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Quote of the Week
On the Canadian oil sands: “It is not a growth sector, and one of the issues particularly for the oil sands is, if you’re sitting in London or New York or Hong Kong or Tokyo and you’re running institutional money, are you really going to think about being a shareholder in something that’s going to cost billions, take 10 to 15 to 20 years to realize a return and be in the high-cost production when price is under pressure and global growth is slow? I don’t think so…. In general, we’re the [world’s] high-cost producer…. And in a US$50 [oil market] … we’re just not competitive.”
John Stephenson, CEO of Stephenson & Co.
1. Oil and the Global Economy
Oil prices remained firm last week amidst continuing reports concerning actual or impending supply disruptions. US futures dipped below $50 a barrel on Friday, to close at $49.83, but analysts are expecting further gains as the impact of more disruptions are felt. Higher oil prices have encouraged a small revival of drilling activity with the US rig count up slightly for the second week in a row.
A few observers are reminding us that while shale oil now may be marginally profitable in a handful of sweet spots, we are far from a general revival of the shale oil industry. Bankruptcies continue to be announced each week and the banks, which have lost billions in bad loans to the industry, continue to be stuck with large equity stakes in firms with dubious prospects. One analyst is arguing that Canada’s tar sands, which are very high-cost producers, do not have a future and will receive very little capital investment.
Much of the oil industry’s future has to do with how far ahead one wants to look. Large cuts in capital expenditures will soon translate into lower production, and unless the world economy contracts radically or undergoes a massive shift to alternative fuels, oil prices will eventually be much higher. This time, however, seems likely to be several years away. Peak oil, the point at which costs of producing declining quantities of oil becomes too expensive for consumers, is out there somewhere.
For the immediate future, the two-year-old oil glut seems to be waning due to supply disruptions which according to the EIA have reached their highest level since 2011. These disruptions seem to be outweighing increased production from the Middle East. The situation in Nigeria is getting worse; new fires in Alberta are threatening other producers there; everyone is waiting for the other shoe to drop in Venezuela which conceivably halts its oil production for an indeterminate period.
The normal economic forces, of course, remain in play. Lower, though currently rising, prices are causing an increased demand for gasoline this summer. Ironically, a gasoline glut seems to be building as more refineries are coming online and pumping out more gasoline than the market can consume. In general, the global economy is not doing well enough to spur much new oil demand. The World Bank recently downgraded its global growth forecasts for 2016, including those for several large consumers, such as China, Japan, and the Eurozone.
Despite inventories that are 35 percent higher than usual, natural gas prices have risen by 25 percent in the last two weeks and are now just below $2.50 per million BTUs. Like in the US oil industry, natural gas production is slowing with the rig count now down 63 percent from last year. The low and clearly unprofitable natural gas prices the industry has seen of late were partly due to a bad winter and partly due to increased gas production. The recent round of price increases seems to be due to several factors. For years we have seen steady increases in natural gas reserves, but these increases seem to be slowing due to forecasts of warmer temperatures and more demand for gas-fired air conditioning for this summer; the shift from coal to natural gas for electricity generation; and finally the start of US LNG exports after many years of delays.
2. The Middle East & North Africa
Iran: For several months after the sanctions were lifted Tehran had trouble finding foreign shipping companies willing to transport its crude due to lingering insurance problems. In April, a temporary insurance fix was brokered so that now upwards of a third of Iran’s oil exports are carried by foreign vessels. This development has allowed Iran to ramp up its oil exports much faster than analysts had believed was possible due to limitations on the number of tankers Iran owned – many of which were occupied storing the crude surplus that grew up during the sanctions. Last week, Royal Dutch Shell joined France’s Total as the second major European oil company to resume purchases of Iranian crude. Iran says that some 80 percent of its pre-sanctions oil export contracts in the EU are now active.
The controversial oil export contracts designed to lure billions of dollars in foreign investment to upgrade the country’s oil industry are back on the table. While foreign oil companies are happy to participate in exploiting Iran’s cheap-to-produce oil, they are not going to do it at a loss. Meanwhile, hardliners in Tehran insist that foreigners should not be allowed to “steal” Iran’s oil. The solution seems to be language in the contracts which maintains that the oil belongs to the Iranian people even if the foreigners are allowed to keep part of it for their efforts.
Tehran has announced that it plans to build a $3 billion refinery on its southern coast to boost sales of oil products to Asia. The Iranians hope that foreign investors will supply 80 percent of the capital for this venture and plan to issue a tender for this investment in the next two or three months.
Syria/Iraq: As military pressure on ISIL forces in Syria and Iraq increases, the group is stepping up suicide bombing strikes in Baghdad and now Damascus as the only means of retaliation it has left. The caliphate has no means of resupply now that it is no longer in a position to capture Syrian or Iraqi government munitions. Its supply of oil has been cut significantly in the past year and routes out of the country are being closed. The country still has millions of people as hostages in the cities and towns it controls so that the fight is likely to be long and bloody, causing tens of not hundreds of thousands of civilian casualties and increased numbers of refugees. The underlying causes of the rebellion such as the numerous religious and tribal splits across the region are nowhere near solution. Occupation of traditional Sunni regions of the country by Shiite militias does not bode well for future stability. While ISIL is on the military defensive and may eventually be destroyed by the combined military might of its numerous opponents ranging from Moscow to Washington, its demise is unlikely to end the troubles.
For now, however, the ISIL threat to Iraq’s oil supply seems to be on the wane, but political disagreement among the Shiites that rule Iraq is increasing. The recent incursion into the Green Zone by supporters of the radical Shiite Muqtada al-Sadr does not bode well for the future of the Iraqi government as such troubles are likely to continue.
For now, the bottom line is that Iraqi oil production may continue to grow slowly as foreign oil companies increase production, but the long-term prospects are not good.
Libya: Forces loyal to the Government of National Accord seem to have taken control of the Islamic States Libyan “capital” of Sirte after days of fighting. Casualties were heavy as the Islamic State probably had thousands of supporters in the city. Western governments including the US and several EU states have been supporting the attack on the Islamic State forces as a necessary first step to stabilizing the country and ending the flow of refugees across the Mediterranean.
Outside observers are optimistic that the government force that overran Sirte might form the nucleus of a new national Libyan army that would stabilize the situation and take power away from local militias with their own agendas that have dominated the country in recent years.
There may be some hope for the revival of Libyan oil production yet.
Saudi Arabia: The government is moving quickly to makeover the Saudi economy to remove its dependence on oil. Last week the cabinet approved the National Transformation Program, which envisions the country boosting its non-oil revenues to $141 billion by 2020. The plan to sell off less than 5 percent of the Saudi’s Aramco Oil Company, which is estimated to be worth some $2-3 trillion, would be the first step. Wall Street is excited about the prospects of an IPO which could generate $1 billion in fees on IPO revenues of over $100 billion.
The government is still working on its first international bond sale which could raise some $15 billion to help with the widening government budget gap and has announced an income tax on foreigners resident in the country.
The government has cut back on a plan to increase the use of renewables to 50 percent of its energy mix. The new plan envisions an increase in the use of natural gas from 50 to 70 percent of its energy mix to stop burning so much easily exportable crude to generate power. Gas projects usually take three to four years to implement, so the Saudis will have to start new natural gas programs soon to have the gas available by 2020.
3. China
Platts’ analysts calculate that China’s apparent demand for oil fell by 1.3 percent year over year in April to 11.3 million b/d. Refinery throughput in April averaged 10.9 million b/d, a 2.3 percent increase over last year. As China refines and exports increasing quantities of oil products, product imports fell by 48 percent over April 2015. This was the third consecutive drop in China’s apparent demand which is now expected to grow by less than 2 percent this year as its economy continues to contract.
The chief economist for China’s central bank forecasts that China’s GDP will grow by 6.8 percent this year. However, these official forecasts are becoming ever more suspect as a contracting economy conflicts with the image the Chinese Communist Party wants to project.
4. Nigeria
The situation continued to deteriorate last week with still more attacks. Although the government bans the release of details concerning insurgent attacks, an attack on Friday, which damaged Eni’s “major” crude pipeline in Bayelsa State, probably cut exports considerably. The most recent official figure on Nigeria’s oil production was 1.6 million b/d, but since then there have been several new attacks with some putting production closer to 1 million b/d. Shell announced last week that it would no longer repair damaged facilities until the attacks come to an end.
Last week a new insurgent group calling themselves “The Ultimate Warriors of the Niger Delta” emerged. This group is demanding that 60 percent of all oil revenues be returned to the native people of the Niger Delta region. So far efforts to open a dialogue with the Niger Delta Avengers that has been blowing up oil facilities for the last six months has not been successful. All the group says is that it will continue the attacks until Nigeria has no more oil production.
The drop in oil revenues is causing a variety of secondary problems for Nigeria. Restrictions on repatriating earnings have locked up nearly $1 billion in airline revenue. Iberia has already suspended flights to the country, and United is expected to follow suit in July. Other major airlines including Air France, British Airways, Virgin, and Emirates are affected by the currency controls that were introduced last year. Travel agencies, hotels, and restaurants are already feeling the impact of reduced travel to the country. The World Bank has reduced its forecast for Nigeria’s growth this year to 0.8 percent from its estimate of 4.6 percent in January. Nigeria has held its currency at about 200 to the dollar which is half the black market rate.
Several years ago militant attacks were terminated by paying massive bribes to the insurgents to stop attacking oil facilities. This year oil revenue was so low that it was forced to stop the government’s payments thus provoking the renewed attacks.
As yet there is no end to the troubles in sight, so that Nigerian oil production could continue to decline until only far offshore production of a few hundred thousand b/d is left.
5. Venezuela
Riots demanding food and violent looting of food stores have become a daily occurrence across the country. At night, armed gangs attack food trucks and break into stores in search of food. Opposition efforts to oust the President and usher in policy changes are stuck in complex constitutional procedures amidst government efforts to block a recall. Most observers are saying a presidential recall seems unlikely this year. This development increases the likelihood that we will see more violence as thousands of starving people take the streets in search of food.
The government has established a new program under which 9,000 committees made up of government supporters will take some 70 percent of available food from supermarkets and sell it directly to families approved by the committee. Critics say these committees are only feeding people who support the government and leaving the rest to go hungry. Riots have broken out when people waiting at food stores were told that all the food was going to the government committees and that there would be no food for sale.
Venezuela’s crude production, which fell to 2.53 million b/d from 2.72 a year earlier, seems to be continuing. Last week the national oil company, PDVSA, announced that it reached a new financial agreement with US oil service provider Schlumberger to keep the company from pulling out of Venezuela for lack of payments. Halliburton, the other large oil service provider, has announced that it too was curtailing service in the country. Without the help of these US companies, PDVSA has little chance of maintaining its oil production. The new financial agreement may involve paying the US companies in oil rather than hard currency.
6. The Briefs
The world’s oil reserves were unchanged in 2015 despite a sharp drop in investment and exploration after the collapse in crude prices, BP said in its benchmark industry report. (6/10)
Unplanned global oil supply disruptions averaged more than 3.6 million b/d in May 2016, the highest monthly level recorded since EIA started tracking global disruptions in January 2011. From April to May, disruptions grew by 0.8 million b/d as increased outages, largely in Canada, Nigeria, Iraq, and Libya, more than offset reduced outages in Kuwait, Brazil, and Ghana. (6/10)
The UK oil and gas industry will ax 120,000 jobs by the end of the year following the collapse in oil prices, according to a lobby group. This year, 330,000 jobs will be supported by oil and gas production, down from a peak of 450,000 in 2014, according to the report from Oil & Gas U.K. (6/10)
The Bank of Scotland has warned that nearly a third of companies are planning further job cuts to survive the slow recovery from sub-$30 a barrel oil prices seen earlier this year. (6/6)
In Norway, when Dagens Næringsliv reported on Friday that the government coalition and its two support parties had reached a deal to stop the sale of petrol and diesel vehicles in 2025, the news was spread to a number of US media outlets thanks in large part to an enthusiastic tweet from Tesla CEO Elon Musk: “Just heard that Norway will ban new sales of fuel cars in 2025. What an amazingly awesome country. You guys rock!!” Musk wrote. But the political agreement crumbled before it ever really took hold. (6/7)
Royal Dutch Shell cut spending plans further and promised increased savings following its record purchase of BG Group as it continues to adjust to the slump in oil prices. Europe’s biggest energy company will spend $29 billion this year, it said Tuesday. That was down from an earlier projection of $33 billion. (6/7)
Russia’s economy could show signs of recovery by the second half of 2016, assuming an average annual oil price of $40 per barrel. The Central Bank of Russia said it was cutting its key interest rate by a half percent to 10.5 percent per year. The bank said growth in the economy was “imminent” with inflation moving toward the target rate of 4 percent by late 2017. (6/11)
The upcoming Cyprus bid round may be one of the best opportunities of the year — to build a new oil and gas empire. When the tiny Mediterranean nation offers up its offshore acreage this summer, all eyes will be on the “usual suspects”—Eni, which works next door in Egyptian waters; Noble Group, which works in the Israeli offshore; and possibly Russian firms like Gazprom or Rosneft, as well as the super-majors. (6/7)
The Israeli Energy Ministry has said that the supergiant Leviathan offshore gas field may be 20 percent smaller than its developers, US-based Noble Energy and Israeli partner Delek have previously estimated. (6/7)
Saudi Arabia’s energy ministry is scaling back renewable power targets as the world’s biggest oil exporter plans to use more natural gas, backing away from goals set when crude prices were triple their current level. The kingdom aims to have power generation from renewable resources like the sun make up 10 percent of the energy mix, a reduction from an earlier target of 50 percent. (6/7)
In India, the durability of the nation’s demand for oil could be a big factor in whether oil’s recent run to a six-month high over $50 a barrel can be sustained. “The big news in demand is growth in India, which now rivals China,” said Daniel Yergin, vice chairman of consulting firm IHS. (6/7)
In Egypt, a new natural gas discovery on the coast of the Nile Delta has been made by Eni and British Petroleum (BP). The two companies own a 50-50 share of the Baltim South license, the area of the delta in which the “significant” discovery occurred, a statement by Eni said. (6/10)
In Angola, Isabel dos Santos — the richest woman in Africa, the president’s daughter and now the CEO of the country’s state-run oil giant — on Mondaysaid she plans to overhaul the Sonangol oil company department by department to bring it out of the oil price crisis. (6/8)
Argentina is ramping up imports of gasoil and liquefied natural gas to record levels this year. Still a long way from regaining the energy self-sufficiency lost in 2010, the South American country has bought 49 cargoes of LNG so far this year and will buy 90 in all. Major oil companies are competing for a lucrative slice of market share during a years-long “transition” period that will last until Argentina boosts domestic oil and gas output significantly by developing vast new shale reserves in the Vaca Muerta formation. (6/9)
In Mexico, for the first time in nearly eight decades, the ubiquitous Pemex gas stations have competition along the nation’s highways and city streets. Two companies have opened three gas stations under their own brands, breaking one of the state-owned petroleum company’s last monopolies. (6/9)
In Canada, no matter how much oil sands producers cut costs, John Stephenson argues companies can never do enough. While the CEO of Stephenson & Co. noted some players in the sector will be able to squeeze out tiny profits in a US$50 per barrel oil price environment, he stressed the oil sands’ economic heyday is over. Oil sands producers in northern Alberta have among the highest operating costs in the world. (6/8)
The US oil rig count for June 10 increased for the second week in a row, this time by three rigs to 328 compared with 635 a year ago, according to Baker Hughes Inc. Cowen & Co. forecast the total oil and natural gas land rig count would increase by about 315 rigs by the fourth quarter of 2017. (6/11)
US natural gas from shale basins accounts for more than half of the total production today and will do so through 2040 to support more exports, a review from the EIA finds. (6/9) [NOTE: spectacular dartboard alert]
Western Colorado has 40 times more natural gas than previously thought, potentially making it the second-largest formation in the country, the US Geological Survey said Wednesday. Mancos Shale formation in Colorado’s Piceance Basin holds about 66.3 trillion cubic feet of gas, up from 1.6 trillion estimated in 2003. (6/9)
Four minor earthquakes were reported in and around the shale reserve basins in Oklahoma last week the U.S. Geological Survey found. The largest of the tremors was the 3.5-magnitude quake recorded about 20 miles east from Oklahoma City. A March report from the USGS found central U.S. states have experienced a dramatic increase in seismic activity over the past six years which coincides with the shale oil boom. (6/7)
US crude oil exports rose to 591,000 barrels per day in April, up 83,000 barrels from March, according to new data from the US Census Bureau on Friday. Yet three months after the authorities lifted the four-decade ban, the US had exported less in the first quarter of 2016 than it did over the same period the year before, when the ban was still in place. (6/7)
Cash-strapped US oil and gas companies, including No. 2 natural gas producer Chesapeake Energy Corp, are expected to cut their debt piles this year as a long-awaited rise in the price of oil persuades investors to swap bonds for stock. Exchanging the debt of financially distressed firms for their equity can be a high-risk maneuver because shareholders are usually wiped out in the event of bankruptcy. (6/10)
The latest Fortune 500 list has four oil majors in the top 100 – Exxon, Chevron, Marathon Oil, and ConocoPhillips – and another one, Devon Energy at 219. All five have suffered the consequences of the oil price drop, to a different degree, but all five have proven resilient enough. Whether this resilience will hold in case of another sudden price drop—always a possibility in the minds of those thinking far ahead—is questionable. (6/10)
Job losses: Tumbling crude and natural gas prices have weakened the energy industry’s influence in Washington as cutbacks in the oilfield have spread to the nation’s capital. Casualties include the army of lobbyists battling new regulations and the rosters of trade groups trying to elect friendly candidates in November. The Independent Petroleum Association of America has shed about 100 members in the past year. (6/8)
Oil and natural gas producer Devon Energy said it would sell assets in Texas for nearly $1 billion and that it was making progress on the sale of other assets as part of its plan to improve its finances through divestitures. (6/7)
US rig company Hercules Offshore said Monday it was returning to Chapter 11 bankruptcy and now planning to sell off all of its assets. Hercules CEO John Rynd said recently the recent crude oil price recovery was not strong enough for his company, which emerged from bankruptcy in November. (6/7)
In Pennsylvania, Shell announced that it will build a petrochemical plant 30 miles north of Pittsburgh, a move under consideration since 2012. The plant is expected to create 6,000 construction jobs and 600 permanent jobs and draw chemical companies and other manufacturers to the region. The news was welcome in a state that has been hard hit by low energy prices, causing several thousand layoffs and a squeeze on local government revenues. (6/8)
Green$ for Greens: The country’s biggest environmental groups say Republican Presidential nominee Donald Trump’s pro-drilling and anti-global warming positions have sparked a record wave of donations and volunteer recruitment that could revitalize US green advocacy. (6/11)
A Colorado anti-fracking group crashed Colorado Governor John Hickenlooper’s book event over his support of fracking in the state, ending in assault claims as well as a few citations. The protestors wreaked enough havoc to delay Hickenlooper’s scheduled speech by an hour, causing security guards and police to be brought in to calm the crowds before the event could continue. (6/10)
The United States Supreme Court declined to hear an appeal lodged by the government of Ecuador that contested a $96 million arbitration settlement awarded to the American oil company Chevron. In effect, the highest court in the US upheld a ruling by the US Court of Appeals for the District of Columbia Circuit, which favored Chevron in an arbitration deal issued by The Hague’s Permanent Council of Arbitration in the Netherlands. (6/7)
SPR twist: The United States boasts the world’s largest stash of emergency oil supplies, yet the country’s ability to influence global crude markets with releases from that reserve has waned. The Obama administration hopes to fix that problem with an overhaul of the Strategic Petroleum Reserve, or SPR, and details about its plans should be revealed in coming weeks. (6/10)
US gasoline consumption is set to climb to a record this summer as the lowest pump prices in more than a decade encourage Americans to take to the roads. Demand will average a record 9.5 million barrels during the second and third quarters, the EIA said in its monthly update Tuesday. The average retail price for regular-grade gasoline this summer is forecast at $2.27 per gallon, down from $2.63 during the 2015 summer driving season. (6/8)
Against trade deal: More than 450 groups on Monday called on Congress to reject the Trans-Pacific Partnership (TPP) if it comes up for a vote this fall, saying the trade deal would allow fossil fuel companies to contest U.S. environmental rules in extrajudicial tribunals. (6/7)
Regulators are wrangling with bankrupt coal companies to set aside enough money to clean up Appalachia’s polluted rivers and mountains so that taxpayers are not stuck with the $1 billion bill. (6/7)
India’s 12 major government-owned ports handled around 18.33 million tons of imported thermal coal over April-May, up 1.3% from 18.09 million in the same period a year ago. (6/9)
The U.S. and India have agreed to move forward with the construction of six nuclear reactors in India by an American company, the first such contract since the countries signed a landmark civil nuclear deal in 2008. It marked a significant step forward in resolving obstacles to the sale of nuclear reactors and fuel to India. Under the new agreement, Nuclear Power Corporation of India and Westinghouse Electric Co., a US unit of Toshiba Corp., will begin work on the engineering and site-design work for the reactors, though the contract won’t be finalized until June 2017. (6/8)
Battery storage: China will soon be home to the world’s largest battery. The massive power facility will provide peak shaving, grid stability, emergency power, and load management to the Dalian peninsula in northeastern China. (6/7)
Russian carmaker AvtoVAZ is asking employees to voluntarily retire in exchange for a generous retirement package. The company, which is one of Russia’s biggest employers outside the energy sector, cut 44,000 jobs last year. This year, it is looking to cut another 10 percent of its staff. The cuts are another bad sign for Russia’s struggling economy. (6/7)
The UK’s pound slumped as much as 1.1 percent after weekend polls showed Britons favor exiting the European Union, spooking some investors who have been betting the UK would vote to stay. (6/7)
The China Railway said on Friday that the Las Vegas-based XpressWest’s unilateral cancellation of a high-speed railway contract with its subsidiary is “a mistake” and “irresponsible” and a breach of contract. The rail line would have connected Las Vegas, Nevada and Los Angeles in California. The two sides planned to start construction on the 370-kilometer line in September 2016. (6/11)
Offshore UK wind: EDF Energy Renewables has started to build a new offshore wind farm off the coast of Blyth in Northumberland in Britain. The wind farm will have a maximum total generating capacity of almost 100 megawatts. (6/7)
In Ireland, one day after signing a European commitment on offshore wind, the government said it can only realize its true potential through regional collaboration in avenues like grid connectivity. (6/8)