Peak Oil Review 19 February 2019

February 19, 2019

Editors:   Tom Whipple, Steve Andrews

Quote of the Week

“Washington doesn’t like cartels like OPEC.  But then how can you have one market [the oil trade] dominated by one currency – the dollar?”Participant at an EU industrial working group convened to promote the euro and fight the monopoly of the US dollar in oil and commodities trading (2/14)

Graphic of the Week

1.  Oil and the Global Economy

Prices moved higher last week as the markets perceived that production problems in Venezuela and elsewhere might outweigh any decline in demand that could take place if global economic growth slows.  London oil climbed by nearly $5 a barrel last week to close at $66.25.  This is still about $20 a barrel lower than the recent peak set last October, but up about $16 a barrel from the early January low.

On the face of it, the 800,000 b/d OPEC+ production cut plus 400,000 b/d of Venezuelan production that is having trouble finding a market due to the US sanctions, should be enough to move prices higher.  Glimmers of an end to the rapid growth in US shale oil production are starting to emerge.

Saudi Arabia’s energy minister said this week that the kingdom’s production would decline to near 9.8 million b/d next month.  That is more than 1 million less than it pumped in November before agreeing with the rest of OPEC and Russia to cut production, and 500,000 b/d below its output target from the group.  The country’s exports will also fall to the lowest level for March since 2011, a testimony to the effect US shale oil production and growing political tensions with the US are having on the Saudis.

However, there are threats to global economic growth looming which could overwhelm any cuts in oil production should a global recession emerge.  We already see economic slowdowns in major industrial countries, and there are several large shoes out there waiting to drop – Brexit and the Sino/US trade war to name two.

The OPEC Production Cut:

There seems to be a split emerging in Moscow as to whether the production cut “alliance” with OPEC is doing Russia any good.  Rosneft’s chief executive Igor Sechin wants Russia to quit the deal with OPEC.  Sechin sees it as a threat to Russia that benefits the United States.  However, for now, the likelihood of his opinion leading to a pullout from the deal probably is not in the cards as Moscow is only making limited cuts slowly.

Russian Energy Minister Alexander Novak said on Thursday that there are risks for global oil markets from the political crisis in Venezuela, yet there are no proposals to reverse the global oil production cut deal.  Novak said Russia had cut its oil production under a pact between OPEC and non-OPEC producers by 80,000-90,000 barrels per day from its level in October.

The world’s need for OPEC crude is shrinking, suggesting that they will need to extend the deal through the second half of the year.  The latest forecasts from supply-and-demand studies of the oil industry’s most-watched organizations – the International Energy Agency, the US Energy Information Administration, and the Organization of Petroleum Exporting Countries itself – show the need for OPEC crude diminishing as demand forecasts are trimmed and US supply outlooks are increased.  This, of course, depends on whether the optimistic forecasts for US shale oil production this year come to fruition.

Moscow said last week that there were no substantial talks currently taking place to establish a formal alliance between Russia and OPEC.  This is due to the additional red tape it would create, as well as the risk of US sanctions against monopolies.

US Shale Oil Production:

The US Energy Information Administration last week raised its forecasts for average US production in 2019 to 12. 4 million b/d, an annual increase of 1.45m b/d.  This is also 350,000 b/d higher than predicted three months ago, despite warnings that shale oil is slowing down.  Twelve months ago, the EIA forecast 2019 growth would be just 590,000 b/ d.  This raises the issue of whether the EIA projections for this year and next are overly optimistic as they do not seem to be backed up by the detailed data regarding production trends.

The decline in shale oil production from legacy wells that are more than a month old is getting to be steeper and faster all the time.  According to Rystad Energy’s forecast, if no new wells were to be completed in 2019-20, shale oil production would decline by 62 percent or 4.5 million b/d.  This means that unless the shale oil industry drills and fracks enough wells to produce 4.5 million b/d in the next two years, US shale oil production would actually decline.

According to Rystad Energy partner Artem Abramov, “It is evident that without an increase in activity levels in terms of new completions, or further increases in oil well productivity, the pace of growth will decelerate in 2019-20.  In fact, if the activity and productivity levels seen in the fourth quarter of 2018 prevail, US light oil production will increase by less than 1.5 million b/d between the fourth quarter of 2018 and the fourth quarter of 2020.  This corresponds to a 50 percent lower growth rate than what was achieved over 2018.”

Drilling curbs by oil producers in the Permian Basin will continue until transport bottlenecks ease and investors stop punishing companies for increased capital spending, executives at an energy conference said last Thursday.  The price of crude in the Permian fell sharply last year, selling as much as $18 below US benchmark prices, as a lack of pipeline capacity landlocked some oil output and as investors pushed producers to reduce spending and boost shareholder returns.

Pioneer Natural Resources Co, one of the Permian’s largest producers, said this week it plans to reduce 2019 capital expenditures by 11 percent, or about $350 million, slowing its production growth from prior years.  “There aren’t nearly as many drilling dollars available,” said Bobby Whiteside, president of Midland, Texas-based oil producer Regions Permian LLC.  “If Wall Street wants you to drill within cash flow, you’re going to have slower growth.”

As Standard Chartered analysts said last week, “In our view, there is a large gap between the generally downbeat views of the US oil industry itself and its investors and the upbeat tone of much media coverage and many analysts.”

2.  The Middle East & North Africa

Iran: After 3 months of sanctions, the US has succeeded in reducing Tehran’s oil production by about 1 million b/d to 2.75 million where it has stabilized.  In early May, the waivers that Washington granted to eight countries so that they could continue importing some oil without increasing world oil prices will expire.  Few expect to see much of decline after the expiration of the waivers so that the US goal of forcing significant changes to Iran’s foreign policies is still some time off.

There is little doubt that Iran’s economy has been hurt by the sanctions.  However, with nearly the whole world looking for ways around the sanctions without hurting trade with the US, not much is likely to happen in the immediate future.  Increasing tensions between Iran and Israel over the Syrian situation could eventually lead to more trouble than the sanctions.

Iraq: Per the OPEC production freeze agreement, Iraq has made steep cuts at state-run fields, but those reductions are offset by increases at international oil company operated projects.  Iraq sustained record-high oil production in January, despite efforts to begin limiting output in accordance with the agreement.  The federal government and the autonomous Kurdistan together produced about 4.94 million b/d in January – the same as overall output in December.

The Kurdistan Regional Government issued an order Thursday to end all oil and refined product exports to Iran immediately.  The directive will stop the flow of hundreds of tanker trucks that have been carrying crude and heavy fuel oil from Kurdistan across the Iranian border each day.  This trade has drawn complaints from Washington as it seeks to tighten sanctions against Iran.

Saudi Arabia: The government plans to develop an international energy exploration and production business for the first time, even as the kingdom seeks to curb its reliance on hydrocarbons.  Khalid al Falih, Saudi Arabia’s energy minister, said an overseas expansion would be a critical part of the company’s future.   “We are no longer going to be inward-looking and focused only on monetizing the kingdom’s resources,” Falih said.  “Going forward the world is going to be Saudi Aramco’s playground.”

While Saudi Aramco is the world’s largest oil producing company, it has never gone overseas to drill for oil, relying on its massive domestic reserves.  Now the Saudis want to become an international energy player like Royal Dutch Shell or Exxon Mobil, pumping oil as well as gas overseas.  How this plan squares with Crown Prince Mohammed bin Salman’s efforts to wean the kingdom off what he has called its “dangerous addiction to oil” remains to be seen.

Riyadh would need oil prices at $80-85 per barrel to balance its 2019 budget, Jihad Azour, Director of the Middle East and Central Asia Department at the International Monetary Fund told Reuters.  Saudi Arabia’s officials, including Energy Minister Khalid al-Falih, don’t discuss publicly ‘targeted oil prices’ or the desired level of oil prices that would be comfortable to the Kingdom’s finances, but analysts and the IMF have estimated what oil price level would be necessary to cover Saudi Arabia’s budget spending.

Saudi Arabia’s Safaniyah offshore oil field is producing at reduced capacity after a ship’s anchor cut the main power cable.  An earlier report suggested that production at the field had stopped completely, sparking worry about global heavy oil supply.  With Venezuela sliding into chaos and with US sanctions reducing the flow of Venezuelan heavy crude to refineries, another heavy crude-producing field outage only adds to the problem.

Libya:  Eastern Libyan military forces have full control of Libya’s biggest oilfield, El Sharara, a spokesman said. There was no immediate confirmation or comment from the state oil firm which operates with foreign partners the 315,000 b/d field deep in Libya’s southern desert.  Libya’s state oil firm NOC is committed to a swift resumption of oil output at the El Sharara oilfield, but only after its workers’ safety is assured.  So far, there is no word that production at the field has resumed.

The UN-backed government says that joint Libyan and US forces have bombed alleged al-Qaida militants in a southern desert town.  Tripoli-based government spokesman Mohammed al-Salak said late Wednesday the bombing took place in the town of Ubari, about 950 kilometers, or 590 miles, south of the capital, Tripoli.

3.  China

US and Chinese negotiators concluded the sixth round of cabinet-level negotiations in Beijing on Friday with no indication of substantial progress on core issues that President Donald Trump has said must be part of any “real deal” to end the trade war between the world’s two biggest economies.  The US negotiating team was expected to sit down with President Xi Jinping later on Friday, reciprocating Mr. Trump’s courtesy meeting with Vice Premier Liu He in Washington late last month.

The impasse is increasing pressure on the US administration to delay a scheduled increase in tariffs on March 2 to facilitate a possible summit meeting with President Xi Jinping.  If an agreement is not reached by March 1, President Trump has said he will increase the punitive tariff rate on $200 billion of Chinese imports from 10 percent to 25 percent.

China’s crude oil imports in January grew 5.1 percent year on year to 10.07 million b/d, preliminary data from the General Administration of Customs showed last Thursday. This was the third time China’s monthly crude imports were above 10 million b/d, despite dropping 2.7 percent from 10.35 million b/d in December 2018.

China’s natural gas imports in January, comprising LNG and pipeline gas, rose 26.8 percent year on year to 9.81 million tons — the equivalent of 13.53 Bcm.

4. Russia

The US is still deciding which sanctions to impose on Russia as part of mandatory penalties triggered in 2018 that could include blocking Russian petroleum imports into the US and banning US bank loans to Moscow.  Blocking US imports of Russian oil would not have a significant market impact but banning Russia’s access to international debt and other measures to hamper Russian exports could deliver a severe blow to its economy.  The US imported about 317,500 b/d of refined products and 67,500 b/d of crude from Russia in the first 11 months of 2018.

Energy Minister Novak said on Thursday that there are risks for global oil markets from the political crisis in Venezuela, yet there are no proposals to reverse the global oil production cut deal.

Moscow said last week there were no substantial talks currently taking place to establish an alliance between Russia and OPEC.  Energy Minister Novak had said earlier it was highly unlikely OPEC and other oil producers would set up a joint structure due to the additional red tape it would create, as well as the risk of US sanctions against monopolies. Reuters reported last week that OPEC  and its allies had drafted a document for setting up a new alliance but had carefully avoided any mention of sensitive issues such as oil prices.

5. Nigeria

Politicians and voters across Nigeria expressed dismay on Saturday after the government postponed the national election hours before polls were due to open.  One opposition leader called the move a ploy to keep President Muhammadu Buhari in power.  The chairman of the Independent National Electoral Commission told reporters the one-week delay was needed “to hold a free and fair election.”

The Niger Delta Avengers—the militant group responsible for most of the attacks on Nigeria’s oil infrastructure in 2016— resurfaced a few days before the now postponed Nigerian presidential elections, saying that they are backing the opposition candidate and would attack oil facilities if incumbent president Muhammadu Buhari is re-elected. Four years ago, the Avengers were able to reduce Nigeria’s oil production by several hundreds of thousands of barrels of oil per day.

The Nigerian Navy says it has destroyed no fewer than 637 illegal refineries, 104 speed boats and arrested 340 suspects in the Niger Delta during 2018.  The illegal refineries, which for the most part consist of an oil drum or two, are claimed to have stolen some 277,000 barrels of oil last year. Even if these numbers are wildly exaggerated, illegal pipeline tapping and refining are still a significant problem which is slowly destroying Nigeria’s onshore oil industry and forcing it offshore.

Shell announced the release of a tender for the development of the Bonga South West Aparo oil field. The project’s initial phase includes a new Floating, Production, Storage, and Offloading (FPSO) vessel; more than 20 deep-water wells and related subsea infrastructure.  The field lies 15km Southwest of the existing Bonga Main FPSO and is expected to produce 150,000 b/d.

6. Venezuela

The US increased pressure on President Maduro on Friday by sanctioning some of his top security officials and the head of the state oil company and unveiling plans to airlift humanitarian aid to the Colombian border.  The 250 tons of food supplies, hygiene kits, and nutritional supplements began arriving Saturday to the border city of Cucuta, where tons of boxes of emergency aid already are warehoused awaiting delivery into Venezuela.  Last year, the US sent more than $100 million in assistance to Cucuta to help Colombian authorities absorb some of the estimated 3 million Venezuelans fleeing hyperinflation and food shortages.

US sanctions on PDVSA continue to alter global crude and diluent flows and are accelerating the collapse of the South American nation’s oil sector.  The sanctions, which the Trump administration announced January 28 and are expected to remain in effect until Venezuelan President Nicolas Maduro leaves office, have caused US Gulf Coast refiners to scramble for new sources of heavy crudes and have cut off flows of US refined products and diluents to Venezuela.  But the sanctions have yet to affect oil prices significantly.

Estimates abound as to how fast Venezuela’s oil production is going to slip. Rystad Energy’s base case is that Venezuelan production drops by 340,000 b/d year-on-year to 1 million bpd in 2019 and slides even further to 890,000 b/d in 2020.  In the low case scenario, where the status-quo continues, and Venezuela is unable to offset the effects of US sanctions and secure new financing, the country could see an additional 20 percent reduction in crude output this year, dropping to about 800,000 bpd, before sliding to 680,000 bpd in 2020.

However, according to the US State Department’s Special Envoy to Venezuela, Caracas’ oil production could fall to just 500,000 b/d by year’s end.  Venezuelan production dropped 10,000 b/d to 1.16 million b/d in January from 2.4 million b/d in December 2015, according to the latest S&P Global Platts OPEC production survey.

Due to the US sanctions, one of the world’s largest commodity traders, Trafigura, has decided to halt its oil trade with Venezuela. Losing Trafigura is a severe blow to PDVSA, which has been working with Trafigura and other trading houses to sell crude oil and to import refined oil products.  In 2018, Trafigura took 34,000 b/d of crude oil and products from Venezuela, most of which it resold to refineries in the US and China.  The US sanctions now block all payments to PDVSA accounts, and buyers of Venezuelan crude are directed to deposit payments in a separate escrow account.

PDVSA is telling its customers to deposit the money for purchases in Russia’s Gazprom bank.  However, Gazprom said over the weekend it would not handle PDVSA money due to the harm US sanctions could do to its other business.

China has been holding talks with Venezuela’s political opposition to safeguard its investments as pressure builds on Nicolás Maduro.  Its diplomats are worried over the future of its oil projects in Venezuela and nearly $20 billion that Caracas owes Beijing.

7. Mexico

A package of $3.5 billion worth of tax cuts was granted last week to the state oil company Pemex to be spread over the next six years.  In addition, the government will inject $3.9 billion into Pemex, officials said on Friday.  This move could strengthen its finances and prevent a further credit downgrade, although investors saw the plan as only a short-term fix.

Falling oil output, corruption and high labor costs have contributed to the decline of the company that was once a symbol of national pride.  It now holds roughly $106 billion in financial debt, the highest of any national oil company in Latin America.  Fitch and Moody’s rate Pemex’s credit one notch above junk.   For years the Mexican government used Pemex’s pockets as a personal piggy bank, without ever fully repaying what was taken out of the coffers.

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

The European Union has convened a wide-ranging industrial group to work on promoting the euro and fighting the monopoly of the US dollar in oil and commodities trading, reflecting broader tensions with Washington over trade and sanctions. (2/14)

BP bullish on oil: Global oil demand will prove resilient over the next two decades even if ambitious targets set in the Paris climate change accord are met and the adoption of renewable energy is “off the charts,” according to BP’s annual energy outlook. (2/15)

German LNG: Germany will likely build two terminals to import liquefied natural gas, in a move to appease the US while Berlin also supports the Russia-led Nord Stream 2 gas pipeline, which has divided the European Union member states in recent years. (2/13)

EU LNG: The European Union reached a provisional deal on Wednesday on new rules governing import gas pipelines including Russia’s planned Nord Stream 2, in a move that cast doubts over the project’s current operating plan. In the deal, Europe is closing a loophole in its laws as its dependency on natural gas imports increases. The new rules ensure that EU law will be applied to pipelines bringing gas to Europe and that everyone interested in selling gas to Europe must respect European energy law. (2/13)

Turkish exploration ships will soon start drilling for oil and gas offshore the northern part of Cyprus, a move that could reignite tension between Turkey, Cyprus, and Greece regarding the exploration rights off the eastern Mediterranean island. Turkey claims that part of the Cyprus offshore area is under the jurisdiction of Turkish Cypriots or Turkey. (2/14)

In Yemen, the Saudi-backed government hopes to scale up its crude production to 110,000 b/d in 2019, with exports touching about 75,000 b/d. The government of Abd-Rabbu Mansour Hadi controls the southern port city of Aden and areas holding Yemen’s oil-and-gas fields. The Iranian-aligned Houthi group controls the capital Sanaa and the oil terminal of Ras Issa on the western coast. Yemen’s oil output has collapsed since 2015 when the Saudi-led military coalition intervened in Yemen’s war to try to restore Hadi’s government to power. (2/11)

India’s largest LNG importer may invest in Tellurian Inc.’s proposed Driftwood LNG liquefaction and export facility near Lake Charles, La.  The approximately 27.6-million ton per annum Louisiana project would also include natural gas production, gathering, and processing infrastructure as well as the 96-mile Driftwood Pipeline. (2/16)

The US oil rig count increased by three to 857, according to Baker Hughes.  Gas rigs declined by one to 194. (2/16)

US crude oil output is expected to rise 1.45 million b/d this year and 790,000 b/d more next year, bringing total output to 13.2 million b/d, the EIA said in a monthly forecast on Tuesday. US oil production this year is forecast to be at a record 12.41 million b/d. (12/13)

Texas Independent Producers Royalty Owners Association reported that Texas oil wells produced more than 1.54 billion barrels of crude in 2018, well above the previous record of 1.28 billion barrels set in 1973. (2/13)

Crude exports: Sentinel Midstream on Monday became the latest contender in the race to build a crude export terminal off the US Gulf Coast, announcing plans to develop a facility off Freeport, Texas that could load a supertanker in one day. The company’s announcement follows seven other proposed crude export terminals. (2/12)

US dry natural gas production will rise to an all-time high of 90.16 billion cubic feet per day (bcfd) in 2019 from a record high of 83.26 bcfd in 2018, according to the EIA’s Short-Term Energy Outlook on Tuesday. (2/13)

Biogas: Southern California Gas Co. and biogas producer Calgren Dairy Fuels announced that renewable natural gas produced at Calgren’s dairy digester facility in Pixley, California is being injected into SoCalGas pipelines. The renewable natural gas from a cow manure digestion facility is already being used to fuel about 400 waste hauling trucks. (2/16)

A biofuel win: The European Commission, the entity responsible for negotiating trade deals on behalf of the European Union, announced last week that they will now allow soybeans grown in the United States to be used for biofuel in the EU. This move came as part of a campaign to improve trade relations with the United States. (2/15)

KY coal closures: The board of the Tennessee Valley Authority voted Thursday to close its Paradise 3 coal plant in western Kentucky by the end of 2020 and to close its Bull Run plant in eastern Tennessee by 2023. The two plants combined employ about 270 people, according to the TVA. In a tweet earlier this month, President Trump urged the TVA to “give serious consideration to all factors before voting to close viable power plants, like Paradise #3 in Kentucky!” (2/15)

The US solar power industry workforce expanded by 150,000 jobs in the period 2010 to 2018, the latest census from the Solar Foundation found. Last year alone, however, the sector shed almost 8,000 jobs, and it contracted by more than 9,000 jobs during 2017. (2/14)

Solar from space: Chinese scientists have revealed plans to build and launch into orbit a space solar station that could capture the Sun’s rays 24/7. China has already started to build an early experimental space power plant in the city of Chongqing. Such solar power technology could supply reliable energy 99 percent of the time and have six times the intensity of the solar farms that work on the earth. (2/16)

A French wind power tender has attracted interest from international energy firms, signaling that France’s offshore wind industry could finally be taking off after years of missteps.  While Britain and Germany have already built 8,200 and 6,400 megawatts (MW) of offshore wind capacity, France does not have a single turbine in the water. In two previous French tenders, projects worth $12.4 billion were awarded but have not materialized because of public opposition and contract disputes. (2/16)

New H2 angle: The Dutch Institute for Fundamental Energy Research is partnering with Toyota Motor Europe to develop a device that absorbs water vapor and splits it into hydrogen and oxygen directly using solar energy. Researchers have already developed small solid-state photoelectrochemical cells that capture water from ambient air and then generate hydrogen upon illumination by sunlight. Working with gas instead of liquid has several advantages. Liquids introduce some technical problems, like unwanted bubble formation. Furthermore, by using water in the gas phase instead of the liquid phase, there is no need to purify the water. And finally, since only the water that is present in the surrounding air is used, the technology is applicable in remote places where no water is available. (2/13)

Population, soil, fertilizer, fuels: A painful truth is that we may need to reduce population. Some demographers tell us that human population will peak at mid-century and then gently decline through 2100. Others say that population will continue to grow through 2100. Neither of them may be right if we as a civilization don’t figure out how to preserve the fertility of the soil. And, that’s before considering the effects of worsening climate change and other resource depletion including fossil fuels. (2/12)

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