Editors: Tom Whipple, Steve Andrews
Quote of the Week
“The fracking industry has helped set new records for US oil production while continuing to lose huge amounts of money — and that was before the recent crash in oil prices. But plenty of people in the industry and media make it sound like a much different, and more profitable, story… The explanation is pretty simple: Shale companies are not counting many of their operating expenses in the “break-even” calculations. Convenient for them, but highly misleading about the economics of fracking because factoring in the costs of running one of these companies often leads those so-called profits from the black and into the red.” Justin Mikulka, DeSmog Blog (1/19)
Graphic of the Week
Note that in the last 13 years there has been very little increase in OPEC production.
1. Oil and the Global Economy
Oil prices continue to climb steadily closing up about $3-4 a barrel by the end of last week. Behind the move are concerns that US shale oil production this year may not be as strong as forecast; lower OPEC production; and reports that the US and China are making progress towards ending their trade war. New York futures closed at $53.80 on Friday, while London closed at $62.70. This leaves London’s Brent about $12 a barrel higher than it was at the end of December, but $22 lower than it was in September. These prices should make the OPEC exporters happier but may not be high enough to keep shale oil production increasing as fast as predicted.
The International Energy Agency continues to insist that global oil demand will be stronger this year than in 2018 as lower fuel prices counter slowing economic activity. Some observers are not sure that this analysis is valid. They point to the growing gap between the price of gasoline and middle distillates (diesel and jet fuel) that run much of the global industrial and transportation systems. Last week diesel in the US was selling for 68 cents a gallon more than regular gasoline. Last year the difference was 41 cents. The EIA reports that US gasoline inventories are about 6 percent above the five-year average, while distillate inventories were 3 percent below.
Concerned observers note that the supply of very heavy crude, which is blended with very light shale oil to make middle distillates, is shrinking in Canada, Venezuela, and Mexico, its primary sources. The mandate to reduce emissions from shipping, which comes into effect soon, will further exacerbate the middle distillates situation. Some are starting to speculate that the middle distillates sector of the fuel industry will turn out to be the place where peaking of world oil production first becomes a problem.
The OPEC Production Cut: The cartel published the list of oil production quotas for each country in the OPEC+ deal last week. With the exception of Iran, Venezuela, and Libya which are exempted from the cuts due to their precarious economic or political situations, the bulk of the cutting will be done by the Saudis and their Gulf Arab neighbors. Five of OPEC’s current 14 member’s oil production has been trending down for years and is largely inconsequential in the global 100 million b/d oil market.
Riyadh will cut 322,000 b/d from its October baseline of 10.633 million b/d and keep output at 10.311 million b/d. According to OPEC’s secondary sources, the Saudis produced 10,553 million b/d in December, down by 468,000 b/d from November. They certainly seem to be doing their part in contrast with the Russians who are saying it is impossible to cut production during the winter or parts of their production infrastructure will freeze.
Qatar, which has been producing about 600,000 b/d, has left OPEC and is no longer included in the cartel’s production data. The OPEC 14 production was down by 751,000 barrels per day in December. That was after November production had been revised downward by 23,000 barrels per day. Iran is now at about the average they held during the previous sanctions period. Iraq reached a new all-time high in December of 4,714,000 b/d. That was up 88,000 b/d from November. Kuwait also increased production in December, up 29,000 b/d to 2,800,000 b/d while Libya and Nigeria are back to having political problems slowing their production.
In its monthly Oil Market Report, the IEA increased its non-OPEC supply growth number for 2019 to 1.6 million b/d, from 1.5 million b/d in last month’s report, thereby lowering the fabled “call on OPEC.” The agency raised its estimate of the US’ crude output growth this year to 1.1 million b/d, from 1 million b/d in last month’s report, adding that US crude output would probably be higher than the production capacities of Russia and Saudi Arabia by mid-year.
OPEC has decided to hold an extraordinary full ministerial meeting on April 17 in Vienna to discuss the state of the oil market and the production cut deal, while the cartel’s non-OPEC partners will join for a full OPEC+ meeting on the following day, April 18.
US Shale Oil Production: Evidence is mounting that low oil prices are beginning to slow the growth of US shale oil output. The optimistic pronouncements of the IEA and other prognosticators that US production will increase by a million or more b/d this year may not come to pass. The US rig count dropped by 21 oil rigs last week, marking the third consecutive week of declines and the biggest drop since early 2016. Although oil prices have rebound by about $10 a barrel since late December, they are still more than $30 below the recent highs set in September. As one headline writer put it, “Fracking in 2018: Another Year of Pretending to Make Money.”
The newest trend in the shale oil industry is large oil companies buying out the Permian’s smaller operators and pumping out the basin’s crude with in a more efficient manner. The large oil companies can bring vast resources and economies of scale to the shale oil business, and generally know what they are they are doing. They do not need to cook the books to convince lenders that they will soon be profitable. Indeed, they can bury their shale oil operations amidst the millions of barrels of oil they already produce from conventional wells.
The supermajors are used to investing billions of dollars in projects that may return nothing for five or six, or sometimes, even ten years. Most importantly, they appreciate better than most that there has been insufficient investment in finding new oil so that shortages are almost certain to come in the early to mid-2020s, which will bring much higher oil prices.
Drilling in Texas, even if it is for short-lived shale oil wells is much more attractive than production sharing agreements with the few countries around the world that will grant them access on money-making terms. The problem with investing in the Permian Basin is how many sweet spots are left to drill and how rapidly the cost per barrel will climb when companies are forced to drill less productive rock. If oil prices climb back well above $100 a barrel, and consumers can still afford to buy it, there may be profits in producing expensive shale oil. The supply and price of middle distillates may be the critical problem for the next decade.
2. The Middle East & North Africa
Iran: There is a consensus that Tehran currently is exporting about 1 million b/d, down from 2.7 million last May when the US withdrew from the nuclear deal. The Iranians are going to considerable lengths to circumvent the sanctions and to hide exports. The government continues to maintain that the sanctions are not seriously hurting it.
The current waivers that Washington has granted to major importers of Iranian crude are due to expire at the end of May. The current thinking in Washington is that the waivers will be extended if there is a significant increase in oil prices by May. The Trump administration is pleased that it has been able to take over a million b/d of Iranian oil from the market without raising prices and hopes to keep it this way by judicious use of waivers.
China’s largest refiner, Sinopec, has offered $3 billion to Iran’s state oil company to jointly expand the development of a major field in Iran. The sources of this information say Sinopec considers itself to be safe from US sanctions because the initial deal was signed back in 2007.
Syria/Iraq: Iraq’s oil sector ended a record-setting year with its most prolific single month of crude production ever. Overall crude output from fields controlled by both the federal government and the autonomous Kurdistan Regional Government totaled 4.94 million b/d in December, according to an Iraq Oil Report analysis.
Saudi Arabia: The Saudis now plan to take Aramco public in 2021 according to Energy Minister Khalid al-Falih. Gulf News quoted al-Falih as saying Aramco was the world’s most important and most valuable oil company. The minister said earlier that Aramco was planning to issue its first international bond, now worth around $10 billion – down from the $40 billion that was discussed last year — to fund part of the acquisition of a majority stake in petrochemical giant Sabic from the Saudi sovereign wealth fund.
The larger bond issue was canceled after Aramco became concerned about having to make its accounts and reserves public. Recently, a third-party reserve audit by DeGolyer and MacNaughton found that Aramco had reserves of 263.1 billion barrels, a bit over 2 billion barrels more than the company has been reporting for years. Unless the Saudis can find a way around the requirement, a bond issue would also require the company to make its accounts public for the first time since its nationalization back in the 1970s.
Libya: crude oil production and exports have been disrupted since early December due to port closures caused by bad weather as well as security incidents and issues at the country’s largest oil field Sharara, which has been shut in since December 8. As a result, Libya’s crude oil production in December fell to 928,000 b/d from 1.1 million b/d, according to OPEC’s Monthly Oil Market Report released last week. Last Thursday the national oil company opened all its oil loading terminals after nearly a week’s suspension due to bad weather.
Libya produced an average of 1.107 million b/d in 2018, the oil company’s chairman Mustafa Sanalla said earlier this month. Total revenues reached $24.4 billion, the highest since 2013. If the security situation improves, Libya plans to produce 2.1 million b/d by 2021.
Beijing’s economic woes continue. According to the Financial Times editorial board, the warnings we saw last year are a sign of the deepening economic distress, and that this will have a far more significant external impact in the coming year than it did in 2018. Despite more than a decade of efforts to rebalance the economy and wean itself off the stimulus introduced in the wake of the 2008 financial crisis, China remains addicted to ever-higher levels of debt and construction. The Institute of International Finance estimates China’s total debt exceeded 300 percent of gross domestic product by the end of last year. Last week, China’s central bank announced that it was injecting a record $84 billion into the economy to boost liquidity and promote increased lending.
Despite hopes that a US/China trade deal will be reached soon, it may still not be enough to offset China’s lagging economic growth. Sources told Reuters last week that Beijing is planning to lower its economic growth target to 6.3 percent. This comes as China saw its exports fall unexpectedly in December by 4.4 percent, the most in two years, with imports also dropping 7.6 percent in their biggest decline since July 2016.
For many years China’s economic growth has driven the global demand for oil. This year started well, with China’s crude oil imports for 2018 posting a 10.1 percent growth to 9.28 million b/d and imports for December at 10.35 million b/d, the second time it has ever breached the 10 million b/d mark.
However, the imports are not consistent with actual domestic demand; much of the crude imported in the fourth-quarter went into building inventories, and imports mask high product re-exports. For 2019 S&P Global Platts Analytics expects China’s crude imports to rise to 9.7 million b/d, up from 9.2 million b/d last year. The growth in China’s demand for oil slowed to 590,000 b/d in 2018 versus 720,000 b/d in 2017 and demand growth is expected to fall further to 450,000 b/d in 2019.
Due to weather and geological conditions in the cold Russian winter, Moscow cannot cut its oil production too quickly, Energy Minister Novak said last week, reiterating Russia’s commitment to stick to the new OPEC+ deal and to reduce output gradually. A few days before, Saudi energy minister al-Falih said that Russia was moving with the cuts but “slower than I’d like, but they’ve started, and I am sure as they did in 2017, they’ll catch up and be a positive contributor to re-balancing the market.”
However, The Paris-based International Energy Agency on Friday cast doubt on whether Russia would meet its agreement with OPEC to cut crude oil output. In its Oil Market Report, the IEA said: “Data show that Russia increased crude oil production in December to a new record near 11.5 million barrels per day and it is unclear when it will cut and by how much.”
The Nigerian National Petroleum Corporation is worried about the rising incidents of pipeline vandalism across the country. In October 2018, its pipeline network suffered a 42.9 percent increase in the incidents of pipeline vandalism compared to the previous month. Giving a breakdown of the breaches in its infrastructure in a statement, a company official said the corporation recorded 219 pipeline vandalizations in October, compared to 125 incidents it suffered in September of the same year.
An election for a new Nigerian President and General Assembly will take place on February 16th. Presidential candidate Atiku Abubakar on Wednesday branded the state-run oil company a “mafia organization” and pledged to privatize it if he is elected. Abubakar said he had tried without success to end the opaque administration of the National Petroleum Company (NNPC) when he was vice-president under Olusegun Obasanjo from 1999 to 2007. The NNPC and other state-run organizations have been widely criticized as slush funds for successive governments, particularly around election time. Abubakar said “unless we dismantle these mafia organizations, we cannot progress, let’s privatize them.”
With a population of 191 million, Nigeria still ranks among the top 10 among countries with the lowest gasoline prices in the world. According to the Global Economic Policy Initiative, Nigeria presently ranks number six behind only Venezuela, Sudan, Iran, Kuwait, and Algeria.
Venezuelan crude oil production continued its steady decline and hit a new low in December with just 1.15 million b/d produced. Venezuela’s December month-over-month production declined 33,000 b/d, according to reports by secondary sources in OPEC’s latest report issued on Thursday. The new production figure represents a decline from over 1.2 million b/d in October, and an average of 1.25 million barrels in the third quarter.
Citgo, Chevron, PBF, and Valero are major importers of Venezuelan crude, and the Trump administration has been resisting sanctions on Caracas’s oil exports. However, last week National Security Council staff told some US refiners that sanctions on Venezuelan crude exports are under consideration, a signal that opposition within the administration to sanctions on Venezuela’s oil sector may be weakening. While Washington has sanctioned state-owned PDVSA, restricting its access to new debt financing, the country’s gold sector, and sanctioned multiple government officials, it has resisted direct sanctions on oil flows. This reluctance was due to both the potential impact on oil prices and US refiners and the fear that oil sanctions could worsen Venezuela’s humanitarian crisis and allow it to place blame on the US. In addition, Trump remains resistant to any action that could increase oil prices.
In October, US refiners imported an average of 505,870 b/d of Venezuelan crude, down from about 629,480 b/d in September, but only about 5,000 b/d less than US refiners imported in October 2017. Meanwhile, US refiners are bidding up prices for heavy grades of crude oil such as those produced by Venezuela. These crudes are needed to blend with the very light shale oils to work efficiently in US refineries along the Gulf Coast. Without heavier crudes to blend, it is difficult to produce diesel and other middle distillates. Venezuela also needs the light US shale oil to blend with the very heavy Orinoco crudes to make them suitable for shipping.
“It’s more serious than I’ve heard before,” said a refining industry executive familiar with the White House discussions. “They are setting the table to pull the trigger if they have to.” US refiners would have few supply alternatives if the Trump administration were to cut off crude imports from that country. Supplies of the heavy oils have been harder to secure in recent months because of cutbacks and production curbs in Western Canada, Mexico, and Venezuela. One type of US heavy oil, called Mars, traded at a $6.80 per barrel premium to US crude futures on Thursday, the strongest in nearly five years and up from a $4.50 per barrel premium on Tuesday, a US oil broker said.
The crackdown by Mexico’s new president on rampant fuel theft has turned into a battle to prevent economic chaos after state governments, businesses and consumers were caught by surprise by the decision. On Dec. 27th President Lopez Obrador unveiled a plan to increase military protection of oil installations and began cutting shipments through pipelines that have been bled for years by thieves. So far, the result has been more than a week of severe fuel shortages, shuttered gas stations, and lines of motorists snaking around city blocks waiting hours to fill their tanks. Lopez Obrador said that the government was looking at purchasing an additional 500 tanker trucks to distribute gasoline and that officials were asking private companies to increase fuel imports.
Officials in three affected states told Reuters they were not warned about the supply cuts. “There was zero coordination,” said Alejandro Guzman, head of economic development in the government of Jalisco, home to the country’s second-biggest city, Guadalajara. “We started to notice when the gas stations began closing.” He estimated only a quarter of gas stations in the western half of Guadalajara had fuel to sell during the past week. Still, once the shortages became apparent, Pemex’s new management started to work well with the state to try to address the problem.
Meanwhile, fuel continues accumulating at Mexico’s ports and storage terminals as the government struggles to accelerate deliveries to gas stations via truck instead of speedier pipelines. Mexico currently has almost 7 million barrels of gasoline, diesel, and jet fuel in dozens of tankers anchored around Pemex’s ports waiting to discharge. Some 5.3 million barrels more are stored at terminals, said Pemex Chief Executive Octavio Romero.
Mexico’s government, dealing with fuel shortages stemming from this crackdown on theft, is expected to postpone a new rule requiring pumping stations to sell cleaner diesel, according to sources with knowledge of the decision and documents from the regulator. This marks the first delay of a 2016 regulation that had been expected to go into effect at the end of 2018. It has lost traction mainly due to lack of infrastructure, but also because of fears that it would exacerbate fuel shortages.
Last Friday, a massive fireball engulfed people scooping up fuel spilling from a pipeline that was drilled into by thieves in central Mexico, killing 21 people and badly burning 71. Illegal taps into pipelines occurred 12,581 times in the first ten months of 2018, an average of about 42 per day. With crowds of townspeople often involved, either aiding thieves or collecting spilled fuel in primitive containers, it was only a matter of time before a fire occurred.
7. The Briefs (selections from the press – date of article in Peak Oil News is in parentheses – see more here: news.peak-oil.org)
Britain has rejected the case for a relaxation of fracking regulations despite warnings that the current system is “strangling” the industry, the Financial Times reported on Sunday. Energy Minister Claire Perry has dismissed pleas by shale gas developer Cuadrilla for rules to be loosened, citing a letter from Perry to the company’s chief executive. (1/14)
In Norway, OMV, the operator of the nation’s northernmost oil discovery offshore —Wisting in the Barents Sea—could begin production in 2026. That could provide some relief for Norway’s oil industry amid current forecasts that production will decline from the mid-2020s in the absence of new major oil discoveries. (1/17)
Northern Cyprus wants to resolve a dispute over natural gas drilling with Greek Cypriots to avoid the possibility of its leading to wide instability, the breakaway state’s deputy prime minister said after visits with Trump administration officials and US lawmakers. “We believe this is an unfair situation … which may put the stability of the region at risk,” Kudret Ozersay said last week. (1/19)
China’s CNOOC Group said it aims to double its exploration projects and proven oil and gas reserves in seven years, the company said on Friday. The announcement was a direct response to President Xi Jinping’s call to improve the country’s national security by boosting domestic production and reserves, CNOOC said in the post. (1/18)
Nigeria ranks among the top 10 cheapest petrol selling countries in the world, a policy group has revealed in its latest report. In its report released on 15 January, the Global Economic Policy Initiative said Nigeria presently ranks number six in the world only behind Venezuela, Sudan, Iran, Kuwait and Algeria. (1/18)
Angolan efforts: With production declining and investment scarce, the Angolan leadership has put in place a number of new policies to reboot its oil industry and propel economic development. However, those changes take time and renewed deep-water oil and gas exploration for fresh reserves will take years to yield the desired results and stop the daily production crunch. (1/19) [Ed. note from BP data: Angolan production peaked at 1.88 million b/d in 2008 and has declined 11 percent, in bumpy fashion, through 2017.]
A week after Venezuelan President Nicolas Maduro was sworn in for a second term in office, the option of a complete oil embargo against Venezuela has been put back on the table, according to two unnamed sources who spoke to CNN. The sources also said President Trump was mulling over a declaration that recognizes the President of the Venezuelan National Assembly, opposition politician Juan Guaido, as the legitimate president of the country. (1/17)
Heavy crude shortage–really? Just two or three months after a glut in Canada, there is now robust demand for Canadian heavy crude from US refiners—which process more than 50% of the world’s heavy crude—but not enough capacity to transport it across North America to the Gulf Coast cheaply. The good news for Canadian producers is that cheap or not, if the refineries need it, the refiners will buy it. Bloomberg reports some heavy crude grades such as Heavy Louisiana Sweet are already trading at a premium to lighter and typically more expensive grades. (1/16)
The US oil rig count dropped a whopping 21 rigs to 852, with the gas rig count also declining by four to 198, according to Baker Hughes’s report at week’s end. The oil and gas rig counts are still up by 114 up from this time last year, 105 of which is in oil rigs. (1/19)
Crude production climbing: The EIA has estimated that US crude oil production averaged 10.9 million b/d in 2018, rising by 1.6 million b/d from 2017 and reaching its highest level and seeing its largest volume growth on record. This year, America’s crude oil production is expected to average 12.1 million b/d in 2019, while crude production in 2020 is seen averaging 12.9 million b/d, with most of the growth coming from Texas and New Mexico. (1/17)
Net oil exporter? Continuously rising US shale production will make the US a net exporter of crude oil and petroleum products in the fourth quarter of 2020, the EIA said in its January Short-Term Energy Outlook, which offered a first glimpse into the administration’s forecasts for 2020. Last year, US net imports of crude oil and petroleum product are estimated to have dropped to an average of 2.4 million b/d, from an average of 3.8 million b/d in 2017. (1/17)
Offshore to grow in 2019: Rystad Energy forecasts offshore spending will outgrow spending on onshore shale activities this year. At current oil price levels, spending on land rigs, fracking and other services for the shale industry is likely to stay essentially flat in 2019. The offshore service market, too, will feel the effects of the recent oil price slide, but this sector is nevertheless projected to grow by a robust 4% this year. (1/17)
Oil majors will spend US$208 billion on offshore drilling and other oilfield services this year, according to Rystad Energy. All in all, Rystad told Bloomberg that Big Oil would probably approve about 110 offshore projects this year, up from 96 last year and 43 in 2016. (1/14)
Seismic boost: Buoyed by the success of seismic imaging that found an extra billion barrels of oil in the Gulf of Mexico, BP is looking to take its latest technology to Angola and Brazil. The software used in the Gulf led to BP discovering the crude in an area where it had long thought there was none to be found. Industry experts said the scale of the discovery 8 km below BP’s Thunder Horse field, announced last week, marked a major leap forward for deepwater exploration. (1/18)
US natural gas prices continue their rollercoaster ride at the height of the heating season, after extreme volatility gripped the market in the fall amid more-than-a-decade low natural gas inventories ahead of the winter. Analysts believe that volatility in the natural gas market will continue to be high through the winter, as inventories below the five-year average and seasonal storage draws make natural gas prices highly vulnerable to changes in the short-term weather models and forecasts. (1/18)
VW’s EVs: Volkswagen AG announced that Chattanooga, Tenn. will be the company’s North American base for manufacturing electric vehicles based on the modular electric toolkit MEB. This expansion of Volkswagen’s US footprint will include an investment of $800 million into the Chattanooga facility and create 1,000 jobs at the plant, plus additional jobs at suppliers. EV production at the site will begin in 2022. (1/14)
EV semi-trucks: The Tesla Semi has two versions, one with a range of 300 miles and one with a range of 500 miles. The price tags are, respectively, US$150,000 and US$180,000 but CEO Elon Musk said Tesla is aiming for even higher ranges of up to 600 miles. The Semi is not yet in production. Last year, Musk said it was scheduled to begin mass production this year and no updates to this timeline have been announced. (1/18)
PG&E’s bankruptcy is likely the first climate-change bankruptcy but probably not the last. In October, its market value was $25 billion. This week, it was removed from the S&P 500 as its value tumbled below $4 billion and its shares fell to their lowest level since at least 1972. The PG&E bankruptcy could be a wake-up call for corporations, forcing them to expand how they think about climate-related risks. (1/19)
Nukes are slowing: In the United States nuclear simply can’t compete with cheap natural gas and other renewables growing more affordable all the time in the nation’s wholesale electricity markets. In fact, just within the last five years six nuclear plants in the United States have closed and almost 35% of the nuclear plants that remain are being met with the possibility of early closure or are facing retirement. (1/17)
Coal shut down momentum: More US coal-fired power plants were shut in President Donald Trump’s first two years than were retired in the whole of Barack Obama’s first term, despite the Republican’s efforts to prop up the industry to keep a campaign promise to coal-mining states. The number of US coal plants has continued to decline every year since coal capacity peaked at just over 317,400 MW in 2011, and is expected to keep falling as consumers demand power from cleaner and less expensive sources of energy. (1/14)
Germany has mined and burnt lignite for hundreds of years and has the physical scars to show for it. A government-appointed task force is set on February 1 to release a plan on ending the use of lignite, or brown coal, in a crucial decision for Germany’s energy industry and its standing in the fight against climate change. Lignite — one of the dirtiest sources of energy — accounts for almost a quarter of electricity generated in Europe’s largest economy and 20,000 jobs. (1/14)
Global spending on solar energy declined by almost a quarter last year to US$130.8 billion, mainly on the back of a regulatory policy overhaul in China that led to an oversupply of solar panels, driving prices down. This, in turn, resulted in an 8-percent slide in overall renewable energy investments to US$332 billion. (1/18)
Shell on climate targets: Clean energy solutions are not moving fast enough to meet the UN targets for curbing the effects of global warming, and alternative energies are unlikely to meet those targets without policy support, Charles Holliday, the chairman of oil supermajor Shell, said. (1/18)
Australian heatwave: An extreme heatwave has afflicted the nation since Saturday, causing wildlife deaths, bushfires and an increase in hospital admissions. (1/19)
Creative innovation: Chevron and Occidental Petroleum recently announced they will invest in Carbon Engineering Ltd., a Squamish, B.C. clean energy start-up company backed by among others, Bill Gates. Carbon Engineering has developed a process, the Direct Air Capture technology, that removes carbon dioxide directly from the atmosphere. According to the company, the facilities are industrially scalable. The second technology, Air to Fuels, aims to lower the carbon footprint of the transportation sector through the creation of synthetic fuels. This process combines clean hydrogen produced via electrolysis from water with the CO2 captured from the atmosphere to produce hydrocarbon fuels such as gasoline, diesel and Jet-A. (1/14)