By Tom Whipple.

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

1.  Oil and the Global Economy
Oil prices closed out last week a dollar or two higher than the previous week with NY at $94.37 a barrel and London at $106.48. In the US prices were up due to concerns that the dramatic drop in US crude inventories in the last two months are due to more than just bad weather and year-end tax avoidance. Although recent reports on the prognosis for the US economy have been mixed, oil traders have been cherry-picking the more bullish ones as a reason oil prices went a bit higher last week. In London, uncertainties relating to Libya, Sudan, Iraq, and the Iranian negotiations have kept prices around $106 since the beginning of the year.

Next week the southern leg of the Keystone XL pipeline is due to begin moving 700,000 barrels of crude per day from Cushing, Okla. to Gulf Coast refineries. Many observers believe that this pipeline will shrink the price differential between WTI and Brent crudes that has existed since the glut of fracked shale oil built up at Cushing several years ago.

The controversy over whether Congress should lift the ban on exporting US crude continues to grow with oil producers in favor of the higher prices they could get for their oil on the world market, and refiners favoring the cheap crudes they can get in the US. Given that he US is still importing about 7 million barrels of crude a day most see no benefit in lifting the ban.  The more sophisticated arguments in favor of lifting, however, center on the grades of crude being produced in the US and the relative costs of transportation. Most start with the assumption that US shale oil production will continue to grow by 2 million b/d in the next few years and that there will be a surfeit of light, sweet crudes. Such crudes are more suitable for refineries along the US East Coast and Europe than the Gulf Coast refineries which are designed for heavier, sourer crudes. The argument is that it is more economical to get the lighter crudes to the refineries that can use them more efficiently rather than refining them in existing refineries along the US Gulf Coast.

The return of the polar vortex to the northern and eastern US pushed natural gas prices up to a close of $4.32 per million BTU’s last week as the EIA reported another record drawdown of natural gas inventories. Stockpiles have now fallen by 34 percent since early November and are 15 percent below the five-year average for this time of year. At least two or three rounds of unusually cold air are expected in the next month which will likely move natural gas prices still higher.

Some analysts say the shale gas boom has a long ways to go and that inventories will quickly be refilled no matter how cold the weather gets. They see the higher gas prices resulting from the cold weather as encouraging more drilling.  Others are noting the annual increases in natural gas production the US has seen for nearly a decade now seems to be easing so that smaller annual increases and higher prices may be ahead. Even at current prices many doubt that drilling for natural gas is yet profitable unless large amounts of natural gas liquids can be produced with the gas.

The UN warned again that the world’s nations are failing to control carbon emissions and, despite the emphasis on green fuels, growing use of coal and petroleum products continue to make the situation worse. Europe which was once a leader in carbon control now has a weakening economy that is forcing it to reconsider the importance it had placed on climate change.

Last week Shell Oil issued a profit warning for the first time in ten years. The major oil companies have been hurt by rapidly increasing costs of finding and producing more oil, while prices have remained generally level. In addition, Shell has suffered several major setbacks in recent years, including a $2 billion write-down on its Texas shale oil venture, the grounding of its Arctic drilling platform, and the competition from cheap US gasoline for its European refining operations.

2.  The Middle East & North Africa

Iran:  The interim agreement between Tehran and the 6 major powers comes into effect on Monday, January 20th. The West will release some $7 billion in blocked Iranian assets and Tehran has promised to stop enriching uranium to 20 percent which is only useful for further enrichment into weapons grade uranium — a highly provocative program. The current deal seems to have wide acceptance in Tehran, even by hardliners who have come to appreciate the damage the various embargoes are doing to the Iranian economy. Moscow injected itself in the fray last week by offering to barter goods for Iranian oil at the rate of $1.5 billion a month – thereby reducing the effectiveness of the embargo.

The interim deal will last for six months, after which a permanent and more far reaching agreement is to be signed. Many believe that such a deal which would include the lifting of the oil sanctions will be impossible to conclude.  The West wants to restrict Iran’s capability to quickly and secretly acquire a nuclear weapons’ capability by limiting the number of nuclear centrifuges, releasing the true story of its efforts to build nuclear weapons, and subjecting it to rigorous inspections. Many, particularly the Israelis and their close friends, say even this is not enough and Tehran must refrain from conducting any uranium enrichment or production of plutonium. Both of these demands will be hard or impossible for Tehran to accept, so the prospects for a lifting of the oil embargo and wide open trade with Iran may not be as good as many are saying. The odds seem to be that we will still have an Iranian oil embargo for the foreseeable future.  The issues involved simply run too deep, especially Tehran’s involvement in the Syrian uprising and the various Sunni-Shiite confrontations taking place in the Middle East.

Syria:  There was little movement last week, as the rebels seem to be more involved in fighting the al Qaeda wing of the uprising than the government. Nobody is winning at the minute.

Moscow says it will take over the exploration for natural gas from the Syrian portion of the Mediterranean basin and will develop it on Syria’s behalf.

The “Geneva II” peace conference is to open in Switzerland this week with representatives of 35 countries, under the aegis of Russia and the US, to assemble. Damascus will be there with the provision that the continuation of the Assad government is non-negotiable as will representatives of some of the insurgent groups. Tehran will not attend the meeting as the Iranians refuse to discuss any alternative to Shiite dominance of the country. There is no end to this uprising anywhere in sight. The fighting among the various insurgent groups simply adds another layer of complexity to the situation. The danger of an endless insurgency is that its impact on neighboring states is increasing and it is only a matter of time before oil exports from the region are affected.

Iraq: Bombings and violence continued across Iraq last week as local tribesmen supported by government forces attempted to take control of Ramadi in Anbar province from al Qaeda. The US is sending more arms and ammunition to Iraq to help with the Anbar situation and there is talk about sending a US training mission too. The UN reported that 2013 was the deadliest year since 2008 with nearly 8,000 killed. There is little good that can be said about the situation in Iraq. Sectarian lines continue to harden and a cross between an insurgency and a civil war seems to be underway. Someday it likely will get to the oil exports.

The disagreement between Iraqi Kurdistan and Baghdad came to a head last week when Erbil began exporting oil through a new 300,000 b/d pipeline to Turkey without permission or sending remittances to the central government.  Erbil says that the oil revenues it receives will go first to pay the contractors, then for reparations due from the “atrocities” during the Saddam Hussein era, and finally be shared with Baghdad. It will likely be quite a while before the “atrocities” are paid off. Kurdistan has been receiving 17 percent of Baghdad’s oil revenues, but this payment was terminated in retaliation for the opening of the new pipeline. In addition to cutting payments to Erbil, Baghdad has embarked on a widespread program of lawsuits and blacklisting of Turkish firms doing business with Iraq in an effort to stop the exports.

Baghdad can barely deal with the Sunnis in Anbar much less take on the Kurds with military force. If the Kurds can continue to export large amounts of oil indefinitely, they should have no trouble doing without Baghdad.

Libya:  The government says oil production is now in the vicinity of 600,000 b/d after the restart of the Sharara field on January 4th.  The local militias controlling the Sharara field have extended for another week the deadline for the government to satisfy their demands or they will close the oil field again.

In the meantime, new troubles have broken out in the south with an eruption of tribal and ethnic fighting that prompted the government to declare a state of emergency and start troops towards the region. Tribal discontent and occasional violence in the south between Arabs and the Tebu and Tuarg tribesmen has been going on for decades, but has been on rise since the overthrow of Qaddafi allowed everybody to arm themselves from the former government’s vast weapons stockpiles. There seem to be some Qaddafi loyalists involved in the troubles. An airbase near Sebha was briefly held by insurgents who were driven off by government planes.

Unrest in the south, where most of Libya’s oil reserves are located, is always of concern. Over the weekend, there was fighting in Sebha as well as at Jalu near the oil fields at Kufrah.

3.  China

China’s electric power consumption increased by 7.5 percent last year which is in line with reported GDP growth. As nearly 80 percent of the country’s electricity is generated with fossil fuels, Beijing is still pumping a lot of carbon and heavy metals into the atmosphere. The government announced last week that it intends to increase its synthetic coal to gas production to some 50 billion cubic meters by the end of the decade. It would then constitute about 12.5 percent of the gas supply.

New numbers released last week show that Beijing tripled its money supply since the end of 2006. This flood of money has fueled the rapid economic growth in recent years, but has also fueled massive inflation with asset prices, especially housing, soaring into the stratosphere. Consumer prices have held relatively stable due to falling commodity prices and widespread over-production of manufactured goods.

Instead of purchasing bonds as the does the US Federal Reserve, China’s central bank buys up dollars which keeps China’s currency low against the dollar and fosters exports. The cost of apartments is now so high that recent college graduates will never be able to afford one and only those who bought in early are doing well.
The debt of China’s local authorities has increased by 70 percent in the last few years as local governments spent heavily on infrastructure that does not have much of an immediate return such as roads, airports and railways. The key question is whether the government can contain this asset inflation without causing a major economic slump. Many are worried that Beijing is on the verge of a slowdown that could easily reduce its ever-growing demand for oil.

4.  Quote of the Week

  • “In the long term, given the severe declines in [US] shale oil productivity, the limited prospects for major new basins, and the plateau in US capacity starting in 2016, improved access to markets and so forth, domestic US oil prices are bound to make a strong recovery starting in 2016. This and the maturity of major fields across the world, the high cost of deep offshore and Arctic production, and the continued violent turmoil in many oil producing nations are bound to keep oil prices at historically high levels for decades to come.”

“The prospect of a severe oil price drop can only happen as the outcome of another economic collapse. On the other hand, an upward spike in oil prices is far more credible given the military tensions across the world that could disrupt oil supplies and the limited elasticity in supplies. Dysfunctional governments and failed states are now a pervasive syndrome across the world. There is little evidence that the collective global leadership is able to contain or to stabilize these many crises.”
—   Sadad Al-Husseini, Husseini Energy, former Saudi Aramco VP of E&P (see Commentary at the end of this issue)

5.  The Briefs

  • BP’s Energy Outlook 2035 forecasts that world energy consumption will increase 41 percent between 2012 and 2035. Countries outside of the OECD, especially China and India, are forecast to contribute to virtually all of this growth. Energy per capita use will increase by 14 percent. According to the outlook, all fuels experience growth. Among fossil fuels, natural gas grows fastest (+1.9% p.a.), followed by coal (+1.1% p.a.) and oil (+0.8% p.a.). (1/16)
  • Operators of Kazakhstan’s Kashagan oil field are considering a temporary solution to resume output, halted indefinitely since mid-October after a series of dangerous gas leaks. Before the stoppage, sour and toxic gas coming off the offshore field in the Caspian Sea was separated from crude oil, and sent to an onshore processing plant via a 56-mile pipeline. But the pipe is plagued by leaks. Members of the consortium are now looking into a makeshift solution that would involve re-injecting the gas into the ground. (1/18)
  • Nigeria’s crude oil production forecast of 2.39 million b/d in the 2014 budget is over-estimated, according to Standard and Poors. This is due to increased tension in the Niger Delta region and the forthcoming 2015 general elections. Bloomberg, in its survey a couple of days ago, said that Nigerian oil production averaged less than two million b/d last year, compared with the 2.53 million barrels the government had predicted. (1/17)
  • In Venezuela, Petrovietnam has suspended production of crude oil, citing tough economic conditions. Officials say the investment environment there is not suitable right now, either for them or several other foreign investors.  A Petrovietnam official said that skyrocketing inflation in Venezuela makes the cost of doing business there too high. (1/14)
  • In Mexico, foreign oil companies will have to wait another two years before beginning to invest an estimated $20 billion in recently opened oil and gas industry. Foreign crude producers will be allowed to bid on fields for exploration and begin developing infrastructure and operations as soon as late next year. Prior to granting the operating licenses, the legal framework has to be determined. (1/16)
  • Iran: executives from some of France’s biggest companies are slated to fly to Tehran next month—signaling a fresh wave of corporate interest in Iran as the West eases sanctions. (1/14)
  • India will lower its crude oil imports from Iran by 15 percent to 9 million-9.5 million mt in fiscal year 2014-2015 (April-March), from an estimated 11 million mt in fiscal 2013-2014. The cut is in line with the 15 percent annual reduction countries have to show to be eligible for US waivers from sanctions against Iran. (1/14)
  • Pirate attacks at sea have dropped 40 percent since their peak in 2011. There were only seven attacks and attempted attacks off Somalia last year, down from 49 in 2012 and 160 in 2011, the epidemic’s peak. The Somalia piracy problem was cracked after armed guards were placed on ships and  patrols by international naval forces were incresed. (1/15)
  • Egypt’s military has stepped up security along the Suez Canal, a vital oil shipping artery that’s one of the world’s most strategically important waterways, to protect it from attack amid a swelling jihadist insurgency in the Sinai Peninsula. There were at least two jihadist operations in 2013 on the canal — 120 miles long and 900 yards wide, most of which is vulnerable to attack. (1/18)
  • US land-based drilling rigs accounted entirely for the sharp 23-unit increase in the rig count during the week ended Jan. 17, Baker Hughes Inc. reported. The US now has 1,777 rigs working—1,408 for oil and 365 for gas. Horizontal drilling rigs increased by 15 to reach 1,173. For the second consecutive week, Canada experienced a large rise in its rig count, up 88 units to 565. Oil rigs rose 79 units to 379 while gas rigs increased 9 units to 186. Canada now has 36 fewer rigs operating than last year at this time. (1/18)
  • US rail delivery of petroleum and petroleum products was up 12.4 percent last week from the same period in 2013, the American Association of Railroads said. (1/17)
  • In Albany, New York, officials are trying to get up to speed on how to handle a potential oil-train accident, as are their peers from Chicago to Denver to New Orleans. Railroad officials don’t like to talk about it, but oil trains are rumbling through many large cities because of surging output from North Dakota’s Bakken shale. (1/15)
  • New railroad car regulations that could require the railroad industry to improve, phase out or retrofit the tank cars it uses to haul crude oil and other flammable liquids are still more than a year away. (1/15)
  • Recent railroad accidents are increasing the chances President Barack Obama will approve the Keystone XL pipeline from Canada , said Senator John Hoeven , a North Dakota Republican. (1/15)
  • Canada is urging President Barack Obama’s administration to make a decision on the Keystone XL pipeline amid signs of further delays in a final ruling on the $5.4-billion project. (1/17)
  • Russia’s Natural Resources Ministry said it isconcerned hydraulic fracturing in neighboring Ukraine could pollute regional water supplies. (1/18)
  • California-based BNK Petroleum said it was upbeat about the shale potential inPoland following the start of a drilling campaign. BNK said it started a horizontal drilling program at Polish shale well Gapowo B-1 and expects to spend the next 30 days on the operation. (1/17)
  • The geological characteristics in Poland means it may be hard for energy companies to duplicate the US’s shale gas success. Paul Stevens, an oil analyst at London think tank Chatham House, said it may be tough to replicate that success in Poland. “The geology has not worked out.” (1/16)
  • Poland’s national auditing agency this week criticized the slow pace of developing the country’s shale gas industry, blaming government inefficiency. Several foreign energy firms that came into Poland seeking to tap its shale gas potential, such as Exxon Mobil, Marathon Oil and Talisman Energy, have pulled out due to mixed exploration results and the uncertain regulatory landscape. (1/15)
  • Prime Minister David Cameron will give millions of pounds to local authorities that allow shale gas developments to go ahead, part of a drive to create more jobs and encourage investment in the U.K. (1/13)
  • Alaskan officials want to invest billions of state dollars in a major pipeline to transport natural gas from Point Thomson down to central Alaska, a move they say will increase energy sales and boost state revenue. (1/16)
  • Since 2005, US gas production from shale plays has increased rapidly, twice as fast as gas consumption growth, reaching 24 tcf in 2012. Gas consumption, though not rising as fast as production, still grew by 16 percent over that same time period to 25.2 tcf in 2012. Use of gas from electric power generation accounted for most of the consumption gains. Net imports of gas have been reduced by 58 percent during those years. (1/15)
  • Corn vs. switchgrass: a study by US DOE’s Great Lakes Bioenergy Center has concluded that focusing on the yield of an energy crop alone can come at the expense of many other environmental benefits. Although the corn biomass yield was higher, all other ecosystem services, including methane consumption, pest suppression, pollination, and conservation of grassland birds, were higher in perennial grasslands. (1/15)
  • Toyota, the world’s biggest seller of hybrid-electric vehicles, vowed to surpass U.S. rules intended to reduce carbon emissions and double fuel economy to 54.5 miles per gallon by 2025.  (1/16)
  • European car sales fell for the sixth straight year in 2013. Some 11.9 million new cars were registered in the European Union last year, a decline of 1.7% compared with the previous year. (1/16)
  • Alan Mulally, Ford’s chief executive, said questions of “personal mobility” and “quality of life” were some of the “most important and exciting developments” around the world, and simply providing more and more cars was “not going to work.” (1/15)
  • When Ford begins selling its new, aluminum F-150 pickup truck it will mark a new era for the auto industry in which successfully managing big technological risks will separate winners from losers.  The truck trims roughly 700 lbs, and the rule of thumb is an improvement of 1 mpg per 100 pounds avoided. (1/13)
  • Primary energy production peaked in Europe in 1996 at 1138 million tons oil (mmtoe) equivalent and has since fallen to 970 mmtoe in 2012. That is a drop of 15 percent. In N America, primary energy production hit a new peak in 2012 of 2512 million tons of oil equivalent. That is up 8.5% since 1996. Rising energy production in North America and falling Energy production in Europe lies at the heart of energy prices trading in opposite directions on either side of The Atlantic, along with attendant economic advantages. (1/14)
  • The Japanese government has approved a business turnaround plan submitted by Tokyo Electric Power Co., operator of the stricken Fukushima nuclear power plant, which includes restarting idled reactors at the utility’s Kashiwazaki-Kariwa plant. The business plan approval is required under the terms of a $10 billion state bailout of Tepco. (1/17)
  • Japan’s 10 major power utilities consumed 5.27 million mt of LNG in December, a record high for monthly imports and up 4.2 percent year on year. The power utilities also used a total 466,078 b/d of crude and fuel oil for power generation in December, down 25.9 percent from a year earlier, according to Platts calculations. (1/17)
  • Volatile weather around the world is taking farmers on a wild ride, and such weather extremes are on the rise.  Farmers say they can adapt to gradual change—be it dryer or wetter, hotter or cooler conditions; it is the extremes that do the damage. Farm ministers from around the world gathered in Berlin over the weekend to discuss climate change and food production at an annual agricultural forum. (1/17)