Peak Oil Review: 7 January 2019

January 7, 2019

Editors:   Tom Whipple, Steve Andrews

Quote of the Week

“Shale companies have attracted huge amounts of capital from Wall Street over the past decade.  So far, investors have largely lost money. Since 2008, an index of US oil and gas companies has fallen 43%, while the S&P 500 index has more than doubled in that time, including dividends. The 29 companies in the Journal’s analysis have spent $112 billion more in cash than they generated from operations in the last 10 years, according to data from FactSet, a financial-information firm.” Bradley OlsonRebecca Elliott and Christopher M. Matthews, The Wall Street Journal (1/2/19)

Graphic of the Week

1.  Oil and the Global Economy

Since hitting a recent low on Dec 22nd, oil prices have climbed by $5-6 a barrel as the markets tried to sort out where supply and demand are going.  With US oil prices still below $50 a barrel, it is hard to imagine that the optimistic forecasts for US shale oil production will be reached in 2019.  There are continuing indications that China’s economy is headed for a dip, but there are reports that US/China trade negotiations are making progress.  The US sanctions on Iran seem to be hurting Tehran’s exports, and the OPEC+ production cut is slow getting off the ground.

The US stocks report, which was delayed by two days, showed an unexpectedly large increase in US gasoline inventories last week, while crude stockpiles were unchanged.  Distillate stockpiles, which include diesel and heating oil, rose by 9.5 million barrels, the greatest one-week jump since December 2016 and gasoline inventories were up by 6.9 million barrels.  The surprise increase in petroleum products was the result of an unusually high refinery utilization rate of 97.2 percent which was a record for this time of year.  Crude stocks at the Cushing, Oklahoma, delivery hub rose by 641,000 barrels.  Net US crude imports rose last week by 468,000 b/d, while crude production was unchanged at 11.7 million bpd.

A British firm, Apex Consulting Ltd, has released an updated report on the costs of producing oil for some of the major oil companies between 2015 and 2017 when oil prices declined significantly, and oil companies were forced to cut back on exploration and drilling for oil.  Between 2011 and 2014, when the oil industry was making an all-out effort to increase production, the average cost of production for the major oil companies almost doubled from $10 a barrel to around $20.  With oil selling for over $100 they did well, but costs of production got out of control as the supermajors went after ultra-deepwater, and heavy oil resources.  The boom stretched the resources of the oil service companies who raised prices significantly.

Following the mid-2014 price collapse, there were numerous project cancellations and cuts in investments across the industry.  As could be expected the most expensive per barrel projects went first so that the average cost fell significantly.  According to Apex, its Supermajor Cost Index fell by more than 41 percent to an average of about $13 a barrel in 2017 compared to 2014.  These costs are mostly for commercial oil production as little of the US’s shale oil production, which is substantially more expensive, is included in this number.

Cost of production likely increased in 2018 as the major oil companies’ capital expenditures were higher, but the sharp price drop late in the year has again confused the picture.

TThe OPEC Production Cut:

In December, the US imported the lowest volume of OPEC crude in five years, according to market intelligence firm Kpler.  Only 1.63 million b/d of crude arrived during the months, down from 1.80 million b/d in November and 1.78 million b/d in October.  Saudi Arabia shipped 534,000 b/d to the US in December, nearly a 100,000 b/d drop from November.  Algeria’s shipments were also down almost 100,000 b/d, and Nigeria’s shipments to the US dipped by almost 50,000 b/d.  Iraq, on the other hand, increased crude oil shipments to the United States by 140,000 b/d.

Algeria’s energy minister said last week he was confident oil prices would return to between $65 and $70 a barrel by April but stressed that the OPEC alliance would cut production further if the market had not responded by then.  Many observers are skeptical that the 1.2 million b/d OPEC+ production cut will be sufficient to offset rising US shale oil production and the slowing global economy.  J.P. Morgan said prior to the OPEC meeting early December, that “if OPEC didn’t really cut by more than around 1.2 million b/d, and they did so just for the first half, (not) for the full year, that we could gravitate toward … our low-oil-price scenario, which is $55 Brent for 2019.”

US Shale Oil Production:  Given that US oil prices are still below $50 a barrel and that producers have started to cut back on operational drilling rigs, the EIA did not estimate that there was an increase in US oil production last week – leaving the number at 11.7 million b/d.

The major news last week was in a Wall Street Journal story with the title “Fracking’s Secret Problem – Oil Wells Aren’t Producing as Much as Forecast.”  The subtitle was Data analysis reveals thousands of locations are yielding less than their owners projected to investors; ‘illusory picture’ of prospects. As three reporters were involved in producing the story, it is clearly an important one that has been well massaged by editors.  Based on analysis by Rystad Energy and confirmed by two other energy consulting firms, the story concludes that “thousands of shale wells drilled in the last five years are pumping less oil and gas than their owners forecast to investors, raising questions about the strength and profitability of the fracking boom.  Based on an analysis of some 16,000 wells operated by the 29 largest shale oil producers, it seems that two-thirds of the projects of how much oil would come from these wells are overly optimistic.

That sales pitches to potential investors by shale oil drillers are optimistic is not particularly news unless the estimate of how much less shale oil we can expect is specific enough to gain an insight as to where the industry will be five or ten years from now.  The Journal does not want to undercut conventional wisdom that the shale oil boom is leading America to “energy independence,” so it is rather circumspect in discussing specifics.  Early in the story, the Journal says that “flawed forecasting doesn’t mean US oil output is about to drop;” however, much of the story points at the conclusion that a lot of the oil that the US shale oil industry is supposed to produce in the next ten years will not be coming.

The Journal notes that Schlumberger reported in a research paper that secondary shale wells completed near older, “initial” wells in West Texas had been as much as 30 percent less productive than the initial ones.  This problem threatens to undercut growth projections for the Permian Basin as the recent boom involves drilling more wells closer to the most productive ones.

Three years ago, Pioneer Natural Resources told investors that it expected wells in the Eagle Ford shale of South Texas to produce 1.3 million barrels of oil and gas apiece.  Those wells now appear to be on a pace to produce about 482,000 barrels, 63 percent less than forecast, according to the Journal’s analysis.  An average of Pioneer’s 2015 forecasts for wells it had recently fracked in the Permian Basin suggested they would produce about 960,000 barrels of oil and gas each.  Those wells are now on track to produce about 720,000 barrels, according to the Journal’s review, 25% below Pioneer’s projections. Pioneer disputes these conclusions, noting that it assumes its wells will produce for at least 50 years. Given that most authorities say that shale oil wells are pretty well empty in five years or less, it is not clear where the 50-year lifetime is unless they are planning costly re-drilling and re-fracking.

There are other examples, but they all suggest that shale oil wells may not be able to produce enough oil at recent prices to cover the costs of land acquisition, drilling, fracking, and production.  The Journal notes that the 29 companies it follows closely have spent $112 billion more in cash than they generated from operations in the last ten years.  While lenders continue to finance shale oil production, equity stakes in shale oil companies have fallen from some $35 billion in 2016 to circa $6 billion last year.  At some point, Wall Street may figure out that the days of $100+ oil that is needed for profitable oil production is not going to return and that the best places to drill profitable shale oil wells are all gone.

2.  The Middle East & North Africa

Iran: Iran’s Parliament Research Center is predicting negative growth for Iran in the current fiscal year that ends March 20 due to its falling exports.  The contraction could be as much as 5.5 percent or, with the best-case scenario, only 2.6 percent.  The 5.5 percent contraction assumes that Tehran’s exports will shrink by 1.6 million b/d while the optimistic number assumes 800,000 b/d fewer exports.

Imports of Iranian crude oil by Asian buyers hit their lowest in more than five years in November according to government and ship-tracking data.  China, India, Japan, and South Korea last month imported about 664,800 b/d from Iran, according to the data, down 12.7 percent from the same month a year earlier.  South Korea cut imports to zero for a third month in November while Japan followed suit.  India’s November imports are down about 40 percent from October.  Imports are expected to be larger in December because of the sanction waivers.

The US sanctions and the ensuing waivers seem to be working.  According to Iran’s deputy oil minister, “China, India, Japan, South Korea and other countries that were granted waivers from Washington to import Iranian oil are not willing to buy even one barrel more from Iran.”  Always optimistic, but giving few details, the minister said “Despite US pressures on the Iranian oil market, the number of potential buyers of Iranian oil has significantly increased due to a competitive market, greed, and pursuit of more profit.”

Iraq: Baghdad posted its highest monthly export total to date in December and, combined with Kurdistan, set a nationwide annual record.  The federal government and the Kurdistan Regional Government together exported a total of 4.159 million b/d last month, more than 100,000 b/d above the previous high-water mark, set in December 2016.  The average sale price in December was $52.8 per barrel, generating around $6.1 billion in revenue.

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Iraq says it was committed to the OPEC+ output-cutting deal and would keep its oil production at 4.513 million b/d for the first half of 2019.  OPEC, Russia and other non-members, an alliance known as OPEC+, agreed in December to reduce supply by 1.2 million b/d in 2019.  OPEC’s share of that cut is 800,000 b/d.

Libya:   The Sharara oilfield, which was taken over on Dec. 8 by tribesmen, armed protesters, and state guards, is expected to lose 8,500 b/d to looting, state oil company NOC said on Thursday.  NOC chairman Mustafa Sanalla warned on Thursday that attacks on the field could destroy the Sharara system and damage the economy.

3.  China

Crude oil prices were higher last week, partly on reports that China plans to hold talks with the US this week to settle their trade balance differences.  The trade war is one of the biggest reasons for heightened uncertainty around oil prices.  As China is one of the world’s top importers of crude, any sign that demand for it might waver immediately puts pressure on prices.

In recent years, China has become the largest market for many consumer, luxury and durable goods, as its expanding middle class entered the consumer goods markets for the first time.  Now as the economy starts to falter, oil producers, electronics makers, travel services and many other sectors are feeling the pinch.  Apple is the latest company to sound the warning, attributing a sharp falloff in iPhone revenue to China’s rapidly decelerating economy.  Ford and GM have reported significant sales drops for China in a slump that has hit foreign and domestic automakers alike.  E-commerce is feeling the slump, cutting its revenue forecast and reporting a fall in active customer accounts.

China issued its first batch of crude oil import quotas for 2019 last week at a lower volume than for the same batch a year ago.  The Ministry of Commerce granted quotas totaling 89.84 million tons to 58 companies.  This is down from the 121.32 million tons in the first batch of allowances for 2018, although allocations may increase the overall volume for 2019 in a second batch of quotas later this year.  Lower import quotas may signal slower growth in the demand for oil.

4. Russia

Russian oil production rose to a post-Soviet record high of 11.16 million b/d last year on an annual average basis.  The total surpassed the previous record average of 10.98 million bpd set in 2017.  All the Russian majors increased their oil production last month.  Rosneft, the world’s largest listed oil producer by output, raised its oil production by 4.6 percent year-on-year in December, while Lukoil and Surgutneftegaz both increased their output by 2.5 percent.

5. Nigeria

On January 1, France’s Total had started up oil production from Nigeria’s ultra-deepwater oil field Egina, which is expected to produce 200,000 b/d at peak output.  Oil was first discovered in the field 15 years ago.  The field is located 93 miles offshore Nigeria’s coast at 5,250-feet water depth.  Total Upstream Nigeria Limited operates the field with a 24 percent interest, in partnership with Nigerian National Petroleum Corporation, South Atlantic Petroleum, China’s CNOOC and Petrobras.

The Floating Production, Storage, and Offloading (FPSO) unit used to develop the field is the largest one Total has ever built.  This project has also involved a record level of local contractors.  Six of the eighteen modules on the FPSO were built and integrated locally, and 77% of hours spent on the project were worked locally.

Nigeria’s crude oil daily production increased last year by about 2.09 million b/d, translating to a 9 percent improvement, compared with the 2017 average daily production of 1.86 million barrels.  In the last two years. the government has reached settlements with the militant groups that were blowing up oil facilities across the Niger Delta.  The Egina field which is some 100 miles offshore should be much less vulnerable to militant attacks than pipelines running through the swamps.

6. Venezuela

Thirteen nations announced last Friday that they would not recognize the legitimacy of the new presidential term of Nicolás Maduro, who is set to be inaugurated this week for a second time.  Diplomats from Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Guyana, Honduras, Panama, Paraguay, Peru, and St. Lucia issued a joint statement, denouncing last year’s election as flawed and urging Mr. Maduro to hand power to the opposition-controlled National Assembly until another election could be held.

Although the US is not part of the Lima Group which issued the declaration, US Secretary of State Mike Pompeo participated in Friday’s meeting by video conference and recently held meetings across Latin America which included discussions of the Venezuelan situation.

7.  The Briefs (selections from the press – date of article in Peak Oil News is in parentheses – see more here: 

ICEs peaked in 2018? Sales of internal combustion engine cars in 2018 are unlikely to be surpassed in any future year, as demand in the world’s three largest markets stalls and carmakers seek to ramp up production of electric cars. (12/31)

The international rig count, excluding North America, was 991 at the end of November 2018, down 26 from the month prior but up 49 from November 2017, according to the Baker Hughes site.

Scrapping crude tankers: Companies around the world have scrapped a record number of large crude tankers in 2018.  About 100 vessels of the industry’s main crude carriers have been sent to India and Bangladesh for demolition. The shipping bust is no surprise; the vessels, which transport 40 percent of the world’s crude, were on course for the worst charter rates in three decades.  The implosion of charter rates was due to a two-year reduction of OPEC cargoes plus environmental regulations.  The global growth slowdown has certainly not helped. (1/2)

In Mozambique, Exxon has secured long-term purchasing commitments for liquefied natural gas from its Rovuma project, moving closer to a final investment decision on a facility that will add as much as 15.2 million tons of LNG to global capacity.  If approved, production would begin in 2024. (1/2)

In Ecuador, President Lenin Moreno said that a special audit into $4.9 billion worth of oil-related infrastructure investment in the last decade reveals that about half of it was lost to corruption. (1/5)

Canada’s oil rig count crashed during the last full week of December, declining by 61 rigs during the week to finish at 70 oil rigs operating. (1/1)

Canadian blame game: In Canada, the National Energy Board (NEB) said on Friday that pipeline capacity constraints were not the only thing plaguing Canada’s oil industry.  It instead shifted the blame onto increased oil production in the last couple of years, saying that if its oil producers weren’t producing so much oil—which came in at 4.3 million barrels per day in September—pipeline capacity at 3.95 million b/d would not have been an issue.  The NEB also cited lower demand from US refineries—a significant market for Canadian oil producers—due to maintenance season.  Western Canada’s largest customer in the US, BP’s Whiting Refinery in Chicago, went offline in September, exacerbating the discount of WCS to WTI. (1/5)

The US oil rig count declined by 8 rigs last week to hit 877 while the gas rig count held steady at 198, according to Baker Hughes’ weekly report.  The combined oil and gas rig count of 1,075 is still up 151 from this time last year, 135 of which is in oil rigs.  Canada’s rig count rebounded, up 6 to start the year off at 76; that’s still down 98 rigs year-over-year. (1/5)

In Alaska, Italy’s Eni said Thursday it will buy the rights of all of the Oooguruk oil field in shallow waters offshore Alaska and become its operator because its proximity to the Nikaitchuq field will provide synergies.  The second field that Eni will now own and operate in Alaska yields 10,000 barrels of oil equivalent per day from 25 oil wells and 15 gas/water injector wells.  The additional field is only eight miles from the Nikaitchuq field it developed in 2011, which produces 18,000 barrels of oil equivalent per day. (1/4)

California imported an average 447,063 barrels of crude oil by rail over the first nine months of last year.  The jump was driven by increased overall exports from New Mexico, Wyoming, and Canada, California’s three oil-by-rail suppliers. (1/5)

Refiners go light: US light oil has become too cheap for Gulf Coast refiners to pass up.  Fuel makers on the Gulf, home to the largest cluster of refineries in the world, processed oil with an average API gravity of 33.06 in October–the lightest crude in 26 years thanks to a surge in domestically produced light barrels.  Growing US output has sent imports to a 3-year low, as domestic barrels are cheaper than imported ones.  West Texas Intermediate, the US benchmark oil, is being traded at a discount of $8.10 per barrel compared with Brent, the benchmark used to price imported oil. (1/3)

Permian flaring grows: So much gas has bubbled up from the oil wells in the area that it has overwhelmed pipelines needed to take it to market.  Rather than wait for new gas pipelines to arrive, bottling up lucrative oil production in the process, energy companies are incinerating the methane. Flaring means the gas will never be used by consumers.  It is also forgone revenue for energy producers and tax authorities.  The pollution emitted is significant, even if carbon dioxide released in flaring traps far less heat in the atmosphere than methane gas. (1/5)

New pipeline: The Mariner East 2 natural gas liquids (NGL) pipeline extending from Eastern Ohio to the Philadelphia area is in service, owner Energy Transfer LP reported Saturday.  The 350-mile pipeline transports ethane, propane and butane east from processing plants in Ohio to the company’s Marcus Hook Industrial Complex in Delaware County, Pa. (1/1)

Trump’s talent re oil prices: President Donald Trump said OPEC “is essentially a monopoly,” even as he credited his own “talent” for having brought down oil prices. “Four months ago, oil hit $83 a barrel,” Trump told reporters in the Rose Garden after meeting with Congressional leaders to try and reach a deal on the partial government shutdown.  Oil “was heading to $100 and then it could have gone to $125.”  Trump repeated his statement from earlier this week that his efforts made the difference in bringing down the oil price.  “After I made some phone calls to OPEC…all of a sudden, it started coming down. Didn’t happen by luck, it happened through talent.” (1/5)

Oil & gas regs rollback: one area where the Trump administration has been ruthlessly effective has been in promoting the interests of the energy industry.  His federal agencies have succeeded in gutting a long list of environmental regulations affecting drilling and mining companies.  Two-years in and the regulatory climate for oil, gas and coal companies is a lot friendlier than it used to be. (1/3)

The partial government shutdown is increasing the chances of delays in US energy initiatives including the release of President Donald Trump’s proposed offshore drilling plan and allowing higher levels of ethanol in gasoline during summer months, energy industry groups said on Friday. (1/5)

CA on EV mileage tax: A research report submitted to the California legislature this week by the University of California, Davis’ Institute of Transportation Studies proposes switching EVs to a mileage-based road-funding fee while continuing to have gasoline-powered cars pay gasoline taxes. (1/4)

US EV sales up: During 2018, total plug-in EV sales were more than 354,000 vehicles, or 72.5% more than the 199,000 EVs sold in the US in 2017.  Sales of best-selling Tesla’s three battery-powered models were reported January 3 by InsideEVs to have totaled just over 191,000 vehicles in 2018, compared with just over 50,000 in 2017. The Edison Electric Institute said the transition to electric vehicles is well underway with more than 1 million EVs on US roads as of October 2018. (1/4)

Norway’s EV push: Almost a third of new cars sold in Norway last year were pure electric, a new world record as the country strives to end sales of fossil-fueled vehicles by 2025. (1/3)

Tesla going to China: In a sign that Tesla is preparing to start construction of its first factory in China, Elon Musk said on Monday that he would be visiting China soon for the groundbreaking ceremony. Tesla’s China factory in Shanghai will be its first production facility outside the US (1/2)

Biofuels innovation: a new discovery by a team of scientists based in the west Indian city of Pune at the National Chemical Laboratory offers a quicker, eco-friendly technique for converting industrial biomass into biodiesel. (1/3)

CA planning for H2: The California Energy Commission and California Air Resources Board have released a joint report on the planning, design, development, and deployment of hydrogen refueling stations critical to supporting the adoption of fuel cell electric vehicles. (1/3)

China doing H2: the hilly city of Yun Fu in China’s southern Guangdong province decided in 2009 to lop the top off the surrounding hills and build a 13.4 sq. km industrial park focused on fuel cells — a rival technology to internal combustion engines and electric batteries.  A whole suite of companies covering the supply chain have now set up in the park, which is producing hundreds of buses and small trucks using fuel cells that run on hydrogen gas.  So successful has it been that local officials now plan to flatten two more hills to create a neighboring vehicle manufacturing plant and a chemicals facility. (1/2)

Indian state-run Coal India Limited said Tuesday that output over April-December rose 7.4 percent year on year to 412.45 million tons. (1/2)

India pushes RE: Indian power companies spent much of the past decade rushing to build coal-fired power plants in anticipation of surging electricity demand as economic growth took off.  Now, many of those projects are mired in deep financial distress and private investment in coal power has ground to a near halt.  The biggest driver of long-term uncertainty for the industry is one that few anticipated 10 years ago: an explosive take-off in the renewable power sector, as India joins the global push to tackle climate change by shifting towards green energy. (1/1)

Assaults in AZ on driverless cars: A Waymo autonomous vehicle, while idling recently in Chandler, Ariz., was attacked by an assailant who slashed its tires.  Some 21 attacks have been carried on driverless cars by some disgruntled residents in Chandler who object to the technology and the field testing in their town.  Most residents and officials welcome the tests. (1/1)

ZEV push: The California Air Resources Board will conduct a public hearing 21 February to consider approving for adoption a proposed Zero-Emission Airport Shuttle regulation.  The regulation as currently written would require fixed route airport shuttles, that serve California’s 13 largest airports, to transition to 100% ZEVs by 2035. (1/1)

Tom Whipple

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the long-running Energy Bulletin (formerly "Peak Oil News" and "Peak Oil Review"). Tom has degrees from Rice University and the London School of Economics.  

Tags: geopolitics, oil prices