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Tom Whipple, Editor

Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  Ukraine
4. China
5.  Quote of the Week
6.  The Briefs

1.  Oil and the Global Economy

Futures prices in New York and London climbed in the first days of last week before falling slightly to close at $103.74 and $107.33 respectively. Optimism about the prospects for the US economy and higher gasoline demand sent NY oil prices to a five-week high while London remains concerned about Libyan oil exports and the Ukrainian situation.  The premium of London oil over NY is down to $3.59; however many analysts expect to see this back in double digits shortly as the crude glut along the Gulf Coast slows or halts the transfers from Cushing, Okla.

The demand for US gasoline has been stronger than expected lately causing, along with refinery maintenance, a drop in US gasoline inventories of 5.2 million barrels the week before last. Most of the 8.8 million b/d US refineries are shipping is going into US gas tanks, but 600,000 b/d or more is going for export. Total petroleum products export numbers are currently around 3.6 million b/d which is about 28 percent higher than last year. The EIA expects that US gasoline prices will peak at about $3.66 per gallon in May and then decline. The Administration currently has the average gallon selling at $3.60.

Last week the International Energy Agency released its monthly Oil Market Report. The Agency sees “elevated risks” for the oil market stemming in part from the Ukrainian situation. Russian oil demand is forecast to fall by 55,000 b/d to 3.5 million due to the fallout from the Crimean annexation. Further economic sanctions on Moscow could cut Russian demand by a further 150,000 b/d. The Agency now forecasts that the global demand increase will be 1.3 million b/d in 2014, down 100,000 b/d from last month’s estimate.

World oil production fell by 1.2 million b/d in March due to sharply lower production totaling 550,000 b/d by Iraq, Saudi Arabia, and Libya. OPEC says the March decline is likely to be made up in coming months due to increased exports from these countries.  Year over year, however, world oil production was up by 1.1 million b/d for the month as a 2 million b/d increase in non-OPEC production offset the 1 million b/d drop in OPEC output.

The weekly natural gas storage report showed US inventories finally increasing again, but only by 4 billion cubic feet which is less than half normal for the week. Four billion barely makes a dent in the nearly 3 trillion cubic feet that will have to be stored away before next November to make up for this winter’s cold weather. Stocks in the more vulnerable East Region actually fell by 5 billion cubic feet last week. As below normal temperatures are forecast for the rest of the month, the rebuilding of US natural gas stockpiles is not off to a good start. Natural gas futures, which are up by nearly 40 cents per million in the last two weeks, closed on Friday at $4.62.

2.  The Middle East & North Africa

Iran:  Last week started with much hopeful talk about progress in the nuclear talks, but spokesmen warned that much work is left to be done. The talks continued to the weekend with no final agreement yet in sight. Tehran’s appointment as its UN ambassador of an individual who was involved in the takeover of the US embassy 35 years ago has added another dimension to the nuclear talks. The White House and Congress are refusing to let the new ambassador into New York and Tehran is refusing to appoint anyone else. The next round of negotiations is scheduled for mid-May.

The IEA reports that Iranian oil exports were up to 1.65 million b/d in February. March exports are currently thought to be 1.05 million b/d, but the IEA expects to revise that upward as more information is received. With other OPEC oil production down sharply last month many oil importers are willing to risk US sanctions by importing more Iranian oil. The generally optimistic atmospherics surrounding the nuclear negotiations leaves many importers with the impression that the sanctions will be over soon.

Iraq:  Two Iraq’s are starting to emerge: the relatively peaceful south where foreign oil companies are making good progress in exploiting the last easy-to-tap oil fields left in the world and the increasingly chaotic north.

In addition to the usual string of shootings and bombings, last week Sunni insurgents closed eight of ten gates on a major irrigation dam on the Euphrates river that they had seized last February. The action shut down 80 percent of the Euphrates’ water flowing towards the southern part of the county. The insurgents’ immediate goal was to flood the low lands around Fallujah to hamper government efforts to retake the city, but the closure of such a large river also threatened much of the country’s agriculture and forced a partial shutdown of power stations down the river due to the lack of cooling water. After a few days, the insurgents realized they might also flood parts of the city they occupied so they reopened five of the eight gates they had closed. The army says it will mount an operation to recapture the dam shortly.

It was revealed last week that Iraq’s northern export pipeline has now been closed for more than 40 days and is unlikely to reopen soon.  Past bombing of the pipeline were quickly repaired, but this time the insurgents stayed in the area of the bombings and massacred the repair crew. Additional crews accompanied by military forces were driven back by insurgent attacks. The oil company has decided to leave the pipeline closed until the government can guarantee security for the repair crews – an unlikely proposition.

An interesting insight into the dire Iraqi security situation was seen last week when it was announced that Baghdad will send its most dangerous inmates to prisons in Kurdistan for safekeeping. After a series of spectacular prison breaks in which a combination of bribed guards and superior fire power freed hundreds of al Qaeda insurgents, Baghdad decided that the Kurds could do a better job of securing captured terrorists.

There was some good news from Iraq last week. Shell announced it has lifted the first crude from the newly developed Majnoon oilfield and Baghdad announced that the newly installed single point mooring buoys at the Basra oil export terminals loaded an average of 829,000 b/d in March. This new export capacity will partially offset the indefinite loss of the northern export pipeline to Turkey.

With only two weeks to the parliamentary elections, the political situation in Iraq continues downhill. The government has not yet passed a budget. The Insurgent control of large parts of Anbar province will prevent voting from taking place there, and there are increasing doubts that a viable government can be formed after the vote. To top it all off, there are reports that the Sunni insurgents in Anbar province are considering a drive towards Baghdad.

Libya: After reaching an agreement with the dissidents holding the four eastern oil ports, it now appears that only one of these ports with an export capacity of 110,000 b/d will be opened this week. Negotiations continue to open the other three ports. An additional 110,000 b/d will not do much for Tripoli’s cash flow, but it is a start. Some 60,000 b/d continues to be lifted and exported directly from offshore oilfields where it has been exempt from interference by the militias.

Over the weekend, Libya’s major refinery and oil export terminal were temporarily shut down by yet another dissident group demanding a bigger share of the pie. The country in reality is under the control of dozens of large well-armed militia groups and hundreds of smaller ones who want little more than a share of the oil revenue. The government has little or no authority other than that stemming from the support of the US and other NATO powers that are reluctant to become too deeply involved in a chaotic situation that is likely to last for decades. The chance that Libya will be able to export large amounts of oil on a regular basis does not look good.

3.  Ukraine

The situation took a turn for the worse last week when unidentified groups of well-armed and well-organized men seized numerous government buildings in eastern Ukraine.  As they all speak Russian, no one can say if they are from the Russian special forces or are local ethnic Russians who have simply been organized and armed by Moscow or local separatists . In the meantime a large Russian military force has been positioned close to the Ukrainian border where it could easily intervene in what Moscow is calling a civil war. The eastern Ukraine has most of the country’s industrial and mineral wealth so what without these provinces a new Ukraine would be a much poorer state.  Despite Moscow’s protests that it does not want to take over the Russian speaking provinces of Ukraine, it is giving every indication that it wants to detach these provinces from Kiev’s control in one form or another.

Kiev has set Monday as the day for the militants to disperse or it threatens force. If Moscow uses this as a pretense for more military intervention, relations with the West are going to be different.

The impact of all this on the global economy and the world energy markets has yet to be seen. Kiev is refusing to pay its gas bill to Moscow and the Russians are threatening to cut off the natural gas supply – some of which passes through to Europe. The IEA is already forecasting that Russian trade will be hurt by the crisis and ensuing sanctions so that its domestic demand for oil will fall this year.  There is much discussion of the US and other western powers helping Ukraine by supplying fuel.  There are many downsides to this situation that could easily result in higher energy prices or even shortages. As all this still has a ways to play out it seems too early to consider what might happened.

4. China 

Evidence continues to accumulate that China is in the midst of an economic slowdown. March trade data shows imports and exports falling by more than expected, raising questions as to whether China will able to achieve its 7.5 GDP growth target for the year. Food prices jumped in March, but deflation of industrial prices continues casting still more doubt on the prospects for this year. China’s manufacturing in February fell to an eight-month low. While the economy continues to grow slowly, the purchasing managers’ index shows that it is very close to contraction. Some of the lower numbers being reported may be related to the lunar holidays and various tax and regulation avoidance schemes. Chinese officials have rejected an IMF warning that the country may be facing a hard landing.

The new Chinese government is undertaking several major reforms this year ranging from anti-corruption drives and increased privatization to a major effort to clean up the environment. Slowing economic growth should lessen the demand for oil, but China’s oil product consumption is uneven. The rapid growth of its car fleet continues unabated so at a minimum the demand for gasoline should continue to increase.

Drinking water for the 2.4 million people that live in Lanzhou, China was contaminated last week when a broken pipe leaked benzene into the city’s water supply. The leak has been fixed and people have been warned not to drink the water for a while.

4.  Quote of the Week

  • The east-west stand-off over Ukraine has sparked a political debate over whether the US should loosen its energy export restrictions so Europeans can buy liquefied natural gas, or LNG, from America’s shale energy boom. Asked if Cheniere’s terminal could rescue eastern European countries from their dependence on Russia, [Cheniere’s CEO Charif] Souki said: “It’s flattering to be talked about like this, but it’s all nonsense. It’s so much nonsense that I can’t believe anybody really believes it.”

–Barney Jopson, The Financial Times; April 10, 2014

5.  The Briefs

  • Iraq’s oil minister said his country hoped to complete construction of a 200 km (124 miles) oil pipeline to raise exports to Turkey to more than 1 million barrels per day this year. (4/10)
  • Iran’s petroleum minister said Iran was ready to produce more than 4.2 million barrels of oil per day during the current calendar year, which began last month. (4/9)
  • The resumption of the Kashagan project in Kazakhstan has been beset with problems ever since a tricky-to-fix gas leak forced the French company Total and its partners to stop production in October. A Total spokesman said that if there were to be any production by the end of the year, it wouldn’t be much. (4/12)
  • In Kazakhstan, it may be extremely expensive to rebuild the pipelines needed to restart operations at the giant (16 billion barrel) Kashagan field in the Caspian Sea. Hydrogen sulfide found within the field causes the field’s pipelines to crack open almost as soon the hydrogen sulfide is exposed to moisture. A corrosion engineer said a nickel-based steel alloy that would resist hydrogen sulfide may cost the consortium operating Kashagan as much as 15 times more than conventional pipelines. (4/8)
  • Oil theft looks set to push Nigeria off its spot as top African crude oil exporter in May and exports could fall to 1.59 million b/d, their lowest since records began in 2009. Exports are far below the high above 2.2 million bpd reached in 2011, and the May figure is set to fall beneath the exports of Angola, usually the continent’s second largest exporter. (4/8)
  • Nigeria is witnessing the negative effect of shale oil exploration in the USA as the country’s crude oil export to North America dropped by 91 percent in one year. Prior to the decline, the US was the highest buyer of Nigeria’s crude. (4/8)
  • Nigerians are increasingly focused on getting affordable fuel for their vehicles and to run their power generators, without which they are guaranteed darkness. Many parts, these days, go for weeks without electricity. (4/10)
  • Norway’s Statoil said it wants to cut its carbon dioxide emissions from oil sands production. Their long-term targets are to reduce CO2 intensity 25 percent by 2020 and 40 percent by 2025. (4/9)
  • US crude oil proved reserves rose for the fourth consecutive year in 2012, increasing by 15% to 33 billion barrels, according to the EIA. Crude oil and lease condensate proved reserves were the highest since 1976, and the 2012 increase of 4.5 billion barrels was the largest annual increase since 1970, when 10 billion barrels of Alaskan crude oil were added to US proved reserves. (4/11)
  • Oil forecast: The EIA increased its price forecast for West Texas Intermediate crude for 2014 to $95.60 a barrel and $89.75 in 2015. Brent’s average premium to WTI would be $9.28 in 2014 and $11.17 in 2015. The EIA slightly decreased its forecast for this year’s US crude output to 8.37 million b/d, a level still up 13% from 2013. The demand forecasts were 18.9 million for the U.S. and 91.61 million for the world. (4/9)
  • Reducing the dependence on oil and increasing energy security involves more than just increasing production, US Energy Secretary Moniz said. He said that a diverse energy mix may be one of the better ways to advance energy security in a way that keeps environmental issues at bay. (4/9)
  • US rail regulators, acting after an oil-train derailment last year ignited a fireball that killed 47 people in Canada, said they intend to require at least two crew members for crude shipments, a proposal opposed by the railroads. (4/10)
  • NuStar Energy officially opened its third petroleum dock at the Port of Corpus Christi (TX). NuStar and other companies are building docks, storage tanks and other facilities to take advantage of the oil boom in the Eagle Ford shale formation 100 miles away. The port shipped out 350,000 barrels of crude a day in November, up from under 10,000 at the start of 2012. (4/11)
  • All oil from Alaska’s North Slope is transported south via the Trans-Alaska Pipeline System (TAPS). The problem is that the TAPS will be shut down if production drops below 350,000 barrels per day. Production in the North Slope is expected to average 342,000 barrels per day in 2022. (4/12)
  • The Alaska Department of Revenue predicts production of 521,800 b/d this year. The annual spring report comes four months after the state began cutting oil production taxes with hopes of spurring new investment and stemming the decline. Alaska gets more than 80 percent of its state tax revenue from oil production, which has been in decline for 25 years. (4/10)
  • The arctic waters off the Alaskan coast may be one of the more promising reserve basins in the nation, but exploration will have to wait, Shell said Wednesday. The company in January said it was suspending its efforts to explore Alaskan waters because of costs and court challenges to its exploration campaign.  Yet Shell’s lead executive VP for the Arctic acknowledged that “as traditional oil and gas resources decline, we have to develop resources in new, more challenging locations to help meet rising global demand.” (4/10)
  • Alaska’s oil and gas regulatory commission has adopted new, more stringent rules governing hydraulic fracturing that include increased testing of water wells for contamination. The rules will require testing of all water wells within a half-mile radius of a well to be fractured, and will mandate testing of the water wells for contamination after the fracture job is completed. (4/10)
  • Texas is eyeing the possibility of shipping its excess crude oil to California, a state that historically imports from Alaska, the Middle East and Ecuador. In September 2013, Texas produced 2.7 million barrels of crude per day, the highest average of oil output in over 32 years. Once an oil exporter, the Golden State now depends on imports for more than 60 percent of its oil supply. (4/9)
  • In California, there is one group that is starting to reap serendipitous marketing ammunition from the state’s current historic drought and the ever-present worry of ground-shaking tremors: the anti-fracking movement. (4/11)
  • Chevron and Exxon have spent lavishly to boost their oil and gas output, but production has been dropping and profits have been muted. Chevron said its first-quarter global oil and gas production is expected to drop from the year-ago quarter, as poor weather led to downtime in the US, Canada and other regions. The company said global oil-equivalent production in January and February totaled 2.58 million b/d, down 2.5 percent from the same period last year. (4/10)
  • Despite the fourth anniversary of the Deepwater Horizon incident approaching—when close to 5 million barrels leaked from the well blow-out—BP says it’s committed to playing a major role in Gulf of Mexico operations. (4/12)
  • In France, a new contract to buy natural gas from Azerbaijan shows the decades-old structure of Europe’s energy market—where natural gas prices were tied to crude oil prices —  is starting to crumble. For the first time, GDF Suez signed a 25-year contract to buy gas from BP and partners in the former Soviet republic at prices tied to those in Western Europe’s domestic gas markets. Europe’s gas contracts have been tied to oil since the 1960s as a way of providing certainty to suppliers who would then invest billions to build fields and pipelines. (4/12)
  • Spain overtook Norway last month to become the region’s biggest exporter of liquefied natural gas. The southern European nation has never produced any of the fuel. Utilities that contracted to buy LNG before the slump are now contending with a sixth consecutive year of diminishing domestic demand, spurring them to re-export cargoes. The trade is being underpinned by prices in Asia and South America that are about 30 percent higher than in Europe. (4/12)
  • Shale gas in China: China’s largest energy company has made the country’s first commercially viable shale gas discovery, but that path can be fraught with risks, as one town has seen first-hand when a rig exploded . (4/12, 4/11)
  • The Australian energy sector is in the midst of a sea change, with investors retooling their strategies to focus on unconventional gas.  Consultant group Wood Mackenzie said Australia’s established unconventional gas industry is likely to rank highly, when benchmarked against other unconventional plays outside North America.  (4/9)
  • Lower natural gas prices drove down US proved reserves in 2012, despite notable production gains in the Marcellus and Eagle Ford shale gas plays. Natural gas proved reserves, estimated as wet natural gas that includes natural gas plant liquids, decreased 7% in 2012 to 323 trillion cubic feet, as operators revised the proved reserves of their existing natural gas fields downward in response to lower natural gas prices. (4/12)
  • Natural gas-fired power plants accounted for just over 50 percent of new utility-scale generating capacity added in 2013 in the US. Solar jump to 22 percent from less than 6 percent in 2012. Coal provided 11 percent and wind nearly 8 percent. Almost half of all capacity added in 2013, and 60 percent of natural gas capacity, was located in California. (4/9)
  • Combined global production of ethanol and biodiesel fell in 2012 for the first time since 2000, down 0.4 percent from 2011. (4/11)
  • Greenpeace said Monday major world economies were showing an increase inrenewable energy in their grids.  A spokesman said that renewable energy has expanded, fallen in price and is ready to challenge traditional forms of energy. (4/8)
  • Germany has amended renewable-energy laws meant to help make the country nuclear-free but that have sent power prices rocketing—squeezing consumers and the country’s formidable export machine. The cabinet approved amendments on Tuesday that it said would contain soaring electricity costs while seeking to protect German jobs in the industrial sector. The changes include less ambitious targets for wind power and a cut in subsidies for certain forms of green energy. (4/9)
  • Greenhouse gas emissions from transportation may rise at the fastest rate of all major sources through 2050, the UN will say in a report due April 13. Heat-trapping gases from vehicles may surge 71 percent from 2010 levels, mainly from emerging economies. (4/9)
  • Methane leaks:  As the fracking boom continues unabated across the US, scientists, engineers, and government experts are increasingly focusing on the complex task of identifying forty potential sources of methane leaks and devising methods to stop them.  .  (4/8)
  • The US Naval Research Laboratory has made significant advances in the development of a gas-to-liquids synthesis process to convert CO2 and H2 from seawater to a fuel-like fraction of C9-C16 molecules. CO2 in the air and in seawater is an abundant carbon resource, but the concentration in the ocean is about 140 times greater than that in air, and 1/3 the concentration of CO2 from a stack gas. (4/9)
  • BlackLight Power announced that it achieved sustained electricity production from a primary new energy source by using photovoltaic technology to transform a brilliant plasma, with power comprising millions of watts of light, directly into electricity. (4/9)