Tom Whipple and Steve Andrews, Editors
Quotes of the Week
No new oil and natural gas fields are needed in the net-zero pathway.”
Fatih Birol, Executive Director, International Energy Agency
(The above statement) “…not only runs entirely contrary to the main reason that the IEA was founded, namely, to promote secure and affordable energy supplies to foster economic growth, but it also seems to forget the pivotal role hydrocarbons, mainly oil and gas, play in the global economy.”
Cyril WIddershoven, international consultant and commentator; on Oilprice.com
Graphic of the Week
1. Energy prices and production
Oil: Prices had their worst week in at least a month as the market contends with a potential deal that could lift US sanctions against Iranian crude. WTI futures in New York rose the most since mid-April on Friday, tracking a broader market rally that buoyed prices during most of the trading day. Nonetheless, crude benchmarks couldn’t shake off the specter of millions of barrels a day of Iranian crude returning to the market, with Brent futures in London posting the most significant weekly decline since March.
Global oil demand is recovering with major economies reopening amid a cautious supply approach from OPEC+ and restraint in US shale, Barclays said on Friday. Despite the possibility of a return of Iranian oil supply and the resurgence of COVID in parts of Asia, global oil demand is “healing,” and oil inventories are set to normalize over the next two to three months, the UK bank said in a note on Friday. Barclays expects the global market to be in a deficit of around 1.5 million b/d in the second half of this year.
Gasoline shortages in America’s Southeast are shrinking. However, two weeks after the Colonial Pipeline went offline due to a hack, some drivers still find it hard to locate gasoline. At week’s end, roughly 30% of all retail gas stations in North Carolina, South Carolina, and Georgia were out of gasoline. Virginia and Tennessee were also experiencing significant outages.
The IEA Report: Nations worldwide need to immediately stop approving new coal-fired power plants and new oil and gas fields and quickly phase out gasoline-powered vehicles. They must do so if they want to avert the most catastrophic effects of climate change, the world’s leading energy agency said Tuesday. In a comprehensive new report, the International Energy Agency issued a detailed road map of what it would take for the world’s nations to slash carbon dioxide emissions to net-zero by 2050. That would very likely keep the average global temperature from increasing 1.5 Celsius above preindustrial levels — the threshold beyond which scientists say the Earth faces irreversible damage. While academics and environmentalists have made similar recommendations before, this is the first time the IEA has outlined ways to accomplish such drastic cuts in emissions. That’s significant, given the fact that the influential agency is not an environmental group.
The IEA report was not well accepted by those with economies dependent on the sale of fossil fuels. For example, OPEC, whose 13 members sit on 80% of the world’s crude oil reserves, produced an internal briefing document on the IEA’s report. “The claim that no new oil and gas investments are needed post-2021 stands in stark contrast with conclusions often expressed in other IEA reports and could be the source of potential instability in oil markets if followed by some investors,” OPEC’s briefing said.
Shale Oil: The shale industry, much maligned by investors for excessive spending without returns to show for it, has managed to resist expansion during a 22% run-up in oil prices during the first three months of this year, holding output almost flat. A round-up of data on the drillers shows expectations for record free-cash-flow and signs that the industry is starting to pay its way. There are also indications that workers are finally returning to the fields while drilling ramps up at a more moderate pace.
When squeezing out more oil and gas for less money is a priority for upstream producers, longer laterals are giving a competitive edge in unconventional basins in the US, producing more hydrocarbons per foot drilled. Laterals – the horizontal portion of a well – have become longer and longer during the last 15 years. Drilling out 15,000 feet, or nearly three miles horizontally, reduces the number of wells companies need to drill to achieve their production goals and does it at increasingly lower costs.
In America’s most productive oil region, private companies are burning off isolated and thus unwanted natural gas at almost six times the level of intensity than publicly listed companies. The majority of flaring by the top operators in the Permian Basin — an area that accounts for more than half of US oil output — still occurs routinely, despite industry pledges of cleaner supply chains within the next decade, according to figures from energy consultancy Rystad.
Natural Gas: The US gas storage deficit to the five-year average continues to climb, while warmer weather setting in across the US diminished the chances for builds as gas-fired power demand grows. US coal-fired power generation is set for a short-term recovery this summer. Higher prices of coal’s leading fossil fuel competitor, natural gas, will discourage gas-fired electricity generation. Natural gas prices are rising this year and traded above $3 per million British thermal units last week, compared to less than $2 at this time last year.
Reduced natural gas production and record-high American exports of liquefied natural gas have fueled a rally in natural gas prices since the start of the year. In February, the winter storms, which triggered the most significant monthly drop in US natural gas production on record, also played a part in rising natural gas prices as inventories drew down quickly amid record residential consumption.
There are signs that the US power sector is approaching “peak gas,” with demand topping out decades ahead of schedule. “The era of robust growth in the US natural gas market is likely coming to a close,” said an analyst at Morgan Stanley. “It doesn’t mean the market falls apart. It doesn’t mean gas demand falls off of a cliff. It means that we need less new supply in the future.”
A cloud of methane was detected by satellite over a natural gas field in Canada, identifying a hidden source of pollution from one of North America’s most prolific production basins. The emissions rate was estimated at 79 metric tons an hour on April 20, according to geospatial analytics company Kayrros SAS, which found the plume by analyzing European Space Agency data. According to the Environmental Defense Fund, if the release lasted an hour, it would trap roughly the same amount of heat as more than 300,000 cars driving at 60 miles an hour. The satellite data didn’t show the duration of the leak.
Prognosis: The possibility of a peak oil supply crisis is starting to bother some industry observers. In recent years it has become fashionable to talk about peak oil demand, brought about by the climate crisis, rather than about oil supplies running short. As a result of seven years of falling investment and given the capital-intensive nature of the oil business, global offshore production (about 1 in 4 barrels produced) has entered a period where new projects cannot offset existing declines and, at best, production will stay flat for the next several years. This significant loss of future capacity means the burden falls on US shale and OPEC to satisfy demand growth, yet the ability to do so is a problem.
While US shale basins have acted as the global swing producer in recent years, the era of US shale hyper-growth is over. The failed experiment of unbridled spending due to unlimited access to external capital resulted in the incineration of hundreds of billions of dollars of shareholder equity and a subsequent investor-led change to shale companies’ very ethos. The old model of massively outspending cash flow and chasing growth has evolved to underspending, which has led to the return of capital back to investors in the form of dividends and share buybacks. This profound change, combined with the depletion of much of the higher quality drilling inventory, means that the future growth rate of US shale will be a fraction of years past.
For OPEC countries the ability to remain going concerns and satisfy their sovereign needs has struggled for years with insufficient revenue due to weak oil prices. Many had to deplete foreign exchange reserves, sell off stakes in crown corporations, and cut social spending, thereby risking regime change due to violating the unspoken social contract with their populaces. The least attractive use of scarce capital was an investment in new oil productive capacity, especially in an era of low oil prices.
While the market is currently concerned with the return of some 6 million b/d of voluntarily curtailed OPEC production, given the stronger-than-expected rebound in global oil demand, these volumes will be quickly returned without disrupting oil balances by early 2022. As a result of sovereign needs superseding the investment in new capacity once this curtailed production returns, OPEC will exhaust its spare capacity and cannot significantly grow in the years ahead. This milestone will rival the importance of the end of US shale hyper-growth and could mark the beginning of a multi-year bull market for oil.
2. Geopolitical instability
(These are the situations that reduce the world’s energy supplies or have the potential to do so.)
Iran: The US, Iranian and European negotiators will convene this week for a fifth – and what they hope will be the final – round of talks over reinstating the nuclear deal. Iran’s President Hassan Rouhani said on May 20th that a “main agreement” had been reached, with the US broadly committing to lifting its sanctions targeting Iran’s oil, petrochemical, shipping, insurance, and banking sectors. However, final details have yet to be settled. US officials have been more cautious, saying only that the four rounds of discussions so far have “crystalized” what steps each side still needs to take. With Iran scheduled to hold its presidential election on June 18th, analysts expect the nuclear negotiations to reach a framework deal in May, with complete oil sanctions relief by September.
Iran is preparing to boost production and exports of crude oil as talks on the nuclear deal with the United States continue to progress, government officials said. According to the report, Iran could return to a production level of 4 million b/d in as little as three months. What’s more, it could add to that figure millions of barrels of crude currently in storage.
Iran will ship the first cargo of crude oil from its new terminal at Jask on the Oman Sea Coast in June, following the completion of a critical oil export pipeline that bypasses the Strait of Hormuz. The new pipeline can carry 1 million b/d of crude from Iran’s West Karun oil fields to the southern coast on the Sea of Oman for export.
The National Iranian Oil Co. is set to sign a $1.78 billion deal with a domestic company to develop the Farzad B gas field in the Persian Gulf. An ONGC Videsh-led consortium discovered Farzad B gas within the Farsi offshore gas block in 2008. The consortium had signed a preliminary exploration-development deal with Iran in 2000, while only the exploration was done. In 2016, Iran said it was examining the Indian proposal but that an agreement was unlikely because of the difference between Iran’s demanded gas price and India’s offer.
Iraq: Baghdad has rejected ExxonMobil’s effort to sell its stake in the West Qurna 1 oil field to two Chinese companies, raising a cloud of uncertainty and potential conflict over a project responsible for about one-tenth of the country’s oil output. In a letter to Exxon dated May 13th, the state-run Basra Oil Company said, “We’d like to let you know that we don’t agree with the terms you’ve agreed to with the two companies listed above,” which the letter identifies as the China National Petroleum Corp. and the China National Offshore Oil Company.
3. Climate change
While scientists warn with increasing urgency that global warming is sharply increasing the likelihood of deadly heatwaves, many regions are doing little to protect vulnerable populations. Recent research shows that the worldwide death toll from extreme heat is rising. However, “Large parts of society don’t think of heat as a threat,” said Oxford University climate scientist Fredi Otto after researchers unveiled a series of new extreme heat studies last month.
According to Bloomberg data, in more than five years since the world agreed to limit warming temperatures, banks have poured more than $3.6 trillion into fossil fuel—almost three times more than total bonds and loans backing green projects. Now this enduring disparity favoring oil, gas, and coal producers might finally be at an end. Green bonds and loans from the global banking sector exceed the value of fossil financing so far this year, an unprecedented reversal since the clinching of the Paris Agreement at the very end of 2015.
According to new research from Rhodium Group, China now accounts for more greenhouse gas emissions than all of the world’s developed nations combined. Its emissions of six heat-trapping gases, including carbon dioxide, methane, and nitrous oxide, rose to 14.09 billion tons of CO2 equivalent in 2019, edging out the total of OECD members by about 30 million tons.
Years of warming temperatures, a failed rainy season last summer, and low snowpack this winter have combined to reduce western US rivers to a relative trickle. The agency that controls irrigation flows on the Rio Grande forced the issue. To conserve water, it opened its gates a month later than usual. Severe drought — connected mainly to climate change — is ravaging New Mexico and the entire Western half of the United States, from the Pacific Coast, across the Great Basin and desert Southwest, and up through the Rockies to the Northern Plains. In California, wells are drying up, forcing some homeowners to drill new ones that are deeper and costlier.
4. The global economy and the coronavirus
Deaths from Covid-19 and Covid-related causes are likely to be two to three times the number recorded in their official data, the World Health Organization said last week. Some six to eight million people may have now died from Covid-19 or its effects since the start of the pandemic, compared with 3.4 million deaths recorded in countries’ official reporting.
The worldwide demand for goods is recovering, however supplies are running out. The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks, and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation.
A surge in food prices is deepening the pain caused by Covid-19 across the developing world, forcing millions into hunger and contributing to social problems that could lead to more political unrest and migration. According to the Food and Agriculture Organization of the United Nations, food prices have jumped by nearly a third over the past year, even as pandemic-related job losses are making it harder for families to afford basic staples.
United States: The speed of the US rebound from the Covid-19 crisis has left executives, investors, and economists scrambling to interpret whether labor shortages and rising prices point to a short-term economic summer heatwave or a more extended period of dangerous inflation. Some of the country’s largest companies have hailed the recovery in recent earnings announcements while declining to predict whether the swift vaccination rollout and massive fiscal stimulus will cause problems for corporate America.
European Union: Ambassadors from the 27 EU countries approved a European Commission proposal from May 3rd to loosen the criteria to determine “safe” countries and to let in fully vaccinated tourists from elsewhere, EU sources said. They are expected to set a new list this week. Based on the European Centre for Disease Control and Prevention data, Britain and several other countries would meet the new criteria. The United States would not, although Americans with proof of vaccination would be welcomed.
Europe faces the prospect of higher electricity bills and a supply crunch, as utilities struggle to finance new gas-fired power plants unless they meet stricter emissions criteria imposed by banks pressured to stop financing fossil-fuel projects. The region’s utilities already anticipate power supply problems as they phase out coal and nuclear generation and aging infrastructure.
For well over a decade, international producers have said gas was a necessary transition fuel on the journey to decarbonization. But increased urgency to halt climate change and the scaling up of renewable technology have left investors and policymakers hesitating over plans for large new plants in the region. The falling cost of renewable energy and the potential of emerging technologies, such as hydrogen, is at the front of policymakers’ minds, pushing gas out of favor as they legislate even more ambitious climate targets.
German Chancellor Angela Merkel rejected demands to bring forward an exit date for ending coal generation in Germany, currently set at 2038. “Those affected need some reliability on the path to climate neutrality,” Merkel said. “I don’t want to unravel this again after one year.” Climate activists say that without an earlier coal phase-out, the more ambitious climate protection targets Merkel’s government just agreed on cannot be achieved.
China: Beijing said it is providing COVID-19 vaccines to nearly 40 African countries, describing its actions as purely altruistic in an apparent intensification of what has been described as “vaccine diplomacy.” The vaccines were donated or sold at “favorable prices,” Foreign Ministry official Wu Peng told reporters. Wu compared China’s outreach to the actions of “some countries that have said they have to wait for their people to finish the vaccination before they could supply the vaccines to foreign countries,” in an apparent dig at the US.
China’s factories slowed their output growth in April, and retail sales significantly missed expectations as officials warned of new problems affecting the recovery in the world’s second-largest economy. While China’s exporters are enjoying strong demand, global supply chain bottlenecks and rising raw materials costs have weighed on production, cooling the blistering economic recovery from last year’s COVID-19 slump. Factory output grew 9.8% in April from a year ago, in line with forecasts but slower than the 14.1% surge in March.
China’s crude throughput in the second quarter is likely to be buoyed by improving domestic demand, and a shortage of oil product supplies due to the introduction of consumption taxes on light cycle oil and mixed aromatics, analysts said on May 17th. In the first month of Q2, the country’s throughput edged up 0.1% at 14.15 million b/d in April from March even as heavy maintenance works led to the volume falling below the average 14.19 million b/d in the first quarter.
Russia: Peak oil demand is looming, and oil-exporting countries are determined to make the most of their oil resources while they can. “Everything that can be produced should be produced while there is still demand to sell it,” the head of the energy committee at the Duma, the Russian parliament, said last month at the presentation of a draft document aiming to do just that. “The main thesis in this strategy is the monetization of current reserves and resources – that is, the maximum monetization of exports,” Pavel Zavalny also said at the event. Russia is one of the three biggest oil exporters globally, alongside Saudi Arabia and the US. Russia claims, somewhat implausibly, it has enough oil to keep producing at current rates at least until 2080.
A second natural gas pipeline linking Russia and Germany edged closer to completion after the Biden administration loosened sanctions on the controversial project. Still, significant hurdles remain before the fuel can start flowing under the Baltic Sea. Biden’s change in stance from Donald Trump’s fierce opposition to the pipeline means Nord Stream 2 will likely get finished as soon as this year. But the sanctions left in place could make it hard to gain all the necessary approvals to start operations. This year’s German election, where the Green Party are contenders to lead the next government, also clouds the picture. “It’s not the end of the story,” said Kirsten Westphal, a senior analyst at the German Institute for International and Security Affairs.
India: As the country confronts a devastating coronavirus outbreak where thousands are dying each day, India desperately needs to vaccinate its population as soon as possible. Yet, the vaccine drive is stumbling just when it is most crucial. Over the past six weeks, the number of vaccinations per day has fallen by about half, from a high of 4.2 million per day on April 2nd to 2 million on Thursday. Vaunted as the largest in the world, India’s vaccine program is being hobbled by supply shortages and an abrupt shift in procurement policy. The woes of the inoculation drive are especially striking given India’s unique advantages, including a large vaccine industry and a record of mass immunization campaigns.
India’s oil demand worsened in the first half of May as large parts of the nation remained under local lockdowns. According to people familiar with preliminary data from the country’s three biggest retailers, sales of road transport fuels during May 1-15 dropped by a fifth from the previous month and about 28% from the same period in 2019. Average daily sales of gasoline — used in cars and motorcycles — fell to about 53,300 tons, the lowest in a year. The sale of diesel — the country’s most-used fuel and a proxy for economic health — dropped to a seven-month low of 147,300 tons a day during May 1-15. The plunge in consumption at the world’s third-biggest crude consumer will weigh on oil prices.
Shipping operations for commodities ranging from oil and coal to consumer goods and textiles were delayed in the week ending May 22nd, as the cyclone Tauktae raged past India’s western coastline. Naval ships and aircraft have been deployed to evacuate hundreds of personnel from oil barges and a rig while the bunkering operations have also been severely hit.
5. Renewables and new technologies
Bloom Energy announced an agreement with the Idaho National Laboratory to test the use of nuclear energy to produce clean hydrogen through Bloom Energy’s solid-oxide, high-temperature electrolyzer. This carbon-free hydrogen is obtained through electrolysis that is powered by nuclear generation. When the electric grid has ample power, rather than ramping down power generation, the electricity generated by nuclear plants can produce cost-effective hydrogen.
A team at Harvard has a developed yet another design for a solid-state battery that uses a hierarchy of interface stabilities to achieve an ultrahigh current density with no lithium dendrite development. A significant challenge with Li-metal batteries (in which the anode is made of lithium metal) is dendrite formation on the surface of the anode.
SAE International’s Wireless Power Transfer and Alignment Task Force, SAE J2954, is urging the US Federal Communications Commission to support the commercialization of wireless charging operating in the frequency band of 79 kHz to 90 kHz based on SAE J2954 standards. The SAE task force consists of more than 150 international experts representing automakers, suppliers, users, national laboratories, and government agencies.
6. The Briefs (date of the article in the Daily Energy Bulletin is in parentheses)
Oil major BP has lobbied for the EU to support natural gas, a move that exposes divergent views among investors and reflects a broader European dispute about the role of fossil fuel in the transition to a lower-carbon world. The European Commission – aiming to reach net-zero greenhouse gas emissions by 2050 – had planned to omit gas-fueled power plants from a new list of investments that can be marketed as sustainable but delayed the decision last month following complaints from some countries and companies. Britain’s BP was among those lobbying against the plan. (5/17)
German pushing rail vs. planes: Germany’s environmentalist Greens party wants to boost rail travel at the expense of domestic flights to help the country achieve its goal of sharply reducing greenhouse gas emissions. The Greens’ candidate for the chancellorship in this year’s national election, Annalena Baerbock, said Monday that her party would reduce government subsidies for air travel, specifically tax exemptions on kerosene fuel, to create a level playing field for rail companies. (5/18)
Japanese refiners plan to sell assets and speed structural reform and overseas expansion as fuel demand is expected to fall faster due to a prolonged impact from the COVID-19 pandemic and an accelerating global decarbonization trend. (5/17)
Yumen, “the cradle of China’s oil industry,” that has become a totem for China’s changes over the past four decades—from a time of sacrifice and ideology to one of the entrepreneurs and the pursuit of wealth, from the old economy to the new, from fossil fuels to renewable energy. As the old town dies, a new city center is rising an hour and a half’s drive to the west. (5/18)
China’s surprise move to slap a consumption tax on imports of light cycle oil and mixed aromatics will force refiners to boost the output of these products at home, which could lead them to ship in incremental crude oil cargoes divert some feedstock from other oil products. (5/19)
In Nigeria, Royal Dutch Shell will offload the last of its in-country assets in a move to rein back risks including sabotage attacks, crude thefts, and litigations with host communities linked to operating in the turbulent investment climate of Africa’s largest oil producer and commit its future to cleaner energy elsewhere. (5/20)
Royal Dutch Shell shareholders overwhelmingly backed the company’s energy transition strategy on Tuesday. Still, the increased support for a second climate resolution filed by an activist group pointed to growing pressure to tackle climate change. (5/19)
Nigeria is encouraging Royal Dutch Shell to keep its onshore oil and gas business in the country instead of divesting it. (5/20)
Colombia’s oil industry is yet again under considerable pressure, despite the national government in Bogota attempting to reactivate the economically crucial sector. The March 2020 oil price crash, COVID-19 pandemic, rising security risk, and significant political turmoil are weighing heavily on the oil industry’s performance. (5/19)
EV train: Wabtec Corporation announced that its FLXdrive battery-electric locomotive—functioning as one unit in a consist also containing two Tier 4 locomotives—delivered more than an 11% average reduction in fuel consumption and greenhouse gas emissions for an entire train—the equivalent of more than 6,200 gallons of diesel fuel saved and approximately 69 tons of CO 2 emissions reduced. (5/18)
Ford unveiled the F-150 Lightning battery-electric pickup. Arriving in spring 2022, the Lightning will be available in four series and two battery options at more than 2,300 EV-certified Ford dealers across the country. F-150 Lightning offers a standard-range battery targeting 230 miles of EPA-estimated range and an extended-range battery targeting 300 miles. (5/20)
EV push: President Biden on Tuesday cast the US as being in an urgent race with China to build electric vehicles as he visited a plant in Dearborn, Mich., that is about to formally unveil the electric version of its popular F-150 pickup truck. The trip was part of Biden’s ongoing pitch for a $2 trillion infrastructure plan that includes incentives to accelerate a transition to EVs. (5/19)
China has ordered power transmission firms to connect a minimum of 90 gigawatts (GW) of wind and solar capacity to the grid this year as part of a new policy initiative to meet its low-carbon targets. China will focus on the transmission of renewable power rather than the construction of new capacity to avoid waste and ensure that wind and solar plants can sell all their electricity on the market. (5/20)
In California, today’s monster fires result primarily from three human forces: taxpayer-funded fire suppression that has made the forest a tinderbox; policies that encourage construction in places that are prone to burning; and climate change, which has worsened everything. (5/18)
An iceberg more enormous than New York’s Long Island has broken off the coast of Antarctica, with measurements taken from satellites and planes confirming it’s the world’s largest. Average sea levels have risen about nine inches since 1880, and about a quarter of that increase comes from ice melting in the Greenland and Antarctica ice sheets (5/20)