Editors:   Tom Whipple, Steve Andrews

Quote of the Week

“This [Exxon] is the company that denied the [climate] science, despite knowing the damage their oil exploitation was causing; which funded campaigns to block action on climate and now refuses to face up to its environmental crimes by attending today’s hearing. We cannot allow the lobbyists from such corporations free access to the corridors of the European parliament. We must remove their badges immediately.”
Molly Scott Cato, member of EU parliament

Graphic of the Week

1.  Oil and the Global Economy

Prices climbed for the first three trading days last week on the perception that oil supplies were tightening due to the OPEC+ cuts, the US sanctions on Iran and Venezuela, and a 9.6-million-barrel decline in US crude stocks.  Prices in London closed on Wednesday at $68.50 — a four-month high.  However, market sentiments changed on Thursday and Friday as fears of an economic slowdown hit the equity and oil markets.  Signals from the Federal Reserve that there may not be any more interest rate increases this year contributed to the idea that harder economic times are ahead.  A report on Friday showed factory output in the eurozone fell in March at the fastest pace in nearly six years, while US manufacturing activity slipped to its lowest level in almost two years.

Evidence continues to accumulate that there is a significant paradigm shift underway in the US shale oil industry which is generally acknowledged as key to future growth of the global oil supply.  US shale has never lived up to its backers’ expectations that it would someday be highly profitable.  After a decade of steady losses by many shale oil drillers, we are seeing the financing of unprofitable firms drying up, forcing them to cut back on plans to increase production.  The US rig count has dropped for the last five weeks to 1,016 rigs.

At the same time the smaller drillers, who started the shale oil revolution, are running into a barrier to further growth, they are slowly selling out to the wealthy international oil companies.  The latter claim that their superior technology and integrated, larger scale operations can be profitable – at least in the Permian Basin.  Conoco and Exxon say they can increase production in the Permian by millions of barrels per day over the next five years so that global oil shortages are unlikely to develop in this period.  There are, of course, those who say the major oil companies will not be able to increase and sustain production by as much as they say due to the geology of shale oil which is only profitable in a limited number of locations and depletes so rapidly that constant drilling is required to stay even.

The success of the major oil companies, notably Exxon and Conoco, in the Permian Basin during the next few years is shaping up to be a vital issue in determining how long global oil supplies can continue to grow.

The OPEC Production Cut: The cartel+ canceled its planned meeting in April and will decide instead whether to extend output cuts at a meeting on June 25-26.  This delay will allow time to assess the impact of the US sanctions on Iran and the crisis in Venezuela.  Saudi Arabia’s energy minister said the market still was looking oversupplied, but that April would be too early for any decision on output policy.  The minister also said that he was confident that OPEC and its partners would reach full compliance with the announced cut, and even exceed it, in weeks to come.

The United Arab Emirates’ energy minister said on Wednesday that he expects OPEC to finalize the long-term cooperation charter with its non-OPEC partners in June.  The issue of a formal OPEC+ pact has been around for some time, but Moscow has preferred that the alliance continue with ad hoc production agreements as necessary.  Including Russia and its oil-producing allies into the OPEC agreement, however, would give the organization more clout in dealing with importing countries.

US Shale Oil Production: The headline of the week reads: “Oil majors rush to dominate US shale as independents scale back.” The story goes on to describe how Exxon is building a massive shale oil project that its executives boast will allow it to ride out the industry’s boom-and-bust cycles.  According to Drillinginfo, the oil majors have spent $10 billion buying acreage in the Permian since early 2017 and currently have 75 drilling rigs in operation, up from 31 in 2017.

Exxon’s CEO Darren Woods recently said Exxon would change “the way that game is played” in shale.  Its size and businesses could allow Exxon to earn double-digit percentage returns in the Permian even if oil prices crashed to below $35 a barrel.  The company’s 1.6 million acres in the basin means Exxon can treat its Permian operations as a “megaproject.”

As integrated firms, Exxon and the other oil majors do not have to make a profit only by selling its newly produced oil as do the smaller drillers but can earn money from transportation, refining, and retailing oil products – hopefully offsetting any losses from drilling and producing oil in the Permian.  According to IHS Markit, the Permian is to produce about 5.4 million b/d in 2023, up from 4.1 million today.  Ostensibly, there is little doubt that the major oil companies have many advantages over the smaller drillers which could allow them to drill at lower costs and make money from shale oil other than just selling the crude.

A recent study of the profitability of the smaller oil companies shows that the stock of the average smaller company is down 43 percent since the October 2018 high.  The study casts doubt on their prospects and ability to borrow money.  While the oil majors are moving into the Permian, the bulk of US shale oil production still comes from small companies that are under financial stress and are cutting back on new drilling which in the case of shale oil means that production could start to fall.

The underlying issue is the geology of shale oil.  Currently, the Eagle Ford and the Bakken are producing about 1.4 million b/d and are growing very slowly.  The major oil companies are staying away from these basins and placing their bets on the Permian.  A recent report on the Bakken shows that the basin produced 55 million barrels of water in December along with 40 million barrels of oil.  The share of water coming from wells, some of which is natural and some injected during the fracking process, is growing as a percentage of the total liquid output from the Bakken’s wells.  At an average cost of $4 a barrel to dispose of wastewater, the total estimated cost to dispose of Bakken wastewater now is over $2 billion a year.  This situation obviously does not bode well for the future of the basin.

There are major changes underway for the US shale oil industry. Whether these changes result in higher production over the next five years or whether the shale oil boom which has added about 8.5 million b/d to US oil production will peak has yet to be seen.

2.  The Middle East & North Africa

Iran: Tehran’s daily oil exports appear to have dropped in March to their lowest level this year. Shipments are thought to be averaging between 1.0 and 1.1 million b/d, according to Refinitiv Eikon data and three other companies that track Iranian exports. That’s lower than February when shipments were at least 1.3 million b/d.  The situation may get worse if Washington stops giving waivers to importing countries. Numbers on Iranian exports should be taken with a grain of salt as Tehran has become expert in hiding its shipments.  The Iranians recently sent several oil tankers to Asia using forged documents that indicated the oil was coming from Iraq, according to Reuters.  There are reports of ship-to-ship transfers of Iranian oil at sea to hide the cargo’s origin.

The US granted waivers to eight of the major Iranian clients—including China and India—after it placed sanctions on Iran’s oil in the fourth quarter of 2018.  The waivers are due to expire in six weeks, and there is much attention on whether they will be renewed.  Iraq’s waiver, which was due to expire last week was extended another 90 days, but this waiver is mainly for imports of Iranian natural gas to run Iraqi power plants which would have trouble functioning without Iranian fuel.

Iranian President Rouhani launched four new development phases at the giant South Pars offshore gas field, which will add 110 million cubic meters to the daily output of the gas field.  The expansion cost $11 billion.  Petroleum Minister Zanganeh said South Pars would produce from 27 phases of development within a year and that production would reach more than 750 million cubic meters later this year.  Iran’s total natural gas production currently is 841 million cubic meters daily, which should rise to 880 million cubic meters daily by next March and 950 million cubic meters daily in 2021.

OPEC’s February oil production data from Ron Patterson’s Peak Oil Barrel.

Syria/Iraq: US sanctions have cut off Iranian oil shipments to Syria.  Tehran has been unable to deliver oil to Syria since Jan. 2, according to maritime-data provider TankerTrackers.com. That compares with an average of 66,000 barrels a day in the last three months of 2018.  Storage tanks are virtually empty in the port city of Baniyas, home to Syria’s largest oil refinery.  Iranian crude exports to Syria have been vital to the country during the civil war, as Syrian domestic oil production dropped from 353,000 b/d in 2011 to 25,000 b/d in 2017, according to figures from BP.  Moscow has been shipping oil products to Syria to keep the country functioning.

In Iraq, widespread flooding is threatening to shut down the 117,000 b/d Majnoon oil field and has already submerged thousands of acres of Basra farmland.  Output at Majnoon has not been affected so far, but floodwaters have already reached four wellheads, and further breaches of a nearby dirt berm could put the field’s main facilities underwater.

OPEC’s February oil production data from Ron Patterson’s Peak Oil Barrel.

Saudi Arabia:  The kingdom’s crude oil exports in January fell to 7.254 million b/d from 7.687 million b/d in December, according to official data released last week. Production in January was 10.2 million b/d down 400,000 b/d from December. Some 377,000 of crude was burned directly to produce electricity during January. Burning crude directly to generate electricity is a wasteful practice, and the government has been making an effort to switch to natural gas or even solar.

OPEC’s February oil production data from Ron Patterson’s Peak Oil Barrel.

Libya: Crude oil production has recovered to 1.2 million b/d as the Sharara oil field is approaching its rated 330,000 b/d after being closed by militants for three months. The chairman of state-owned National Oil Corporation (NOC) says the country can increase output to 1.4 million b/d this year — “if the security situation remains stable.”

The NOC is working on initiatives to reignite Libya’s upstream sector by opening existing wells and oil processing facilities that have been shut down since the Gadhafi days. The NOC’s target, which is to reach a production capacity of 2.1 million b/d by 2021, hinges on Libya attracting foreign investment along with a significant improvement in the security situation.

OPEC’s February oil production data from Ron Patterson’s Peak Oil Barrel.

3.  China

In the first two months of 2019, Chinese refineries processed 12.68 million b/d— the highest on record and a 6.1-percent increase compared to the same period last year, according to China’s customs data. The refiners are on course to process more than 13 million barrels of crude oil per day for the first time ever in the third quarter this year.  Most of the processed crude came from imports of crude oil, which continued to increase this year compared to the same months of 2018.  In February, China imported 10.23 million b/d, up 21.6 percent on the year.  In January, imports were 10.03 million b/d, up 4.8 percent on the year.

Beijing has been increasing its refinery operations for several years now in an effort to dominate the Asian oil product markets. Large scale purchases of crude and modern efficient refineries give Chinese refiners an advantage against their traditional competitors.  Zhejiang Petrochemical and Hengli Petrochemicals are each expected to have a new 400,000-b/d refineries up and running by the end of the third quarter this year.

If oil prices continue to climb, the next round of increases may largely depend on what happens between the US and Chinese trade negotiations. There have been conflicting reports in recent days.  The two sides have gotten this far by hashing out the easy stuff.  China agreed to buy more American energy and farm products, and the US delayed tariffs and signaled a desire to end them.  But the hard issues are going to be difficult to overcome.  These include intellectual property rights, access to the Chinese market for American firms, data-services, and other practices by the Chinese government that Washington views as unfair.  President Trump said last week that the US expected to keep tariffs on Chinese goods in place for a “substantial period of time,” even after a deal.  “We have to make sure that if we do the deal with China that China lives by the deal.”

4. Nigeria

The Kolmani River-II Well in northern Nigeria is progressing satisfactorily, with drilling of 6,700 feet so far. This exploratory well is being drilled in hopes of finding oil and gas in northern Nigeria.  The target for the Kolmani River well is 14,200 feet and could be deeper depending on findings.  Should substantial amounts of gas be found in the northern parts of the country, the government again is talking about building a 2000-kilometer pipeline through Niger and into Algeria and even Morocco where it could link to pipelines into Europe.  Seven months ago the government said it was working with a Chinese consortium on financing a 614-kilometer pipeline from gas fields in southern Nigeria to Kaduna in the north.

As it has been for many years, the refining situation in Nigeria is in chaos with most refined products being imported at considerable cost for an oil-producing country.  The heart of the problem is the lack of maintenance which eventually leaves refineries processing a fraction of their name-plate capacities and operating at a loss.  Last week the government announced that it was planning to overhaul the two refineries at Port Harcourt which have a combined capacity of processing 210,000 b/d but have not had major overhauls for the last 19 years.  There has been talk that progress on the new 650,000 b/d Dangote refinery, which is supposed to replace the existing refineries, is slipping.  Plans to overhaul the Port Harcourt refineries which are 30 and 55 years old suggest that the government is hedging its bets on the Dangote project.

5. Venezuela

The electricity is back on in many parts of Venezuela, but the country is not out of trouble as yet.  The country’s’ electric grid which depends on the Guri dam for 80 percent of its energy is in terrible condition and experts are expecting frequent and long-lasting power outages to continue.  The second-tier effects of the power failures could be profound.  In many areas, water service still isn’t back to normal, because there isn’t enough electricity to run the pumps and many are worried that there are no seeds and fertilizer to grow this year’s crops.

U.S. crude imports from Venezuela have dropped to zero, for the first time on record, preliminary data from the Energy Information Administration showed on Wednesday.  Imports from Venezuela, historically one of the biggest suppliers of crude to the US, were about 587,000 b/d in late January.  Venezuela’s principal Jose export terminal is back in operation and PDVSA says it may divert the oil that was going to the US to Russia for the lack of anywhere else to send it.  Whether such a plan does much for its earnings has yet to be seen.

There is no word on the status of the three “upgraders” which are jointly operated by Venezuelan and foreign personnel.  These devices process the very heavy Orinoco oil into a lighter substance which can be exported.  At last word, only one of the three upgraders were working and there was a severe shortage of imported solvent to mix with the heavy oil.

OPEC’s February oil production data from Ron Patterson’s Peak Oil Barrel.

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

The new low-sulfur fuel regulations by the International Maritime Organization (IMO) that begin January 1, 2020, limit the sulfur content in marine fuel to 0.5 percent from 3.5 percent currently. As 2020 draws nearer, oil refiners around the world, from Europe to the US to Asia, are preparing to capture as high refinery margins for distillates like diesel and marine gasoil as they can get. Some refiners have changed their maintenance schedules for 2019, with planned refinery stoppages heavily geared toward the spring in the first half of the year, leaving more operating refining capacity for the fall of 2019, when the 2020 ship fuel change will be imminent. (3/20)

In the EU, Exxon could lose its lobbying access to the European parliament after no company representative showed up at a hearing on climate change denial. A member of the European parliament from the Green party has already submitted a request to ban the company. (3/23)

In Israel, all the requirements needed for the start of Israeli gas exports to Egypt are not yet in place, with first flows now not expected until at least the middle of this year.  US-based producer Noble Energy and its Israeli partner Delek Drilling — together with Egyptian-owned Sphinx EG — in September last year agreed to buy a 39% stake in the idled East Mediterranean Gas pipeline for $518 million as part of plans to use the pipeline in reverse for Israeli gas to flow to Egypt. At the time it was announced that exports would start “at the beginning of 2019” once the deal was completed.  A little more work on the deal remains to be done. (3/23)

Sudan considers oil and gas exploration blocks offered by Egypt in the Red Sea’s Halayeb area as a direct intrusion into Sudanese territory, Saad al-Deen Hussein al-Bishri, minister of state at Khartoum’s oil ministry, was cited as saying. The Halayeb triangle, which is controlled by Egypt, has been claimed by Sudan since the 1950s. However, Cairo says it is Egyptian territory and it has long been a source of contention between the two neighbors. (3/21)

In Angola, a gasoline shortage in one of Africa’s leading oil producers means drivers in the capital Luanda have to form lengthy queues to fill up their tanks. The shortages are causing problems for those who drive for a living. (3/22)

Colombia has shelved two environmental licensing requests made by oil companies ConocoPhillips and Canacol Energy Ltd for fracking projects in northern Cesar province. Colombia does not yet allow hydraulic fracturing, but the government says use of the technique could nearly triple Colombia’s oil and gas reserves. An expert commission convened by the government to study non-conventional exploration methods has recommended strict monitoring of three pilot projects to determine whether the techniques should be widely used. The companies did not meet minimum conditions for the Piranga project, while the Plata project raised possible water protection concerns. (3/21)

The Mexican government plans to use money from a public income stabilization fund to help reduce the sizeable debt pile that state energy major Pemex has accumulated. Reuters reports, quoting the country’s deputy finance minister, that the fund is worth US$15.4 billion and the government plans to make it “counter cyclical.” (3/23)

Canada’s oil and gas rig count fell by 56 and is now 105, which is 56 fewer rigs than this time last year as Canada’s oil industry continues to face steep uphill battles over its constrained pipeline capacity that is necessary to get its heavy crude to market. (3/23)

Canadian natural gas producers have been going through a similar predicament to their oil-producing brethren–not enough takeaway capacity amid growing production, and as a result, plunging domestic prices. Last year, the annual average discount of Alberta natural gas benchmark AECO to the US Henry Hub benchmark was at its widest in nearly two decades—since 1999. (3/22)

The US oil rig count declined by nine in the week to March 22, bringing the total count down to 824, the lowest since April 2018, GE’s Baker Hughes said on Friday. That is the first time the rig count has declined for five weeks in a row since May 2016 when it fell for eight consecutive weeks. Gas rigs slipped by one to 192.  (3/23)

A US judge has blocked oil drilling planned in Wyoming because the government failed to adequately consider its impact on global warming – a decision that could complicate President Donald Trump’s broader efforts to expand oil, gas and coal output on America’s public lands. (3/21)

More “solar oil”: BP is planning to start powering some of its operations in the United States with electricity produced by solar farms, Bloomberg reports, quoting the chief executive of an affiliate, Lightsource BP. The UK-based supermajor bought a 43-percent stake in Lightsource two years ago, committing to spend US$200 million on the company over a period of three years. (3/21)

SPR sales: The US Department of Energy has sold 4.32 million barrels of sweet crude from its Strategic Petroleum Reserve for a total of more than $285.7 million, an average of $66.14/b, according to documents posted to the agency’s website Thursday. (3/22)

Chemical fire/leaks: An earthen barrier holding chemicals that leaked from a massive petrochemical fire outside Houston breached on Friday, prompting restrictions on travel around the site and through a part of the busiest US oil export port. It was the third time this week that chemical releases from the plant prompted local travel restrictions. (3/23)

Natural gas in US storage facilities decreased 47 Bcf to 1.143 Tcf in the week that ended Friday, the US EIA reported Thursday. The withdrawal was smaller than the 87 Bcf pull reported during the corresponding week in 2018 as well as the five-year average draw of 56 Bcf. As a result, stocks were 315 Bcf, or 21.6%, under the year-ago level of 1.458 Tcf and 556 Bcf, or 32.7%, below the five-year average of 1.699 Tcf. (3/22)

Ethanol supply problem: Massive flooding in the US Midwest has knocked out roughly 13 percent of the nation’s ethanol production capacity, as plants in Nebraska, Iowa and South Dakota have been forced to shut down or scale back production following the devastation. With rail lines are washed out, and corn in storage flooded, production is dropping off, sending prices spiking in markets that buy the corn-based fuel. (3/22)

In California, a major battery storage project that would help the state replace three of its natural gas power plants may need to be scrapped as a result of PG&E Corp’s bankruptcy.  The company is afraid it will not be able to line up financing for its 75-megawatt Hummingbird battery storage project. (3/23)

EV expansion: Ford is expanding its production capacity for the company’s next-generation battery electric vehicles at a second North American plant. Tied to the company’s $11.1-billion investment in global electric vehicles, Ford is expanding its BEV manufacturing footprint to its Flat Rock Assembly plant in southeast Michigan. (3/21)

General Motors Co. said Friday it will invest $300 million to build a new electric car domestically rather than outside the country, a decision that comes as President Trump has blasted the Detroit auto maker for its plans to close four US factories. The planned investment in an existing Michigan plant, GM said, is part of a broader commitment to spend $1.8 billion at its US manufacturing operations, adding 700 jobs in several states over the next three years. (3/23)

US carbon dioxide emissions from energy consumption will remain near current levels through 2050, according to projections in EIA’s Annual Energy Outlook 2019. Energy-related CO2 emissions generally follow energy consumption trends. In the US, emissions associated with the consumption of petroleum fuels—motor gasoline, distillate, jet fuel, and more—have consistently made up the largest portion of CO2emissions. In 2018, the transportation sector’s consumption accounted for 78% of US CO2 emissions from petroleum and more than one-third of all US energy-related CO2 emissions. (3/22)

New H2 twist: A Stanford-led team has developed a new electrolysis system to split seawater in hydrogen and oxygen. Their findings are published in an open-access paper in the Proceedings of the National Academy of Sciences. Existing water-splitting methods rely on highly purified water—a precious resource and costly to produce. Hongjie Dai and his research lab at Stanford University have developed a prototype that can generate hydrogen fuel from seawater. (3/20)