Quote of the Week

“I think the question, a little bit in the longer term is – is this [2018] the last big rise in US production?… If you look at the economics on most of the big Permian players, not many of them make a lot of money.”
Ian Taylor, CEO at oil trading firm Vitol

Graphic of the Week

Monthly oil production decline rates from two counties in the Eagle Ford tight oil play.

1.  Oil and the Global Economy

US futures closed out 2017 above $60 a barrel for the first time since mid-2015. In the first half of the year, the OPEC/Russian production cut seemed to have little effect, but as the year wore on global crude inventories dropped.  By the third quarter, higher demand and lower inventories led to a price rally which left New York futures 12 percent higher for the year and London 17 percent higher. Prices are up by about 30 percent since OPEC and the Russians agreed to cut production in late 2016. For the record, US futures closed out the year at $60.42 and London at $66.62. Problems with UK, Libyan, and Nigerian production have pushed the spread between London and New York futures to more than $6 a barrel in recent weeks.

During the past year, US shale oil production has increased by 16 percent and total US oil production is expected to top 10 million b/d in the next few weeks. However, this increase has not been enough to offset the OPEC/Russian production freeze and a series of temporary and other interruptions to oil production that have taken place in recent weeks.  These interruptions include pipeline leakage and sabotage in the UK and Libya as well as the steady decline of Venezuelan crude and oil product production.

As usual, forecasts are mixed as to what will happen in the coming year. For the immediate future, however, most are talking about prices continuing to move higher in the first quarter as Chinese demand is turning out to be stronger than expected and US oil and product exports set records.

While adherence to the OPEC/Russian production freeze and the course of US shale oil production will be important in the coming year, geopolitical events could still play an important role in where oil production and prices go in the next 12 months. There is also a speculative factor in that a technical sell-off after a run of increasing prices is possible.

The OPEC Production Cut: There are several scenarios as to how the production cut will play out over the next 12 months. The recent extension until the end of the year has put the cut on track to balance the markets at some point during the coming year. A few such as Iraq’s oil minister see the markets balanced by the end of March, while the IEA is saying that it expects a return to rising inventories during the first half. This could reverse the recent prices increases and even cause an extension of the OPEC agreement into 2019.

Oil producers will discuss an exit strategy for their deal on cutting output once the market moves closer towards being balanced, Russian Energy Minister Alexander Novak said recently. It will likely be summer before any action is taken unless widespread cheating begins if prices rise.

US Shale Oil Production: The US oil rig count rose by 42 percent during 2017 compared to the corresponding period last year, as energy companies boosted spending. Drillers held the number of oil rigs steady for a second straight week at 747 in the week to Dec. 29. That was 222 more than the 525 rigs at the end of 2016.  There is much optimism across Texas regarding the prospects for the industry in the coming year.  The Permian Basin pumped an estimated 815 million barrels of crude in 2017, beating its previous record of 790 million barrels, achieved back in 1973. Over the past decade, the Permian has added almost 2 million b/d to US production, and by the end of this year, it could be producing 2.75 million barrels daily which will boost total U.S. oil production to more than 10.5 million barrels by the end of this year.

There are some dark clouds on the horizon which could be a harbinger of trouble ahead and even the beginning of the end for the decade-long shale oil boom.  There is evidence that points to falling production in the Eagle Ford from some of the recently drilled shale wells. In the last few years, drillers have been able to increase the initial production from recently drilled wells by using “new technologies” such as longer laterals, using more sand during fracking, and more sophisticated staging. The success of these new practices gave the appearance that the shale oil industry had found ways to get more oil out of fracked wells. As the months of production ticked by, however, it is becoming apparent that the burst of higher production only lasts a few months and down the road two or three years, these “new technology” wells may not produce any more oil than it the pre-new technologies era. Moreover, the “new technology” wells cost more to drill and frack, leaving the industry back where it was.

If this trend continues and the oil being extracted from a very limited number of “sweet spots” is ever exhausted, we could be facing declining US shale oil production within a few years. A recent Federal Reserve survey of 134 companies involved with shale oil production in the US southwest says that nearly all companies are saying that oil prices must stay above $60 a barrel for a substantial increase in drilling to occur. Even if US shale oil production continues to climb, it may not be enough to meet rising global demand for oil because of the large cutback in expensive conventional oil projects – mostly offshore.  Offshore megaprojects will take many years to come online. Some believe we could see output deficits and much higher prices as soon as 2019.

2.  The Middle East & North Africa

Iran: Soon after Iran’s first vice-president announced how well the economy was going, people took to the streets in the largest protest demonstrations in nearly a decade to complain about how poorly the economy was going and the rampant corruption in the nation’s current form of government. Many are concerned about how much Tehran is spending to prop up fellow Shiite governments and movements in Syria, Iraq, Lebanon, Palestine, Gaza, and Yemen.

Some believe that last week’s demonstrations were initiated by hardliners to make trouble for the moderate Rouhani government, but soon got out of hand and turned into anti-regime riots. While few believe the government is in any danger and that the security forces will not be able to handle the protests, the popular outcry could impel the government to rethink its foreign policy and its efforts to support fellow Shiites.

Saudi Arabia:  Many expect that 2018 could be a pivotal year in the history of the Saudi monarchy. While numerous changes in Saudi governance and society last year laid the groundwork, this year could see many more significant changes such as a new king, an IPO for Saudi Aramco and the beginning of major changes in the Saudi economy away from dependence on the oil industry.

Last week the Saudi government released at least two dozen high-profile suspects held on corruption charges, as those accused of illegally amassing wealth are agreeing to settle. Among those released in the past week is Ibrahim al-Assaf, a former finance minister and board member of Saudi Aramco.  Others released include the former assistant minister of finance Mohammed bin Homoud Al Mazyed, Saoud al-Daweesh, former chief executive of Saudi Telecom, and Prince Turki bin Khalid.

Libya:  On Tuesday, a pipeline explosion 80 miles south of the Es Sider oil terminal cut Libya’s output by 70,000 to 100,000 b/d, according to the state oil company. However, crude cargoes at the Es Sider port were still loading without any interruption. The damage to the pipeline is expected to be repaired this week.

3.  China

Growth in China’s manufacturing sector slowed in December as a crackdown on air pollution and a cooling property market impacted the economy. While the economy grew at about 6.9 percent in 2017 and is expected to grow by some 6.5 percent this year, a slowdown has taken hold in the last few months. This is due to a combination of government measures, ranging from a crackdown on smog in some heavily industrialized provinces to continued curbs on the housing market.  A senior Chinese official says China can achieve its goal of doubling the size of its economy by 2020 even if annual expansion slows to 6.3 percent, signaling a greater willingness to tackle debt and pollution at the expense of growth.

China is adopting a new “green index” to pressure local governments to reduce pollution and create more-sustainable economic development—though a high pace of growth is likely to remain the Chinese leadership’s priority. The new “green development” index released last week has 55 parameters, from carbon emissions to disposable income per capita. The index is meant to guide local governments on development and send a signal to focus less on rapid growth at the expense of the environment.

Beijing has criticized officials in the industrialized province of Shandong for deceiving authorities to evade capacity cuts in the polluting coal, steel, aluminum and chemical sectors.  The Ministry of Environmental Protection said Binzhou city, China’s aluminum smelter hub, used fake certificates and false data to win approval for 2.4 million tons of new aluminum capacity in 2014. Rizhao Steel, a major producer, continued to run a mill with 6 million tons of capacity after it had been due to shut in 2015.

The natural gas shortage continues. Imports of coal from Australia slipped in November from a year ago, as heavy traffic congestion in Australian ports delayed shipments. More than 300 large dry cargo ships have been waiting outside Chinese and Australian ports in a maritime traffic jam for over a month, delaying shipments to China. The government has urged coal miners to increase high-grade coal supplies to ensure heating fuel for winter. This comes after the central government scaled back its plan earlier this month to convert northern cities to natural gas from coal for heating because provinces across China were facing gas shortages.

China will become the world’s second-biggest importer of LNG this year as it overtakes South Korea. This is a huge boost to Asia’s emerging spot market as Chinese buyers rely much more on short-term purchases to meet their needs than their counterparts in Japan and South Korea.

Russia held on as China’s largest crude oil supplier for the ninth month in a row in November, topping Saudi Arabia for the year. Shipments from Russia in November reached 1.26 million b/d up 11 percent from a year ago, according to detailed commodity trade data for last month from China’s General Administration of Customs. Saudi Arabia came in second, with November imports dropping 7.8 percent from a year ago to 1.056 million b/d.

China’s independent refineries have received their first round of crude import allocations for this year with volumes close to their annual ceiling, a move that will allow them to better pace their imports through the year and bring more efficiency to their crude buying.

4. Russia

The future of the Russian oil industry could lie in the Bazhenov shale formation, the largest in the world. Russia has become the biggest global producer of crude oil with almost no contribution from shale, a technically difficult and expensive resource to extract. Only Americans have gotten shale right so far, but the Kremlin is taking the first steps to unlock Russia’s potential. Companies like Gazprom Neft are leading Moscow’s drive to replicate the US shale boom, experimenting with a uniquely Russian, state-controlled approach to fracking that contrasts with the free-for-all among independent producers in Texas and North Dakota.

The head of Russia’s Gazprom said Tuesday that its European partners in the Nord Stream-2 pipeline project have fulfilled their financing obligations for 2017. This pipeline will allow Gazprom to pump more gas to Europe, where the project has divided opinion over increased dependence on Russia. Gazprom is partnered in the project by Uniper, Wintershall, Shell, OMV, and Engie.

5. Nigeria

The oil products shortage across the country continued last week. Long queues remained the main feature in most of the capital last week as motorists spent hours waiting for gasoline. In the meantime, the blame game on the cause of the acute gasoline shortage continued with the Nigerian National Petroleum Corporation describing as ‘very unfortunate’ claims by the Depot and Petroleum Products Marketers Association that it was largely responsible for the scarcity of gasoline.

The Senate cut short its three-week recess to convene a meeting with stakeholders in the oil sector, with a view to addressing the fuel scarcity which appears to have defied solutions. The Ekiti State Governor has reacted to the persistent fuel scarcity in the country and called on President Buhari to resign for failing to end the crisis. He said the federal government was showing a “nonchalant attitude” towards the fuel situation which had affected economic activities across the country in the last three weeks.

6. Venezuela

A general with no energy experience has been installed as the head of the PDVSA. Arrests, firings, and desperate emigration have gutted the company. Oil facilities are crumbling, while production is plummeting. As the rest of the oil-producing world recovers on the back of stronger energy prices, Venezuela is getting worse, the result of dysfunctional management, rampant corruption, and the country’s crippling economic crisis. The deepening troubles at the state oil company, the country’s economic mainstay, threaten to further destabilize a nation and government facing a dire recession, soaring inflation, and unbridled crime, as well as food and medicine shortages.

Twenty-eight people were arrested in southern Bolivar state for looting and disorder over Christmas in the latest unrest during a severe economic crisis. There have been scattered protests and roadblocks around the country in recent days over food shortages, power-cuts, high prices and fuel rationing. The local chamber of commerce head said ten businesses – mostly liquor stores – were looted as dark fell on Christmas Day in Bolivar, which has seen unrest at various points over the last four years. In the western Andean states, police and soldiers were guarding gas stations, where there were long lines and customers were only allowed to fill up 35 liters per vehicle.

President Maduro announced in early December that he would follow China’s ‘petro-yuan’ by proclaiming a new national cryptocurrency – the ‘Petro’ – to overcome the West’s “financial blockade.” Last week he followed up by confirming that “every Petro will be backed by a barrel of oil… and gold.” Some joked that a different name might be more suitable… “KLEPTO-currency.”

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

UK imports: A British trade group said it’s better to tap inland gas than be vulnerable to foreign suppliers, as a vessel docked with its first-ever cargo of Russian LNG. The LNG tanker docked at a British port with the first cargo of liquefied natural gas ever delivered from the Yamal LNG plant in the Russian Arctic. (12/30)

Offshore UK, Ineos shut down the Forties pipeline system from the North Sea to inland refineries on Dec. 11 after discovering a hairline crack on infrastructure near Aberdeen, Scotland. The system carries about 40 percent of the production from the British waters of the North Sea. The company said Thursday repairs to the pipeline are mechanically completed, and it was progressing on the gradual restart of the system. (12/29)

Offshore Scotland, Premiere said initial production from its floating production, storage and offloading vessel parked over the three fields that make up the Catcher area would be around 10,000 b/d. A peak rate of around 60,000 b/d is expected during the first half of 2018. (12/28)

In Russia, a subsidiary of Gazprom Neft said it finished seismic surveys of the Dolginskoye oil field and the Severo-Zapadny license block in the Arctic waters of the Pechora Sea.  The results obtained through these seismic works will remove major subsurface uncertainties and allow Gazprom Neft’s subsequent geological prospecting program at the Pechora Sea to be put in place, the company explained. However, development is costly, with most Russian operators waiting for oil to move above $75 per barrel to review further opportunities in the extreme north. (12/30)

India is set to surpass China as the biggest importer of liquefied petroleum gas (LPG) this month as a drive to replace wood and animal dung fires for cooking boosts consumption. (12/27)

In Egypt, first gas from the Zohr field flowed earlier this month, one or two years ahead of guesstimates. Big Oil has traditionally taken its time with new projects, especially offshore ones. They require a lot of exploration, a lot of planning, and a lot of equipment once the final investment decision has been made. But no longer: the 2014 crisis changed the setting, forcing the mammoths of the industry to at least try to become more nimble and flexible. (12/27)

Egypt is set to inaugurate a new wharf for natural gas and petroleum product tankers on the Gulf of Suez in the coming days, another step in its plan to become a regional energy hub. The new 2.5 km wharf is being built by SUMED, which for decades has operated two pipelines from the Red Sea to the Mediterranean. (12/28)

In Argentina, Exxon will start exporting natural gas from the massive Vaca Muerta shale play to Chile, local media reported. This will make the world’s top oil company the first to commercialize the reserves of the formation that Argentina is eager to exploit to improve its energy security. (12/28)

In Peru, Spanish energy company Repsol said natural gas production started at a site that has the reserve equivalent of a quarter of the nation’s demand. (12/28)

Canadian crude-by-rail exports to the US climbed to a six-month high of 137,000 barrels per day in October, the latest sign that tight pipeline capacity is pushing more oil onto railroads. October was the third straight month in which rail exports climbed. The amount of crude carried by rail out of Canada is expected to surge next year as Canada’s oil sands output grows and outpaces the capacity of congested export pipelines. (12/30)

Tar sands reversal? Last week AXA announced its sell-off of €700m of tar sands investments from its balance sheets, covering 25 tar sands companies and 3 major pipelines projects. The company’s CEO called the projects “not sustainable and therefore also not insurable.” This was a significant win for activists who have been calling on financial institutions to end investments in the tar sands projects and pipelines since 2009, and who have most recently taken their campaigning efforts to the insurance industry. (12/27)

The US year-end oil rig count rose by 222 to 747 rigs (up 42 percent) compared to the corresponding period last year, as energy companies boosted spending amid a recovery in crude prices. The net gain was all during the first two quarters (by 231) since the oil rig count declined by nine during the second half. Drillers held the number of oil rigs steady for a second straight week at 747 in the week to Dec. 29. The number of gas rigs in the US now stands at 182, up from 132 a year ago. (12/30)

US crude oil production in October rose by 167,000 b/d to 9.64 million b/d, the highest level in more than 46 years, while natural gas production leaped to a new record, US EIA data showed on Friday. The production increases come on the heels of higher energy prices, with US crude futures recently touching $60 a barrel for the first time since mid-2015. Natural gas futures hit near four-week highs on Friday. Production was expected to continue rising through 2017 and into 2018, driven by rising exports and growing oil demand. (12/30)

US oil exports surged: In the first half of the year, there were several weeks when the US topped 1 million b/d, but exports averaged about 750,000 b/d between January and June. In the third quarter, the export machine kicked into high gear, and Hurricane Harvey was arguably the spark; because so many refineries were damaged, a lot of the oil produced in Texas had to go elsewhere. (12/29)

Offshore Alaska, Italian oil producer Eni this week began drilling a new well in US waters off the north coast, becoming the first company to do so since 2015. The oil and gas firm is working from an artificial island in the Beaufort Sea about three miles off Oliktok Point in the Arctic Ocean. The well is expected to run more than 6 miles (10 km) long. The project could result in 20,000 barrels a day of oil production. (12/28)

In Texas, the energy sector is leaving 2017 on a high note, though oil prices will need to be higher than expected for strong rig counts, a bank survey found. Most of that optimism came from drilling services companies, those that were hit hard by the market downturn in early 2016.  (12/30)

Tax bill benefit: US refiners and pipeline companies are likely to embark on a capital spending spree in the next year, fueled by a provision in the recently-passed US tax bill that rewards investment in new projects, said energy industry lobbyists and analysts. The bill contains a bonus depreciation provision that allows all companies to immediately write off the full costs of capital improvements, instead of depreciating the new asset over time. The immediate expensing of capital costs will make less financially-attractive projects more viable. (12/27)

Regs rollback: The Trump administration’s Interior Department proposed Friday regulations that would scale back some of the safety regulations for offshore drilling put into place by the previous administration in the wake of the 2010 Deepwater Horizon disaster.  Among other things, the proposed new rule would rescind the provision that would require operators to submit safety devices such as blowout protectors for certification to third parties before installation. The proposed change is part of the Interior Department’s efforts to roll back the Obama-era safety and environmental regulations on the oil and gas industry as part of the Trump administration goal of achieving “energy dominance without sacrificing safety.” (12/30)

Gas power: A glut of gas flowing out of US shale fields is fueling a power plant construction boom in several northeastern states, despite fierce competition that has caused wholesale electricity prices to plummet. The key for electricity producers is location, location—preferably close to cheap natural gas. (12/29)

In Germany, wind power will be the biggest single source of electricity this quarter with storms pushing wind output to new record-highs and December on track for a new monthly output record over 14 TWh. (12/28)

South Korea has finalized a power supply plan that aims to make renewables the country’s fuel of choice for power generation for the next 15 years, its energy ministry said on Friday. The plan is largely unchanged from a draft released earlier this month that outlined the gradual reduction in the use of coal and nuclear fuel as the usage of gas and renewables for power generation increased over 2017-2031. South Korea plans to meet 20 percent of its total electricity consumption with renewables by 2030. (12/29)

In India, the government’s target is to boost installed solar power capacity more than five-fold to 100 gigawatts by 2022. The problem, though, is India meets about 85 percent of its solar cell demand through imports from China, and photovoltaic modules account for over half the costs of a solar project. Now, the Indian government is left contemplating whether the domestic industry of solar cells and modules manufacturers should be “protected” from cheap imports. (12/28)

US vs. China charging stations: University of Michigan researchers earlier this year reported 16,000 public charging stations in the US, with nearly 43,000 individual charging connectors or plugs, based on federal government data. That made for only about one-in-10 charging stations to gas stations, with about 112,000 gas stations operating in the US as of 2015. China had 190,000 chargers installed by September 2017, with big plans in place to expand the network to 800,000 charging points. (12/28)

Commuters in Beijing started using special license plates to designate alternative vehicles for the first time. The Chinese Ministry of Public Security in November announced the introduction of special green license plates for alternative vehicles in 12 cities, with a full-country roll-out planned for the first half of 2018. Local governments use special plate quotas for congestion and smog. According to national data, there were around 825,000 electric vehicles on Chinese roads to date. (12/29)

2017 = natural disaster year: In the year that President Donald Trump pulled out of the Paris accord and downplayed global warming as a security threat, the US received a harsh reminder of the perils of the rise in the planet’s temperature: a destructive rash of hurricanes, fires, and floods. The country recorded 15 weather events costing $1 billion or more each through early October. (12/29)

Population slowdown: According to the most recent UN estimates (United Nations 2017), almost one half of the world’s population lives in countries with below replacement fertility (BRF), i.e. with a total fertility rate (TFR) below 2.1 births per woman. (12/28)

A new study from Harvard T.H. Chan School of Public Health links short-term exposures to fine particulate air pollution and ozone—even at levels well below current national safety standards—to a higher risk of premature death among the elderly in the US. The risk was even higher among elderly who were low-income, female, or non-white. (12/27)

The growing importance of Asia’s major economies will continue in 2018 and beyond, according to a league table that sees the region dominating regarding its size in just over a decade. The report by the Centre for Economics and Business Research in London sees India leapfrogging the U.K. and France next year to become the world’s fifth-biggest economy in dollar terms. It will advance to third place by 2027, moving ahead of Germany. In 2032, three of the four largest economies will be Asian — China, India and Japan — and, by that time, China will also have overtaken the US to hold the No. 1 spot. (12/26)