Peak Oil Review – 20 May 2019

Editors: Tom Whipple, Steve Andrews

Quote of the Week

Regarding climate change research: “The material has been given wide circulation to Exxon management and is intended to familiarize Exxon personnel with the subject. It may be used as a basis for discussing the issue with outsiders as may be appropriate. However, it should be restricted to Exxon personnel and not distributed externally.”

CO2 “Greenhouse” Effect, A Technical Review, Prepared by the Coordination and Planning Division, Exxon Research and Engineering Company, April 1, 1982

Graphic of the Week

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 The struggle between fears that the US sanctions will lead to an oil shortage and the intensifying US-China trade war will lead to a depression continued last week.  Oil prices fell on Monday, climbed smartly for three days, and then fell again on Friday as the trade war took a turn for the worse.  The week ended with prices higher — $62.76 in New York and $72.21 in London.   It was a bad week for oil production with Russia’s contamination problem temporarily halting shipments into Europe; Iranian production this month likely to be on the order of only 500,000 b/d; and Venezuelan production down by another 300,000 b/d.  The Beijing-Washington trade war has no end in sight, and newly announced 25 percent tariffs are likely to increase the prices of many goods in both countries and curtail their exports.   There are many forces currently at work that could affect the oil industry so we are likely to see substantial changes in prices and availability of oil products before the end of the year.  At the top of the list is the possibility that the US-China trade war will morph into a recession with lower demand for oil.  There is much saber-rattling going on in the Middle East as Iran’s oil sales slump to a fraction of their recent level. As Tehran’s economy falters, the possibility of conflicts affecting oil exports rise.  In the past week, we have seen tension ratchet up to a level not seen in recent years.   Then we have Venezuela, Libya, and Nigeria where the geopolitical situations could remove a million or more b/d from the export markets within the next year.  This decline, however, could be balanced out by the end of the1.2 million b/d OPEC+ production cut or even the forecast 1 million+ b/d increase in US shale oil production. Moscow seems to want the OPEC+ production restrictions lifted at the end of June, but the Saudis, who need $85 oil to balance their budget want to see what happens in the coming 40 days.   There has been little growth in the world oil supply outside of the US, Canada, and Iraq during the last ten years.  As we are currently in a world where the demand for crude is going up by some 1.2 million b/d each year, the oil to meet this demand must come from somewhere.  Conventional wisdom says it will come from the US shale oil industry and in particular from the Permian Basin as all the other US shale oil basins seem to be past their prime and unable to yield significant increases in production.  Expectations are that the Permian Basin alone will fuel the growth of the world economy.  We now are seeing numerous stories in the financial and oil industry press with headlines such as “Surge of New Permian Basin Oil to Feed Global Supply” and “Rising US oil output helping fill gap left by Iran, Venezuela: IEA.”   US production of oil and condensates is forecast to rise by 1.7 million b/d in 2019. Crude oil is supposed to account for about 1.2 million b/d of that forecast rise according to the IEA.  The agency noted, however, that 2019 would be lower than US crude oil output growth of 1.6 million b/d in 2018.  The agency says reduced rig counts and maintenance in the Gulf of Mexico had affected US output in the first half of the year, but an uptick in drilling permits and hydraulic fracturing, or fracking, early in the year would lift production.  If these forecasts turn out to be correct, then the 2019 demand can be filled.   However, scattered evidence is indicating that the growth of the US shale oil industry may not be as robust as in recent years.  Funding for the smaller drillers is dropping. Recent reports of actual shale oil production are not as high as forecast a few months before.  We should have a pretty good idea by fall whether output from the Permian Basin will be sufficient to keep the global economy growing.   The OPEC Production Cut: Crude oil production from the cartel fell by only 45,000 b/d in April, according to OPEC’s latest Monthly Oil Market Report despite deep cuts by Saudi Arabia and continued decline in output from Venezuela and Iran.   OPEC trimmed its estimate of oil supply growth from outside the group in 2019 and said the rapid rise in production of US shale oil is slowing.  OPEC is keeping its forecast of global growth in oil use during 2019 steady at 1.21 million b/d indicating that demand for its oil will be higher later in the year.   The Vienna OPEC+ meeting to decide the fate of the production cut still is scheduled for June 24-25.  Little was heard from the Gulf Arabs last week as to the prognosis for the cuts, but Moscow has been hinting for some time that it would like to see a change rather than simply extend the agreement.  A panel of the OPEC and non-OPEC partners met in Jeddah, Saudi Arabia, this past weekend to discuss the state of the oil market.  No decision was expected to be made at the meeting, but the gathering will debate the issues and make recommendations to be acted on at OPEC’s next full meeting in Vienna in June.  An essential part of the problem that OPEC+ faces is whether production from Iran, Venezuela, and Libya will continue at April levels for the rest of the year.   US Shale Oil Production: With the fate of global economic growth seeming to rest on rapid increases in oil production from the US’s Permian Basin, the issue has come in for much dissuasion in recent months.  Much is at stake in the immediate future of the basin.  Large oil companies such as Exxon, Chevron, and now Occidental are staking much of their futures on the premise that they can produce oil profitably for many years.   They are banking on new technologies such as drilling multiple wells from the same pad and drilling longer laterals. While these technologies have boosted production of shale oil to spectacular highs in the last few years, accumulating evidence shows that these technologies are not extracting any more oil from a given piece of land.  They are simply getting the oil out faster.  The day when US shale oil production peaks is still unknown, but the new technologies are bringing it closer than it was five years ago.   There is a lot of smoke and mirrors in reporting on shale oil production.  Every month since 2013, the EIA’s Drilling Productivity Report features ever increasing “new well” production by region without mentioning that the new wells are much longer than the old ones and are being drilled almost exclusively in well-defined “sweet spots.”  The real issue is how much oil these wells are producing per lateral foot over the well’s lifetime.   Every month headlines are made when the EIA releases its forecast for shale oil production in the coming month.  Currently, the Administration says that US shale oil production will climb by 83,000 b/d between May and June to a total of 8.5 million barrels.  In six weeks when the actual output is counted, the number will likely be lower than the forecast.  For example, last February, the EIA forecast that the Bakken oil play would produce 1.46 million b/d day in March.  Three months later we have the actual production for the month, which was only 1.39 million – although North Dakota did suffer some nasty weather in March.  The Bakken is an oil play that most agree does not have much further to grow and is certainly not surging.   The lesson here is that as the shale oil age begins to wind down, we should be looking only at verified production numbers and not optimistic forecasts that are produced by organizations with agendas of their own.  The agendas of forecasters may be obvious such as those made by or for organizations soliciting investments, or more subtle since as those made by government organizations which cannot by definition predict hard times ahead.

2.  The Middle East & North Africa

Iran: Tension rose in the Middle East after unknown assailants attacked four oil tankers anchored just outside of the Strait of Hormuz.  The attack led to a round of recriminations as Washington said Iran was likely behind the attacks.  Tehran denied the attacks, blamed Israel, and then accused the US of framing Iran so it would have an excuse to attack.  When stories appeared in the press that the US was thinking about sending 120,000 troops to the region in addition to the carrier task force, patriot missiles, and a wing of B-52’s, many became concerned about hostilities that would threaten the 17 million barrels of oil per day that pass through the strait. By week’s end, the rhetoric seemed to be lower with President Trump denying he wanted to attack Iran.  However, a day later amid speculation about divisions inside his administration, Trump muddied his position by tweeting that it “may very well be a good thing!” that Iran does not know what to think. 

According to tanker trackers, Iranian exports in May could be at only 500,000 b/d or lower, working a severe hardship on Tehran’s economy.  The growing US pressure on Iran has weakened President Rouhani and made his hardline rivals more assertive. Whether Rouhani can survive the US sanctions remains open.  Iran’s exports have dropped by 59 percent since April when Iran shipped circa 1 million b/d.  They are also less than a fifth of the more than 2.5 million b/d that Iran exported in April 2018, the month before President Trump withdrew the US from the nuclear deal.

Iranian officials have been telling the European countries that it must be allowed to export 1.5 million b/d or it will be forced to leave the nuclear pact implying that it might resume work on nuclear weapons.  Last week, Iran notified China, France, Germany, Russia and the United Kingdom of its decision to halt some commitments under the nuclear deal, but so far it does not appear to be committing any violations.

Iraq:  Baghdad continued to curtail its oil production in April to meet its OPEC obligations.  The curtailment was accomplished mainly by cutting production from the state-operated fields in the south.  The federal government and the autonomous Kurdistan Regional Government produced about 4.61 million b/d last month down slightly from 4.64 million b/d in March.  The Iraqis, however, seem to regard Washington’s refusal to extend the sanctions waivers on Iran as a signal that they can increase production to replace the Iranian oil.

As summer approaches and the temperatures in southern Iraq can soar to as high as 130^o F, Baghdad is becoming concerned about the electricity it needs to deal with the sweltering conditions.  Last summer Iran turned off a 400 MW power line that supplied power to the Basra region, making the situation nearly intolerable.  This year Washington is involved in a confrontation with Iran and is urging Baghdad to cut economic relations with Tehran before the Iraqis have a replacement for the power and natural gas for power stations it imports from the Iranians.

As tensions rose between Washington and Tehran, the US ordered an evacuation of non-essential personnel from its embassy in Baghdad and Exxon began pulling its engineers from the West Qurna oil field.  So far, BP and Chevron are keeping their employees in Iraq but are watching the situation closely.

Saudi Arabia:  In addition to having two of its oil tankers attacked just outside of the Strait of Hormuz, the Houthis in Yemen launched drone strikes against two pumping stations on the Saudis’ East-West pipeline. This line carries about 2 million b/d from the eastern oil fields to export terminals on the Red Sea.  The attack caused a fire at one pumping station, but shipments resumed the next day.  The Saudi-led coalition quickly retaliated with air strikes on Yemen’s capital Sanaa on Thursday, targeting bases of the Iran-aligned Houthis.

Aramco says that it doesn’t believe all the “peak oil demand hype” and expects that its crude oil will be in high demand for decades to come.  While the Kingdom is working on its Vision 2030 strategy, which will diversify its economy away from oil, the Saudis and their oil firm are increasingly looking to lock in future oil demand. In recent years, Aramco has been pursuing deals to sell more crude to China and India—the two largest importers that continue to grow.

Libya:  The fighting on the outskirts of Tripoli continues as General Haftar’s “Libyan National Army” presses its attack to take the capital. The attack on Tripoli and President Trump’s praise for Haftar, who many consider another Qadhafi, has come in for sharp criticism.  Amnesty International says that “as the battle for Tripoli unfolds, the warring parties have displayed a shameful disregard for civilian safety and international humanitarian law by carrying out indiscriminate attacks on residential neighborhoods.”  The World Health Organization says that more than 400 people were killed in the latest offensive and over 2,000 wounded.  The UN says that more than 60,000 people have fled their homes.

As the fighting in Libya settles into a protracted stalemate, the situation does not look good for the country’s oil production.  Although Libya’s oil production has held up well, even increasing output in April by 71,000 b/d to 1.176 million b/d according to OPEC, it seems doubtful that this success can continue.  The chief of Libya’s National Oil Corporation, Mustafa Sanallah, said on Saturday continued instability in Libya could make it lose 95% of its oil production.  Sanallah confirmed an attack earlier Saturday on a southeastern Libyan field. The Islamic State claimed responsibility for the attack.

3.  China

After several weeks of optimism that the China-US trade war would soon be over, the situation took a turn for the worse with both sides imposing new tariffs and threatening that there would be no trade negotiations until the other side changes its position.  The US maintains that China has an unfair advantage by spending so much on state subsidies for its industry, while Beijing says that state subsidies are the way its economy works.   The Trump administration issued an executive order on Wednesday banning China’s electronic giant, Huawei, from providing equipment for US networks and said it was subjecting the Chinese company to strict export controls. This move could have repercussions for the global electronics industry.

Last week, China said it would impose higher tariffs on a range of US goods including frozen vegetables and liquefied natural gas, striking back in the trade war after Washington raised tariffs on $200 billion in Chinese imports. These moves have heightened fears the world’s two largest economies were spiraling into a no-holds-barred dispute that could derail the global economy.  Washington has begun the process of expanding US tariffs to cover all $540 billion in Chinese imports — a potentially seismic jolt to the global economy that is expected to raise prices for everyday products.

The anticipated surge in US LNG exports prompted government efforts to speed up permitting, but is threatened by the tariffs.  LNG exporters may not be able to secure financing for the billions of dollars it costs to build new export terminals if tariffs prevent buyers from signing contracts.  The impact of those competing forces became apparent last Monday when China raised tariffs on imports of LNG from the US to 25% from 10%, effective June 1.

Beijing is having problems too. Economic activity cooled across the board last month, undoing a brief surge earlier in the year and raising questions about the economy’s vitality even before higher US tariffs begin.  Factory production, retail sales, and investment in fixed assets all slowed in April, coming in below market expectations. China reported weaker growth in retail sales and industrial output for April on Wednesday, suggesting that Chinese consumers were growing more worried about the economy.  Overall retail sales in April rose 7.2 percent from a year earlier, the slowest pace since May 2003.

On top of the economic problems, African swine flu is sweeping across South East Asia and threatening to spread even further after decimating some pig farmers in China, which consumes more pork than any other country.  The Chinese can’t get enough pork in normal circumstances, and Chinese consumers account for half of global pork consumption.   Since the first outbreaks took place last August, over 1 million pigs have been culled and 129 outbreaks officially reported by authorities, according to the UN’s Food and Agriculture Organization.

4.  Russia

Moscow’s crude oil production averaged 11.16 million b/d in the first twelve days of May finally bringing the country within its cap under the OPEC+ deal. However, the decline in production may have been the result of restricted exports via the Druzhba pipeline due to the oil contamination issue.  As part of the OPEC+ production cuts between January and June, Moscow pledged to reduce production by 230,000 b/d from October’s post-Soviet record level of 11.421 million, to 11.191 million b/d. Crude oil production stood at around 11.24 million b/d in the first half of April, meaning that it had yet to fall in line with the pledged production cuts.

It has been three weeks since Belarus told oil refiners and pipeline operators in Europe that the crude heading towards them down the 3,400-mile Druzhba pipeline network was contaminated with organic chloride.  Russian oil flows via Druzhba were halted immediately, sending crude to a six-month high above $75 a barrel and tarnishing Russia’s reputation as an exporter.   Russia’s pipeline monopoly, Transneft, said last Tuesday that oil producing firms were to blame for the recent contamination and sources said there was no quick fix to the problem.

Exports of clean Russian oil via the Druzhba pipeline will be restored in late May or early June, Russian Energy Minister Novak said on Wednesday.  However, the bills are due for millions of barrels of contaminated oil that have been stuck for weeks in pipelines from Belarus to Germany.  Western oil companies and European refiners that bought the crude, before discovering it was unusable, have so far refrained from freezing payments as they want to maintain good relations with Moscow and avoid protracted legal battles in Russian courts.

Several Western buyers have asked Russian producers if they can postpone payments for the tainted crude while buyers and sellers agree how to resolve the mess.  There are an estimated 19 million barrels of contaminated crude stuck in the pipelines and loaded on tankers; it’s a $1.2 billion problem.  However, Russia’s Deputy Prime Minister Kozak said on Thursday that Transneft would provide compensation to all parties that could prove real damages from contaminated oil.

5.  Nigeria

There are indications that Nigeria has lost a significant amount of oil as a result of increasing pipeline vandalism and oil theft in the Nigeria Delta. An investigation by the newspaper, Vanguard, over the weekend showed that many oil companies, including the International Oil Companies and indigenous producers, had been affected.  The latest report obtained from Shell Petroleum Development Company indicated that the company, apparently the highest producer with over 600,000 b/d, experienced 39 cases of vandalism and oil theft between January – April 2019.

A research firm, All On, which was started by Shell, has advised Nigeria to initiate a graduated tax on the production and importation of power generating sets that use diesel and petrol.  Such a tax would speed up the growth of off-grid renewable energy power sources in the country.  All On also asked the government to set a timeline of three years to get the generators out of the country and convert from using fossil fuel generating sets to clean energy sources such as solar.

The Federal Government has accused former President Goodluck Jonathan and the former Minister of Petroleum Resources, Diezani Alison-Madueke, of accepting bribes and breaking the country’s laws to broker a $1.3 billion oil deal eight years ago.  The deal, in which Royal Dutch Shell and Eni jointly acquired the rights to an offshore oilfield, has led to legal cases in several countries.  Last December, the Federal Government filed a $1.1 billion lawsuit against Shell and Eni in London dealing with the 2011 oilfield deal.

6.  Venezuela

Venezuela’s crisis is the largest economic collapse outside of a war in at least 45 years, economists say.  “It’s really hard to think of a human tragedy of this scale outside civil war,” said Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund.  “This will be a touchstone of disastrous policies for decades to come.”
 
Yet another problem has been added to Venezuela’s growing list of woes: gasoline import shortages that have caused lines at gas stations.  Local production has slumped too as the second-largest refinery in the country stopped operating.  Imports of fuel and diluents that are necessary to make Venezuela’s extra-heavy oil refinable into fuels have dropped to 86,000 b/d from 225,000 b/d for April.
 
Venezuela’s Orinoco Belt saw production plunge by 77 percent on Tuesday, falling from 764,100 b/d at the start of April to just 169,800 b/d on Tuesday.  The crucial oil upgraders have stopped processing heavy crude because a decline in exports has left the nation without sufficient storage space.  Three of the four upgraders, which convert Orinoco oil into lighter exportable grades, have started “recirculating” – a process that keeps systems running to prevent damage but does not yield new upgraded oil.  The fourth upgrader, owned completely by PDVSA, has been offline for months.  A separate facility that blends Orinoco heavy crude with lighter grades, a joint venture between PDVSA and China’s state-run CNPC, was producing around 70,000 p/d of exportable crude as of May 14.  That was down from about 100,000 b/d earlier this year.
 
This information indicates that Venezuela’s oil production and exports will be considerably lower in May, likely around 500,000 b/d, than the 768,000 b/d it produced in April and the 1.34 million produced last year.
 
The Trump administration suspended all commercial passenger and cargo flights between the US and Venezuela, citing safety concerns stemming from political instability and economic turmoil in the South American nation.

7.  The Briefs (date of the article in the Peak Oil News is in parentheses)

The UK’s goal to maximize oil and gas recovery from the North Sea will harm the country’s Paris Agreement climate goals, a new report by climate campaign groups showed on Wednesday. The UK’s petroleum reserves remain at a significant level, with overall remaining recoverable reserves and resources ranging from 10 to 20 billion barrels plus of oil equivalent, according to the UK Oil and Gas Authority. (5/16)

Offshore Angola, Italy’s oil and gas major Eni said on Tuesday that it had made another discovery in the nation’s deep offshore waters estimated to contain up to 250 million barrels of light. The results of the data collection from the new discovery in Block 15/06 indicates a production capacity of over 10,000 barrels of oil per day. (5/15)

In Angola, President Joao Lourenço has fired Sonangol CEO Carlos Saturnino, as well as the whole board of directors. Bad timing.  After Saturnino took over from Isabel dos Santos, the daughter of former Angolan president/autocrat José dos Santos, Sonangol seemed to finally move in the right direction with a leaner approach to things and optimized asset portfolio. Also, investor confidence has just started to rise lately after international investors came to appreciate the Angolan government’s quest to bring more transparency into the oil sector and to sweeten up a bit its terms and conditions. (5/16)

Guyana, sandwiched between Venezuela and Suriname, has in just a couple of years turned from an empty spot on the global oil map into one of the new hot spots thanks to a series of discoveries offshore, made by Exxon and Hess Corp. The first discoveries came in 2015, and since then, Exxon has been announcing new ones on a more or less regular basis. To date, there have been 12 discoveries, with the reserves associated with them topping 5 billion barrels of oil equivalent. (5/13)

The Mexican government has approved a fiscal stimulus measure that could see Pemex raise oil production by as much as 400,000 b/d. Under the new credit terms, the maturity of a loan of $5.5 billion would be extended by two years and some $2.5 billion in existing debt would be refinanced. The money will be used to boost oil production at aging fields that are currently uneconomical to continue exploiting. (5/15)

US LNG winner: Gas deliveries were observable Wednesday at all six US LNG export facilities in the Lower 48 states, the first time that has happened as America is poised to increase its share of the global supply market, S&P Global Platts Analytics data showed.  Four of those facilities are currently operating, following Cameron LNG’s start-up Tuesday in Louisiana, and two more are preparing to begin production. (5/16)

US LNG exports have been on a steady rise over the past year, especially to Europe, where they surged by 272 percent since July last year. However, this year’s hurricane season could interfere with the trend and compromise the flow of US LNG to Europe and Asia. (5/14)

Schlumberger is selling its non-core businesses and associated assets of DRILCO, Thomas Tools and Fishing & Remedial services as well as part of a manufacturing facility in Houston to Wellbore Integrity Solutions (WIS) for $400 million. WIS, an affiliate of private equity firm Rhône Capital, plans to operate the combined businesses as a global provider of drilling services; tubing work strings, rentals, and accessories and fishing and remedial services for drilling intervention and abandonment activities for the oilfield service industry. (5/16)

EV tax hit: A bill at the Illinois legislature proposes to raise the annual registration fee for electric vehicles (EV) from $17.50 to $1,000 and to more than double the gas tax from 19 cents to 44 cents per gallon, under a plan to fund infrastructure. (5/14)

Driverless EV deliveries: Resembling the helmet of a Star Wars stormtrooper, a driverless electric truck began daily freight deliveries on a public road in Sweden on Wednesday, in what developer Einride and logistics customer DB Schenker described as a world first. Robert Falck, the CEO of Swedish start-up Einride, said the company was in partnership talks with major suppliers to help scale production and deliver orders, and the firm did not rule out future tie-ups with large truck makers. (5/16)

Africa’s economic potential is enormous: the continent contains significant mineral and energy deposits, a young and growing population, and an underdeveloped energy sector desperately in need of investment. Approximately 640 million people, or two-thirds of the entire populace, don’t have access to electricity. Russia’s energy industry, in comparison, is booming. Its state-run nuclear energy company Rosatom has an order book of 34 reactors in 12 countries worth $300 billion. Recently, Moscow has set its eyes on Africa where most states have either already struck a deal with the Kremlin or are considering one. (5/16)

Oil & gas top energy sector: The world is moving in the opposite direction of the Paris climate pact goals, with investment in renewable energy falling for the second consecutive year in 2018 and spending on fossil fuel extraction rising, the IEA warned.  Spending on renewable power such as wind, solar, and biomass projects slipped 1 percent in real terms to $304bn in 2018, the lowest level since 2014, according to an IEA report published on Tuesday.  Investment in coal mining rose by 2.6 percent compared with the previous year –     the first uptick since 2012 – to $80bn, while capital expenditure in oil and gas extraction saw a 3.7 percent increase to $477bn. (5/14)

Exxon’s technical review of climate change, circulated in 1982, includes a summary which begins by noting that the previous 25 years before 1982 have seen an 8% rise in atmospheric CO2 to 340 parts per million, “a trend which began in the middle of the last century with the start of the Industrial Revolution.” (5/16)

Arctic warming: Near the entrance to the Arctic Ocean in northwest Russia, the temperature recently rose to 84 degrees Fahrenheit. Meanwhile, the concentration of carbon dioxide in the atmosphere eclipsed 415 parts per million for the first time in human history. By themselves, these are just data points. But taken together with so many indicators of an altered atmosphere and rising temperatures, they blend into the unmistakable portrait of human-induced climate change. (5/15)