Editors:   Tom Whipple, Steve Andrews

Quote of the Week

“Since the beginning of the shale revolution a decade ago, the world has discovered 110 billion barrels of oil. Meanwhile, consumption has totaled 360 billion barrels. This 250 billion barrel deficit between discoveries and consumption seems sure to grow in the years ahead, given recent oil discovery trends.

“It is understandable why people would be complacent about this scenario. After all, didn’t the world face similar risks a decade ago, only to have shale oil save the day? But it isn’t clear that there is another ‘shale oil miracle’ that is ready to save the day. There are indeed more high-cost oil resources out there that can be developed, but these projects take a long time to complete. That’s why we can look out two to three years and see an impending supply crunch. The longer investments in the industry remain depressed, the more unavoidable this scenario becomes.” Robert Rapier, a chemical engineer and industry commentator (3/23/18, in Forbes magazine)

Graphic of the Week

1.  Oil and the Global Economy

In a short trading week, oil prices closed mixed with London futures holding steady but New York declining on higher US oil output.  US oil prices continue to fall well behind world prices, as booming shale oil production deals with pipeline constraints, leading to the biggest discount to North Sea Brent in three years. On Thursday, the discount climbed to over $11 a barrel. The weekly US stocks report showed that while oil production grew by 44,000 b/d, a drop in US imports and a surge in exports to 2.1 million b/d resulted in a decline in US commercial crude inventories of 3.6 million barrels from the week before last.

The regional discount problem is not confined to Permian Basin oil production.  Western Canada Select consistently trades at a substantial discount to US futures prices. Last week the Canadian heavy crude was trading at only $41 per barrel or $25 below New York futures. These discounts are good for refiners and exporters but are causing problems for the drillers who are struggling to break even.

US natural gas futures are rallying to levels not seen in May since 2010 as hot weather boosts the demand from power plants and exports continue to increase. US storage of natural gas now is about 23 percent below the five-year average, the most for this time of year since 2014. Prices are heading towards $3 per million BTUs as the unexpectedly hot weather in May followed a cold April. The sudden temperature swing which demands more natural gas for heating and then cooling is hindering the normal seasonal ramp-up of the fuel going into storage.

Although the recent decline in prices is based on the possibility the OPEC production freeze will be modified or lifted and steadily increasing US oil production, many authoritative voices are saying that these developments will not be enough to prevent much higher oil prices later this year. It currently appears that Saudi Arabia and Russia are talking about adding somewhere between 300,000  and 1 million b/d to the world’s oil supply which should hold down prices. However, Goldman Sachs is arguing that inventories are already back down to the five-year average and that demand is being underestimated. Venezuela is losing production and infrastructure bottlenecks in the Permian Basin could foretell that US shale production for the rest of the year will not be as high as expected. Without OPEC and Russia increasing supply from current levels, inventories would fall “to historically low levels by the first quarter of next year”. In addition to the Venezuelan meltdown, growing tension surrounding the new US sanctions on Iran have led to Iranian threats to resume enriching uranium in the next few months. The impact of the growing US trade war with China is unknown, but some are suggesting this alone could force all prices towards $100 a barrel this summer.

The fundamental principle underlying the future of oil prices is that worldwide we are not finding as much oil as is being demanded at current prices and reserves are depleting faster than ever before. A supply crunch is coming. The only issue is when not if.  In the US, we’ve been drawing down inventories steadily February of 2017, because our net imports are not sufficient to meet demand.

The OPEC Production Cut: The cartel’s oil production dropped in May by 70,000 b/d to 32.00 million b/d largely due to militant attacks in Nigeria and the ongoing decline in Venezuela that dragged total production to the lowest level since April 2017. The decision that will emerge from the OPEC plus meeting to set new oil productions levels will depend on policy decisions in Moscow, Riyadh, and Washington. These three countries, each of which can produce over 10 million b/d or one-third of the world’s oil supply, have differing price objectives that will determine where the oil markets go in the immediate future. Russia and the Saudis would like much higher prices to help their lagging economies while President Trump is already demanding that OPEC increase production to keep prices lower before the US mid-term elections.

Washington is saying that there is so much oil in the world that its new Iranian sanctions, which kick in this fall, would not be significant. Tehran is saying that OPEC members at their meeting later this month should protect members targeted by US sanctions. The Iranian government is busy courting European, Russian and Chinese leaders for continued support of the nuclear agreement and is threatening to resume nuclear enrichment if Washington’s new initiative hurts its exports.

US Shale Oil Production: Drillers added two oil rigs in the week to June 1, bringing the total count to 861, the highest level since March 2015. The US rig count, an early indicator of future output, is much higher than a year ago when 733 rigs were active. However, decisions to activate or mothball rigs have to be taken at least several weeks in advance; we could be seeing a carryover from steadily rising prices last spring.

The surge in shale oil production continues to run into bottlenecks. From West Texas pipelines to Oklahoma storage centers and Gulf Coast export terminals, the delivery system for American crude is straining to keep up with production, limiting the industry’s ability to take full advantage of growing demand.  Last week Barclays analysts predicted, “a new shock” for energy markets as a lack of pipeline capacity near the Cushing, Okla. storage hub threatened the flow of oil. Pipeline shortages in the Permian basin, meanwhile, may not be overcome by new construction for another 18 months. These problems are undercutting the conventional wisdom that US shale oil production will stabilize global prices as crude exports from Venezuela and probably from Iran seem likely to decline.

The recent increase in oil prices to above $60 a barrel is helping oil companies refinance some $138 billion in debt due this year and a total of $400 billion is coming due before the end of 2019. Between 2012 and 2014 there was an “an irrational exuberance” going on when oil prices were high, and interest rates were low resulting in a surge of borrowing that must be paid back.  Conventional wisdom on Wall Street says that shale oil is profitable above $60 a barrel, but this may not be the case. As bottlenecks grow, many drillers are being forced to accept large discounts for their oil and the industry as a whole is far from profitable.

The Wall Street Journal recently reported that only five of the Top 20 US oil companies that focused on hydraulic fracking generated more cash than they spent in the first quarter of this year. This continues a trend that has been ongoing throughout the fracking boom where companies are spending $1.13 for every $1 they take in. While lenders are hoping that much higher prices will soon wipe out the massive debts drillers are accumulating, it could be a question of whether drillers are forced to default before the days of $100+ oil prices return.

2.  The Middle East & North Africa

Iran: Last week, Tehran’s most notable production was threats of what would happen to the world if its oil production is harmed by the new US sanctions. Iranian diplomats and media outlets have been active in lining up support from China, Russia, and India, while Tehran’s propagandists have been telling the EU that it is up to them to stop the impact of Washington’s sanctions immediately. Chinese and Russian state-backed companies are maneuvering to profit from European firms leaving Iran, threatening Washington’s effort to raise economic pressure on Tehran.

Iran’s Oil Minister Bijan Zangeneh said that France’s Total has 60 days to secure a waiver from the new US sanctions to stay in the multi-billion-dollar South Pars gas development project.  Total, the first supermajor to have returned to Iran after the previous sanctions were lifted, said it would not be able to continue the South Pars gas project and would have to unwind all related operations before November 4, 2018 unless US authorities grant it a waiver supported by the French and European authorities. This project waiver should include protection of the Company from any secondary sanction as per US legislation. As the US has few economic ties to Iran, it is the threat of secondary sanctions against any company doing business with the country that gives the US a significant potential impact on Tehran’s economy.

The biggest threat from the current confrontation is that Tehran could pull out of the 1968 Treaty on the Non-Proliferation of Nuclear Weapons (NPT) —a treaty in which 93 countries, including Iran, have vowed never to obtain nuclear weapons.  Two weeks before the U.S. sanctions were announced, a senior Iranian official said that Tehran might withdraw from the NPT treaty if President Trump pulled out of the nuclear agreement.

If the Iranians pull out of the NPT, it will signal that not only are they are going to resume their nuclear enrichment program but that they would be resuming the development of nuclear weapons. This, in turn, would increase the likelihood of a new arms race in the Middle East and increasing concerns about what Israel could do to stop an Iranian nuclear weapons program.

Saudi Arabia: Other than the negotiations over the fate of the OPEC+ production freeze agreement there was little news from Saudi Arabia last week. Saudi Aramco awarded a contract to Halliburton for unconventional gas stimulation services, as Saudi Arabia seeks to reduce further its domestic crude oil burn, freeing barrels for export or refining. The contract, which includes hydraulic fracturing and well intervention operations, will “further improve the economics of Saudi Aramco’s unconventional resources program,” Aramco said in a statement last week. In recent years, the Saudis have found it necessary to burn increasing quantities of valuable crude oil in their power plants to generate enough electricity for summer air conditioning.  New solar and natural gas programs are aimed at finding other sources of energy and stop the massive waste of burning raw crude in power plants.

Energy Minister Khalid al-Falih said last Friday Saudi Arabia is most likely to hold the initial public offering of stock in Aramco during 2019. This confirms a delay from the initial plan to list the company in 2018.

Libya:  Last week, the government announced a “maximum security” alert over possible terrorist attacks against oil ports and oilfields. The country faced oil production outages too, as severe weather caused turbines to stop working. Approximately 120,000 b/d was shut in as a result of that outage, at a time when Libya is trying to raise its production above the 1 million b/d mark.  Armed guards are now standing by at oil ports ready to thwart any terrorist attack in the oil crescent region—Libya’s most prolific oil area.

3.  China

The Trump administration sent a sudden, harsh message to its China last Tuesday, saying the US was moving forward with its threat to apply tariffs on Chinese imports and restricting Chinese access to sensitive US technology. The move surprised many observers after the White House said any trade war with China would be put on hold while negotiators worked on a deal that would reduce the $375 billion Chinese annual trade advantage by buying more US goods.  The White House said it would announce by June 15 a final list of $50 billion in Chinese imports that would be subject to tariffs of 25 percent. The next day, Beijing lashed back at the renewed threats from the White House, warning that it was ready to fight back if Washington was looking for a trade war.

At least five independent refineries in Shandong, China’s northern province, have been ordered to cut operating rates as Beijing aims for blue skies for a regional summit in port city Qingdao next month, showing that polluted air is still a top concern.  China typically takes such steps ahead of major political events to ensure they proceed with clear air. The cuts range between 30 percent and 50 percent of the plants’ capacities, removing about 45,000 b/d of processing capacity, a fraction of the 1.9 million b/d that independent refiners, known as teapots, imported in April.

China’s thermal coal prices jumped more than 4 percent last Tuesday and were on track for their biggest one-day gain since November 2016 due to strong demand by industrial and electric power plants. Despite efforts to switch to natural gas and renewables, China is still heavily dependent on coal to keep its economy growing at six-plus percent a year.

China’s carbon emissions are on track to increase at the fastest pace in more than seven years during 2018 according to Greenpeace. Carbon emissions in the country increased 4 percent in the first quarter of this year. If that pace continues, it would be the fastest increase since 2011.

4. Russia

An energy ministry official said last week that Russia would be able to raise its oil output back to pre-cut levels within months if there is a decision to unwind the production cut deal with OPEC and other producers. Moscow agreed to cut Russian output by 300,000 b/d from a 30-year high of 11.247 b/d starting in 2017.

Rosneft increased its crude oil production by 70,000 b/d last week, in preparation for an OPEC+ decision to start easing production quotas.  The company has a spare production capacity of between 120,000 and 150,000 b/d, and its average daily production during the first quarter was 4.57 million b/d. The company is still producing with the quota assigned it under the OPEC+ deal,  but the fast ramp-up is a clear indication Russia’s largest oil producer is eager to return to higher production now that oil prices are approaching $80 a barrel.

There’s been a lot of talk about the US efforts to use LNG to replace a share of Russia’s natural gas market in Europe. President Trump has pushed for U.S.-sourced LNG to become so much of the EU’s energy security that several European states, notably Germany, have accused the president of playing energy geopolitics, cloaking concerns for European energy security to the benefit of US LNG producers. Last week, however, Gazprom and the European Commission resolved a resolved a seven-year-old anti-trust dispute after Gazprom agreed to change its operations in central and Eastern Europe making it more likely that Russian natural gas will dominate the EU energy market for many years to come.

5. Nigeria

The flow of crude oil to the Forcados terminal is said to have resumed last week, but loading delays have continued to accumulate, also delaying the release of June and July loading programs. Two weeks ago, the Trans-Forcados pipeline that ships between 200,000 and 240,000 b/d of crude to the Forcados terminal was shut down for repairs of a minor leak. Trading sources said that loadings were delayed by at least one week. Two days later, the Nigerian subsidiary of Shell declared force majeure on Bonny Light on exports because of the shutdown of the 150,000 b/d Nembe Creek pipeline.

Shut-in pipelines have remained the most significant challenge to Nigeria’s oil production. Latest data from the Nigerian National Petroleum Corporation showed that about 163,000 b/d was shut-in for the entire month of December 2017. In January 2018, a total of 194 pipeline points were vandalized, 22 pipeline points were either failed to be fixed or ruptured/clamped. Thus, 216 pipeline points were destroyed during January against the 176 points recorded in the previous month. Port Harcourt-Calabar-Aba and Aba-Enugu pipeline segments accounted for 187 points or 86 percent of the affected pipeline points.  Last week Shell confirmed four leak points on the 100,000 b/d Trans Ramos Pipeline.

International Oil Companies operating in Nigeria may have devised a way to compel the Federal Government into changing its fiscal policy on the long-considered Petroleum Industry Governance Bill.  The IOCs have deliberately put on hold the Final Investment Decision on five offshore oil and gas projects to force the government to alter terms in the new bill deemed unfavorable to deepwater projects.  Estimated to be worth over $23.5 billion, the offshore projects were expected to assist Nigeria achieve a daily production of four million b/d. The decisions on these projects ought are supposed to be taken before the end of 2018.

6. Venezuela

During his inauguration speech, President Maduro said he would seek the help of OPEC to double Venezuela’s oil production, which is currently at 70-year lows. Maduro said the current production rate—about 1.5 million b/d—would need to increase by 1 million barrels daily by the end of this year.

India doesn’t plan to use Venezuela’s ‘petro’ cryptocurrency to pay for crude oil imports. India’s central bank has issued an order saying that it doesn’t allow trade in cryptocurrency. India’s average oil imports from Venezuela have recently slumped to their lowest level since 2012.

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

Airline executives are gathering in Sydney’s winter chill under the shadow of higher oil prices and a string of accidents after enjoying a near-spotless 2017 in terms of profits and safety. (6/1)

Kenya took a step toward building an export pipeline from its oil fields to the port city of Lamu with the award of an early-phase design contract. A third-party review found reserves in the South Lokichar basin of an estimated gross of 766 million barrels of oil, a 24 percent increase from earlier estimates. (5/31)

Offshore Senegal, there is a strategic interest emerging in oil where a project can break even at $35 per barrel, the chairman of Australian developer FAR Ltd. said.  With 11 successful wells drilled to date, plus the results from a recent geotechnical study, the company revealed another 198 million barrels added to the estimated 641 million barrels in the best estimate scenario of contingent reserves. (5/31)

For Angola, Total announced it’s made a $1.5 billion final investment decision to get more oil out of a field in the deep waters off the coast. Total leads a consortium developing the Zinia 2 offshore development in Block 17 of the Pazflor field. A budget of $1.2 billion will be used to tap nine wells connected to an existing floating production storage and offloading unit. Zinia 2 has a production capacity of 40,000 barrels of oil per day. (5/29)

South African secret: A natural harbor to the northwest of Cape Town keeps a secret that oil tracking professionals are still trying to uncover. The secret is exactly how much oil is in storage at any given moment at the Saldanha Bay array of tanks that can hold up to 45 million barrels. These tanks, unlike oil storage facilities elsewhere, are half underground, making it harder to collect enough satellite imagery to venture an estimate. Oil traders, apparently, appreciate this rare privacy of stocks. The Saldanha Bay storage hub is among the largest in the world. (5/31)

In Brazil, French oil major Total said on Wednesday that its plans to drill in the ecologically sensitive Foz do Amazonas basin were still alive, despite Brazil’s decision to reject its drilling application. It is the fourth time that Brazilian environmental agency Ibama has rejected that drilling application and requested additional information. (5/30)

Brazil received no bids in the first tender for a total 1.63 million barrels of crude extracted from the pre-salt zone. The state received the oil as payment from operators of fields in the zone and planned to sell it under three-year contracts. However, interest was lacking, with only Shell registering as a bidder. The lack of interest in the tender was likely a result of changes approved by parliament last week. Under the changes, companies can no longer sell crude at prices lower than those set in a reference range by the energy industry regulator, ANP. (6/1)

Brazil’s oil workers ended a 72-hour warning strike at state-led oil producer and refiner Petrobras a day early after a Labor Court judge increased fines for not adhering to an injunction prohibiting the walkout. (6/2)

LNG Canada: Malaysia’s Petronas said on Thursday it had agreed to buy a 25 percent stake in the LNG Canada project located in British Columbia. LNG Canada is a joint venture between Royal Dutch Shell Plc, PetroChina Co Ltd, Mitsubishi Corp and Korea Gas Corp. Upon completion, Shell will be the biggest shareholder with a 40 percent stake in LNG Canada. (5/31)

Canada will buy Kinder Morgan Canada’s Trans Mountain oil pipeline and its proposed expansion project in an attempt to ensure that it is built. Kinder Morgan had stopped all non-essential work on the $5.70 billion project in April, citing permitting delays and political opposition in British Columbia, and said it would scrap the expansion unless the legal challenges are resolved by May 31. Expansion of the Trans Mountain pipeline, which takes crude from Alberta’s oil sands to a facility in the Pacific province of British Columbia, has also faced opposition from environmental groups and some aboriginal groups. The minority left-leaning New Democratic government in British Columbia, citing the risks of a major spill, opposes the project.  So the central government is buying the stalled project and will sell it after completion. (5/29 and 5/30)

The US oil rig count added two rigs, growing to 861, according to GE’s Baker Hughes.  While that was the 8th increase during the last nine weeks, analysts do not expect any big changes in the rig count for the rest of the year.  A year ago, 733 oil rigs were active. (6/2)

US crude oil production hit a record 10.8 million b/d last week, while on a monthly basis, it peaked at 10.47 million in March, the EIA said. (6/2)

Exxon vs. Wall Street: ExxonMobil has outlined aggressive plans to step up spending and boost production. In March, Exxon said it would hike capital expenditures to $24 billion this year, $28 billion in 2019, and $30 billion between 2023 and 2025. All told, the company could spend $200 billion through 2025. Wall Street is clearly not impressed with the strategy. Exxon’s share price is off 11 percent since the start of 2017, while Chevron is up roughly 7 percent and Shell is up 27 percent. But Exxon may not have much of a choice other than to increase spending. Its production base has eroded, dipping in five of the last six years. (5/28)

Exxon Mobil Corp’s Darren Woods says his company is at the center of a delicate balancing act between those who want a cleaner environment and those seeking economic growth that depends on rising energy utilization. Exxon is planning to invest more than $200 billion in major oil and gas projects around the world over seven years, a signal that growth carries a bit more weight in company plans. (6/1)

Shell said on Thursday that it had started early production at a deepwater subsea development in the US Gulf of Mexico a year ahead of schedule and at a forward-looking, break-even price of less than $30 per barrel of oil. Shell began early production at the Kaikias development that has an estimated peak production of 40,000 barrels of oil equivalent per day (boe/d), adding more production in its key deepwater focus area, the Gulf of Mexico. (5/31)

EPA hits MPG: The Environmental Protection Agency on Thursday formally submitted its proposal to roll back rules that required automakers to nearly double the fuel economy of passenger vehicles to an average of 54.5 miles per gallon by 2025. (6/1)

Biofuel waivers: Continuing a national trend, the US’s second-largest oil refining company has recently requested a biofuel hardship waiver from the EPA. The waiver, if granted, would allow refining giant Marathon Petroleum Corp. to exempt one of its facilities from Obama-era federal biofuel quotas. This move coincides with a recent campaign by the EPA to expand biofuel waivers, to the delight of the oil industry and the equally strong dismay of the corn lobby and its 15 billion gallon a year corn-based ethanol market.  (5/31)

Fiat Chrysler will phase out diesel engines in its passenger cars sold in the Europe, Middle East, and Africa markets by 2021. The company, however, will still offer diesel in its light commercial vehicles across its brands. Company executives also laid out broad as well as brand-specific electrification plans—running the gamut from 48V mild-hybrids and high voltage hybrids, plug-in hybrids, and battery-electric vehicles. (6/2)

EV report: A report from the IEA on the global outlook for electric vehicles found sales passed 1 million last year, a record level and a 54 percent increase over 2016. Norway has the largest concentration, with EV sales accounting for 39 percent of new vehicle sales. While the global electric vehicle market is expanding, IEA reports the supporting metals and refining markets are becoming a problem. (6/1)

Power sector CO2 down:  Because of the increased use of natural gas, carbon dioxide emissions from the US power sector were at their lowest in 30 years. The US EIA reported total fossil fuel consumption in the national power sector was at its lowest level since 1994. EIA anticipates a 29 percent share for coal in total electricity generation in both 2018 and 2019, down from the 30 percent last year. The share for natural gas, meanwhile, grows from 32 percent last year to 34 percent through 2019. (5/30)

MidAmerican Energy, a company of Berkshire Hathaway, is on track to become the first investor-owned utility in the US whose electricity production from renewable source is equal to the electricity needs of its customers—if a major wind project gets the go ahead and is competed. The company is awaiting approval from the Iowa Utilities Board on a large-scale wind farm project, worth $922 million, which should be completed in 2020. MidAmerican will keep its gas-fired, coal, and nuclear power plants due to the intermittent nature of wind power generation. (6/1)