Peak Oil Review – 14 Aug 2017

Quote of the Week

[After two nuclear plants in South Carolina were cancelled:] “We continue to believe that the problem with new nuclear (small modular units excepted) power plants is not that they generate electricity with nuclear fission. The difficulty is economic. The nuclear units are expensive, base load generating units in a world where production of electricity is becoming less expensive and increasingly decentralized. Base load power plants (and especially nuclear ones) are, in general, must-run, inflexible price takers. Going forward there will be less need for those facilities regardless of how they are fueled. Furthermore, the builder of a nuclear plant must bet an enormous sum on the need for electricity a decade hence, when the plant is completed. Given the uncertainty in power demand and prices, that is a gamble uncompensated in the regulatory process.

By Leonard Hyman and William Tilles for Oilprice.com

Graphic of the Week

Contents

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

1.  Oil and the Global Economy

It has been two weeks of mixed signals as to the course of oil prices. Last week prices fell around 1.5 percent, closing at $48.82 in New York on concerns that the OPEC/NOPEC collation was not following through on its pledge to cap production. Even though US stocks continue to fall, much of this is due to increasing exports of light oils and finished oil products and not to increased domestic demand. On Friday, the IEA said that although the oil markets were slowly balancing, it is not going quickly. OPEC and other friends of higher oil prices continue to release optimistic reports, but the consensus seems to be that oil prices will stay around their current levels for the rest of the year unless there is a major geopolitical upheaval.

There are indications that oil prices will be higher in the next year or two, but for now, the interplay between the production cut, US shale oil increases, and various demand projections will determine pricing.

The OPEC Production Cut: This week’s consensus is that the OPEC/NOPEC production cut is not going well as the coalition is currently producing about 470,000 b/d above commitment. Despite reassurance from the Saudis that deeper cuts still are on the table, these depend on other countries cooperating which does not look very promising at the minute. Most members of the coalition are low-cost producers that are making some money at the current $50 a barrel price of oil. As there is not much optimism that we will see significantly higher oil prices soon, most exporters are happy just to keep current revenues and grow their production. Another round of OPEC compliance talks last week does not seem to have produced any solid results.

Concerns already are rising over what will happen if OPEC does not extend the production cut which is scheduled to end next March. If the cut is cancelled and production bounces 1.5 million b/d or so higher, prices could tumble again creating all sorts of havoc next spring as everybody attempts to produce oil at the highest possible level.

US Shale Oil Production: Despite the optimism about the future of the US shale oil industry, concerns are rising about the rate of decline from currently producing shale oil wells. The top US shale oil basins: Permian, Eagle Ford, Bakken, Haynesville, Marcellus, Niobrara, and Utica — should see a legacy oil decline rate of 350,000 b/d between July and August. This means that the industry has to come up with 350,000 b/d from new wells just to keep shale oil production steady.  There is so much drilling going on these days that the industry still is expected to add 113,000 b/d of new production during August; however, reports that there are not enough fracking crews available to complete the newly drilled wells casts some doubt on this projection.

North Dakota reported last week that its production slipped by about 1 percent in June, but should continue at just above 1 million b/d for the foreseeable future. Continental Resources which does much of the drilling in North Dakota says it is cash neutral at current oil prices, but is optimistic it can increase production later this year.

In the Permian, the US’s fastest growing oilfield, investors are starting to worry that drillers are producing much more natural gas and natural gas liquids than expected. The Permian currently has nearly half of the active US oil drilling rigs. If these trends continue, the hopes on higher US shale oil production in the next few months will fade rapidly. Some are already talking about US shale oil production going into decline within the next three years, no matter what the price of oil.

Global Demand: Oil prices rose last week after a report from OPEC showed global demand for oil would be 200,000 b/d higher next year than it previously forecast. In its latest monthly report, the IEA predicted that the demand for oil this year will increase by 1.5 million b/d, up 100,000 b/d from last month. Demand growth will average about 1.4 million b/d in 2018.  The IEA released its periodic revisions to its back data last week showing that global oil demand is actually 330,000 b/d less for the period between 2015 and 2018 than previously thought.

2.  The Middle East & North Africa

Iran: President Rouhani is starting his second term under pressure from the left and from the conservatives. In a recent article, the conservative clerics and the Revolutionary Guard were described as an “alternative government with guns.”  After the election, the conservatives arrested the President’s brother and put him in jail – likely as payback for Rouhani’s election victory and warning to Rouhani, that despite his strong election showing, they still control many of the levers of power in Iran and will not let his more “liberal” policies go too far.

The National Iranian Gas Co. has completed a new pipeline serving the northern provinces of Golestan, Mazandaran, and Gilan, which had been receiving its gas from Turkistan since 1997. During gas shortages last winter, Turkistan raised prices and reduced the flow of gas into Iran. The new pipeline will receive its gas from the giant South Pars field Iran shares with Qatar.

Discussions have begun between Tehran and Baghdad about the construction of a pipeline that would move oil from Kirkuk in northern Iraq through Iran for export. This would stop the current practice of exporting the oil through Iraqi Kurdistan and Turkey to the export terminal at Ceyhan, Turkey. Such a development would greatly complicate the relationship between Baghdad and Erbil over the distribution of oil revenue.

Iraq: Baghdad’s oil production in July was down slightly from the 3.81 million b/d produced in June. About 3.2 million b/d were exported last month. These figures do not include the exports from Kurdistan which are exported through Turkey. An increasing share of Iraqi oil production has been going to the US as the Saudis cut their exports to the US as part of the production cap.

After passing its 2017 budget, Baghdad was able to raise $1 billion with an unsecured bond issue after passing an IMF review of its finances.  While the IMF believes that Baghdad is getting its fiscal house in order, Moody’s recently gave Iraq a low Caa rating indicating that the risks of lending money to the country are still very high.

Saudi Arabia: Riyadh plans to cut is exports in September by at least 520,000 b/d as the government still hopes to drive oil prices higher. Chinese and South Korean importers expect their allocations of Saudi oil will drop by 5 to 10 percent in September. Energy Minister al-Falih said the country does not rule out further production cuts, but stressed that the country will not take unilateral action and that other exporters must join in the effort. So far seven months of production cutbacks have shown little result.

The Saudis remain hard at work attempting to diversify their economy in anticipation of lower oil revenues in the future. Last week Riyadh awarded its first major contract for the construction of a $5.2 billion shipyard complex at Ras Al Khair on the east coast. The Saudis are also planning to build massive new cities in the desert. Last week the Saudis announced two major developments that it plans to build. One will be the size of Belgium and the other the size of Moscow.

Competition to issue the massive Aramco IPO is still underway. Last week the UK Institute of Directors criticized the Financial Conduct Authority’s proposal to lower the standards that Aramco would have to meet to be listed in London. The British are talking about a new category that would allow firms controlled by sovereign governments to meet lower disclosure standards.  Goldman Sachs still is trying to get a piece of the largest IPO ever issued. Despite the recommendation from legal and financial advisers to list on the London Stock Exchange, top Saudi officials would prefer to list the Aramco IPO in New York. London has fewer regulations, but Crown Prince Mohammed bin Salman wants to list in New York for “political considerations.”

Libya: Production at the 270,000 b/d Sharara oil field was briefly halted last week when armed men broke into the control center interrupting production. By week’s end, the dispute was resolved and production was returning to normal. Libya is currently producing circa 1 million b/d and so far, there is no move from OPEC to curtail production which could go somewhat higher before an extensive investment is needed. Before the uprising, Libya was producing 1.6 million b/d.

3.  China

Beijing’s gasoline and gasoil exports grew in the first half but are unlikely to rise significantly in the second half of 2017 as the government is expected to reduce the volume of quotas to rein in outflows, sources said. “We have been limiting product exports since July, as the quota allocated is not enough for us to export at the same level as in the previous months,” said a source with PetroChina.

The International Energy Agency said that China would account for 40 percent of the global growth in natural gas demand over the next five years. Imports of the fuel in Asia are running at record rates as Beijing pushes on with its cleaner energy agenda that should see the country satisfy 10 percent of its energy needs with gas in 2020, up from 5.9 percent in 2015. This shift to gas is now creating new opportunities for independent energy companies at the expense of state-owned giants.

China’s coal producers have been making impressive profits this year despite government efforts to reduce coal production. Part of the problem has been widespread flooding which has reduced hydro-electric production, forcing the country to produce more coal-fired electricity.

Construction began last week on the world’s second largest hydropower dam which is located on an upper section of the Yangtze River in southwest Sichuan Province. Beijing is also aiming to expand its electric bus fleet from 1,000 to 10,000 by the start of the next decade. The project will eliminate 45 tons of carbon dioxide emissions every year.

Winter and fall pollution is still a major concern in north China. The government is making some progress around Beijing, but in other provinces, the situation is described as “grim.” The effort to reduce pollution is upsetting many markets as government inspectors are forcing lower production at a wide range of plants to curtail emissions. Shandong Province is undergoing its fourth round of inspections by the Ministry of Environmental Protection. Reduced production is forcing up the price of soy meal in the region.

4. Russia

Russian oil output is down 307,000 barrels per day, compared to October levels, according to the country’s oil minister.  “Therefore, Russia is meeting its obligations on lowering production.” Novak was referring to the promise Moscow made to OPEC and ten other NOPEC nations in November to cut production by 300,000 b/d in an effort to rebalance oil supply with demand.

The U.S. signing of the new Russian/Korean sanctions bill sent relations to their worst point in 50 years with Moscow ordering the US embassy staff reduced by 755 and flew a reconnaissance plane over the Washington Mall. The new US sanctions on Moscow did not set well with some in the EU who are deeply involved with Russia for their energy supplies. Of particular concern is the planned Nord Stream 2 gas pipeline that would bring 55 billion cubic meters of Russian natural gas to Germany offsetting the drop in nuclear power and the use of coal. The new sanctions will make it more difficult to build the pipeline, but it is unlikely to be stopped. Moscow is dependent on its oil and gas exports for its national budget and is looking to the Nord Stream 2 and similar TurkStream to bring in revenue for many decades.

A gap in US sanctions rules allows Western companies to help Russia develop some of its most difficult oil reserves, and risks undermining the broad aim of the measures. When Washington imposed the sanctions on Moscow in 2014 over its annexation of Crimea and its role in the Ukraine conflict, the US Treasury said it wanted to “impede Russia’s ability to develop so-called frontier or unconventional oil resources”. The restrictions were designed to prevent Russia countering declining output from conventional wells by tapping these hard-to-recover reserves which require newer extraction techniques. Three years on, however, Norway’s Statoil is helping Rosneft develop unconventional resources while BP is considering a similar project.

5. Nigeria

Shell has disclosed that its operations in Nigeria still are threatened by insecurity in the Niger Delta.  The company indicated in its latest report that crude oil theft, sabotage and related damage to oil and gas facilities continue to present significant security concerns in parts of the Niger Delta, as well as environmental damage, which is aggravated by the proliferation of illegal refineries in the area.

The Nigerian government, however, announced last week it will make illicit refineries operating in the Niger Delta legal, and will even supply them with crude. The legalization process will take until the end of the year, and the crude they will process will be sold at a reasonable price. This move is in contrast with years of government shutdowns of illegal refineries in the Delta, follows negotiations between the federal government and local community leaders that were aimed at resolving problems, including oil theft that causes spills and losses for pipeline operators as well as lack of jobs in the area.

The government is threatening that International Oil Companies and their indigenous counterparts may soon be forced to halt oil production, as the cost of producing a barrel of crude oil remains too high. The Minister of State for Petroleum Resources Kachikwu, said that the oil sector has suffered an infrastructural deficit of over $15 billion (N4.59 trillion) as many investments have been put on hold due to the low oil prices. At an international conference and exhibition organized by the Society of Petroleum Engineers in Lagos, he said it is better for Nigeria to stop crude oil production than to produce at a high cost.

6. Venezuela

With the establishment of a new constituent assembly as the country’s governing body, the situation is taking a turn for the worse. Opposition leaders have been arrested. Much of Latin America has joined with Washington to denounce the new body as a dictatorship. Everybody is mulling more sanctions, but there is a consensus that blocking oil exports would only make the situation worse as it would choke off most of the country’s food supply.

PDVSA is still functioning at a much-reduced level, but there are fears that a civil war involving the military could break out at any time forcing oil company employees to remain at home thereby reducing the country’s oil exports. Statoil, Chevron, and Total have pulled some of their foreign staff out of the country due to the deteriorating security situation. PDVSA plans to run its refineries at 44 percent of capacity in August which will lead to still more gasoline shortages.

Russia’s Rosneft says it already has made $6 billion in prepayments to Venezuela and will no longer make advances. Caracas has already cut back on shipments to Citgo, which pays in hard currency which can buy food, in favor of sending more oil to Moscow to cover back debts which bring in more revenue. Among the more volatile issues is the $1.1 billion dollar note that that is backed by 49.9 percent of the US oil company Citgo which PDVSA owns. Should PDVSA default, the Russians would have legal title to several US oil refineries.

Conventional wisdom says that Venezuela is likely to collapse in the immediate future and will be exporting far less oil. The best guess is that such a collapse would send oil prices $5-10 higher.

7.  The Briefs (date of article in Peak Oil News is in parentheses)

In the U.K., with shale drilling about ready to go for the first time ever in the country, British opponents said public sentiment was moving against the practice. Cuadrilla Resources said the drilling rig used to tap wells at a shale basin in Lancashire arrived at its destination in late July. The industry is in its infancy in the country, though the British government estimates there may be enough natural gas locked in shale to offset gas imports on pace to increase from 45 percent of demand in 2011 to 76 percent by 2030. (8/3)

The UK Institute of Directors has criticized the Financial Conduct Authority’s proposal to amend listing rules that would accommodate Saudi Arabia’s oil giant Aramco, which is planning to list 5 percent in London next year. According to the organization, which brings together business leaders from all industries, such a rule change is not justified and it might compromise London’s reputation for corporate governance. (8/3)

Norway’s oil industry has been salivating for years over the Arctic Lofoten islands, which could potentially hold between 1.3 and 3 billion barrels of crude. It will likely have to keep dreaming. The general election next month is unlikely to lift a deadlock that’s keeping a ban on drilling off the environmentally sensitive archipelago as more and more Norwegians are turning their backs on the industry that helped make the country one of the world’s richest. (8/7)

Germany’s wind and solar portfolio now stands at 95 GW after 3.8 GW of new capacity was brought online in the first six months of 2017, an S&P Global Platts analysis shows. Wind and solar output are now almost on par with output by coal and major gas plants.  (8/2)

Poland relies on Russian energy company Gazprom for most of its natural gas shipments, though, like its European counterparts, it has tried to diversify its sources. A deal for shipments through a Russian natural gas pipeline expires in the next decade and Poland’s Foreign Minister said the contract will be extended if Russia offers a better price. He expects domestic production to cover one-third of consumption, LNG imports can provide another third, and the last third can come from pipeline from Norway. (8/9)

Russian oil producer Rosneft highlighted its focus on operations offshore Asia by boasting of its future exploration and production plans for Vietnam. The Vietnamese subsidiary said it was marking 15 years of operations offshore Vietnam. (8/3)

In Russia, a gap in US sanctions allows Western companies to help Russia develop some of its most technically challenging oil reserves, and risks undermining the broad aim of the measures, a Reuters investigation has found. The US, having itself experienced a spike in oil output from tapping shale rock over the past decade, worded the measures to prohibit Western companies from helping Russia develop “shale reservoirs”. It did not mention other lesser-known forms of unconventional deposits. (8/3)

Abu Dhabi’s National Oil Company is bringing new partners to the offshore sector to support the effort to boost production to 3.5 million barrels per day. The company said it is in “advanced discussions” with more than a dozen potential partners expressing an interest in helping develop offshore areas. (8/9)

India’s biggest refiner, Indian Oil Corp, has secured government permission to import one very large crude carrier (VCCC) of US crude oil every month this year, as Indian firms started buying American crude for the first time. (8/11)

India’s state oil refiners – long focused on churning out transport and cooking fuels – are planning a $35 billion push into petrochemicals to meet an expected surge in demand for goods ranging from plastics to paints and adhesives. The drive comes as the government seeks to promote durable, cheaper materials in industries such as farming and food packaging, while refiners eye long-term threats to their business from renewable energy and a shift to electric vehicles. (8/11)

In Canada, the government of British Columbia vowed Thursday to use every legal option to stop construction of Kinder Morgan Inc.’s planned expansion of a pipeline connecting the Alberta oil sands with the Pacific Coast. (8/11)

The US oil rig count declined by one to 765 for the week ended August 11, Baker Hughes Inc. said. In Canada, the total rig count was down by three to 217, with five fewer oil rigs and two additional gas rigs in service. (8/11)

US crude production in May rose 59,000 barrels per day to 9.17 million bpd. The figures reflected a 27,000-b/d upward revision to April’s production data. Output in Texas rose by 78,000 b/d while North Dakota production fell 12,000 b/d from the previous month. (8/1)

Price vs. profits: Big international oil companies are currently generating more cash at around-US$50 oil price than they did when the price of oil exceeded US$100 in early 2014, Goldman Sachs reckons. Analysts said that simplification, standardization and deflation are repositioning the oil industry for better profitability and cash generation in the current environment than in 2013-14 when the oil price was above $100 a barrel. (8/3)

In Oklahoma, the U.S Geological Survey recorded a cluster of tremors August 3-4 in an area on a watch list for activity related to shale oil and gas operations. Of the ten or more quakes recorded over the two days, the largest was a magnitude-4.2 event. A study from the USGS found the disposal of oil and gas-related wastewater is the “primary reason” for an increase in seismic activity in central states like Oklahoma. (9/7)

Natural Gas exports: The United States has been a net exporter for three of the past four months and is expected to continue to export more natural gas than it imports for the rest of 2017 and throughout 2018. (8/11)

The Federal Energy Regulatory Commission, the main US energy regulator, can get back to the business of approving multibillion-dollar natural gas pipelines after the Senate moved to fill two of four vacancies at the long-crippled agency. (8/9)

Nebraska vs. Keystone: Nebraska regulators opened a final hearing last Monday on TransCanada Corp’s proposed Keystone XL pipeline on Monday, a week-long proceeding that marks the last big hurdle for the long-delayed project after President Donald Trump approved it in March. (8/9)

Oil and wind: For more than three decades, Gulf Island Fabrication has built foundations to anchor offshore-oil platforms to the ocean floor. Now, as lower oil prices take a bite out of that business, it is trying to turn that expertise into an edge in a new business: offshore wind. The Houston-based company recently built the foundations for the first US offshore wind farm, near Rhode Island. (8/7)

State energy use: In 2015, Texas consumed a total of 13 quadrillion British thermal units (Btu), or about 13% of total US energy consumption. California ranked second with a total consumption of 8 quadrillion Btu, about 8% of US total energy use. Louisiana, Florida, and Illinois round out the top five energy-consuming states, which together account for more than one-third of total US total energy use. (8/7)

Coal stockpiles at US utilities continue to trend lower, but it could bode well for coal prices moving into the fall, especially when considered alongside higher natural gas prices and lower coal production. (8/3)

US coal production totaled an estimated 16.1 million tons in the week ended July 29, up 4.4 percent from the prior week and up 13.1 percent from the year-ago week, US EIA data showed. The production increase comes as stockpiles continue to decline and coal consumption is higher. Platts Analytics’ Bentek Energy estimates utility coal stockpiles as of last Thursday stood at 129.7 million tons, which would be the lowest monthly total since September 2014. Platts Analytics also estimated US coal consumption is up 3.2 percent this year compared to last year, primarily due to higher natural gas prices. (8/3)

Coal exports: The US EIA reported coal exports were around 37 million tons total for the first five months of the year, a level that’s 60 percent higher than the same time last year. (8/10)

US coal miners are almost certainly cheering the sharp rise in exports of their product, but their good fortune is mainly the result of Chinese domestic policies that have driven up global prices for the polluting fuel. While US President Donald Trump and his administration would no doubt like to claim credit for reviving the coal industry, it’s likely there has been virtually no structural change that will ensure a sustained boost for US coal exports. (7/31)

Coal power slide: A couple months ago, Donald Trump was cheering a new coal mine in Pennsylvania that will put 70 people to work — good news for a president whose pledge to revive the industry helped get him elected. But a bigger group of coal workers has already suffered sweeping job cuts, and it’s bracing for more. Coal-fired power plants employ more people than mines, and they’re shutting down all over the country. Cheap natural gas, the rise of renewables backed by tax credits, and subsidies for nuclear energy will likely combine to keep the trend going. (8/11)

Nuke stop sign: Scana Corp. announced on July 31 it will stop construction on a nuclear power plant in South Carolina—one of two in development in the US Project costs ballooned in recent years; it would require an additional $11.4 billion to complete the nuclear project for a total project cost of $25 billion, which would bring the project’s cost estimate up 75% from the original estimate when the project was initiated; and the completion date for in service would be delayed by five years. Today, it’s not local or environmental opposition but economics that’s crippling industry growth and undercutting the fiscal viability of existing plants. A natural gas installation coming online in 2022 might cost $14 a megawatt-hour in apples-to-apples capital costs, according to the EIA. Nuclear plants would need more than $70/MWh. (8/2)

Nuke rescue? Scana Corp’s decision to abandon work on a nuclear project in South Carolina has left the state reeling and the governor seeking one of several solutions to save at least one of the two reactors. (8/9)

Storage is the main stumbling block for renewable energy. Data from Bloomberg New Energy Finance reveals that over the first six months of 2017, California lost more than 300,000 MW of solar and wind power because there was no storage capacity. China is losing about 17 percent of its renewable power because it can’t store all of it either. (8/2)

Molten salt storage: Google parent Alphabet Inc. is pitching an idea to store power from renewable energy in tanks of molten salt and cold liquid, an example of the tech giant trying to marry its far-reaching ambitions with business demand. Alphabet’s research lab, dubbed X, said Monday that it has developed plans to store electricity generated from solar panels or wind turbines as thermal energy in hot salt and cold liquids, such as antifreeze. (8/2)

Batteries: Last week, Sun Microsystems co-founder Bill Joy and the company he currently backs, Ionic Materials, unveiled a solid-state alkaline battery design that they claim would be cheaper and safer than the lithium-ion battery. The three main possible applications of the new alkaline battery technology would be consumer electronics, electric cars, and energy storage for the power grid, according to the developers. (8/10)

In Beijing, the current mass transit fleet of 1000 electric buses could expand to roughly 10,000 by the start of the next decade, a transit director said on August 2. The proportion of buses powered by electricity among the total public transport vehicles would increase from the current 10 percent to 60 percent in three years. (8/3)

Mazda Motor Corp unveiled plans to sell cars by 2019 equipped with the world’s first commercial gasoline engine using compression ignition, placing traditional engines at the center of its strategy days after saying it would develop electric cars with Toyota Motor Corp. Mazda, whose research and development budget is a fraction of that of Toyota, could be the first automaker to commercialize a technology that many peers including General Motors Co and Daimler AG have been working on for decades. (8/9)

Warming studies: By the end of the century, the global temperature is likely to rise more than 3.6 degrees Celsius. This rise in temperature is the ominous conclusion reached by two studies using entirely different methods published in the journal Nature Climate Change on Monday. (8/1)