Peak Oil Review – 28 Nov 2016

Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia
5. Nigeria
6. Venezuela
7. The Briefs

1.  Oil and the Global Economy

Oil prices were steady in the first part of the week as the markets waited for news about the OPEC meeting this week. When it was announced on Friday that the Saudis would not attend a preliminary meeting with the Russians and other non-OPEC members, prices dropped about $2 a barrel to close circa $46 in New York and $47 in London. Although analysts and market traders remain skeptical that any significant agreement will be reached, the week began with a spate of reports from “insiders” that “progress” was being made.

From the Saudis’ point of view, a meaningful agreement, which would allow Riyadh to make a significant production cut, rests on Iran, Iraq, and Russia agreeing to make substantial cuts too. From the beginning, Moscow said that simply forgoing its plan to increase production by 200,000-300,000 b/d next year was the same as actually cutting production and that it would not make any cuts from its current output. Iran said all along that it still has a way to go before it reaches its rightful share of the world oil market although it occasionally hints otherwise.  During the week, however, Baghdad reversed its long-standing opposition to a cut and said it would cut production because higher prices would more than make up for the loss of revenue.

Now that the key meeting that was to have taken place on Monday has been canceled by the Saudis’ refusal to attend, everything rests on the main meeting scheduled for Wednesday. This meeting is being touted as the “Most Important OPEC Meeting Ever” as many are saying that the cartel’s role in controlling oil prices will be lost if there is no agreement. For this reason, most believe something will be signed, but doubt that it will contain significant cuts.

The IEA has been warning for some time that higher prices will only bring more US shale oil back into production offsetting the effectiveness of any OPEC cut. The Agency warned again last week that it looks as if global investment in finding and producing more oil will fall again in 2017. The director general of IEA noted that this would be the first time in history that oil investments have declined for three years in a row.

The US oil-rig count, which has been rising since the beginning of the summer, and reports of a large new deposit of shale oil in the Permian Basin are contributing to increased optimism about the future of the US oil industry. Some see production rebounding as the next US administration reduces “burdensome” regulations on the industry. On the other side of the ledger, however, oil prices are still well below a sustainable level. Many producers are just scraping by paying much lower wages to people who would rather keep working and paying unprofitable fees to oil service companies.  More that 200 energy companies have filed for protection from their creditors since the beginning of 2015.  Some 20 have gone out of business and others are going to bankruptcy for the second time.

Concerns about the climate are increasing again due to a report that the temperatures in the Arctic are running 20^oC above normal, and that the sea ice the Arctic and the Antarctic is melting unusually quickly. Climate change may catch up with the oil industry faster than has been predicted.

2.  The Middle East & North Africa

Iran:  Positions on making oil production cuts shift rapidly in the Middle East today. Over the weekend it was reported that Tehran was considering participation in an OPEC production cut of 1.1 million b/d without specifying the size of its contribution. The Iranians keep talking about how nice everything would be if oil prices would climb to $55-60 a barrel but continue to evade making a firm commitment.

There continues to be concern that a Trump administration would tear up the nuclear agreement and re-impose US sanctions on Tehran. Most observers see this as very difficult to do in a way that would bring pressure on Iran. Since the nuclear agreement, Tehran has moved closer to Russia and China in many ways. Some EU countries are anxious to do business with the Iranians again and are unlikely to participate in any US-decreed boycott.

Syria/Iraq: Syrian government forces, composed mostly of Iranian troops and Hezbollah militia heavily backed by Russia, appear close to taking Aleppo which would be a major “victory.” More serious for world order is the threat by Turkish Prime Minister Erdogan to push the 3 million plus Syrian refugees currently in Turkey into the EU in retaliation for EU complaints about the purges he has been conducting. Some 115,000 Turkish public employees, including police, teachers, and soldiers have been fired as suspected participants in the coup against the Erdogan government.  Moreover, If Aleppo is blown to pieces, the refugee situation is bound to get worse.

Most of the news from Iraq last week concerned the fighting to retake Mosel and the casualties being suffered by its civilian population. Efforts to extinguish the oil well fires that ISIL set in August when they were driven out of Qayarah continue. So far seven or eight wells have been capped with a dozen to go. Before ISIL blew off the well heads, they planted land mines around the wells to slow efforts to put out the fires. Before the ISIL takeover, the refinery at Qayarah employed 550 workers and provided diesel for a nearby power plant. After two years of fighting the refinery is in ruins and electricity is no longer being generated for Qayarah. Repairing this damage will take years and lead to still more refugees. The refugee situation in the Middle East is starting to look like post-WWII Europe.

ISIL retaliated for the government attacks last week by setting off a car bomb south of Baghdad that killed over 70 Shiites and wounded 65. We have yet to see serious damage in Shiite-dominated southern Iraq.

Libya:     The National Oil Corporation announced last week that the country’s oil production had temporarily fallen by 70,000 b/d due to power problems. By week’s end, however, the company reported that these problems were solved and that production was back up to 600,000 b/d. The Waha field has a capacity of up to 120,000 b/d and was recently up to 75,000. If Libya can continue to increase its output in the next year, it could eventually offset much of the production cut OPEC is trying to make.

Saudi Arabia: For the first time in decades, the economic situation in the kingdom is not good. Time is running out for the “reforms” made by the young Deputy Crown Prince bin Salman. His efforts to diversify the economy and make major spending cuts in the midst of the low-oil-price crisis is taking the country into the first non-oil recession in 30 years. Government bills are not being paid, the benefits of public sector workers, which comprise a large portion of the working Saudi citizens, are being cut, and the air war in Yemen is becoming expensive and leading to widespread disapproval of Saudi policies.

For decades now, the Royal family has essentially bribed its subjects into quiescence at time in history when hereditary kingdoms with unconstrained power are nearly gone. The Saudi security services are very effective in keeping the dissident situation under control, but times change. If oil prices remain low, the royal family will no longer be able to buy acquiescence in its rule. Ten years from now we could easily see a different Saudi Arabia.

3.  China

Moscow is rapidly assuming the role of leading oil supplier to China, taking over the lead in the first ten months of this year. Imports from Russia in October were 1.1 million b/d, 39 percent higher than a year earlier. During October, imports from Iran were 773,000 b/d; from Iran 875,000 b/d, and from Saudi Arabia, 935,000 b/d. As Moscow continues to push up its oil production and the EU is becoming more reluctant to do business with the Putin government, it seems likely that Moscow will continue to export more oil towards China.

Last winter, Beijing was faced with massive overcapacity in its coal and steel industries and laid out a plan to cut coal production capacity by 500 million tons and steel making capacity by 100 to 150 million tons. The cuts were to be made over the next three to five years to ease the hardships such a massive cut in industrial capacity would cause. Last week Beijing announced that the plan to cut productive capacity was “basically” being fulfilled with notable exceptions where some firms continue to grow with the permission of local authorities seeking increased employment and economic growth.

The housing bubble continues to worry planners in Beijing. With little solid to invest in, Chinese families are turning to the housing market as a way to increase their wealth through rapidly inflating house prices.   In the past two years, the government has been forced to place various kinds of restrictions on the purchase of new homes for fear that the situation will get out of hand and damage the economy. Such are the problems of trying to regulate the aspirations of 1.3 billion people who are growing increasingly wealthy.

4. Russia

Last week President Putin had planned a meeting with the country’s leading oil producers to discuss how they would implement the “freeze” if a production agreement among the leading oil producers was reached this week. After the Saudi pull-out of Monday’s meeting, the meeting in Moscow with the oil producers was postponed until mid-December. This will allow time for the results of this week’s meeting to be digested and to decide if any action is required on Moscow’s part.

Russian oil company Lukoil is not optimistic as to what will happen to oil prices in the coming year. Lukoil is planning on oil prices around $40 for purposes of its next two-year budget. Russian oil companies have benefitted from the weak ruble caused by a combination of oil price and the sanctions imposed over the Ukraine. In this situation, the weak ruble offsets low oil prices so that the Russian oil companies are doing relatively well which is allowing them to slowly increase production.

5. Nigeria

On Sunday, militants blew up another pipeline, owned by the Nigerian Petroleum Development Corp in Delta state. As usual, there are not reports of the impact, but considering that there have been several major attacks in the last three weeks it is hard to believe that Nigeria’s oil production has not moved lower. Last week the petroleum minister announced that crude production had risen to 1.9 million b/d. Some are now saying that production fell as low as 900,000 b/d earlier this year at the height of the militant attacks.

As the Nigerian government continues to put considerable effort into helping OPEC jawbone oil prices higher, its economy continues to collapse with GDP down 2.2 percent in the 3^rd quarter from last year. Government revenue has plunged, foreign currency is scarce, and the state is falling behind on payments owed to the international oil companies. According to the UN the population is now up to 188 million and many in the northern regions are facing starvation.

While the situation is not as bad as in Venezuela, the social decay that is talking place on many fronts suggests that oil production will decline in the next decade.

6. Venezuela

Last week PDVSA, the national oil company, failed to pay most of a $539 million interest payment on its bonds. The company has a 30-day grace period to make the payment or risk being declared in default. So far there has been no reaction to the delay and New York bankers expect that the payment will be made otherwise there is a risk that much of Venezuela’s financial structure could collapse.

Venezuela’s currency lost over 45 percent of its value in November, the biggest monthly decline ever. The unofficial exchange rate is about 3000 bolivars to the dollar and could end the year at 3500-4000.  At this rate hyperinflation could easily destroy the economy before the bond default takes over. Hungry Venezuelans are fleeing the country by every means possible.

China came through last week with a plan to invest $2.2 billion in Venezuela in return for an increased share of the country’s oil production. Venezuela is already sending some 550,000 b/d to China a payment on loans the country received in the last ten years. The new deal would increase China’s daily imports from Venezuela to 800,000 b/d. In the short-term loans from China may help Venezuela’s economy, but in the long run sending 800,000 b/d of its oil production to China in return for nothing does the economy little good.

The opposition said last week that the Vatican-brokered talks between the Maduro government and opposition-dominated parliament are “frozen.”  This situation is clearly headed for a climax, possibly within the next year. Either the financial system will break down completely, the popular demonstrations will become too large for the security forces to contain, or there will be a military coup and civil war. How oil production will fare in the event of a societal collapse remains to be seen. Perhaps Venezuela will do all the production cutting necessary to bring supply and demand back into balance all by itself. The side-effect could be a civil war and another major refugee problem.

7.  The Briefs

Investment in new oil production is likely to fall for the third year in a row during 2017 as a global supply glut persists, stoking volatility in crude markets, the head of the IEA said on Thursday. (11/24)

Production drop: The world’s listed oil companies have slashed oil output by 2.4 percent so far this year during one of the industry’s worst downturns as OPEC battles to agree on its first production cut since 2008. The aggregated production of 109 listed companies that produce more than a third of the world’s oil fell in the third quarter of 2016 by 838,000 b/d from a year earlier to 33.88 million b/d, data provided by Morgan Stanley showed. (11/24)

Higher oil prices would be a boon for the global economy, according to Goldman Sachs Group Inc. Pricey crude means economies such as Saudi Arabia take in more money than they can spend, which financial markets help distribute through the rest of the world, boosting asset values and consumer confidence, the bank’s analysts wrote in a Nov 22^nd research note. (11/24)

Private equity funds are still raising record amounts of capital for energy investments — with managers and investors alike seeing the current downturn as a prime time to pick up good assets for cheap. Most of that money is earmarked for US shale. But this week’s announcements from Indonesia state oil firm Pertamina, and Japanese government arm, Jogmec, show that the spending spree may now be extending to global oil and gas assets. (11/25)

Natural gas ascendant: The IEA released its annual World Energy Outlook Wednesday, saying natural gas will play an increasingly important role in the mix of global fuels through to 2040. Renewables will also play a leading role moving forward, but to what extent will depend on how countries implement the Paris Climate Agreement, which President-Elect Donald Trump has threatened to pull out of following his inauguration. (11/26)

Ten of the world’s top 25 oil producing countries that are experiencing declining reserves-to-production ratios will face serious problems down the road unless new reserves are found and tapped into. The list, in increasing order of problems: Brazil, China, Malaysia, Angola, Indonesia, Mexico, the US [controversial], Norway, the U.K., and Colombia. (11/25)

OPEC cut? The boost to oil prices from any potential OPEC agreement to curb supply when it meets next week will have only a short-term impact, Statoil’s chief economist said on Monday. (11/22)

In Norway, oil and gas companies cut spending forecasts for 2017, deepening what was already a record reduction in offshore investment. The companies expect to invest 147 billion kroner ($17.2 billion) next year, down 3.6 percent from a previous estimate. (11/23)

In Norway, as one oil major after the other considers leaving the country, alarm bells are sounding at the country’s Petroleum and Energy Ministry. Officials warned companies this month that they could be on the hook for the billions of dollars it costs to close oil fields even if they sell their entire local subsidiary, a liability previously limited to individual assets. (11/22)

Saudi Aramco until recently focused on pumping great quantities of oil and, like the Standard Oil companies of John D. Rockefeller, processing it through its refineries. Aramco now aims to vastly expand its petrochemical operations, turning itself into a modern integrated energy company along the lines of Exxon Mobil. (11/21)

India, the world’s fastest growing crude consumer whose demand for fossil fuels is forecast to surge in the next two decades, will likely decide next month on whether to advance $15 billion to Nigeria for future supplies. Essar Oil Ltd., the operator of India’s second-biggest refinery, has struck a $13 billion deal which may lead to the plant processing more oil from Venezuela. (11/24)

In Bangladesh, the Asian Development Bank said it approved a $167 million loan, with as much as $60 million more possible, to help the nation tap into and deliver natural gas from the Titas field north of the capital city, Dhaka. (11/22)

Cairo’s Governor announced on Tuesday that taxi fares’ initial charge would increase by one-third, along with a one-third increase in the rate per kilometer, in the wake of a surge in the prices of fuel. Taxi drivers called on the cabinet earlier this month to adjust the fare in accordance with the recent fuel price hikes. (11/24)

In Liberia, African Petroleum said it’s been working since June to amend the terms of its contract and bring in new industry partners for Liberia. However, the company has received little industry interest as a result of the challenging market conditions for exploration activity and the lack of commercial discoveries in Liberia. (11/24)

Argentina’s state-controlled energy company YPF said on Wednesday it plans to continue a pilot shale oil project with Malaysia’s Petronas, announcing an additional $192.5 million joint investment. The two companies put nine wells into production between May 2015 and September of this year, with an initial $165 million investment, YPF said in a statement. In the next phase, they intend to drill ten horizontal wells and build infrastructure to transport shale oil. (11/24)

Argentina is in the preparatory stages for equipping an aging railway and laying new train tracks to service the Vaca Muerta shale play. The $1.2 billion project also includes building more roads and highways. (11/25)

In Argentina earlier this year things had been looking great for oil developers when the government said it would fix domestic crude prices at around $67.50 per barrel — significantly higher than world prices, in a bid to encourage exploration and development across the country. But news late last week suggests those attractive subsidies are now off the table. The government has now backtracked on the crude pricing plan, with the country apparently planning to eliminate higher crude prices immediately. (11/22)

In Cuba, Melbana Energy Ltd. of Australia said Cuba’s national oil company CUPET extended its contract for early exploration efforts in an onshore area called Block 9 by eight months to November 2017. (11/24)

Mexico’s move to implement historic energy reform legislation in December 2013, and follow-up legislation in 2014 that further solidified the comprehensive de-nationalization, provides an unprecedented opportunity for oil companies looking to tap into Mexico’s huge energy potential. (11/22)

The US oil rig count rose by three in the past week to 474, according to Baker Hughes Inc. The oil-rig count has been rising since the beginning of summer. The nation’s gas-rig count rose by two to 118 in the past week. (11/24)

There’s a mismatch of what the US is selling and what growing oil consumers India and China are buying. About 98 percent of the American exports are light crude. Most of China and India’s refining capacity of about 19 million barrels a day is geared to take heavy oil. (11/23)

Keystone pipeline: Advisers to Donald Trump are exploring ways he can green-light the Keystone XL oil pipeline on the day he is sworn into office, including by rescinding a 48-year-old presidential order. The strategy hinges on Trump rescinding a 1968 executive order that put the State Department in charge of permitting border-crossing oil pipelines. (11/24)

The Obama administration is rushing to get a flurry of priorities done before Donald Trump takes office. One of those items was a five-year lease plan from the Department of Interior, for the years 2017 through 2022, which includes territories the federal government plans on auctioning off for oil and gas drilling on the outer continental shelf. On November 18, Interior released its plan, and notably absent from the plan was acreage in the Arctic and Atlantic Oceans. (11/22)

In the Permian Basin, fracking has helped turn it into the nation’s most productive oil field — and the only part of the US where the oil industry continues to expand robustly despite a price slump that began in mid-2014. But the parched Permian Basin is also home to a broad array of rare wildlife, including a significant number of species already considered threatened or endangered. (11/26)

The 2010 Deepwater Horizon oil spill caused widespread land erosion in Louisiana by killing vegetation whose roots kept the land from eroding. After the oil spill had killed the plants, the marshlands lost a lot of land — especially in the shoreline areas that were heavily coated. (11/24)

“Chapter 22:” At Global Geophysical Services headquarters in a Houston suburb, a few employees are winding down what is left of an oil and gas industry data provider that only three years ago had a staff of more than 1,000 and offices around the world. Global Geophysical is a “Chapter 22” company – a term coined by restructuring experts for firms that return to bankruptcy court after their first Chapter 11 overhaul failed to fix their problems. (11/23)

In Texas, a bill that could bring thousands of jobs back to the state’s struggling oilfields is up for consideration when the Legislature reconvenes in January. The so-called Majority Rights Protection Act would allow a transaction if 70 percent of working and royalty interest owners in a given field agree whether to move forward with secondary or tertiary drilling. Texas is the only major oil-producing state that requires 100 percent of landowners to ratify an agreement. (11/22)

In Texas, some semblance of stabilization in the energy sector has resulted in a net positive for the state of the state’s economy, a regional banker said. The Federal Reserve Bank of Dallas reported unemployment fell in all nine major metropolitan areas in the state last month. (11/22)

Natural gas advocates can no longer sit on the sidelines while applications for pipeline certificates make their way through FERC’s permitting process, industry stakeholders said at a conference last week. Rather, they need to be proactive and loud in their support to counter the growing “Keep It In The Ground” movement. Opposition to interstate natural gas pipeline projects has grown to unprecedented levels in recent years. (11/24)

Ethanol ruling: Federal regulators finalized a rule Wednesday that raises the amount of ethanol refineries must blend into the nation’s gasoline supply, providing a boost to ethanol companies and drawing criticism from an oil industry that opposes higher levels. Yet the current rule requires far less than the 24 billion gallons envisioned by a 2007 law. The EPA is using a waiver in that law allowing the agency to set lower amounts for a variety of reasons, including slower-than-expected development of certain kinds of non-corn biofuels. (11/24)

EVs vs. ICEs: The increasing stringency of global emissions standards, both current and projected, is driving up the cost for internal combustion engines to meet those standards, although numerous technology pathways exist. An official with Volkswagen’s North America Engineering and Planning Center said that, as a result of those pressures, some of their strategists believe the cost lines between battery-electric vehicles and diesel will cross within the coming decade. (11/23)

Toyota and Mazda — the two Japanese automotive groups most skeptical about electric vehicle technology — have finally revealed plans to mass-produce battery-powered cars. They are late to a game that most of the world’s carmakers, including Volkswagen, Daimler, General Motors and Jaguar Land Rover are already playing, as they confront the rise of US electric vehicle start-up Tesla. Their decisions were passive, rather than a proactive move to capture the electric vehicle market. Neither indicated they had made any major breakthroughs in battery technology — nor did they express confidence in making money from electric vehicles. (11/22)

India is trying to boost sales of its low-quality coal by offering more of the fuel at home and initiating steps to lower freight costs, while global prices are high, with the government hoping the moves will help cut imports. (11/21)

Argentine officials on Friday said they would grant more contracts to build renewable power generators, bringing the total investment committed to such projects to $4 billion. The government plans to award contracts to produce 1,281 megawatts of clean energy through 30 different wind and solar power projects. (12/26)

Canada plans to phase out completely traditional coal power by 2030 and will work with the country’s four remaining provinces that still burn the fossil fuel to reach the overall goal, Environment Minister Catherine McKenna said on Monday. The move is the latest measure Canada is taking to meet greenhouse-gas reduction targets by 2030, and follows the introduction of a nationwide carbon levy that starts in 2018. (11/22)

Climate battle: Exxon Mobil, under fire over its past efforts to undercut climate science, is accusing the Rockefeller family of masterminding a conspiracy against it. The company, which has been accused of scheming to pay surrogates to deny the threat of climate change, is trying to turn the tables by calling its opponents the real conspirators. It is fighting state attorneys general, journalists and environmental groups in an all-out campaign to defend its image. (11/22)

Rising seas worry buyers: Real estate agents looking to sell coastal properties usually focus on one thing: how close the home is to the water’s edge. But buyers are increasingly asking instead how far back it is from the waterline. How many feet above sea level? Is it fortified against storm surges? Does it have emergency power and sump pumps? Rising sea levels are changing the way people think about waterfront real estate. (11/25)