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Quote of the Week

“This discovery [Smith Bay; see Briefs below] could be really exciting for the state of Alaska.  It has the size and scale to play a meaningful role in sustaining the Alaskan oil business over the next three or four decades.”

Caelus CEO Jim Musselman.

“With an oil pipeline that is three-quarters empty, this is good news for the state of Alaska.”

Alaska Governor Bill Walker

Graphic of the Week
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1. Oil and the Global Economy
2.  The Middle East & North Africa
3.  Russia
4. Nigeria
5. Venezuela
6. The Briefs

1.  Oil and the Global Economy

The rally that began with the announcement of the OPEC production freezes in late September continued through Thursday last week. There is much skepticism that the tentative agreement, which will not be signed for another six weeks, will have a significant impact on global oil supplies. Crude prices slipped on Friday settling at $49.81 in New York and $51.93 in London.  The 10-day rally now has taken prices up by about $5 a barrel. OPEC and the Russians have figured out that just talking about supply cuts can increase oil revenues substantially. A $5 price jump increases OPEC’s revenues from pumping roughly 33 million b/d by some $160 million a day.

Fundamentals are still saying that expectations of higher prices in the near future are premature. OPEC crude production rose to a record high of 33.24 million b/d in September, 110,000 b/d higher than in August and marks the fourth consecutive month of production growth. Libya, Iraq, Nigeria and Iran all registered increases last month. Libya and Nigeria, whose production has been well below normal of late, are said to be exempt from capping their production at unusually low levels under the new OPEC freeze agreement.  A series of meetings is being organized between now and Nov 30th when the OPEC agreement is supposed to be signed, to work out the difficult problem of just which members will cut production and by how much.

A key factor in the OPEC deliberations may be the pace at which US shale oil production revives in the next month or so. North America saw a 6 percent increase in exploration and production activity last month while the average rig count in the US and Canada was up by 40 from August. While still below the level seen two years ago, this amount of activity is probably enough to check further declines in US production when coupled with a large amount of oil production from new Gulf of Mexico rigs scheduled to come into production next year.

The debate over the price level that will spur major increases in US shale oil production continues. Some see the $50 level that prices have been flirting with since last spring as some sort of break-even level for some shale operators. It is now well recognized that US shale oil production is critical to oil prices and the global economy for conventional production has been nearly stagnant for the 12 years. Some recent analyses of US shale oil production show that it may be peaking about now even if prices go considerably higher.

More people are coming to recognize that the shale oil boom has been debt-fueled by low-interest rates and that bankers have been risking billions in clearly unprofitable shale-oil ventures.  It took $100 a barrel oil to get the high-cost shale oil industry started. Some are now saying that “efficiencies” – low wages and unprofitable oil service company fees – have brought the profitability level for shale oil down to $60 a barrel. Some are skeptical and hold that most shale oil companies cannot survive unless oil sells in the  $90-100 range.

The bottom line of several recent analyses that are in agreement is that US shale oil will peak in three years or less, and might have done so already due to the decline caused by low oil prices. Currently, nearly all new shale oil production is concentrating on the sweet spots where returns are the greatest.  If the industry is to expand and increases production, it will have to drill an ever increasing number of lower quality wells that will ultimately result in falling production.

By 2020 or so, we should a much better picture of just where would oil production is going, and possibly have entered and an era of much higher, unaffordable, oil prices.

2.  The Middle East & North Africa

Iran: Total crude and condensate sales reached about 2.8 million b/d in September, nearly matching peak 2011 shipments before sanctions were imposed. The increase of 300,000 b/d from August was mainly condensates which are light oils extracted from natural gas and are used largely used for petrochemical production. Iran sold about 600,000 b/d of condensates in September. Among the condensate purchasers was BP, marking the first purchase of Iranian oil by the company since the end of the sanctions.

With much fanfare, Tehran announced that it had signed its first “new model” oil production contracts that it hopes will revive its oil industry and move production significantly higher. However, the first contracts were signed with domestic oil firms and signify little or nothing to attract large amounts foreign investment.  No details about the contracts were released.  Iran’s oil minister says that foreign oil companies are busy studying the new model contracts and expects the first of these will be signed with foreign companies before the end of the Iranian year, which is March 20th.

Syria/Iraq:  Baghdad’s oil exports were up slightly last month, but revenue declined. Exports from Basra as well as the first federal government sales from the northern oil fields through Kurdistan and the Turkish port of Ceyhan lifted the average export rate to 3.27 million b/d for August.  The US is said to have provided much of the impetus for the new deal between Baghdad and the Kurds to keep Kurdish forces involved in the battle to retake Mosul from ISIL.

In Kurdistan, oil income fell for the fourth consecutive month in September as the government paid off old debts to the foreign companies that have been doing its drilling. The Kurds say they exported some 564,000 b/d in September, an increase of over 33 percent from August. It is this increase in revenue that likely caused the foreign oil companies to demand back payments, some of which are many months behind. Without the foreigners, Kurdish oil would be out of business.

ISIL continues to launch suicide bombings in Baghdad as preparations to assault Mosul continue. According to local businessmen, the situation in Basra is deteriorating. Due to low oil prices, the government no longer has enough money to pay its debts to local companies and to keep the lid on unrest. Since the US invasion, security in Basra has been maintained through an elaborate system of payments to local militias and patronage that gave jobs and subsidies to some 7 million people living in the region. As the money to support this system dries up, robberies, kidnappings, and assaults have been on the increase. Some are saying that foreign oil companies will have an increasingly difficult time operating in this environment.

The situation in Syria continues to deteriorate with Moscow bringing in more troops and weapons systems to protect it forces and the Assad government against possible retaliation for its bombing of Aleppo. Although many are hailing supposed Russia gains in the struggle, which consist mainly of blowing Syria’s largest city to pieces and killing thousands, Moscow is on the wrong side in this dispute as there are many more Sunnis than Shiites in the country and hatred of the government increases every day. The Assad government is now almost entirely supported by Russia, Iran, and Hezbollah.  In the long run, this is not a winning situation for Moscow.

Libya: Oil production has now increased to over 500,000 b/d due to the occupation of the three main export terminals by forces loyal to Khalifa Haftar that took the terminals away from local guard forces that had closed the terminals as a way to force higher payments from the National Oil Company.  Two of the terminals are now functioning and a third remains closed due to damage during the fighting. The National Oil Company remains confident that it can increase production to 600,000 b/d by the end of the October and 900,000 by the end of the year.  Libya is exempt from the impending output cap and is free to increase production. Prior to the uprising, it was producing some 1.3 million b/d and without political interference, it should be able to attain this level again.

Saudi Arabia:  Most of the reporting last week dealt with the impending sale of 5 percent of Saudi Aramco to the public. Part of the sale is to be an opening of the books to give an outsider a better idea of the company’s operations. This information has been kept private since the Saudi government took full control of the company 35 years ago.

How the Saudi’s will come out of the impending production freeze is of growing interest. With major rivals, such as Iran and Iraq, planning to keep increasing production, it seems clear that the burden of keeping production below the announced ceiling will fall on the Saudis and the other Gulf Arab States. If Nigeria and Libya restore production to anywhere close to former levels, then the Saudis will have to decide whether to make a substantial cut in production or ignore the whole proposal as simply an exercise in talking prices higher.

3. Russia

Moscow’s oil production continues to rise reaching a new high of 11.11 million b/d in September, up 4 percent from August. Russia’s all-time record production was 11.41 million b/d, set back in 1988 before the collapse of the Soviet Union. Most of the increase came from drilling for conventional oil in existing fields. This has been facilitated by the drop in the ruble which has allowed Russian oil companies to make large profits in rubles when they sell their oil abroad. The continuing production increases are a surprise for most outside observers who believe that there must be an end to production from aging oil fields some day.  Moscow is making an effort to drill in Arctic waters, but it will be many years before it makes much of a contribution to total production.

Some are questioning whether the Russians are making an effort to increase production prior to the OPEC production cap to which Moscow is supposed to be a party.

Another issue facing Moscow is the need to diversify its economy away from oil and gas production fast enough. Russia has been described as a “gas station” with a country attached as much of its economic activity is focused on extracting hydrocarbons and minerals. Efforts to diversify into other areas have made little progress.  In the long run, the demand for oil and gas will have to decline due to concerns about carbon emissions and possibly new and cheaper sources of energy. The loss of markets for its oil would leave the Russian economy in a very difficult position.

4. Nigeria

Even though foreign countries are signing up for deliveries from the Forcados terminal next month, we still have not had a recent report on how production is going vs. militant efforts to stop it. Although the main militant group that did so much damage earlier this year appears to have suspended attacks, a new group continues to claim it is doing damage. As usual, government policies prevent any announcements as to the efficacy of rebel attacks.

Nigeria is close to securing a $4 billion loan from China as a 40-member Chinese investment team is due to visit the country later this month to assess opportunities. China is cutting expensive domestic oil production and has not had much success in starting a shale oil boom of its own as the US has done. This is putting a priority on diversifying its oil sources as much as possible. In places, such as Nigeria, where the international oil companies are rapidly tiring of the expensive damage being done to their facilities and dealing with corrupt local governments, they are increasingly unwilling to increase onshore investment. While there is still interest in developing the relatively safe offshore Nigerian oil fields, those subject to militant attacks are being  sold off to local firms.

Nigeria is suing several of the foreign oil firms operating in Nigeria, such as Shell, Eni, and Chevron, claiming that the companies are stealing Nigerian oil and shipping it abroad without paying royalties and taxes to the government. The government says that between 2011 and 2014 some $12.7 billion was stolen simply by not reporting to the government the actual scale of oil production and exports. The companies are saying the accusations are groundless and that the government is simply trying to find a reason that billions in oil revenues, that have likely been embezzled, are missing.  Efforts by foreign accounting firms to find the missing oil revenue earlier this year came to naught due to lack of cooperation by the government agencies involved.

5. Venezuela

Outside of a report that employees of the national oil company are selling their company uniforms to pay for food, most of the news last week was about efforts to raise cash to pay overdue oil service company bills and to make bond payments due in October. The national oil company, PDVSA, is considering issuing $4.7 billion in promissory notes in order to pay its oil service contractors who are already withdrawing services for lack of payment. Without full contractor support, PDVSA’s oil production has fallen every month this year including a 10.2 percent drop in August.

PDVSA’s major liquid asset at the minute is Venezuela’s ownership of the US-based Citgo oil company.  PDVSA says Citgo is worth some $8.3 billion. US financial analysts put Citgo’s value at closer to $3 billion.  PDVSA is asking its bondholders to swap their soon-to-mature notes for longer-term securities, thereby putting off and avoiding default on some $2 billion in payments due in the next year. In return, the new bonds would be backed by a 50.1 percent interest in Citgo.  Venezuela’s title to Citgo, however, is clouded by billions in outstanding claims by Exxon and other foreign oil companies, stemming from the Chavez government’s expropriation of heavy oil processing facilities several years ago.

Should PDVSA’s bondholders reject the offer, Venezuela may be forced to sell off Citgo in pieces and take the cash, leaving the bond default issue an open question.

6.  The Briefs

In the North Sea, the number of rigs drilling for oil and gas plunged in September to 27, the lowest in nearly 35 years as companies cut spending to weather low prices. That is the lowest number since Baker Hughes Inc. started keeping records in January 1982. (10/8)

Norway is ratcheting up withdrawals from its $890 billion sovereign wealth fund to support a recovery as it foresees a continued slump for the nation’s petroleum industry. The government is boosting oil wealth spending by 10 percent to $28 billion next year, according to the 2017 budget released in Oslo Thursday. (10/6)

In the UK, Cuadrilla Resources won the right to horizontally drill and hydraulically fracture four wells in northern England after a two-and-a-half year battle. If it can prove it won’t cause too many traffic problems, it could also get permission to drill another four. While the go-ahead for Cuadrilla is a chink in the armor that has so far stymied attempts to produce shale gas in the UK, it’s nowhere close to what the country needs to replicate U.S. success in exploiting shale gas reserves using fracking. (10/8)

Saudi Aramco, the world’s biggest oil company is planning to sell shares in the entire business and not just in its refining or distribution operations.  According to its CEO, the company will announce “very soon” a list of investment banks and consultants advising it on the initial public offering. It plans to list shares on the Saudi stock market and is also considering foreign bourses in London, Hong Kong and New York. Aramco’s plan to sell a stake of about 5 percent could value the company in trillions of dollars. (10/7)

Saudi Aramco is preparing to give investors unprecedented access to its accounts, lifting the lid on the world’s biggest oil producer ahead of a planned initial public offering in 2018. It is planning to show investors backdated accounts for its 2015 and 2016 financial years, which could be released as soon as 2017. (10/7)

China and the US are locked in negotiations over curbing North Korea’s energy trade in response to its fifth nuclear test last month, according to four diplomats from United Nations Security Council countries with direct knowledge of the talks. (10/5)

Chinese gasoline will reach the US East Coast for the first time in nine years as a surge in New York prices helps ease a glut in Asia. (10/4)

Winter energy prices are likely to rise, but not because of this week’s decision by OPEC. Instead, energy traders say, look to China. What’s more likely to keep winter energy prices propped up is the secretive stockpiling of crude oil by China. (10/3)

MENA slowing: Growth prospects for the global economy have diminished or slowed in recent years. The World Bank estimates the economies in the Middle East and North Africa should grow by 2.3 percent this year, which is a half percent lower than the estimate for last year. (10/7)

South Africa and Nigeria: The IMF has cut its 2017 economic growth forecasts for Africa’s two largest economies as low commodity prices, policy uncertainty and weak investor confidence weigh on output. (10/5)

Sudan as a united country started producing oil in the 1990s, though the division of Sudan and South Sudan in 2011 left most of the oil fields straddling the new border. The split resulted in a loss of Sudan’s oil export revenue, which is down about 80 percent from before South Sudan became a nation. (10/6)

In Chad, ExxonMobil said on Thursday it disagreed with a court decision that fined a consortium led by the U.S. oil major over $75 billion – nearly four times BP’s record Deepwater Horizon settlement – over unpaid royalties. (10/7)

Nigeria’s cash-strapped government is suing some of the world’s biggest oil companies on claims they were involved in illegally exporting $12.7 billion of the country’s crude to the US between 2011 and 2014. (10/3)

Brazil’s Congress voted 292-101 on Wednesday night to open up its pre-salt oil fields to foreign investors by scrapping Petrobras’ obligation to be the area’s sole operator. In a significant change to Brazil’s offshore oil industry regulations, companies other than Petrobras can now operate blocks in the largest deep-water deposits discovered this century. (10/7)

Canada’s oil-sands industry is in a race with other forms of crude production and emerging technologies such as electric cars to remain a relevant energy source in the coming decades, according to consultancy Deloitte LLP. Among various scenarios, oil-sands producers face the risk of a “forced transition” away from oil and natural gas as power generation is dominated by solar panels and wind turbines and as electricity replaces oil as a transportation fuel. (10/5)

The split in support for oil pipelines among indigenous Canadians is putting livelihoods at risk as Canada’s oil industry waits for new conduits to win approval, the country’s top aboriginal leader said. (10/4)

The US oil rig count climbed three last week to 428, said Baker Hughes Inc. The nation’s gas rig count fell by 2 to 94 in the past week. The U.S. offshore rig count rose by 1 rigs at 23, which is 9 less than a year ago. (10/8)

Oil employment: After almost two years of seeing jobs disappear, energy companies saw some good news emerge last month as the job rate remained steady in the month of September. With the stabilization of oil prices, the industry may finally be poised for job growth. Baker Hughes notes that in the third quarter, the industry added 95 drilling rigs, bringing the total to 425. (10/8)

The response of US shale production over the next two months may well impact how OPEC decides to finalize the tentative production freeze it announced last week in Algiers, according to the US EIA’s Adam Sieminski.  He noted that OPEC will be looking at US production statistics and if they see US production beginning to recover, it would make difference as to OPEC’s production strategy. (10/7)

US imports: Reversing a five-year-long decline trend, U.S. gross crude imports rose by 7 percent, or by 528,000 barrels per day, in the first half of this year compared to the same period last year, with imports from OPEC producers increasing the most. [U.S. crude oil imports were regularly above 10 million barrels/day during 2005-06, then bottomed at 7.3 mb/day in early 2015 and are now regularly over 8 mb/d.]  (10/7)

US exports: In the first half of 2016, the US exported 4.7 million barrels per day of petroleum products, an increase of 500,000 b/d over the first half of 2015 and almost 10 times the crude oil export volume. While U.S. exports of distillate and gasoline increased by 50,000 b/d and nearly 140,000 b/d, respectively, propane exports increased by more than 230,000 b/d. Propane surpassed motor gasoline to become the second-largest U.S. petroleum product export, after distillate. (10/5)

In Alaska, where the government faces a $3.5 billion budget gap, state lawmakers narrowly voted in June to trim tax subsidies that have saved oil and gas explorers almost $1 billion a year since 2007. (10/7)

Just off Alaska’s northern coast, Caelus Energy LLC, a small company backed by private equity, says that it has discovered oil. The Smith Bay field could hold as much as 6 billion barrels of oil, with about 1.8 to 2.4 billion barrels considered to be recoverable. If that is the case, the discovery would instantly raise Alaska’s statewide recoverable oil reserve base by about 80 percent. To move the oil Caelus will have to build an $800 million pipeline that travels 125 miles east, connecting to an existing pipeline system in Prudhoe Bay. Caelus estimates that the field could eventually produce 200,000 barrels per day, which would substantially extend the life of the Trans-Alaskan Pipeline. Development costs will be steep – on the order of $8 to $10 billion. Higher oil prices are probably needed for full-scale development to make sense – as high as $65 per barrel plus certainty on state tax policy and incentives. If things go according to plan, production could begin in 2022. (10/7)

In Alaska, an official with the US Geological Survey’s energy program for the state cautioned in a report from the Alaska Dispatch News that it’s too early in the Caelus program to “get too bullish,” noting the company has done little well testing and lacks third-party verification of its stated volumes. (10/6)

In the southeastern US, gasoline prices spiked in September after a major gasoline pipeline suffered a leak and was forced to temporarily shut down. The Southeast may see gasoline prices rise again because the problems with the pipeline are not over. (10/6)

Problems with energy infrastructure in the US and production considerations from OPEC mean delays in expected seasonal declines in gas prices, AAA said. They report a national average retail price for a gallon of regular unleaded gasoline at $2.22, relatively unchanged from one month ago. (10/5)

Natural gas futures in the U.S. rose by 14.4 cents to $3.193 on the NYMEX to the highest point since June 2015 as investors anticipate a boost in demand. The climb in price of natural gas of 4.7 percent allowed futures to increase for the fifth straight day. (10/8)

According to EY records, 11 exploration and production companies in the United States realized a collective loss of over 2.12 billion barrels of oil in proved reserves for 2015. The majority of this figure was contributed by natural gas, a market seriously oversupplied. Because of the shale boom, natural gas prices have fallen to $2.5 per mm Btu, much less than the $4.2 per mm Btu figure recorded in 2014. Producers are struggling to pump gas out of the ground at a price that makes economic sense. (10/5)

Gas demand/prices: The U.S. is experiencing a structural increase in gas demand with more gas-fired power stations operating more hours per year and consuming a record volume of gas. But domestic gas production is turning down, with output nearly 4 percent lower in July 2016 compared with July 2015. Growing demand for gas and shrinking supplies are not sustainable, so gas prices will have to rise to encourage more drilling and limit the use of some gas-fired power plants. U.S. power producers had 448 gigawatts of gas-fired generation capacity in July 2016, an increase of 25 gigawatts since the end of 2012. (10/5)

In Pennsylvania, new regulations governing the extraction of natural gas through fracking will go into effect on Saturday, the first overhaul since the industry took off in the state more than 10 years ago. The new rules allow the state to require additional measures if fracking is taking place near public resources, and requires drillers to restore water supply that is degraded or damaged through fracking. (10/8)

Offshore wind: With the recent completion of the first wind turbine field off the coast of Block Island, many oil rig developers are shifting their attention to this popular new industry. Deepwater Wind LLC installed five turbines three miles southeast of Block Island this past August and they will hopefully be online in November. These turbines will produce 30-megawatts of energy, enough to power over 16,000 homes. The capital required for these projects can be quite expensive; the Block Island project was a $300 million investment. (10/3)

As the doors open at the Paris Motor Show, one thing is being made abundantly clear about the future of the automobile: it’s electric.  Renault has unveiled its new electric car, called Zoe. It’s claimed to have a range of an impressive 250 miles—about the same as a Tesla Model S. Unlike the Tesla, however, it will cost around $30,000 when it goes on sale later this year in Europe. That pits it against both the Chevrolet Bolt, due later this year for $37,500, and the Tesla Model 3, due next year for $35,000.

The global shipping industry is bracing for a key regulatory decision that could mark a milestone in reducing maritime pollution, but which could nearly double fuel costs in a sector already reeling from its worst downturn in decades. The shipping industry is by far the world’s biggest emitter of sulfur, with the SOx content in heavy fuel oil up to 3,500 times higher than the latest European diesel standards for vehicles. To combat such pollution, the International Maritime Organization’s Marine Environment Protection Committee will meet in London on Oct. 24-28 to decide whether to impose a global cap on SOx emissions from 2020 or 2025. (10/4)

Russian state nuclear power plant giant Rosatom sent lobbyists to meet with the Chilean government and discuss “collaboration in possible lithium projects. (10/3)

Alberta’s government issued a request for information on the potential costs and the best way forward toward using solar power for half of government operations. Three contracts to power government-owned buildings are on the books. (10/8)

Renewables: For decades most Fortune 1000 companies did little more than try to manage costs as they bought electricity and fuel from the existing marketplace. This model of simply relying on the existing marketplace to meet energy needs has, however, suddenly become outdated. More and more companies are realizing the strategic advantages of sourcing renewable power. Companies that fail to adapt will face serious competitive disadvantages as this trend accelerates. (10/4)

Climate agreement: A global agreement to combat climate change will take force after support from European nations sent the accord across an important threshold on Wednesday, prompting U.S. President Barack Obama to hail it as a “historic day” for protecting the planet. (10/6)

Canadian Prime Minister Justin Trudeau says Canada will implement a tax on carbon emissions by 2018 to combat climate change. Trudeau made the announcement in Parliament on Monday as debate started over whether Canada should ratify the Paris accord on climate change. It is expected to pass. (10/4)

India, after depositing its signature to the Paris climate deal, received financial support to advance solar energy. The Asian Development Bank said it would set aside $500 million in funding to help advance a rooftop solar energy system to help India acclimate to what, for the country’s energy sector, is emerging technology. (10/5)

Carbon offsets: the International Civil Aviation Organization announced an agreement to limit the industries greenhouse gas emissions by offsetting it with activities like planting trees and other carbon sinks. (10/8)