Quote of the Week

“[Indonesia:] Once the world’s largest exporter of LNG, the country is anticipated to start importing LNG for the first time from 2021, as declining production fails to keep pace with demand.”
BMI research report

Graphic of the Week

1.  Oil and the Global Economy

The first week of the new year saw much activity related to the energy markets. Oil prices continued to climb with NY futures closing at $62.01 on Thursday, the highest close since December 2014. The continuing fall in world crude stocks — US stockpiles were down by 7.4 million barrels last week—and a healthy global economy continues to push prices higher.  London futures are now at $67.66 a barrel and are closing in on $70.

The week also saw the “bomb cyclone” which sent temperatures down to record levels along the US’s East Coast and sent spot natural gas prices up 60-fold in the northeast to circa $175 a barrel vs. the normal three.

The Trump administration continued its efforts to make America energy independent by lifting regulations against drilling along all US coasts. There is already considerable push-back from the affected states that don’t want to see their beaches fouled. Last week the administration rescinded many of the regulations established after the BP Gulf incident to prevent offshore blowouts. Some believe the new policies will never result in much drilling as the major oil companies are unlikely interested in facing years of lawsuits, boycotts, protests, and the possibility that a future administration would change the policy. If oil companies plan to bring oil to shore via pipelines, they are unlikely to receive much cooperation from hostile state governments that do not want to see oil-stained beaches.

With oil prices again approaching $70 a barrel, many are predicting higher oil production from OPEC and Non-OPEC counties.  The US’s EIA is already predicting an increase in US shale oil production of 780,000 b/d this year. Other analysts are looking for a 1.4 million b/d increase this year. Venezuelan oil production could collapse at any time, taking a million or more b/d off the markets. Should this happen, the OPEC/Russian alliance is likely to cancel its production freeze to increase their oil revenues.

While the Iranian uprising has yet to affect oil exports, there is no telling where this situation is going. The standoff with Saudi Arabia is fraught with dangers to oil exports. Most expect demand for oil to remain strong in the coming year and the IMF expects global GDP to rise by 3.6 percent. However, as we have seen many times in the past, higher oil prices stifle demand. If oil gets above $100 a barrel many economies will start to quake. If we ever get back to $140 a barrel again, then we will probably see another great recession.

The most significant development for world oil prices is the lack of investment in conventional oil which constitutes some 90 percent of the world’s oil supply.  Multiple agencies are warning about the lack of investment in the energy sector. The IEA reports that last year energy companies approved the lowest number of new drilling projects in more than 70 years. Global investment in exploration is expected to be about $37 billion in 2018, down 7 percent from a year earlier and over 60 percent below the 2014 peak, according to WoodMackenzie.  Some are warning that there is at least a possibility of going back to the situation we had ten years ago where oil prices were very, very high at a time when demand was growing.

The OPEC Production Cut: OPEC’s crude oil production remained largely unchanged from November to December, but that was mostly thanks to a 50,000-b/d decline in Venezuela’s production, as well as further cuts in Saudi Arabia. At 32.47 million b/d, OPEC’s production is slightly below the 32.5-million-b/d ceiling.  OPEC compliance with an oil supply-cutting deal improved in December due to a further decline in Venezuelan output and extra cuts by Gulf exporters.  The United Arab Emirates for the first time since the deal took effect in January 2017 pumped below its OPEC target, joining Saudi Arabia and Kuwait.

US Shale Oil Production: The financial press is unusually enthusiastic about the prospects for increased shale oil production and higher prices. Futures prices have been rising fairly steadily for 27 weeks since hitting a trough around $43 in late June 2017. Now that US oil prices are back above $60 a barrel, many writers believe industry assertions that they are now profitable. The rig count started turning up 19 weeks after prices started to rise, which is consistent with normal behavior.  Although the rig count unexpectedly stalled in the second half of December, the continued increase in futures prices suggests it will start increasing shortly unless bad weather or logistics problems prove to be major obstacles.

There is a growing realization that increasing shale oil production cannot by itself satisfy the ever-increasing demand for oil now that discoveries of new conventional oil are at 50-year lows. Optimistic analysts are saying that this will not have an important impact on oil prices for another ten years. Some are saying that the problem will come much earlier.

2.  The Middle East & North Africa

Iran: Although the riots in numerous Iranian cities are credited with helping to boost oil prices last week, there is no evidence as yet that the troubles will affect oil exports. So far, the riots focus on economic complaints that too much is being spent on foreign adventures and that the common Iranian is hurting. Iran has numerous security forces which have been able to deal with unrest in the past. Although some are talking about the troubles sending oil prices much higher, this does not seem likely for the immediate future.  The government announced over the weekend that the demonstrations are now over.

Iraq: Oil exports from Basra in December set yet another record, capitalizing on a steady increase in crude prices. Iraq averaged 3.535 million b/d of exports in December. This was the fourth straight month of increasing loadings, according to preliminary data from the Oil Ministry released Tuesday, leaving Iraq with a record 3.309 million b/d average for the year. Loadings in Ceyhan, Turkey, of crude from the Kirkuk pipeline in the north of the country continue to remain on hold.

Kurdistan’s fourth-quarter exports plummeted after Baghdad’s takeover of Kirkuk-area fields, but independent oil sales have risen modestly due to recent production increases. Exports from Iraq’s semi-autonomous Kurdistan region averaged slightly more than 304,000 b/d from Turkey’s Ceyhan port in December, an eight percent increase over November. Slight production upticks in a handful of fields accounted for the rising exports.

Oil Minister al-Luiebi invited US companies to take part in tenders offered by the Iraqi oil ministry and said that Iraq was preparing more favorable work conditions for foreign companies investing and doing business in Iraq. ExxonMobil and Chevron already have operations in parts of Iraq. Exxon signed an agreement in 2010 with Iraq’s South Oil Company to redevelop and rehabilitate the West Qurna I oil field.  In 2013, Exxon signed agreements with PetroChina and Pertamina for participating interest in the West Qurna I project. In October 2011, Exxon also signed six Production Sharing Contracts (PSCs) covering more than 848,000 acres in the Kurdistan.

Saudi Arabia:  Aramco has cut the price of Arab Light for the US market further for February despite shipping record-low amounts to the US. American refiners will receive Arab Light for $0.10 a barrel less, at $0.90 above the benchmark for the Gulf Coast. This is the second monthly price cut of Saudi oil for the United States. Saudi exports to the US have been falling more or less steadily since August 2016, hitting a low of 415,000 b/d in the week to October 27, according to the EIA.

The Saudis increased local gasoline prices last Monday, according to the state news agency. The initiative, aimed at more efficient energy use, coincides with an ambitious reform plan to boost sources of revenue It said Octane 91 will sell for about $1.50 a gallon. The kingdom plans to eliminate subsidies for a wide range of energy products, according to a new long-term fiscal plan in the 2018 state budget released last month.

Libya: Despite the periodic bombing of key pipelines, oil revenues nearly tripled in 2017 to $14 billion as the country managed to gradually recover its oil production, reaching 1 million bpd for the first time since 2013.
The National Oil Corp said it had won two international arbitration cases over the 220,000 b/d Ras Lanuf refinery and called for the refinery to restart as soon as possible. The cases, which date to 2013, had been settled in the government’s favor at the International Chamber of Commerce in Paris. The Libyan Emirati Refining Company is the owner and operator of the refinery.

3.  China

Liquefied natural gas prices in northern China have dropped more than 40 percent from record highs reached two weeks ago as a supply crunch has eased and curbs have been enacted on industrial users of the fuel. Some industrial users were cut off from their gas supply or couldn’t afford it,” said Li Ruipeng, a manager at an LNG dealer in the northern Chinese province of Hebei. “Supplies have increased as more gas has been diverted from the south to north.”

Beijing’s crackdown on dirty air has China on track to overtake Japan this year as the world’s biggest importer of natural gas, which is the easiest way to replace dirtier coal. China – already the biggest importer of oil and coal – is the world’s third-biggest user of natural gas behind the United States and Russia, but has to import around 40 percent of its total needs as domestic production can’t keep up with demand. New data indicates China’s 2017 imports of pipeline gas and LNG will top 67 million tons, up by more than a quarter from 2016.

Beijing announced on Friday it plans to create several “super-large” coal mining companies by the end of 2020 as the government takes steps to streamline the fragmented coal industry and slash outdated capacity. China plans to form a number of mega-miners, each with the capacity to produce 100 million tons of coal per year. China has more than 4,000 coal mines with a total capacity of 3.41 billion tons a year. Only six of China’s coal mining companies are currently capable of producing annually more than 100 million tons.

China increased its Strategic Petroleum Reserve by almost 14 percent between June 2016 and June 2017, according to data by its National Energy Administration. As oil prices increased in the third and fourth quarter this year, the pace of the Chinese state oil reserve stockpiling has eased, according to analysts cited by Reuters. According to the NEA, China had 37.73 million tons of oil, equal to 275 million barrels, in nine bases by the middle of 2017.

4. Russia

Moscow had a good year in 2017. Not only did oil prices go up substantially, but Russian oil production has continued to grow in 2017, with average daily output at a 30-year high of 10.98 million b/d, though the pace of growth slowed from 2016 because of the country’s participation in OPEC’s production freeze. Moreover, Gazprom raised its exports by 8.1 percent annually to a record high of 193.9 billion cubic meters in 2017, the chairman of Gazprom’s management committee, Alexey Miller, said last week.

Gazprom shipped 190 billion cubic meters of natural gas to Europe in 2017—a record high, according to Bloomberg. In 2018, that figure is expected to dip to 180 billion cubic meters, which will still be the second most on record. Russia’s intervention in Ukraine and its annexation of Crimea in 2014 led to a standoff between Moscow and the West—but Europe’s imports of Russian gas are up more than 25 percent since then, despite a lot of rhetoric in the EU about diversification.

5. Nigeria

The fuel shortage continues to persist in Nigeria, with long lines at the gas pumps seen across the country. As domestic refining has nearly ground to a halt due to lack of maintenance, most refined products must be imported and this is causing problems. Minister of State for Petroleum Resources, Ibe Kachikwu, says lack of sufficient reserves, low clearance speed of imported fuels at the ports, and diversion of products are some of the reasons for the ongoing fuel crisis.

A gas pipeline fire is causing blackouts in Nigeria. The Nigerian National Petroleum Corporation says it will restore the gas pipelines soon, but the process of extinguishing the fire “might lead to a complete shutdown of the pipeline system,” which leads to the states of Lagos, Ondo, and Ogun. “Once the national grid is restored, output from the hydroelectric power stations and all other unaffected gas-fired thermal power stations will be increased to the extent possible.”

6. Venezuela

President Maduro said last week that Venezuela would issue 100 million units of its new oil-backed cryptocurrency in coming days. It is unclear whether any investors will want to purchase the “petro” at a time when the country is going through an economic crisis.

On Friday, Maduro ordered a temporary shutdown of air and maritime traffic with Aruba, Bonaire, and Curacao accusing smugglers there of seeking to plunder his country.  The Caribbean islands, which are short distances from Venezuela’s northern coast, have long hosted black markets for Venezuelan contraband. In recent years, people fleeing Venezuela’s food shortage have been landing on the islands by boat.

Last week the secretary of the professional and technician division of the United Federation of Venezuelan Petroleum Workers said “There is no more gasoline in Venezuela. In Venezuela, we are out of gas. In Venezuela, there is no gas oil. In Venezuela, there are no lube oils.” The secretary said that poor management led to the stoppage of 80 percent of the country’s refineries. “Only Amuay and Cardón refineries are operative, and that is nothing. They produce 40,000 barrels per day and the national demand is over 200,000 barrels of gas per day.”

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

Global sales of passenger cars and trucks likely surpassed 90 million for the first time in 2017, the latest indicator that demand for conventional automobiles remains strong even as driverless cars and ride sharing get increasing attention. The results were fueled in part by a continued rebound in Western Europe and recovery in major emerging markets, including Brazil and Russia. Asian buyers are the main engine for sales growth with more than a quarter of the cars sold last year going to Chinese customers, up from less than 15% a decade ago. (1/3)

The eastern Mediterranean is expected to witness the first conflict of 2018, as developments at the end of 2017 are signaling worsening relationships between Turkey and the Greek Cypriot-Greece-Israel-Egypt bloc. Territorial disputes over natural gas and newly discovered hydrocarbon reserves in the eastern Mediterranean basin are the reason. (1/3)

Pakistan has imposed restrictions on fuel oil imports with immediate effect, as domestic consumption declines amid rising LNG imports and the shutdown of several fuel oil power plants. (1/3)

A second Sino-Russian oil pipeline began operations on New Year’s Day, doubling China’s capacity to import crude from the East Siberia-Pacific Ocean system. China can now import 30 million tons annually (about 600,000 barrels a day) of Russian ESPO crude via pipeline. (1/2)

Indonesia is suffering from slowing exploration, rising costs from mature assets and a ‘seemingly perpetual decline’ in oil and gas output, energy analysts at BMI said in a brief report sent to Rigzone, which forecasted a steady drop in Indonesia’s oil and gas production to 2026. (1/4)

Offshore Guyana, ExxonMobil’s sixth “home run” oil find on the Stabroek block in less than three years may not only push estimated recoverable reserves notably higher but could further whittle down breakeven costs. The Ranger exploration well, announced by ExxonMobil Friday, also opens a new part of the frontier Guyana play, located about 130 miles offshore the South American country, where 3.2 billion boe of recoverable oil equivalent has been found in ExxonMobil’s five prior discoveries. (1/6)

Brazil’s state-controlled oil company Petrobras said Wednesday that it has agreed to pay $2.95 billion to settle a US class action brought by investors seeking to recoup the money they claim to have lost as a result of a corruption scandal. (1/3)

Canadian exports of crude oil fell 2.4 percent month-on-month in November to 3.28 million b/d after a decline in shipments to the US. The 80,000 b/d drop in exports to Canada’s biggest customer came in the same month TransCanada Corp’s Keystone pipeline was shut down following a leak in rural South Dakota. (1/6)

The US oil rig count was cut by five this week to 742, according to Baker Hughes.  This was despite the price of oil hovering near its high in nearly three years.  Active natural gas rigs held steady at 182. (1/6)

The December US rig count was mixed last month, with US land numbers down and offshore up. Commodity pricing group S&P Global Platts said in an emailed report it counted 988 rigs working inland in the United States in December, down about 3 percent from November, but up 47 percent from the same time last year. (1/6)

The US is poised to ramp up crude oil production by 10% in 2018 to about 11 million barrels per day, according to research firm Rystad Energy. Surging shale oil output should allow the US to dethrone Russia and Saudi Arabia as the planet’s leading crude oil producer. (1/5)

Natural gas surged to 60 times the going rate as howling blizzard conditions stoked demand for the furnace fuel across the US Northeast. Spot prices for the fuel used to heat homes and generate power reached a record $175 per million British thermal units in New York. That’s a far cry from the $2.93 that US gas futures have been averaging on the New York Mercantile Exchange this winter. (1/6)

R&D: Six small US oil and natural gas drilling projects will receive about $30 million in federal funding for research and development to help achieve President Donald Trump’s policy of boosting output of fossil fuels. The projects seek to increase understanding of the behavior of oil and gas reservoirs, advance the completion of wells, and improve drilling technologies at offshore operations. (1/4)

President Trump is wasting his time with some of the areas proposed for offshore drilling, an attorney said. Erik Grafe, an attorney for Earthjustice, told UPI that Trump is calling for leases in areas that Obama withdrew, notably in Arctic and Atlantic waters. According to Grafe, Trump doesn’t have the authority to undo Obama’s order because it was issued jointly with the Canadian government. (1/6)

Dialing down safety regs? The Trump administration’s proposed changes to offshore oil drilling rules are raising fundamental questions over whether safety regulators at the Interior Department should also be concerned with promoting oil and gas production. The Bureau of Safety and Environmental Enforcement on Friday published proposed revisions to a safety rule that was passed in the wake of the Deepwater Horizon disaster. (1/2)

Retail gas prices started the year at their highest level in four years, with some regional inventories at their lowest levels in seven years, a survey by AAA Motor Club found.   (1/5)

Declining MPG: More US consumers seem to be buying light trucks rather than passenger vehicles, and that’s skewed the average fuel economy lower. The University of Michigan’s Transportation Research Institute reported the average fuel economy of new vehicles sold in December was 25 miles per gallon, down about 0.8 percent from November. For all of 2017, the University of Michigan said average fuel economy for vehicles was 25.2 mpg, unchanged from the previous year. (1/6)

GM posted solid gains in pickup trucks and crossover SUVs—among its most profitable products—and posted record sales for the year in both categories. However, the US auto industry in 2017 likely suffered its first annual sales decline since the financial crisis eight years ago, as demand finally ebbs after a remarkable multiyear growth spurt. (1/4)

Coal suit: A company that planned to build a coal export terminal in the Pacific Northwest to ship western US coal to Asian markets sued the state of Washington on Wednesday for blocking construction last year. The complaint claims that state regulators “unreasonably” refused to process permits to develop a site on the Columbia River where an existing Washington state lease allows coal exports. (1/4)

Solar slowdown: Between 2007 and 2016, installations of new panels rose nearly 90-fold, from 169 megawatts of capacity to 15 gigawatts. As it enters 2018, however, the industry faces a clouded future. President Donald Trump has talked about his enthusiasm for solar power, but the priorities of his administration lie elsewhere. Last year installations slowed for the first time in more than a decade, dropping about 22 percent to 11.8GW, according to estimates for the Solar Energy Industries Association. (1/6)

UK power:  It was a record year for powering the country using renewables in the UK, National Grid has revealed, making 2017 the “greenest year ever”. The year saw 13 clean energy records smashed in total – including the first day when wind, nuclear and solar generated more power than gas and coal. And in April, the country had its first day without coal generated energy since the industrial revolution. (1/2)

2017 was warm: It’s been very cold over North America for days, but globally 2017 has ended up smashing the record for the hottest year on record without an El Niño. And that has scientists worried, since the warmest years usually happen when the long-term human-caused global warming trend gets a short-term boost from an El Niño’s enhanced warming in the tropical Pacific. (1/6)

In New York, Gov. Andrew Cuomo in a State of the State rollout included a broad-based agenda to address climate change by building a state economy based on clean energy and through efforts to reduce greenhouse gas emissions. Cuomo said he’d reconvene a committee to vet ways to maneuver through some of the challenges presented by a changing climate.  In June, the governor formed a climate alliance with his counterparts in California and Washington state to work on the benchmarks laid out in the global Paris climate deal. Cuomo also said he’d reconvene a climate advisory panel to avoid “political interference” from the White House. (1/4)