Editors:   Tom Whipple, Steve Andrews

Quote of the Week

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions. In fact, I’m not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.  While hundreds of billions of dollars of benefits have accrued to hundreds of millions of people, the amount of shareholder value destruction registers in the hundreds of billions of dollars. The industry is self-destructive.”Steve Schlotterbeck, former CEO of drilling company EQT

Graphic of the Week

1.  Oil and the Global Economy

After a week of rampant speculation about what could happen at the G20 summit that would affect oil prices, the announcement on Saturday that the US and China have agreed to keep the current tariffs in place for now and would resume trade negotiations left the situation about where it has been for months.  President Putin announced that Russia and its friends would join Saudi Arabia in extending the OPEC production cut for another six to nine months eliminating the drama from the formal OPEC+ meeting that will take place early this week.  Oil prices were up a bit for the week settling at $64.74 in London and $58.47 in New York.

The agreement between Washington and Beijing to resume negotiations was about what the markets expected from the G20 summit.  The talks had broken down seven weeks ago when the Chinese said that they could not accept some provisions that had been tentatively agreed to in a draft text.  President Trump will not impose any new tariffs on China and will backtrack on banning the sale of American equipment to the Chinese telecom giant, Huawei.  In May, the US Commerce Department put Huawei on a blacklist that prohibits American companies from selling equipment to Huawei.  The ban was a significant blow to Huawei, which relies on chips, software, and other electronic components from the United States.  In return, China will resume purchases of US farm products and “other goods.”

Although an end to the US-China trade dispute is nowhere in sight, the G20 announcements suggest that the situation is under control at the minute and that tariffs which could lead to an economic recession are on hold.  Likewise, the extension of the OPEC+ agreement until next year should prevent another 1 million b/d of crude being dumped on the market forcing prices down.  On Sunday, an editorial in the official China Daily warned while there was now a better likelihood of reaching an agreement, there’s no guarantee there would be one.  “Things are still very much up in the air.”

Although the better-known forecasters of oil production continue to talk about US shale oil output climbing by millions of barrels per day in the next couple of years, the evidence continues to accumulate that a large production increase, on top of the impressive gain we’ve seen over the past decade, is unlikely to happen.

US Shale Oil Production: US crude oil output in April rose to a new monthly record of 12.16 million b/d, according to the EIA’s Petroleum Supply Monthly which was released on Friday.  This report which is compiled some two months after the most recent month analyzed is usually more accurate and less subject to revision than the weekly estimates or the forecast about how big production will be in the coming month.  The agency also increased its estimate for March crude production by 11,000 b/d to 11.92 million.  Production in the US Gulf of Mexico rose 77,000 b/d to 1.98 million in April.  These numbers suggest that the US raised its onshore production, which is mostly shale oil, by 172,000 b/d in April, which seems to be rather high given that the Drilling Productivity Report for March was estimating only 85,000 for the month.  Revisions to these figures may be in order.

There are numerous reports that most shale oil drillers, except perhaps for the major oil companies, are cutting back on opening new wells to mollify their financial backers.  It seems unlikely that the shale oil industry will be able to increase production by 83 thousand b/d in June and 70 thousand in July as projected by the EIA.

A recent survey by the Dallas Federal Reserve reveals that oil industry executives are unusually pessimistic about the prospects for the future.  A combination of low oil prices, increasing costs, and the lack of investor willingness to fund losing firms suggest that the era of rapid increases in shale oil production may be coming to a close.

The monthly report from the North Dakota government on the status of production in the Bakken shows that output for the six months through April is nearly flat.  These numbers suggest that the Bakken along with the Eagle Ford and Niobrara basins may be close to peak production.  This development leaves the Permian Basin — and within the basin only the efforts of a handful of large international oil companies — to keep US shale oil production growing in the next few years

2.  The Middle East & North Africa

Iran: President Trump imposed “hard-hitting sanctions” on Iran’s Supreme Leader last week leading to an exchange of invective with Tehran calling the President “mentally retarded” and the president threatening to obliterate parts of Iran if it attacked “anything American.” Moreover, Tehran announced that the sanctions on Khamenei mean the end of diplomacy and the negotiations that the White House has been signaling it is ready to begin.

Iranian crude exports have dropped in the first three weeks of June to 300,000 b/d or less after the US tightened the screws on Tehran’s primary source of income.  Iran’s June exports are down from about 400,000-500,000 b/d in May as estimated by industry sources and a fraction of the more than 2.5 million b/d that Iran shipped in April 2018, the month before President Trump withdrew the US from the nuclear deal.  Iran has exported 5.7 million barrels of crude in the first 24 days of June to the United Arab Emirates, Turkey, Singapore, and Syria, although these may not be the final destinations.

Asia’s crude oil imports from Iran fell in May to the lowest in at least five years after China and India wound down purchases amid US sanctions, while Japan and South Korea halted imports.  Total imports from Asia’s top four buyers came to 386,021 b/d of Iranian crude in May, down 78.5 percent from a year ago to the lowest monthly level since the data began to be collected by Reuters in 2014.  Imports had hit a 9-month high of 1.62 million b/d just a month earlier as buyers rushed to ship in as much as they could before waivers ended.

Iran is on course to breach a threshold in its nuclear agreement, but President Trump says there was “absolutely no time pressure” on the issue.  Other world leaders gathered in Japan continued to express concern about Iran, even as Trump appeared relaxed.  Chinese President Xi Jinping said the Gulf region was “standing at a crossroads of war and peace,” calling for calm and restraint and talks to resolve the issue.  European Council President Donald Tusk, also at the G20, expressed concern about Iran potentially breaching the pact, saying the European Union would continue to monitor Tehran’s compliance.  The escalating crisis has put the United States in the position of demanding its European allies enforce Iranian compliance with an accord Washington itself rejects.

The countries that are still parties to the agreement – European powers Britain, Germany and France plus Russia and China – held urgent talks with Iranian officials on Friday in hopes of persuading Tehran to hold off.  Iran’s envoy, Deputy Foreign Minister Abbas Araqchi, said the talks were “a step forward, but it is still not enough and not meeting Iran’s expectations.”  The likelihood that Iran could exceed the deal’s limits as soon as the next few days is the next looming worry for European leaders trying to keep confrontation between Washington and Tehran from spiraling out of control.  Despite abandoning the deal, Washington has demanded European countries ensure Iran complies with it.  Iran says it cannot do so unless the Europeans provide it with some way to receive the deal’s promised economic benefits.

Iraq:  Baghdad’s oil ministry reported last month that the country’s May crude production rose to 4.595 million b/d, its highest since January 2017 and more than its quota of 4.512 million b/d.  Analysts and independent estimates have put Iraqi production at even higher levels than those reported by the ministry.  S&P Global Platts’ latest survey of OPEC output pegged Iraq’s May production at 4.82 million b/d.

Last week Iraqi Oil Minister al-Ghadhban said “Iraq confirms its commitment to the cut agreement.  “However, the ministry stays ready to satisfy any growth in global oil demand when the overhang of stocks disappears by maintaining the production capacity and by improving export infrastructure.”

Secretary of State Pompeo urged Iraq’s prime minister to take steps to ensure that Iraq isn’t used as a new staging ground for attacks on the Saudis.  The May 14 drone attacks were initially thought to originate from Yemen, where Houthi rebels had claimed credit for causing damage to an important oil pipeline stretching hundreds of miles across Saudi Arabia.  But US officials familiar with the intelligence said the attacks had originated in southern Iraq, most likely implicating Iran-backed militias with a strong presence there.  Iraqi leaders are questioning the US assessment and have asked the Trump administration for more evidence to support its claims.

Saudi Arabia: Saudi Aramco was busy last week trying to reassure its customers that it has the ability to keep oil shipments flowing no matter what happens in the Gulf.  The CEO, Amin Nasser, said in an interview in Seoul on Tuesday, “we can supply through the Red Sea, and we have the necessary pipelines and terminals.”  Saudi Arabia is South Korea’s most important source of crude oil.

In reality, Aramco will not be able to keep the necessary crude oil and products volumes flowing to Asian and European markets in the case of a full Strait of Hormuz blockade.  Even though Aramco operates a crude oil pipeline with a capacity of 5 million b/d, carrying crude 750 miles between the Arabian Gulf and the Red Sea, much more is needed to keep the oil market stable.

Libya:  Forces supporting the UN-recognized Government of National Accord in Libya have seized a town near Tripoli that served as the main supply base for the Libyan National Army (LNA) of General Haftar.  The takeover of Gharyan is a severe blow to Haftar’s forces, which are affiliated with the rival eastern government of Libya.  Forces allied to the Tripoli government, backed by air strikes, stormed the town, some 90 km (56 miles) south of Tripoli, in a surprise attack, witnesses said.  They took the central operations room of the LNA, which by evening had left the town, they added.  Gharyan is also home to field hospitals, and a helicopter base located there.

“This is a game changer,” said Tarek Megerisi, a policy fellow with the North Africa and Middle East program at the European Council on Foreign Relations.  “If Haftar can’t retake Gharyan quickly. Tarhouna and the remaining LNA units will be more isolated, under-resourced, and with lower morale,” he said.

Following the taking of Gharyan, Libyan government fighters discovered a cache of American missiles, usually sold only to close American allies, at the captured rebel base. Markings on the four Javelin anti-tank missiles’ shipping containers indicate that they were sold to the United Arab Emirates in 2008.

Even if General Haftar’s LNA is forced to withdraw from its attempt to seize Tripoli, it still has the ability to disrupt much of Libya’s 1 million b/d of oil production.

3.  China

Beijing’s booming economy has had the undesired side-effect of increasing China’s dependence on foreign oil imports.  Twenty-five years ago, China produced approximately 4 million b/d, which was enough to satisfy the country’s domestic demand for petroleum products.  In April 10.64 million b/d were imported, which is a new record.  In 2018, the share of imported oil reached 70 percent and is expected to grow.

Even though Russia became China’s largest crude supplier, pumping in some 1.48 million b/d via pipeline, Beijing is still vulnerable to upheavals abroad.  It has already lost a share of its traditional oil supply due to the US sanctions on Iran and Venezuela.  Should hostilities in the Middle East slow or halt much of the region’s exports, China’s economy would be in trouble.

This ever-increasing reliance on foreign oil has become especially worrying for Beijing in the past year due to the escalating trade war with the US.  To at least slow this dependency, President Xi has called on Chinese energy companies to increase domestic production. While China would love to replicate the American shale boom, they face a different situation.  Shale formations in China differ from the ones in the US because the oil and gas deposits are located much deeper and are less concentrated, which makes extraction more difficult and expensive.  They also lack the technical expertise required to frack horizontal wells and, so far, have made little progress in extracting shale oil.

Beijing’s only choice is to try to get more oil from its existing oil fields by using expensive secondary recovery techniques to extract more oil.  In the next five years China’s “big three,” PetroChina, Cnooc, and Sinopec, aim to increase spending by $77 billion on oil fields that are mature and require high costs to raise production.  Skeptics are already questioning the policy of spending so much capital on mature oil fields.  According to a researcher at the China National Petroleum Corp., the additional spending will only increase production to 200 million tons by 2022, which is not a significant gain.

4. Russia

The two-month-old contaminated oil saga continued to play out last week.  Moscow says the problem is over, but some of its customers are still unhappy.  To clear the contaminated oil from the Druzhba pipeline, oil traders loaded a dozen tankers with contaminated crude and sent them off in search of customers who would buy the bad oil at a discount and mix in with enough clean oil so that it could be refined.  This plan has not worked out so well, and more than 7 million barrels worth around $500 million remains homeless, zigzagging between Europe and Asia.

In China, buyers have refused to take dirty Russian oil, forcing trader Vitol to send a cargo back to Europe.  “I’m not willing to risk our equipment just for cheap crude,” said an oil trader with a North Asian refinery.  Buyers have also paid millions of dollars in demurrage charges as tankers are stuck with the dirty oil, preventing ship-owners from sending them on new voyages.  Russia has promised to compensate buyers after they file claims post-sale.  “The problem is that this oil is often impossible to sell. So how can I file a claim?” a Russian oil buyer said.

Elsewhere on the pipeline, Czech oil refiner Unipetrol stopped taking oil from the Druzhba pipeline due to chloride contamination detected at the Ukraine-Slovakia border.  Oil flows to Poland through the Druzhba pipeline resumed on Thursday after being suspended on Wednesday evening due to the discovery of contaminated oil.  It has been a hard year for Russian oil exports, and the whole debacle will likely cost Moscow billions of dollars in lost production and reparations.

5. Mexico

Pemex reported another decline in its crude oil production in May, which was partially offset by a modest uptick in condensates, natural gas liquids and gas output.  The company produced 1.68 million b/d of crude, down just a fraction of one percent from production of 1.69 million b/d in April.

Mexico’s new president, López Obrador, has been a critic of the energy reform of his predecessor Enrique Peña Nieto, who opened Mexico’s oil and gas sector in 2013 to private investment for the first time in seven decades.  Six months into office, the populist left-wing president now blasts the energy reform as “a failure” and vows not to call new bidding rounds for foreign oil companies for oil exploration and production in Mexico unless those companies show results.

López Obrador wants a greater role for Pemex in reversing the downward trend in Mexican oil production and is criticizing the foreign oil firms for failing to do so.  He is ignoring the fact that lead times between awarding contracts for finding oil are measured in years, not months.

After allocating a $1.5 billion stimulus package to the company earlier this year, Lopez Obrador has declared his intention to see Pemex increase its oil production to 2.4 million b/d and its gas production to 6.5 billion cf/d by 2024.  However, the cancellation of recent joint-venture auctions for Pemex by Mexico’s Comision Nacional de Hidrocarburos (CNH) has raised concerns about the government’s new strategy for the company.  Earlier this month, the commission announced the cancellation of a farmout previously scheduled for October of seven inland production areas where oil and gas production has lapsed in recent years.  The commission’s latest joint venture cancellation drew criticism from some of its members who have argued that the government’s production goals for Pemex would be unachievable without private investment.

President López Obrador said on Thursday that the natural gas pipeline contracts that the previous administration had signed were ‘abusive’ and ‘unfair’ to the Mexican state, raising additional concerns whether the new administration will respect previously signed energy deals.  Delayed startup of the Sur de Texas-Tuxpan pipeline could continue indefinitely amid possible arbitration proceedings, and already appears to be impacting South Texas natural gas supply.  Over the past several months, supply likely contracted by the state-owned Mexican power generator to feed the delayed pipeline has overwhelmed the region, depressing prices and filling regional storage inventories.  In June, prices at hubs in south and east Texas are down sharply compared to last year.

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

In Turkey, state upstream operator TPAO will start drilling for gas east of Cyprus in early July, within the Exclusive Economic Zone (EEZ) claimed by the Republic of Cyprus.  TPAO’s drillship has been anchored off Turkey since Monday; the vessel will depart “in a few days” for its planned drill site. (6/28)

Somalia prospects? Royal Dutch Shell and Exxon Mobil are looking to re-enter the market in Somalia ahead of an oil block bid round taking place later this year. Shell and Exxon Mobil had a joint venture there prior to the toppling of dictator Mohamed Siad Barre in the early 1990s. Somalia has been mired in insecurity since Barre. The country currently does not produce any oil but production could transform the economy as early stage seismic data has shown there could be significant oil reserves. (6/28)

In Brazil, Petrobras plans to increase oil exports from 600,000 b/d on average in the first half of 2019 to more than 800,000 b/d, thanks to increasing production from their off-shore pre-salt oil plays. (6/29)

Argentina’s ambitious drive to emulate the US shale boom is moving ahead after the country delivered its first-ever exports of light crude oil and liquefied natural gas from its massive Vaca Muerta shale deposit in Patagonia earlier this month. Two private-equity firms – the UK’s Riverstone and Argentina’s Southern Cross Group – unveiled plans on Thursday to invest $160 million in a 78.4 percent stake in the first exclusively midstream company to operate in the Vaca Muerta, or “Dead Cow”, rock formation. A gradual rise in exports is expected, with Argentina’s light oil shipments forecast to reach 70,000 b/d next year. (6/28)

Vaca Muerta #2: After years of drilling and development and billions of US dollars of investment, Argentina’s vast shale play Vaca Muerta has finally seen the first tangible results with the first exports of light crude oil and liquefied natural gas (LNG) from the resource-rich formation. Apart from Argentina’s oil and gas group YPF, international oil and gas majors including Exxon, Chevron, Shell, and Total hold acreage positions in Vaca Muerta and have recently announced plans to proceed with major development projects in the most promising shale oil and gas basin outside the United States. Higher costs, regulatory uncertainty, and insufficient infrastructure have so far hampered a U.S.-style shale revolution in Argentina. (6/27)

The US oil rig count increased by four to 793, while the gas rig count decreased by four to 173, according to GE’s Baker Hughes.  The combined oil and gas rig count is still 967 for the week, with oil seeing a 65-rig decrease year on year and gas rigs down 14 since this time last year.  (6/29)

Water handling: In the Permian Basin alone, the combination of saltwater from wells and water used in the fracking process is expected to be three times larger than crude output by 2023, according to Jefferies Group. Pipeline owners already are adept at transporting oil and gas, so adding water handling to their portfolios may be a logical next step for them. (6/26)

Refinery fire: Philadelphia Energy Solutions will seek to permanently shut its oil refinery in the city after a massive fire caused substantial damage to the complex. Shutting the refinery, the largest and oldest on the US East Coast, will cost hundreds of jobs and squeeze gasoline supplies in the busiest, most densely populated corridor of the United States. (6/27)

East coast fill-in: US East Coast ports can expect more cargoes like the one aboard the Maersk Cancun once Philadelphia Energy Solutions refinery shuts. The tanker delivered 296,000 barrels of reformulated gasoline from the Netherlands to New Jersey last Thursday, on the eve of the fire that sealed the fate of the plant. Suppliers in Canada, Europe and the US Gulf Coast are likely to pick up most of the slack. (6/28)

Shale gas $$ bust: Reported spending outweighed income for a group of 29 large public shale gas companies by $6.7 billion in 2018, bringing the group’s 2010 to 2018 cash flow to a total of negative $181 billion, according to a March 2019 report by the Institute for Energy Economics and Financial Analysis. (6/25)

Oil Leak: A new federal study has found that a leak in the Gulf of Mexico that began 14 years ago has been releasing as much as 4,500 gallons a day, not three or four gallons a day as the rig owner has claimed. The leak, about 12 miles off the Louisiana coast, began in 2004 when a Taylor Energy Company oil platform sank during Hurricane Ivan and a bundle of undersea pipes ruptured. Taylor Energy, which sold its assets in 2008, is fighting a federal order to stop the leak. (6/26)

Green New Deal pricey:  Eliminating fossil fuels from the US power sector, a key goal of the “Green New Deal” backed by many Democratic presidential candidates, would cost $4.7 trillion and pose massive economic and social challenges, according to a report released on Thursday by energy research firm Wood Mackenzie. (6/27)

The US state of Michigan has filed a lawsuit asking for an Enbridge Inc oil pipeline that runs under the Straits of Mackinac in the Great Lakes to be decommissioned, Michigan’s attorney general said on Thursday. The Line 5 oil pipeline ships 540,000 b/d of light crude oil and propane and is a critical part of Enbridge’s Mainline network, which delivers the bulk of Canadian crude exports to the United States. Potential disruption to Line 5 adds to the Canadian oil sector’s worries about transporting crude. (6/28)

Harris County in Texas plans to sue Valero Energy Corp for pollution from its Houston refinery.  In recent years, environmental groups like the Sierra Club and Environment Texas have filed citizen lawsuits against refineries and chemical plants, but it is rare for governments to do so. (6/29)

Boulder County, Colorado halted accepting new oil and gas drilling and seismic testing permits for nine months, the latest community in the state to enact measures aimed at curbing oil and gas production. Colorado is the fifth largest oil producing state. This year Colorado lawmakers passed Senate Bill 19-181, tightening regulations on the state’s oil and gas industry. (6/29)

Another bankruptcy: Oilfield services firm Weatherford International on Friday filed a prepackaged restructuring plan with the US Securities and Exchange Commission, according to a regulatory filing. The proposed restructuring will reduce the firm’s funded debt from roughly $8.35 billion to $2.5 billion. (6/29

EU’s EV growth: Registrations of pure electric, plug-in hybrid and hybrid cars totaled 94,000 units in 18 European markets in May 2019, counting for 7.1 percent of the total volume, up from 5.3 percent in May 2018, according to figures from JATO Dynamics. The majority of registrations came from hybrid vehicles, but the growth was driven by pure electric cars, where registrations jumped from 12,300 units in May 2018 to 22,300 (+81 percent) last month. (6/25)

France registered its highest temperature—45.9 deg C (114.6 deg. F)—on record.  Twelve towns in southern France saw new all-time highs on Friday and three experienced temperatures above 45 degrees, it said. The World Meteorological Organization said 2019 was on track to be among the world’s hottest years, and that 2015-2019 would then be the hottest five-year period on record. (6/29)

Britain’s new target to reach net zero greenhouse gas emissions by 2050 became law on Thursday, making it the first among the major G7 countries to set such a goal.  Outgoing Prime Minister Theresa May had announced the target earlier this month, saying the plans were ambitious but crucial for protecting the planet for future generations. (6/27)

Population tracking: Since the days of Thomas Malthus, we’ve worried that overpopulation is about to overwhelm our planet. Those fears haven’t gone away. A further two billion people will be added to the current world population of 7.7 billion by 2050, the UN Population Division said in a report this week. Numbers will still be rising as the total approaches 11 billion people in 2100, according to the UN’s central forecast. At the same time, signs are starting to emerge that this picture may be too pessimistic. Malthus’s key error was his failure to foresee how fertility rates would fall with increasing incomes – and the pace of change on that front has been staggering in recent years. (6/25)