Peak Oil Review – 21 Nov 2016

1.  Oil and the Global Economy

Oil prices climbed on Monday but then held steady for the rest of the week as talk of an OPEC agreement balanced against a stronger dollar and increasing global oil surpluses. At week’s end, New York futures settled at $45.69, about $2 above the recent lows touched the week before last, but $7 below the tops of the speculative bubbles set in June and early October.

With the Vienna OPEC meeting only nine days away excitement over the prospects for a production cut are reaching a fever pitch in the oil speculator community. It is obviously in the interests of the major OPEC exporters and Russia to do all they can to push up prices by predictions of a successful meeting next week. Bloomberg notes that Russia has increased its oil export earnings by some $6 billion during the last few months simply by agreeing to talk about production cuts with OPEC.  Most observers believe that an agreement will be signed in Vienna. However, there is still much skepticism that any agreement will result in sufficient cuts to balance the oil markets in the coming year.  OPEC’s secretary general is making the rounds asking for a 1.3 million b/d cut in production. While several of the major exporters are saying this is a fine idea and that they will love the money they will make from higher prices, we have yet to see a single solid proposal.  As we know, many members of OPEC have decades-long records of ignoring production ceilings as there is no penalty and only benefits from over-production.

The crux of next week’s meeting will be what happens to Russian, Iranian, and Saudi production. Iraq is saying it will not halt production increases while a civil war is going on.  Russia is saying it might stop increasing production, but no cuts.  Iran wants to get its production up to 4.0-4.2 million b/d while the rest of OPEC is proposing that it cap production at 3.92 million for the good of all.

The US shale oil industry has had an interesting week. Baker Hughes reported an “astonishing” 20-unit increase in active drilling rigs in the US. This is the largest increase in the number of active rigs since July 2015. In the last three weeks, 30 rigs have been re-activated. Given that the US crude inventory is close to record highs and continues to grow, the addition of rigs suggests that some operators are optimistic about the future.  While there could be an oversupply of oil for the next year or so, the massive reductions that have been made around the world in drilling for new oil suggest that prices will be much higher around the end of the decade. Optimism that OPEC will succeed in pushing prices higher in the next year and promises that the Trump administration will remove restrictions and regulations on producing oil is contributing to the increasing rig count.

The publication of a US Geological Survey assessment of the Permian Basin says that the Wolfcamp shale oil deposit may contain 20 billion barrels of oil, 16 trillion feet of associated gas and 1.6 billion barrels of natural gas liquids. The four layers of shale oil are reported to be the largest “continuous” oil pool the USGS has ever surveyed. The report, however, notes that all this oil is as yet “undiscovered and only technically recoverable,” but does not mean that all of it is economically viable.

The Permian Basin has produced oil since the 1920s; however, its multiple layers of shale, some of which are a mile thick, was not economically viable until the advent of fracking. Whether much of this shale is ever exploited depends on many factors such as oil prices, the course of global warming, and continuing demand for oil.  At current prices, some observers say this oil is not being produced at a profit, but should oil rebound into the $100 range; the US is prepared to begin extensive drilling. This, in turn, is likely to result in another oil glut such as the one that formed two years ago.

The advent of a new US administration and the prospect of major changes in government regulation of energy production has provoked a spate of speculation about what will happen to various segments of the energy industry. Will nuclear boom? Will new policies towards Mexico hurt the large flow of US natural gas going south of the border? Will drilling resume in the Arctic?  Will the new President pull out of the Iran nuclear agreement and do his best to cut the recently revived Iranian oil production? Could this lead to soaring oil prices? These and many other issues remain to be sorted out in the coming weeks.

2.  The Middle East & North Africa

Iran: A Russian delegation visiting Tehran signed a batch of agreements for three Russian oil companies to begin working with Iran to develop its oil. This comes despite the growing competition between Moscow and Tehran for the European oil market. There is clearly a political overtone to these agreements as Iran and Russia are closely involved in supporting the Assad government in Syria. Moscow and Tehran are also in talks over a $10 billion arms deal.

Iranian oil production is nearing pre-sanction levels as oil production started at three new fields last week. President Rouhani said the latest production figures for Iran show that it produced 4 million barrels of oil per day in October and exported 2.4 million. This number came as a surprise and was 250,000 b/d higher than what was previously believed. If this is correct, Iran is already producing above what several OPEC members are saying its production cap should be. Rouhani is running for reelection on the prosperity the nuclear agreement and increased oil production will bring to Iran, so his claims need some verification.

Some are saying that it is unlikely that the Trump administration will pull the US out of the Iranian nuclear agreement despite the rhetoric to do so during the election campaign. There are so many other countries involved in the arrangement that a US pullout would do little to damage Iranian oil production, but would be almost certain to send Tehran back into a nuclear weapons program. There is some talk that US actions alone could cut Iranian production by 1 million b/d, but this seems unlikely, given the effort it took to impose meaningful sanctions the last time.  This talk has naturally upset Tehran which is saying it will not accept any changes to the nuclear deal.

Discussions are underway to pipe a seabed natural gas pipeline to Oman. The pipeline would cost $1.5 billion and would have the capacity to move 1 billion cubic feet of natural gas per day. In Oman, it would be compressed into LNG using existing facilities and shipped to the world markets. This would provide a relatively cheap and secure way to get Iranian into the natural gas markets.

Syria/Iraq: On top of all its other problems, Syrian food production is reported to be at an all-time low with wheat production now at 1.5 million metric tons — down from 3.5 million before the civil war erupted.  With imports taken into account, the country is facing an 840,000-ton shortfall. Bad weather along with the disruptions caused by the fighting are to blame for the shortfall. Moscow has already made a deal to ship 1 million tons of wheat into the country to prevent mass starvation this winter. It is clear that there will be very little left of Syria in a few years and that the refugee problem is only starting.

Iraq plans to export 3.16 million b/d of crude from Basra in December, slightly less than in November which took an unexpected jump as the country increased exports to get ahead of any OPEC production freeze. Baghdad has not been participating in the preliminary talks on a freeze, and few believe it will agree to any restrictions. Analysts point out that Iraq’s current oil contracts would force it to pay the international oil companies for any lost production should it accept a cap at the OPEC meeting.

The Kurdish government has been getting loans from the international oil companies doing business in the Iraqi province. So far some $2 billion has to be raised by the oil companies through bank loans that are to be paid back in oil. Now Glencore, another oil company doing business in Kurdistan, is seeking to raise another $550 million. Kurdish oil that is sold directly to oil companies without involving Baghdad brings a lower price on the international markets because of occasional supply disruptions and threats of lawsuits from the Iraqi government.

Libya:  The National Oil Company says it is planning to produce 1.1 million b/d next year, well above the 600,000 b/d it is now producing. Should it reach this goal, the increased production will eat into any OPEC production cut that comes out of the Vienna meeting next week.

Saudi Arabia: Despite President-elect Trump’s rhetoric about banning Saudi oil imports into the US, most observers do not believe this will happen, and is simply campaign talk to attract the votes of unemployed oil workers. The Saudis have already reacted to the talk and have warned the US about the billions in US exports that the kingdom purchases from the US. They also claim that banning Saudi imports would badly damage the US economy.

The Saudis are supposed to be about to reveal their biggest secrets which are the details of Saudi Aramco’s reserves and oil production. These numbers have been kept secret ever since the Saudis took complete control of the oil company from American oil interests back in 1980.  For the last 35 years very little information, other than total production numbers, has been released to the public. Detailed field by field information should allow analysts to get insights into how long it will be before “twilight in the desert” arrives.

3.  China

China’s oil production fell to a seven-year low in October as domestic oil producers remain cautious due to uncertainties over the price of oil in coming months. China’s oil production was down by 11.3 percent to 3.8 million b/d from October of 2015. As the world’s largest oil importer Beijing is becoming increasingly dependent on foreign oil. Chinese oil companies are trying to slowly buy their way into US oil production as the US is one of the few stable places where oil production is not under control of the government. There is growing concern that the Trump administration will not allow much more Chinese investment in key US industries.

As winter sets in, power plants across North Asia are running flat out to keep up with the demand for energy. Recent cutbacks in coal production have resulted in shortages, forcing Beijing to turn to increased imports from Australia and Indonesia to keep the lights on.  The cutback in Chinese coal production, however, has led the IEA to reduce its forecast for global coal demand. The Agency now sees demand rising by 214 million tons in the next 25 years as contrasted with the 485 million it forecasted last year.

Coal prices in Asia have doubled in the last six months due to the severe cutbacks in Chinese production. This in turn, has led Beijing to relax restrictions on coal production until increases in nuclear and renewables can catch up.

4. Russia

Where Moscow stands on the OPEC production agreement is the issue of the week. After talks with OPEC officials, Russia made it clear it does not want to cut production, but may be willing to freeze production at some level. OPEC did not get the pledges to cut production that it wanted.

Russia’s Central Bank does not seem optimistic about oil prices. The bank is expecting to see them around the $40 level for the next few years but does not believe there will be another collapse to $30 a barrel.

President Putin warned Germany there is a risk that Ukraine will siphon off gasoline bound for the Federal Republic this winter if it turns very cold. Ukraine is no longer purchasing natural gas from Russia as part of an ongoing dispute over prices and payments.

5. Nigeria

It now appears that Niger Delta Avengers did substantial damage when they blew up the pipeline bringing oil to the Forcados export terminal on November 2^nd. This pipeline had been carrying some 150,000-200,000 b/d before the sabotage.  Nigeria’s October output climbed back up to 1.84 million b/d in October after damage from previous attacks was repaired. The Avengers say they blew up three trunk lines bringing oil to the Bonny Export Terminal last week. These pipelines have a capacity of 300,000 b/d. This attack was said to be in retaliation for an offensive by the Nigerian Navy against terrorist groups and illegal oil refineries operating in the Delta. As usual, we will have to wait awhile until the damage caused by the attack is confirmed by official sources.

If history is any lesson, government security forces are unable to deal with the threat to hundreds of miles of oil-carrying pipelines running through the Delta swamps. The only solution seems to be paying bribes to local militant groups to “guard” the pipelines. The last time it was used, this tactic brought several years of peace. The attacks began again when low oil prices led the government to stop paying the bribes. On top of the attacks, oil theft is believed to skim off about 10 percent of the country’s oil export revenue.

6. Venezuela

The government is preparing to cut its crude and refined product supplies to Petrocaribe by 40 percent next year. The Petrocaribe program was set up by the Chavez government in 2005 to provide oil to 17 friendly Caribbean and Central American countries at preferential rates with long payment periods. Those receiving the oil only have to pay 5 to 50 percent of market value up front with the rest deferred up to 25 years at 1 percent interest. Caracas can no longer afford this program as the oil being sent around the Caribbean Basin could be sold for far more revenue on the open market.

Venezuela’s economic collapse is beginning to affect the earnings of the roughly 64 S&P 500 US companies doing business in the country. Many US companies are using an accounting procedure to remove their Venezuelan subsidiaries from their financial statements and writing off the losses in one big charge against earnings. Several companies have shut down facilities or had their Venezuelan plants expropriated. Others are simply unable to get paid for anything they ship into the country or services they provide. Imports into the Venezuela have dropped by 45 percent during the first eight months of 2016 as compared to 2015. The slide continues.

7.  The Briefs

The LNG industry has been turned on its head by forces that could not been foreseen just a few years ago. The continuous drop in demand for gas in Asian markets (down by 2 percent in 2015), excess supply from Australia and the United States, new pricing and a contractual framework have fundamentally changed the long-established LNG business model. Natural gas trade grew at 2.6 percent annually between 2000 and 2015, reflecting the overall trend of rising global demand for lower carbon energy. (11/17)

The Mediterranean is rapidly becoming the world’s most oversupplied oil market, as exports from OPEC heavyweights Iraq and Iran, rising star Kazakhstan and the return of Libyan crude force traders to get creative in marketing their barrels. Supply of virtually every key grade of crude in the region has increased in the last year, in spite of the benchmark oil price struggling to hold above $45 a barrel and showing a year-on-year loss of over 10 percent. (11/15)

The oil market is “pretty pessimistic” about OPEC reaching a deal to cut production, BP Chief Executive Officer Bob Dudley said. Oil prices will probably stay around current levels if the Organization of Petroleum Exporting Countries fails to implement the deal it reached in Algiers in September to limit output. (11/15)

Saudi Arabia has warned Donald Trump that the incoming US president will risk the health of his country’s economy if he acts on his election promises to block oil imports. (11/16)

Kuwait renewed a contract to supply Egypt with crude oil for the next three years, according to a senior Kuwaiti government official, who said the shipments are not intended to make up for the loss of Saudi fuel shipments to the North African country. (11/18)

Output at Kashagan, Kazakhstan’s oil new field, averaged 52,600 b/d during October, while Kazakh officials have said that in order to reach commercial output the field needs to achieve stable production of at least 75,000 b/d. The field off Kazakhstan’s Caspian coast has cost about $55 billion to develop. (11/15)

The possibility that Russia could cooperate with OPEC to shrink the global oil surplus helped lift international crude prices from as low as $27 in January to an average of $44 for the year as a whole. This increase, combined with rising Russian production, has boosted government revenue. (11/17)

Power plants across North Asia are running at full tilt as the region braces for the early onset of winter, underpinning prices for the coal, gas and oil they need to churn out electricity. Commodity market analysts blame the La Nina weather pattern for the chill, with temperatures in Seoul and Beijing forecast to drop below levels typical for the time of year until year-end. (11/17)

In Australia, Shell LNG Chevron’s $54-billion Gorgon liquefied natural gas plant was shut down for a third time since it launched in March, with sources telling news agencies that the downtime delayed shipments but did not cause any cancellations. (11/15)

In Chad, Exxon Mobil is negotiating with the government about a record $74 billion fine the oil company was told to pay last month by a court in the central African nation because of a dispute over royalties. (11/16)

Offshore Africa, drillers burned by a two-year slump in crude prices are slowing exploration of deep-water prospects, undermining a key driver of growth on the continent. In the 25 years since 1982, African oil output doubled to more than 10 million barrels a day. Now, with prices sitting below $50 a barrel, international drillers have cut their plans for capital expenditure in the next five years by $100 billion, according to a report by Wood Mackenzie Ltd. (11/18)

The U.S. oil rig count increased by an impressive 19 rigs last week, ending up at 471 rigs drilling for oil, Baker Hughes reported.  Rigs drilling for natural gas increased by 1 to a new total of 117.  The increase in rig count indicates continued confidence in the sector, despite weekly US crude oil inventory builds that continue to add to the supply side of the already imbalanced supply/demand equation. (4/19)

US shale oil production declines over the past year and a half are forecast to slow to 20,000 b/d in December, down from a 30,000 b/d drop in November, according to the US EIA. December’s shale oil output is estimated to be at 4.498 million b/d, compared to 4.518 million b/d in November. This compares to a decrease of 118,000 b/d to 4.949 million b/d over the same time period a year ago. (11/15)

Bakken oil production was down 10,119 b/d in September and production continues to decline though one analyst expects it to level off soon. (11/17)

The U.S. has more gasoline than it knows what to do with. Exports have risen above imports for three consecutive weeks as recurring pipeline outages and higher production levels by refiners caused Gulf Coast inventories to grow. (11/16)

GE is working with Maersk Drilling on a pilot drilling program that uses advanced algorithms and sensor data to potentially increase productivity as well as cut maintenance costs by up to 20 percent. The program would create a so-called digital twin of the drilling operation and use advanced programming to help spot potential inefficiencies or failures ahead of time. (11/18)

US natural gas in storage increased 30 Bcf to 4.047 trillion in the week ended November 11, breaking the previous all-time high of 4.017 Tcf set the prior week. This was the first build of the 2016 injection season that was larger than both the corresponding week last year and the five-year average. As a result, stocks were 1.3% higher than the year-ago level and 5.6% more than the five-year average. (11/18)

U.S. gas exports: The US in early November began seeing small net volumes of natural gas exports that recently climbed above 1 Bcf/d, an analysis of data from Platts Analytics’ Bentek Energy showed Monday. The emergence and rapid acceleration in export volumes comes amid a recent decline in Canadian imports and a ramp up in feed gas volumes delivered to the Sabine Pass LNG export terminal. (11/18)

Arctic lockout: The Obama administration’s decision to forgo auctions of new oil and gas drilling rights in US Arctic waters deals a blow to energy companies seeking to lock up new territory beyond the long-explored Gulf of Mexico. Interior Secretary Sally Jewell said the move, announced Friday, strikes the right balance by sustaining oil and gas development in the Gulf, while blocking the activity in remote and fragile Arctic waters that could be devastated by an oil spill. (11/19)

Push back? A late-term decision from the Obama administration to sideline some Colorado oil and gas reserves drew fire from industry circles anticipating an about-face. (11/19)

Earthquakes: Following a cluster of events near Oklahoma shale basins, data from the USGS show 22 small tremors in the last week. USGS data show the largest event was a magnitude-3.7 quake reported in Medford on Wednesday. Oklahoma Gov. Mary Fallin last week issued a declaration of emergency after a magnitude-5.0 event struck Cushing, the central U.S. storage hub for crude oil. (11/15)

Residents of Pawnee, a town hit by Oklahoma’s strongest earthquake, have filed a class-action lawsuit against dozens of energy companies, accusing them of triggering destructive temblors by injecting wastewater from oil and natural gas production underground. Pawnee residents say the companies operate injection wells even though they know the method causes earthquakes. A magnitude 5.8 earthquake struck the town of about 2,200 in September and the lawsuit claims 52 more have hit the area since. (11/19)

Natural gas-fired and renewable resources are expected to enjoy growing electrical power generation mix shares over the next three decades, driven by low-cost gas and renewable energy cost declines and performance improvements. The emergence of low-cost gas has driven major changes in the power sector, with the annual average capacity factor for combined-cycle generators jumping from 35% in 2005 to over 56% in 2015 at the expense of coal-fired generation. NREL expects renewable penetration, including hydroelectric capacity, to climb from 14% of all US generation in 2015 to about 24% in 2020 and 44% in 2050 under a “mid-case” scenario. (11/18)

Renewables momentum: Walmart announced an aggressive plan to increase its investments in renewable energy, pledging to power half its operations from wind, solar, and other renewables by 2025 and to cut the carbon footprint of its operations by 18 percent over the same period. Ten days later, Microsoft made its largest wind-power purchase agreement ever, with a deal to buy 237 megawatts of electricity from turbines in Kansas and Wyoming to run data centers in Cheyenne. If the actions of Walmart and Microsoft are any indication, a Trump administration will do little to dissuade companies from continuing to invest in renewables. (11/17)

Britain’s last coal power station will be forced to close in 2025, the government said as it laid out its plan to phase-out the polluting fossil fuel. But in a delayed consultation on the phase-out, published on Wednesday, officials admitted that the last coal power station was likely to shutter in 2022 even without government intervention. (11/15)

Roughly 145,000 new electric vehicles (EV) were sold in Europe in 2015—double the 2014 tally, according to a recent T&E report. EV sales have now reached the milestone of a 1% market share; figures for 2016 to date suggest significantly more than 200,000 plug-in vehicles will be sold in Europe this year. (11/14)

Global carbon dioxide emissions from burning fossil fuels have stayed almost flat for the third year in a row in what scientists say is a “clear and unpredicted break” that could mark a turning point in the world’s efforts to curb climate change.  Emissions are only expected to rise by 0.2 percent in 2016, having failed to increase in 2015 and growing by just 0.7 percent in 2014.  That is a sharp turnaround from the decade up to 2013 when carbon pollution growth averaged 2.3 per cent a year.  (11/14)

Climate flooding? In an enclave of Ft. Lauderdale, known as the Venice of America, where dream-big houses look out over a maze of picturesque canals, the comparison to the Venice of Italy no longer seems so appealing.  In South Florida, which takes rising sea levels—especially “king tides”—seriously enough to form a regional compact to deal with global warming, climate change is no abstract issue.  Rising sea levels exacerbate increasingly intermittent floods. (11/19)

Paris throw-down: With the election of Donald J. Trump — and his threat to withdraw the United States from the accord — shell-shocked negotiators at the recent Paris conference confronted potentially deep fissures developing in the international consensus on climate change. On the sidelines of the negotiations, some diplomats turned from talking of rising seas and climbing temperatures toward how to punish the United States if Mr. Trump follows through, possibly with a carbon-pollution tax on imports of American-made goods. (11/19)

A federal judge in Texas is giving Exxon Mobil an unprecedented chance to question a state law-enforcement officer who is investigating whether the energy company hid damaging data about climate change from investors. U.S. District Judge Ed Kinkeade in Dallas on Thursday ordered Massachusetts Attorney General Maura Healey to appear in the city on Dec. 13 to face questions from Exxon lawyers. The company claims her probe into the company’s public statements about global warming is politically motivated. (11/19)

Polar wackiness: October and November are when the Arctic is supposed to get super-cold, when the sea ice that covers the vast Arctic Ocean is supposed to grow and thicken. But in fall of 2016 — which has been a zany year for the region, with multiple records set for low levels of monthly sea ice — something is totally off. The Arctic is super-hot, about 36 degrees F (20C) warmer than normal, with cold anomalies of about the same magnitude over north-central Asia. (11/18)

CCS: Momentum needs to build up behind carbon capture and storage technologies in order to put weight behind the Paris climate deal, the director of the IEA said. (11/16)

Sweden’s Riksbank is debating whether to become the first significant central bank to issue a digital currency as it responds to an increasing move away from cash in the Scandinavian country.   It hopes to take a decision on whether to start issuing what it calls an ekrona in the next two years.  This would be as revolutionary as the paper note which the bank introduced 300 years ago. (11/16)