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Quote of the Week

“2017 is the sweet spot for integrated companies. It took two to three years to adjust to the drop in oil prices, and a lot of the efficiencies introduced in recent years will roll into 2017 when projects kick in and free cash flow will improve.”

Lydia Rainforth, analyst with Barclays

Graphic of the Week

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

1.  Oil and the Global Economy

It was a volatile week, with New York futures starting out at around $43 a barrel on Monday, climbing to $47.50 on Thursday and then falling to close at $45.88 on Friday. The major event last week was the EIA status report, which came out on Thursday, reporting a near-record fall in the US crude stocks of 14.5 million barrels from the week before last. This was the largest weekly drop in 17 years and set off a short-lived buying frenzy. Traders ignored the impact of tropical storm Hermine which was thrashing around in the Gulf that week, closing production platforms and delaying tanker arrivals along the Gulf and East Coasts. The EIA reported that US crude imports were down by 12.6 million barrels from the week before, and that US refineries were running at 93.7 percent of capacity to satisfy US gasoline consumption demand over Labor Day. By Friday, traders realized that the crude drop was likely a one-off event and not the beginning of a trend.

For the rest of the month, the top oil issue is the outcome of the Algiers OPEC gathering. Hopes that this meeting will result in a meaningful cut in production have been a major impetus for upward movement of the oil markets during the last six weeks. Obviously, all oil exporters would like to see higher prices, but only those who have little prospect of moving their production higher in the immediate future are willing to sign on to a freeze. Several major exporters including Iran, Iraq, Nigeria, Libya, and Venezuela are pumping well below normal and likely would demand an exemption, or at least a delay, from any freeze. For this reason, most analysts do not see any prospect for a significant production freeze this year.

Last week it was announced that the agreement between Moscow and Riyadh to consult on oil prices does not include an immediate freeze even though Russia and Saudi Arabia are the largest exporters and do not have much prospect for significant increases in production.  Tehran’s rapid growth in exports seems to have come to a halt with production below the country’s initial production goal of 4 million b/d. Iraq is making an effort to increase its exports through Kurdistan and Turkey, and there are signs that some Nigerian production may resume.  While some forecasters are still saying that the markets will rebalance before the end of the year, others are talking about 2017.

Much discussion still focuses on increased US production as prices push close to $50 a barrel, and Wall Street seems willing to finance increased oil production even though it may come at a loss.

2.  The Middle East & North Africa

Iran: Tehran’s position on a possible oil production freeze is seen as the key to any freeze agreement. The Saudis say they will not cap production as long as Iran continues to increase output. Last week, however, the reporting on the likelihood that the Iranians would feel they could freeze production was mixed.  Iran’s oil minister said that his country is now producing 3.8 million b/d and is closing in on the 4 billion b/d target that is supposed to be Iran’s pre-sanctions production. This triggered reports that Iran was willing to go along with a freeze, and was negotiating an exemption with the other OPEC members and Moscow that would allow it to continue increasing production until some pre-defined level.

Later in the week, however, there were reports that Tehran’s oil production has been stagnating for the last three months and was only 3.63 million b/d in August. In 2015 Iran produced an average of 2.84 million b/d but quickly rebounded to 3.64 million earlier this year when sanctions were lifted.  If the reports concerning stagnating Iranian production are true, it remains to be seen if an agreement can be achieved later this month that leaves Tehran free to increase its production by another 400,000 b/d while the Saudis and other OPEC members freeze their production.

It should be remembered that Tehran is working hard to increase its production to 5 million b/d by opening new oil fields with foreign help. Bids for foreign oil companies on the new model Iranian oil contracts are due next month.

Hardliners in Tehran continue to slam foreign nationals holding dual citizenship with Iran into jail on trumped up charges of endangering Iranian security. This practice is intended as a warning to all that the theocracy will not tolerate the spread of foreign culture into Iran. Whether this sits well with international oil companies considering on whether they should sink billions into the Iranian oil industry remains to be seen.

Syria/Iraq: Despite the announcement of a US-Russian ceasefire and peace plan that is supposed to go into effect on Monday, heavy fighting continued over the weekend as government planes continued to bomb rebel-held towns inflicting heavy casualties. Most observers are skeptical that this ceasefire will hold. The February cease-fire fell apart in a few weeks.

US and coalition aircraft conducted more raids against oil fields and tanker trucks held by the Islamic State.  Given the duration of these attacks, ISIL must have very few oil resources left in the territory it controls. Unlike troops and military equipment which can be dispersed among the civilian population, oil production, and storage facilities present discrete targets which are relatively easy to find and destroy.

An Iraqi Shiite militia announced on Wednesday that it had sent 1,000 fighters to Syria to help the Syrian government battle the largely Sunni rebel forces. This is one more sign of the growing Sunni-Shiite conflict that bodes ill for the future of the region.

Erbil has begun transferring oil into storage tanks controlled by the Iraqi government at the Ceyhan export terminal in Turkey. This comes after the two governments agreed on a temporary export cooperation scheme and will allow both governments in increase their exports and badly needed oil revenues.

The Iraqis are considering a proposal to send crude from the northern Kirkuk oil fields to a new refinery in Sulaimaniya province in northeastern Iraq and then truck the oil into Iran for sale. This proposal could add another 20,000 b/d to Iraq’s oil production.

Saudi Arabia: The kingdom’s oil production sagged slightly from a record 10.67 million b/d in July to 10.63 million in August. Saudi production usually increases in the summer months to provide the energy needed for air conditioning.  The Saudis still maintain they are willing to enter a production freeze agreement with Russia and the other OPEC members, provided Iran’s production is brought under some kind of restriction.

Despite the occasional claim that they can pump 12 million b/d, it seems doubtful that the Saudis can maintain their production much higher than current levels. From the Saudi point of view 10.6 million b/d is a good level at which to cap their production.

The agreement between Russia and the Saudis last week does not seem to have any substance and is seen by most as simply another effort to “talk prices higher.”  There seem to be growing doubts that any agreement that will rebalance the oil markets will emerge from the Algiers meetings.

The Saudi government is reviewing some $69 billion worth of ongoing contracts in an effort to cut the state budget which is now in deficit. Observers expect some $20 billion in contracts will be canceled or postponed bringing more hardships on the foreigners who do most of the work in Saudi Arabia. During the last round of cuts many were left without money for food and had be bailed out or evacuated by their home governments.

3.  China

There are early signs that China’s economy may be stabilizing. Imports in August were up for the first time in nearly two years boosted by increased coal imports. Although August exports were down by 2.8 percent from August of 2015, this was a smaller decline than expected. The signs of growth, however, may only be the result of the recent spending spree on more government infrastructure and not from increased consumer spending.

Oil imports in August rose to 7.77 million b/d the highest since April and coal imports surged. The government, however, has been cutting back on high-cost domestic oil fields and coal mines, replacing their production with cheaper imports. It may be some time before we know how much of the increase is due to economic growth and how much is due to lower domestic consumption.

Another question is whether China is continuing to import as much oil for its growing strategic reserve now that prices have rebounded from the lows seen last winter. Now that China has released its here-to-fore secret information on the size of its petroleum reserve, we know that as of the first of the year, Beijing had 32 million tons or about a 35 day supply in strategic reserves. This number may be meaningless as increases since then have not been revealed.

4. Russia

It will be another three weeks before we learn whether the much-touted Saudi-Russian oil pact has any meaning. Most analysts are skeptical saying the agreement is only “lip service” to drive prices higher without taking any concrete steps.

Russia’s sovereign wealth fund, which has been financing the country’s government deficits for the last two years, had its biggest drop in August. The Reserve Fund which peaked at $142 billion in 2008 is now down to $32 billion, a 16 percent decrease since July. In addition to the “Reserve” fund the country has a second reserve, “The National Wellbeing Fund” which contains $72 billion. The continuing decline underscores that Moscow still has not gotten its economy under control following the massive declines in oil revenues in the last two years and the sanctions imposed after the Ukraine incursion.

Gazprom says it now has the permits to build a new pipeline “TurkStream” that will bring Russian gas into southern Europe. This pipeline is a replacement for the ‘Southstream” project which floundered in 2014 when Bulgaria pulled out. This project has been delayed due to bad relations between Moscow and Ankara which have been improving in recent months. There are still concerns that the EU is too dependent on Russian gas, and many would like to see the region diversify its sources of supply.

5. Nigeria

The Nigerian Army reported last week that it had arrested a suspected leader of the Niger Delta Avengers militant group that is responsible for reducing Nigerian oil production by some 700,000 b/d or more this year. The Avengers, but not other newly-formed militant groups, announced a ceasefire in late August, but the government continues to pursue suspected members. Most observers are skeptical that the ceasefire will last.

Some reports now put Nigerian oil production at 1.2 million b/d down from the normal 2.1 million.  Shell, however, announced that it is lifting the force majeure on the Nembe Creek terminal now that the Nembe Creek Trunk Lines has been repaired and reopened.

Given its dependence on oil revenues, Nigeria, a nation of some 181 million, faces economic collapse in the near future unless the militancy problem can be solved.  The situation is compounded by the Boko Haram insurgency in the northern provinces.

7.  The Briefs

Production growth coming: Never mind the drop in crude prices, huge spending cuts and thousands of job losses – the world’s top oil and gas companies are set to produce more than ever for some time. Overall production at the world’s seven biggest oil and gas companies is set to rise by around 9 percent between 2015 and 2018, according to analysts’ estimates. (9/6)

Peak surge?” Surging demand from drivers in the richest countries helped power a rally in crude this year. But many analysts say that surge is ending. Economic growth isn’t strong enough in the U.S. and Europe to produce the necessary increase in jobs or new manufacturing that would spur large, long-term increases in oil demand. (9/7)

Offshore UK, a “very significant” reservoir of oil was uncovered during a pilot drilling program in British waters west of the Shetland Islands, a British-based company said Friday. Initial assessment of the well results, which are subject to refinement of the provisional data, suggest that the Lancaster field is likely to be significantly over 200 million barrels. (9/10)

Norway’s Statoil recently announced that the Johan Sverdrup oil field will now have a break-even price of $25 per barrel. While there is a steadfast effort to drive costs down across the North Sea, it appears that most other North Sea operations remain far from profitable at $25 per barrel. (9/6)

French oil services company Bourbon said that any rebound in oil and gas prices would take a while to reach companies in the offshore marine sector because of deep cuts in investments during the prolonged oil downturn. Bourbon has a fleet of about 513 vessels providing offshore services for oil and gas companies. (9/9)

Shipping rates for Very Large Crude Carriers (VLCCs) traveling the Rotterdam-Singapore route dropped as low as $2.25 million as of Friday, representing the lowest price ever seen for VLCC charters since these analysts began assessing the route in January 2006. That price was down over $200,000 from the last assessment. (9/7)

European energy leaders in Budapest signed off on grants to help bolster energy diversity schemes they said Friday were already having tangible results, including several natural gas projects. (9/10)

Two major Caspian Sea oil fields—Kashagan in Kazakhstan and Lukoil’s Filanovsky–scheduled to come on stream this year will together produce at least 200,000 b/d by the end of 2016, according to industry sources and a loading schedule seen by Reuters. That means significant volumes from the projects will be going imminently on to a world market that already has a glut of supply. (9/10)

In Asia, the industry downturn continues to weigh on oil and gas workers. Asian job losses are particularly glaring in the region’s offshore sector as major shipyards accounted for a large part of the world’s construction of newbuild rigs, floating production systems, offshore structures and offshore support vessels. (9/9)

Australian energy company FAR Ltd. said it is focusing the bulk of its spending and exploration efforts on emerging basins off the coast of West Africa. With contingent resources of around 200 million barrels of oil, the company last week said the SNE oil field met the minimum threshold to be considered commercial. Envisioning a floating production storage and offloading concept, FAR said it estimates a peak production rate of 140,000 barrels of oil per day from the SNE field. (9/7)

Equatorial Guinea’s economy will contract further this year due to falling oil output and low crude prices, the International Monetary Fund said. Weak oil revenues and limited buffers will require further cuts to public investment. Overall economic activity in 2016 is expected to decline further by nearly 10 percent. Gross domestic fell 7.4 percent last year. (9/9)

Mexico will continue to hack into the budget of its oil producer next year, a move likely to mean further financial duress and continued output declines for Petroleos Mexicanos. (9/9)

In Alberta, the provincial government said it was pushing forward with a jobs plan as the oil-rich region’s economy drags down the nation. The plan will offer around $23 million over two years to help pay for long-term, locally developed projects meant to create jobs and diversify the provincial economy. (9/9)

In Canada, Suncor Energy—the nation’s largest oil producer—is in talks with government officials for permission to “strand,” or abandon, some high cost and greenhouse gas-intensive crude-oil deposits. (9/8)

The U.S. oil rig count increased by seven to 414, which marked the eleventh straight week of no-decline in the oil rig count, according to Baker Hughes Inc. The gas count grew by four to 92 rigs. (9/10)

Apache Corp. says it has discovered the equivalent of at least two billion barrels of oil in a new West Texas field that has the promise to become one of the biggest energy finds of the past decade. The discovery, which Apache is calling “Alpine High,” is in an area near the Davis Mountains that had been overlooked by geologists and engineers, who believed it would be a poor fit for hydraulic fracturing. It could be worth $8 billion by conservative estimates. (9/8)

OK quake: The U.S. Geological Survey is examining whether the 5.6-magnitude earthquake that shook Oklahoma on Saturday and tied for the strongest temblor ever recorded in the state was triggered by the underground disposal of wastewater from oil and gas production. The quake spurred Oklahoma regulators within hours to demand that operators of 37 disposal wells in a 500-square-mile area shut down. (9/6)

Biofuels blues: U.S. oil refiners, beset by the weakest profit margins in six years, have been laying off workers, revamping operations and ratcheting up pressure on regulators and lawmakers to tweak the renewable fuel program, whose costs have ballooned. The top 10 U.S. independent refiners look set to take a record hit on renewable fuel credits this year. (9/9)

Natural gas prices rose Friday on indications that the glut of the fuel is shrinking. The natural-gas market is oversupplied following a winter of sluggish demand and robust production. However, stockpiles of the fuel fell more than expected last week, reducing the surplus. Inventories of natural gas stood 9.8% above the five-year average level for this time of year as of Sept. 2, down from a surplus of 11% the prior week. (9/10)

Total S.A. said on Friday it is exercising its preemption right to acquire the 75% share in the Barnett Shale which it doesn’t already own to become the sole owner and operator of the field. (9/10)

NGLs: Rigzone presented an article featuring the perspectives of two prominent supporters of developing a $10 billion natural gas liquids (NGL) storage and distribution system in West Virginia, Ohio, Pennsylvania or Kentucky. The proposed Appalachian Storage Hub project would provide a regional home for ethane and possibly other NGL produced in the Marcellus, Utica and Rogersville shale plays and support growth in petrochemicals manufacturing – and job creation – in the four-state area, the hub advocates said. (9/10)

SPR degrading: Decades of wear and tear mean that the infrastructure of the Strategic Petroleum Reserve is now in desperate need of an upgrade. The DOE says Congress needs to cough up $375.4 million to make repairs, otherwise the SPR may not be all that effective. The SPR was setup in the aftermath of the 1973 Arab oil embargo to stash 90 days’ worth of supply into storage for safekeeping, meant to be used in the event of a supply outage. (9/9)

Under the $1.5 – $2 billion SPR revamp plan, three dedicated marine terminals would be added to the Strategic Petroleum (SPR), a string of 60 heavily-guarded underground caverns on the Texas and Louisiana coasts. Also, aging equipment for oil processing, firefighting and security would be fixed or replaced at the SPR, which was last updated in the late 1990s. (9/8)

Leasing process: Bipartisan leaders in the US House of Representatives returned from recesses to pass a measure that would move offshore oil and gas leasing to the Internet. Rep. Garret Graves, R-La., said moving the process to the Internet would increase competition and cut out some of the costs associated with holding leases in public space. (9/8)

The Dakota Access 1,100-mile pipeline, costing $3.7 billion, would carry oil from just north of land owned by the Standing Rock Sioux Tribe to Illinois, where it would hook up to an existing pipeline and route crude directly to refineries on the US Gulf Coast. The line would be the first to allow movement of crude oil from the Bakken shale to refineries on the Gulf. North Dakota’s governor activated 100 National Guard troops on Thursday ahead of an expected ruling by a federal judge on a Native American tribe’s request to halt construction of a crude oil pipeline that has drawn fierce opposition and protests. (9/9)

Violent protest: The fight over the fate of the 1,168-mile Dakota Access Pipeline (DAPL) intensified on Saturday when a clash between private security agents defending the construction site and Native American protestors led to several injuries for both parties. A total of six people were bitten by dogs, according to Steve Sitting Bear, a spokesperson from the Standing Rock Sioux Reservation, who also said the private guards pepper-sprayed at least 30 protestors. Four private security agents and two guard dogs also suffered injuries. (9/7)

Pipeline halted: The Obama administration halted work on a stretch of land where Energy Transfer Partners LP is building its controversial Dakota Access oil pipeline, a move that could threaten to thrust the fate of the project into the hands of the next president. (9/10)

In California, a US judge on Wednesday halted a plan to allow fracking on public lands in the state’s central region, saying a federal agency’s environmental plan should have taken a “hard look” at the potential impact of the process. The ruling was at least the second setback in three years for fracking in California. (9/8)

California’s Gov. Jerry Brown signed a pair of bills to make major cuts in the state’s greenhouse-gas emissions, while allowing elected officials greater ability to oversee its progress. Already on pace with targets for 2020, the governor signed off on a package of measures that require California to cut emissions by at least 40 percent from the 1990 benchmark by 2030, amid opposition from the oil industry, business groups and Republicans. (9/10)

In Texas, manufacturing—an economic backstop to traditional oil—is witnessing a drop in payrolls. Apart from oil, Texas is one of the top manufacturing states in the country and a stronger dollar, which makes US goods more expensive, continued to put pressure on that part of the state economy. The Federal Reserve Bank of Dallas warned earlier this year that the pressure from low oil prices was spilling over to other parts of the state’s economy. (9/9)

Enbridge will buy Spectra Energy for $28 billion. The arrangement has an enterprise value of about $127 billion and the deal is expected to close in the first quarter of 2017. The merged company will have assets spanning crude oil, liquids and natural gas pipelines, terminal and midstream operations, a regulated utility portfolio and renewable power generation operations. (9/7)

Refinery Sale: Saudi Aramco and its U.S. refining joint-venture Motiva Enterprises lead the race to buy the Houston refinery owned by LyondellBasell Industries, a Dutch chemical company. (9/6)

In California, the mix of energy sources used for power generation this summer changed from last summer, as renewables and imported electricity offset 20% lower natural gas use. (9/7)

Coal-fired power generation under development worldwide has shrunk by 14 percent this year, driven down by China as it struggles with oversupply and tries to promote cleaner energy, a study by showed on Wednesday. India also introduced policies in the first half of 2016 curbing plans for coal-fired plants, partly due to under-utilization of existing plants, according to a Global Coal Plant Tracker run by non-government and anti-coal group CoalSwarm. (9/7)

Wind turbines installed in Liverpool Bay at 640 feet tall are the largest of their kind in the world.  Danish company DONG Energy announced it installed the first of the 32 8-megawatt turbines planned for its Burbo Bank Extension project off the British coast. (9/9)

Volkswagen faces claims that it broke consumer protection laws in 20 European countries by marketing cars at the center of the “diesel-gate” scandal as “green”. (9/6)

Diesel Dummies: There is a new menace on America’s roads: diesel truck drivers who soup up their engines and remove their emissions controls to “roll coal,” or belch black smoke, at pedestrians, cyclists and unsuspecting Prius drivers. Gradually, law enforcement officers in the country are being trained at “smoke school” to pick up the skills to police the coal rollers. (9/5)