Quote of the Week

“We believe that the Barnett shale offers compelling evidence that technology improvements ultimately cannot overcome geology. We believe the implication is that shale is a scarcer resource than generally considered and thus are more constructive longer-term as the world must seek a more marginal barrel to match future demand growth. That is bullish for longer-term oil price.”

“Increasing lateral length hurts all horizontal well performance as frictional losses increase and in the Barnett, optimal well length was determined by balancing reduction of fixed costs with reduced incremental production. Even correcting for lateral length, Barnett wells got worse with time. The E&P narrative is that a revolution in technology of improved completions (more sand, water, clusters, geo-steering, landing, etc.) is pushing down the cost curve. Yet we fail to see it in the most complete data record we have.”

Bernstein Research

Graphic of the Week


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

Last week started with a flurry of speculator optimism deriving from the World Energy Congress in Istanbul during which the Russians backed Saudi efforts to raise prices using a production freeze, the details of which have yet to be determined. For the rest of the week, oil prices moved little as various reports affecting the oil markets showed that it is unlikely that a significant OPEC/Russian production agreement can be negotiated.  The week ended with New York futures settling at $50.35 and London at $51.95. Most analysts do not expect any significant change in prices until the fate of the freeze becomes known around the end of November.  In the meantime, technical exchange meetings will take place to see if an agreement can be worked out. Recent and projected increases in OPEC production make it likely that considerably larger production cuts than were agreed to at Algiers will be necessary to move prices higher. Goldman Sachs warned last week that the planned Russian/OPEC production freeze is unlikely to be enough to rebalance the markets in 2017.

An interesting sidelight to the recent price run up from $40 to over $50 a barrel is that physical oil traders, as opposed to speculators who play the futures market, are not as bullish about the prospects for the markets.  As Reuters reported, physical oil traders say there is plenty of oil available and much is being sold at a discount to official prices to keep cargos moving. We may be seeing a case of the real world diverging from the speculative one that thrives on rumors and rhetoric.

Last week’s EIA stocks report showed the US crude inventory climbing by 4.9 million barrels, the first increase in six weeks.  US crude stocks are now 474 million barrels higher than usual for this time of year. Working off this surplus will take some time, which is why the IEA is saying that the markets will not be balanced until sometime next year.

Concern continues to be expressed about the lack of investment in future oil production. The Saudi oil minister said that over $1 trillion worth of oil projects have bee canceled or delayed since prices began crashing two years ago. Last week OPEC officials expressed the same sentiment. It will take 4-5 years for these spending cuts to have an impact on production so it will be early in the next decade when production starts to decline. Meanwhile, a significant number of oil production projects that were begun before the price drop will still be coming online in the next couple of years which suggests that lower prices still have a way to go.  The US Gulf of Mexico, Angola, Libya, Iraq, Iran, Kazakhstan, and Nigeria are all expecting to increase production within the next year or two. Should prices move into the $60s, many US shale oil producers say they are ready to step up production.

An interesting new report on the prospects for US shale oil production was issued last week. Bernstein Research says that there is no evidence that increasing the horizontal lateral lengths in shale oil wells results in higher production. Some in the industry have been touting longer lateral lengths as a technical breakthrough that will allow the shale oil industry to increase its production. Some outside observers believe that the US shale oil industry is living on a very limited number of productive “sweet spots.”  When these locations are drilled, probably within the next four to five years, shale oil is likely to become far more expensive to produce, and production will drop.

The low oil prices and massive drop in investment in new production are putting a severe strain on drillers and equipment manufacturers of oil drilling and processing equipment. Many firms built up large debts during the boom years, and are unlikely to survive until prices rebound significantly.

2.  The Middle East & North Africa

Iran: Residual US sanctions on Iran are still a big problem for Tehran. Western clearing banks still will not do business with the Iranians fearing they will violate US rules and be subject to harsh penalties. This means that little western investment has flowed into Iran since the sanctions were lifted. When the Europeans left Iran at the beginning of the sanctions, China took over many of the abandoned projects and flooded the country with Chinese technicians.  Unless Western firms start investing large sums in Iran, it looks as if Tehran will be stuck with China and Russia to rebuild its oil industry.  This is not the amount of diversification the country seeks to have.

Now Tehran is having second thoughts about so much dependence on the Chinese who do not always perform as fast as the Iranians would like. The Chinese have already been kicked out of a $4.7 billion offshore contract for failure to perform. The Rouhani government is coming under pressure for failing to deliver on its promises that a flood of western investment in the post-sanctions era would revive and grow the economy.

Another area of contention is an oil reservoir that straddles the Iran-Iraq border. Baghdad has already let a contract for Shell to exploit the field from their side of the border and Shell is now pumping more than 200,000 b/d while Chinese-manned rigs on the Iranian side are only pumping 125,000. Tehran fears that over time Iraq will produce more than its fair share of the oil.

Syria/Iraq: Before the civil war began, Syria produced 4 million tons of wheat a year and was able to export some 1.5 million tons. The fighting and loss of control over large areas left the government able to procure only about 400,000 tons this year. It needs 1.5 million tons to feed the population in the areas it controls. Moscow has stepped in and is selling Damascus some 1 million tons at well below market rates and is considering sending another 350,000 tons gratis.

Feeding Syria is just one more cost the Putin government has assumed following its intervention on behalf of the Assad government.

The effort to retake the city of Mosel from ISIL is underway. The Islamic State is moving many of its offices and personnel from the city in anticipation of the attack. In anticipation of the attack, ISIL is setting all the oil wells on fire that it still controls. Last weekend ISIL forces attacked the Qayarah oil field and lit several wells on fire. The noxious smoke is forcing many civilians to evacuate from the region.

Baghdad’s oil minister has called on its oil industry to increase output in the rest of 2016 and in 2017. Baghdad is already quibbling with OPEC about how much oil it produces which varies between 4.35 and 4.7 million b/d according to the various surveys and official figures.  The Iraqi oil ministry says that it has agreed to freeze its production at 4.74-5.0 million b/d. If the lower estimate of Iraqi production is taken as the base, the Iraqis would be free to produce another 650,000 b/d under the freeze.

In Kurdistan, Norway’s DNO is about to add four new wells to the Tawke field. In the next few months, the company will drill more wells, increasing the field’s output from 109,000 to 135,000 b/d.

Libya: Gunmen loyal to the Tripoli government seized the offices of the UN-backed National Accord Government on Friday. On Sunday fighting was reported in the capital as forces supporting and opposing the move clashed. The UN and the US condemned the move. The significance of this development for the rapidly rebounding Libyan oil production is as yet unclear.

The battle against the Islamic State forces in Sirte is nearly over. Over the weekend government forces continued to eliminate pockets of Islamic State resistance in the city.

The head of Libya’s National Oil Company said that oil production has now reached 540,000 b/d and will reach 900,000 by the end of the year though the events in Tripoli over the weekend may complicate the matter. The oil ports and desert oil production sites are under the control of forces loyal to the eastern government so that what happens in Tripoli may not have a major impact on the oil export situation.

Libya’s $1.2 billion claim against Goldman Sachs for improperly managing the country’s sovereign wealth fund in 2008 was rejected by a court in London.

Saudi Arabia: The announcement that Moscow and Riyadh are ready to cooperate to limit oil output sent prices to a one-year high in London. It will be several weeks before we have a better idea as to just what “limit oil output” actually means. With several OPEC members planning production increases and with Moscow and the Saudis unlikely to increase oil production much further, many believe the announcement is simply rhetoric aimed at inducing speculators to push prices higher.  The Saudi’s oil minister is already talking about $60 oil soon. This sounds like an effort to suggest to oil speculators that they should be bidding oil up to this level. Another $10 on the price of oil would add an additional $70 million a day to Saudi export earnings.

There is a split between Saudi Arabia and Egypt going on as the Saudis have failed to make their monthly oil delivery to Egypt. Cairo denies that the stoppage is in retaliation for an Egyptian vote in the UN that Riyadh did not like, and says that the stoppage is for logistical reasons. It is always possible that the Egyptians are behind on their payments for the oil.

Low oil prices have forced Riyadh to cut its capital spending by 71 percent in 2016 from the highs seen three years ago. The kingdom has the largest budget shortfall among the top 20 world economies and has been slashing spending as fast as possible to make up for this situation. However, the Saudis are moving to gain control of more oil assets in the US. They are about to take full control of the Motiva refinery in Texas, and Motiva is moving to buy the Lyondell Basell refinery in Texas. If this purchase takes place, the Saudis will control two major refineries in Texas.

As part of its effort to issue stock in Aramco to help with the budget crisis, the Saudis say they have enough oil reserves to last another 70 years.  Although Saudi reserves have not been audited by any outside entity for the last 20 years, the Saudis hope that reserves of this alleged size are enough for any potential investor to buy the $10 billion worth of bonds they are offering or to invest in shares of Saudi Aramco.

The latest word on the forthcoming Aramco IPO is that it will involve shares in the whole company and not just the upstream portion as had been rumored. Although the Saudis have only released selected financial information on the company for the last 20 years, analysts put its value at anywhere from $1 trillion to $10 trillion. A 5 percent share of $10 trillion would bring the company $500 billion in revenue and massive profits for the financial institutions marketing the shares.

3.  China

China imported a record 8.08 million barrels of oil a day in September due to an increase in stock piling emergency reserves and to the need to supply new refineries it has recently opened. Cuts in domestic production are also spurring the demand for imports. China’s net exports of oil products were 2.37 million b/d last month, which was close to the record of 2.49 million set in July. Much of China’s growing oil consumption is going into finite strategic reserves, replacing lower domestic production, which is down almost 6 percent this year, or refined into oil products and being dumped on the world markets. Some are saying the efficiency of the new Chinese refining capacity is such that Chinese firms can offer discount prices for refined products to keep sales moving.  What is not clear is whether much of the increased Chinese imports are going into increased domestic consumption.

There was a report last week that Beijing is moving too slow its gigantic housing bubble, which has driven the cost of new housing to unbelievable levels. The government is very concerned that this bubble will end in a “hard landing” crash that could affect many sectors of China’s economy.

Official trade data released last week shows that China’s exports in September were down 10 percent year over year. This, of course, adds to concerns that China GDP growth will be smaller than expected in coming months, a fear that has been on the back burner of late.

4. Russia

The news of the week was Moscow’s announcement that for the first time it was ready to join OPEC in studying a production freeze to drive prices higher.  Obviously, as a major oil exporter, the hard-pressed Russians would like to see oil prices higher; whether they are ready to take concrete steps to lower production is another question. While the major oil companies will follow the orders of President Putin, there seems to be a disagreement among the heads of the major oil companies. The head of Lukoil says that Russia would cut if OPEC comes to an agreement, while the head of Rosneft says Russia will not cut production. Russia’s energy minister said his country prefers to stop increasing production, which is increasing at a very slow pace, rather than making a clear cut in production.

President Putin said last week that the sale of a medium sized oil company, Bashneft, to the giant state-owned firm Rosneft will give an impetus to privatization. It is difficult to see just how selling a company to a state-owned firm has anything to do with privatization, but this is Russia today where the nexus between public and private is murky.

This signing of an agreement between Russia and Turkey to build the TurkStream gas pipeline and to seek common ground on the war in Syria marks new ground in the normalization of the Russian-Turkish relationship. Just a year ago, relations were at a low after the Turks shot down a Russian aircraft along the Syrian border. The TurkStream is a replacement for the South Stream pipeline to Bulgaria that was vetoed by the EU as it seeks to wean itself from Russian gas.

5. Nigeria

There was no news on the status of Nigerian oil production last week, which is believed to be rebounding due to repairs to a major pipeline and a temporary truce with a major militant group. Low oil prices continue to hurt the Nigerian economy with inflation running at about 18 percent. Mood’s says non-performing loans are now about 12 percent, up from 5 percent last December.

6. Venezuela
The largest banknote printed in Venezuela is 100 Bolivars, which has a value of less than 10 US cents. With gasoline selling for 6 Bolivars a liter or a fraction of a cent, transportation is very cheap. Some estimate that it costs more to print, import, and circulate the 100 Bolivar note than it is worth. The food crisis continues to get worse. Although the government still provides subsidized food at affordable prices, these supplies are running out, and many can no longer afford to eat a sufficient amount of food. A recent study says the average weight loss in Venezuela is between 15 and 30 pounds in the last five months. The study estimates that 25 percent of children are undernourished.

Many Venezuelans now spend the day standing in food lines. Murders in Caracas hit 474 in September.  The government lives in a dream world as to where the country is going, but seems to have been able to delay a recall election so it will continue in office for another three years. The situation is deteriorating so rapidly that oil production which is already down 450,000 b/d seems likely to continue falling. At some point the whole country seems likely to collapse and most if not all oil production will stop.

7.  The Briefs

Trade firms that profited from the renaissance in global refining over the past two years are bracing for tougher times as ample stocks, dwindling volatility and newly powerful refineries in China squeeze opportunities. (10/15)

OPEC producers have lost more than US$1 trillion in revenues over the past three years due to the slump in oil prices, OPEC Secretary General Mohammad Barkindo told reporters in Washington DC. Investments in the oil industry shrank more than 26 percent last year and are projected to drop by another 22 percent this year, Barkindo said on the sidelines of meetings of the International Monetary Fund (IMF) and the World Bank in the U.S. capital. (10/11)

EV’s vs. oil demand: Rising demand for oil over the next two decades is likely to overwhelm the impact of the electric car on crude markets, said Spencer Dale, chief economist for BP. The clean-energy research unit of Bloomberg LP estimates that battery-electric vehicles, which only run on power from a plug, will displace 13 million barrels of oil a day  by 2040.  BP estimates demand for oil will grow 20 million b/d during that same period.  (10/12)

Germany isn’t content with relying on financial incentives to usher in an era of pollution-free cars. The country’s Bundesrat (federal council) has passed a resolution calling for a ban on new internal combustion engine cars by 2030. From then on, you’d have to buy a zero-emissions vehicle, whether it’s electric or running on a hydrogen fuel cell. (10/11)

In the Barents Sea, the latest 3D seismic surveys suggest that there may be billions of barrels of undiscovered oil, according to a geology and geophysics expert. The 3D data gives a much better picture than previous two-dimensional images. (10/14)

In the North Sea, the demand for decommissioning work is increasing, Jonathan McGregor, head of engineering at oil and gas consultancy firm Jee Ltd, said. This demand will continue to increase over the next couple of years at least, McGregor said, whose sentiment was supported by oilfield services firm Subsea 7 S.A. – a company that has already completed over 20 North Sea decommissioning projects. (10/13)

In the UK, shale oil has a place in the energy mix, but exploitation will require environmental safeguards and industry expertise, a government agency said. (10/14)

In Poland, the race to explore for shale gas is now over after its state-run firm PGNiG and oil refiner PKN Orlen cancelled exploration projects there. Polish gas was expected to come to market in 2014. International oil companies, including Chevron Corp., Exxon Mobil, and Total flocked to the European country to assist in the search for gas, but they pulled back their efforts after disappointing results and the oil price crisis. (10/14)

Floating nuke: Russian company Zapsibgidrostroy (it’s a mouthful, yes) has begun the construction of the docks that will carry the world’s first floating nuclear power plant to its location off the Chukotka coast. From there, the NPP will supply power to the coast and to the offshore oil and gas platforms pumping crude in Arctic waters, starting in 2019. Work on the 21,000-ton NPP, named Akademik Lomonossov, has been in progress since 2007, and the plant itself is already complete and undergoing tests. (10/11)

The first batch of crude oil from the giant Kashagan oil field off the coast of Kazakhstan has been processed and is destined for exports, an operator said. The plan is to gradually increase Kashagan production to the target capacity of 370,000 b/d by the end of next year. (10/15)

Kashagan, a vast oil field in the Caspian Sea, has been 16 years in development and cost more than $50 billion in investments. The project has been plagued by multiple delays and cost overruns. A 2008 budget estimate of $38 billion jumped to $53 billion by the end of last year. [Hence the field’s nickname Cash-Again…] (10/14)

Israel and Turkey discussed building a gas pipeline between the two nations, according to the Israeli energy minister, who made the announcement during the country’s first ministerial visit to Turkey in six years. The two countries’ ministers agreed to “establish immediately dialogue between our two governments” to determine the project’s feasibility. (10/14)

Saudi Aramco informed Egypt’s state-held Egyptian General Petroleum Corporation that it would suspend the delivery of refined oil products to Egypt. (10/11)

In the UAE, construction on what will be the world’s tallest building by 2020 has officially started in Dubai, home to Burj Khalifa, currently world’s tallest man-made structure. The new tower sets another challenge in the history of human architecture. (10/11)

The Kuwaiti government gave the go-ahead to a request by the Kuwait Petroleum Corporation (KPC) to create what would be the country’s largest oil company. The new firm – the Kuwait Integrated Petrochemical Industries Company (KIPIC) – will act as a subsidiary of the KPC and a spokesman believes it will have the production capacity of approximately 615,000 barrels per day (bpd). (10/12)

China is now the world’s biggest oil importer, unseating the U.S. The country’s crude imports climbed to a record 8.08 million barrels a day in September, a year-on-year increase of 18 percent. China took advantage of lower crude prices last month to make substantial purchases. (10/14)

In the offshore Great Australian Bight, BP has abandoned oil exploration five years after it began searching for resources in one of the world’s last frontier regions and before it could drill a single well. The decision to step away from the project off the country’s southern coast follows a review of the company’s upstream strategy and wasn’t influenced by regulatory delays. The project won’t be able to compete “in the foreseeable future” for capital investment against other upstream opportunities, according to the statement. (10/11)

Egypt is pushing big energy companies to give it a break on payments for fuel shipments after Saudi Arabia’s sudden decision in October to halt artificially cheap petroleum deliveries tightened an economic squeeze in the North African nation. On Wednesday, Egypt asked energy suppliers to give the country six months instead of three months to come up with the money for already-ordered deliveries of LNG, crude oil and petroleum products. (10/14)

For Angola, Italian energy company Eni said it was one step closer to its goal of pulling more oil from Angola with the pending launch of an offshore production facility. ENI said the first oil from the East Hub development project is planned by the first half of 2017. (10/15)

Venezuela and Iraq’s own figures on how much crude they produced in September were 565,000 barrels a day higher than estimates compiled by OPEC from so-called secondary sources. The two nations are disputing the data, which could determine the production target for each country when caps on members’ output are decided next month. (10/13)

In Brazil late last week the House of Representatives took a major step toward privatizing oil and gas development by voting 292-to-101 to approve the removal of requirements that state firm Petrobras must participate in high-impact pre-salt oil projects. Up until now, Petrobras by law was required to be a participating partner in all pre-salt blocks. (10/13)

Mexico is targeting U.S. West Coast refineries to boost sales of its flagship Maya crude amid a global oil glut. While Mexico has been a regular supplier of Maya oil to U.S. Gulf Coast refineries, it hasn’t shipped any to the West Coast since February 2008. (10/13)

The US oil rig count rose by four last week, according to Baker Hughes. That makes the 16th straight week of no-decline in the oil rig count, though the current total of 432 oil rigs is 73 percent below the peak of 1,609 oil rigs in October 2014.  The number of active gas rigs rose by eleven, the biggest jump since late January. The gas rig total stood at 105, which is a 10-month high. (10/15)

A new independent estimate of world oil reserves has been released by Rystad Energy, showing that the U.S. now holds more recoverable oil reserves than both Saudi Arabia and Russia. For the U.S., more than 50 percent of remaining oil reserves are unconventional shale oil. Texas alone holds more than 60 billion barrels of shale oil according to this new data. (10/12)

There is a lot more oil in storage than the amount that can be accounted for by domestic production and imports. That’s a big problem since oil prices move up or down based on the U.S. crude oil storage report. (10/11)

Five oil pipelines carrying Canadian crude were halted this week in the United States in an act by protesters opposed to oil sands development and a proposed new pipeline in North Dakota. The coordinated attacks in isolated locations near the Canadian border sparked a flurry of exchanges among pipeline operators, police, Canada’s national energy regulator and a US counterpart to assess the impact. (10/15)  The five pipelines are able to carry more than 2 million barrels a day of Canadian crude into the U.S.  Enbridge Inc. said protesters attempted to slow the flow of oil on a pipeline in Minnesota by using bolt cutters to tamper with valves. (10/12)

The U.S. Army Corps of Engineers won’t yet authorize construction of the $3.8 billion, four-state Dakota Access oil pipeline on federal land in southern North Dakota, it said Monday, along with reiterating its earlier request that the pipeline company voluntarily stop work on private land in the area. The corps’ statement came in the wake of a federal appeals court ruling Sunday that allowed construction to resume on the pipeline within 20 miles of Lake Oahe. (10/11)

In Oklahoma’s hot newer shale plays, don’t expect a major ramp-up of oil production any time soon, even as companies invest billions of dollars in the region, said Newfield Exploration Co.’s chief executive officer. Producers need more exploration time and a higher oil price before they can begin accelerating drilling in the Scoop and Stack oil formation, Newfield’s CEO Lee Boothby said in an interview Thursday. (10/15)

North Dakota’s oil output fell below the 1 million b/d mark for first time in two years, the state said on Thursday, even as other U.S. operators add rigs thanks to rising crude prices. Production dropped in August by 4.7 percent, or some 49,000 bpd, to 981,039 bpd, and is likely to continue dropping. (10/14)

Texas helped lead the US out of recession, thanks in part to the shale drilling revolution. But since the end of 2014, the state has lost more than 91,000 jobs in oil-and-gas extraction and mining-support activities, nearly half of the total national job losses in those categories. Texas payrolls were up 1.6% in August from a year earlier, trailing the national pace of job growth for the 11th consecutive month. (10/12)

The price of natural gas is up more than 72 percent in the last six months as drilling in the U.S. slows. An unusually warm summer kept demand high and helped to push prices from $1.90 per million Btus on April 15, to $3.28 on Monday. (10/14)

Nat.gas prices: One of the biggest threats to an extended rally in U.S. natural gas prices is lurking in the oil patch. Gas production in most of the country has dropped amid cost-cutting. Not so in the Permian Basin, the nation’s biggest crude reservoir and one of the few places where drilling has remained profitable. (10/14)

Efficiency gain: The world is squeezing more from the energy it uses even though markets are awash in cheap oil and natural gas, a report from the IEA showed. Energy intensity, which measures the amount of fuel consumed per unit of gross domestic product, fell 1.8 percent last year, triple the average rate over the past decade and more than the 1.5 percent reduction in 2014. (10/11)

Humble pie: The IEA, the world’s most prominent energy forecaster, will raise its outlook for wind and solar installations following a decade of underestimating growth in the renewables industry. (10/15)

Ocean power: California becomes the 14th coastal state in the country to form a task force examining the potential of wind and wave energy. (10/15)

Climate change: Last week we learned that the Paris climate agreement will go into effect in November after the European Union formally joined the accord, tipping it past the threshold needed to become a reality. Now this week brings another major foray in international climate diplomacy, as more than 140 countries adopted an amendment to the 1987 Montreal Protocol to phase down the use of hydro fluorocarbons, or HFCs, which are super-polluting, powerful greenhouse gases. (10/15)

HFC ban: In Kigali, Rwanda, negotiators from more than 170 countries gathered this week to complete an accord that would phase out the use of “super-heat-trapping” hydro fluorocarbons, or HFCs, worldwide, and with them the cheapest air-conditioners that are just coming within reach of people in large parts of developing economies like India.  Unlike the Paris agreement the HFC ban would come with the force of law, with richer countries giving money to help poorer countries comply, and trade and economic sanctions against those that do not. (10/13)

A mega drought spanning several decades could be almost certain to hit the American Southwest this century if greenhouse gas emissions are not curbed, a new study says. Rising temperatures will “load the dice” in favor of a mega drought in the region. Combined with a decline in rainfall, warming conditions could put risk levels at 99 percent for much of the region. (10/13)