Editors:   Tom Whipple, Steve Andrews

Quote of the Week

“[T]he fortunes of energy companies are highly dependent on a single, highly-salient, well-understood, widely-available, plausibly exogenous factor – the price of oil….This is a market where firm value hinges to a large degree on observable luck, so the fact that we observe little filtering of luck from [the size of] executive pay is particularly striking.” Lucas W. Davis and Catherine Hausman, the Energy Institute in Haas

Graphic of the Week

[Editor’s note: we acknowledge that, visually, the growth rate in the figure above appears higher than the differential implies.  That said, we’re assuming that the Financial Times has it correct. Bottom line: the number of DUCs has tripled during the last two years.] 

1.  Oil and the Global Economy

Oil prices fell by another $1-2 a barrel last week to settle at $67.75 in New York and $76.83 in London as the struggle between lower demand occasioned by the Sino-American trade war balanced against falling Iranian exports.  Last week saw a storm in the Gulf of Mexico which did less damage than expected and a 4.3 million barrel drop in US crude inventories which brought them to the lowest since 2015.  However, prices were driven lower as US gasoline stocks rose by 1.8 million barrels and distillate stockpiles by 3.1 million barrels, suggesting that the summer driving season has come to an end.

Last week saw several stories in the financial press laying out the case for higher oil prices ahead.  Barclays now expects Brent to average $75 per barrel in 2020 and $80 in 2025.  The bank noted that the market is dramatically different than it was at this point last year.  The forecasts of the major financial institutions, however, are rather mild in comparison to those arguing for much higher prices ahead.

Most of these analyses focus on the Iranian sanctions combined with a generally tight oil market, rising demand and the over-dependence on steadily increasing production from the Permian Basin to balance the market.  Some believe there are limits to how much OPEC can increase production in response to falling Iranian, Venezuelan, and possibly Libyan and Nigerian exports.  Some see considerable potential for a military conflict in the Persian Gulf as Iran faces internal dissent due to falling oil exports.  Others talk about the lack of sufficient capital investment in finding new oil, but the consequences of this are still a few years off.  However, some are throwing around numbers, like $90, $95, or even $150 a barrel within the next year without having any real insight into which of many possibilities could cause a price spike.

The OPEC Production Cut: An OPEC and non-OPEC technical committee will meet on September 17th to discuss proposals for sharing the agreed-upon output increase of 1 million b/d.  There are four suggestions on how to distribute the increase, presented by Iran, Algeria, Russia and Venezuela, one of the sources said, suggesting agreement will not be straightforward.  One idea, to share it pro-rata among participating countries, is unlikely to be approved by Russia and Saudi Arabia since it would give them less than the supply boosts of 300,000 and 400,000 b/d that they respectively want, the source said.

OPEC, Russia and other non-members agreed in June to return to 100 percent compliance with oil output cuts that began in January 2017.  Months of underproduction in Venezuela and elsewhere had pushed adherence above 160 percent. The June meeting concluded with disagreement between Saudi Arabia and Iran, longtime rivals in OPEC.  Any proposals agreed to by the technical committee will be presented to ministers attending a monitoring meeting in Algeria on Sept. 23,

OPEC’s crude oil production hit a 10-month high in August, as Iraq including Kurdistan pumped at record levels and Libya recovered from weeks of port blockades.  The total OPEC-15 oil production came in at 32.89 million b/d last month, including 320,000 b/d output from its newest member, Congo, which joined OPEC in June this year.

US Shale Oil Production:  At a Barclays conference in New York last week The CEOs of Schlumberger and Halliburton said they see activity in the Permian slowdown.  Pipeline constraints have not yet curtailed production growth, but the oilfield service companies have already felt the impact.

Oil producers in the Permian Basin are increasingly turning to trucks and rail to ship the crude to refineries and export terminals on the Gulf Coast.  Crude oil production in the Permian is in the vicinity of 3.6 million b/d, while pipeline capacity out of the region is just 3.5 million according to Wood Mackenzie.  Crude is selling for as much as $10 more a barrel in South Texas, the Gulf Coast and other markets outside of West Texas.

Last week saw several critical newspaper stories on the future of the shale oil industry.  An opinion piece in the New York Times pointed out that the 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses.  In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.  Amir Azar, a fellow at the Columbia University Center on Global Energy Policy, calculated that the industry’s net debt in 2015 was $200 billion, a 300 percent increase from 2005.

Another recent publication uses Hubbert Linearization and concludes that US shale oil production will be down from 5 million b/d and will start to drop in a year or so to around 1 million by 2025.  This analysis is indeed not the industry’s nor the EIA’s appraisal of the situation, but the number questioning just how long the shale oil “bubble” will last is starting to grow given the lack of profits.

2.  The Middle East & North Africa

Iran: Tehran’s oil exports may have declined as much as 600,000-700,000 b/d in August, to as low as 1.66 million, according to the Wall Street Journal and SVB Energy International.  SVB expects Iran’s oil exports to fall as far as 0.8 million b/d by November. That will amount to the loss of nearly 1 million b/d from April, the month before Washington withdrew from the nuclear accord.  The supply disruptions have been more severe than many had expected because the US is taking a tough line on sanctions, sending signals that Washington will grant few if any, waivers to Iran’s customers.  This stance is making it difficult for Iran to find insurance for its shipments and financing for oil deals.

Resistance to Washington’s plans for Iran has come mainly from the EU and China.  However, there are limits to the EU’s influence over European oil companies who have interests in keeping good ties with the US and can purchase oil elsewhere.  The EU is preparing for the hit its economies will have to absorb once the full weight of Washington’s punitive measures comes into effect in the fourth quarter of this year.

India imported about 523,000 b/d of oil from Iran in August, down 32 percent from a month earlier, according to preliminary tanker arrival data.  Pompeo said Thursday that come November, however, the sanctions on Iran will “ratchet up to yet another level,” so that nations choosing to continue accepting imports of Iranian oil will face US sanctions themselves.  Washington will consider waivers for Iranian oil buyers such as India, but they must eventually halt imports.

Economies from North America to Europe and East Asia are seeing growing economic activity, causing global oil consumption in 2017 to rise by 1.5 million b/d, further tightening the market. As Tehran has already warned, OPEC will be unable to meet shortfalls if the US pursues its policy of reducing Iranian oil exports to zero.  This goal is highly unlikely, however, as China has refused to abide by the new US sanctions.

Iraq: Civil unrest fueled by anger against corruption and misrule by Baghdad spread across the south of the country last week as protesters stormed the Iranian consulate in Basra while others took workers hostage at a nearby oilfield.  After five days of deadly demonstrations in Basra in which government buildings have been ransacked and burned, protesters broke in and damaged the consulate’s offices, shouting condemnation of what many perceive as Iran’s sway over Iraq’s political parties.

Terminals in the Basra Gulf and Kurdistan-controlled Ceyhan in August combined for a record average of 4.028 million b/d of oil exports, representing a 4 percent increase from July.  The federal government exported 3.583 million b/d – its highest monthly average ever – and earned $7.7 billion on an average $69 per barrel.

Despite production and export figures showing a significant improvement, optimism is not warranted.  The country continues to head towards a major showdown between the two main political rival blocks, led by Prime Minister Al Abadi and former PM Al Maliki.  Both are currently in a race to lead the country while being confronted by internal and external threats.

Saudi Arabia: In the latest twist, the Saudis now want to keep oil prices between $70 and $80 a barrel as they try to strike a balance between maximizing revenue and keeping a lid on prices until US congressional elections, according to OPEC and industry sources.  Urged by President Trump to cool what was then a heating market, Saudi Arabia pledged June 23 along with the rest of OPEC, Russia and nine other non-OPEC partners to boost crude output by a collective 1 million b/d, in anticipation of supply shortages caused by US sanctions on Iran and Venezuela’s economic crisis.

The Saudis could earn $161 billion this year from oil exports, versus a budgeted $131 billion.  Financial services provider Al Rajhi Capital noted in a report that the economic growth of the Kingdom is doing well due to higher oil prices.  The company also forecast growth in non-oil revenues that will contribute to a further narrowing of the fiscal deficit, which the firm sees at around $22 billion, 58 percent lower than the budgeted deficit.

Saudi Aramco awarded Baker Hughes the first integrated services contract for the expansion of its offshore Marjan oilfield, the most significant development program this year.  This project is the first of three planned offshore expansions aimed at expanding its production capacity to offset natural declines at maturing fields.

Yemen’s Houthi rebels are claiming a successful attack on an unidentified oil facility belonging to Saudi Aramco in Jizan, according to a report from the Iranian state news agency.  The strike with Badr 1 missiles took place last week, two days after an earlier one that targeted a Saudi frigate in Jizan.

A senior adviser to Crown Prince bin Salman appeared to be confirming that the kingdom is considering digging a canal along the border with the Qatari peninsula, effectively turning it into an island. Reports of the canal first emerged back in April on a news website with close links to the Saudi royal family.  However, the official’s remarks were the most unambiguous reference yet that the Saudi regime is serious about the project.

Libya:  A ceasefire was signed between armed factions fighting over the Libyan capital, the United Nations announced last Tuesday, after more than a week of violence inside Tripoli. Dozens of people have been killed in fighting engulfing the capital as rival armed groups vie for power and money.

Some 400 prisoners escaped from a facility near the Libyan capital Tripoli during the fighting between militia groups in the city, police say. “The detainees were able to force open the doors” to leave the Ain Zara prison, the local police said.  They added that guards, fearing for their lives, were unable to prevent the breakout.  Many of the prisoners held at the Ain Zara prison in south-east Tripoli were supporters of the former Libyan leader Muammar Gaddafi and had been found guilty of killings during the uprising.

There were no reports of disruptions to oil production last week which is around 1 million b/d.

3.  China

China’s crude oil imports rose 6.5 percent in August from a month earlier to their highest since May, boosted by a rebound in demand from smaller, independent refiners.  Arrivals last month were 9.04 million b/d, according to the General Administration of Customs. This was up from 8.0 million b/d a year ago and 8.48 million in July. For the first eight months of the year, crude purchases stood at 299 million tons, up 6.5 percent from last year.

The White House is gearing up to hit China with tariffs of 25 percent on as much as $200 billion in Chinese goods, on top of the $50 billions of Chinese exports already facing 25 percent levies.  China has pledged to retaliate against US tariffs in “equal scale and equal strength.”

Chinese officials and executives of ExxonMobil Corp discussed a $10 billion investment by the US firm in the southern province of Guangdong, according to Chinese state television.  Exxon said last Thursday it signed a preliminary deal to build a petrochemical complex and invest in a liquefied natural gas terminal in China.  It said the investment would be worth billions of dollars but did not give a specific figure.

PetroChina is betting big on boosting natural gas production in line with the government’s policy to increase its gas production and use by industrial firms and residencies.  However, the planned production increases will not even come close to reducing China’s dependence on oil and natural gas imports—they are set to rise further as the country’s energy demand grows. However, less dynamic coal-to-gas switching, improved gas storage, and a boost in imports will help China avoid a repeat of the heating crisis seen in the past winter according to Wood Mackenzie analysts.

4. Russia

Russia’s oil production in August was virtually flat at 11.21 million b/d compared to July as Moscow kept output at a near post-Soviet record, after having reversed most of its production cuts under the OPEC+ deal the previous month.  After the OPEC meeting in June decided to ease compliance rates, Russia increased production in July and pumped at its highest level since the OPEC/non-OPEC agreement came into force in January 2017.  At 11.215 million b/d, Russia’s oil production in July was very close to the post-Soviet record-high of October 2016, the month used as a baseline for the production cuts.  Russia’s oil production in July increased by 148,000 b/d from June, according to government data.

Russia’s oil industry has plenty of cash and will be able to withstand the planned $15 billion in extra taxes over the next six years.  The government is looking for extra money to implement President Vladimir Putin’s pledges of higher social spending and better infrastructure over the next six years, expected to cost around $120 billion.  The new oil tax changes will see an increase in the mineral extraction tax and a gradual reduction in oil and oil products export duty.

5. Nigeria

Nigeria’s oil production fell by 14.56 million barrels in the second quarter.  The drop, which accumulated from 160, 000 b/d production shortfall was a result of 1.84 million b/d production average in the second quarter, a 3.95 percent decline between April and June.  This decline from a 2 million b/d average in the first three months of the year had also reduced the country’s economic growth to 1.50 percent year-on-year between April and June.

In recent weeks there have been threats by militant groups to resume disruption of oil production in the Niger Delta if the federal government fails to restructure the country.  Acting under the auspices of the Coalition of Niger Delta Agitators, militant leaders said new actions would be initiated against the interest of the Nigerian government in the Niger Delta region if the country remained the way it is.  In 2016, Nigeria lost hundreds of thousands of barrels of oil production each day following a series of militant attacks on oil facilities.

The Nigerian Navy has deployed 16 newly bought ships to the Niger Delta to guard critical oil infrastructure.  In August, a report from the Nigeria Natural Resource Charter revealed that the country had lost some $7.23 billion from theft during 2016 and 2017. Data from Chatham House suggests that in addition to oil theft in the Delta, Nigeria is also losing $1.5 billion a month from pirates stealing oil.  The situation is so bad that Nigeria has been ranked the world’s worst performer in terms of oil theft, ahead of Mexico, Russia, and Iran.

Shell has reportedly initiated negotiations with local oil producers for selling two of its Nigerian oil licenses in the Niger Delta, worth about $2 billion. After the sale, Shell will focus on its deepwater operations where the frequency of theft and threat of attacks on infrastructure are low.  Shell’s tenure in Nigeria dates to 1936 back when Shell D’Arcy was founded, the group’s first company in Nigeria.

6. Venezuela

Caracas’s production fell by 20,000 b/d to 1.22 million b/d last month.  Compared to August last year, Venezuelan oil production was down by 680,000 b/d.

A new analysis of the Venezuelan situation says that the most likely force that will cause a political change comes from bondholders and their lawyers as they move to seize the country’s foreign assets.  Venezuela owes about $65 billion US in outstanding bonds, according to Caracas Capital, a financial advisory firm.  That’s in addition to other debts owed by the government and state companies — an estimated total of about $150 billion US.  Holders of that debt include some of the biggest names in US finance, such as BlackRock, T. Rowe Price, Northern Trust, and the U.K.-based Ashmore Group.  Venezuela also owes tens of billions of dollars to Russia and China, after borrowing heavily from the two countries in recent years, mainly through oil-for-loan deals.

Venezuelan drivers faced long lines for gasoline in border states on Tuesday as the government struggled to roll out a new payment system that is supposed to reduce smuggling of heavily-subsidized fuel. The pilot program that began last Tuesday in eight states was supposed to provide service stations with wireless devices that use a state-backed identification document called the Fatherland Card to carry out fuel transactions.  The payment system will pave the way for charging international prices for fuel – a massive increase given that gas is now almost free.  Gasoline prices are set so low that the equivalent of $1 buys nearly 400,000 gallons of fuel. Experts estimate Venezuela – where shortages of food and medicine have fueled hunger, disease and a mass exodus of citizens – loses at least $5 billion per year as a result of not selling gasoline at international prices.

ConocoPhillips is still awaiting payment from Venezuela on a $2 billion arbitration settlement reached last month with the country’s state-run PDVSA.  Conoco suspended legal attachment efforts last month that had cut Venezuela’s oil exports from several Caribbean facilities following a deal that allowed Caracas 90 days to make an initial $500 million payment.  Conoco says it would resume its legal efforts to collect the debt if the payments are not made.

7.  The Briefs (selections from the press – date of article in Peak Oil News is in parentheses – see more here: news.peak-oil.org)

A wave of contaminated fuel that has clogged and damaged engines on between 200 and 300 oil tankers and container vessels in the past months has pushed shippers to demand stricter quality controls around the world.  The calls are shining a light on the notoriously opaque shipping fuel sector, where any contamination can spread quickly and be difficult to trace back to its source. That is because large volumes of fuel oil are blended with so-called “cutter stocks” by suppliers and sold through an extensive network of middlemen before finding their way into ships’ fuel tanks. (9/5 and 9/6)

Scotland’s leader Nicola Sturgeon launched on Friday a major renewable energy project boasting the world’s most powerful wind turbines, which she hopes will propel the independence ambitions of her nationalist party.  The 11,191-meter-high turbines in the waters of Aberdeen Bay will eventually produce 312 GWh of power a year – enough to power 80,000 households – helping to reduce Scotland’s reliance on its oil industry. (9/8)

Syrian sanctions: The US Department of Treasury announced sanctions against five Syrian companies and four individuals on allegations of facilitating crude oil shipments and financing to the Assad government. (9/8)

Qatar’s energy minister on Thursday called for oil-producing countries to boost investment in the oil and gas sector given a recovery in the price of oil, but said he did not back setting any specific targets for such investment.  The Minister said he expected the issue to be addressed during a meeting of OPEC and non-OPEC countries in Algeria at the end of the month. (9/7)

In Yemen, the governor of a southern province pumping 100,000 bpd—half of Yemen’s total oil production— threatened on Thursday to suspend oil shipments from the region if the internationally recognized Yemeni government doesn’t meet the demands of protesters in Yemen’s south who have been protesting against government policies as the economic and humanitarian situation continues to deteriorate and the local currency to plunge. (9/7)

Turkmenistan completed an upgrade of its largest electric power plant on Saturday, which it hopes will help boost exports and eventually allow supplies to Pakistan, which would require the construction of a new transmission line. The Central Asian nation, which sits on the world’s fourth-biggest natural gas reserves, has been hit hard by the plunge in global hydrocarbon prices and is seeking to diversify exports in order to increase its hard currency earnings. (9/8)

African boom: There are at least 41 billion untapped barrels of crude oil in sub-Saharan Africa, the US Geological Survey estimated two years ago.  During the downturn, oil companies bought licenses there and waited for the price environment to improve to advance their drilling plans. Independents such as Tullow Oil and Kosmos Oil expanded on the continent alongside supermajors such as BP.  Now, these drilling plans are gathering pace, Uganda is one of the hot spots.  Senegal, Kenya and even Namibia are other centers of attention. (9/7)

In Brazil, the outcome of their upcoming presidential election is astoundingly unclear, with scenarios that range from a winner from the far-right, center or left. The energy industry is certainly not at the core of the debate by any means, but there could be significant ramifications for Brazil’s oil and gas industry. (9/7)

Falkland’s kerfuffle: The Royal Navy of the U.K. has intercepted an Argentinian survey ship that a Navy commander suggested had been ‘snooping for oil’ on the edge of British territorial waters off the Falkland Islands in the South Atlantic.  Navy officials and experts called it a minor incident in an area with a long-standing territorial dispute between the UK and Argentina, who also staged a brief war over the Falklands in 1982. (9/7)

Ecuador loses court ruling: Chevron Corp said on Friday an international tribunal ruled in its favor in an environmental dispute with Ecuador, finding the South American nation had violated its obligations under international treaties.  The tribunal unanimously held that a $9.5 billion pollution judgment by Ecuador’s Supreme Court against Chevron “was procured through fraud, bribery and corruption and was based on claims that had been already settled and released by the Republic of Ecuador years earlier.” (9/8)

The US oil rig count fell by two to 860 on Friday while the gas rig count increased by two to 186, according to Baker Hughes data.  Canada’s oil and gas rigs for the week fell sharply, by 24, bringing its total oil and gas rig count to 204, with an 18-rig decrease for oil and a 6-rig decrease for gas for the week. (9/8)

In Powder River Basin, compared to the Permian, Big Oil has found less-congested pipelines, cheaper land, and more importantly, a whole lot of oil. It’s not the first time that the Powder River Basin has garnered industry attention.  In 2014, when oil prices were soaring, many industry players were already eyeing the basin as the next big thing, but when oil prices waned in the following years many drilling plans in Powder River were abandoned for established operations.  Now with higher prices for crude, there has been a renewed rush for land deals in oil-rich areas, and the Powder River Basin is no exception. (9/5)

Delta’s Trainer refinery: Delta Air Lines, parent of refinery owner Monroe Energy, is moving forward with strategic options to sell a 49% stake in its 190,000 b/d Trainer, Pennsylvania, refinery, but will continue to operate the plant. (9/8)

Oil industry executives are rewarded for the strong performance of their companies. This “pay-for-performance” model incentivizes CEOs to maximize company value. But in the oil and gas industry, much of a company’s value is determined by the price of oil, which is entirely outside of management’s control—in other words, pay is in part based on luck. (9/6)

Colorado ballot issue: Oil and gas companies have pumped millions this campaign cycle into an effort to defeat a Colorado ballot measure that would increase new drilling setbacks by five-fold and cripple the future of the industry there.  The pro-industry group Protecting Colorado’s Environment, Economy and Energy Independence, received $7.9 million during August alone, according to data from the state’s secretary of state.  If the ballot issue is approved, drilling setbacks would increase from the current 500-foot setback to 2,500 from all occupied structures as well as vulnerable areas, including waterways and parks. (9/8)

Fuel-switching: In the U.S., the capability of the manufacturing sector to switch the fuels it uses declined continuously between 1994 and 2014, according to the EIA.  Among the most commonly substitutable fuels used in manufacturing, the amount that could readily be switched in less than 30 days dropped from 24% in 1994 to 10% in 2014.  Shifting use of these energy sources was likely the result of increased availability of natural gas, generally lower natural gas prices relative to other fuels, and the ability of natural gas to comply with environmental regulations.  These factors led manufacturers to focus on natural gas use and to discount the value that fuel switching capability had provided in earlier years.  (9/7)

German EV’s launching: While it’s taken them two years to join the race, German automakers are poised and ready to take on Tesla during a particularly vulnerable time for the electric carmaker.  Mercedes-Benz is set to unveil its much-anticipated electric SUV on Tuesday.  Then BMW will be flying the autonomous iNEXT electric crossover to press events in Munich, New York, San Francisco, and Beijing.  Audi will unveil its first all-electric SUV at a world premiere in San Francisco on Sept. 17. (9/5)

North American railroads have begun to invest in improving rail efficiency and better infrastructure due to in part to increased demand from coal shipments.  Canadian National will buy an additional 60 locomotives from GE after ordering 200 in December 2017, citing demand for higher rail capacity from commodities, the railroad said Wednesday. (9/8)

US offshore wind growing: The US East Coast is leading the nation’s charge toward developing an offshore wind industry, and while the country only has 30 MW of offshore wind capacity installed currently, if goals are met and announced projects are built, the East Coast could have nearly 9 GW of offshore wind capacity by the 2030s. (9/8)

Pushing batteries: China is looking to boost its energy storage market and projects as it adds growing renewable power capacities.  At the end of last year, the Chinese authorities issued a unified national policy to boost the energy storage industry that has been lagging behind other countries despite the fact that China is leading global investments in renewable energy. Also thanks to the central government policy boost, and to some regional storage policies, China added nearly as much battery storage capacity in the first half of 2018 as it had in total at the end of 2017. (9/3)

The California Fuel Cell Partnership’s (CaFCP) 2030 vision statement describes a self-sustaining market in 2030 for fuel cell electric vehicles and renewable hydrogen, and the strategic priorities necessary for realizing it. The CaFCP document envisions 1,000 hydrogen stations enabling upwards of 1,000,000 electric vehicles on California roads in 2030.  As of July 2018, nearly 5,000 fuel cell cars are already on the road in California. These first adopters currently have access to 35 retail hydrogen stations, with another 29 stations in development. (9/6)

Global emissions risk: The world is not making nearly enough progress in reducing greenhouse gas emissions to achieve the goals for limiting global warming agreed at the Paris climate summit in 2015, a group of political and business leaders has warned. The Global Commission on the Economy and Climate said on Wednesday the next decade or so would be “a unique ‘use it or lose it’ moment in economic history”, creating an opportunity to put the world on a path of low-emissions growth.  If that opportunity was not grasped, however, the group warned that “by 2030 we will pass the point by which we can keep global average temperature rise to well below 2C”, the objective set at Paris. (9/6)

Solar HR&D: A new study, led by academics at St John’s College, University of Cambridge, has used semi-artificial photosynthesis to explore new ways to produce and store solar energy. They used natural sunlight to convert water into hydrogen and oxygen using a mixture of biological components and manmade technologies.