Editors: Steve Andrews, Tom Whipple
Quote of the Week
“In just a little more than a year, Mexico’s net oil exports fell from 314,000 barrels per day to net imports of 90,000 barrels per day in December 2018…I find it strange that this has not yet been mentioned in the news as it is a very critical factor for the future of Mexico.” Steve St. Angelo, oil industry commentator
Graphic of the Week
World demand growth for key materials vs. GDP and population growth
1. Oil and the Global Economy
Prices have climbed steadily for the last three months closing on Friday above $60 a barrel in New York and $67 in London. The combination of slowing US shale oil drilling and the Venezuela, Iran, and the OPEC+ situations continue to outweigh the bad economic news that may someday lower demand. The situation in Venezuela gets worse every day, and it seems likely that the country will see a significant drop in production and exports during March.
On Friday, the EIA reported that the average daily US crude production slipped during January for the first time in nearly six months falling to 11.871 million b/d from 11.961 in December. This number is likely to be more accurate than the weekly estimates that are based more on trends than actual production numbers. Given the severe weather across North Dakota during the last two months, it seems unlikely there will be an increase in Bakken production until spring.
The US oil rig count continues to slide, falling from 885 on January 1st to 816 last week. This situation suggests that we may not see another 1.8 million b/d gain in shale oil production like happened in 2018 despite all the hype about the smarter and wealthier international oil companies taking over the Permian Basin from smaller, less efficient, drillers.
U.S. and Brent crude oil futures touched a new high for the year this week. While the price increase is underpinned by the fundamentals of the oil market, optimism is increasing that a settlement of the US-China trade dispute is in the offing and that the prospects for a recession later this year are receding.
It should be noted, however, that along with higher crude prices, US gasoline prices have been increasing at a steady pace – up 28 cents a gallon in the last month. Prices on the US West Coast are already over $3 a gallon and Michigan, Illinois and Pennsylvania are in the vicinity of $2.80. While nobody is forecasting a return to $4 a gallon gasoline in the US in the immediate future, California is already at $3.61 for regular and is approaching the point where discretionary driving starts to slow.
The OPEC Production Cut: Saudi Arabia is having a hard time convincing Russia to stay much longer in an OPEC+ pact cutting oil supply, and Moscow may agree only to a three-month extension. Russian Energy Minister Novak told the Saudis last month that he is under pressure to end the cuts but would agree to extend the cuts to the end of September. Moscow has always been skeptical of the cuts, given that the collapse of Venezuela amounts to nearly the same thing without harming the major oil exporters. Last November, Russia agreed to go along with the deal but warned that it would not be able to cut 50,000-60,000 b/d until spring. This situation left the Saudis and the other Gulf Arabs to shoulder the bulk of the cut.
In the meantime, President Trump, worried about the price of gasoline during next year’s presidential election, is calling for higher OPEC production.
US Shale Oil Production: The International Energy Agency recently forecast that a “second” shale revolution was on the horizon. The next wave would drive US oil output to “19.6 million b/d by 2024 up from 15.5 million b/d in 2018,” and higher crude exports are expected. The forecast was published just before the CERA Week 2019 conference last month and caused “ecstatic dialogues about the viability and future direction of the industry. US production is expected to account for 70% of the total increase in global output capacity by 2024, while total exports of crude and refined products should reach 9 million bpd, surpassing rivals Russia and Saudi Arabia.
The Agency probably made this optimistic forecast based on the growth of US shale oil production in recent years without giving much concern to recent developments or the economics of shale oil. There is increasing evidence that the financers of the 10-year-old shale oil boom are becoming tired of the billions of dollars that they have lost as for most producers it still costs more to find and extract shale oil than the product selling price. Although there have been “efficiencies” in producing shale oil in recent years, a large number of drillers are still losing money even with oil now selling for $60 a barrel.
The next issue is whether there is enough oil left to extract at affordable prices. This issue seems to be focusing on the Permian Basin as the other shale basins have not been growing rapidly in the last two years despite all sorts of expensive “new technology” and procedures being applied. As some of these are rather new ways of extracting oil, we will not know for a couple of years whether they increase the amount of oil ultimately recovered from a given well or just extract it faster. Some geologists who have looked closely at the Permian doubt that the large amount of oil that the Geologic Survey says can be found in the basin will ever be produced economically.
The last issue is the growing presence of the international oil companies in the Permian Basin. These companies have very large cash flows and can even afford to produce shale oil from the Permian at a loss provided they can make up the difference between the well and the retail gas pump. If there is oil that can be produced economically in the Permian Basin even by the international oil company standards, then production there might be able to grow. If the affordable oil is not there, then there may not be much of a “second” shale oil revolution in the immediate future.
Last week two South Korean refiners canceled the delivery of U.S crude oil cargoes saying they were concerned about the quality of the crude. There is a massive pipeline network carrying crude oil from US shale oil fields to the Gulf Coast ports. While passing through many pipelines, oil can get contaminated with oil residue, heavy metals, pipe cleaning agents, and a group of compounds called oxygenates. The latter can be especially troublesome to refiners. If contamination of US shale oil proves to be endemic, we could see demand drop.
2. The Middle East & North Africa
Iran: Renewal of the US sanctions waivers which affect Iranian sales to India, China, South Korea, Taiwan, and Japan is the subject of much debate in Washington. The National Security Council staff does not want to extend the waivers, while the State Department believes such an action would do more harm than good. Iran’s exports seem to be down by about a million b/d since before the sanctions were announced and some believe that as much as another million b/d could be cut from Tehran’s exports if its major customers stop all imports. Japanese refineries have already halted imports of Iranian oil after buying 15.3 million barrels between January and March in anticipation that the US sanction waiver will not be renewed.
Over the years, Iran has become expert in evading US sanctions though what Washington describes as a vast network operating in Turkey and the UAE which helps the Iranians to continue exporting oil and receiving payments. Among the techniques Tehran uses is transferring oil at sea from Iranian tankers to those of foreign registration and issuing forged export certificates attesting that the cargoes originated in Iraq.
Torrential rains have plagued Iran in the last few weeks with 26 of 31 provinces issuing flood threats. Particularly hard hit was Khuzestan Province which produces some 70 percent of Iran’s oil and almost all of its natural gas.
The loss of revenue from the sanctions is starting to have an impact on Iran’s foreign policy. Projects Iran promised to help Syria’s ailing economy have been postponed. The Trump administration says the strains show that the sanctions are effective. However, other observers doubt constrained oil sales will ever have much effect on passions loose in the Middle East.
Iraq: Iraq’s total oil production fell by about 70,000 b/d in February as the government began cutting output to comply with the OPEC+ agreement. The federal government and the KRG together produced some 4.83 million b/d, down from an estimated 4.90 million b/d in January.
Security forces at the Alaas field in northern Iraq have thwarted an attack by Islamic State militants, killing and injuring several attackers. This attack is the latest by the terrorist group on the same oil field after it was driven out of the area in 2017. While Baghdad celebrated the defeat of Islamic State after the battle for Mosul, some military experts warned that not all militants were destroyed in the push and that the group will sooner or later resurface.
Saudi Arabia: An underfunded budget is forcing the Saudis to push for oil prices of at least $70 per barrel this year, even though US shale oil producers could benefit, and Riyadh’s share of global crude markets might be further eroded. Riyadh cut exports to its primary customers in March and April despite refiners asking for more of its oil. The move defies President Trump’s demands that OPEC help to reduce prices while he toughens sanctions on oil producers Iran and Venezuela.
The long-awaited Saudi Aramco acquisition of Saudi Basic Industries Corporation (SABIC) took place last week. Aramco has acquired a 70 percent stake in SABIC, with an estimated value of $69.1 billion. The deal would join Saudi Arabia’s two largest companies and give the Saudi sovereign-wealth fund, SABIC’s current owner, roughly the same amount of money it had expected from an initial public offering for Aramco. This money will supply part of the capital that Prince Mohammed needs to diversify the Saudi economy. Saudi Aramco plans to issue a $10 billion bond this week start the funding of the SABIC purchase. The bond would be the first-ever debt issuance by the Saudi Arabian Oil Co.
US Energy Secretary Perry has approved six secret authorizations by companies to sell nuclear power technology and assistance to Saudi Arabia. The Trump administration has quietly pursued a deal to sharing US nuclear power technology with the Saudis, who plan to build at least two nuclear power plants. Several countries including the United States, South Korea, and Russia are competing for that deal, and the winners are expected to be announced later this year.
Libya: Oil workers at Sharara oilfield, which recently re-opened after a three-month occupation by militant workers, have demanded a salary increase of 67 percent as they try to return oil production at the field to its normal 315,000 b/d production.
Profits at large Chinese industrial companies fell at the fastest pace in almost a decade in the first two months of 2019 in the latest sign of a slowdown for the Chinese economy. Industrial profits fell 14 percent year-on-year, figures from the National Bureau of Statistics showed, the largest drop recorded since May 2009. Earnings in the auto industry tumbled 42 percent year-on-year for January and February.
Uncertainty caused by the US-China trade war, as well as a government crackdown on China’s high levels of corporate debt, led the country’s economic growth to fall to its slowest annual rate in almost three decades in 2018. The fall in industrial profits comes despite a series of fiscal and monetary stimulus measures put in place since July to shore up growth. The possibility that China’s economy is headed for a steep downturn is a significant factor in keeping a lid on oil prices.
China’s largest state-run oil majors, China Petroleum & Chemical (SINOPEC), China National Petroleum Corporation (CNPC), and China National Offshore Oil Corporation (CNOOC) have announced plans to spend billions in the next few years to increase oil output. Many observers are saying this effort will be a massive waste of money as China has few opportunities to open new oil fields and that increases in capital expenditures attempting to rejuvenate aging oil fields is unlikely to pay off.
According to data published by China’s National Bureau of Statistics, Chinese mines produced 3.55 billion tons of coal last year, a 5.2 percent increase as compared to 2017. The bureau also reported that in 2018 the country generated a total of 4.979 trillion kilowatt-hours of electricity from coal-fired power plants, 6 percent higher than the same measure in 2017. Moreover, data released by the Chinese energy bureau last week shows that the country added 194 million tons of coal mining capacity during 2018. This increase in production capacity is in direct contrast with China’s widely publicized promises to reduce their dependence on fossil fuels, especially dirty coal, as well as specific avowals to do away with excess mining capacity.
For a while, things were looking up: emissions decreased, although very slightly, from 2014 through 2016, and coal emissions, in particular, went down. But now that progress appears to be in reverse. China’s inventory of coal plants averages 12 years old with a total lifespan of 40 years. Unless something changes, we can expect growing emissions from China.
Bayelsa State Governor, Mr. Dickson recently lamented the environmental damage in the Niger Delta. He said the region suffers from some 335,000 barrels of oil spills annually, worth about $20 million, as against only 35,000 barrels in the United States. Bayelsa accounts for forty percent of Nigeria’s oil wealth and hosts the operations of all the major multinational oil companies. Whether these numbers are anywhere near accurate is difficult to say as the government suppresses details of oil spills. While some of the leaks are likely due to inadequate maintenance and are the fault of the oil companies, most seem to be due to thieves drilling into oil lines to steal oil and gasoline, and militants blowing up pipelines and other facilities for political ends.
Numerous studies have shown that oil leaks extract a significant toll on the residents of the oil-producing regions. A 2011 United Nations Environment report disclosed that life expectancy in the Niger Delta is around ten years lower than the national average.
The situation continues to deteriorate, and last week saw the second and then a third significant blackout. The second closed down the country’s primary oil export terminal for three days. Exports did not take place for at least seven days during March which is likely to result in a significant drop in export levels from the 920,000 b/d that were exported in January. The four oil upgrading facilities in the Orinoco Belt, which can process some 700,000 b/d of very heavy Orinoco crude for shipment, were shut down for a second time.
The Petropiar upgrader, partly-owned by Chevron, and the Petromonagas facility, in which Rosneft has a minority stake, never regained full capacity after the March 7 blackout. The other two upgraders, Petrocedeno, partly-owned by Total and Equinor, and Petrosanfelix, which is fully-owned by PDVSA, halted operations after the power outage on Monday. There is no word on the current status of these facilities but should the outages last much longer Venezuela is going to be exporting very little oil in the weeks ahead.
The Venezuelan electrical grid has become so unstable that periodic power shortages are expected to continue indefinitely.
There was little political movement in the country last week. Moscow flew in two planeloads of what are thought to be troops. These soldiers could be a deterrent against a US invasion or simply be providing added security for President Maduro in the wake of threats to oust his government.
President Maduro decided to allow international aid from the Red Cross into the country, his first admission that Venezuela is suffering from an economic collapse. At a news conference in Caracas on Friday, Francesco Rocca, president of the International Federation of Red Cross and Red Crescent Societies, said the agency had received permission to start relief efforts from both the government and the opposition. The government didn’t comment on the announcement from Mr. Rocca, who said the agency would begin delivering medical supplies within 15 days to benefit some 650,000 people. The population of Venezuela currently is 31.3 million, most of whom are near starvation or at least very hungry.
To make matters worse, the US has instructed oil trading houses and refiners around the world to cut dealings with Venezuela further or face sanctions themselves, even if the trades are not prohibited by published US sanctions. Moreover, President Trump is considering imposing sanctions on companies from other countries that do business with Venezuela.
6. The Briefs (selections rom the press – date of article in Peak Oil News is in parentheses – see more here: news.peak-oil.org)
World fleet MPG gains slowing: The improvement in fuel economy of cars and other light-duty vehicles around the world has slowed down in recent years. After improving by an average of 1.7% per year for more than a decade, fuel economy gained just 0.2% a year in advanced economies between 2015 and 2017. Twenty-seven countries, including Sweden, Canada and the United Kingdom, saw their fleet fuel economy stagnate or worsen.
European primary gas demand fell 1.9% to 599 Bcm in 2018, while renewable power generation grew 8.5% to 1,462 TWh, the IEA said in a report Tuesday. The figures reveal how renewables are displacing both coal and gas in European power generation, in contrast to the US and China, where gas demand climbed sharply on coal-to-gas switching. (3/26)
The European Parliament has approved EU emission performance standards for new cars and vans by 2030, intended to cut oil use in road transport and promote electric vehicles. The standards require new cars to emit 37.5% less CO2 on average and new vans 31% less CO2 on average compared with 2021 and reflect the EU’s increasing efforts to cut both its oil imports and transport emissions. The cuts are above the 30% the European Commission originally proposed November 2017 for both new cars and new vans. (3/28)
Egyptian LNG: After more than a decade of uncertainty for Egypt’s natural gas sector, leading even to importing LNG for years, Cairo is heading to a much brighter gas future. Two weeks ago, Egypt re-joined the ranks of global LNG exporters when its state gas company EGAS tendered to sell four cargoes of LNG for loading in April from the Idku liquefaction plant on the Mediterranean coast. (3/28)
In Algeria, protesters are demanding the resignation of President Bouteflika. Estimates say crowds in the capital, Algiers, reached a million. It is the sixth successive Friday of mass anti-government protests in the country. (3/30)
Pickups for China: While China may be the world’s largest market for electric vehicle sales, Chinese car buyers have a new love affair: pickup trucks. As in the U.S., pickups are ideal for construction, farm, and maintenance companies — but consumers find them very appealing for the horsepower and cargo capacity. The world’s largest new vehicle sales market saw its numbers fall for the first time last year since the 1990s, but pickups sales grew 10 percent to about 452,000 units sold during that time. (3/28)
South America vehicular fuels: Meeting in Brazil this week, auto executives from Toyota to GM talked up traditional fuel sources like ethanol, natural gas, and diesel, underlining how South America’s protected auto market is likely to resist a broader global move toward electric vehicles for years to come. (3/27)
Mexico net oil importer: For the first time in more than 50 years, and according to multiple data sources, Mexico has become a net importer of oil, in part due to overreliance on its legacy super-giant field Canterell. This is undoubtedly bad news for the Mexican government as it has relied upon its oil revenues to fund a large percentage of its public spending. (3/30)
The Mexican subsidiary of US railroad operator Kansas City Southern expects its gasoline transport business to grow at least 15 percent by volume this year, and possibly much more, a senior executive said on Tuesday. Jose Zozaya, president of the Mexican unit, said the railway is being approached by new fuel importers, beyond existing clients that already supply their own retail gas stations in Mexico like U.S.-based ExxonMobil Corp and France’s Total SA. (3/27)
In Canada, two years after an M&A boom driven by the exit of several oil majors from the oil sands, sellers of oil and gas assets are having trouble finding buyers. With persistent uncertainty about the future of Alberta’s crude oil pipeline network, sluggish capital markets, and high debt levels among potential buyers, the apparent shunning is only to be expected. The pipeline problem seems to be the biggest. (3/28)
Keystone pipeline: President Donald Trump signed a permit on Friday granting permission for TransCanada Corp to build the long-delayed Keystone pipeline at the U.S.-Canada border for the importation of oil from Canada. The $8 billion pipeline, which would carry 800,000 barrels per day of oil from Canada’s oil sands to refineries along the US Gulf of Mexico, has been held up in US courts. But the hotly contested pipeline expansion, meant to carry oil from Alberta to Nebraska, still faces hurdles more than a decade after it was first proposed, including a state-level challenge that could complicate its completion. (3/30)
The US oil rig count fell by 8 to reach 816 while gas rigs declined by 2 to reach 190, according to the Baker Hughes weekly report. The total number of active oil and gas drilling rigs fell by 10 rigs to 1,006, up just 13 from last year’s total. Compared to last year at this time, oil rigs are up 19 while gas rigs are down four. (3/30)
Oil exports: The US Gulf Coast is set to become a net crude oil exporting region for the first time on a quarterly basis, signaling a shift in global oil flows that has been in the making for a while. While there was one VLCC loading at a Gulf Coast port every six days in 2017, last year this rose to almost four VLCCs every six days. During the first 11 weeks of 2019, the total number of VLCCs loading at the Gulf Coast increased to five per week, with the average daily amount of crude flowing out of the US at 3.6 million barrels. Most of this is going to Asia. (3/28)
Citgo Petroleum, the U.S.-based unit of Venezuelan state-run oil firm PDVSA, said on Thursday it raised $1.2 billion through a five-year term loan to cover operating expenses and to refinance existing debt. Citgo said it settled a $320 million accounts receivable securitization facility and a $900 million revolving credit line. The financing would help Citgo fund its operations following US sanctions and its split from the parent company. (3/29)
In Houston’s Ship Channel, the US Coast Guard is working to set up a “locking system” in areas where water was contaminated with significant amounts of benzene after a fire at the Intercontinental Terminals Co. tank farm and begin allowing ships out of Carpenters Bayou, the Old River and Jacinto Port. (3/30)
Colorado’s coming drilling restrictions: Colorado’s state legislature is one step away from stiffening drilling regulations after years of conflict. While a ballot initiative to tighten drilling regulations was defeated during last November’s election by a well-funded industry campaign, the new Democratic majorities in the state legislatures are poised to pass legislation that expand existing limits on drilling. Going forward, the state’s oil and gas commission will likely be forced to put more emphasis on health and safety issues such as proximity of drilling rigs to occupied structures. (3/30)
Alaska pipeline progress: Technical teams from the Alaska Gasline Development Corp. (AGDC) and supermajors BP and ExxonMobil will meet next week in Houston to begin a review of the proposed $43 billion Alaska LNG project in an effort to find potential cost reductions so the massive capex project can move forward, Tim Fitzpatrick, an AGDC spokesman said on Tuesday. Discussions will begin on April 2 and last for most of the month. (3/29)
Ethanol shortage: Portland, Oregon, rack gasoline has jumped more than 33 cents since March 12 on ethanol shortages tied to the recent “bomb cyclone” in the US Midwest that set off flooding and interrupted rail movement of ethanol. (3/29)
Ethanol fast-track: After President Donald Trump promised Iowa voters he would unleash high-ethanol gasoline, his administration fast-tracked a plan to lift summertime restrictions on the fuel, forgoing studies of its potential price tag and hastily ending a review of the measure. (3/29)
US coal inventories in the power sector were at a 13-year low of 99.2 million st at the end of January, down from 102.79 million st after December and the lowest since stockpiles were at 98.19 million st after September 2005. The January total was down 34.3% from the five-year average. (3/28)
Cross-over energy suppliers: Ten years ago, you knew where you stood with your energy suppliers. Oil companies sold road fuel, while utilities supplied electricity and gas. Today, those old lines of demarcation are blurring. Utilities can fill up your car and oil companies want to keep your lights on. Technological progress and the threat of climate change are forcing both oil companies and utilities to rethink their strategies and are pushing them into each other’s territory. On Sunday Royal Dutch Shell, one of the world’s largest oil and gas companies announced that its First Utility retail power business would be rebranded as Shell Energy, with 700,000 households switched to renewable power. (3/26)
Methane from wind power: German utility Uniper has started producing methane gas derived from wind power and feeding it into gas pipeline networks at its Falkenhagen site as the country seeks wider uses for renewable energy. The step, part of the European energy project called STORE&GO, demonstrates that it is feasible to produce entirely green energy with qualities identical to natural gas. (3/27)
Solar deal: Kirkbi, the family holding company behind toy maker Lego, said on Friday it had agreed to buy a majority stake in Enerparc Inc., a US affiliate of German solar developer, Enerparc AG. (3/29)
Italy’s EV king? Enel, the Italian electricity group that by some measures holds the title of the world’s largest electric utility, last week highlighted the rapid growth in its network of electric car charging points. By the end of 2018 it had installed 49,000 worldwide – up 63 percent during the year. (3/26)
Electric aviation technology company magniX and Harbour Air, North America’s largest seaplane airline, announced a partnership to transform Harbour Air seaplanes into an all-electric commercial fleet powered by the magni500, a 560 kW (751 shp) all-electric motor that delivers 2,814 N·m of torque. Operating 12 routes between hubs such as Seattle and Vancouver and across the Pacific Northwest, Harbour Air transports more than 500,000 passengers on 30,000 commercial flights each year. (3/27)
Mandatory vehicle safety technologies: The European Parliament, Council and Commission (the EU institutions) reached a provisional political agreement on the revised General Safety Regulation. As of 2022 a suite of 15 new safety technologies will become mandatory in European vehicles to protect passengers, pedestrians and cyclists. The new mandatory safety features include: For cars, vans, trucks and buses: warning of driver drowsiness and distraction (e.g. smartphone use while driving); intelligent speed assistance (ISA); reversing safety with camera or sensors; and data recorder in case of an accident (“black box”). (3/28)