Editors:   Tom Whipple, Steve Andrews

Quote of the Week

“As a matter of our policy, we want to end all of those subsidies [for electric vehicles].  And by the way, other subsidies that were imposed during the Obama administration, we are ending, whether it’s for renewables and so forth…It’s just all going to end in the near future. I don’t know whether it will end in 2020 or 2021. Larry Kudlow, White House economic advisor

Graphic of the Week

1.  Oil and the Global Economy

Oil prices surged briefly on Friday after the announcement of a 1.2 million b/d OPEC+ production cut; however, by the close NY futures were up only $1.61 to close at $52.61, and London was up about the same to close at $61.67.  The bulk of the cut is to come from the Saudis and their Gulf Arab allies.  Moscow is to cut production by 228,000 b/d but does not expect its cuts to start until spring, and the Iranians were exempted from the cut.  Despite the announcement, oil prices were still down slightly for the week.

Last week was marked by concerns that the OPEC+ coalition would be unable to agree on an adequate cut or even any cut at all.  Prices fell almost 3 percent on Thursday after the first day of the OPEC meeting ended with only a tentative deal to tackle weak prices.  Analysts had only been expecting a cut of 1 million b/d, so the extra 200,000 barrels came as a surprise and led to a price rally.  The cuts are not to start until the first of the year, and even Russian Energy Minister Novak admitted that the markets would be oversupplied for the first half of the year.

Opinions are split over the efficacy of the production cut with some saying that a fully-implemented cut will clear the oversupply while others fear that growing US shale oil production will offset the cuts.

The state of the global economy is still of concern to many oil traders.  With signs of an economic slowdown coming in Asia, Europe, and the US, a million b/d production cut may not be enough to offset a drop in the demand for oil products if the economic situation turns really sour.

The OPEC+ Production Cut: The story of last week’s OPEC meeting seems to be one of concessions on the part of the Saudis who are taking by far the largest share of the cut while giving in to demands for exemptions by Iran, Libya, and Venezuela.  Moscow stated its opposition to a reduction several times in the last few weeks, but in the end, agreed to a slow starting cut of 228,000 b/d.  The Saudis were under pressure from President Trump who kept tweeting his opposition to any production cut that might drive prices higher. The Khashoggi affair and anti-Saudi bills floating around the US Congress are yet another aspect of the pressures the Saudis are facing.  Following the meeting, Saudi energy minister Khalid al-Falih tried to calm Washington by saying “We try to keep the market within a reasonable band for consumers.”

US Shale Oil Production: Unless the OPEC+ production cut results in a significant retracing of the nearly $25 a barrel drop in oil prices that has taken place in the past two months, next year may not be a good one for US shale oil producers.  Oilfield service companies this year have been hit by a slowdown in demand as regional oil prices have fallen with transportation bottlenecks faced by producer customers.

Schlumberger expects sales in the US to drop 15 percent in the final three months of the year compared with the third quarter due to several factors including the swift decline in crude prices, exhausted exploration budgets, and maxed-out pipelines moving oil from the Permian Basin.  “We are seeing a significantly larger drop in activity than we expected,” said Patrick Schorn, executive vice president of wells at Schlumberger.

The cost of producing shale oil vs. its selling price is still a major issue despite the boom in shale oil production.  Despite boasts of low breakeven prices, many shale companies have failed to take a comprehensive look at the all-in expenses of producing oil.  According to the Wall Street Journal and consulting firm R.S. Energy Group, accurate breakeven prices that incorporate costs such as land acquisition come out to about $51 per barrel in the Permian, $57 per barrel in the Eagle Ford, and $64 in the Bakken.  Most of the oil and gas pipelines planned for 2019 and 2020 will connect the Permian Basin with consumers and export terminals in the Gulf of Mexico.  Until those pipelines arrive, shale oil producers in the Permian basin will continue receiving $10 to $13 less for each barrel compared to WTI levels. With oil trading in the low $50s, it is evident that little money is being made to generate the dividends that will attract new investment for capital expansion.

Unless oil prices rise above $100 a barrel again and stay there, it is difficult to foresee a future in which the US shale oil industry continues to produce oil at the pace various government agencies are predicting.

A new US Geological Survey study estimates undiscovered, technically recoverable resources in Wolfcamp and Bone Spring Formations in Permian Basin are more than two times larger than the size determined in a 2016 study. The Wolfcamp shale and overlying Bone Spring Formation in the Permian Basin contain an estimated mean of 46.3 billion barrels of oil. In addition, the USGS analysis finds that the Wolfcamp holds 281 trillion cubic feet of natural gas and 20 billion barrels of natural gas liquids. The Geologic Survey says that the higher estimate of recoverable oil comes from recent innovations in hydraulic fracking.

The new report was hailed by the Secretary of the Interior as proof that “American energy dominance is now within our grasp as a nation.” The CEO of the API commented that “Now the world’s largest producer of natural gas and oil, the United States is a global energy leader at the same time we are driving down GHG emissions.”

2.  The Middle East & North Africa

Iran: Tehran was spared the pain of cutting production under the new OPEC agreement ostensibly because of the US sanctions.  Given the problems facing Iran’s oil production under US sanctions in the coming year the 2.5 percent cut that was applied to most OPEC members likely will turn out to be insignificant.

Iran hopes that the special purpose vehicle that would allow the European Union to continue buying Iranian oil despite the US sanctions will become operational by the end of the year.  The “special purpose vehicle” is to act as a cut out for European buyers of Iranian oil, allowing the EU refiners to buy oil with Iran without having to pay Iran directly.

Although Iraq would like to take over a large share of Iran’s oil exports, Baghdad’s overwhelming dependence on Iranian natural gas for its power stations gives Tehran considerable leverage.  Last summer, when Baghdad was late with payments for the Iranian gas, Tehran turned off the flow, which led to power outages, which, in turn, ignited the protests that shook southern Iraq.

Iranian President Rouhani yet again threatened to close the Strait of Hormuz, which affects some one-third of all global oil shipping as it’s a key transit choke point in the Persian Gulf.  On Tuesday Iranian state broadcasts carried his words, saying “if someday, the United States decides to block Iran’s oil (exports), no oil will be exported from the Persian Gulf.”  He further vowed that the United States would not be able to prevent Iran from exporting its crude.

Iraq: Oil revenues fell steeply in November, as exports fell by an average 85,000 b/d.  Even the resumption of Kirkuk oil sales via Turkey was not enough to offset southern export disruptions and sinking oil prices.  For the first time in more than a year, Baghdad exported oil northward to Turkey’s Kirikkale refinery. But those gains were more than offset by a 3 percent drop in exports via the Basra Gulf, from 3.47 million b/d in October to 3.36 million b/d in November.

Improvised explosive devices were found in the vicinity of two oil fields in southern Iraq last week, as renewed protests over a lack of jobs and services continued. There were no casualties or operational interruptions at any of the impacted fields.

Saudi Arabia: At the end of the OPEC meeting last week Saudi Energy Minister Falih said Saudi Arabia’s oil production would fall to 10.2 million b/d in January, down from 10.7 million b/d in December as it takes the largest reduction as part of the1.2 million b/d production cut agreement.   A 500,000 b/d cut would be about 60 percent of OPEC’s share of the cut leaving the other Gulf oil producers and Nigeria to cut most of the remaining 300,000 b/d.  Iran, Libya, and Venezuela are exempt from the cuts.

Members of the Organization of the Petroleum Exporting Countries are upset over the close ties between Saudi Arabia and Russia as the group looks to cut output to offset falling crude prices.  OPEC delegates say they are growing increasingly concerned that Saudi Arabia is giving nonmember Russia too much leverage over prices, OPEC officials are saying.  Many cartel members, including Venezuela, Algeria, Kuwait, and Nigeria, feel sidelined as the bond between the world’s two largest oil exporters strengthens and together, they make the decisions affecting all of OPEC’s members.

Libya:  Tripoli’s oil production has fallen by about 300,000 b/d since the start of this month due to the closure of export terminal amid harsh weather and full storage tanks.  Libya has been suffering severe rainfall that closed all its oil export terminals along with roads.  Flooding and high waves on the coast made the docking of tankers impossible, stranding more oil in storage.

3.  China

China’s imports of crude oil hit a new monthly high of 10.43 million b/d in November, beating the record set in October of 9.61 million on heavy buying from private refiners and startup of new mega-refineries.  For the first 11 months, China imported 418.11 million tons of foreign crude oil, or 9.17 million b/d, putting it on track to make this year a record high for imports.  Chinese oil imports from Iran are expected to rebound this month from the lows of October and November as China’s state-held companies have already started to use US waivers to continue importing Iranian oil.

China’s consumption of oil products rose 4.1 percent year on year to 28.13 million tons in October, according to data released by the National Development and Reform Commission. The growth was mainly led by gasoline consumption, which rose 11.1 percent year over year, while gasoil consumption fell 2.2 percent over the same period.  Over January-October period, China’s oil product consumption was up 5.3 percent on year, with consumption of gasoline rising 6.9 percent and gasoil rising 3.1 percent.  The oil product consumption growth in the first ten months was slower than the 6.8 percent year-on-year increase seen in the same period of last year.

A number of the concessions that officials in Washington claimed to have secured from the Chinese president were either unsupported by any official confirmation from the Chinese side or were mired in confusion.  Doubts about the solidity of the deal rose when it was announced that Robert Lighthizer, the US trade representative who is considered to be a hardliner on China, would be leading the upcoming talks.  However, Unipec, the trading arm of Sinopec, plans to resume imports of US crude oil during the 90-day trade truce window, as the tentative halt to additional tariffs and lower oil prices are making American oil attractive again.

Although crude is not on China’s tariff list, Chinese buyers have been staying away from US crude oil purchases since the summer, when the trade war escalated.  According to the EIA, the US didn’t export any crude oil to China in August and in September, compared to 384,000 b/d in July and a record-high 510,000 b/d in June.

4. Russia

Russian oil production was 11.37 million b/d in November, down from the post-Soviet record high of 11.41 million in October, accord to data released by the Energy Ministry last week.  At the OPEC meeting last weekend, Russia agreed to accept a 2 percent cut based on the October high of 11.4 million b/d.  This equates to a reduction of 228,000 b/d.  Moscow said it would reach this commitment gradually due to winter demand and technical conditions.

The seizure by Russian forces of three Ukrainian vessels and their crews in the Kerch Strait at the entrance to the Sea of Azov has turned a harsh spotlight on the Nord Stream 2 gas pipeline project.  Some European lawmakers suggested curtailing the project to punish Moscow for its seizure of Ukrainian ships.  However, Berlin’s foreign minister said last week that Germany would not withdraw its support for the Nord Stream 2 gas pipeline project.

Nord Stream 2 has been contentious since its inception in 2015 because it would deprive Ukraine of most of the estimated $2 billion it earns annually in gas transit fees.  It is opposed by the US, while most of eastern Europe is also against it.  Concern has also been expressed by France, the UK, Sweden, and Canada.  Last month lawmakers in the German and European parliaments signed a letter to Angela Merkel asking her to stop the pipeline.  Last week, all three candidates to replace Merkel as leader of her Christian Democratic party spoke out against the pipeline.

6. Venezuela

Russia will invest $5 billion to raise Venezuela’s oil production by 1 million b/d under a new economic agreement, Venezuelan President Maduro said last Thursday.  The deals would involve joint ventures between Venezuela’s state-owned company PDVSA and its Russian partners in Venezuela, although Maduro did not specify which companies would be involved.  Maduro also said Russia would supply 600,000 tons of wheat to Venezuela in 2019 and signed mining contracts, including a $1 billion investment for the production of gold.  Observers are skeptical that $5 billion will go very far in healing Venezuela’s oil production problems which include the lack of diluent for its heavy oil, unreliable power, human resources, and the lack of sufficient cash flow.

White House officials are urging Trump to hit Venezuela with sanctions that could further cripple its state-owned oil company PDVSA.  The 30 percent decline in crude prices over the last two months could embolden the president.  Trump had avoided sanctions on Venezuela’s oil sector for fear of causing a price spike. For now, it appears that the US is still reluctant to do anything that would contribute to higher oil prices.  In September, the US imported 650,000 b/d of Venezuelan crude.

Venezuelan officials are traveling to London with plans to meet with the Bank of England over the repatriation of $550 million in gold held in the bank’s vaults.  The Maduro government wants gold back to Venezuela because of fears it could be caught up in international sanctions on the country and seized to satisfy a court judgment.

Venezuela’s President Maduro said that Venezuela would put in place in 2019 a program to sell all its oil production in the Petro cryptocurrency, which the leader is touting as the first state-backed oil-backed digital currency. According to Maduro, Venezuela will free itself from the dollar which used by Washington “to create economic pain” to other countries, and to “persecute countries, as it does with Venezuela, Cuba, Iran, and Russia.”  The Petro, however, is seen by analysts and experts as nothing but a scam and another effort by Venezuela to skirt sanctions and mask the inability to overhaul its economy.

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

In the Netherlands, gas production at the earthquake-prone Groningen field will drop by at least 75 percent in the next five years, ahead of schedule towards the projected end of extraction.  The Dutch government decided this year to shut down in 2030 what was once Europe’s largest natural gas field because decades of extraction had caused dozens of earthquakes each year, damaging thousands of homes and buildings. (12/4)

France’s cancellation of the fuel tax increases this week in the aftermath of increasingly violent protests signaled the perils and political headwinds that governments worldwide may face as they try to wean their citizens from fossil fuels. The French government’s tax increase, written into law before President Emmanuel Macron was elected, proved a tipping point for hard-pressed families already laboring under some of Europe’s highest overall tax burdens. (12/7)

In Azerbaijan: Exxon Mobil and Chevron are seeking to sell their stakes in that nation’s largest oilfield, marking the retreat of the US majors from the former Soviet state after 25 years as they re-focus on domestic production. (12/5)

From Australia, exports of LNG from the east coast during November were the second highest since shipments began at the beginning of 2015 as volumes to China set a record. (12/6)

Argentina’s state oil and gas company YPF and Malaysian Petronas will invest jointly $2.3 billion in an oil production project in the Vaca Muerta shale play, one of the largest in the world. The project envisages daily production of 60,000 barrels of crude oil and gas, to be reached by 2022. The two companies have already spent $550 million on exploration in the La Amarga Chica area and have achieved production at a daily rate of 9,800 boe. (12/6)

Offshore Cuba, Australia’s Melbana oil exploration company, which has rights in an area known as block 9, will now also work to enhance production from the separate Santa Cruz offshore field, which has been producing oil for over a decade. Cuban production of crude oil in 2017 was about 50,000 b/d.  Its consumption was about 172,000 b/d in 2015, which means it is dependent mostly on imports with Venezuela playing a key role. (12/6)

If Mexico halts auctions for two years as President Andres Manuel Lopez Obrador plans, its crude output will only reach 2.46 million b/d by 2027, not 3.07 million b/d, the previous administration said in a transition report. (12/5)

In Alberta last week, with the market saturated and prices depressed, the premier announced that her government would temporarily curtail the province’s oil production, chiefly from the tar sands.  There isn’t enough pipeline capacity to ship the crude to market.  New oil sands projects that were planned years ago have continued to come online over the past year, boosting production. Those projects were launched with the expectation that new pipelines would be completed by now. But most of the major pipeline proposals have been either delayed or canceled. The result has been a glut of oil filling storage tanks in Canada. (12/7)

In Canada, the pipeline shortage that has been strangling the oil industry is weighing on spending plans for next year, with Canadian Natural Resources slashing its capital budget for 2019 by $750 million, due to the lack of shipping options. (12/6)

Canada’s central bank plans to hold special, targeted meetings with members of Canada’s energy industry to discuss how the situation will affect their plans for investment and determine whether layoffs are a possibility. (12/7)

The US oil rig count declined by ten last week to 877, the biggest such cut since May 2016, according to Baker Hughes.  The number of gas rigs increased by nine to 198, making a total rig count of 1075.  Year-to-date, the total number of oil and gas rigs active in the United States has averaged 1,029.  That keeps the total count for 2018 on track to be the highest since 2014. Canada’s oil and gas rigs for the week decreased by 17 rigs this week after losing five rigs last week, bringing its total oil and gas rig count to 186, which is 33 fewer rigs than this time last year. (12/8)

US oil exports: The Louisiana Offshore Oil Port (LOOP) is pushing out the most oil it’s shipped in any one month since the terminal began supertanker exports in February—three Very Large Crude Carriers carrying 6 million barrels of oil overseas.  LOOP’s ability to handle VLCCs could help the US exceed 3 million barrels a day by this time next year.  The dramatic rise in LOOP exports this month could be a fluke caused by fewer incoming tankers. (12/8)

Oil exports #2: The US became a net oil exporter last week for the first time in 75 years, and even if it is likely to be for just one week, the achievement highlights the increasing global influence of the soaring US crude oil production. (12/7)

Pipeline boom: Globally, the US ranks no. 1 in pipelines planned and under construction.  Most of the oil and gas pipelines planned for 2019 and 2020 will connect the Permian Basin with consumers and export terminals in the Gulf of Mexico. Until those pipelines arrive, shale oil producers in the Permian basin will continue receiving $10 to $13 less for each barrel compared to WTI levels. (12/6)

The NYMEX January natural gas futures contract jumped 16.1 cents to settle at $4.48/MMBtu Friday as current and upcoming weather trumped a storage withdrawal that was largely in line with the five-year average. (12/8)

New chemical hub: Royal Dutch Shell gave the green light to a massive $6 billion ethane cracker facility just outside of Pittsburgh, one of numerous planned petrochemical facilities for the region. Taken together, the chemical and petrochemical boom could turn Appalachia—a region exporting inexpensive natural gas—into a new “hub” of sorts of plastics and other petrochemical products.  The federal government is hoping to egg this on. The Department of Energy just published a report for the US Congress trumpeting the case for a new petrochemical hub. (12/7)

The Trump administration published documents last week detailing its plan to roll back Obama-era protections for the vast habitat of the greater sage grouse, a chicken-like bird that roams across nearly 11 million acres in 10 oil-rich Western states. (12/7)

Biofuels downside: Biodiversity conservationists have revealed that at least ten percent more land than what is currently being used to grow green crops will be required to successfully replace fossil fuels with alternatives derived from natural sources such as biofuel. The increase in the need for land for energy-related uses could undermine natural habitats across the world. Some scientists also argue that there is not enough marginal land left to grow enough biofuels to replace fossil fuels significantly. (12/7)

Nukes in Argentina? Russia signed a new nuclear cooperation agreement with Argentina, which is already negotiating with China about building nuclear reactors.  The deal is not a contract to build nuclear reactors, but a framework agreement like ones Russia has signed with many countries. (12/5)

Killing EV/RE subsidies: White House economic adviser Larry Kudlow said on Monday the US will end subsidies for electric cars and other items including renewable energy sources. Kudlow said he expected subsidies for buying electric cars will end in 2020 or 2021. (12/5)

In Georgia, South Korea-based SK Innovation, a developer of lithium-ion batteries for electric vehicles, will invest $1.67 billion to build a new electric vehicle (EV) battery manufacturing plant. (12/5)

E-buses, taxis, and trucks: Some Chinese automakers have emphasized commercial EV development because they hope an early lead in the segment could eventually translate into success in the larger passenger market—and having almost no foreign competition at home for commercial EVs has helped them build early momentum. (12/3)

Electric aircraft: Amprius, Inc., a manufacturer and developer of high energy and high capacity lithium-ion batteries, announced that the company is supplying advanced lithium-ion cells to the Airbus Defense and Space Zephyr Program. Using Amprius’ cells, which contain a 100% silicon anode, the unmanned Zephyr S flew more than 25 days, setting a new endurance and altitude record for stratospheric flight. (12/6)

The world’s greenhouse gas emissions are rising at a faster pace in 2018 than they did last year, the latest evidence that planet-warming pollution is proliferating again after a three-year lull in the middle of the decade. (12/6)

Global carbon dioxide emissions are accelerating at their fastest pace in seven years and hit a record high in 2018, despite pledges by nearly 200 countries to limit global warming to well below 2C.  Carbon emissions rose 2.7 percent in 2018 mainly due to emissions growth in China, India and the US.  The data come as the annual UN climate talks are underway in Katowice, Poland. (12/6)

Royal Dutch Shell will set carbon emissions targets next year and link these to executive pay, reversing its chief executive’s opposition and following intense pressure from shareholders who want fossil fuel companies to take greater responsibility for their contribution to global warming.  Investors such as the Church of England and Robeco have pushed Shell to make firm commitments to cut its carbon footprint, saying last year’s announcement of a long-term “ambition” to halve carbon emissions by 2050 did not go far enough. (12/3)