Quote of the Week
“The Permian Basin is America’s super basin in terms of its oil and gas production history, and for operators, it presents a significant variety of stacked targets that are profitable at today’s oil prices.”
Prithiraj Chungkham, director of unconventional resources for IHS
1. Oil and the Global Economy
2. The Middle East & North Africa
5. The Briefs
1. Oil and the Global Economy
After climbing steadily for over a month, oil prices slid downwards about a dollar a barrel last week ending up circa $51.50 in New York and $56 in London. The summer price surge took oil to the highest seen in two years with New York futures climbing from $42 a barrel in late May to peak above $52 last week. Several factors sustained the summer price surge. OPEC and the IEA released reports forecasting that global consumption would be higher. The Kurd’s independence referendum which led to Turkey threatening to block Kurdish oil exports was another factor, as were the effects of the hurricanes in the Gulf of Mexico.
The oil markets are being affected by a continuous stream of news that is suggesting prices will be going higher or lower. These factors range from changes in supply and demand, the economic situations in numerous countries, to geopolitical upheavals and hurricanes. Over the next few years, the fundamentals say that the lack of sufficient investment in finding and developing new oil fields will push prices higher – possibly much higher. Much of the discussion is over just when this price increase will take place with some saying that the recent price surge was too much to be justified by fundamentals. Others say demand from Asia will grow so fast that it will even outrun optimistic forecasts for US shale oil production.
The OPEC Production Cut: The efficacy of the OPEC and friends’ 1.8 million b/d production cut is still being debated. In September OPEC production rose by 50,000 b/d, and adherence to the agreement slipped to 86 percent from 89 percent in August. Despite marginal compliance with the production cut, stockpiles are shrinking, and the markets are growing tighter than they have been for several years. At a meeting last week OPEC decided to postpone any changes to the freeze agreement until December. Some OPEC members are insisting that Nigeria and Libya have their exemptions from the agreement removed and that they join in the cuts.
US Shale Oil Production: Investors, many of whom are losing money by investing in shale oil, are pushing firms to separate executive pay from increasing production. Currently, many firms see the future as constantly growing production regardless of whether they are making money. This requires continuous borrowing to expand production in hopes that someday prices will be high enough to turn a profit and pay off all the debt. Recent studies say that it will take oil prices above $50 a barrel and probably nearer to $60 to make many firms profitable even with all the so-called “efficiencies” they have supposedly enacted in the last few years.
Last week there was much discussion about a new report issued by HIS Markit Ltd. which says the Permian basin holds 60 to 70 billion barrels of crude. This is said to be worth $3.3 trillion and could supply every US refinery with crude for the next 12 years. Needless to say, there was little discussion of the cost to extract all this oil. With production at the other major shale oil fields, Eagle Ford and the Bakken, due to trend lower in the next ten years, many believe the future of the Permian Basin holds the key to where oil production and prices are going in the decade ahead.
Estimates of 60 to 70 billion barrels, even after much study, seems way out of line with most thinking outside of those trying to hype the potential of their companies to Wall Street investors. When the EIA last commented on the reserves in the Permian in 2015, it said the reserves were on the order of 5 billion barrels. A recent study of the SEC filings by the major producers of Permian oil came up with reserves of 3.7 billion. Outside analysts expect that production of tight oil from the Permian will continue to grow slowly for the next few years, possibly by as much as 700,000-800,000 b/d but will level out in the early 2020s and will never be enough to offset forecast of future global demand.
2. The Middle East & North Africa
Iran: The key oil-related issue at the minute is the US threat to cancel the nuclear treaty for alleged Iranian non-compliance. Outside of Washington the other parties to the agreement are satisfied with Iranian compliance, but the Trump administration is broadly hinting that it will tell Congress that Tehran is not in compliance with the agreement on October 15th. Congress will then have 60 days to pass new sanctions on Tehran which would certainly kill the deal.
Tehran is very upset at this turn of events and is doing its best to push Europe to save the nuclear deal and find ways to get around any US banking sanctions. The Iranians say that if the agreement is set aside, they will return to enriching uranium and all the activities the agreement sought to prevent. Iran is currently exporting about 3 million b/d of crude and condensate vs. less than 1 million b/d when the sanctions were in place. Many doubt that the US alone can do much damage to Iranian exports and that in the end, Trump will decide that the risks that could result from breaking the treaty could be worse than any possible gains. This is only one piece of a very complicated Middle Eastern situation that is slowly coming unraveled with a major threat to oil exports.
Iraq: With 92 percent of the population of the Iraqi Kurds voting for independence from Baghdad, a chapter in the Middle Eastern situation was opened last week. Baghdad, Ankara, Tehran, Washington and many other capitals are very concerned about this development and the possibility of a declaration of independence by Erbil. The Turks, worried that their large and restive Kurdish population would never rest until they could become part of a Kurdish state, have already threatened to close their border with Iraqi Kurdistan, halting the 600,000 b/d of oil that the Kurds are exporting through Turkey. They are also threatening to starve the Kurds into submission or launch a joint military operation with Baghdad to bring the Kurds under control. Although the Kurds have a formidable military force by regional standards and sentimental support from many western nations, it is doubtful if they last in a military confrontation with enemies including Russian-supported Syria arrayed against them. Even the US would likely be forced to support the Iraqi Army in such a conflict.
Whatever happens, there is a serious threat to oil production in Iraqi Kurdistan and northern Iraq in the offing.
Saudi Arabia: In comparison with past decades, the situation is moving fast in Saudi Arabia. While there does not seem to be an immediate threat to the 10 million barrels of crude the kingdom produces daily, there are many dark clouds on the horizon. Low oil prices are slowly weakening the country which has a myriad of expenditures required to keep the government in power. The government has recently been forced to borrow $12.5 billion to cover expenses after borrowing $17.5 billion last year. The Aramco IPO seems to be hung up in disputes about the company’s net worth. King Salman will be visiting Russia this week, a sign of improving relations with Moscow. All this is in addition to a restructuring of the economy away from dependence on oil.
Overshadowing all this is the trouble brewing inside the royal family. Many important family members are unhappy with the way King Salman has moved his son, the 32-year-old crown prince, into a position of nearly unquestioned authority. Many in the Saudi royal family are questioning the move which overrides decades of traditions within the royal family. While the Saudi government runs a tight ship and can deal with most forms of internal dissidence, widespread dissent within the royal family could turn into a serious threat. Long-term members of the Interior Ministry are being purged in favor of people loyal to the king’s son. Some are being imprisoned.
The important point is that a political upheaval in Saudi Arabia would result in major changes to oil exports and to the global economy.
Libya: The problems at the Sharara oil field seem to be over, and output should soon approach a million b/d. This, of course, has OPEC very unhappy. Together Libya and Nigeria have increased production by about 550,000 b/d in the past year, seriously undercutting the 1.2 million b/d OPEC production cut. Nothing was done at the recent OPEC meeting and it will be December before any changes can be made. It seems doubtful that the Libyans would be amenable to a production cut.
A lot has been happening in China lately. The government issued new regulations requiring that 10 percent of new car sales be electric by 2019 and 12 percent in 2020. Given that the Chinese purchased about 28 million new cars last year, we could be looking at sales of electric cars surpassing 3 million units in the next few years. China is raising the retail prices of gasoline and diesel — the eighth increase this year.
Customs data show that Chinese demand for crude has been one of the major reasons why the oil markets have become tighter in recent months. In the first eight months of this year, the Chinese imported 8.44 million b/d, up 12.3 percent or 950,000 b/d over the same period last year. Some of this increase is due to lower domestic production as the Chinese close older high-production-cost wells. Much of the increased imports now are coming through pipelines from Russia.
We are starting to see indications that China’s efforts to reduce the air pollution that is a major life-threatening problem in much of the country, may start to reduce its GDP growth. For years, China has enjoyed rapid economic growth while paying little attention to air, water, and soil pollution. This era is coming to an end.
The possibility that Venezuela might default on its debts before early November is growing larger. The National Oil company, PDVSA, has nearly $2 billion in bonds backed by a majority stake in Citgo Holdings. If PDVSA cannot come up with the money in US funds on time, a vote by 25 percent of the bondholders would entitle the bondholders to the majority stake in one of the US’s largest refiners. Making the payments to bondholders in the US has become more difficult of late as most financial institutions do not want to do business with Caracas. If a default is ever declared, even an accidental one caused by confusion over a payment mechanism, it would be “catastrophic” for Venezuela’s economy.
A total collapse would take at least another million b/d off the global market. While much of this is going to China, Beijing would buy oil elsewhere to cover the missing Venezuelan barrels.
5. The Briefs
Europe’s big oil refiners are searching for other uses for roughly $10 billion of investments in diesel as they anticipate falling demand for what was once European drivers’ favorite fuel. Total of France, Repsol and CEP of Spain, and Saras of Italy are planning to use facilities built to churn out diesel mostly for passenger cars to instead provide chemically similar products like container-shipping fuel and jet fuel. They hope to at least minimize the latest blow to an industry that was already being squeezed by competition from Asian and Middle Eastern refiners. (9/30)
[But then…] A massive surge in diesel fuel demand this year has been the main driver for higher crude oil consumption in 2017 along with buying to fill up strategic petroleum reserves, an executive from oil major Royal Dutch Shell said in Singapore on Tuesday. Diesel demand for 2017 is making up about 50 percent of the year-on-year demand growth in oil products after only making up 27 percent of the increase in last year’s consumption. (9/26)
Offshore Netherlands, a large gas discovery in the Dutch North Sea could be even bigger after an exploration drill beat expectations, a shot in the arm to the traditionally gas-rich Netherlands whose output has been declining. (9/28)
Russia’s Gazprom ranked no.1 in the 2017 S&P Global Platts Top 250 Global Energy Company Rankings, toppling ExxonMobil and ending its 12-year reign at the top spot. Exxon not only lost its no.1 spot on the list, it slipped to 9th place. (9/26)
Questionable move: Former German Chancellor Gerhard Schroeder faced criticism at home after he was first nominated to the board and then elected as chairman of Russia’s biggest oil producer Rosneft on Friday. Schroeder, a Social Democrat who led Germany from 1998 to 2005, faces widespread criticism, given Western sanctions against Moscow over the Ukraine crisis and Chancellor Angela Merkel’s frosty relations with the Kremlin. (9/30)
Offshore Israel, the value present in the Leviathan gas field off the coast of Israel was revised higher for one of the drilling partners, an independent review found. Delek Drilling, an Israeli company, estimates Leviathan holds about 21.4 trillion cubic feet of natural gas, an estimate that’s about 13 percent higher than when the field was discovered in 2010. (9/28)
Kuwait is green-lighting the development of non-associated gas fields after seven years of delays, in a move that would more than double the Jurassic field’s non-associated gas production which has been static since 2010. Production has stagnated at 180 million cubic feet per day since then, but now the government plans to grow gas output to 510 million cubic feet per day. (9/27)
In Oman, British energy company BP said it brought lessons learned from hydraulic fracturing of tight gas in the United States to start production at a natural gas field in Oman. (9/26)
China will raise the retail prices of gasoline and diesel from Saturday, the country’s top economic planner announced Friday. This is the eighth increase this year. (9/30)
China is considering relaxing rules requiring foreign automakers to have a local partner, according to people with knowledge of the situation, a move that could pave the way for Tesla to manufacture their electric vehicles in the country. (9/26)
South Korea plans to replace coal-fired power plants under construction with LNG-based power turbines in a bid to cut pollution, the government said in a statement Tuesday. It would also seek to scrap some 2.2 million diesel vehicles by May 2022, before President Moon Jae-In’s term ends. People would be offered incentives to switch to less polluting LPG-powered cars. (9/26)
Uganda will seek to join OPEC once the East African nation starts pumping crude out from Lake Albert oil fields along the western border with the Democratic Republic of Congo at the end of the decade. (9/28)
Brazil will on Wednesday begin reversing what industry officials say was a costly and ultimately disastrous decision a decade ago: setting aside billions of barrels from the Western Hemisphere’s largest oil discovery in 30 years for its state-run oil firm at a time when deep-pocketed foreign companies were clamoring to invest. Brazil removed key acreage from a 2007 auction that could have yielded $100 billion in signing bonuses plus hundreds of billions more in spending commitments when the price of oil was near record highs. (9/26)
Petrobras’ creditors have agreed to swap $6.22 billion in Petroleo Brasileiro bonds that are due between 2019 and 2021 for long-term securities, allowing Brazil’s state-owned oil company to lower its debt burden during a period of chronically low oil prices. (9/26)
Offshore Brazil, Exxon Mobil’s big bet on the Campos basin shows its willingness to pay up to replenish its reserves and may pave the way for hefty bids in October auctions in the country’s rich pre-salt areas. Marking a return to Brazilian exploration after a five-year absence, Exxon took eight blocks in the coveted basin, one of Brazil’s most productive, at an auction on Wednesday. (9/30)
50 years of oil sands: The Great Canadian Oil Sands facility opened north of Fort McMurray, Alta., on Sept. 30, 1967, with much fanfare, bunting, and speeches by politicians. It was the first large-scale commercial operation of the oilsands, and the result of a gamble taken by Philadelphia’s Sun Oil and its chief executive, J. Howard Pew, and by 100,000 Alberta households who invested $1,500 each to buy a bond to fund construction of the facility. (9/30)
The US oil rig count increased by 6 last week and the gas rig count decreased by 1, according to Baker Hughes, Inc. The total combined rig count now stands at 940 rigs, up 418 rigs from the year prior. The number of drilled-but-uncompleted wells (DUCs) has grown over the past couple of months and stood at 7,048 as of the last count in August 2017—40% higher than a year ago August (5,031). (9/30)
US crude oil production rose to a 9.24 million barrels day in July, an increase of 141,000 bpd, the US EIA said on Friday. (9/30)
Harvey hangover: In August, the month before the impacts from Hurricane Harvey were felt across the sector, total gasoline deliveries, a measure of consumer demand, declined 1.5 percent from July and were lower than last year by 1.5 percent. Demand strains, however, may become apparent once API publishes data from September as Hurricane Irma left many gas stations in Florida dry because the state has no refineries of its own. (9/30)
Harvey hangover #2: CB&I, an engineering, procurement, and construction company that serves oil and gas, chemicals, power and industrial storage markets, said it’s being forced to close its Fabrication Services Shop in Beaumont due to “sustained irreparable damage” from Harvey’s rainfall and flooding. The company is permanently closing the entire facility, which resulted in the layoffs of 455 employees, most of them terminated Sept. 21. (9/26)
Permian reality? In news that is certain to upset adherents to the never-dying cult of Peak Oil, IHS Markit released a study on Sept. 25 indicating that, per their analysis of data from more than 440,000 oil wells in the Permian Basin, the basin still has somewhere between 60 and 70 billion barrels of producible oil to give up in coming years. (9/29; Editor’s note: dartboard alert)
Chevron Corp will next year invest around $4 billion to ramp up its crude production in the Permian Basin area of the US. Ryan Krogmeier, Chevron’s VP of crude supply and trading, said that the company would increase its output from the Permian Basin, largely situated in Texas and New Mexico, to over 400,000 barrels per day over the next few years. (9/25)
In Texas, July crude oil production was slightly lower than last year, preliminary data show. Texas is the No. 1 oil producer in the nation and at least parts of four of the seven active shale basins in the country lie within its borders. For July, crude oil production averaged 2.43 million b/d, about 6,000 b/d shy of the level from July last year. (9/27)
Feds on fracking: With a court dismissing a challenge to federal rules on hydraulic fracturing, producers said it was time for President Trump to erase the law altogether. The 10th US Circuit Court of Appeals overturned a lower court’s ruling on overreach challenges against the US Bureau of Land Management, which wanted regulatory oversight from the states during President Barack Obama ‘s tenure. (9/27)
US Energy Secretary Rick Perry and Interior Secretary Ryan Zinke said Monday the Trump administration is focused on quickening the pace of oil and natural gas pipeline permitting as it works towards a mammoth reorganization of the federal government. (9/27)
Candidate Donald Trump courted farmers last year with praise for ethanol and promises that he would boost the home-grown fuel. Now those farmers and other biofuel supporters say the people President Trump has put in charge of the issue in Washington are instead boosting their fossil-fuel rivals. Trump loaded his cabinet with allies of the oil industry, which views the Renewable Fuel Standard that mandates biofuel use as costly and burdensome. (9/30)
Weekly US coal production totaled an estimated 14.68 million st in the week that ended Saturday, down 5.3% from the prior week and 4.8% below the same week a year ago, according to US EIA. It marked the second time this year coal production has dipped below the year-ago total. Coal production has steadily declined in the past five weeks since peaking at a year-to-date high of 17 million st for the week that ended August 19. (9/29)
Coal ambush in Puerto Rico: The island has more contaminants to worry about thanks to the coal industry, which has been stockpiling coal ash in southern Puerto Rico. According to Adriana Gonzales of the Sierra Club, an uncovered five-story pile of coal ash situated next to a low-income and minority community in the town of Guayama threatens to toxify the entire area thanks to its content of heavy metals like arsenic, mercury, and chromium that will be released when the rain liquefies the ash. (9/29)
Baseload is back? The US DOE has thrown a lifeline to the struggling US coal and nuclear industries by proposing a new rule that would explicitly compensate them for contributing to electric grid reliability and resiliency. (9/29)
Coal/nuke subsidies? The US Energy Department is mandating that the Federal Energy Regulatory Commission consider new rules that would effectively raise power prices to pay more to plants considered more resilient. The department suggests nuclear and coal-fired plants as potential recipients and charges FERC with tweaking electricity markets so they give more of a reward to plants that have at least three months of fuel on site and can run uninterrupted through extreme weather, disasters or other emergencies. (9/30)
Nuke bailout: Nuclear power plants received a much-needed boost from the Trump administration this week when the White House approved $3.7 billion in loan guarantees for two struggling power plants in Georgia. The pair is currently under construction and has already received $8.3 billion in similar loans from the Obama administration. To date, the US government has offered $12 billion for this pair of projects. (9/30)
EV boost: New York Governor Andrew M. Cuomo announced that the state has seen a 74% increase in electric car sales over the same time period last year, resulting from the Drive Clean Rebate initiative launched on 21 March 2017. The program provides New York residents with a rebate of up to $2,000 for the purchase of a new plug-in car from participating dealers. (9/30)
MPG reversal: An analysis by a team from the University of California, Davis, MIT and Yale suggests that households that buy a fuel-efficient vehicle tend to compensate for that purchase by buying a bigger, more powerful second vehicle. This unintended effect could erode goals of fuel economy standard policies by up to 60%. (9/27)
With utility-scale solar systems, the “levelized cost of energy” (LCOE) measures the cost of electricity generated in a way that is comparable to the cost of electricity from other sources. LCOE is calculated by combining the initial installation price with the present value of the power plants lifetime operational expenses. That sum is then divided by the net present value of the power produced, as measured in kilowatt-hours (kWh). The assumptions underlying the LCOE estimates are based on systems installed in an average US solar resource location – represented by Kansas City, Missouri – and do not include either the federal investment tax credit or any state or local incentives. Performance targets for solar were set back in 2011 were developed by the National Renewable Energy Laboratory. For 2020, the targets per kWh are: $0.06 for utility-scale generation; $0.08 for commercial; and $0.10 for residential. It’s that $0.06 per kWh target that the DOE announced has just been reached…three years early. (9/26)
San Francisco and Oakland are suing Chevron, ConocoPhillips, ExxonMobil, BP and Royal Dutch Shell —the five biggest investor-owned fossil fuel producers in the world—over the costs of climate change. The two California cities join the counties of Marin, San Mateo and San Diego and the city of Imperial Beach that have taken similar legal action in recent months. (9/26)