Quote of the Week
“All the climate arguments are real, urgent and important.”
Spencer Dale, group chief economist at supermajor BP, told the Washington Post.
Graphic of the Week
1. Oil and the Global Economy
2. The Middle East & North Africa
8. The Briefs
1. Oil and the Global Economy
The struggle between declining economic growth and falling oil supplies continued to affect oil prices last week. The failure of a significant portion of Venezuela’s electricity grid has already been a significant blow to the country’s roughly 1 million b/d of oil production, and the situation seems likely to get worse. However, part of this decline could be offset by the return to production of Libya’s 300,000 b/d Sharara oilfield after being offline for three months.
There was mixed economic news last week. The US jobs report does not bode well for the future, and China’s exports were some 20 percent lower last month than in 2018. This news was offset by talk of a settlement to the US-China trade dispute later this month. These factors balanced each other off resulting in London futures falling about 1 percent to $65.74 and New York futures climbing by a similar amount to close the week at $56.07.
The major domestic news for the week was the announcement by Chevron that it plans to increase its production from the Permian Basin by 900,000 b/d in the next five years and a similar statement by Exxon that it will expand its Permian output by 1 million b/d. These announcements came in response to a Wall Street Journal story that US shale oil production is starting to falter due to wells being drilled too close together.
For the next few weeks, the course of the Venezuelan power outage and the US-China trade talks could impact oil supplies and prices. Should Venezuela’s multiple problems lead to the loss of a major part of the country’s exports, then oil prices will likely move higher. Coupled with the OPEC+ production cuts, signs that the rapid growth of US shale oil production may be about to slow, and even the furor over Brexit, we may be on the verge of geopolitical changes that will affect the oil markets before the year is out.
The OPEC Production Cut: Russia plans to speed up oil output cuts this month, and by the end of the month it will bring its oil production cut to 228,000 b/d from the October level. Energy Minister Novak told reporters on Monday “We have an understanding that in March there will be higher compliance rate than in previous months.” Moscow maintains that the extreme cold in which most of its oil is produced prevents it from cutting production in the winter without damaging its equipment and oil fields.
US Shale Oil Production: Last week began with a report in the Wall Street Journal that the “shale companies’ strategy to increase oil and gas production by drilling thousands of new wells more closely together is turning out to be a bust.” Not only is less oil than expected coming from wells being drilled too close to an older well, but the production from older wells in the vicinity of the new ones is “threatening the US oil boom and forcing the maturing industry to rethink its future.” The practice of bunching wells in close proximity to other wells has been going on for some time, but now we have the prestigious Wall Street Journal, which is read carefully by lenders to shale drillers, alleging that the practice has become so widespread that it threatens the industry.
The Journal, which has verified the problem by examining production reports for thousands of recently drilled wells, says that engineers are warning that the new “child” wells could produce as much as 50 percent less oil than more widely spaced wells. These “child” wells, however, cost the same to drill and frack as more isolated wells, raising the issue of whether the capital cost of “child” wells will turn out to be more than the value of the oil that they will ever produce. Most of the wells planned for the next decade will be “child” wells.
One driller who was planning to drill 32 wells in each drilling block of roughly two square miles is now planning to drill 16 to 24. A recent study by the Society of Petroleum Engineers found child wells could produce between 15 and 50 percent less oil, depending on how close the wells are packed. Another study by Rystad Energy found that the first “parent” wells will produce 10 to 12 percent less oil and gas on average when a “child” well is drilled nearby. Much lower production from “child” wells becomes important as over 50 percent of the wells in the Permian Basin are now “child” wells.
Drillers have finite acreage from which to produce oil, so it’s not always possible to stretch out the same number of planned wells over a larger area. Companies will have to drill fewer wells than they had anticipated, which means that we are likely facing “an industrywide write-down” if drillers are forced to downsize the estimates of wells they can drill and soon will have trouble coming up with enough new production to offset the notoriously rapid depletion of shale oil wells.
The story brought an immediate reaction from Chevron and Exxon who are heavily invested in the Permian and are counting on production from the basin for much of their profitability in the coming decade. These companies have deep pockets, so they are not dependent on a constant infusion of new capital and bring with them more technical expertise than the smaller drillers. Both companies are expecting a Permian basin oil boom in the next five years.
Chevron says it expects to double its production to 900,000 b/d in the Permian and Exxon expects to be producing 1 million b/d by 2024. Chevron says it does not have the problem of lower production from child wells that is plaguing the smaller drillers as it is using “sophisticated machine learning technology” to plan where and how to drill and frack its wells. Chevron is becoming increasingly dependent on shale oil production and says its Permian resources of 16.2 billion barrels are about a quarter of its total reserves.
Exxon says its Permian reserves are now about 10 billion barrels out of global reserves of 100 billion. The company claims it is so good at producing shale oil from the Permian that it can be profitable even if prices fall to $35 a barrel. However, last year the Australian mining giant BHP pulled out of the US shale oil business after writing off roughly $20 billion saying they had better opportunities for making money than producing shale oil. Perhaps Chevron and Exxon will be better managers of shale oil properties and will be able to extract oil at a profit where others have failed. It will be an interesting decade ahead.
Last week US oil drillers cut the number of operating oil rigs for a third week in a row to the lowest level in 10 months as the smaller producers cut spending even though oil majors plan to spend more. Drillers cut nine oil rigs in the week to March 8, bringing the total rig count down to 834, the lowest since May.
2. The Middle East & North Africa
Iraq: Iraq maintained near-record levels of oil exports in February, with overall sales averaging 3.996 million b/d. The export total includes 3.621 million b/d by the federal government and 375,000 b/d by the autonomous Kurdistan Regional Government.
At least six paramilitary fighters died in an insurgent ambush on in Iraq’s disputed northern territories, which remain fertile ground for Islamic State militants to continue the insurgency. This is the region which had been controlled by the Kurds until they were forced out by government troops last year.
Saudi Arabia: The kingdom produced 10.1 million b/d of crude in February, well below its quota under the OPEC+ supply quota 10.31 million b/d. A government official told S&P Global Platts that “March will be lower.” Saudi Energy Minister al-Falih said last month that March production would fall to 9.8 million b/d, with exports at 6.9 million b/d.
Large volumes of natural gas have been found in the Red Sea, according to the Energy Minister al-Falih. Aramco also is considering opportunities for acquisitions of liquefied natural gas projects in the United States. Earlier this year, Aramco’s chief executive Amin Nasser told Reuters that the company was looking to spend billions of dollars on natural gas acquisitions in the US as part of a strategy to bolster its gas business.
The listing of Saudi Arabia’s Aramco is on track to take place in 2021 according to Energy Minister al-Falih. In January, Al-Falih said the company would issue an international bond in the second quarter of this year, mostly to fund the acquisition of a majority stake in petrochemicals major Sabic, valued at $70 billion, but also to tap “multiple sources of capital.” Given Aramco’s reluctance to make its accounts public, as befits a company preparing for a listing, many are skeptical that the bond issue will ever take place since international bond investors are just as interested in a company’s financial health as stock investors.
Libya: The country’s biggest oil field resumed production last week, adding another complication to OPEC’s effort to trim a global supply glut. Sharara is expected to produce 80,000 b/d immediately, and the regular output of 300,000 b/d will be restored now that the site has been secured. The first export cargos of Sharara crude since the lifting of force majeure will be loaded this weekend, according to trading sources and shipping reports.
The field, which was shut down in December after guards seized it while demanding more money, was taken over last month by forces loyal to eastern militia leader Khalifa Haftar. The National Oil Company “has received assurances that site security has been restored, verified by our inspection team, enabling staff to return to work,” Chairman Mustafa Sanalla said in the statement. The shutdown led to $1.8 billion in lost production.
In a new development, forces from eastern Libya loyal to Haftar have now reinforced a base in the center of the country and signaled to Tripoli that they might move to take over the capital. The UN is attempting to mediate between Haftar and Tripoli’s internationally-recognized government led by Prime Minister al-Serraj, Western diplomats say. They fear it may be the last UN attempt to unify the rival administrations and end the chaos that followed the overthrow of Muammar Gaddafi in 2011.
Haftar, a 75-year-old former general, is increasingly taking the situation into his own hands, backed by the United Arab Emirates and Egypt who see him as the man to restore order to Libya. For many, especially in the east, the general is the only one who can end fighting by numerous small militia groups with ever-changing names. His enemies in western cities see him as the new Gaddafi.
China lowered its economic growth target this year to between 6 and 6.5 percent, acknowledging a deepening slowdown. A paper published last Thursday by the Brookings Institution reinforced longstanding skepticism about the government’s statistics. According to the paper, China’s economy is about 12 percent smaller than official figures indicate, and its real growth has been overstated by about 2 percent annually in recent years suggesting that Beijing’s economy currently is growing at around 4 percent.
Beijing reported its steepest year-on-year decline in exports in three years on Friday, the latest sign that a global slowdown and the trade dispute with the US are hurting its economy. Exports sank 20.7 percent last month compared with February 2018, the biggest monthly fall since February and four times steeper than the 4.8 percent decline forecast in a Reuters poll of economists. Imports fell 5.2 percent, compared with a forecast drop of 1.4 percent, leaving China with the smallest trade surplus in 11 months.
China’s CNPC plans to increase its oil and gas exploration budget five-fold over last year as the country’s dependence on foreign-sourced energy commodities deepens to nearly 70 percent for oil and over 45 percent for natural gas. CNPC will spend $740 million (5 billion yuan) on exploration to pursue the goal of reducing import dependence.
US-based LNG exporter Cheniere Energy is in talks with China’s state-run Sinopec about a long-term LNG supply agreement, with the parties awaiting further instructions from government authorities. The Wall Street Journal reported that Cheniere is expected to sign an $18 billion supply agreement with Sinopec that might be announced as part of a broader US-China trade deal at a summit between President Trump and Chinese President Xi Jinping at the end of March.
The supply of domestic coal is expected to tighten further as authorities in China’s northwestern province had ordered open-pit mines to shut down. According to a document released by local authorities in Shenmu and Fugu, counties in Shaanxi’s Yulin city, all open-pit coal mines will have to be shut by the end of this year.
China’s coal imports in February fell sharply from January due to uncertainty over Beijing’s policies, while the week-long lunar new year holiday also cut into business. Coal arrivals were nearly halved in February to only 17.6 million tons, down from 33.50 million tons in January.
Russian exports of oil and oil products to the United States surged in the last week of February to their highest level since 2011, with Russia taking advantage of the Venezuelan collapse. At least nine tankers delivered 3.19 million barrels of oil and oil products of Russian origin to US ports in the week February 23 to March 1.
On Thursday evening the San Geronimo B substation in the center of the country, which supplies electricity to four out of five Venezuelans from the massive Guri hydropower plant, went down. The San Geronimo B substation connects eight out of ten Venezuela’s largest cities to the Guri hydropower plant via one of the longest high-voltage lines in the world.
So far, the government has said nothing about the cause of the blackout, except to blame it on Washington and the opposition. Venezuela gets about two-thirds of its power from four hydro dams along the Caroni river including the Guri dam which is one of the largest in the world. The nearby San Geronimo A backup substation, which transmits current from the smaller Matagua hydropower plant, operated intermittently on Sunday. Supplies from Matagua and few unreliable thermoelectric plants allowed the government to send sporadic power to parts of Caracas throughout the weekend.
Unless repairs to the to the substation can be made quickly, which seems increasingly unlikely, due to the lack of spare parts, the country is facing a humanitarian crisis on a scale not seen since World War II. Food is spoiling due to the lack of refrigeration and there no way to pump or transport fuel so that food supplies can be maintained. Much of the oil industry has come to a halt due to the lack of power for pumps.
In other news, opposition leader Juan Guaido had returned to the country despite threats to arrest him. The US is considering imposing more sanctions and is discussing emergency economic aid. The World Bank says that Venezuela must pay ConocoPhillips more than $8 billion to compensate Conoco for assists expropriated by Hugo Chavez back in 2007.
In recent years, PDVSA’s fleet of 15 oil tankers has been operated by a German ship-management company that supplied the crews and operated the ships. This worked well until Caracas stopped paying the German firm and the various port charges that tankers accrue during normal operations. The German firm has already abandoned several oil tankers that have been detained in foreign ports for non-payment of local bills. The Germans say they will return ten tankers to Venezuela and remove their crews, but there are no crews in Venezuela immediately available to operate the giant ships. Unless a solution is found, Venezuela will soon be out of the tanker business.
As the political and economic situation deteriorates to unimaginable levels, Moscow has reaffirmed its support of the Maduro government. This support includes threatening the US against military intervention and facilitating payments for Venezuelan oil that skirt the US sanctions. In recent years, Russia has invested billions of dollars in supporting the Maduro regime and fears it will lose its money and its influence in the country should the government fall. Over the weekend, however, there were signs that Moscow is backing off on its support for the Maduro government as the power shortage makes its situation ever more hopeless.
Standard & Poor’s cut the credit rating for Mexico’s national oil company, Pemex, last week. The move reflects concerns that the government’s plan to clean up Pemex’s finances is insufficient, and that the company will continue to be subjected to political decisions that conflict with its financial objectives. Newly elected Mexican President Obrador has said he will inject $3.9 billion into the company which is currently $106 billion in debt. S&P says this is not enough and that it will take at least $20 billion in government aid to revive Pemex.
Despite the efforts of the new Mexican government to reduce the country’s dependence on US natural gas, a new report says this will be impossible in the foreseeable future. Mexico now imports over 50 percent of its natural gas requirement from the US, and this seems likely to increase. Mexico does not have the capital to develop sufficient gas production to reduce that being piped in from the US.
7. The Briefs (date of the article in the Peak Oil News is in parentheses)
BP on oil’s future: Despite the forecast that peak oil demand could come in the 2030s, BP noted that under all scenarios oil will continue to play a significant role in the global energy system by 2040. Moreover, BP wrote that significant levels of investment are required for there to be sufficient supplies of oil to meet demand in 2040, adding that in all scenarios, trillions of dollars of investment in oil is needed. (3/6)
Norway’s $1 trillion sovereign-wealth fund took a major step toward selling off some of its substantial holdings in oil-and-gas companies, a move to shield the oil-rich nation from the risk of permanently lower crude prices. The Norwegian finance ministry proposed that the fund remove energy-exploration and -production companies from its portfolio, following a 2017 recommendation made by the central bank, which uses the fund to invest the proceeds of the country’s oil industry. (3/9)
Russia’s Gazprom Export said Thursday it had made its first ever sale of gas to a western European company priced in rubles, as the company continues to use its Electronic Sales Platform as a tool for diversifying its European gas sales. (3/8)
The US oil rig count decreased by nine to 834, the lowest since last May and the third straight weekly decline, according to GE’s Baker Hughes. Gas rigs declined by two to 193. (3/9)
Exports growing: The US is poised to export more oil and liquids than Saudi Arabia by year-end, according to Rystad Energy. The shift, Rystad explains, comes from continued rising production from US shale plays and increased oil export capacity from the US Gulf Coast. (3/8)
Offshore brouhaha? The Trump administration is set to unleash its offshore, five-year oil drilling plan within weeks, making it perfectly clear that it would like to open more acreage to drillers along the coast of the country. That has drawn opposition from both Democratic and Republican leaders in the coastal states. (3/8)
South Dakota’s governor, Kristi Noem, has proposed legislation seeking to uncover where out-of-state funds for pipeline protests come from and “cut them off at the source;” Republican Noem also said she would set up a fund for extraordinary costs for law enforcement that usually accompany pipeline protests. (3/6)
Colorado is overhauling the laws governing how the oil and gas industry operates in the state. The legislation seeks to put more protections on public health, safety and the environment as it relates to oil and gas development. (3/7)
Oil busting: The Colorado State Senate Transportation & Energy Committee has passed a bill which the American Petroleum Institute (API) says “threatens hundreds of thousands of jobs.” In an organization statement posted on its website, the API said bill SB19-181 would “at the very least hinder, if not prohibit” energy development in Colorado. (3/8)
Sage grouse habitat issue: The US government received bids for about 70 percent of the land it offered at a large oil and gas lease sale in Wyoming last week, held over the protests of conservationists who argued the area was critical habitat for wildlife, including a threatened bird. (3/4)
Alaska’s dream of building a massive liquefied natural gas (LNG) export terminal could be coming to an end. For years, former Alaska Gov. Bill Walker pushed the massive $44 billion capex intensive project as a way to offset decades of dwindling oil production in the country’s largest state. To date, some $260 million has been spent by the AGDC on the Alaska LNG project. New governor Michael Dunleavy, who took office in December, is taking a different approach. (3/6)
Alaska Gas Line Development Corp said on Wednesday it received the last major federal permit needed before it can decide on its proposed $10 billion Alaska Stand Alone Pipeline to supply natural gas to in-state consumers. (3/7)
The first US floating liquefied natural gas (LNG) project continues to plan future steps in its progress despite the U.S.-China trade war, a top manager at one of the project’s partners told Reuters on Thursday. The first US floating LNG project, Delfin LNG, is planned to be located nearly 50 miles off the Louisiana coast in the US Gulf of Mexico. (3/8)
EV supercharging: Tesla announced that it is introducing V3 Supercharging, which will support peak rates of up to 250 kW per car. V3 represents a new architecture for Supercharging. A new 1MW power cabinet with a similar design to Tesla utility-scale products supports the peak rates of up to 250kW per car. At this rate, a Model 3 Long Range operating at peak efficiency can recover up to 75 miles of charge in 5 minutes. (3/8)
VW and EVs: One of the world’s largest carmakers, Germany’s Volkswagen AG, is betting big on electric vehicles and e-mobility with a war chest of around US$50 billion to challenge Tesla, which, for the time being seems unfazed by the increasingly crowded EV market. (3/7)
UK wind: The UK has announced a new target to source a third of its electricity from offshore wind by 2030 but faces criticism for not setting more ambitious goals to reduce carbon emissions. The agreement is the first sector deal for renewable energy and follows a period of rapid growth of wind power, which accounted for 17 per cent of the country’s electricity generation last year. (3/7)
Germany’s RE: Combined wind and solar generation in Germany is forecast to reach a record high this week after Monday’s total narrowly missed the country’s daily all-time high. Wind power covered 64 percent of German power demand on Monday and has been Germany’s single biggest source of electricity year to date. The surge in renewables is expected to push average German weekly spot power prices down to levels seen last spring. Widening the view, across Europe wind power covered 24 percent of electricity demand Monday. (3/6)
Efficiency backsliding: LED light bulbs are already on the shelf, work great, last longer, use one-sixth of the power of an incandescent bulb, and are gaining sales dramatically. Efficiency advocates worry that the Trump administration could slow the pace of this lighting revolution by pushing back some supportive rules established during the Obama administration. (3/9)
Greenland’s 660,000-square mile ice sheet contains enough fresh water to flood coastal cities around the world. Warm air over the sheet is causing it to melt, but new work reveals that rainfall is also causing more melting than previously thought. (3/9)
BP climate strategy: BP said that it would support a call from a group of institutional investors to expand its carbon emissions reporting and to describe how BP’s strategy is consistent with the goals of the Paris Agreement in yet another pledge by Big Oil to start taking investor demands on climate action seriously. (3/6)