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Quotes of the Week

“On the supply side, non-OPEC supply growth has reversed into declines due to major cuts in upstream investments and the steepening of decline rates. Without investment, that trend is likely to accelerate with the passage of time to the point that many analysts are now sending warning bells over future supply shortfalls and I am in that camp.”

Saudi Arabia’s Energy Minister Khalid al-Falih, at the Oil & Money Conference in London

“I don’t quite share the same view that others have that we are somehow on the edge of a precipice. I think because we have confirmed the viability of very large resource base in North America … that serves as enormous spare capacity in the system. It doesn’t take mega-project dollars, and it can be brought online much more quickly than a 3-4 year project. Never bet against the creativity and tenacity of our industry.”

Rex Tillerson, CEO ExxonMobil, at the Oil & Money conference

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

1.  Oil and the Global Economy

Except for a brief spike on Wednesday following the release of the EIA’s stocks report, oil prices were relatively stable last week trading around $51-52 a barrel in New York and London. Little price movement can be expected until the OPEC/Russia combine agrees on the nature of a production freeze, if any. Last week, there were mixed signals from Moscow as to just what their intentions regarding a freeze would be. With several countries expecting an exemption from any production cap, the bulk of the cut would likely fall on the Saudis and the other Gulf Arab states.  The IEA is still saying that it does not expect the price of oil to go much above $60 in the near future as US shale oil producers would quickly flood the markets,  offsetting any OPEC freeze of the size under discussion.

With oil production continuing to climb in several countries, there is growing disagreement as to whether markets are returning to a balanced supply/demand situation. The Saudis announced last week the self-serving belief that the worst of the oil market glut is over. They note many speculators have increased their positions in the futures market to the highest in over two years suggesting they foresee higher prices ahead.

Observers note that the price differential between current and later months for London oil futures has widened to minus 69 cents, the biggest discount since February.  This situation normally means that the markets are well-supplied and that there are no shortages on the immediate horizon. A few are even saying that the recent OPEC-driven price jump is just a speculative bubble and that prices will be settling in the near future.

A considerable amont of news came out of the Oil and Money conference in London last week which was attended by numerous oil ministers and CEOs of major oil companies.  ExxonMobil’s CEO Rex Tillerson made headlines by saying that he does not foresee a large increase in oil prices in three or four years due to the drastic cuts in investment that have taken place recently. Tillerson repeated the industry line that new technologies and efficiencies will allow North American oil companies to produce more oil without causing a price “blow out.”  The Saudi oil minister, however, joined the IEA in taking the opposite view, maintaining the drop in investment will lead to shortages and much higher prices in the early part of the next decade.

As more rigs drilling for shale oil are brought back into production, disputes are growing as to whether drillers have brought their costs down to the point of profitability. The industry maintains, for the benefit of its investors,  that new “efficiencies” and better technology (long laterals in shale wells and the use of more sand and fracking stages) have allowed it to pump more oil at less cost. Critics, familiar with the industry, however, are skeptical that there has been much in the way of efficiencies other than drilling multiple wells for the same pad.

The critics are saying that longer laterals and more fracking stages are not yielding sufficient extra oil to justify the costs. The oil service companies are starting to complain that they have been forced by circumstances to provide critical services to drillers at below cost and that this will not continue much longer.  Moreover, places to drill in the “sweet spots” where most of the new drilling has been taking place in the last two years are running short so that soon the productivity from newly drilled wells will drop and costs per barrel will increase.

Rigzone noted last week that the two major oil service companies, Halliburton and Schlumberger, are not participating in the rebound in shale oil drilling. These companies mostly service the larger drilling companies with complex and expensive services. Most well completion these days is being done by smaller drillers that are drilling and fracking simple wells with the help of the smaller, local oil service companies that presumably have lower overhead and can offer lower prices.

Despite the uncertainties of the next few years, the CEO of BP told the London conference last week that the worst of price collapse was now over and that his company could now afford to begin investing in a limited number of long-term projects where the prospects for making a profit look good.  Other executives told the conference that deep-water projects soon will be coming back. Initiation of new deep-water projects, which take years to develop, has come to nearly a complete halt. The executives say most new deep water drilling will take place in the Gulf of Mexico and off Brazil where the prospects for oil are large and drilling costs are low as compared to drilling in the Arctic.

2.  The Middle East & North Africa

Iran: Last week, Tehran began qualifying foreign bidders to participate in its auction of drilling rights in Iranian oil fields. The Oil Ministry said that 50 projects would be available for bidding consisting of 29 oil fields and 21 natural gas fields. The ministry says they were talking to the 16 international oil companies that have expressed interest.  Iranian officials say some of the locations could be profitable with $40 oil.  Tehran hopes to attract $150 billion in foreign investment by 2020.

Executives from some of the companies that have been to Tehran say they have doubts about the pending Iranian projects. They note that the Iranians have yet to offer them detailed geologic information about the prospects; the names of the Iranian companies they would be forced to partner with to satisfy the hardliners in the government;  the terms of contracts they would have to sign; and lastly whether these contracts would violate the remaining US sanctions. Most international oil companies or their bankers have business in the US and do not want to end up blacklisted by Washington.  No US companies will be participating in the auction.

Last week, Tehran said It currently was pumping 3.8 million b/d of crude and 688,000 b/d of condensate. The country expects to hit 4 million b/d of combined production in about two weeks and increase its crude output to 4 million next year and 4.28 million in 2020.  The Iranians say that its output estimates from the OPEC Secretariat of 3.6 million are not acceptable as the lower number could become an issue in the future discussions about a production freeze.

Syria/Iraq: At least 24 were killed and dozens wounded in ISIL attacks on government buildings in Kirkuk Friday morning.  Among the dead were 4 Iranian technicians working at the Kirkuk power station. All of the 80 Iranian nationals working at the plant have been withdrawn to Iran.

The attack to retake Mosel continues to make slow progress. ISIL fighters imbedded among the large civilian populace living there making for slow going. ISIL has fired many oil wells south of Mosel, and the toxic smoke is a problem for the forces attacking the city.

In southern Iraq, terrorist bombs have exploded in Basra, Iraq’s oil capital, which has been relatively quiet in recent years. Government security forces in the area have been reduced to provide manpower for the assault on Mosel so security problems have been growing in recent months. These problems including fighting between rival tribes, robberies, and kidnappings. Good security in Basra is vital to keeping the oil industry running as many foreign companies are working there.

Libya: Although oil production is now back up to 580,000 b/d and the National Oil Company is planning to dispatch the first cargo of crude from the Es Sider export terminal, there are still serious concerns about the country’s political stability. It is unclear just who, if anybody, is in charge in Tripoli these days. The battle to clear the Islamic State insurgents out of Sirte in nearly over with only a small pocket of insurgents still holding out.  Most of the oil is being shipped from terminals that are far from the fighting, so exports could continue increasing for a while.  The Libyan National Oil Company was a competent organization that was capable of organizing the production of some 1.6 million b/d before the uprising. At some point, it will need more outside help to increase production but for now, it has considerable resources that have not been damaged by the fighting.

Saudi Arabia: OPEC says the Saudis pumped 10.63 million b/d in August down by 400,000 b/d from the peak set in July. Exports in August were down by 310,000 b/d to 7.31 million. The kingdom usually increases production in summer to cover the need to produce more electricity for air conditioning. In London last week the Saudis said they see oil prices at around $50-60 a barrel as being adequate to ensure global supply without spurring increased production of expensive oils coming from deep water wells, the tar sands, and shale oil fields.  The Saudis see these expensive sources of oil, which are only economic at high oil prices as the reason for the oil glut. Keeping prices down to the level where only traditions sources of oil – mostly from the Middle East – can be produced profitably is the way to prevent further oil gluts and price declines.

The Saudis are said to have increased their oil sales to China in September by cutting prices to gain a market foothold before any production freeze comes into effect.  China has been buying increasing quantities of oil lately, but much of it is simply being refined into products for export and not increasing Chinese domestic consumption.

The Saudis were able to sell a record $17.5 billion in bonds last week and investor orders were said to have reached $67 billion. As a largely debt-free state with massive oil revenues, the kingdom looks like a good credit risk to foreign investors. The bonds sales are intended to allow the Saudis to diversify their economy away from complete dependence on oil sales in the realization that these oil reserves will not last forever.

3.  China

Beijing’s crude production stabilized in September and was up slightly over August production at 3.9 million b/d. Output in September, however, was 9.8 percent lower than in September 2015 and few expect that production will rebound this year.  Imported oil is still cheaper to procure, even after recent price increases.  Diesel exports in September jumped by 50 percent month over month and gasoline exports were up by 25 percent as China continues to flood the Asian markets with cheap oil products.

China announced that its GDP grew by 6.7 percent in the third quarter which is in line with to government’s annual growth target.  Many analysts believe that this rate of growth is being achieved through a dangerous expansion of credit and unproductive public works projects. Twenty urban governments recently introduced regulations to put the brakes on the housing bubble which has driven up prices by as much as 25 percent in recent months.

Chinese coal imports have surged in recent months sending the Australian spot market to over $100 a ton for the first time in nearly five years. China has been making an effort to close thousands of small inefficient coal mines and as an interim step is importing cheaper imported coals that can be delivered to power plants along the water’s edge.

4. Russia

Moscow continues to talk up its potential to increase production in the years ahead as a way of strengthening its position in the talks with OPEC on a production freeze which begins on Monday. By starting from a higher base, real or imagined, a country can make apparent “concessions” without causing any real pain. Venezuela, Iran, and Iraq are trying a similar tactic.  As part of the hype, the head of Rosneft said his company could increase production by up to 20 percent next year.

The Russians are making a major effort to maintain a strong presence in the global oil markets. Moscow has already made progress in becoming a major oil supplier to China but faces resistance in selling to the EU where deteriorating political relations have led to efforts to diversify energy sources. Russia has become dependent on energy and mineral exports for its economic well-being. It has very little else going for it these days.  Among the recent efforts is Rosneft’s deal to buy India’s Essar oil for $7.5 billion.  More deals with India are said to be in the works. By buying India’s second largest refinery, Rosneft assures itself the inside track on sales to India in competition with Middle Eastern exporters.

5. Nigeria

The government has been forced to cut the selling price of all of its oil grades as it seeks to regain the markets lost during the insurgent attacks last spring and summer. Gross government revenue in September was down by about $8 billion (12 percent) in September from August despite the recent increase in crude prices. Nigerian production is believed to be rebounding and there have been no reports of any significant insurgent attacks for the last few weeks.

6. Venezuela

The National Electoral Council suspended a step in the recall process virtually insuring that President Maduro will not face a recall election this year. If a recall election is held in 2017, and polls show Maduro losing badly, his current vice president would take over until 2019, meaning that there would be little change in government policies for the next three years.

Despite paying up to 46 percent annual interest on its bonds, Venezuela is having a hard time in convincing bondholders to exchange bonds maturing in 2017 for bonds maturing later. Many bond fund managers have already sold out of Venezuelan bonds believing that default is inevitable.  Venezuela is facing $15 billion in bond payments in 2017 with only $12 billion in foreign exchange reserves. The value of its outstanding bonds now is about $65 billion. Moreover, the National Oil Company owes another $19 billion to contractors who perform the bulk of the work in exploring for and drilling for oil.

A default would have major consequences and likely result in a collapse of the government and economy. Much of Venezuela’s food supply must be imported. As the government currently is placing a priority on bond payments above the priority of food imports, the country is slowly starving to death and infant mortality is spiraling.

Should there be a default in the coming months, US imports to Gulf Coast refineries could be hit hard as bondholders place liens to freeze Venezuelan assets in the US. As the situation worsens, some believe a change of government, possibly through a military coup, is the only hope left for the country.

7.  The Briefs

Global oil companies face a “resoundingly negative” threat from a sharp growth of electric cars, one of the leading credit rating agencies (Fitch Ratings) has warned.  Although the report accepts it could take a long time for electric cars to become a disruptive force through mass adoption, Fitch outlines a grim scenario for global oil companies.  The agency says that the threat of electric cars could create an “investor death spiral” as nervous asset holders sell out of oil companies, making debt and equity more expensive. (10/19)

Oil tanker rates jumped to a four month high as traders booked the most cargoes for the time of year on record, offering signs that Middle East producers could be adding barrels to the market just before OPEC embarks on its deepest output cuts in eight years. (10/19)

The offshore rig market is currently in its worst slump since the mid-1980s. Since September 2014, when the current downturn began, utilization worldwide has fallen by around 20 percent. Day rates have followed along, with new fixtures, contract extensions and rate adjustments falling by as much as 50 percent. Early contract terminations have become the norm and over 110 contracts totaling over $20 billion of contract value have ended early during the past two years. As of October 2016, there were 143 jackups, semisubmersibles (semis) and drill ships on order or under construction (not including the 29 rigs for Brazil’s operations) – far more than rig demand can absorb. (10/21)

The deepwater oil industry is not dead, even after the brutal drop in oil prices in recent years, but activity will focus on regions such as Brazil and the Gulf of Mexico where resources are large and costs low. (10/19)

Small deepwater surge: Some movement in the offshore sector is coming as governments get more accommodating — in an attempt to spur drilling and increase revenues at a time when drilling is down across the world. This week’s news about the big changes to Brazil’s petroleum laws was a prime example. (10/18)

Cleaner fuel: The world’s leading maritime nations are leaning toward setting rules next week to cut the sulfur in oceangoing vessels’ fuel by more than 85 percent in 2020, people familiar with the matter say. Shipping executives say it would cost around $40 billion for the industry to meet the new rules, with some of the outlays starting soon, during one of the sector’s worst-ever downturns. (10/22)

The UK’s oil and gas sector has shed 25 percent of its jobs over the last two years. Some 84,000 jobs were lost during 2015 and 40,000 this year. (10/21)

In Norway, the environmental group Greenpeace said Tuesday it filed a lawsuit against the government for giving energy companies consent to drill in Arctic waters. The group said in their challenge that Norway was violating the Paris climate agreement by moving ahead with oil drilling in the Barents Sea. (10/19)

The Norwegian Petroleum Directorate, the nation’s energy regulator, said a regional subsidiary of French supermajor Total discovered gas while drilling a wildcat well, a well drilled into an area not previously known to hold reserves. (10/18)

Baltic pipeline: The signing of a $203 million deal for a Baltic gas pipeline linking Finland and Estonia is the first step in breaking Russia’s grip on Finland’s energy sector. The pipeline will stretch 94 miles between both countries and eventually carry natural gas in both directions. First gas will flow through the infrastructure in 2020. (10/22)

Natural gas market gloom and doom: the latest news from Russia is likely to add fuel to the pessimism–Gazprom has updated its 2016 budget, increasing spending planned for the year by a meager 1.3-percent rise on the budget approved in December 2015.  That contrasts to an upward revision of 27 percent for the company’s 2014 budget, and an almost 1.5-fold increase for the 2013 budget. Gas is cheap, and it’s likely to continue to be cheap in the observable future. (10/20)

A $13 billion deal involving Russia and India threatens to weaken the grip of Middle East crude suppliers in the world’s fastest growing oil market. Russia’s largest oil producer is following a strategy by resource-rich firms and nations to secure outlets for their output, and may supply the facility with Venezuelan crude and challenge Middle East exporters that provide about two-thirds of the country’s imports. (10/17)

Saudi Arabia will soon choose a site for its first nuclear power plant as the world’s biggest crude exporter seeks to diversify its sources of energy. Khalid Al-Falih, the country’s energy minister, said wind and solar power will also play a “very significant part” of Saudi Arabia’s energy mix. (10/22)

Kuwait’s emir ordered the dissolution of Parliament over the weekend, citing security concerns and “the circumstances in the region”, which includes the oil price crunch and other economic and security worries. The announcement followed an emergency meeting of the government one day after the speaker of the 50-strong legislature called for early elections, again on the grounds of economic challenges, largely stemming from oil. (10/18)

In Yemen, despite a brief halt to the fighting, the security situation is too volatile to return to producing oil, Austrian energy company OMV said. (10/21)

In Cuba, one of the few foreign energy companies working there said the momentum is moving in its favor as the US government eases restrictions on its Cold War foe. (10/19)

In Canada, Shell said Thursday it would sell developed and undeveloped acreage in the Canadian provinces of Alberta and British Columbia to Calgary-based Tourmaline Oil Corp. Those assets currently produce dry gas and natural-gas liquids equivalent to 24,850 barrels a day of oil. The deal comes as Shell seeks to shed $30 billion assets world-wide after its $50 billion acquisition of BG Group in February. (10/21)

The US oil rig count increased by 11 in the latest week, marking 17 straight weeks of no-decline in the active rig figure, according to Baker Hughes Inc. The streak suggests a strong recovery for the U.S. drilling sector. The gas count saw a three-rig increase to 108 rigs. (10/22)

Oil imports up: U.S. gross crude oil imports increased by 528,000 b/d, or 7 percent, during the first half of 2016 compared to the first half of 2015.  The US EIA blames the increase on the fact that US oil was less cost effective to produce. (10/22)

Propageddon?! Chesapeake said Thursday that it set a new record for fracking by pumping more than 25,000 tons of sand down one Louisiana natural gas well, a process the shale driller christened “propageddon.” The super-sized dose of sand — known as a “proppant” in the industry— is able to prop open bigger and more numerous cracks in the rock for oil and gas to flow. Output from the well increased 70 percent over traditional fracking techniques, representatives said. (10/21) (Editor’s Note: Some doubt that this technique which adds to the cost of fracking a well adds enough production during the life of the well to be worth doing.)

In tight-oil wells, the average length of laterals has increased by hundreds of feet in both oil- and gas-bearing rock this year, with an unofficial record 18,544 feet, about 3.5 miles, claimed by a well in Ohio. (10/19) (Editor’s Note: Some analysts note that the added cost of long laterals contributes enough extra production to be cost effective.)

Exxon Mobil’s CEO says ample production from US shale regions will keep prices subdued for years to come, disagreeing with others in the industry who have warned about a looming shortage. (10/20; see Quote of the Week above)

Oilfield services company Halliburton said Wednesday it turned a profit after a downturn in the industry characterized by its CEO as devastating. Halliburton said its cash flow topped $1 billion. In total, profit attributable to the company was $6 million, compared with a loss last year of $54 million. Total revenue, however, dropped more than 30 percent. (10/20)

Biofuels pilot: The National Renewable Energy Laboratory, together with petroleum refining technologies supplier W.R. Grace, and pilot plant designer Zeton Inc., built a unique pilot-scale facility that can produce biomass-derived fuel intermediates using existing petroleum refinery infrastructure. This pilot plant combines biomass pyrolysis together with fluid catalytic cracking—one of the most important conversion processes used in petroleum refineries—to demonstrate the potential to co-process biomass-derived streams with petroleum, at an industrially-relevant scale. There are 110 domestic fluid catalytic cracking units currently operating in the United States. Using them to co-produce biofuel could enable production of more than 8 billion gallons of bio-derived fuels, without construction of separate bio-refineries. (10/18)

An estimated 62,500 power plants are operating around the world, with a total installed generating capacity of more than 6,000 gigawatts (GW) in 2015. The nine largest operating power plants in the world by capacity are all hydroelectric power plants. Four of the world’s ten largest power plants are located in China, and all four of those plants began operating in the past 13 years. (10/19; source—US EIA)

Wind is the fastest growing source of electricity in the US, and about 70 percent of wind power production is coming from low income counties. These counties are typically rural, often in Midwestern areas, where the dominant industry for decades has been agriculture. Increasingly though, many farmers are finding that leasing space to wind turbine operators is more lucrative than growing corn. Farmers benefit directly from wind turbines to the tune of between $7,000 and $10,000 per turbine in annual leasing fees. (10/19)

The US Climate Prediction Center now says there is a 70 percent chance that La Niña will develop during the Northern Hemisphere autumn 2016 and there is a 55 percent chance it will persist during winter 2016-17. El Niño-Southern Oscillation, with its cool phase La Niña and warm phase El Niño, is one of the most reliable long-term indicators for global climate. The ENSO phases can have drastically different impacts on commodities worldwide – from energy use to grain yields. (10/20)

Climate powwow: European ministers said they committed to working with non-member states Armenia, Azerbaijan, Belarus, Georgia, Republic of Moldova and Ukraine—all near the eastern territorial border–on greening up the economy. All parties adopted a declaration to coordinate on climate and low-carbon initiatives aimed at promoting a sustainable and inclusive economy. (10/19)

Climate policy shift: In a sweeping accord reached on Saturday, companies including Honeywell and Chemours, a DuPont spinoff, were among the most active backers of a move away from a profitable chemical—hydrofluorocarbons, or HFCs—that has long been the foundation for the fast-growing air-conditioning and refrigeration business. The companies were driven less by idealism than by intense competition, and a bet that they could create more environmentally friendly alternatives. (10/18)