Graphic of the Week

1.  Oil and the Global Economy

In the wake of the OPEC decision to extend the production freeze, the oil markets were relatively quiet last week. Prices fell early in the week after the EIA reported a 6.78-million-barrel increase in the US gasoline inventory, but climbed later in the week on reports of near-record Chinese oil imports for November of more than 9 million b/d and concerns about the embassy-in-Jerusalem situation. At week’s end US crude settled at $57.36 and London nearly $6 higher at $63.40. For the immediate future, there are concerns about the US oil rig count which continues to climb slowly. The EIA reported last week that US production expanded to 9.71 million b/d, the highest since EIA began compiling weekly data in 1983. There are, of course, concerns that the EIA’s weekly production estimates are inflated and will be revised when better information becomes available. Other factors moving the markets last week were a good US jobs report, signs of modest growth in the EU economy, and the threat of a strike in Nigeria.

The weekly EIA stocks report showed the US crude inventory falling by 5.6 million barrels as crude imports from OPEC continue to fall. Over the last four weeks US crude imports averaged 7.6 million b/d, nearly 5 percent lower than last year. The US crude inventory is now down by over 80 million barrels since its peak in mid-March in spite of a 30-million-barrel release from the strategic petroleum reserve.

The OPEC Production Cut: The cartel’s production fell by 300,000 b/d in November to its lowest level since May. Much of the drop came from lower production by Angola, Iraq, and Venezuela combined with a stronger compliance to the supply cut deal which climbed to 112 percent of target from 92 percent in October. Saudi Arabia pumped below its OPEC target, as did all other members except Ecuador, Gabon, and the United Arab Emirates.

Attention is turning to OPEC’s “exit strategy” which is how the cartel will lift the production caps at the end of 2018. Last week the Saudi’s said that they would adhere to the production freeze through the second half of 2018 and hinted that there might be an agreement to lift the cap gradually so as not to crash oil prices with 1.8 million + barrels of oil coming on the markets at once. Moscow says that it could take six months to negotiate a satisfactory end to the production freeze.

The future of the great US shale oil boom remains unclear. With US crude prices now pushing $60 a barrel and the rig count slowly climbing, some claim that the US will soon be producing at record highs that will make America energy independent. There are many aspects of the shale oil story which cast doubt on this optimism. First of all, a lot of what is coming out of horizontal shale oil wells these days is natural gas liquids and very light crude. While these liquids are useful and can be sold to refineries that can handle light crudes or used as chemical feedstocks or dilutants for very heavy oil, they are not always direct substitutes for conventional middle-weight oils.

Reports that the gas/oil ratio coming from new finds in the Permian Basin contain more low-valued gas than expected should be disconcerting. Then we have the sweet spot issue. With the fall of prices in the last four years, drilling for shale oil has been concentrated in the most highly productive places. Once these sweet spots are exhausted, shale oil wells will become less productive and drillers will have even more trouble recovering their costs.

Finally, we have growing impatience on Wall Street to see some profit from the shale oil business rather than steady production increases and large losses. While nearly $60 a barrel (some say soon to be $70) oil will help the situation, the rapid depletion of shale oil wells means that the industry must drill many new wells each year just to keep production steady. With the prospects of more lower productivity wells being drilled in the future, somewhat higher prices may not turn the industry profitable.

The question of just why investors keep pouring billions in losing propositions is interesting. Some believe that banks and other investors are simply naïve and are being taken in by the oilmen’s hype about a brilliant future. Others believe that some on Wall Street understand that there is simply not enough conventional oil being found to satisfy future demand so that oil prices will be considerably higher in the next decade. What “considerably” higher means is a matter for conjecture. We have already seen oil at $140 a barrel. Real global oil shortages either from depletion or geopolitics could easily drive oil to unaffordable levels as seems to be happening with nuclear power in the US. Should shale oil prices climb way above $100 a barrel, the industry could become profitable and pay off its billions in debt — if it can find consumers who will buy its oil.

This is the dilemma for the next five to ten years.

2.  The Middle East & North Africa

Iraq: Baghdad’s $88 billion national budget for 2018 envisions higher oil revenues based on producing 3.88 million b/d and an average oil price of $46 a barrel. There is already a dispute between the government and Kurdish, Sunni and Basrawi MP’s over sharing of the revenue.

British energy company Genel said it found more oil in the Kurdish region of Iraq. Genel has a 44 percent working interest in the Taq-Taq field inside Kurdish territory in northern Iraq. The company said production at a new test well started at a preliminary rate of 3,200 barrels of oil per day.  The Taq-Taq field currently has gross production of 15,100 barrels per day of oil.

Saudi Arabia: The grand plan to get the kingdom’s economy diversified and out of the oil business by 2030 will be more of a problem than first thought. The Saudis have no tradition of private ownership and do not have the legal or regulatory framework to establish one. Public-private partnerships were non-existent, and the recent jailing of many of the country’s most prominent citizens until they gave up much of their wealth to the state simply adds to the problem.  While the scope of privatization efforts is increasing, the flow of deals and bids has almost completely halted. The crown prince seems to have lost focus on the economic future of the country, and continues an embargo against Qatar—a fellow Gulf state—and the anti-corruption campaign that undermines the unity of the Saud family.

The Aramco IPO that is to raise billions is still on hold, as the government tries to figure out the terms of the offering. Over the weekend, representatives of the London Stock Exchange traveled to Riyadh in an attempt to snare the IPO business for the UK. Prime Minster May recently told reporters that “I think London is extremely well-placed’’ to be picked as the listing venue.” Last month President Trump tweeted that he “Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange.”

3.  China

Besides the big jump in oil exports, the biggest energy story in China last week was the lack of sufficient natural gas to fuel all the buildings in northern China that have been converted from coal to the less polluting source of heat. Beijing had banned the use of coal for heating this winter in an ambitious plan to reduce pollution. Recent winters had seen heavy smog blanket China’s northern region. But millions are now left without proper heating, after failing to switch from coal to other fuels in time for winter. The coal ban has also reportedly led to a gas shortage as people rushed to switch to the alternative source, which has compounded the problem.

The Chinese Ministry of Environmental Protection said on Monday in an urgent letter to 28 cities in the north that residents now could continue burning coal or firewood to keep themselves warm in the areas where the switch from coal to natural gas and electricity has not been completed. The situation has caused a panic in the natural gas market. Chinese state-owned company CNOOC, the country’s largest importer of liquefied natural gas, has leased two tankers to store emergency LNG supplies offshore, spending US$10 million on the plan, as China’s massive coal-to-gas switch leads to unprecedented soaring gas demand and concerns of fuel shortages this winter.

China’s state planning commission has ordered eight Chinese regions to “regulate” surging gas prices caused by the winter heating demand and the switch to gas from coal. The eight regions are the leading natural gas producing regions Shaanxi, Inner Mongolia, Xinjiang, and Sichuan, as well as the biggest gas-consuming regions Hebei, Jiangsu, Liaoning, and Beijing, according to the NDRC official.

On the other side of the coal/gas coin, China imported 22.05 million tons of coal in November, including lignite, thermal and metallurgical material, up 3.62 % from October but down 18.2 percent year on year.

China is importing increasing volumes of oil not only because of demand growth but also because its domestic oil production is declining as large aging fields mature and as companies cut production from higher-cost fields amid the lower-for-longer oil prices. Thus, Chinese dependence on crude oil imports is continuously rising and is set to further grow in the foreseeable future. Last year, China met 64.4 percent of its crude oil demand with imports, due to high production costs at home and favorable international prices resulting from the global glut. This was a 3.8-percent increase compared to 2015.

China’s efforts to establish oil trading in yuan have sparked much interest in what could be a shift in the global financial system and a reduced role for the US dollar. However, with policymakers prioritizing market stability over internationalization, plans announced back in 2012 to start oil-futures trading priced in yuan or on the Shanghai exchange are still pending. The latest from the city’s International Energy Exchange is that it’s coming soon, with test trades scheduled this weekend.

The Chinese have stopped accepting shiploads of other countries’ plastic trash as it phases in a new ban. That’s bad news for the recycling industry, as China has been a major consumer of salvaged materials it processes into a resin that ends up in pipe, carpets, bottles, etc. Now Beijing has begun buying new plastic to replace all the recycled scrap — and that’s great news for US chemical makers, which are scrambling to find markets for millions of tons of new production. US exports of one common plastic are expected to quintuple by 2020.

4. Russia

France’s Total said the first LNG export shipment via ice-class tanker left the new $27 billion gas liquefaction facility on the Yamal peninsula, located well up into the severe Arctic environment.  Total and China’s National Petroleum Corp. each own 20% of the facility. The Yamal facility took years to find financing ultimately from China that didn’t violate US sanctions on Russia over Ukraine.  Yamal marks a departure for Russia’s gas exports, which have long focused on state-owned Gazprom delivering fuel via pipeline into Europe. Yamal will use ice-breaking ships to transport LNG along the northern coast of Siberia during the summer.

Gazprom is set to exceed the level of exports to Europe and Turkey that was recorded in 2016 as cold weather is spreading across the continent. So far this year, Gazprom has exported 179.8 Bcm to what it calls the “Far Abroad” — Europe and Turkey, but not the countries of the former Soviet Union — higher than last year’s record high of 179.3 Bcm. Russian gas has been in strong demand through 2017, with a prolonged cold snap in January and February seeing supplies peak.

There are enough contracts in place to start construction on expansions to the twin Nord Stream gas pipeline, Gazprom said last week. The company plans to double the capacity for the Nord Stream pipeline system, which runs under the Baltic Sea, and crosses into European territory before it makes landfall in Germany. Some EU countries are not happy about this expansion as it makes the continent too reliant on Russia for its energy. The Danes have already moved to stop the project from crossing under its territorial waters.

5. Nigeria

Nigeria’s lack of infrastructure is hampering the transportation of gas to power plants, and six of these are currently sitting idle because they lack gas according to Shell Petroleum Development Company. The reason why they are not getting gas, even though they are flaring 800 million cubic feet per day is that they don’t have enough pipelines to deliver the gas to the power plants.

Nigerians were thrown into a panic last week following the re-emergence of long queues at fuel stations in parts of the country. Rumors of hike in gasoline prices sparked fear that the Christmas season could be marred by a scarcity of the product. In Abuja, many motorists who left work were unable to buy fuel, as many stations were shut.

China’s Sinopec has hired BNP Paribas to sell its oil business in Nigeria and Gabon, as the state-owned oil giant pares back its presence in Africa. Sinopec and other oil groups including China National Petroleum Corporation and CNOOC made large acquisitions between 2009 and 2013 with the help of low-cost loans from Chinese state-owned banks. The hunt for overseas assets was intended to bulk up their energy reserves and meet future demand from China. But oil prices fell to about $27 a barrel in 2016 from more than $100 in 2014, making some of these investments unprofitable.

6. Venezuela

Sanctions and low production led to a decline in Venezuela’s oil production during November. The last time levels were this low, an industry strike had shut down a large portion of the Latin American nation’s oil sector. State-run PDVSA sent a total of 475,165 barrels of oil to the US per day in November – a 36 percent drop from last year and a 12 percent drop from the previous month. The last four years have seen the country lose one million bpd of production, mostly due to inadequate funds to maintain oil facilities.

The revenue decline is causing Caracas to take oil from its joint ventures in the Orinoco Belt to keep its refineries operating. Crude from a joint venture with Chevron is increasingly being used for domestic refining instead of being exported to the US.  Last month, President Maduro named a National Guard general as the head of PDVSA and the country’s oil ministry. The general said he would end corruption at PDVSA, but nothing about the company’s huge foreign debt or declining production.

China’s Sinopec is suing PDVSA in a US court over unpaid bills, an indication that China has lost patience with the Venezuelans. In the lawsuit, Sinopec is suing for $23.7 million plus punitive damages, alleging that PDVSA has only paid half of the bill in a contract from 2012 to purchase steel rebar—which is used in oil rigs—for $43.5 million from the Chinese firm.

7.  The Briefs (date of article in Peak Oil News is in parentheses)

Discoveries slump: 2017 will most likely witness a continuation in the decline of conventional oil discoveries. This year has seen no major onshore discovery; pretty much all significant finds were confined to offshore areas of the Americas, where Mexico’s continental shelf unearthed two highly promising formations. (12/6)

EU oil investor slump: European oil shares are losing their pulling power as investors take another look at the long-term future of energy companies focused on fossil fuels. A proposal by the world’s largest $1 trillion sovereign wealth fund to ditch its oil and gas shares because of the volatile oil price, has highlighted the risks of being exposed to a sector which analysts say is in long-term decline. (12/7)

French LNG ships: After reaching a supply agreement with French supermajor Total, shipping group CMA CGM said that liquefied natural gas is the maritime fuel of the future. French container shipping company CMA CGM and Total announced in a joint statement Monday an agreement spanning ten years will begin at the start of the new decade. (12/5)

Russia’s Gazprom says there are enough signed contracts in place to move into the construction phase of expanding the twin Nord Stream gas pipeline through the Baltic Sea and on into Europe. (12/9)

Gazprom has just set a new record, having exported more natural gas to Europe and Turkey through last Friday than it did during all of 2016. (12/9)

Chinese LNG: Chinese state-owned company CNOOC, the country’s largest importer of liquefied natural gas (LNG), has leased two tankers to store emergency LNG supplies offshore, as the massive coal-to-gas switch leads to an unprecedented soaring gas demand and concerns of fuel shortages this winter. (12/8)

China has begun buying brand new plastic to replace all the recycled scrap — and that’s great news for US natural gas producers and chemical makers such as Dow-DuPont, which are scrambling to find markets for millions of tons of new production amid an industry investment binge. US exports of one common plastic are expected to quintuple by 2020. The world’s biggest user of scrap plastic—51% of exported recycled supplies—has stopped accepting shiploads of other countries’ plastic trash as it phases in a new ban. That’s bad news for the recycling industry. (12/6)

China’s EV future: The world’s automakers are just starting to bet on an electric car future — and already, one of the most powerful people in the industry says that future belongs to China. The Ford Motor Company said on Tuesday that it planned to introduce 15 battery-powered electric or plug-in gasoline-electric hybrid car models in China by 2025. (12/6)

Electric cargo ship: China just launched its first all-electric cargo ship, which will travel 50 miles at a top speed of 8 miles per hour on a single charge. It will take two hours to recharge, which is about as much time the vessel needs to unload at a destination. Of course, the vessel is the first of its kind, so ports will have to be fitted with charging stations specifically for the ship. So far, only two ports have received the special upgrade. (12/8)

In East Timor, one of the world’s newest and poorest countries, oil revenues accounted for 78 percent of the budget for 2017. The country has been heavily relying on oil income to try to grow out of poverty. East Timor could still be a success story even with expectations that its oil fields will run dry by 2022 and its sovereign oil fund will be emptied by 2027. (12/8)

New Delhi’s air is so polluted that a cricket match between Sri Lanka’s and India’s national teams had to stop play mid-game due to Sri Lankan players getting sick.  The foul air contained 22 times the particulates that the World Health Organizations considers acceptable. (12/9)

Angola was once a magnet for international oil companies such as BP, Exxon-Mobil, Total, ENI and others.  No longer.  Between 2015 and 2020, actual and projected capital spending budgets for Angolan work by oil majors have been cut an estimated $67 billion. (12/9)

Venezuela exported 475,000 b/d of oil to the US last month, a 36 percent drop over the same month last year and a 12% drop compared to the previous month.  The last four years have seen a decline in production of 1 million b/day, mostly due to lack of funds to maintain oil facilities. (12/9)

The Panama Canal’s new wider set of locks can accommodate US LNG tanker exports, cutting 11 days off the trip from Louisiana to Asia.  But business deals aren’t working out as planned.  Some 17 months after the expanded locks opened, only one LNG tanker a day is guaranteed passage.  The Panama Canal Authority blames the industry for lackadaisical shipping schedules, and the industry blames the Authority for holdups. (12/9)

Mexico’s crude oil exports to the US hit a three-year high above 800,000 b/d last month.  This was in large part due to hurricane disruptions to normal shipping and refining operations.  Some of those exports went to the West Coast, an unusual occurrence. (12/9)

Mexico’s Pemex blamed the failure of a recent deep-water Gulf of Mexico auction on the competition from ongoing tenders for deep-water Brazilian leases.  Weak investor appetite for Mexico’s blocks was also blamed on lower oil prices. (12/9)

The US oil rig count climbed modestly by two units to 751, the fifth consecutive increase, according to Baker Hughes Inc. Rigs in the Permian climbed up over 400 for the first time since February 2015.  Gas rigs remained flat at 180. (12/9)

The US trade deficit increased to $48.7 billion in October from $44.9 billion in September amid rising imports and higher crude oil prices, increasing the value of US oil imports, government data showed on Tuesday. The US crude oil imports rose to $10.664 billion in October from $9.131 billion in September. (12/6)

Appalachian natural gas production grew from 7.8 Bcf/d in 2012 in 2012 to 22.1 Bcf/d in 2016 and was 23.8 Bcf/d this year.  This 200% increase has had significant implications for the US market: lower costs for consumers, growth in domestic chemical manufacturing, and displacement of coal-fired power in the electric generation sector. (12/7)

LNG exports: In August 2017, total US natural gas liquefaction capacity in the Lower 48 states increased to 2.8 billion cubic feet per day (Bcf/d) following the completion of the fourth liquefaction unit at the Sabine Pass liquefied natural gas (LNG) terminal in Louisiana. With increasing liquefaction capacity and utilization, US LNG exports averaged 1.9 Bcf/d, and capacity utilization averaged 80% this year, based on data through November. Five additional LNG projects are currently under construction in the US, and they are expected to increase total LNG export capacity to 9.6 Bcf/d by 2019. (12/8)

Alaskan LNG: A letter of intent was signed with a Japanese company to secure liquefied natural gas from a possible development in Alaska, a state pipeline company said, the second such expression of interest in less than a month. An LNG project in the design phase would connect the natural gas reservoir in Prudhoe Bay through 800 miles of pipeline to a liquefaction plant on the south-central Alaskan coast. (12/6)

The Austin Chalk formation, which sits right on top of the Eagle Ford formation in Texas, was a hot play in the mid-1900s, mid-1970s, and 1990s. However, it was all but forgotten during the shale boom when the Eagle Ford formation took front and center. With the majority of shale plays still on the shelf, the Austin Chalk is back on the radar and stronger than ever, proving a prominent contender in the ever-growing oilfield category. (12/8)

Solar oil: Aera Energy, a joint venture owned by Shell and ExxonMobil, is building California’s largest solar energy project in the San Joaquin Valley, where 1.7 billion barrels of heavy oil has been extracted since operations began in 1911. The $250 million project will install 630 acres of glass homes with exposed motorized solar panels installed on their roofs. The panels’ angle will change to optimize heat collection, which will allow a maze of pipes to heat water and create industrial steam. The steam will be used to heat heavy oil and make it flow to the surface more easily. (12/8)

Power crash: General Electric Co. said Thursday it was cutting 12,000 jobs in its power business, or nearly 18 percent of the unit’s workforce, as the conglomerate slashes costs and battles overcapacity in an industry in upheaval. GE has said it misjudged the market as volume dropped in demand for traditional coal and gas-fired power, while demand for renewable energy sources grew. (12/8)

Monuments rollback: President Trump announced his plan to shrink Bears Ears National Monument by 85 percent, while also cutting Grand Staircase-Escalante National Monument by half, a move that could open up Utah to more oil and gas drilling. But Bears ear is not that attractive; even when oil was around $100 a barrel, no one was moving drilling rigs nearby; with the current oil price, there is even less incentive. (12/5)

Tax boosts fossil fuels: The US Senate tax reform bill is pro-growth legislation that would help the domestic oil and gas industry, Jack Gerard, President and CEO of the American Petroleum Institute, said after the Senators passed the sweeping tax reform on Saturday. (12/5)

Tax bill hammers RE: The Republican tax bills moving through Congress could significantly hobble the United States’ renewable energy industry because of a series of provisions that scale back incentives for wind and solar power while bolstering older energy sources like oil and gas production. (12/8)

Delay on decision: The new chairman of the Federal Energy Regulatory Commission will get time to get his feet on the ground before the FERC is required to rule on Energy Secretary Rick Perry’s request to subsidize aging coal and nuclear plants in an effort to keep power inputs to the grid diversified. (12/9)

Colonial pipeline holdup? Oil major Chevron, leading refiner Valero and Delta Airlines have complained to the US energy watchdog about fees that Colonial charges to ship gasoline, diesel and jet fuel through its fuel network, the country’s largest.  The complaint states that the fees “greatly exceed just and reasonable levels.” (12/9)

Biofuels dustup? President Donald Trump has agreed to meet representatives of the US oil refining industry and oil-supporting lawmakers to discuss the Renewable Fuel Standard Program—a meeting that could set the stage for negotiations over the US biofuels policy that has been pitting the oil refining industry against the Midwest farm lobby.  (12/5)

Timid investors? Why isn’t Wall Street moving money in to back the next shale boom? 1. Fear of the depth of the price cycle. 2. Not much confidence that OPEC and Russia will adhere to announced cuts. 3. Fear that US producers will ramp up production again when they can hedge above $50. 4. Fear that EVs will destroy gasoline demand. (12/9)

US shale oil drillers and explorers, after years of meager returns and overspending to boost production at all costs, are about to see their share prices rise, thanks to a new wave of a more disciplined approach to spending and a focus on higher returns. (12/9)

Alaska’s NPR-A: Even as the US Senate moves to allow oil drilling in Alaska’s Arctic National Wildlife Refuge (ANWR), the real action is 150 miles west, where industry proponents hope a coming sale of 10 million acres of land will revitalize the state’s sagging crude production. The Trump administration, through the US Bureau of Land Management, will auction off 10 million acres on Wednesday in the National Petroleum Reserve (NPR-A), a hotbed of oil exploration and development in the western part of Alaska’s North Slope. The planned sale has encouraged the oil industry while angering environmental groups. (12/6)

France will reduce the share of nuclear energy in its electricity mix—currently, 75%–“as soon as possible”, French junior environment minister Brune Poirson said on Tuesday, although she did not give a target date. (12/6)

Fusion: ITER, an international project to build a prototype nuclear fusion reactor in southern France, said it is facing delays if the Trump administration does not reconsider budget cuts. ITER’s director said the US contribution had been cut from a planned $105 million to $50 million this year and its 2018 budget cut from a planned $120 million to $63 million. (12/7)

V2G technology: Honda has invested in advanced bi-directional charging technology at its European R&D site in Offenbach, Germany, which is helping to balance demand and store energy more efficiently across the facility. The concept previewed takes power from the grid, charges an EV battery, then can return stored energy from those EV batteries through Vehicle-to-Grid (V2G) technology. (12/6)

H2 boost: Toyota will build the first megawatt-scale hydrogen fuel and renewable generation plant, setting a new energy benchmark that experts hope will pave the way for Australia’s hydrogen industry. Toyota North America will build the plant to support its operations at the Port of Long Beach, in the US, using agricultural waste to generate electricity, water and hydrogen. (12/7)

The climate change simulations that best capture current planetary conditions are also the ones that predict the direst levels of human-driven warming, according to a statistical study released in the journal Nature Wednesday. (12/7)

Graphene potential: New research has delved into graphene’s rippling structure, discovering a physical phenomenon on an atomic scale that could be exploited as a way to produce large quantities of clean energy. The team of physicists led by researchers from the University of Arkansas is working with scientists at the US Naval Research Lab to see if the concept has legs. (12/5)