Quotes of the Week
“US dry gas production is projected to rise to an all-time high of 81.7 billion cubic feet per day (bcfd) in 2018, but US consumption is also expected to hit an all-time high of 78.2 bcfd in 2018. With exports rising to record highs as well, it does not leave a lot of extra gas to go into storage.”
Scott DiSavino, Reuters
“We feel the current [natural gas] market has become far too complacent and that prices are simply too low to account for demand growth and the amount of gas needed in storage for the next winter heating season.”
Martin King, director institutional research at GMP FirstEnergy in Calgary
Graphic of the Week
Alibaba’s T-Mall, in partnership with Ford, has opened China’s first car vending machine in the city of Guangzhou.
1. Oil and the Global Economy
2. The Middle East & North Africa
6. The Briefs
1. Oil and the Global Economy
Oil prices rose by nearly $5 a barrel on concerns that a US and allied attack on Syrian military installations would lead to a wider war. Futures prices closed Friday at $67.39 in New York and $72.58 in London setting multi-year highs. After the markets closed, strikes on Syrian chemical facilities were launched. Initial reports suggest that considerable care was taken to avoid harming Syrian civilians or Russian and Iranian interests. A relatively benign response from Moscow suggests that this attack alone will not lead to more serious hostilities in the immediate future that could drive oil prices higher.
Global oil stocks could be just weeks away from returning to their five-year average levels, as global demand growth holds and key producers continue to rein in production, the International Energy Agency said Friday. OECD oil stocks fell by a larger-than-normal 25.6 million barrels in February to within just 30 million barrels of their five-year average. Two years ago, the storage surplus was some 400 million barrels above normal. A combination of the OPEC+ production cut and lower production in Venezuela and Africa is offsetting increasing US production for the time being.
The OPEC Production Cut:
Some are wondering if the oil markets are tightening too fast due to the OPEC+ production freeze and supply disruptions in several member states. In the most recent OPEC Oil Market Report Venezuela’s production fell as expected by 55,300 b/d, taking production down to 1.488 million. The surprise however was that output fell so much elsewhere, including Algeria (-49,500 b/d), Angola (-81,700 b/d), Iraq (-13,100 b/d), Libya (-37,200 b/d) and Saudi Arabia (-46,900 b/d). Should the global supply go into deficit prices would likely go higher despite expectations of higher US shale oil production.
The IEA is still forecasting that global demand will increase by 1.5 million b/d this year. However, the Agency warned that the US-China trade dispute could affect demand. The clash is introducing a downward risk to the forecast, and oil demand growth would possibly drop by some 700,000 b/d if global economic growth were reduced by 1 percent due to a widespread increase in trade tariffs.
US Shale Oil Production: The EIA predicts the Permian will hit 3.156 million b/d of output this month, an increase of 80,000 b/d from March, and 850,000 b/d from a year ago. Billions of dollars are pouring into the region, and two out of every three new oil rigs are being activated there. The basin is getting crowded, which not only means skyrocketing prices for land and a search for opportunities along the periphery but also rapidly shrinking availability of space on the Permian’s pipeline network to move the oil to market.
While most observers knew additional pipeline capacity would be needed to move oil out of the basin, few expected that the situation would tighten so quickly. “At the end of 2017, there was just 160 kb/d of line space available out of Western Texas. This small surplus is likely to turn into a deficit in the second half of 2018,” the IEA said in its March Oil Market Report.
According to Genscape, pipeline utilization in the Permian jumped to 96 percent over the past month. Genscape says the Permian has 3.175 million b/d of pipeline, rail and local refining capacity combined. That’s a problem given that the EIA sees production jumping to 3.156 million b/d in April.
Pipelines are already close to being full. Prices for oil from the Permian are starting to reflect that problem. Midland light sweet crude is trading at a $8-per-barrel discount to WTI indicating that pipelines are full going to the Gulf Coast. The earliest possible relief will come from the opening of the Permian Express 3 pipeline, which could add 200,000 b/d of capacity by the end of this year. Permian drillers could be forced to slow production growth or even shut down some operations if things get worse.
As more pipelines are built to take oil from US shale fields to Gulf refineries or export terminals, much of the crude produced in the Permian and elsewhere no longer passes through the Cushing, Okla. terminal. The current benchmark for US oil prices, West Texas Intermediate crude, or “WTI” is derived from the price of physical oil delivered to Cushing for more than three decades. Now, traders and major global crude buyers are advocating replacing WTI with a new benchmark futures contract that would reflect the value of crude delivered to the Gulf Coast.
2. The Middle East & North Africa
Iran: Iran’s currency, the rial, traded at 40,000 to the dollar last year, but this week plunged to 60,000 rials per dollar, sparking panic buying. President Hassan Rouhani has already been dealing with a restless population, and the rial’s plunge comes just a few months after protests erupted across the country. Current US sanctions on Iran curb bank financing so that Tehran is having trouble bringing the proceeds of its oil sales home.
The Trump administration must decide what to do with Iran sanctions by May 12. Most expect the US will leave the accord. Secretary of State Steven Mnuchin recently said that “very strong” sanctions on Iran were possible, suggesting that such sanctions are currently being discussed in Washington. The US will likely have to go-it-alone in imposing new sanctions as few other countries are likely to go along with the plan. However, a recent study from Columbia University’s Center on Global Energy Policy concludes that US sanctions on Iran’s banking and trade could reduce its oil sales by some 400,000 to 500,000 b/d.
While the 2015 nuclear deal was greeted with much optimism by most Iranians, so far the deal has not brought forth a bonanza of western investment in the country. The recent riots are a sign that all is not well and that new sanctions could bring on more political instability.
Tehran has few options in face of Washington’s threat to step up economic sanctions. It is threatening to restart its nuclear enrichment program, which it claims it can do within four days. A nuclear enrichment program is likely to a new round of tensions in the Middle East with the Saudis vowing to acquire their own nuclear weapons, not to mention what the Israeli’s will do.
Iraq: Anti-government demonstrations in Kurdistan are forcing the government into economic reintegration with the federal government rather than going-it-alone with oil revenues. Prime Minister Barzani is reversing unpopular cuts to the salaries of civil servants and making financial commitments that can only be fulfilled with the help of budget transfers from Baghdad.
Iraq’s Supreme Court will hear a six-year-old case next month on the fundamental constitutional conflicts that underpin Baghdad-Erbil oil disputes. The court will decide on the legality of the Kurdistan Regional Government’s independent operation of its oil sector. The case could decide the balance of political power towards Baghdad and elevate the risks faced by both producers and buyers of KRG crude. If the companies helping the Kurds produce oil are forced to pull out, a settlement between Baghdad and Erbil seems likely.
Iraq is being forced to limit its oil exports due to extensive delays in maintaining and upgrading outdated infrastructure at the Basra export terminal. As the country tries to sustain near-record export levels, some pipelines cannot handle the pressure and have begun leaking. As Baghdad has few other immediate options to step up its oil exports, ambitious plans for much larger oil exports in the next few years may have to be put on hold.
Iraq has pushed back this month’s auction to award the rights to develop 11 additional oil and gas fields to international companies within ten days after it again amended some of the contract terms. In recent years, Baghdad has prided itself in having the toughest oil contract terms which left international oil companies with little or no profit in return for developing Iraqi oil fields. While the Iraqis say they are loosening up on contract terms to attract more foreign investment, the recent delays suggest they still have a way to go.
Saudi Arabia: Last week Yemen’s Houthi rebels fired a ballistic missile at Riyadh in retaliation for air raids by a Saudi-led coalition. Saudi Air Defense intercepted at least one ballistic missile over the capital on Wednesday as multiple blasts were heard, and plumes of smoke could be seen in the region. The attacks caused a small upturn in oil prices, while traders are more concerned about events in Syria. In addition, the Houthis used drones to attack the oil refinery at Jazan, just north of Yemen. The Saudis report “operations were not affected. “ The attacks are a reminder that the Saudi-Houthi war has now been going on since 2015 with little progress.
There was a spate of reporting last week saying the Saudis are trying to force oil prices up to $80 a barrel. This is the price at which many observers say will balance the Saudi’s budget again and halt the drain on the kingdom’s sovereign wealth fund. The forthcoming IPO of a small share of Saudi Aramco is also linked to the price of oil with higher oil prices making the issue more attractive to foreign investors. The Saudis desire to see oil at $80 is not shared by all OPEC members. Some are worried that the Saudis are targeting too high an oil price that could further boost US shale production.
Saudi Arabia’s stock exchange, Tadawul, is confident that it will be able to accommodate the listing of Saudi Aramco without any liquidity problems. Many are worried that Tadawul would not be able to take on the placement of Aramco shares without liquidity problems. Even conservative estimates that the Aramco’s sale might be around $50 billion have some worried the Tadawul might not be able to accommodate it without becoming illiquid.
Libya: In December the last Islamist militias were routed from Benghazi by forces loyal to military strongman General Hifter. After the victory, Hifter tried to woo the Trump administration by hiring a Washington lobbying firm to improve his image as a potential future leader of Libya. Last week, however, the 75-year-old Hifter was flown to Paris after suffering a stroke.
The incapacitation of Hifter raises new concerns about the future of Libyan oil production. In recent years Hiftner’s forces have taken control of the major oil export terminals allowing for a sharp increase in oil production. He was widely hailed as the new Libyan leader. Now all this is up in air awaiting developments. The return to local militias stopping and starting oil production over local issues or a bigger share of the pie seems a possibility.
Libya has the largest proven oil reserves of an estimated 47 billion barrels in Africa. Back in the 1970’s, Libya was producing 3 million b/d which has fallen to about 1.6 billion at the time of Gadhafi’s death. In recent years, production has come close to stopping, but now is struggling to maintain production of about 1 million b/d.
China’s March crude oil imports were 9.22 million b/d as compared with 8.41 million in February, and January’s record 9.57 million. Imports for the first quarter grew 7 percent from a year ago to about 9.09 million b/d, an increase of nearly 595,000 b/d on average compared with the same period in 2017.
Customs data also showed China’s March refined fuel exports shot up to a new high at 6.69 million tons, 43 percent higher than the same month a year earlier. State refiners have stepped up exports to help cope with a growing surplus of refined barrels. In one example, Sinopec is lining up its third very large crude carrier for shipping diesel from China to Europe or West Africa, people familiar with the matter said.
Trade tensions between the US and China are likely to have an adverse impact on global growth even if the threatened tariffs are never imposed. US officials have emphasized the tariffs are only a proposal at this stage and could be averted by a settlement. However, the hardline rhetoric and aggressive tariff proposals have sent financial markets into a frenzy, moving up and down in response to the latest news.
The threat of tariffs could have a damaging impact on investment decisions that depend on global supply chains – even if the import taxes are never actually imposed. For businesses considering the location of new manufacturing facilities, the threat of tariffs is likely to cause an additional pause before projects are approved. If decisions are delayed, the result will be a slowdown in investment with negative implications for growth.
New US sanctions against Moscow risk derailing the recovery in Russia’s economy, which had just begun to take hold after the Kremlin’s last confrontation with the West in 2014. The new sanctions against Russia announced last Friday are one of Washington’s most aggressive moves yet to punish Moscow for its meddling in the 2016 US election and other “malign activity.” Analysts in Moscow say the sanctions could consign Russia to years of low growth, frustrating its efforts to stimulate a rebound from a two-year downturn brought on by low oil prices and Western sanctions over Moscow’s role in the Ukraine crisis.
Russia’s GDP returned to growth of 1.5 percent last year due to higher oil prices, but was short of a government target of 2 percent. Moscow’s economy is growing by 1.8 percent this year, with oil prices above $60 a barrel. Moscow is considering replacing the US dollar in crude oil payments on deals with Turkey and Iran, Energy Minister Alexander Novak said last week.
Russian companies expect to invest $22.5 billion in oil production this year, with crude output and exports forecast to be at the same levels as in 2017. The country invested $23 billion in oil production in 2017, up by 10 percent compared to the 2016 investments of $21 billion.
The Monthly Oil Market Report published by OPEC says Caracas’ oil production fell by 55,000 b/d in March, to 1.488 million. Venezuela’s self-reported production fell by a greater amount—77,000 b/d, from 1.586 million in February to 1.509 million in March. The consensus of analysts is that Venezuela’s oil industry is unlikely to pull out of this situation. The country’s position is likely to worsen, with Venezuelan refineries expected to close as crude shortages and underinvestment in maintenance take a toll.
Venezuela says it has proven reserves of 301 billion barrels, although much of it is of a heavy oil that requires processing with diluents to pump through pipelines. A large share of Venezuela’s reserves likely cost too much to extract at today’s prices.
Caracas stopped paying bondholders in September, according to central bank data, contradicting statements by President Nicolás Maduro that the country would continue to honor its debts. Regular foreign debt payments of hundreds of millions of dollars a month have fallen to a few tens of millions since last October.
Venezuela currently is undergoing the worst migration crisis in recent Latin American history due to food shortages. The UN says 5,000 emigrants a day are leaving the country at a rate of 1.8 million a year. There are now some 600,000 Venezuelans living in Columbia. Thousands of others have left for other countries and boats carrying starving people are landing on islands in the Caribbean. This situation will not last much longer.
6. The Briefs (date of the article in the Peak Oil News is in parentheses)
Methane leak satellite: The Environmental Defense Fund is planning to build and launch a satellite that would look for industrial methane leaks. The launch is planned for late 2020 or early 2021. MethaneSAT would be an orbital eye in the sky that could monitor industrial methane leaks all over the planet. (4/13)
The UK government could be close to agreeing on a massive support package—dubbed a sector deal—with the North Sea oil and gas industry. The package could be worth more $1.4 trillion over the next 17 years. (4/10)
Saudi Aramco and India’s Ratnagiri Refinery & Petrochemicals signed a deal on Wednesday to construct a $44 billion refinery and petrochemical project in India. The refinery portion, to be located on India’s West Coast, will be able to refine up to 1.2 million b/d and goes a long way towards satisfying both India’s and Saudi Arabia’s interests. (4/12)
Saudi Arabia signaled its intent to expand chemical production along the US Gulf Coast and potentially double the size of North America’s biggest oil refinery—Motiva’s refinery in Port Arthur, Texas. (4/9)
With Saudi Arabia, the chief executive of Total SA on Tuesday confirmed the French oil major intends to enlarge its refinery joint venture with state oil giant Saudi Aramco. The agreement would include an extension of the petrochemical complex at Saudi Arabia Total Refining and Petrochemical refinery in Jubail and could also include adding a cracker unit. (4/11)
In Papua New Guinea, Exxon Mobil said the reserve estimate for its natural gas is 4.3 trillion cf, 84 percent higher than its 2012 estimate, warranting a significant expansion of its operations in the country. (4/13)
New Zealand’s government has announced all oil and gas exploration offshore the country will be banned in a bid to protect New Zealand from the effects of climate change. The ban, however, will not extend to existing exploration projects. There are more than 30 active licenses in New Zealand at the moment, of which 22 are for offshore blocks. (4/13)
In Angola, OPEC estimates oil production was down to 1.5 million b/d last month. A period of lower oil prices and field maturation are curbing Angola’s potential. Production for the OPEC member is at an 18-month low. Production from Angola is expected to climb once production from the deepwater Kaombo field starts this summer. The field could have a peak capacity of around 230,000 bpd. (4/14)
Guyana’s giveaway? The International Monetary Fund (IMF) is calling on the authorities of Guyana to revamp their tax laws for future oil contracts to protect themselves from unbalanced exploitation after massive Exxon oil discoveries make this venue a hotspot for supermajors. While existing contracts must be honored, future contracts shouldn’t be so generous, the IMF said. (4/10)
Mexico’s Pemex is currently processing about 9 percent more crude oil at its domestic refineries than it did in 2017, CEO Carlos Trevino said Tuesday. Trevino told reporters that current processing levels stand at about 834,000 b/d, which compares to crude processing of about 767,000 b/d last year. Trevino said he expects processing levels to reach about 900,000 b/d once maintenance plans at two facilities are completed. (4/11)
Canadian provincial tiff: A rift between two Canadian provinces is threatening to derail a pipeline expansion that would nearly triple the amount of crude flowing from northeastern Alberta toward Asian markets. Kinder Morgan Canada Ltd. said on Sunday it would scrap the expansion of the Trans Mountain pipeline if Canada’s federal and provincial governments couldn’t resolve their differences by May 31. The pipeline expansion has hit stiff opposition in British Columbia where environmentalists and lawmakers say it puts the Pacific coastline at risk. (4/11)
The US oil rig count increased by 7 to 815, up by 132 over last year at this time, Baker Hughes reported. Gas rigs fell by 2 to 192, a five-rig increase to the number of oil and gas rigs this week. The total number of oil and gas rigs now stands at 1008, up by 85 during 2018. (4/14)
Hacking pipelines: In the past few weeks at least eleven natural gas pipeline operators were the direct victims of cyber-attacks. The hacks, while extremely concerning, did not disrupt the supply of gas to US consumers, but the industry may not be so fortunate next time. This recent slew of pipeline hacks, while it was thankfully without severe consequences, serves as a wake-up call, bringing attention to the vulnerability of our energy systems and vital infrastructure like pipelines. (4/11)
Bottlenecks on the US natural gas superhighway are starting to stack up, raising concerns about whether the infrastructure can be built fast enough to meet surging supplies. Gas output will expand by 24 billion cubic feet, or 32 percent, through 2025 from last year, according to US EIA estimates. To support that growth, the country’s gas industry needs to spend $170 billion over the next seven years on pipelines, compressor stations, export terminals and other related infrastructure. (4/11)
Devon Energy Corp said it would lay off 300 workers, roughly 9 percent of staff, part of a plan to streamline operations and boost the shale oil producer’s sagging returns and stock price. The cuts will affect all areas of the company’s operations, not just its Oklahoma City headquarters. (4/11)
Oklahoma regulators forced an oil and gas producer to reduce operations on a well used for disposing of saltwater following a large earthquake over the weekend that set off a series of seismic activity in the state. The first quake occurred on Saturday, registering at magnitude 4.6, and was followed by several others, including a magnitude 4.5 earthquake that hit near Perry early Monday morning. (4/10)
Ethanol boost: President Donald Trump said on Thursday his administration may allow the sale of gasoline containing 15 percent ethanol year-round, something that could help farmers by bolstering corn demand. (4/13)
Ethanol dodge: Even as President Donald Trump floats the idea of more ethanol sales, critics say moves by the EPA would undercut the support to corn farmers. Some lawmakers and ethanol producers say the change is undermined as the EPA continues its longstanding practice of issuing hardship waivers to some oil refineries. (4/14) [Ed. note: So…which is it?]
Higher gasoline prices: EIA forecasts that drivers in the US will pay an average of $2.74 per gallon this summer for regular gasoline, the highest average summer gasoline price in four years. EIA’s forecast gasoline price for summer 2018 (April through September) is 26 cents higher than the average price last summer, largely reflecting changes in crude oil prices. (4/13)
US natural gas prices could rise in 2018 after utilities pulled the second biggest amount of gas from storage on record over the winter, even though the season was slightly warmer than normal. That left total stockpiles about 20 percent below usual at the end of the heating season on March 31, and will require companies to add 16 percent more gas than usual into storage this summer just to get inventories back to normal levels before next winter. (4/10)
UK renewables power output in the first quarter was a record 25.0 Trillion Wh, thanks to a strong performance by wind. The first quarter saw 37.3 percent of electricity generation from gas-fired power stations, with renewable projects contributing 29.0 percent and nuclear plants 18.1%. Coal-fired power stations produced 9.4 percent, while 6.3 percent came from imports. The quarter saw 18.3 percent of generation come from wind farms, 6.8 percent from biomass plants, 2.2 percent from solar farms and 1.7 percent from hydro plants. (4/13)
In India, solar energy has been a great success story at a time when cities such as Delhi have been choking on the foul air caused by their dependence on thermal power, generated by plants that burn dirty coal and lack the most modern scrubbing technology. While the pricing of solar energy does not always measure the cost accurately, it is fast becoming competitive with coal-fired power plants. Or at least that seemed to be the case until January when Narendra Modi’s government announced it planned to introduce 70 percent tariffs on solar panels imported from several countries — but mostly directed against China. India barely has a solar panel manufacturing industry. (4/11)
Shell on Thursday published a report entitled “Energy Transition,” showing how the company expects to adapt during the transition to low carbon energy systems. The company says it wants electricity “including from renewable sources …to become the fourth pillar of our business, alongside oil, gas, and chemicals.” Shell wants to be involved in all elements of the electricity supply chain from generation and trading to the supply of electricity to end-users. (4/13)
Shell’s report came a week after Shell was threatened with legal action by Friends of the Earth, the environmental group, over its contribution to global warming, and weeks before a vote at its annual meeting on a resolution from activist shareholders calling for a faster shift away from fossil fuels. (4/12)
Battery electric vehicles can be economically attractive as commuter cars in city traffic. Attractiveness fades for longer-distance traveling due to larger battery packs, a smaller efficiency advantage, and more fast charging at on-peak rates. As a result, displacing just a low single-digit percentage of global oil consumption through BEVs will require perpetual subsidies. A strong argument can be made that future overall cost reductions could be greater for hybrids than BEVs. (4/10)
In the battery industry, records seem set to be broken almost as soon as they are set. When Tesla completed its 100 MW/129 MWh installation last year, that signaled that the race for bigger and better storage systems was just beginning. Now, Recurrent Battery, a San Francisco-based company and the US unit of Canadian Solar, said it has plans to build a 350-MW solar farm in the California desert along with a battery storage system of the same size. (4/13)
Wind + batteries: BP Wind Energy has signed a purchase agreement to install a high-storage battery at its Titan 1 Wind Farm in South Dakota. The 212 kW / 840 kWh battery, supplied by Tesla, will be integrated with the wind farm and configured to help manage internal electricity demands of turbines when wind isn’t blowing. By doing so, it will enable the wind farm to store electricity when the site is generating it, and then have that electricity available to be consumed whenever needed. (4/11)
Climate extremes: Two international research teams have published separate studies in the journal Nature, which together add powerful evidence to fears that the system of ocean currents known as the Atlantic Meridional Overturning Circulation or AMOC is losing strength. Winter weather is likely to become less stable, with more outbursts of extremely cold air from the Arctic. It could have the opposite effect in summer. For example, the 2015 European heatwave was paradoxically linked to record cold in northern Atlantic waters that year. (4/12)
Fossil water follies: Much of the modern world’s agricultural productivity, industrial activity, and high degree of urbanization is dependent upon the pumping and exploitation of limited freshwater resources. In some regions the water that is being relied upon is so-called fossil water — that is, water that was deposited many millennia ago and is mostly not being replenished. (4/10)