year as it hunts for a giant oil field in Uruguayan waters. A discovery could extend an exploration boom in a country that currently imports all of its oil and gas needs. Total, Tullow Oil Plc, BG Group Plc and BP Plc have invested more than $1 billion in exploration activities since they won eight offshore blocks in 2012. (3/8)
Pemex’s woes are hitting home for suppliers that less than two years back were preparing for an oil boom. Cotemar, one of Mexico’s largest oil service providers, will lay off as many as 2,000 workers after Pemex suspended two of the company’s contracts amid massive budget reductions. (3/12)
TransCanada Corp., the company behind the controversial Keystone XL oil pipeline project, is in takeover talks with Columbia Pipeline Group, a U.S. natural-gas pipeline operator with a market value of about $8 billion. The companies could reach a deal in the coming weeks. (3/11)
The US total rig count has fallen to the lowest level since at least 1940, oil services company Baker Hughes said on Friday, as energy firms continued to slash activity amid the deepest energy price rout in a generation. Combined rigs in the U.S. oil and gas fields fell by nine this week to 480 (oil down 6 to 386, gas down 3 to 94), overwriting a previous record low of 488 in April 1999. (3/12)
Optimizing production: some US drillers are spending a little bit more on measures that are subtly flattening the so-called "production curve" of shale wells, either by limiting the initial surge in output or by squeezing a few additional barrels out of older wells. Choking output at newly fracked wells curtails immediate supply and revenue in hopes that prices will be stronger later, whereas maximizing output at old wells with things like "artificial lift" is a relatively cheap way to increase volume and immediate revenues. (3/10)
Bakken pipeline: The last state permit needed for a 346-mile pipeline that would carry a half-million barrels of crude oil daily from North Dakota to Illinois was approved Thursday by Iowa utilities regulators. (3/11)
Exports north? US gas drillers battered by the lowest prices in 17 years have found another release valve for their output: Canada. Pipeline companies led by Spectra Energy, TransCanada and Energy Transfer Partners are gearing up to more than double the flow of natural gas into Canada by 2027. (3/12)
Fracking let-down: Two recent studies further call into question the oil and gas industry’s claims of the climate benefits and community benefits of hydraulic fracturing. An EPA study concludes that “the income distribution of the population nearer to shale gas wells has not been transformed since shale gas development.” The other concludes that the petrochemical industry’s planned construction and expansion projects announced in 2015 alone are the “pollution equivalent to the emissions from 19 coal-fired power plants.” (3/11)
Methane leakage rules: The Obama administration’s decision to crack down on the methane leaking from nearly 1 million oil and gas wells across the country promises to reduce greenhouse gases but also imposes new costs on an industry that’s already reeling. Industry leaders cried foul, saying new methane rules could quash domestic drilling, heaping more pain on energy companies that have idled more than 1,000 rigs and gutted more than 250,000 jobs. (3/11)
BP relief: A federal judge has ruled BP does not have to pay for economic losses other businesses suffered when the federal government shut down deep-water drilling in the wake of BP’s catastrophic 2010 oil spill in the Gulf of Mexico. (3/12)
Anadarko Petroleum Corp. is shrinking its workforce in the latest step to cope with a collapse in oil and gas prices, following plans to park rigs, slash dividends and sell assets. The third-largest U.S. natural gas producer is laying off about 1,000 workers, roughly a 17 percent reduction. (3/11)
Exxon Mobil has put on hold a possible project to double the size of the company’s 344,500 barrel per day Beaumont, Texas, refinery due to cuts in capital spending because of falling oil prices. (3/11)
Offshore rig company Transocean said Tuesday payments and delivery for five new drilling rigs was now delayed four years following an agreement with its contractor. Transocean said it made a mutual agreement with rig builder Keppel Offshore & Marine to defer work on five class Super B 400 jackup rigs. (3/9)
Chevron, compared with its competitors, is better placed to ride out the downturn and benefit from the upturn when it comes.  Yet with oil at $52 per barrel, which was the average price of Brent crude last year, Chevron does not look like a business with a great long-term future. (3/10)
Chevron Corp. is putting the brakes on all but one major oil project for the foreseeable future as collapsing crude prices make most new investments unprofitable. The world’s third-biggest investor-owned oil explorer plans to reduce spending on drilling rigs, oil platforms and other developments by about 26 percent during the next two years. (3/9)
Sabine Oil & Gas Corp won an important court ruling on Tuesday that will allow the bankrupt energy producer to shed certain pipeline contracts, potentially exposing companies that transport and process gas to the crisis in the energy industry.  The ruling by New York’s influential bankruptcy court is the first major test of whether Chapter 11 can be used to end a contract with companies in what is known as the midstream sector of the energy industry. (3/9)
Losers in waiting? The $9.2 billion investors paid to snap up new equity offerings from US oil companies in 2016 proves those investors are indeed ready for more punishment. The amount is in line with the pace of such equity offerings in 2015 even as the mood in the oil markets has grown dourer. (3/10)
Coal bin: Northwest Peabody Energy, the largest private coal company in the world, is one of the last remaining coal majors to still be floating above the bankruptcy tidal-wave that has hit the industry. But it now looks like that even this coal behemoth will likely go under. (3/10)
Clean Coal Technologies Inc. is pilot-testing a process that pre-treats coal with lower-grade heat prior to the combustion process.  The process does not set the coal aflame, but heats it enough to coax out moisture and impurities, meaning that the resulting Btu content of coal is higher and the coal burns cleaner. (3/8)
Coal exports: While the U.S. remained a net exporter of coal, last year’s levels marked the third straight year for declines. The US last year exported 74 million tons of coal, a 23 percent decline from 2014. (3/8)
Fukushima: Five years after the earthquake and tsunami struck, causing three nuclear reactors at Fukushima to melt down, an ongoing effort to clean up the mess is at once routine and precarious. A veneer of stability at the plant masks a grueling day-to-day battle to contain hazardous radiation, which involves a small army of workers, complex technical challenges, and vexing safety tradeoffs.  (3/11)
A Japanese court issued an injunction to halt two of the four nuclear reactors restarted by the country’s utilities, backing local residents who were worried about a repeat of the March 2011 Fukushima nuclear disaster. (3/10)
EVs: With all good technologies, there comes a time when buying the alternative no longer makes sense. Think smartphones in the past decade, color TVs in the 1970s, or even gasoline cars in the early 20th century.  It’s looking like the 2020s will be the decade of the electric car. Battery prices fell 35 percent last year and are on a trajectory to make unsubsidized electric vehicles as affordable as their gasoline counterparts in the next six years, according to new analysis by Bloomberg New Energy Finance. (3/12)
It was the warmest winter in the Lower 48 states in 121 years of record-keeping, NOAA announced last week. Temperatures averaged over the country between December and February were nearly five degrees above the 20th-century average. (3/9)
US companies are cutting emissions voluntarily and buying clean energy at the fastest pace ever, as lower renewable energy prices and easier availability of these sources makes these economical options. (3/9)
CO2 jump: The National Oceanic and Atmospheric Administration has reported the biggest 12-month jump in carbon dioxide concentrations since record-keeping began, based on preliminary data from its Earth Science Research Lab in Mauna Loa. From February 2015 to 2016, the global concentration of carbon in the atmosphere rose a record 3.76 parts per million (ppm), to over 404 ppm. (3/10)
ExxonMobil is being investigated by the Attorneys General of New York and California with a view to criminal charges for securities fraud and racketeering over their stance on climate change. The ramifications are enormous for the course of the global energy transition. The oil and gas giant stands accused of lying to its shareholders for many years. (3/11)