Editors:   Tom Whipple, Steve Andrews

Quote of the Week 

[about proposed seismic testing off the east US coast] “Almost every single one of those states is pretty adamant about not wanting that activity off their shore. The administration is pushing through the industry agenda on expanded oil and gas leasing despite all evidence that other stakeholders have other viewpoints about the appropriateness and the scope of that activity.” Elizabeth Klein, deputy director, State Energy and Environmental Impact Center, NYU School of Law

Graphic of the Week

1.  Oil and the Global Economy

Oil prices fell by more than 11 percent last week to their lowest since mid-2017 with London futures closing at $53.82 and New York at $45.59.  There is much debate as to whether the rapid fall in prices is due to oversupply or fears of a global economic recession slowing the demand for oil.  Forecasts of rapidly growing US shale oil production next year that could offset much of the OPEC+ production cut and growing political chaos in Washington, London, Paris, and other world capitals is adding to concerns about the future.

While most financial institutions are forecasting lower oil prices next year, a few are looking for a price rebound to $70 or $80 a barrel as the OPEC+ production cut comes into effect.  Add this to reports that the Saudis will cut more than expected, Venezuela continues to implode, Libyan production is down by a third, and given the selling price of crude, US shale oil production may not increase as much as government forecasters are predicting.

Outside of consumers happy with low gasoline prices, and the boost that low energy costs always give to industry’s bottom line, the major consequence of the 40 percent oil price decline is what it will do to US shale oil production in the coming year.  Some observers are calling the situation a “bloodbath” for shale oil producers noting that at $45 a barrel or lower, nearly all the independent shale oil producers are losing a substantial amount on nearly every barrel they produce.

Some of this gloom can be mitigated by the increasing involvement of the major international oil companies such as Exxon and Chevron into production from the Permian Basin.  These firms have multi-billion-dollar profits from their conventional oil operations and can afford to wait for the higher oil prices that are sure to come in the next decade. These firms have no need to convince investors to lend them more money by using dubious accounting procedures and are attracted by the speed at which shale oil wells can be brought into production, in contrast to the years and billions of dollars involved in deepwater offshore oil production which is about their only alternative these days.

In recent years, a handful of observers have begun expressing fears about what will happen to global diesel production.  These concerns are based on the premise that as an ever-increasing share of global “oil” production is coming from unconventional sources such as shale oil and natural gas liquids which in general are not suited for producing diesel, the industrial fuel that keeps trucks, farm tractors, ships, some trains, and many automobiles running.  Observing a decline in global diesel production is difficult because some refineries that have access to cheap natural gas can turn heavy oil into the lighter “middle distillates” such as diesel and jet fuel by breaking down longer molecules into shorter ones.

We are already seeing the spread between gasoline and diesel increasing.  Last year at this time, diesel was retailing in the US for 39 cents a gallon more than gasoline. This year the spread is 60 cents a gallon.  Should the assertion that global diesel production is already at or near a peak prove to be true, it has many implications for the future of economic growth and the need to make rapid changes in our energy consumption.  For now, the data, except for the price spread, is not sufficient to reach a conclusion.  In a few years, we should have a better idea as to whether diesel shows signs of peaking.

The OPEC Production Cut:  The cartel plans to release a table detailing output cut quotas for its members and allies OPEC’s secretary-general said in a letter seen by Reuters on Thursday.  OPEC had initially said it would not publish individual quotas; however, “In the interests of openness and transparency and to support market sentiment and confidence, it is vital to make these production adjustments publicly available,” OPEC Secretary-General Barkindo said in a letter to members.  Barkindo said to reach the proposed cut of 1.2 million barrels per day, the effective reduction for member countries was 3.02 percent which is higher than the 2.5 percent initially discussed;  however, Iran, Libya, and Venezuela are exempt from the cut.  The Secretary-General also commended Saudi Arabia for pledging to cut its production to 10.2 million b/d starting in January, a deeper reduction than allocated.

US oil production in the most recent week was 11.6 million b/d.  If production expands at the rate that the EIA has forecast, it will effectively swamp the 1.2 million b/d OPEC+ cut by the end of next year.  This gloomy outlook for oil prices depends on how much US production increases. Some of EIA forecast is based on several long-awaited offshore projects that are due to start producing in the latter part of next year.  While the 2014-15 price slump led to sharp declines in US shale oil production, large well financed international oil companies have a foothold in the US shale oil industry and are unlikely to stop drilling due to a temporary decline in prices.

US Shale Oil Production: During the past week, the financial press has been filled with stories about what the $30 price drop is going to do to the shale oil industry. The thrust of most stories is that shale oil drillers are making major cuts in the plans for their capital expenditures in the coming year.  For nearly a decade, the costs of producing shale oil have been controversial.  With the constant need to raise capital to replace rapidly depleting wells, drillers have a strong incentive to publicize break-even costs below the selling price of oil.  As many observers have pointed out, this usually involves creative accounting in which many costs of producing shale oil are put aside, and attention is focusing on direct costs of producing from the best wells.

In the last few years, longer laterals and more fracking sand have been touted as leading to higher initial production, but most of these wells have not been in production long enough to tell whether they produce more oil by the end of their useful lives.  Longer laterals and more sand increases the cost of these wells which may or may not be more profitable than early shale oil wells.  Although industry consultants say that oil produced in parts of the Permian Basin currently costs from $32 to $47 to produce, we will have little idea if these are actual costs until financial statements appear later next year showing whether individual firms are making or losing money.

The EIA says that US shale oil production will increase by 113,000 b/d in December and 134,000 b/d in January. The Bakken is to increase production by 18,000 b/d next month; Eagle Ford by 19,000 b/d; the Permian by 73,000 b/d; Anadarko by 10,000 b/d and Niobrara by 10,000 b/d. We are already getting reports that production from North Dakota’s Bakken shale is expected to level off early next year, but local officials are still optimistic that peak output is still years away.

Exxon Mobil presence in the Permian has grown to become the most active driller in the Basin. The company’s increased presence in the Permian is a bet that it can drill wells so cheaply that they’ll be profitable. The company says its shale wells can make double-digit returns with oil at just $35 a barrel. Nearly all of the companies concentrating on shale oil drilling seem to be losing money at $45 a barrel.  While Exxon can hide any losses in shale oil among its massive production of conventional oil, it will be interesting to see if it will be so efficient that it will make money where others have failed.  Exxon is coming late to shale oil, and many of the best locations have already been drilled.  Moreover, Exxon is subject to the same problems of moving oil to markets and shortages of workers and other infrastructure in the region.  Exxon’s CEO Darren Woods, however, expects strong growth through 2025 when he’s expecting to produce much as 800,000 b/d from the Permian and the Bakken Basins.

2.  The Middle East & North Africa

Iran: Iran’s revenues from crude and oil products grew by 55 percent between March and October compared to the same period of the previous year, according to data from the Central Bank of Iran.  Between March and October, Iran’s oil revenues were helped by record exports in April and May, and later by high oil prices in the late summer and early fall.

After July, however, Iran’s oil exports started to drop as buyers were unwilling to commit amid uncertainties over whether anyone would be receiving a US waiver to continue importing oil from Iran.  The US’s announced policy of driving Iranian oil exports down to ‘zero’ led to fears of a supply crunch, and oil prices shot up to four-year highs in early October.  In October, however, crude oil exports from Iran to Asian countries—its biggest clients—sank to average 762,000 b/d, according to customs data and shipping reports.  This was the lowest monthly average for Iranian crude oil exports to Asia in five years and a 56.4-percent decline on an annual basis.  The US sanctions appear to have cut Iran’s crude exports by around 1 million b/d, but Tehran is still estimated to be exporting more than 1 million b/d.

Switzerland is close to launching an initiative to let companies sell food, medicine, and medical devices to Iran using a payments channel that would be the first such mechanism to win Washington’s approval.  Berne’s humanitarian supplies plan comes as leading EU powers plan to set up a mechanism to finance broader trade with Tehran.

A court in Paris fined France’s Total $572,000 for having bribed public officials in 1997 in exchange for securing oil and gas contracts in Iran.  Total has been accused of paying 30 million in bribes under the cover of a consultancy contract to obtain a deal to develop the gas field South Pars in Iran.  In 2017, Total became the first major to have returned to do business in Iran after the earlier sanctions were lifted, with the multi-billion-dollar South Pars 11 gas development project.  However, after the US withdrawal from the Iran nuclear deal this year, Total said in May that it would not continue to participate in the South Pars 11 gas project and would be out of Iran before November 2018.

Iraq: Iraqi Oil Minister Thamir announced last week that US’s Schlumberger Ltd will drill 40 wells in the giant Majnoon oilfield which currently produces some 240,000 b/d.  In June, Royal Dutch Shell exited Majnoon and handed the field’s operations over to Basra Oil.

The Trump administration has granted Iraq a new, 90-day exemption from sanctions targeting Iran, enabling Baghdad to continue energy imports that account for about one-third of the country’s electricity supply.  When the sanctions first came back into effect, on November 5th, the US granted a 45-day waiver that has now been extended by another 90 days.

Saudi Arabia:

The kingdom’s crude oil exports jumped to a 22-month high of 7.70 million b/d in October, as the country increased shipments ahead of the return of the US sanctions on Iran.  Exports in October rose by 268,000 b/d from September to the highest level since January 2017, when the initial OPEC/non-OPEC production cut deal began.  Saudi Arabia’s crude oil exports in September had also increased from August – by 219,000 b/d to 7.43 million b/d.  The high Saudi oil exports in September and October are believed to be a response to the US pledge to drive Iranian exports down to ‘zero,’ which oil traders interpreted as an imminent supply crunch.

After oil prices plummeted again last week amid fears of oversupply, Saudi Energy Minister al-Falih said that he expects global oil inventories to drop by the end of the first quarter next year and that we will achieve a balance between supply and demand in 2019.

King Salman announced that the Kingdom will spend 7 percent more next year, or around $295 billion.  This breaks the record 2018 budget $261 billion and sparks concerns about the economy’s sustainability as the increase for next year includes a hefty bill for cost-of-living allowances introduced this year.  The cost-of-living allowances were instituted at the start of this year to stimulate economic growth, but also to strengthen support for Crown Prince Mohammed whose policies have met with mixed reactions.  It’s no coincidence that the allowances target public servants and military personnel, besides pensioners and the poorest segments of society.

After the kingdom announced the record government budget for 2019, analysts warned Saudi Arabia will require oil prices higher than $84 per barrel, some $30 above current world prices, to avoid running another deficit.

Libya:  The National Oil Company (NOC) declared force majeure on operations at El Sharara oilfield last week, a week after the company declared force majeure on the field’s exports.  The 315,000 b/d oilfield located in the south of the country was seized by a local militia group trying to get on the payroll as oilfield guards.  This is a recurring theme in Libya, where many see seizing NOC facilities as an easy way to get the attention of weak governments.

The oilfield remained closed at the end of last week with the state oil firm NOC still resisting pressure from some officials to pay off the protesters which shut the field down.  Prime Minister Fayez al-Sarraj flew to the oilfield last week to meet protesters who seized the southern facility and called the demands of the protestors legitimate.  Preparations were being made to restart output, but conflict erupted between the government and NOC which wants to stop getting blackmailed by protesters, who occupy fields to demand cash and jobs.

3.  China

Beijing will buy little or no crude from the US in the early weeks of 2019 despite a truce in a trade war between the two countries.  This means that the US will continue to hold only a sliver of China’s market even as a wave of new refining capacity starts up there.  It also suggests that China is unlikely to use crude purchases to help plug a widening trade gap with the United States, which remains a core source of tensions between the two.

Sinopec Economics & Development Research Institute expects China’s oil product exports to rise 9 percent year on year to 51 million tons in 2019, as an increase in domestic product supplies surpasses demand growth.  The institute noted that “Oil product surplus will surge, and competition will be more intensive, as two greenfield independent refining and petrochemical firms will bring about 10 million tons of new oil product supplies to the domestic market, which will be much higher than the domestic demand growth of 6 million tons.”

China National Offshore Oil Corporation (CNOOC) has signed agreements for oil and gas exploration offshore China with nine international companies including oil majors Chevron, ConocoPhillips, Shell, Total, and Equinor.  CNOOC and the nine companies will share development opportunities in areas located in the Pearl River Mouth Basin offshore China.

China is set to tighten its sulfur-limit restrictions for ships by extending the 0.5percent bunker fuel sulfur limit from the initially designated Emission Control Areas (ECAs) to the entire coastline.  Given the rising concerns over environmental pollution, tightening sulfur-limit restrictions was to be expected.  Meanwhile, rising coal imports may lead to higher coastal coal freights.  Despite the restrictive measures taken by the government, China imported 271 million tons of coal in the first 11 months of 2018, up 9.3 percent over 2017.

4. Russia

Russian energy minister Novak expects his country’s crude oil output in 2019 to be around 555-556 million tons (11.145-11.165 million b/d) but said this figure could be revised downwards due to OPEC+ agreements to cut production.  A lot will depend on Russia’s oil production policy after the first half of 2019.  The new OPEC+ deal, under which Russia will be cutting 228,000 b/d, is for six months with an option to review in April.  Russian oil companies will reduce their production by that amount during the first quarter of 2019.  Novak said this reduction would be achieved during the first quarter as production has exceeded 11.42 million b/d so far in December.

Russia’s oil production has been on an uninterrupted upward trend, thanks to new oilfields coming onstream after 2008 when it declined amid a worldwide financial crisis and plunging oil prices.  If production turns out to be around 11.15 million b/d next year, it will be the first decline in ten years.

5. Nigeria

An Italian judge said last week that international oil companies Eni and Royal Dutch Shell were fully aware that their purchase of a Nigerian oilfield in 2011 would result in corrupt payments to politicians and officials.  The companies bought an offshore field for about $1.3 billion in a deal that spawned one of the industry’s largest corruption scandals.  It is alleged that about $1.1 billion of the total went to agents and go-betweens.

France’s Total is set to begin exports from the new ultra-deep Egina oil field offshore Nigeria in February 2019, at an initial rate of just over 100,000 b/d.  The Egina oil field is based on a subsea production system connected to a floating production, storage and offloading (FPSO) unit.  The field’s production capacity is forecast at 200,000 b/d—around 10 percent of Nigeria’s total oil production.  According to Bloomberg estimates, 200,000 b/d in exports will make Egina the fourth biggest Nigerian crude grade in terms of volumes.  The international oil companies working in Nigeria are doing their best to move their operations offshore where they are relatively immune to theft and sabotage by militant groups.  It has been about ten years since an offshore facility was attacked by militants.

6. Venezuela

Oil output is down from over 2.2 million b/d in January 2018 to some 1.1 million in November. That represents a fall of over 68 percent from the country’s peak production of almost 3.5 million b/d in 1998.  Some believe that production is already below 1 million b/d.

President Maduro has replaced the official running PDVSA’s oil-production joint ventures, two people familiar with the matter said on Friday.  Rafael Urdaneta, who became vice president of PDVSA, will be replaced by current oil ministry official Radames Gomez.  Urdaneta, a former housing official, has been in frequent disputes with foreign partners over payment delays involving oil-for-loan pacts.

A group of investors is demanding the Venezuelan government pay off both the interest and principal of a defaulted $1.5 billion bond that won’t mature until 2034, escalating the battle between bondholders and President Nicolás Maduro’s administration.  The group of five investment firms owns about $380 million worth of the sovereign debt that has been in default since January, according to S&P Global Ratings.  The default, plus the size of the firms’ stake, gives the group the right to call for immediate payment, according to Mark Stancil, an attorney in Washington who represents the investors.

The investor group is the first to demand full payment of Venezuelan debt since the country began spiraling into widespread default late last year.  US sanctions, a paucity of seizable assets, and the abundance of creditors have made investors reticent to push for payment, which will likely touch off complicated and costly legal battles.

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

Qatar Petroleum, the country’s state energy major, is looking to invest as much as $20 billion in LNG projects in the United States over the next few years.  The investment is separate, apparently, from Qatar’s plans to boost its local production capacity from the current 77 million tons of LNG annually to 110 million tons by the early 2020s. (12/18)

Qatar Petroleum signed a deal with Italy’s Eni late Sunday to acquire a 35% stake in three offshore oilfields in Mexico, QP said in a statement.  QP already holds some stakes in Area 1, as part of a Shell-Eni consortium participating in the exploration of five offshore blocks in the Perdido and Campeche basins. (12/17)

India imported 4.2 million b/d of crude oil in November, down 11.4 percent year on year.  Crude imports were also down 19.4 percent from October.  Analysts said the biggest decline in nearly four years was mainly due to lower overseas purchases by refiners after US sanctions on Iran, and also due to maintenance shutdowns by some refiners. (12/21)

In North Korea, coal gasification may have freed supplies of imported fuel for the military, among other uses, experts said. A fresh drive since 2016 to generate chemical products from coal was also designed to allow them to face down sanctions—in perpetuity if necessary.  China, North Korea’s longtime ally, has provided technology and expertise for the coal-conversion efforts. (12/18)

Mexico’s Pemex will focus on existing shallow water assets and refining next year at the expense of riskier, deepwater projects under a new government that has vowed to turn around the ailing company.  The 2019 budget blueprint presented on Saturday by officials of President Andres Manuel Lopez Obrador calls for some $23 billion in discretionary spending for the company known as Pemex, up about 14 percent from this year. (12/17)

Canada’s federal government will provide a $1.2-billion lifeline to Alberta’s energy industry, adding that most of the funds will be used for “job support.” The report comes on the heels of protests in Alberta against the lack of oil transport capacity that has seen the price of Canadian crude take a nosedive, hitting not just producers’ bottom lines but their workforce as well. (12/19)

In British Columbia, ExxonMobil has withdrawn its Canadian liquefied natural gas (LNG) export project WCC from an environmental impact review, effectively meaning that the plan has been shelved.  The WCC LNG project, led by Exxon and also participated in by Imperial Oil Resources Ltd, withdraws from the Environmental Assessment process in British Columbia. (12/21)

The US oil rig count increased by nine to 883 while the gas rig count decreased by one to 197, Baker Hughes reported.  This was a turnaround after three losses in a row in the three weeks prior.  The total number of active oil and gas drilling rigs now stands at 1,080. (12/22)

GOM: Activity booms, first-ever production, and key sanctions are some of the factors leading to a grand year for the US Gulf of Mexico. The Gulf is on track to have a stellar 2019, with increases in drilling and merger and acquisition activity, new project sanctions and first-ever production from a Jurassic play. (12/21)

ANWR: The Coastal Plain of the Arctic National Wildlife Refuge has nearly 428,000 acres with high potential for petroleum resources, according to a draft environmental impact statement.  A tax reform bill signed into law roughly a year ago by President Donald Trump requires Interior to hold at least two lease sales in ANWR by the end of 2024.  These sales must both offer at least 400,000 acres of the “highest hydrocarbon potential lands” within the Coastal Plain and allow for 2,000 surface acres of federal land to be used for production and support facilities. (12/21)

East coast lockdown: Attorneys general from nine coastal states are intervening in a lawsuit aimed at blocking seismic surveys that could help pinpoint oil under Atlantic waters but also imperil whales and dolphins.  The move brings the heft and resources of top state law enforcement officials to a fight over the future of oil and gas exploration along the US East Coast. (12/21)

Gasoline prices fell another 5 cents last week, to $2.37 per gallon, and the price drops that have been going on for about 10 weeks straight may continue at least to the end of the year, thanks to slowing demand and plentiful supplies. (12/19)

Inventories of ultra-low sulfur diesel on the US Gulf Coast hit a four-year low during the week ended December 14, EIA data showed Wednesday.  USGC ULSD stocks plunged 1.37 million barrels to 30.23 million barrels last week. The last time they were reported lower was November 7, 2014, at 30.03 million barrels.  The draw came on the back of USGC production rates falling 30,000 b/d to 2.76 million b/d. (12/20)

ExxonMobil Corp. is calling on the EPA to regulate emissions of methane from all new and existing oil and gas wells across the country. Exxon has two reasons to back such a regulation.  First, it is facing pressure from investors and lawsuits over climate change.  By calling for regulations, it’s an attempt to show Exxon wants gas to be as clean as possible, even if those regulations never happen.  Second, as a massive global company, Exxon is positioned to benefit financially over smaller companies.  It can easily afford pollution-control equipment that others have a harder time obtaining. (12/18)

Bunker fuel conundrum: When the International Maritime Organization announced it would introduce a new, lower sulfur emission ceiling for bunkering fuel, many in the energy industry worried that demand for high-sulfur fuel oil would suffer a blow from which it would not be able to recover.  But by January 2020, when the new emission rules come into effect, the number of scrubbers both installed and ordered could reach nearly 2,300.  And all these vessels will be producing sulfur acid-rich wastewater from the scrubbers and will need high-sulfur fuel. (12/18)

The Port of Houston has grown thanks to its hometown energy industry but has also recently invested hundreds of millions in new infrastructure to attract the potentially more lucrative larger container ships.  Houston is the largest US port for energy exports, and exports of oil and byproducts such as natural-gas liquids are booming now that the US is pumping crude at a record of more than 11 million b/d.  In contrast to the energy exports, some of the container ships are unloaded by the port, bringing it substantial revenues. (12/20)

US liquefied natural gas export capacity is on the brink of doubling in 2019, which will boost the super-cooled fuel’s influence on the US natural gas market, where volatility surged in 2018 after several years of slumber.  LNG exports have been the fastest growing source of US natural gas demand since the country started ramping up exports in 2016 and are expected to expand deliveries in the coming years as several more export terminals enter service.  Its imprint is being felt in the US gas futures market, which in November experienced its longest stretch of extreme volatility in nine years due to demand, low inventories and unseasonably cold US weather. (12/20)

Biofuels bypass: The US EPA granted oil major Exxon Mobil a financial hardship waiver this year temporarily freeing its Montana refinery from US biofuel laws, three sources familiar with the matter told Reuters.  Exxon, which reported earnings of almost $20 billion in 2017, became the largest known company to be awarded a such a waiver by the Trump administration’s EPA under a program meant to protect the smallest fuel facilities from going bust. (12/20)

E-truck: Daimler Trucks North America has delivered the first vehicle in its Freightliner Electric Innovation Fleet—a Freightliner eM2—to Penske Truck Leasing, fulfilling its promise to put an electric commercial truck in customer’s hands in 2018.  The Freightliner eM2 106 is intended for local distribution operations in the food sector and last-mile delivery services.  The batteries of the new electric version provide 325 KwH for up to 480 hp. The range of the eM2 is around 230 miles. (12/21)

Global demand for coal, an energy source that has raised air quality concerns, is set to rise for the second year in a row in 2018 and will remain stable in the next five years. Declines in Europe and North America are offset by strong growth in India and Southeast Asia, according to a report from the IEA, which expects 0.2%/year growth over the next five years. (12/20)

The future of the nuclear power industry lies in China. The Chinese are presently building more nuclear electric power generating stations than any other country.  This year, the Chinese will add three more nuclear power stations to their fleet bringing their total up to 40, while eighteen nuclear plants are also under construction.  According to MIT estimates, the Chinese can erect a nuclear plant for half the cost of a plant here in the US.  If so, what’s the problem? First, let’s put the numbers into perspective. Nuclear power accounts for about 4 percent of Chinese electric power production. (Nuclear accounts for about 20 percent of electric power generation in the US.)  Solar and wind generation accounts for 7 percent of production in China and the renewable component has been growing far faster than nuclear. (12/20)

EDF Renewables North America said on Wednesday it had formed a joint venture with oil and gas firm Royal Dutch Shell’s new energies division to co-develop a lease area for offshore wind energy in New Jersey.  The area, spread over 183,353 acres and located off the coast of Atlantic City, has the potential to produce about 2,500 megawatts of offshore wind energy. (12/20)

Climate team: A collection of US northeastern states already has a regional cap-and-trade program for major power plants.  Now, the region is pursuing a similar approach for transportation, an ambitious and challenging endeavor, but one that is an outgrowth of frustration with inaction at the federal level.  The aim of the Transportation and Climate Initiative, as the program is called, would be to reduce greenhouse gas emissions from cars and trucks while structuring the program in such a way that it leads to net economic and social benefits. (12/21)