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Tom Whipple. Editor

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

1.  Oil and the Global Economy

As predicted last Wednesday, US crude stocks rebounded on revived crude imports which were up by 1.3 million b/d leading to a 1.7 million barrel increase in US stockpiles. For those keeping book, the 1.7 million barrel increase was about half way between the 100,000 barrels the Wall Street Journal’s consultants were predicting and the 3.7 million the API’s survey came up with. The increase in stocks, mixed news about the US economy, and a softening of the rhetoric over the Ukrainian situation sentoil prices downwards last week with NY futures settling at $102.71 and London’s Brent at $109.41. Supplies at Cushing, Okla. fell by 1.58 million barrels to their lowest since 2008. Stocks there are getting close to the minimum operating level which is thought to be around 20 million barrels.

Much of the news last week focused on President Obama’s plan’s to restrict carbon emissions. The US Chamber of Commerce has been firing off broadsides that the plan will destroy the American economy.  Echoing the American Petroleum Institute, the IHS consulting group (Daniel Yergin) issued a report saying that lifting the embargo on US crude exports would be good for the US economy. The report says conventional wisdom that gasoline prices would increase if the embargo were lifted is wrong. According to IHS, lifting the embargo would increase US crude production by 3 million b/d to 11.3 million – leading to cheaper gasoline for all.

A preliminary estimate says OPEC crude production grew by 75,000 b/d in May to just shy of 30 million b/d.  Saudi and Angolan production increased while Iranian, Nigerian, and Libyan production slumped. The IEA is still saying that OPEC must increase production by another 700,000 b/d during the second half of 2014 or the world will see higher prices.

US natural gas prices were volatile last week, rising sharply on Tuesday andWednesday on forecasts of warmer weather in June which would cut the amount of gas being stored for next winter.  When the weekly natural gas injection report on Thursday showed injections were higher than expected, prices fell to close at
$4.54 per million BTUs. It does not look as if the US will have trouble getting rid of the increase in natural gas production emerging from the shale boom. Not only do we have unusually cold and hot weather to mitigate with more natural gas consumption, but imports from Canada are dropping, pipeline exports to Mexico are increasing rapidly, LNG exports are expected to surge, and according to the Wall Street Journal, the US will soon be awash with foreign-owned petrochemical plants taking advantage of cheap US natural gas.

2.  The Middle East & North Africa

Iraq:  Sunni bombers continue to kill and maim dozens of Shiites – most civilians. The fighting in Anbar province continues as some 42,000 Iraqi troops attempt to drive out the Sunni insurgents that have occupied portions of the province. Some news outlet are reporting ill-equipped government forces are losing the struggle against better equipped and motivated Sunni insurgents who continue to stream into the province fresh from the fighting in Syria. Hundreds of thousands have been driven from their homes by the fighting in Anbar as government forces resort to artillery fire on urban areas to dislodge insurgent forces. The International Red Cross is becoming increasingly disturbed by what is happening to civilians in the province.

The Turks seem to have sided with the Kurdish Regional Government in permitting the export through Turkey of all the oil the Kurds can produce. A Kurdish spokesman said Erbil will not yield to Baghdad and would continue exporting oil as the central government is no longer sending to the Kurds the full agreed-upon share of the nationaloil revenues. The Kurds say they need to export some 400-500,000 b/d to keep their government afloat without Baghdad’s support.

No progress has been reported on forming a new Iraqi government as charges of election improprieties muddy the prospects for a coalition.

The province of Nineveh, which was home to the largest city in the world during Assyrian times, has asked Baghdad if it can get out and become an autonomous region as the central government never does anything for the province with all its oilrevenues.

Libya: Things got even worse last week. The country now has two prime ministers and nobody knows which one has the keys to the nation’s treasury; the US embassy told all American citizens to get out; a militia stole the weapons the US had provided to train Special Forces – halting the training; and the Libyan air force is bombing militia bases in Benghazi. With a former general, carrying a US passport, trying to suppress Islamist forces in the country, many are saying that a lengthy civil war with little to no oilproduction is either here already — or not far away.

3.  China

It was a quiet week as the struggle between economic growth and breathable air continues. China’s apparent oil demand in April rose by 1.4 percent to 9.75 million b/d even though industrial production slipped by 0.7 percent from March. The contraction is likely due to lower industrial activity, although Beijing says its manufacturing increased in May.

In the struggle to clean up the air, China will phase out some 6 million vehicles registered before 2005 prior to the end of 2014, but did not say how it plans to accomplish this. The scrappage will take place in northern cities most troubled with dirty air.  Next year another 5 million are to be scrapped.  To complement the move, gas stations in major cities are to start selling only the cleanest grades of gasoline and diesel. Chinese motor fuels are far more polluting than those sold in the West and until recently there have been no incentives or binding directions for China’s refiners to produce the cleaner but more expensive-to-produce fuels.

Most of the news this week has been concerned with China’s efforts to drill for oil in disputed waters in the South China Sea and the reactions from Vietnam, Japan, and the US.  Over the weekend, the level of rhetoric increased with China accusing the US and Japan of acting in concert to sow controversy in the Asia-Pacific region. So long as China continues to increase its need for oil, this dispute will continue.

4. Ukraine

The situation seems to be stabilizing as Kyiv uses its armed forces to drive pro-Russian groups from key installations in Eastern Ukraine. Government forces seem to be inflicting heavy casualties on the lightly armed insurgents. Moscow seems to have moved some of its armed forces back from the Ukrainian border and toned down its rhetoric against the newly elected Ukrainian President.  However, the capture of numerous Russian citizens fighting with the dissidents inside Ukraine shows that Moscow is still deeply involved in stirring the unrest. There are few controls on border crossing so Russians can freely enter the Ukraine. The Ukrainian government is trying to tighten border controls.

The major issue at the minute is the flow of Russian natural gas into Ukraine which Moscow says it will halt unless some agreement on payments is reached.

5.  Quote of the Week

  • “Most ‘Big Oil’ is suffering from marginal or falling returns even as crude prices stay strong, reflecting their struggle to replace reserves, as access to new energy resources becomes more difficult.  As it is, given their large base, achieving growth in oil and natural gas production has been a challenge for these companies over the last many years.”

Nilanjan Choudhury, Zacks Equity research analyst 

6.  The Briefs

  • Despite increased spending, oil majors are seeing flat or declining production as they struggle to replace reserves. Exxon, Chevron, Shell plc and BP recorded declines in their 2013 production. France’s Total was the only company to buck the trend in declining production. (5/28)
  • In Australia, even as ExxonMobil and partners Santos and Oil Search recently celebrated the sailing of a maiden cargo from their $US19 billion PNG LNG plant in the Pacific, Australia’s peak oil and gas lobby has revealed a five-fold increase in the cost of locally drilled offshore wells. Based on industry data, the average cost of a well spudded off Australia is more than $130 million. The huge rise in well costs has coincided with a more than two-thirds fall in activity levels since 2003. (5/28)
  • Mexican authorities say oil services firm Oceanografía defrauded Banamex, the Mexican unit of U.S. banking giant Citigroup, of about $400 million. Citigroup has already fired 12 employees in Mexico for failing to detect the alleged fraud, which was tied to alleged fake documents from state-owned oilfirm Pemex. (5/30)
  • Pemex is negotiating with Chinese companies to create a fund valued at as much as $4 billion to invest and finance projects. The proposed arrangement is in a “final stage of negotiations,” Pemex said in an e-mailed statement, correcting an earlier filing that said a deal had already been signed. The Sino-Mex Energy Fund would be the largest Chinese investment fund in Latin America. (5/29)
  • US crude imports from Mexico fell 47 percent to 850,000 b/d during 2013, primarily as a result of declining production in Mexico. Despite the decline, Mexico was the third largest source of crude oil imports to the US in 2013, behind Canada and Saudi Arabia. Conversely, US exports of petroleum products to Mexico have increased 152% in the past decade. In 2013, the United States exported 527,000 b/d of petroleum products to Mexico. (5/29)
  • Ecuador, after about three years of negotiations, is preparing to sign deal with China, valued at about $7 billion, to finance a new oil refinery known as the Refineria del Pacifico. The $10 billion refinery will process 200,000 b/d. Thirty percent of the funds will come from the project’s partners and the remaining 70% will be financed by a group of Chinese banks. (5/27)
  • In Scotland, oil and natural gas wealth in the North Sea is expected to become major financial asset if the region votes for independence from the UK in September. The Scottish government said it could finance itself in part through oil and gas revenues while powering its economy with renewable resources. Scotland’s finance secretary said there may be as much as 24 billion barrels of oil and natural gas reserves left in the North Sea and production is on pace to increase by 14 percent between 2013 and 2018. (5/29)
  • Russian’s Foreign Minister said he was interested in encouraging more investments in the Argentine energy sector. (5/29)
  • In Canada, Total will cut 150 jobs at its $10.1 billion Joslyn oil-sands project and delay a final investment decision as costs escalate and the company and partner Suncor Energy look for ways to make the project more profitable. Oil-sands miners have struggled with rising costs in northern Alberta because of labor shortages and distance from equipment suppliers. (5/31)
  • The US drilling rig count gained 9 to reach 1,866 rigs last week, Baker Hughes reported. 1,792 are land rigs, while rigs drilling offshore and in inland waters were unchanged at 60 and 14. Oil rigs rose 8 units to 1,539 while gas rigs edged up a single unit to 326. In Canada, a 44-unit leap brought the nation’s total to 198, 53 units higher than this week a year ago. Oil rigs spiked 40 units to 105; gas rigs were up 4 units to 93. (5/31)
  • The US shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground. Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil’s 0.1 percent. (5/27 Bloomberg)
  • Monthly rates for railway tank cars, which transport liquids such as crude, have increased to $1,500 to $2,000 a car from about $500 in early 2011, before hydraulic fracturing ramped up in North Dakota’s Bakken Shale oil field. Cars that haul sand for fracking are leasing for about $650 a month, up nearly 50% from the end of last year. (5/30)
  • The shale boom and the Jones Act are saving shipbuilding at the 213-year-old Philadelphia Navy Yard.  On a part of the grounds now operated by Norwegian-based Aker ASA, shipbuilding employment has jumped from 330 in 2011 to 1,100 today.  Smaller US shipyards built 341 tank barges in 2013, up 88 percent from 2011. (5/29)
  • Gasoline prices in six US states are up 20 cents from last year at this time, with several reporting prices approaching $4.  Demand is higher than expected, and tight supplies in several regions are pushing up prices.  (5/31)
  • Russia’s natural gas exports to Eastern and Western Europe during 2013 averaged 15.6 bcfd, a 16 percent rise compared with 2012. The increase was mainly driven by exports to Western Europe—especially to Italy, Germany and the UK—which rose by 20% to 12.3 bcfd. (5/31)
  • British shale explorer Cuadrilla Resources, the target of heated protests, said it submitted plans for drilling, fracking and testing the flow of four wells to be drilled in Lancashire County. (5/31)
  • In Mexico, a combination of higher natural gas demand from industrial and electric power sectors and increased US natural gas production has resulted in a doubling of US pipeline exports of natural gas to Mexico between 2009 and 2013, averaging 1.8 billion cubic feet per day in 2013. Mexico’s national energy ministry projects that US pipeline exports to Mexico will reach 3.8 billion cubic feet per day (Bcf/d) in 2018. (5/30)
  • US natural gas demand could increase by 3 Bcf/d to 10 Bcf/d by 2020 under an expected Environmental Protection Agency plan to reduce carbon dioxide emissions from power plants, analysts said Friday. Using its authority under the Clean Air Act, EPA is expected Monday to announce proposed rules designed to limit the amount of carbon emitted by existing power plants. Gas will be one of the winners under every assumption about new source performance standards for existing power plants. (5/31)
  • US natural gas company Cheniere Energy said Friday its Spanish counterpart, Iberdrola, agreed to buy liquefied natural gas from a planned export terminal in Texas.  Cheniere Energy Chairman Charif Souki said.  Deliveries of as much as 400,000 tons of liquefied natural gas from the planned Corpus Christi export facility could begin by 2019. The deal is the third of its kind for Cheniere. (5/31)
  • U.S. natural gas imports dropped 14 percent last year in part because of abundant domestic production. (5/30)
  • US nuclear energy:  NuScale Power joins Babcock & Wilcox in receiving money as part of a six-year program DOE initiated in 2012 to distribute $452 million to support licensing and development of small modular nuclear reactors. (5/29)
  • India’s new Prime Minister Modi has brought three often-quarreling, energy-related ministries under one minister, hoping to crank up the supply of power the country needs to generate more economic growth. (5/28)