Quote of the Week
“The embattled crude oil and natural gas industry worldwide has slashed capital spending to a point below the minimum required levels to replace reserves — replacement of proved reserves in the past constituted about 80 percent of the industry’s spending; however, the industry has slashed its capital spending by a total of about 50 percent in 2015 and 2016. According to Deloitte’s new study, “Short of Capital? Risk of underinvestment in Oil and Gas is amplified by competing cash priorities,” this underinvestment will quickly deplete the future availability of reserves and production.”
The BOE Report
1. Oil and the Global Economy
Oil prices dropped for six straight trading sessions before rebounding on Friday to close at $47.98 in New York and $49.17 in London but both markets were down for the week. Trading was dominated by polls showing that Britain may vote to leave the EU this week sparking financial turmoil and slower economic growth. These fears resulted in a stronger US dollar which in turn drove oil prices lower. Running counter to these pressures were an IEA forecast that the global supply/demand would be back in balance by the end of the year; production outages in Libya, Canada, and Nigeria; and concerns that the deteriorating situation in Venezuela could soon limit oil production and exports.
US shale oil producers brought eight rigs back into production the week of 17 June, and US crude stocks showed a small decline as relatively low gasoline prices spurred demand. It is now conventional wisdom that some US shale oil producers, who already have large amounts of capital sunk into leases, infrastructure, and drilled but uncompleted wells, will resume drilling with oil above $50 a barrel.
While there seems little doubt that the massive reductions in capital investment in exploring for and developing new sources of oil will lead to much higher prices 3-5 years from now, what will happen in the next six to twelve months remains contentious. The IEA notes that unplanned interruptions, mostly in Nigeria, have reduced the global oversupply from 1.5 million b/d day to about 800,000 in the first half of this year and forecasts that global demand will be up about 1.3 million b/d for the rest of the year. However, the Agency notes that OECD countries now have over 3 billion barrels in stockpiles and that this inventory grew by 222 million barrels as compared to last year. Large inventories of crude will keep downward pressure on prices for some time to come. A production deficit of less than 1 million b/d would take a long time to bring inventories back to normal levels.
Last week, Goldman Sachs made the case that the recovery of the oil markets is “fragile” and that overproduction will continue into 2017. Goldman’s believes that supply disruptions are not indicative of a rebalancing in the global oil supply and can have only a temporary effect on prices.
The eventual impact of the decline in capital spending is starting to be commented on by industry analysts. The oil and gas industry will cut $1 trillion from planned spending on exploration and development because of the slump in prices, leading to slower growth in production, according to consultant Wood Mackenzie. Worldwide investment in the development of oil and gas resources from 2015 to 2020 will be 22 percent, or $740 billion, lower than anticipated before prices plunged in 2014, with the deepest cuts in the US. A further $300 billion will be eliminated from exploration spending. Spending cuts mean the loss of about 3 percent of global production this year and another 4 percent by next year, with onshore US production accounting for about 70 percent of the total decline, the consultant said.
Another new study, by the Deloitte Center for Energy Solutions, suggests that there will be a funding shortfall of $2 trillion over the next five years and that capital expenditures are now below the level required to replace reserves. Some $590 billion of oil industry debt will mature in the next five years putting further pressure on new capital spending.
There are so many complicated variables that will impact the global oil situation during the next five years, on both sides of the supply/demand equation, that it is difficult to work out a clear picture of where the industry will be. For now, it certainly appears that the rapid decline in capital expenditures will have a major impact on supply and production.
Along with crude oil, natural gas prices have rebounded for three months. In March futures were trading below $2 per million BTU’s, but since have rebounded to over $2.60. While the natural gas market is currently oversupplied and inventories are 32 percent above normal for this time of year, traders are reacting to forecasts of very warm weather in the US this summer spurring demand for air conditioning.
2. The Middle East & North Africa
Iran: The surge in oil exports that Iran has demonstrated since the lifting of the oil sanctions last winter may be coming to and end. Tehran now expects its crude production to reach an eight-year high of 4 million b/d by the end of the year, defying the predictions of Western analysts that such a rapid recovery was impossible. From here on out, however, production increases will be more difficult to achieve as they will require massive capital injections and lifting of the remaining sanctions.
Iran currently is seeking over $100 billion in foreign investment; however much depends on what sort of terms Tehran is willing to give foreign investors. These terms remain highly controversial in Iranian government circles, as hard-liners do not want to be seen as “giving away” Iran’s oil to foreigners in return for investment. Iranian oil fields remain cheap and easy to exploit which makes them attractive to international oil companies. However, the political situation in Iran gives pause to many foreign investors.
Buying oil from Iran is one thing, but investing billions of dollars into long-term projects is another. The political and military confrontations in which Iran is involved are dangerous and volatile. They could easily lead to re-imposition of sanctions or even hostilities. Although the nuclear issue seems to be settled, Iran is still subject to sanctions for its involvement in terrorism, money laundering and support for Hamas and Hezbollah. Unless the terms of any new contract are very attractive to western oil companies, the risks may not justify the rewards. Tehran is planning to unveil yet another revision to its proposed oil contract in July.
Iran will partner with China to build a new $550 million oil terminal on Qeshm Island in the Persian Gulf to increase Iran’s capacity to export oil.
Syria/Iraq: Last week a Kurdish-Arab alliance backed by US airpower surrounded the key Syrian town of Manbij, cutting off ISIL’s main resupply route to the Turkish border. ISIL has reacted with a wave of suicide car bombings against targets in Manbij and casualties are high. As military pressures on the caliphate which has no source of resupply other than capturing weapons and ammunition from opposing forces increase, the organization has become more desperate.
In Iraq, government forces have retaken much of Falluja as the humanitarian situation worsens. Tens of thousands have been forced from their homes by the fighting as heavy fighting continues in parts of the city not yet taken by the government. Government forces are also moving closer to Mosul, but many doubt the government will be able to retake the city this year.
The Kurds say they are ready to make a deal with Baghdad to increase oil exports if the central government guarantees them revenue of $1 billion a month. Baghdad stopped exports of about 150,000 b/d from the northern oil fields it controls in March to pressure Erbil into coming to an agreement. In theory, Baghdad owes 17 percent, or what the Kurds claim is $1 billion a month, of its oil revenues to the semi-independent Kurdish province. The Kurds stopped marketing their oil through Baghdad last year when the payment sank to $400 million a month.
The Kurds exported an average of 513,000 b/d of oil they produced themselves which earned about $391 million in revenue. About $75 million went to the oil companies producing the oil. The drop in oil prices has caused a massive cash crunch in Erbil as well as Baghdad. The Kurds, desperate for cash to feed refugees as well as prosecute the war against ISIL, have been late in payments to the International Oil Companies producing their oil. With oil prices back to the area of $50 a barrel, the situation is somewhat better; most observers say that Baghdad simply does not have enough money to pay $1 billion a month to the Kurds.
Libya: Fighting continues around Sirte, the Islamic State (IS) controlled city in Libya where a government offensive to retake the city has stalled. So far government forces have suffered some 700 casualties in the effort to neutralize the estimated 5,000 IS fighters in the city which normally is home to some 30,000 civilians. The IS fighters are holed up in civilian neighborhoods and are using women as shields against the Western-backed government forces. At one time the IS had controlled 180 miles of coastline around Sirte using it to bring in more jihadists and supplies.
The split between the new UN-backed Government of National Accord (GNA) and the oil parliament in Tobruk is far from reconciled. The Libyan National Army, led by General Haftar and aligned with the Tobruk government, has not participated in the battle for Sirte. The GNA’s military force is mostly a rebranding of the Misrata militia which has been opposing the Tobruk government. Victory in Sirte would give a boost to the prestige of the Tripoli government which so far as not been able to gain much country-wide support.
Some are saying that the defeat of the IS forces in Sirte will lead to increased terrorist attacks in Tripoli including stepped up suicide bombings. The bottom line is that stability in Libya and a significant increase in oil production still seems a long way off.
The Chinese cut their oil production by the most in 15 years as money-losing, high-production-cost fields were shut down. Oil output in May was 7.3 percent below that of May 2015. Coal production fell by 15.5 percent year over year. Some see this drop as another victory for the Saudi policy of increasing its low-cost oil production to drive higher cost producers from the market. The decline in China’s domestic production will clearly help in rebalancing the oil markets, but will make the country ever-more dependent on imported oil. PetroChina, the nation’s largest producer, said in March it was closing fields that have “no hope” of ever being profitable again.
China’s potential oil reserves, however, are up 64 percent since 2007 due to increased exploration activities, according to a new report from the Chinese Land and Resource Ministry. While potential reserves are up 64 percent, recoverable reserves were up only 42 percent. These numbers now put China’s potential oil reserves at 126 billion tons, with 30 billion tons of recoverable reserves—up significantly since the last assessment nearly a decade ago. The report also puts the country’s estimated natural gas reserves up 158 percent, to 90 trillion cubic meters, with recoverable natural gas reserves up 127 percent, to 50 trillion cubic meters.
In China, talk that Venezuela might default on the loans that China made to the Chavez government since 2005 is front page news. In 2014, China imported some 630,000 b/d of oil and products to pay the interest and principal on the loan.
President Putin declared last week that Russia is more or less out of recession as the country adapts to lower oil prices. Russia’s Central Bank says it expects GDP to grow by 4 percent in 2017. Putin also said last week that he wants a new export pipeline to southern Europe to replace the canceled South Stream route. With the Middle East ramping up to produce more natural gas, Moscow fears that its natural gas sales may suffer from inroads from LNG and new pipelines into southern Europe that are under discussion.
The return of Iran to the European oil markets is already hurting Moscow’s crude sales in the region. The discount of Urals crude to Brent widened to $2.40 a barrel last week, the lowest in two years. Russia became the main beneficiary of the EU sanctions on Iran that halted sales to the EU. The French refinery strike has also hurt Moscow’s sales.
The Central Bank announced on Wednesday that it is abandoning the fixed exchange against the dollar which it has held for the last 16 months and will allow the currency to float freely. The violence in the Delta has brought Nigerian oil exports to a 20-year low and cut foreign exchange reserves by 50 percent to $26 billion. The Nigeria’s currency, the naira, officially pegged at 197 to the dollar while it was going for 350 on the black market, was no longer sensible. In the short-term, the country will suffer from considerable financial instability as the markets readjust to the floating rates. Over the longer term, the move was just one of many necessary reforms to help the country through lower oil prices.
Outside commentators note that the new president wasted a year attempting to prop up the currency to help the poor while capital was flowing out of the country. This decision and an earlier one to eliminate fuel subsidies show that the government is still trying to push through badly needed reforms.
The Niger Delta Avengers claim to have bombed another pipeline last week The group’s high command restated its intentions to attack oil company’s infrastructure and the tankers that come to to the Delta to take away its oil. They also say they are reviewing the policy of not causing casualties by only blowing up oil pipelines in remote locations. The exact state of Nigeria’s oil production is being kept a secret. OPEC reports that crude production averaged 1.4 million b/d in May, but some outsiders believe it could be considerably lower.
The Nigerian Nation Petroleum Corporation insists that the $13 billion that is missing from its accounts and was never turned over to the Federal government was spent for legitimate company expenses in conducting normal operations.
It is hard to portray just how bad in the situation in Venezuela has become. Schools are closed, hardly anybody is working, and food shortages are endemic. Food riots and attacks on food stores are taking place all over the country. The government has set up committees to distribute food, but many complain that the bulk of the food is going only to government supporters. Some 80 percent of normal food supplies have disappeared from retail stores, and many are facing starvation. The government has no real plan to deal with the crisis which can only get worse.
The US has opened quiet talks with Venezuela’s government to explore what the US can do to ease the crisis. To be realistic, the US is the only country with the resources to provide prompt relief if the situation becomes dire with starvation for many imminent.
So far there is little information on the state of Venezuela’s oil industry. OPEC says the country’s oil output fell to 2.37 million b/d, but this is almost certainly too high given the current situation. Most oil production takes place away from urban areas, and presumably, the government ensures that oil workers and their families have enough food to keep working. Production is obviously down and the national oil company is having difficulty keeping foreign firms working without pay and importing necessary supplies to keep the refineries operating.
Since 2005, China has loaned Venezuela some $65 billion in return for oil at favorable prices. Now with Venezuela facing an economic collapse, Beijing is facing a default on its loan. Venezuela is asking the Chinese for a one-year grace period on its loans during which time PDVSA would continue to pay the interest on the loans, but would receive cash for the oil that it is currently shipping to China to repay the principal. Realizing that the Maduro government may not last much longer, Beijing has sent negotiators to Caracas in an effort to extract a promise from the opposition that it will honor the debts should it take over the government.
Should Venezuela default on its debts, it would set a precedent for many other underdeveloped countries that have received large loans from Beijing in recent years.
5. The Briefs
Refinery growth: A fresh wave of seasonal oil demand is expected to be unleashed when the global refining capacity increases to 101.8 million b/d in August, compared to 97.25 million in March, according to data from Thomson Reuters. The expected demand increase of 4.55 million b/d in a matter of six months comes at a time when production is dropping, causing the refineries to compete with each other to grab a portion of the available oil production, which is likely to limit the slide in the price of oil. (6/14)
Refiners in Europe, Asia, and the United States ramped up the proportion of gasoline they churned out to cash on record driver demand. But now they are moving back to the diesel, jet fuel and heating oil that for more than a year had become “by-products” they did not want. (6/17)
Global oil majors Chevron Corp and Royal Dutch Shell Plc are putting small refineries on the auction block as they look to trim lower-margin assets in the face of headwinds from rising crude oil prices. (6/17)
A British environmental advocacy group said more than 150,000 signatures were added to a petition sent to the government against hydraulic fracturing plans. Opponents claim fracking poses risks to people and the environment, and politicians in Westminster shouldn’t force this risky technology on any community. (6/16)
In Ukraine, Halliburton, Schlumberger, and Weatherford are among nine companies that submitted bids to carry out hydraulic fracturing operations for Ukraine’s largest natural gas producer. (6/17)
Russian gas: Shell has plans to sign a deal with the Russian gas company Gazprom sometime this week. The deal is related to Gazprom’s plan to begin a liquefied natural gas project at the port of Ust-Luga in the Baltic Sea. Shell was reported to be interested in picking up 25 to 30 percent of the project, which is expected to include a two-train LNG plant as well as a pipeline that will connect with the Gazprom network. (6/16)
Russia’s second-largest buyer of gas in Europe is now Italy — overtaking Turkey but still behind Germany — the head of Gazprom said Wednesday. CEO Alexei Miller said Italian demand for Russian gas continued to rise and was up 5.3% so far in 2016 compared with the same period of last year. (6/16)
India’s monsoon is expected to dump above-average rainfall on the South Asian nation after two years of drought, cutting its use of diesel for irrigation pumps and generators over the third quarter and potentially rejuvenating diesel exports. India is a net exporter of diesel. (6/17)
The world’s biggest oil importer–a title nobody wants. For decades, the US held undisputed rights to the crown. Last year, China squeaked ahead for the first time amid growing demand and as rising US shale production displaced overseas deliveries. Then $30 oil happened. US drillers shut down the most rigs in modern history; production began to fall, and imports have rebounded. Chinese oil firms also shuttered output and kept demand growing. Now the two are neck and neck. (6/17)
Latin American national oil companies need crude prices to surpass $55 per barrel to break even, a level that would allow them to invest capital enough to start reversing declining output, according to credit rating firm Moody’s Corp. (6/15)
Mexico’s Pemex said on Friday it may be forced to shut its 330,000 b/d Salina Cruz refinery in the next few days if ongoing protests in the southern state of Oaxaca continue to block local roads needed to transport fuels. (6/18)
In Mexico, Statoil may seek to partner with Pemex in deepwater fields as the producer looks to gain a foothold in the country’s recently opened energy market. Pemex and Mexico’s energy ministry announced plans last week to farm out the Trion field in the Gulf of Mexico -– an area believed to contain about 485 million barrels of reserves and estimated to cost $11 billion to develop. (6/14)
Canada relies heavily on the North American market for natural gas exports. With Asian economic growth outpacing that of North America, the government is keen on tapping into new foreign markets for gas with port facilities like Kitimat in British Columbia. In January, the National Energy Board gave its consent for an export license for liquefied natural gas from Kitimat. The NEB said exports of LNG are slated to begin in three years at an initial volume of about 500 million cubic feet per day but increase to 2.3 billion cubic feet by 2023. A final decision on Kitimat LNG facilities in British Columbia is expected later this year. (6/17) [David Hughes, former Canadian research geologist, challenges the projected production amounts cited here and elsewhere.]
Fracking and health: This year, researchers with PSE Healthy Energy, a Canadian scientific institute that supports energy policies based on evidence, assessed studies about fracking and separated out those specifically dealing with air, water, and human health. Researchers concluded that the weight of the scientific literature indicates there are hazards and elevated risks to human health as well as possible adverse health outcomes from fracking operations. (6/14)
The U.S. oil rig count added eight oil rigs for a third week in a row for the first time since August, bringing the oil rig count to 337, according to Baker Hughes Inc., as producers seek more drilling permits after crude prices hit an 11-month high over $51 a barrel last week. (6/18)
Alaska downer: Analysts with the credit rating agency Fitch downgraded Alaska from a triple-A to a double A plus with a negative outlook, cited the large budget deficits the state has run since the steep drop in the price of crude oil. (6/15)
Oklahoma slowdown? Oil producers around the country enticed by crude’s jump to $50 a barrel are hoping to get production back online, but for producers in Oklahoma, new regulatory barriers may keep key parts of the state shut due to worries about earthquakes. Crude’s recent rebound will mark the first test of more stringent regulations recently implemented in Oklahoma – and already, companies are looking for workarounds. Seismic activity has soared in the state in the last five years, linked to disposal of saltwater from fracking activity. (6/13)
With US gasoline prices still below what they were last year, consumer demand moved higher by 2.1 percent, the American Petroleum Institute reported. Gasoline deliveries reached a record high for the month at more than 9.4 million b/d. The average retail price for a gallon of regular unleaded gasoline for May was 15 percent lower than it was last year. Total demand for petroleum products, however, was down only 0.1 percent from April, though still the highest it’s been in eight years. For full-year 2016, retail gasoline prices are expected to average $2.13 per gallon, the least expensive in years. (6/18)
Oregon transportation officials are now calling for a halt of Union Pacific trains after a derailment on the third of June. Eleven cars from a 96-car train owned by Union Pacific that was hauling crude oil along the border of Oregon and Washington derailed, causing one of the cars to catch fire. Crude-oil-only cars are the issue; they are heavier than others and might be putting greater strain on the lag bolts that connect the rails and tracks. (6/18)
Airlines fuel fumble: Jet fuel on the U.S. Gulf Coast was trading at $1.32 a gallon Thursday, up from less than 80 cents on January 20, the lowest intraday level since November 2003. Major jet fuel consumers — including Delta Air Lines and United Continental Holdings — didn’t lock in prices at those January lows after the airline industry lost billions on hedging as crude plunged to about $26 a barrel earlier this year from more than $100 in 2014. (6/17)
Biofuels: In a new report, researchers have challenged the belief that growing crops for bioenergy will cut food production, a concern they say is stalling new schemes. The report also identifies five ways that countries as diverse as the United States and Brazil can achieve their targets to increase energy security, foster rural economic development and reduce greenhouse gas emissions. (6/16)
Uranium: With prices set to double by 2018, we’ve seen the bottom of the uranium market, and the negative sentiment that has followed this resource around despite strong fundamentals, is starting to change. (6/15)
New U.S. nuke: Watts Bar 2, the nation’s newest nuclear power plant, connected to the grid on June 3 and started powering up. At a cost of $4.7 billion, the 1165 MW plant is nothing if not a symbol of the travails involved in getting massive nuclear plants running; permitted in the early 1970s, construction began in 1972 but halted in 1985 when the unit was still just 55% complete. The plant uses a design quite consistent with the current U.S. fleet of 99 reactors. Two more nuclear units are being built by the Southern Company, in Georgia, and two more are under construction in South Carolina. But worldwide, the trend is mixed. Germany has already scrapped 9 of its 17 reactors in the wake of the Fukushima catastrophe and plans to close eight more by 2022. Japan’s fleet of nearly 50 nuclear plants, too, remains almost entirely offline in the wake of the Fukushima disaster, with only two plants having restarted. (6/18)
Pro-nuke enviros: Some of the nation’s most influential environmental groups are softening their longstanding opposition to nuclear power, marking a significant shift in the antinuclear movement as environmentalists’ priority shifts to climate change. The change is lowering one of the biggest political hurdles facing the nuclear power industry in the U.S. and comes at a critical time, as several financially struggling reactors are set to shut down. (6/17)
The costs for solar and wind technologies are cheap and getting cheaper. With the right policies in place, the International Renewable Energy Agency said the cost for solar and wind could drop by as much as 59 percent by the middle of the next decade. Already, the price for solar installations fell by 80 percent and 30 percent for wind since 2009. (6/16)
Battery storage: A growing number of companies – from leading utilities such as E.ON and GE to startups like California-based Stem – are working on developing cheaper energy storage solutions aimed at eliminating the biggest challenge that has confronted renewable energy for decades. Total bought into Stem last year and acquired French energy storage systems maker Saft. Earlier this month, GE announced the acquisition of a stake in Germany’s Sonnen, a successful peer of Saft. (6/15)
The amount of coal produced in the US is the lowest it’s been since the early 1980s as overall demand falters. Natural gas is becoming the primary source of electricity in the United States. Prior to April 2015, the total monthly share of electricity generated by coal had always been greater than gas. One result of this major shift was bankruptcies declared by large coal producers Peabody Energy Corp., Arch Coal, and Alpha Natural Resources, among others. (6/14)
Coal fight: The Supreme Court on Monday left intact a key Obama administration environmental regulation, refusing to take up an appeal from 20 states to block rules that limit the emissions of mercury and other harmful pollutants that are byproducts of burning coal. The high court’s decision leaves in place a lower-court ruling that found that the regulations, put in place several years ago by the Environmental Protection Agency, could remain in effect while the agency revised the way it had calculated the potential industry compliance costs. (6/14)
CO2 threshold: Scientists who measure and forecast the concentrations of greenhouse gases in the atmosphere said Monday humans walking the Earth today will probably never live to see carbon dioxide concentrations in the atmosphere once again fall below a level of 400 parts per million — at least when measured at the Mauna Loa Observatory in Hawaii, where the longest global record of CO2 has been compiled. (6/14)
The Scottish government said it has reduced its greenhouse gas emissions to the point that it met its goals for 2020 years ahead of schedule. Total emissions are down 12.5 percent year-on-year and are 45.8 percent below a baseline level based on 1990 emissions. (6/15)
Greenland has been abnormally warm this spring. Nuuk, Greenland’s capital, soared to 75 degrees (24 Celsius) Thursday, marking the warmest temperature ever recorded in the Arctic country during June (6/13).
NASA is poised to designate an all-electric plane concept as its newest, futuristic aircraft in the biggest boost yet for the idea of building airliners that don’t burn fuel. The electric aircraft is expected to be called the X-57 and could fly as early as next year. (6/17)
Local Motors, creator of the first 3D-printed cars, introduced the first self-driving vehicle to integrate the advanced cognitive computing capabilities of IBM Watson. The vehicle, dubbed “Olli,” will be used on public roads locally in Washington DC, and late in 2016 in Miami-Dade County, Florida and Las Vegas, Nevada. (6/17)
UN scientists predict that Iraq could witness 300 dust events in a year within ten years, The Middle East has been the worst hit by a significant rise in sand and dust storms, with major impacts on human health. Iran and Kuwait are the most affected countries, largely because of sand and dust blowing in from Syria and Iraq. Mismanagement of land and water amid conflicts in the region has been a key factor, as well as climate change. (6/17)
Quote of the Week