Editors: Steve Andrews, Tom Whipple
Quote of the Week
“Eight to 10 million tourists a year come down to Charleston. They don’t want to come to see oil drilling off the coast. Ain’t gonna happen. Not on my watch!” Rep. Nancy Mace (R), a new state representative for S. Carolina, responding to new offshore drilling proposal by the Trump administration
Graphic of the Week
[Note: it appears to us that to achieve the EIA’s higher level scenario shown here—18 million barrels of crude oil production a day in the US by 2050? – would require some unique coverage, of the gas and oil sector, by a Dreamers Act.]
1. Oil and the Global Economy
Oil prices fell sharply last week ending up at $61.25 in New York and $64.37 in London. A higher than expected increase in crude stocks and gasoline was the impetus for the decline. An unexpected decline in Chinese economic activity, likely due to the winter holiday, did not help the outlook for oil nor did President’s Trump’s announcement of new tariffs and the remark that “trade wars are good, and easy to win” did not help the outlook for oil prices. US oil production and the oil-rig count continue to climb slowly. Talk in Washington of crippling new sanctions on Venezuela which would likely remove still more of its oil from the export stream did not help the situation.
The price setback may be only temporary as the market has become enthralled with the current pace of production increases by the US shale oil industry. Many observers are saying that the demand for oil will remain strong into 2020 when the growing electric vehicle industry could start eroding the demand for oil. This projection assumes that the global economy stays healthy for the next few years despite numerous voices sounding alarms.
The OPEC Production Cut: The cartel produced 32.28 million b/d in February — a reduction of 70,000 b/d in comparison to January. The February output was the lowest since last April. The carefully watched compliance with the November 2016 agreement rose to 149 percent in February, jumping five points from January. Some are saying the job of balancing the market is not complete. Even though international oil prices in January topped $71 per barrel, they fell below $64 for a short time last week. Much of the drop in supply was due to the UAE which for the past year has been slow in keeping up its part of the agreement.
US Shale Oil Production: US drillers increased the rig count to 800 for the first time in almost three years. The pace of drilling has grown in an almost-unbroken streak since the beginning of November signaling even bigger production jumps yet to come. Between 2010 and 2015, annual US oil production grew by four million b/d. Production dropped due to the lower prices in 2016, but then rose by 1.2 million BPD between January and December 2017.
In its 2018 Annual Energy Outlook, the EIA makes three projections as to what will happen between now and 2050. In the most likely “reference” or middle case US oil production climbs from the current 10 million b/d to 12 million and stays close to this level for the next 32 years. The low case has production peaking around the current level and then wilting away to 7 or 8 million b/d by 2050. In the high, or wildly optimistic, case, US oil production climbs and climbs to around 19 million b/d three decades from now.
The Reference case projection which assumes that oil finding and drilling technologies will continue to improve as they have in recent years has come in for sharp criticism as it is seen as the official US government projection as to where our oil production is going. The heart of these criticisms is that except for the Permian Basin, other US shale oil fields have already peaked or are unlikely to grow significantly. US offshore production currently is not receiving enough investment to grow significantly.
This rapid growth leaves the Permian as America’s hope for energy dominance. The basin, which has been producing conventional oil for nearly 100 years is currently producing about 2.9 million b/d up from less than 1 million ten years ago. The EIA estimates that oil production from the Permian is currently growing by about 75,000 b/d each month with 258,000 b/d from newly opened wells outpacing the monthly decline of about 183,000 b/d from older wells.
Critics are saying that this rate of increase is unlikely to last. Drillers are concentrating on a finite number of productive sweet spots which will not last for the next 30 years. Costs are rising rapidly so that an increasing number of wells will be losing money. Finally, outside analysts who have examined oil production from the Permian closely say that these expensive “new technologies” do not increase the amount of oil extracted from each new well, but only get similar amounts of oil out faster. The amount of oil that will ultimately be recovered from each well remains about the same depending on the quality of the location that is drilled.
The course of production from the Permian over the next few years may be key to what happens to the US and even world oil production. If drillers cannot come up with some 180,000 b/d of new production each month then production will start to decline. The state of the US economy over the next few years will be another factor with higher interest rates adding a heavy burden to an industry which has been operating at a loss for a decade.
2. The Middle East & North Africa
Iraq: Baghdad exported an average 3.79 million b/d in February, a slight month-on-month increase from January. The federal government sold 3.426 million b/d, down from 3.49 million b/d in January. The reduction in federal oil sales – all of which currently flows through export terminals in the Basra Gulf terminals – was likely due to poor weather and leaks in pipelines leading offshore.
Iraq and Kurdistan may have agreed to a deal with the semi-autonomous Kurdistan Regional Government to resume crude oil exports through its pipeline to Turkey, halted since last July. KRG officials have been silent on the deal to transport crude produced by Baghdad’s oil companies through its pipeline to the Turkish Mediterranean port of Ceyhan.
Another option is the rehabilitation of the pipeline running north from Kirkuk to the Turkish port city of Ceyhan. This pipeline has been out of service since the ISIS offensive several years ago and even then was subject to frequent bombings by insurgent groups trying to reduce the federal government’s revenues. Iraqi Oil Minister al-Luaibi met in Baghdad last week with the regional director of Russian oil company Rosneft to discuss opportunities in the Iraqi energy sector, including efforts to overhaul the Kirkuk-Ceyhan pipeline.
The much heralded Iraqi-Iranian oil swap deal under which Iraq would truck 60,000 b/d of Kirkuk oil to Iran in exchange for Iranian oil to southern Iraq cannot be currently fully implemented because of security issues, an Iranian official said last week. The government apparently cannot control large swaths of territory, as Islamic State insurgents regroup, solidify footholds, and launch attacks targeting security forces and energy infrastructure. Convoys of trucks carrying 60,000 b/d of Iraqi oil into Iran would be a prime target for a resurrected ISIS made up largely of Sunnis.
Basra Oil Co is preparing to tender for a water injection project vital to increase its oil production capacity if talks with Exxon Mobil fail. A massive water injection project which would pump seawater below Iraq’s older oil fields is the key to increasing Iraqi oil production in the south. This multi-billion dollar project, which has involved ExxonMobil, has been under consideration for the last ten years, but little progress has been made. Iraqi Oil Minister al-Luaibi said in October that Baghdad was in final talks with Exxon on developing the project.
Iraq is in talks with Chevron Corp about taking part in the further development of the Majnoon oilfield and with Total about building a new 150,000 b/d refinery at Nassiriya.
Saudi Arabia: King Salman has sacked his top military commanders, including the chief of staff, in a series of late-night royal decrees. The king also replaced the heads of the ground forces and air defenses. No reason was given for the sackings, but they come as the war in Yemen drags on and is nearing the end of the third year of fighting. Crown Prince Mohammed bin Salman, who is also the defense minister, is believed to be behind various recent shake-ups.
The Crown Prince will be leaving next month for a three-week tour to drum up investment in his country. His agenda hasn’t yet been revealed, but sources say he will start his tour March 7 in London, then head to New York, Washington, San Francisco and maybe even Texas.
Nature magazine’s new study says Saudi Arabian oilfields are amongst the lowest carbon emitters on the planet. The study was conducted by Stanford University with funding from Saudi Aramco and focused on the producers that supplied significant amounts of fuel to China. Venezuelan fields were at the bottom of the list with carbon intensity measured at six times that of Saudi Arabia. This was likely due to PDVSA’s widespread use of “steam flooding” to increase oil flows.
Libya: Marathon’s subsidiary in Libya held a 16.3 percent stake in the Waha concession and the acquisition gives Total access to more than 500 million barrels of oil equivalent reserves.
China’s official gauge of manufacturing activity for February suffered its largest drop since 2011 leaving growth near the zero level. The manufacturing purchasing managers’ index published by China’s National Bureau of Statistics fell to 50.3, down a point from January. The fall marked the gauge’s nearest brush with the 50-point mark that separates growth from contraction since August 2016. China’s statistics bureau attributed the slowdown to the lunar new year holiday when migrant workers return to their home villages, and output typically dips. In 2017 the holiday stretched from the end of January through early February, while this year’s holiday fell entirely in February, making for an unfavorable comparison.
China eliminated or suspended 65 gigawatts (GW) of coal-fired power capacity in 2017, exceeding the national target of 50 GW, according to the Xinhua news agency. The Chinese want to eliminate or halt a total of 109 GW of coal-fired power capacity by the end of this decade while at the same time keeping its total installed coal-fired power capacity below 1,100 GW. However, coal remains China’s major fuel source because of inadequate infrastructures such as pipelines, storage, and electricity transmission lines that would raise the utilization of clean energy. Last year, China’s coal consumption went up for the first time since 2013, but coal usage as a portion of total energy consumption dropped by 1.6 percentage points to 60.4 percent.
China’s crude oil imports from the US hit a new record high of 474,450 b/d in January. The volume was significantly higher than the last record high of 289,443 b/d registered in November last year. Unipec, the trading arm of Asia’s largest refiner Sinopec, said it would raise its shipments from the US to China by around 80% to 10 million tons in 2018, from 5.57 million tons last year.
Just hours after an arbitration court ruled in favor of Naftogaz in a long-running payment dispute between the Ukrainian state company and Russia’s Gazprom, a fresh dispute over natural gas flared up on Thursday. Naftogaz said that Gazprom had not stood by its commitment to resume gas supplies, forcing Ukraine to reduce gas usage amid Arctic temperatures.
US and EU sanctions on Russia meant ExxonMobil had to leave a joint venture with Russian oil company Rosneft. Exxon said in an update to its 10-k filing to the Securities and Exchange Commission that it was complying with sanctions imposed in 2014 and expanded ones from the US government last year. Rosneft said on Thursday it would continue developing oil and gas projects on its own and would continue working with Exxon on projects which are not subject to sanctions. President Putin said last week that Russia needed to develop new technology to prospect for offshore oil and gas in the Arctic.
Nigeria’s aging and ill-maintained refineries are unable to meet domestic fuel demand and have made Nigeria the only OPEC member to import gasoline. As a result, Nigeria is the world’s largest gasoline importer. “We actually import one million tons of PMS (Premium Motor Spirit — gasoline) every month into a country that produces oil and gas and has a refinery.” In February the country imported $5.8 billion worth of gasoline in an attempt to alleviate the fuel shortages and end the queues at the gas stations in Nigeria.
The Trump administration is considering sanctioning a Venezuelan military-run oil services company and restricting insurance coverage for Venezuelan oil shipments to ratchet up pressure on socialist President Nicolas Maduro. A US official, close to the deliberations on Venezuela policy said he would not rule out an eventual full-scale ban on Venezuelan oil shipments to the US.
Discussion of new sanctions comes as Venezuela’s main opposition coalition is boycotting the upcoming presidential election, citing “fraudulent” conditions. Last week the country’s election board postponed the presidential vote from April 22 to the second half of May after an agreement between the government and some opposition parties.
If the US expands sanctions on Venezuela to restrict US exports of oil products that are crucial for diluting Venezuela’s extra-heavy oil, oil production would be close to a total collapse. Imports of naphtha from the US currently are some 2 million barrels per month. Oil production in the Orinoco heavy-oil belt depends on the imports of this heavy naphtha, which is blended with the thick extra-heavy oil to allow it to flow through pipelines. Without a source of naphtha, Venezuela’s oil industry would be close to a total collapse, causing still more hardships on its people.
The Venezuela state oil company PDVSA, which has borrowed more than $6bn from Kremlin-controlled Rosneft, caused consternation in Washington last year after putting up a 49.9 percent stake in its US-based refining subsidiary, Citgo, as collateral against a portion of the loan. To many in Congress, Moscow’s acquisition of a large US refiner was unthinkable.
Last week, Swiss commodity trader Mercuria asked the US Treasury for permission to buy out a $1.5 billion loan between Russia’s Rosneft and PDVSA, thus eliminating the prospect of Moscow taking control of refineries on US soil. Rosneft would face an uphill struggle to get approval to take over a stake in Citgo so a Mercuria buyout would avoid yet another problem between the US and Russia.
7. The Briefs (selections from the press – date of article in Peak Oil News is in parentheses – see more here: news.peak-oil.org)
LNG investments needed: Without new operations, the global market for liquefied natural gas could slip into a deficit by the middle of the next decade, Royal Dutch Shell said. Since 2000, the number of supplier nations has doubled, while those importing it quadrupled. By 2030, more than $200 billion of investment in liquefied natural gas is needed to meet the continuing boom in demand. But a decline in spending in the sector since 2014 as a result of weaker energy prices will create a supply gap from the mid-2020s unless new investments emerge. (2/27)
Offshore Norway, a quarter of a billion dollars in development contracts puts the Nova field in the Norwegian waters of the North Sea closer to production. Discovered in 2012, the field is expected to yield between 60 million and 140 million barrels of oil equivalents. (2/28)
Germany’s top administrative court has ruled that the country’s cities have the right to ban diesel cars — a move that could have far-reaching consequences. The ruling, pushed by the need for air pollution reduction, comes as a blow to the country’s automotive industry, which is bracing for a drop in demand for diesel cars. These cars accounted for 45 percent of new registrations in January last year. That share has since fallen to 33 percent. (2/28)
Israel’s energy minister said this week that the country aims to eliminate the use of coal, gasoline and diesel fuel by 2030. Speaking at an energy conference in Tel Aviv, Energy Minister Steinitz said the country’s manufacturing and transportation industries will be fueled entirely by natural gas, electricity and alternative fuels within the next 12 years. (3/1)
In Australia, Fortescue Metal and two Japanese utilities plan to build an LNG import terminal in New South Wales by 2020 to help alleviate an energy crunch in Australia’s most populous state. The supply crunch has come amid soaring gas exports that, as has happened with other major exporters, have shrunk local supplies, causing price spikes. In Australia last year, things got so bad that gas on the domestic market was much costlier than exports to Japan. (2/27)
In Papua New Guinea, production at a liquefied natural gas facility was shut down safely after a major earthquake last week. More than a dozen people were left dead after the island was hit with a 7.5-magnitude earthquake on Monday. (2/28)
Offshore Guyana, Exxon announced that a seventh oil discovery should support the eventual growth of oil production to more than a half a million barrels per day. During the fourth quarter, the company put the total reserve estimate at more than 3.2 billion barrels of oil equivalent, not counting the latest finds. (3/1)
Bidding for offshore Mexico blocks one month ago, Shell bid so aggressively for the Mexican blocks that it confounded industry experts; the company swept up nine of the 19 offshore blocks. Shell knew something no one else did. Six months earlier, its drilling rig had struck a giant oil reservoir, the Whale well, in the US side of the Gulf of Mexico. Calculating that this significantly increased the chances of the Mexican blocks also containing treasure, Shell delayed the announcement of the discovery until the day of the auction, after bids had been submitted. (3/3)
Canada’s First Nations are boosting investments and leveraging their clout with regulators to gain stakes in oil and gas projects as they seek greater returns on energy produced or transported across their territory. Aboriginal groups in Canada have traditionally played a more passive role in the energy industry, collecting royalties from oil and gas output. That model is changing. (3/3)
In Alberta, the provincial government said it would back a process called partial upgrading with an eight-year, US$780 million commitment starting in 2019. Partial upgrading reduces the thickness of the heavier type of crude oil found in the province, which can cut industry costs and improve refinery processing. It also increases the amount of product that can flow through pipelines. (2/28)
The US oil rig count increased by one to 800, or 191 over this time last year. The number of gas rigs, which rose by 2 this week, now stands at 181, or 35 rigs above this week last year. Canada lost another 4 rigs this week after losing 12 last week; the losses were 6 for gas, while oil gained 2. (3/3)
US crude oil production shattered a 47-year output record in November, and then retreated slightly in December, the Energy Information Administration said on Wednesday, as oil production from shale continued to upend global supply patterns. Oil output rose to 10.057 million b/d in November, according to revised figures from the EIA. December production fell 108,000 b/d to 9.949 million, the EIA said. November’s output was the highest on record, surpassing the 10.044 million b/d of crude produced in November 1970. (3/1)
Cleaning up the 94,096 oil and gas wells on US federal land after they stop producing could cost $6.1 billion, and taxpayers may need to pitch in, according to an analysis commissioned by conservation watchdog group ECONorthwest. The study released on Monday reflects one of the downsides to a years-long drilling boom that has made the US a top world oil and gas producer. (2/27)
Chesapeake Energy has class action lawsuits filed against it in seven states by landowners alleging underpayment of royalties. Much of the controversy surrounding royalty money boils down to post-production costs: the expenses of moving and treating gas through a network of pipelines. To cover the costs, drillers might take deductions from royalty checks. Some landowners agree to that, while others negotiate a lease that prohibits it. Many sign leases that don’t address it at all. (3/3)
Chevron, in its second climate change report, said its business is resilient to a number of scenarios the company has looked into, despite the push towards more renewable energy and less oil and gas. The company notes that most forecasts for global energy demand agree that demand for fossil fuel-generated energy will continue to rise in the coming decades, which means Chevron’s main products will not be forced out of the market by renewables anytime soon. (3/3)
Offshore royalties cutback? Top Democrats on the Senate and House natural resources committees urged the Interior Department to drop a proposed cut to offshore oil and gas royalties, warning such a reduction would shortchange US taxpayers. The Interior Department’s Royalty Policy Committee is due to evaluate a proposal to lower the royalty rate companies pay on petroleum produced in federal offshore waters to 12.5 percent from 18.75 percent – part of a plan by the Trump administration to encourage more US energy production. (2/28)
Biofuels movement? US President Donald Trump told rivals from the oil and corn industry gathered at the White House on Thursday that he supports changing the nation’s biofuels policy in a way that would limit costs to refiners while also expanding sales of ethanol. He supported capping the price of biofuels blending credits that refiners must acquire to comply with the RFS, while also expanding ethanol sales by raising ethanol content in gasoline. (3/3)
Biofuels kerfuffle? US Agriculture Secretary Sonny Perdue told an agriculture conference last Wednesday that he and President Donald Trump support the country’s biofuels policy, and that any reports to the contrary are “fake news.” Perdue made the comments a day after Trump hosted a meeting with Cabinet officials and senators to discuss potential changes to the Renewable Fuel Standard to help refiners who say they are struggling under the program. (3/1)
Jet biofuel: The International Air Transport Association has set an ambitious goal for its members: transporting a billion passengers on flights using biofuel by 2025. The goal is a demonstration of IATA’s efforts to help cut carbon dioxide emissions. However, the prospects of biofuel being used on a large enough scale to noticeably dent Big Oil’s income are remote. For starters, biofuel is costlier than regular jet fuel. (3/1)
Wind whopper: General Electric Co. said Thursday that it is planning to build what would be the world’s largest offshore wind turbine—a behemoth nearly three times as tall as the Statue of Liberty. GE said the Haliade-X turbine would be capable of producing 12 megawatts of electricity. (3/3)
MIT researchers have developed a new energy generating device called a thermal resonator: a device that draws heat from the air around it and turns this heat into electricity. It does not need to be in the sun, it could actually be put in the perpetual shade below a solar panel, and it would still generate power thanks to the always present temperature fluctuations. This is early days for the device, and the thermal resonator can only generate tiny amounts of power. But it is a promising gadget nevertheless as it has the hypothetical potential to make batteries obsolete. (3/3)
A year-2100 energy forecast? Dr. Euan Mearns, writing on the Energy Matters blog, looked at the expected increase in population and per capita energy consumption between 2015 and the end of this century, and concluded annual demand could top 29.5 billion tons of oil equivalent (TOE). That would be a 124-percent increase over current demand, raising questions over where the capacity will come from. (2/27)