Peak Oil Review – 1 May 2017

May 1, 2017

NOTE: Images in this archived article have been removed.

Quote of the Week

The key question for the future of the oil market is for how long can a surge in US shale supplies make up for the slow pace of growth elsewhere in the oil sector.”
–Fatih Birol, the IEA’s executive director

Graphic of the Week

Image Removed

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia
5.  Venezuela
6.  The Briefs

1.  Oil and the Global Economy

Oil prices fell again last week on concerns that the OPEC production cut will not be enough to offset increasing US shale oil production. The reopening of two Libyan oilfields which could bring Libyan production back to the vicinity of 700,000 b/d added to the pressure on oil prices. At week’s close, New York futures were below $50 a barrel with London a couple of dollars higher, both down about 8 percent from their April peak of $54-$55 a barrel.

Moscow says it now has cut production by the pledged 300,000 b/d. However, this cut was from an artificially high base and does not mean very much. Given that the Saudis have cut more than their required share, the 1.8 million b/d OPEC/NOPEC cut seems to be complete for now. Given the increases in oil production elsewhere in the last six months, there seems to be general agreement that the production cut will need to be extended until the end of the year.  Otherwise it will be a failure and oil prices will continue to fall. Some observers are saying that the production cut will need to be continued at least through the first half of 2018. For now, however, it seems that only a six-month extension will be agreed upon at a meeting later this month.

A few analysts are saying that US shale oil production is likely to increase at a faster pace than the EIA has been estimating. Rystad Energy expects US shale oil output to grow by 100,000 b/d each month for the rest of this year and into 2018 if prices hold around $50-$55 a barrel.  This is considerably higher than the EIA projections that US production will grow by about 29,000 b/d each month in 2017 and 57,000 b/d in 2018.  Should Rystad be closer to the mark, it would wipe out much of the OPEC/NOPEC production cut, forcing prices lower.  Lower prices, of course, would reduce the incentive for US shale oil producers to increase production at the levels Rystad is projecting.  The US oil rig count rose for the 15th straight time last week to 870 rigs or 450 more than at this time last year. The shale oil industry still has a lot of rigs in storage, so it seems likely that the US rig count will continue to increase for a while.

Looking beyond the current concerns about OPEC vs. US shale oil production is the question of what the world’s oil supply will look like in the next decade. Since US shale oil production took off seven or eight years ago, the possibility of an imminent supply crunch or even peak global oil production has been dismissed by most observers.  However, worries about supply shortages due to the large decrease in oil industry capital expenditures again are being voiced by responsible observers. Last week we heard from Saudi Aramco and the International Energy Agency, both of which have voiced similar warnings in the past.  The IEA points out that worldwide only 2.4 billion barrels of new oil reserves were discovered last year and that the number of oil production projects receiving a final investment decision in 2016 was at the lowest since the 1940’s.

For now, major US oil companies are looking at investing more heavily in shale oil where wells cost less than $10 million to drill and frack as opposed to the billions of dollars that large offshore platforms cost. A few outside observers of the shale oil industry are saying that large production increases cannot continue for much more than a few years. The days of spectacular production increases from the Bakken and Eagle Ford shale oil formations seem to be ending; however, the Permian Basin may still have a way to go. US shale gas production in the Marcellus shal seems to be slipping already, undercutting optimism that US shale gas will be powering the world in coming years.

Global demand for oil is still on the order of 34 billion barrels per year and is likely to keep increasing by 400-500 million barrels each year.  While the subject of derision by many optimists, some form of peak oil still looks likely in the next decade from a combination of lower supplies, higher prices, concerns about climate change, or even new technologies.

2.  The Middle East & North Africa

Iran:  Tehran says it is willing to cap its oil production until the end of the year to help the Saudis raise oil production. Oil Minister Zanganeh said last week that Iran had kept its production at 3.8 million b/d under the agreement that allowed the country to limit its production rather than make an actual cut.

Six candidates have been approved by the Iran’s clerics to run in the May 19th presidential election.  While President Rouhani seems likely to win reelection, growing animosity with Washington and the continued deterioration of the Syrian situation makes the outlook for US-Iranian relations uncertain.

Iraq: Efforts to comply with the production cut seems to have leveled off in March when the country’s crude production increased by 0.4 percent to 4.586 million b/d. The government claims to be fully complying with the OPEC/NOPEC production cut.  Baghdad says it too will go along with whatever consensus on the continuation of production cuts is reached at the next OPEC meeting on May 25th.

However, the country plans to increase its crude production by 600,000 b/d to 5 million b/d by the end of this year. Also, Iraq has started working on doubling the output of the Halfaya oil field to 400,000 b/d next year. The UKs Petrofrac has just be awarded a $70 million contract to expand Iraq’s port facilities in the Persian Gulf.  In December, the company received a $75 million contract to improve the export terminal at Basra. With big increases in production coming and the cost of producing Iraqi oil still well below world selling prices, Baghdad will be hard pressed to continue any production freeze into 2018 should that be necessary.

Saudi Arabia: The value of Saudi Aramco is still a hot topic. The Saudi deputy crown prince Salman al Saud is still pushing the figure of $2 trillion as the company’s market value so that a five percent share should be worth about $100 billion.  The government has been adjusting tax policies lately so that the company would be able to pay a dividend after the IPO rather than just siphoning all the revenue into the national treasury. According to the Wall Street Journal, even Aramco insiders say that, even given the new tax policies, a valuation of the company at $1.3 to $1.5 trillion would be more realistic.  At one point, industry consultants Wood Mackenzie Ltd. were saying the company’s value was more like $400 billion.  The company likely will never release detailed production and reserve estimates that would give outside analysts a better chance of setting a proper value on the company.

Analysts are saying that the Saudis are losing market share to Iran and Iraq due to the production cut. The Saudis agreed to a cut of 486,000 b/d while the Iraqis said they would cut 210,000 b/d from a dubious base number. Iran was allowed to increase production by 90,000 b/d.  The Saudis continue to trash the various peak oil theories, both the supply, and the demand versions, and assert that the demand for oil will keep growing for decades.

The Saudis say they have foiled an attack launched from Yemen to blow up a Saudi oil production distribution center at Jazan on the Red Sea.

Libya: The National Oil Company says it may have reached long-term agreements with local Petroleum Facilities Guard units to keep the Sharara oil field open and producing. There is much reason to be skeptical as in the past, such agreements have only lasted for a few weeks before somebody closes the taps and demands a bigger share of the pie. Libya produced 622,000 b/d in March, but production was way down in April due to the dispute. The company still says it hopes to be producing about 1.2 million b/d by the end of the year if disgruntled people will stop closing ports and pipelines they control. If Libya can reach its goal, its increased production will be a big problem for OPEC as the country is not under any obligation to keep its production under control.

3.  China

Newly released statistics show China’s economy is pulling back from the five-year high that was seen in the last two-quarters. A slipping Purchasing Manager’s Index suggests that manufacturing slipped in April. The new data showed a weakening in employment, output, new orders and export orders. In recent weeks, the government has been introducing tighter curbs on property investment and has been cutting back on infrastructure spending. Some economists are saying the growth in China’s GDP may slip to 6.6 percent this year from 6.7 percent last year.

The government announced that non-fossil fuel use would increase to 20 percent of energy consumption by 2030 and more than 50 percent by 2050. Carbon emissions are due to peak by 2030. This is all very nice, but many think we do not have another 35 years to fiddle with emissions before climatic conditions become so bad they will force change.

4. Russia

Some analysts are noting that it may be more difficult for Moscow to extend its 300,000 b/d production cutback into the second half. It is now clear that Moscow surged its output in the months before the cuts started so that their cut could be based on a higher than normal output and would not have as much impact. Traditionally Russian production slows during the harsh winter months and picks up again in the second half. A close look might reveal that Moscow did not cut any oil production that would not have occurred normally.

Russian oil companies have been announcing plans to increase production so that an obligation to maintain the 300,000 b/d cut through the end of the year would be much more of a hardship. So far, all indications suggest that Moscow will go along with the extension, otherwise there could be another rapid drop in oil prices that would be even more harmful.

5. Venezuela

The situation continues to deteriorate and the month-long anti-government protests continue.  So far two dozen are dead, hundreds injured and 1,500 arrested. Hungry mobs roam the streets at night looting any place they can break into searching for food. The Maduro government has lost the support of the lower classes that brought Chavez to power.   The Pope is calling for mediation, and there is talk of a right-wing military coup.

Some oil companies are pulling out their foreign workers as living there has become dangerous.  China evacuated its oil executives to Columbia a year ago as they became prime targets for kidnappers. Foreign oil executives living in Caracas are forced to live in guarded compounds and travel only by armored vehicle.

Most observers are saying the Venezuela crisis is reaching some sort of a peak. The government has lost the support of nearly all the people and is ruling by decree. The food and medicine situation gets worse and it is likely that oil revenues are dropping. Although much of the oil production activity is located away from where the demonstrations are taking place and oil workers are likely to have the first call on food supplies after the security forces, the situation is bound to deteriorate. The country has little foreign reserves left and cannot import enough essential goods to keep functioning.

The risk of a major drop in oil exports remains high. The recent surge in US oil product exports to Latin America is likely tied to declining Venezuelan refining activity.  It is difficult to see how the situation will not get worse before it gets better.

7.  The Briefs

Oil Sands: As global oil majors pull out of Canada’s oil sands, domestic companies are buying up assets and betting technology and economies of scale will enable them to turn a profit despite low crude prices. Global energy majors have sold off more than $22.5 billion worth of Canadian oil sands assets so far this year, concerned about depressed oil prices, high production costs and carbon emissions and limited pipeline access to market. (4/29)

BP has discovered 200 million barrels of oil in a hidden cache in the Gulf of Mexico, thanks to a technological breakthrough allowing the company to see beneath geological formations that had befuddled oil exploration for decades. The find, worth a potential $2 billion in recoverable oil, is in an undrilled section of BP’s Atlantis field in 7,000 feet of water 150 miles from New Orleans. (4/29)

Coal Shutdown: A Murray Energy subsidiary has notified an Illinois state agency that it plans to lay off 255 employees in three months in a move that industry sources say would likely shut one of the company’s top producing Illinois Basin mines. (4/29)

Rig Count: The number of active oil and gas rigs in the United States rose by 13 on Friday, according to oilfield services provider Baker Hughes. The total oil and gas rig count in the US now stands at 870 rigs, or 450 above the count a year ago. Oil rigs increased by 9, while gas rigs bumped up 4. (4/29)

Offshore Drilling: President Donald Trump signed an executive order Friday to ease regulations on offshore drilling and eventually allow more to occur, particularly in the Arctic Ocean. The order, which takes aim at last-minute Obama administration actions restricting drilling in the Arctic and Atlantic oceans, will likely have limited immediate impact owing to low oil prices, which make drilling in the affected areas economically unattractive.  Environmental groups said preparations are already underway for a legal challenge. (4/29)

The U.S. economy stumbled in the first months of the Trump administration, growing at the slowest pace in three years in a sobering reminder of the nation’s economic sluggishness. Gross domestic product grew at a 0.7% annual rate in the first quarter from the preceding three months, the Commerce Department said Friday. Economic output has grown an average of roughly 2% during the nearly eight-year expansion. (4/29)

Shale Gas: The number of rigs drilling for gas has almost doubled since August, but output continues to fall. Even accounting for a lag between the start of drilling and first production, the drop in output is striking — a well in the Marcellus Shale, America’s most prolific reservoir of the fuel, is producing about half of what it yielded a year ago, according to Bloomberg Intelligence. Companies are struggling to overcome steep decline rates — the natural decrease in production — from shale formations that were the source of huge added supplies in years past. (4/29)

US gasoline demand fell 2.4 percent in February from a year earlier, the second straight monthly decline, according to data released on Friday by the U.S. Energy Information Administration that suggested the market may have trouble repeating last year’s record volumes. (4/29)

US supermajors exceed analysts’ estimates with cost cuts. Chevron turned a corner after its worst annual performance since 1980.  Fresh off Big Oil’s best quarter in years, Exxon Mobil and Chevron may be poised for a repeat. One-third of the way into the second quarter, crude prices — the prime driver of explorers’ profits — are 25 percent higher than a year ago. (4/29)

Pemex’s Board of Director approved its second-ever deepwater joint venture covering the Nobilis-Maximino block in the country’s territorial Gulf waters. (4/28)

President Trump’s remarks about Alaska and senate measures on offshore drilling may point to an executive action on oil and gas. “We’re going to take care of Alaska too,” President Donald Trump told Sen. Lisa Murkowski, R-Alaska, during remarks on the signing of an executive order on national lands. “Don’t worry about it.” (4/28)

Oil Futures: The number of outstanding oil contracts for delivery years into the future has plummeted on the New York Mercantile Exchange. Since 2012 open interest has declined by more than 75 percent for benchmark West Texas Intermediate crude expiring in three or four years’ time. During the same period, the entire WTI market has expanded by 40 per cent.  (4/28)

ExxonMobil has continued its streak of hiking its dividend, announcing another increase in its payout to shareholders on Wednesday. The oil major has boosted its dividend every year for more than three decades, but the collapse of oil prices since 2014 has resulted in more scrutiny over the company’s payments to shareholders. (4/28)

Polish energy company, PGNiG said Thursday it closed on a deal to take its first-ever shipment of liquefied natural gas sourced from reservoirs in the United States. PGNiG said its trading branch in London closed on a deal to accept LNG from Cheneire Energy, which owns a terminal in Louisiana that’s the only one with the permits necessary for current exports of U.S. natural gas. (4/28)

Total gave the go-ahead on Thursday to develop its first major project since 2014 after reporting a sharp rise in quarterly profit that underscored its drive to cut costs throughout the oil price downturn. Total and its peers including Royal Dutch Shell and Exxon Mobil are cautiously refocusing on growth after years of slashing spending, which involved cutting thousands of jobs and scrapping major projects. (4/28)

Tullow Oil said Wednesday its production offshore West Africa for the first quarter met expectations. For full-year 2016, the company said it ended the year with $1 billion in free cash. Tullow is one of the premier players in emerging West Africa and said in February its production for 2017 would likely average 78,000 barrels of oil per day at the low end, a marked increase from the previous year. (4/27)

President Trump signed an executive order on Wednesday to identify national monuments that can be rescinded or resized – part of a broader push to open up more federal lands to drilling, mining and other development. The move comes as part of Trump’s effort to reverse a slew of environmental protections ushered in by former President Barack Obama that he said were hobbling economic growth. (4/27)

LNG/Ethane to EU: A pioneering liquefied natural gas (LNG) carrier departed a Philadelphia-area terminal bound for Europe and opened a new chapter in the global gas business. Laden with more than 27,000 cubic meters of ethane, the Ineos Intrepid – a new class of LNG vessel – embarked on a nearly 4,000-mile voyage across the Atlantic Ocean to Ineos’ ethane cracker in Rafnes, Norway. As Ineos noted at the time, never before had shale gas produced in the United States been shipped to Europe. Previously ethane had only been transported in small vessels on short routes.

Argentina’s Vaca Muerta, one of the largest shale formations outside of North America, offers tons of promise for the country’s energy future. Just don’t hold your breath waiting for it. Many predict lightning fast growth in the region, comparing it to the Eagle Ford and Permian basins in the US, but before the field reaches its potential, gas and oil pipelines need to be built, roads, trainlines and power networks need upgrading, and drilling costs that run 30 percent or higher than in the U.S. need to drop, industry insiders say. (4/26)

Power consumption in the US has stalled for the last decade, breaking the link the industry has enjoyed with economic growth.  Power-sipping appliances, LED lighting and a shift away from heavy industry all have contributed to the slowdown. Total electricity use is forecast to increase 0.8 percent by 2050 as the economy continues to shift to less energy-intensive industries and equipment gets more efficient, according to a 2017 annual report from the U.S. Depart of Energy’s Energy Information Administration. (4/26)

Total, one of the world’s biggest oil producers, is saying electric vehicles may constitute almost a third of new-car sales by the end of the next decade. The surge in battery-powered vehicles will cause demand for oil-based fuels to peak in the 2030s. (4/26)

Gulf of Mexico: The Permian Basin hoards the spotlight, but meanwhile, offshore producers are a fraction of a percentage point away from hitting another all-time high during the first half of the year, according to RBN Energy.  Gulf of Mexico production totaled 1.75 million barrels per day, less than a percentage point away from the previous record set in 2009. By 2018, the Energy Information Administration expects a total of 1.9 million barrels per day in 2018.  (4/26)

Norway: The estimated amount of undiscovered oil and gas in the Norwegian waters of the Barents Sea is likely twice what was previously assumed, the government said. Apart from Russia, Norway is the lead oil and natural gas exporter to the European market, designating nearly all of its offshore production for European Union demand. The Norwegian Petroleum Directorate said new data from eastern and northern parts of the Barents Sea, areas previously a source of dispute with Russia, led to upward revisions of the reserve estimate by up to 65 percent. (4/26)

Geothermal: Geologists and engineers have successfully drilled into the heart of a volcano in Iceland, as part of a project aimed at assessing the economic feasibility of using deep unconventional geothermal resources to deliver renewable energy. Drilling so deep into such a hot borehole poses many difficulties, but if researchers manage to overcome the challenges, fewer geothermal wells would need to be drilled in the future because the energy content of fluids so deep into the ground is much higher than conventional geothermal steam. (4/26)

Tom Whipple

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the long-running Energy Bulletin (formerly "Peak Oil News" and "Peak Oil Review"). Tom has degrees from Rice University and the London School of Economics.  

Tags: Middle East, oil prices, Russia, venezuela