Quote of the Week
“We must break from the recent past [and] re-examine the regulatory onslaught of the last few years that has proposed or imposed some 145 regulations and other executive actions on our industry, and instead work to implement smart energy regulations.”
Jack Gerard, President, American Petroleum Institute
Graphic of the Week
1. Oil and the Global Economy
For the last month oil prices have been stuck in a trading range in New York of between $52 and $54 a barrel. In London, oil has been trading two or three dollars higher. After a 30 percent jump in the last six weeks of 2016 in response to the OPEC production freeze, prices have stabilized as the markets wait to see the degree of compliance with the pledged production cuts. It may take several months to establish a clear trend as so many nations are involved in the cut. While a few countries, particularly the US, publish oil production and inventory statistics weekly, others do a poor job of collecting statistics. A few release incorrect production numbers they know to be untrue for a variety of political reasons.
The Saudis and the other Gulf Arab states likely will adhere to the agreement and make the required cuts this month. For the other countries, the situation is less certain for most are in rather desperate economic straits, badly need any revenue they can get, and have many ways to fudge the true size of their production. Some, such as the Russians, say they will wait and try to stretch out the required cut for as long as possible. There already has been some finger pointing when Baghdad accused the Kurds of continuing to increase production rather than joining in making the cut required of Iraq. In the last week, price increases have been sparked by the falling dollar and reports of disruptions, while decreases have come on new assurances that production cuts are being made.
A 7.1-million-barrel decline in US crude stocks the week before last would usually be good for oil prices. However, at year’s end crude inventories are heavily taxed in the southern US so that refiners can make more money by keeping some crude imports floating offshore until the new year arrives. At the same time, the EIA reported last week that US stocks of gasoline and distillates increased by some 18 million barrels, suggesting that demand was not very good. This situation should straighten out in this week’s report when some of the large amount of oil waiting on tankers is brought ashore.
Aside from the issue of the pledged production cuts actually being made, there is the question of whether Libya and Nigeria will increase their production in the coming year. Last week Shell Nigeria announced that it was closing down a 140,000 b/d pipeline supplying an oil export terminal due to a fire. In Nigeria, a fire or an oil spill is usually a euphemism for militants blowing up a pipeline. The Nigerian government, however, is said to have resumed payments (that amount to bribes) to militant groups to protect the pipelines. This last time the government did this it worked fairly well, but then oil prices were above $100 a barrel, and the government could afford to pay bribes to keep the peace.
Libya announced last week that oil production continues to increase and that the Zawiya export terminal near Tripoli will ship 1.9 million barrels this month. Should production increase to the announced goal of 1.1 million b/d, it would take a large bite out of OPEC’s production cut.
The US shale oil rig count continues to climb and is now back to where it was at the beginning of 2016 but still down substantially from the 2014 highs. The industry, however, maintains that it is now so efficient that it no longer needs as many rigs to maintain and even increase shale oil production. Some are talking about the large production increases that will come when oil prices reach $65 a barrel.
The bad news for offshore oil and gas production, however, continues. Exploration expenditures dropped significantly in 2015 and 2016. Further declines are expected this year as oil prices still have not reached a level that will trigger investment in expensive new offshore projects that are nearly all deepwater these days.
2. The Middle East & North Africa
Iran: Tehran is using the opportunity of higher oil prices to unload the millions of barrels of crude that built up on board tankers during the sanctions. Three months ago the Iranians had some 30 million barrels of oil in floating storage. This has now been reduced to 16 million.
The only other news from Iran last week was the announcement that Total, Shell, Eni, and CNPC were found eligible to bid on new oil and gas projects in Iran. Aside from a legacy natural gas development project that was put on hold during the sanctions, none of the agreements signed so far appear to involve large amounts of foreign investment in Iran. Without this investment, few observers think that the Iranians can grow their oil exports in the coming decade no matter how large their reserves and how cheaply they can be exported.
Syria/Iraq: The main drinking water supply for some 5 million residents of Damascus has been cut off for the last three weeks forcing people to rely on local wells. The government says the rebels have contaminated the water supply; the rebels say it was contaminated by government bombing. This is just one more sign the whole country is on the verge of collapse.
After a record year in which Baghdad exported nearly 10 percent more oil than in 2015, the government says it has begun reducing oil output in keeping with its obligation to cut 200,000 b/d under the OPEC decision. The issue is complicated, however, by Kurdistan which conducts its own exporting through Turkey, independently from what leaves Iraq via tanker from Basra. Although the Kurds have not yet published oil export figures for December, Baghdad is already saying the Kurds are still exporting more than their fair share of the cut.
Under the the terms of the 2017 budget agreement which was passed without Erbil’s agreement, the Kurds are allowed to export 250,000 b/d from their own oil fields. This does not include oil from Iraq’s northern oil fields which the Kurds seized to keep them out of ISIL’s hands after the fall of Mosel. The dispute between the Kurds and Baghdad has been going on for centuries and is growing more complex with every passing year. Nearly every world and regional power has a finger in the Kurdish situation so that oil exports are only a minor part of all that is at stake
Saudi Arabia: A gunfight between police and ISIL suicide bombers in the streets of Riyadh over the weekend highlights what may be the next round of Middle Eastern unrest. As government and other forces aided by the US close in on Mosel and talk about taking ISIL’s capital in Raqqa, Syria, ISIL has retaliated with a series of suicide bombings in Iraq and attacks on soft targets in Turkey. Some are beginning to talk about the possibility that ISIL will find ways to attack oil exports rather than shooting up nightclubs.
Although such attacks would be far more difficult to carry out in Saudi Arabia which has a large and pervasive security apparatus, its oil industry and royal family are prime targets in the years ahead. Damage to key oil exporting facilities in the would have a more significant impact than we have seen to date.
Analysts are starting to note that the much-discussed Saudi sale of 5 percent of Aramco may not take place if oil prices continue to rise. The Saudis are traditionally reluctant to reveal much information about Aramco’s internal workings and profitability. One issue is just what dividends could be expected from whatever shares in the company are sold to outside investors. In its current status ARAMCO is simply part of the state so that all revenues go to government coffers. The company may operate with some niceties such as royalties, and extraction taxes, but these are would only be for show as the government, which is the royal family, controls everything.
Saudi Aramco is reported to have begun talks with its foreign customers about the possibility of a 3 to 7 percent cut in exports during February to comply with the OPEC agreement.
Libya: In Libya, oil production has now risen by 580,000 b/d since November to 700,000. With the opening of the Zawiya oil terminal last week, production could increase even more. All nine of Libya’s main terminals are now operational. The Sharara oil field which supplies the Zawiya terminal was pumping some 300,000 b/d before the uprising began. If this can be restored, Libya could be close to its goal of producing 1.1 million b/d of crude later this year. If production can be maintained, it will have a major impact on the OPEC production cut before the year is out.
The political situation in Libya is in its usual mess. The most recent development is that Moscow, fresh from its triumph in Syria, is trying to establish good relations with General Haftar as a strong man that could take over Tripoli from the the two “national governments” that are currently operating there. Haftar is seeking arms from Moscow to strengthen his position. Should Haftar succeed in becoming the undisputed leader of the country and can establish a stable security situation, Libyan oil production could increase markedly as the country has the largest oil reserves in Africa.
The return of hazardous smog to much of northern China last week was the major story of the week. This is the second occurrence of widespread smogs in the last month. These smogs not only threaten and shorten the lives of hundreds of millions living the region, they also cause considerable economic disruption as factories and construction sites have to be closed on the worst smog days. So far China’s response to the deadly smog has been the promise that it will install air filters in schools in response to parents outraged at the slow speed with which the government is dealing with the situation.
The government announced last week that it plans to invest more than $360 billion in renewable power sources, mainly wind and solar. Whether this will be enough remains to be seen. Shifting the energy balance from a country the size of China away from coal to renewables is difficult to do. This is especially true of a country like China where the main excuse for a one-party state is the ability of the party to deliver economic growth. So far the party has done this very well in unleashing China’s economic potential, but now is paying a price for rapid growth in terms of life-threatening pollution.
This year it will be interesting to watch the fate of China’s 14 independent refiners. In 2015 they were given the right to import crude directly from foreign producers and to export oil products. Imports by independent refiners rose to 46 million tons last year from 10 million the year before. These imports helped to boost China’s total oil imports to 378 million tons or 12.8 percent higher than in 2015. This year Beijing is cracking down on imports by independent refiners so that only about 20 million of the 30 million tons requested for import will be approved. Some believe that this crackdown will slow the growth of Chinese oil imports in the coming year.
Russia recently announced that its oil production was now 11.21 million b/d and that this will serve as the basis for its 300,000 b/d production cut. This is the highest Russian oil production has been in 30 years and is 370,000 b/d higher than in July when Moscow first started talking about cutting its production. Thus the “cut” will leave Moscow producing 70,000 b/d more than when all the fuss about a production cut started.
With oil prices approaching $60 a barrel, there is much optimistic talk coming from Moscow that the nation’s troubles are over and that it now has the resources to overcome the effects of the Ukrainian sanctions and resume economic growth.
Despite the ongoing militancy which has cut oil exports significantly and the price of oil, the government remains optimistic that the situation will turn around this year and it can restore oil production to the “normal” level of at least 2.2 million b/d. Should Nigerian and Libyan production return to anticipated levels, there will not be much of OPEC’s production cut left.
To become self-sufficient in oil products, the government has issued licenses to 22 private firms to build oil refineries in the country. The new refineries would add 2 million b/d to the country’s refining capacity and would eliminate the need to import oil products as well as having surplus to export. Past efforts at building refineries, which are rather expensive these days, have come to naught.
A Court in London will decide if Royal Dutch Shell can face trial in the UK over oil spills. If the courts should rule that Shell can be sued, it is likely to open Shell and BP to lawsuits for many kinds of grievances from across the world.
The national oil company, PDVSA, is facing legal action in the US over a recent move to protect its US subsidiary Citgo from being held liable for company debts. Venezuela owes large sums to US and other foreign oil companies that were awarded as damages by international arbitrators after the Chavez government expropriated their property. Unable to recover their claims in Venezuela, the foreign companies are going after PDVSA’s Citgo subsidiary which is solvent and has considerable value. Recently PDVSA made a deal with Russia’s Rosneft that uses part of Citgo as collateral for a loan and makes it more difficult to seize Citgo’s assets.
The first quarter will be quiet for Venezuela as only about 1.1 billion in debt repayment are due. This will increase to $3 billion in April when a large payment comes due. Last year PDVSA managed to push back its payment schedule by offering lenders an interest in Citgo to extend the loan repayment period. It may try this again, but there is not much of Citgo left unencumbered.
7. The Briefs
In the North Sea, the Valhall and Hod field complex has passed a production milestone of 1 billion barrels of product, far more than expected, BP said. The production mark is more than three times greater than what was expected when it opened in 1982. (1/6)
Lebanon intends to restart its first oil and gas licensing round after a three-year delay, the energy minister said on Thursday. Lebanon’s new cabinet passed two decrees on Wednesday defining the blocks and specifying conditions for production and exploration tenders and contracts. Beirut estimates it has 96 trillion cubic feet of natural gas reserves and 865 million barrels of oil offshore, but squabbling between parties has prevented the passage of vital laws needed to develop the sector. (1/6)
Myanmar’s oil imports are surging to fuel a fast-growing economy and rebuild rotting infrastructure, creating a small but profitable route for ships making a beeline for the emerging southeast Asian nation from the regional hub of Singapore. (1/5)
In Mexico, some 600 people have been arrested, one policeman killed and around 300 stores looted as protests intensify following the weekend decision to hike fuel prices by 20 percent. Supplies of basic goods and fuel are under threat as protesters blockade highways, ports and terminals and the situation intensifies to chaos on the streets and looting. (1/6)
Mexico’s gasoline + drugs: Before readers blow off the response to Mexico’s fuel price hikes as just another protest by an angry population which fails to grasp the “global deflationary collapse” while focusing on “fringe, outlier events” – at least in the words of central bankers – things suddenly got serious when none other than the country’s powerful Jalisco New Generation drug cartel entered the fray, threatening to burn gas stations in response to the price hikes. (1/3)
The US oil rig count rose by four in the past week to 529 while the gas rig count rose by three to 135, Baker Hughes said Friday. The total US rig count is up one from last year’s count of 664, with oil rigs up 13, gas rigs down 13, and miscellaneous rigs up 1. (1/7)
SPR sales: The US government plans to sell up to 8 million barrels of light, sweet crude from three of the Strategic Petroleum Reserve’s four sites later in January, with first deliveries planned for as early as February. (1/7)
The American Petroleum Institute, the leading oil and gas lobbying group in the United States, has called on leaders in Washington to release the reins of regulation for the sake of the nation. The incoming administration of Donald Trump has vowed to make it so the United States is no longer dependent on other countries for its natural resources. Trump, in a statement outlining his energy policies, envisions a United States that’s a net energy exporter by encouraging more onshore and offshore energy production. (1/6)
US petrochemicals: The world’s second-largest petrochemical port in Houston may command 75% of all US polyethylene exports, but expected growth in international shipments as a slew of new ethane crackers and associated derivative units start coming online this year has US ports a thousand miles or more away gearing up to nab a piece of the action. (1/5)
Williams Co.’s Transco pipeline was laid from the Gulf Coast of Texas to New York City 67 years ago. It remains the crown jewel of the natural gas industry, fed by America’s richest shale patch. In the past year, the allure of this 10,500-mile system has helped trigger two failed takeover bids for Williams. Now, as Transco is re-engineered to flow south as well as north, investors are betting more takeover offers may follow. (1/6)
Shell: For Royal Dutch Shell, this year will be much more mundane as years of high spending and ballooning deficits force the Anglo-Dutch oil major to retrench. Even as the New Year promises to bring a sharp improvement in the finances of oil companies across the world, including Shell, not everyone will approach the rebound in the oil market in the same way. Smaller U.S. shale companies, with assets concentrated in some highly profitable areas such as the Permian, are planning to sharply increase spending and drilling. But the oil majors are less nimble, having assets diversified upstream and downstream, spread out across the globe. (1/4)
Cheap gasoline in 2016: A federal survey of retail gasoline prices in the United States in 2016 found consumers paid the lowest average price at the pump last year in 12 years. The U.S. EIA said the average retail price for a gallon of regular unleaded gasoline in the country last year was $2.14, 12 percent lower than during 2015. (1/7)
Gasoline price move: Americans may spend $52 billion more to fill their cars this year as OPEC output cuts boost oil prices and state tax hikes take a bigger bite, according to the Gas Buddy Organization The national yearly average will rise to $2.49 a gallon this year from $2.13 in 2016. (1/5)
The three-year surge in gasoline consumption between 2014 and 2016 could be fleeting. Over the next year or two, gasoline prices will rise, which could put an end to expanding demand. Over the longer-term, not only are smaller cars becoming more efficient and even electrified, but so are gas guzzling SUVs and trucks. If the top selling truck, the F-150, sees a dramatic increase in fuel efficiency, then US gasoline demand could begin a permanent, if gradual, decline. (1/6)
Airlines hiccup: After a comfortable two-year spell of cheap fuel and no major crises to dampen travel demand, US airlines are in for what looks to be a more turbulent 2017. Buckle up. Seven consecutive quarters of declining jet fuel expenses have come to an end as carriers are likely to report higher bills for the fourth quarter of 2016, with more increases in the offing. (1/5)
US auto makers rolled out stronger-than-expected December sales results Wednesday, amid robust demand for trucks and hefty year-end incentives, signaling the industry remained on track to set an annual record in 2016. (1/5)
Net energy exporter? The US is poised to flip its 60-year trend as a net energy importer and become a net exporter by 2026, due to rising natural gas exports and falling petroleum product imports according to the US-EIA. (1/6) [NOTE: consider us skeptical]
Exxon report: The global energy mix will not look that much different for oil and gas in 2040, according to Exxon Mobil’s recently released 2017 Outlook for Energy: A View to 2040. The company forecasts that oil is expected to remain the world’s primary energy source, driven by demand for transportation fuel and feedstock for the chemical industry. Natural gas is projected to grow the most of any energy type, followed by nuclear and renewable energy, in that order. (1/3)
Rex Tillerson will relinquish control of a quarter-billion-dollar nest egg amassed over four decades at Exxon Mobil to avoid a conflict of interest during his confirmation hearings to become US President-elect Donald Trump’s secretary of state. (1/5)
US coal carload volumes fell in the final week of 2016, putting year-end totals 20.1% below 2015 counts, railroad and Association of American Railroads data showed Wednesday. (1/5)
US coal exports totaled 5.95 million tons in November, up 34.8 percent from the prior month and up 39.2 percent from the year-ago month. For overall US coal exports, November was the highest monthly total of the year and the highest monthly total since May 2015. For the year, bituminous US coal exports totaled 11.73 million tons, down 36.5% compared with the year-ago period, while metallurgical coal exports totaled 32.9 million tons, down 15.3% compared with the year-ago period. (1/7)
The aging Indian Point nuclear power plant just north of New York City will close by April 2021 under a deal with Gov. Andrew Cuomo, who has long argued it should be shuttered to protect the millions of people living nearby. It remains to be seen how the state would make up for the loss of electrical generation once the plant, which supplies a quarter of the power used in New York City and Westchester County, closes. (1/7)
Population growth: The US has just registered a fresh low point in population growth since the Depression era. Its annual growth rate sank below 0.7 per cent in 2015-16, making it the lowest rate of growth since 1936-37. When the slowdown first began in the early 2000s, lower immigration growth rates were the main contributor to the decline. But as these levels began to rise again, another phenomenon started playing a bigger role: people started having fewer children. (1/6)
Solar power is now cheaper than coal in some parts of the world. In less than a decade, it’s likely to be the lowest-cost option almost everywhere. In 2016, countries from Chile to the United Arab Emirates broke records with deals to generate electricity from sunshine for less than 3 cents a kilowatt-hour, half the average global cost of coal power. (1/4)
Sea levels: An enormous rift in one of Antarctica’s largest ice shelves grew dramatically over the past month, and a chunk nearly the size of Delaware could break away as soon as later this winter, British scientists reported this week. If this happens, it could accelerate a further breakup of the ice shelf, essentially removing a massive cork of ice that keeps some of Antarctica’s glaciers from flowing into the ocean, and could raise global sea levels by four inches. (1/7)