Quote of the Week
“The basic feature of the petroleum industry … that matters most is that it is not self-adjusting.” The industry has “an inherent tendency to extreme crises” and “hectic prosperity is followed all too swiftly by complete collapse.”
Paul Frankel, economist, “Essentials of Petroleum,” 1946 (from energy columnist John Kemp)
Graphic of the Week
1. Oil and the Global Economy
Three themes dominated the oil news last week. 1. Will OPEC with Russian help succeed in cutting production enough to rebalance the oil markets and move prices significantly higher? 2. Will the US oil industry rebound so vigorously as to offset the OPEC cuts? 3. And finally what will the be the impact of all the new energy policies the Trump administration is beginning to implement?
Oil prices were mostly unchanged at the end of the holiday-shortened trading week with New York futures closing at $53.24 and London at $55.49. The EIA reported that US crude stocks rose by 2.3 million barrels the week before last in contrast with a 5.04-million-barrel decline the API announced the night before the EIA report. While the API quick surveys of oil stocks are frequently well off the EIA’s more authoritative reporting, a 7-million-barrel discrepancy in the wrong direction is unusually large.
Market sentiment seems to be shifting to the notion that the OPEC cuts will reduce the global oil surplus and push prices higher despite continuing skepticism that the cuts will be fully implemented. Last week, OPEC, Saudi, and Russian leaders released a number of statements saying how well the cuts were going and that oil production will be down by 1.5 million b/d by the end of January. Even the IEA joined in the optimism with its monthly Oil Market Report suggesting that the global oversupply of crude is easing. Hedge fund managers are joining in with bullish bets on US crude prices climbing to their highest point in over two years.
There is a debate going on over how much of the global supply must be used up before markets are back in “balance.” OPEC says that consuming some 270 million barrels is all it will take, but others put the size of the glut at closer to 1 billion barrels above normal. The “five-year-average” for global stockpiles has been increasing as the oversupply enters its fourth year so that the “normal average” may be well above the amount that is actually needed to keep the markets functioning. The IEA reported last week that global stocks declined in November for the fourth straight month and, if estimates for December are considered, is now about 82 million barrels below the all-time high set last July.
There is much activity in the US oil industry with higher prices attracting more rigs into production. Last week 29 rigs were added to the active count, an increase of over 80 since OPEC announced its agreement. Activity is now shifting to the Permian Basin as the focal point of the shale oil industry’s revival. Land prices in the basin are reaching bubble proportions as companies outbid each other in an attempt to get a piece of a shale oil region in the US which is still growing rapidly. Since April 2015, oil production has fallen by 19 percent in the Bakken and 37 percent in Eagle Ford oil fields but has continued to grow by 14 percent in the Permian Basin. Last week’s deals in the Permian were capped by Exxon’s purchase of some $6 billion worth of oil and gas properties which may hold more that 3.4 billion barrels of oil and gas. Other property purchases in the basin brought the total for the week to over $10 billion.
The Permian Basin is thought to be the one region where it is still profitable to drill as oil can be produced by a combination of fracking and conventional drilling. The EIA is forecasting that production in the basin will increase during February by 53,000 barrels while falling in the Bakken and Eagle Ford. These EIA projections have not been particularly accurate of late, so it will be some time before we know how all this comes out.
A large increase in US offshore oil production is expected this year. These projects were started early in the decade when prices were high and were continued during the price decline as so much had already been invested. Rystad Energy estimates that the major oil companies – Exxon, Shell, BP, Total, Eni, and Statoil – will increase their total production by some 400,000 b/d worldwide in the coming year. The added production from long-term projects will have to be taken into consideration when evaluating the prospects for the OPEC production cuts.
All the discussion about the OPEC cuts and their effect on prices only covers the next year or so. For the long term, the oil industry is not making the investments needed to sustain the projected global demand for oil into the next decade.
Discussion about the impact of President Trump on US energy policies continued last week. It is clear that the new president will do all in the power of the executive to lift environmental restrictions on oil drilling and appears willing to offer carte blanche to the oil and gas industries to drill for oil and build pipelines anywhere it might be profitable. Moreover, the new President wants to eliminate the need to import oil from the Middle East.
Some are skeptical that these policy shifts will have that much significance in the long run. Economics will still drive the demand for fossil fuels. If renewables turn out to substantially cheaper, it is doubtful that their inroads into fossil fuel markets can be stopped for long. Even if the new administration allows energy producers to pollute as much as they find profitable, these companies will still have to face a wave of protests and lawsuits from environmentalists. Global temperatures set new records for the third year in a row.
During their confirmation hearings, most incoming members of the Trump cabinet acknowledged that global warming might be at least partially caused by man-made carbon emissions. However, they continued to adhere to the proposition that the threats from global warming were so far in the future that they should not be allowed to interfere with the need to grow America’s fossil fuel industries.
2. The Middle East & North Africa
Iran: Tehran continues to express certainty that oil prices will rise in the coming months as parties to the OPEC agreement continue to cut production. This comes amid increasing domestic economic problems. Unemployment is increasing, and Iran’s currency is slipping against the dollar. The benefits of the nuclear agreement and the lifting of the sanctions have been slower in coming than had been hoped. A year after the sanctions were lifted, there has yet to be significant foreign investment in the country.
Beijing has agreed to loan the Iranians $3 billion to upgrade the Abadan refinery. This installation was first opened in 1912, but was largely destroyed in 1980 during the Iraq-Iran War. It had a capacity of 635,000 b/d before the war but has never fully recovered from the war damage. In recent years, the nuclear sanctions and the embargo on importing foreign technology delayed much-needed maintenance.
As China’s domestic oil production continues to fall, the country has been seeking to firm-up its relations with oil-exporting nations through loans and bilateral programs. Four Chinese companies are on the list to participate in developing Iranian oil fields.
With the inauguration of President Trump the issue of US-Iranian relations is starting to be talked about. Although few believe the new administration will move to tear up the nuclear treaty in the immediate future, many are concerned that the US will seek to increase sanctions on Iran in retaliation for perceived aggressiveness in the Middle East.
Iraq: Baghdad says it has reduced its exports by 6 percent as it begins to implement its official production cut under the OPEC agreement. A senior Iraqi official says that he is confident that his country will have its exports down to the agreed level by the end of January. Shell has signed a $210 million agreement with Halliburton to drill 30 wells in the giant Majnoon oil field in southern Iraq. When the wells are completed in about two years, the field’s output should be up to 400,000 b/d from the current 220,000.
The feuding over oil revenues between Baghdad and the Kurds continues. In the most recent twist, the central government has stopped exporting oil from the northern Kirkuk oil field through Baghdad’s marketing organization and is allowing the Kurds to take the oil and refine it themselves in their own refineries. This should reduce the oil going to export from Iraq via the pipeline through Iraqi Kurdistan and Turkey. The move is supposed to have come due to pressure from OPEC.
Government forces continue to make progress in driving ISIL forces out of Mosul. However, a million civilians are thought to still be in the city. This large civilian presence is inhibiting ISIL from planting bombs to harass and delay Iraqi troops as the bombs are more likely to be triggered by civilians rather than advancing troops. In retaliation for the capture of its largest city, ISIL is stepping up guerilla attacks in the surrounding countryside on isolated government forces.
Talks took place among the rival Libya leaders in Cairo over the weekend and are scheduled to continue in Algeria this week. The purpose of the talks is to form a new government that would bring political stability to the country. Should a solution to the various squabbles be found, Libya would be in a good position to increase its oil production markedly. The country has large reserves and could easily get back to its pre-uprising production level of 1.6 million b/d should foreign companies feel the situation is safe enough to bring their technical personnel back into the country.
The Saudis set off a storm of controversy last week by saying there may not be a need to extend the production cut beyond the initial six months. This assumes that supply and demand will soon be back in balance and most of the excess oil in storage will be gone. Riyadh reiterated its commitment to the output cut last week and expressed confidence that it will succeed in pushing up oil prices. Saudi exports are now estimated to have surged to a 13-year high of 8.26 million b/d in November just before the country led the move to restrict supplies.
For the longer term, the Saudis say they are increasing their ability to produce oil and gas to satisfy the long-term demand for oil. The CEO of Aramco said that the Kingdom currently can produce oil on a sustained basis at the rate of 12 million b/d and plans to double its current production of natural gas over the next decade.
As the proposed IPO is supposed to sell 5 percent of Aramco to foreign investors, the Saudis are starting to look at what happens to the company’s earnings. The company currently pays a 20 percent royalty on its total revenue plus and 85 percent tax on its income. If this policy were to remain in place, there would be little incentive for foreigners to invest as there would be no money left in the company to pay dividends. The current system has been devised to move all profits to the government as the sole owner.
The Saudi economy, however, remains in a precarious situation. The IMF notes that the cutback in oil production this year will hurt government revenues and says that the country’s GDP will only expand by 0.4 percent this year down from an earlier forecast of 2 percent. Some are questioning whether the kingdom can survive with oil below $60 a barrel for long given the commitments that it has incurred in recent decades. The government is currently attempting to implement its “Vision 2030” plan which is to diversify its economy away from dependence on oil and gas prices.
Beijing says it posted a 6.8 percent GDP increase in the 4th quarter which was slightly better than expected. This means that for 2016 China’s economy grew by 6.7 percent which is right in the middle of the government’s projected range. The growth, however, came from higher government spending on infrastructure and record bank lending. China’s debt to GDP ratio rose to 277 percent as compared to 254 percent at the end of 2015. The year ahead is filled with uncertainties, especially the country’s interaction with the new Trump administration. A trade war could threaten all sorts of relationships around the world with unknown consequences.
In the meantime, Beijing says that its oil production will slip by 7 percent by the end of the second five-year plan in 2020. Production in the first 11 months of 2016 already was down by 6.9 percent from 2015 as aging high-cost oil fields were closed down as no longer being competitive with low-priced foreign oil. For now, this cut is unintentionally helping the OPEC production cut, but over the longer run it will make China very dependent on foreign oil. Imports in 2016 were already up 13.6 percent over 2015 and hit a record 8.57 million b/d in December.
Some see the decline in China’s domestic production as having a major impact on oil prices in the years ahead. Welcome to peak oil.
The unusually cold weather that has been engulfing northern Europe this winter may have an effect on Far East Russian crude exports. The situation is compounded by the need for Russia to cut oil production for the next six months.
Moscow is hinting that it will initiate an economic stimulus package this year. Its economy has been hurting badly from the double hit of low oil prices and the economic sanctions occasioned by the Ukrainian invasion. Prime Minister Medvedev is talking about a $2-billion-dollar package, which would not seem to very much to spread over an economy the size of Russia’s.
There were reports of a major fire on a major Nigerian oil pipeline last week. The military, however, denied reports that militants had blown up a pipeline. The army said the fire was simply bush burning that got out of control. It has now been several weeks since there has been a verified report of pipeline sabotage. Either the militants have been bought off by the government or the pipeline operators are refraining from making repairs as the rebels are demanding. The situation may only be clarified by higher Nigerian oil exports.
The event of the week was that the government finally was able to issue new banknotes so that the value of the largest note previously in circulation, 100 bolivars, is no longer a few US cents. Now the largest new banknote is worth about $5.60 on the black market which means people no longer have to carry sacks of money around to make purchases. The value of the new notes will not last long as inflation in the country is forecast to hit 1,600 percent this year.
Venezuelan crude exports to the US fell to the lowest levels in 25 years in 2016 (718,000 b/d) due to the inability to import the dilutents used to make the heavy crude saleable. Venezuelan oil production is now in the vicinity of 2 million b/d and is expected to fall due to the lack of investment in new production as well as the failure to pay the foreign oil service companies that do much of the actual work. The national oil company is still in business, but the outlook is cloudy. The complete collapse of Venezuela’s oil production would be enough to force prices higher very quickly.
7. The Briefs
Oil and gas discoveries around the world dropped last year to their lowest since the 1940s after companies sharply cut back in their search for new resources amid falling oil prices. The decline in discoveries means companies such as Exxon Mobil and Royal Dutch Shell will struggle to offset the natural depletion of existing fields, reinforcing forecasts of a supply shortage by the end of the decade. (1/19)
Big oil boon: The recent recovery of oil prices couldn’t have come at a better time for the world’s top oil majors that have ridden the rough oil price crash with huge investment cuts and layoffs. Although the oil majors cut capital and exploration expenditure, they are poised to see this year the biggest production gains–398,000 b/d this year—since 2010. The reason: investments in projects made early this decade, before the oil price slump, are now expected to start yielding results. (1/16)
Oil executives and Middle East producers are concerned that trade tensions between the United States and China risk clouding the outlook for global energy demand growth and a recovery in the price of oil. (1/20)
Saudi Aramco chief: The world needs to invest US$25 trillion in new oil-producing capacity over the next 25 years to meet growing demand, Saudi Aramco’s chief executive Amin Nasser said at the World Economic Forum in Davos on Tuesday. If capital investment drops, he said it could create “spikes” in prices and hurt the global economy (1/18)
Storage headache? A big obstacle is emerging for OPEC’s plan to raise oil prices with output cuts: vast global reserves of crude in storage that threaten its power over markets. (1/13)
Reducing Norway’s oil dependency and living up to campaign promises is proving a costly affair for Prime Minister Erna Solberg. With just eight months to go before Norwegians head to the ballot box, signs that western Europe’s biggest crude producer is building up viable alternatives to its oil industry remain scarce. Struggling to keep up output after 40 years of production, and hammered by the worst plunge in oil prices in a generation, Solberg’s government saw its plans laid to waste soon after taking power in 2013. (1/14)
Two groups of Church of England advisers have cautiously endorsed fracking for shale gas in the UK provided it does not conflict with climate change policy and robust regulations are put in place. Its cautious endorsement is in line with an evolving consensus that does not oppose fracking in principle but is likely to remain wary in practice for the time being. Britain’s shale gas industry remains at an infant stage. Only four wells have been drilled into shale formations. Just one of those has been fractured so far and that induced seismic activity. (1/20)
European prices of natural gas, primarily a heating fuel, has soared to the highest in more than two years. Blackouts across Eastern Europe caused electricity rates to spike to record levels. It’s chaotic, but yet familiar. (1/14)
The Lebanese cabinet, after a 4-year wait, has approved two oil and gas decrees on energy tax provisions and blocking last week – allowing offshore drilling ventures in 96 trillion cubic feet of natural gas reserves to begin brewing. A massive licensing round is set to begin in the country in the next few weeks. (1/10)
Kashagan update: More than 7 million barrels of crude oil have been produced safely from the Kashagan oil field in Kazakhstan since September. Kashagan holds an estimated 16 billion barrels of oil. Production so far is around 180,000 barrels per day. (1/14)
Asia is gearing up to witness new refining capacity growth in at least four countries in 2017, but capacity reductions in some top consuming nations will pull down the net addition to a level that would be lower than the anticipated demand growth the region is likely to see this year. (1/20)
In Egypt, Italian energy company Eni in December secured the bulk of the new exploration and production concessions offered by the government during the latest bidding round. The company made its initial gas discovery in the Zohr field in August 2015 and quickly described it as the largest ever made in regional waters and potentially the largest in the world. A profile of the Egyptian gas sector from consultant group Wood Mackenzie finds the sector is on pace for a profound change in the next five years. (1/13)
In Northwest Kenya, Tullow Oil has found more oil with a closely watched exploration well, boosting the resources in its emerging oil province which is set to feed East Africa’s newest crude export hub. (1/18)
In Uganda, Total SA agreed to buy a stake in a project from Tullow Oil Plc for $900 million as a recovery in crude prices accelerates the pace of deals in the energy industry. (1/10)
Brazil plans to hold two subsalt oil auctions in 2017, putting new exploration areas up for bidding in November for what should be the “most competitive” round of the year. (1/20)
Argentina’s President Mauricio Macri is pushing to revamp flagging production at the country’s massive shale reserves, with companies agreeing on Tuesday to invest as much as $15bn a year in exchange for lower labor costs and extended state subsidies. (1/11)
Offshore Guyana, Exxon Mobil Corp said on Thursday drilling results from a third exploration well showed a new reservoir containing 100-150 million barrels of oil equivalent. (1/13)
Mexico’s Pemex, which has reported 16 consecutive losses and is nearly $100 billion in debt, is auctioning off a little league baseball field and a sports complex used by employees in the eastern state of Veracruz, according to a report by El Universal reviewing the company’s annual property sales plans. (1/14)
Mexico’s Pemex began receiving imported fuel by train at a new privately run terminal for the first time in January as companies expand storage and transportation operations under the country’s energy opening. (1/18)
Canada’s Prime Minister Justin Trudeau sparked anger in the oil-rich province of Alberta on Friday for saying Canada needs to phase out the oil sands. Mr. Trudeau told a town-hall meeting in Peterborough, Ontario, that Canada can’t shut down the oil sands immediately but would need to phase it out eventually. (1/14)
In Canada, energy firms more than doubled the number of rigs drilling for oil this week to the highest level in almost two years as producers returned en masse from Christmas breaks and crude prices remain near 18-month highs. Drillers added 89 oil rigs during the week ended Jan. 13 bringing the total count up to 170. (1/14)
US rig count forecast: Barclays said this week that it expects North American E&P spending to increase 27% in 2017 following a decline of 38% in 2016 (OGJ Online, Jan. 9, 2017). As a result, the banking and financial services firm believes the US rig count will average 730 in 2017, ending the year at 850-875 rigs working. (1/13)
Rig count forecast: Raymond James & Associates Inc. said it sees the tally reaching 800 during the year but remaining constrained at that level because of an equipment bottleneck, mainly in pressure pumping. (1/13)
The US oil rig count increased by 29 to 551, after a decline of seven during the previous week, according to Baker Hughes Inc. That’s 57 more oil rigs drilling than last year at this time. Active gas rigs increased by 6 to 142, which is 15 above the count for the same week last year. This marks 11 straight increases to the gas rig count. (1/21)
Noble Energy agreed to buy Clayton Williams Energy for $2.7 billion in stock and cash to expand in America’s hottest shale play. The combination will create the second-largest acreage position in the Southern Delaware Basin of the Permian shale formation. The deal provides more than 4,200 drilling locations on about 120,000 net acres, with resources of more than 2 billion barrels of oil equivalent. (1/17)
Schlumberger is waiting for the rest of the world’s oil producers to catch up to the North American crude recovery. The world’s largest oilfield service provider sees international spending picking up in the second half of the year and into 2018. Schlumberger Ltd. posted a loss in its latest quarter on lower revenue, but the company said energy prices and production were both poised to increase. (1/21)
Expanded access? Despite presiding over the height of the shale revolution, the Obama Administration has leased less federal land to the oil and gas industry than any other president since at least 1981 – and industry insiders are hopeful the incoming Trump Administration will turn that around. (1/11)
The US Energy Department said on January 9th it would sell 8 million barrels of light, sweet crude oil from the Strategic Petroleum Reserve for actual delivery between March 1 and April 30. The release falls under a measure passed in December that allows for the sale of up to $375.4 million in crude oil for the SPR to finance its upkeep and modernization. The sale should have no major impact on global markets, energy economists said. (1/11)
Retail gasoline prices across the US from GasBuddy found prices dropped 3.2 percent on average for a gallon of regular unleaded to about $2.40. After steady gains for most of the latter half of last year, nearly three quarters of all U.S. states saw prices drop at the pump last week. (1/18)
Natural gas spot prices in 2016 averaged $2.49 per million British thermal units (MMBtu) at the national benchmark Henry Hub, the lowest annual average price since 1999. Warmer-than-normal temperatures for most of the year and changing natural gas demand were the main drivers of natural gas prices in 2016. (1/17)
Gas buffer shrinking: Low natural gas prices have eliminated the surplus left at the end of the mild winter of 2015/16 through a combination of lower production, higher consumption, and higher exports. The declining buffer is stimulating a rise in prices plus more drilling and will also encourage power producers to run their CCGTs for fewer hours in 2017 and use coal-fired units more often. The question is whether prices have already risen enough to stem the shift towards a big storage deficit in the second half of 2017 or will need to rise further. (1/20)
Electricity generation costs: 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–roughly $0.06 per kWh globally. (Natural gas is much more expensive outside the US.) The coal industry is not structured in such a way that it can significantly lower costs, given the low investment in R&D and new technology to cut costs in comparison to the solar industry. (1/20)
Nukes: Utilities are closing US nuclear-power plants at a rapid clip as they face competition from cheaper sources of electricity and political pressure from critics. New York’s Indian Point plant about 35 miles north of Manhattan, a major source of power for the city and its surrounding suburbs, looks to be the latest casualty. (1/10)
The Indian Point nuclear power plant, which consists of two reactors, came online in the 1970s. It has been New York City’s major source of electricity for more than four decades, but it could be taken offline in the next few years. However, it is located just 30 miles from the Big Apple, and as it ages it has become a worry for Governor Andrew Cuomo, who has called it a “ticking time bomb.” (1/13)
Electric cars will pick up critical momentum in 2017, many in the auto industry believe – just not in North America. Tighter emissions rules in China and Europe leave global carmakers and some consumers with little choice but to embrace plug-in vehicles, fuelling an investment surge. In Europe, green cars benefit increasingly from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions. (1/16)
China’s Jiuquan Wind Power Base in the Gobi Desert stands as a symbol of China’s quest to dominate the world’s renewable energy market. With more than 7,000 turbines, it is one of the world’s largest wind farms. Yet during 2016, 60% of its power capacity went unused. More than 92,000 wind turbines have been built across the country, capable of generating 145 gigawatts of electricity, nearly double the capacity of wind farms in the US. Yet much of that power is stymied by persistent favoritism toward the coal industry by local officials and a dearth of transmission lines to carry electricity from rural areas in the north and west to China’s fastest-growing cities. (1/16)
Promoting hydrogen: The heads of some of the world’s biggest oil firms and automakers agreed on Tuesday to push for broader global use and bigger investments in using hydrogen to help reduce emissions and arrest global warming. The oil firms’ and car makers’ chiefs said the plan was part of global efforts to keep global warming well below 2 degrees Celsius. (1/18)
Climate change: California on Friday released a blueprint for meeting an aggressive climate-change goal: a 40% reduction in greenhouse gases by 2030, compared with 1990 levels. The plan, released by the California Air Resources Board, is “designed to continue to shift the California economy away from dependence on fossil fuels to a thriving sustainable future.” (1/21)
Carbon capture: NRG Energy and JX Nippon Oil & Gas Exploration Corp said they had begun operations at a $1.04 billion carbon capture facility at a Texas coal-fired power plant and were using the emissions to extract crude from a nearby oilfield. The facility, the largest of its kind in the world, is the latest in efforts by the power industry to curb carbon dioxide (CO2) emissions. (1/10)
Rick Perry, President-elect Donald Trump’s pick to run the U.S. Energy Department, said during his Senate confirmation hearing on Thursday that global warming caused by humans is real, but that efforts to combat it should not cost American jobs. The comment marks a shift for the former Texas governor who had previously called the science behind climate change “unsettled” and a “contrived, phony mess”. (1/20)