Peak Oil Review – 20 Mar 2017

Quote of the Week

–David Houseknecht, a senior research geologist at the U.S. Geological Survey, says the Smith Bay discovery in Alaska seems to have incredible potential. Then he adds: “But it’s the last one you’d want to bet your retirement money on.” (3/15)

Contents

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

1.  Oil and the Global Economy

After a quick drop of $3-4 a barrel the week before last, oil prices steadied last week as the markets contemplated just how effective the OPEC/NOPEC production freeze will be in the short term.  Speculators had enthusiastically embraced the production freeze when it was announced late last year and drove open interest in futures to record highs. The cuts, however, did not come fast enough or be deep enough to offset increasing oil production from other countries and lower demand. As one important trader put it, “The OPEC cuts were good enough to prevent a repeat of the glut of last year, but it’s a different story if you want to have oil at $60 or $70.” For now, the physical oil market continues to indicate an oversupply situation.

Last week the IEA’s monthly Oil Market Report said OPEC crude output in February rose by 170,000 b/d leaving the cartel’s compliance with the agreement at about 91 percent. Other sources say that the Non-OPEC participants in the agreement were at about 64 percent of compliance for the months. Some adherents to the production cut agreement, including the Russians, insist that they will be in full compliance shortly, The IEA also reported that OECD commercial inventories rose for first time in six months by 48 million barrels largely due to record stockpiles in the US and EU.

For most observers, a six-month OPEC production cut will not be a long enough time to have a lasting effect on oil prices and most believe that a six-month extension will likely be voted on at the next OPEC meeting in late May. Kuwait already has called for an extension and the Saudis are talking about going along with an extension.

The comeback of the US shale oil industry is OPEC’s biggest problem. The EIA forecast last week that US shale oil production will rise by some 300,000 b/d this year and another 500,000 in 2018. Industry sources continue to talk about increased efficiency and production gains, suggesting to many that the EIA’s forecast is conservative and that the US shale oil production increase may be higher. One downside for higher growth, however, is increasing talk of skilled labor shortages and higher wages in the rapidly expanding shale oil industry.

In addition to the steadily increasing US shale oil rig count, OPEC is concerned about the emerging policies of the Trump administration which are aimed at increasing US oil production as quickly as possible. Among the numerous policy changes that the new administration has already made, or says it will make, are decreased regulations on emissions; opening up more federally-controlled land for oil exploration; reducing corporate income taxes which could free up as much as $10 billion for drilling; and imposing a “border tax” which would make imported oil much more expensive. While some of these policy changes such as a “border tax” would impact the industry quickly, others such as opening the Arctic off Alaska to drilling would lead to much oil production for many years.

The future demand for oil has been much discussed lately. Some are looking at the progress being made in electric cars and their relationship to the environment and are suggesting that a “peak oil demand” may be coming in the next decade. Naysayers reject peak demand as a likelihood pointing out that global automobile fleet currently is increasing by about 40 million cars each year, which will result in annual 600,000 b/d growth in oil demand for the foreseeable future.  Others, however, note that in China, where the pollution situation is becoming desperate, the government is planning to mandate that every new taxi must be electric or natural gas-fueled. Should this happen, passenger cars would likely follow. A mandate that all new cars be electric or natural gas could easily follow if there is sufficient production.  Given that the air quality in most of the world’s major cities is at or approaching hazardous levels, pressures to reduce the use of gasoline and diesel powered motor vehicles in cities are likely to increase despite the forecasts of the oil industry.

2.  The Middle East & North Africa

Iran:  Tehran’s oil minister said last week that his country would keep its oil production capped at 3.8 million b/d, provided other OPEC members stick to their agreed upon production quotas. The Iranians are particularly concerned about Iraq which seems to be holding exports from Basra in check while exports from Kurdistan and northern Iraq continue to grow.

Iran is making progress in developing its South Pars natural offshore natural gas deposit and may soon be out-producing Qatar, which is the world’s biggest LNG exporter. While Iran has 18 percent of world natural gas reserves, analysts say that domestic demand is substantial and that the country is importing considerable gas from Turkmenistan and Azerbaijan into areas not served by Iranian pipelines. Few expect that Tehran will become a major exporter in the near future.

Iraq:  Baghdad pumped 4.57 million b/d of crude in February and plans to increase this to 5 million by the end of the year. Only 3.87 million b/d was exported from the northern and southern oil fields in February and exports are thought to be somewhat lower so far in March. As a country where oil production is growing rapidly, Iraq was reluctant to join the OPEC production cap until the diplomatic pressures became too great. Iraq’s oil minister says he wants to increase oil production to 5 million b/d by the end of the year. How this relates to keeping the production freeze in place for another six months seems to be up in the air.

Saudi Arabia: It was a busy week for the Saudis. King Salman was on tour around the Far East in an effort to diversify the Saudi economy; Deputy Crown Prince bin Salman visited with President Trump on Tuesday, and the government made several announcements regarding its oil production. Relations between the Saudis and the US were strained in the last years of the Obama administration due to the Iran nuclear accord and the continued Saudi bombing of Yemen. As the announced policies of the Trump administration are more in line with those of the Saudis, the meeting was cordial and is likely to result in better relations.

The major news from King Salman’s trip came in Beijing where the two governments signed preliminary agreements mostly to invest in new oil and petrochemical facilities worth some $65 billion.  China, whose domestic oil production has been sinking lately, is seeking long-term agreements for oil supplies with the Saudis.

On Thursday, the Saudi oil minister said that the kingdom would extend the production freeze agreement if oil stockpiles were “still above the five-year average.” As stockpiles are about 300 million barrels above that level, Saudi participation in extending the agreement seems likely.

The Saudis told OPEC that they raised oil production back above 10 million b/d in February, reversing about a third of the cuts made in January. This announcement contributed to the sudden price drop last week.  As the Saudis were well ahead of their obligated production cut, the production increase still left the Saudis ahead of their share of the production cuts. There is speculation that Riyadh is growing impatient with other countries lagging on their production cut obligations.

Libya: Libyan oil production fell to about 620,000 b/d during the fighting around the oil terminals at Es Sider and Ras Lanuf which have a combined export capacity of 600,000 b/d. If these ports were fully operational, they could allow the country to raise its exports above 1 million b/d doing considerable harm to the OPEC/NOPEC production cut agreement.

Last week the Libyan National Army apparently regained control of the two oil terminals and there is talk that exports may resume this week. The fighting around the oil terminals has been between the Libyan National Army, which supported by the Eastern government in Tobruk, and various Islamic militias from Misrata. As usual, the argument is over who controls the oil revenue.

In recent weeks, Moscow has become more deeply involved in the Libyan conflict on behalf of the Eastern government and General Haftar’s Libyan National Army. This involvement has been mainly through advisors and logistic support. The Russians have long sought to regain the influence they had in Libya in the days of the Gadhafi government. Moscow’s ability to project military power is being strained by the Ukrainian and Syrian situations and so it is unlikely to be sending more than small contingents of advisors to Libya,

3.  China

Domestic crude oil production for the combined months of January and February dropped by 8 percent from the same period in 2016. Refinery processing during the same period was up by 4.3 percent. The difference was made up by a 12.5 percent increase in crude imports during the period. Even with imported oil back above $50 a barrel, it is still preferred by Chinese refiners in comparison with the costs of lifting expensive oil from aging oil fields. The continuing decline in domestic oil production is behind the recent drive to lock up foreign sources of oil on long-term contracts as domestic crude is now covering only about a third of the amount China is processing in its refineries.

China’s deteriorating oil situation likely is responsible for a continuing build in China’s stocks of crude. Although Beijing infrequently talks about its strategic reserves, a rough idea of what is going into inventory can be determined by adding domestic production and imports and then subtracting how much is run through refineries.  For January and February, it appears that some 740,000 b/d went into China’s commercial or strategic storage.

China continues to reach far afield to obtain new sources of oil to feed its domestic needs and its growing oil product export business. In addition to long term oil procurement deals with the Saudis, last week PetroChina made its first ever purchase from the US’s Strategic Petroleum Reserve of 550,000 barrels. As the purchase is relatively small, PetroChina may simply resell the purchase rather than bringing it back to China. Last week China’s Sinopec announced that it was nearing an agreement to buy a majority stake in Chevron’s South African assets. If the deal it completed, the 110,000 b/d refinery would be China’s first refinery in Africa.

4. Russia

Moscow’s oil minister said on Tuesday that his oil industry had cut production by 160,000 b/d by the middle of March, 200,000 b/d by the end of this month, and would complete its full reduction obligation of 300,000 b/d by the end of April. This, of course, would mean that four of the six-month agreement had passed before Russia was in full compliance. Russia’s Lukoil announced that it would consider a six-month extension to the production cut.

Last week Russia’s Economic Development Minister blamed the sudden drop in oil prices the week before last on “aggressive” increases in output by the US shale oil industry. The increase in US shale oil production, of course, runs counter to what OPEC and other countries are trying to achieve with their production cut. Moscow also hinted that as the US shale industry has imperiled the production cut, it might pull out of the agreement and start a price war. As nearly all of Russia’s oil production come from conventional, low-cost wells, the Russians may believe they are in a good position to weather a further price decline.

Most people are not aware that Venezuela’s national oil company, PDVSA, has owned the US’s Citgo for many years and has pledged 49.9 percent of the company’s stock against a $1.5 billion loan from Russia’s state-owned Rosneft oil company. The Russian company has filed a lien against Citgo with Delaware asserting that should PDVSA default on the loan; the company would belong to the the Russian government. US courts have already been asked to cancel the lien.

5. Venezuela

There was no news on Venezuela’s oil production last week. The major oil story was that the national oil company, PDVSA, is offering Russia’s state-owned oil company, Rosneft, a 10 percent share of the Orinoco extra-heavy crude belt venture. Currently, PDVSA has a 70 percent share, and the US’s Chevron has 30 percent. The project includes a 210,000 b/d oil upgrader. There has been no announcement that the deal has been accepted as yet, but Chevron is already concerned that being forced into a partnership with Rosneft could contravene US sanctions against Russia.  Rosneft already has loaned PDVSA between $4 billion and $5 billion to help the oil company through its troubles.

Venezuela is running out of assets to sell. It does hold the largest official oil reserves in the world which are mostly in the form of extra-heavy oil deposits which are expensive and difficult to extract. Orinoco crude must be mixed with lighter oils before it is saleable.

The economy and social situation continue to deteriorate. The Development Bank of Latin America is reconsidering whether to issue new loans to Caracas due to the dispute between the Maduro government and the Congress which is no longer passing laws.

The government has begun to seize control of bakeries that do not follow its regulations requiring bakers to sell bread at very low, perhaps unprofitable, prices. The president claims that bakers are using their allocation of flour to make higher valued pastries instead of loaves of bread for the poorer people. Venezuela does not grow its own wheat and government flour imports have fallen below that necessary to bake bread for the people.

For the past year, the government has had 30,000 local committees handing out food to the people, but this seems to be going mainly to government supporters. According to government figures, these committees currently are feeding about 4.5 million of the country’s 6 million families. If 4.5 million families are being fed each family is getting about 9 kilos of food a month, which is 3 percent of the 300 kilos a family of five would need to survive. This situation is not going to last much longer.

6.  The Briefs

OPEC is counting on growing demand to bolster the production cuts it’s making in a bid to balance the market. But motorists in the US — the world’s largest consumer of gasoline — are using less, not more. And that’s not likely to change any time soon. About 40 percent of the crude in America is processed into motor fuel, government data show. As the price of gasoline has risen more than 30 percent since February 2016, drivers are burning less, swelling supplies to near record highs. (3/17)

Iran is on track to out-produce Qatar, the world’s biggest LNG exporter, at the vast natural gas deposit they share in the Persian Gulf. But as much as they might want, the Iranians won’t have much gas to export because they are likely to use most of the new production themselves. Until recently, it was a net importer, buying or bartering for gas from Turkmenistan and Azerbaijan because its domestic distribution network doesn’t supply the entire country. (3/16)

Saudi Aramco will resume oil product shipments to Egypt some six months after halting them suddenly, the Egyptian Petroleum Ministry said on Wednesday, signaling a potential thaw in relations after months of tension. (3/16)

China Petroleum and Chemical Corp (Sinopec) is nearing an agreement to buy a majority stake in Chevron Corp’s South African assets, which are estimated at $1 billion. If the deal is finalized, it will be Sinopec’s first refinery asset in Africa, forming a part of the Chinese major’s global fuel distribution network. (3/17)

Offshore Congo, French supermajor Total said it started production at a deep-water prospect with a production capacity of 100,000 barrels per day. Moho Nord is the biggest oil development to date in the Republic of the Congo. Production from Moho Nord comes through 34 wells tied to a platform that Total considers unique to its operations offshore Africa. (3/16)

Brazil’s federal auditing court overturned a preliminary ruling Wednesday that had frozen divestment asset sales by Petróleo Brasileiro SA since December, removing a major roadblock to the state-run oil company’s plan to reduce its massive debt load. (3/16)

Canada’s oil industry is facing a dilemma – three major proposed pipelines but perhaps only room enough for two of them. Previously, all three projects have been bogged down by a combination of the federal approval process, environmental protest, and opposition from First Nations. But with all three pipelines now either approved or nearing approval, the industry admits it only needs the added capacity of two of them. (3/14)

The US oil rig count increased by 14 to 631, an increase of 244 rigs over this time last year, Baker Hughes Inc. reported.  The rig count has risen for nine consecutive weeks and by double digits during seven. The active gas rig count increased by 6 to 157, up 76 units since August 26.  The steady progression of the US drilling and production rebound is being fueled by a notable increase in capital expenditures this year vs. last by US operators. (3/14)

US shale oil production in April is set for its biggest monthly increase since October as output in the Permian Basin, America’s fastest-growing shale oil region, is expected to hit another record high, government data showed on Monday. Total shale oil production was expected to rise 109,000 b/d to 4.96 million b/d, according to the U.S. EIA’s Drilling Productivity Report. (3/14)

In Smith Bay, Alaska, Caelus Energy’s discovery shows enormous potential.  But it’s also a monumental challenge and a monumentally expensive one. The closest pipeline is 125 frozen miles away. Linking up would cost roughly $800 million, CEO Jim Musselman says. That’s the cheap part. Actual production could run $10 billion over a decade. Even Musselman, a Texas oilman with a record of big discoveries, might have trouble raising that kind of money. Costs vary, but the industry estimates that it takes $50 on average to produce a barrel of North Slope oil and move it to market. At current prices, Alaskan oil barely breaks even. Still, Musselman dreams of turning Smith Bay into a rival to Prudhoe Bay, 150 miles to the east, where the Trans Alaska starts its 800-mile journey southward. (3/15)

Off the north shore of Alaska, the Interior Department is weighing Eni SpA ’s request to explore for oil in those waters, giving the Trump administration a chance to reverse course from former President Barack Obama’s attempt to curtail Arctic drilling. Eni’s exploration well would be in an area it previously leased from the federal government, and so it isn’t covered by the executive order Obama issued in December to block the sale of new drilling rights within huge swaths of the Chukchi and Beaufort seas. (3/17)

Labor squeeze: A problem for the U.S. shale oil and gas industry that analysts and observers have warned about for a long time has materialized: there is a shortage of workers. According to one service provider for E&Ps, trucker jobs remain vacant even with an annual paycheck of $80,000, which is certainly a big change from a couple of years ago when layoffs were sweeping through the shale patch. This shortage could dampen the prospects of not just shale producers, but it will also seriously hamper the recovery of the oilfield services segment, which has been hit harder than E&Ps by the price crash. (3/14)

A flood of natural gas swamping the US is turning into a global glut, sinking prices and dimming the hopes of American producers to export their way out of an oversupplied domestic market. Natural-gas futures have fallen 25% over the past 2½ months. Increasing US shale oil production, which contains considerable natural gas, is not helping the problem. (3/15)

Tax boon: Republicans led by President Donald Trump have said they want to cut the top corporate rate to 15 or 20 percent, from 35 percent now. That could mean more than $10 billion in savings for oil producers that are one of the country’s most-heavily taxed industries, according to Bloomberg Intelligence research. (3/14)

Budget blueprint: The Trump Administration has released its budget blueprint for the FY 2018 budget. For the Department of Energy, the blueprint requests $28.0 billion—a $1.7-billion (5.6%) decrease from the 2017 annualized CR level. Within that, the proposed budget would provide a $1.4-billion increase above the 2017 annualized CR level for the National Nuclear Security Administration—an 11% increase. (3/17)

President Donald Trump’s budget proposed a 31 percent cut to the Environmental Protection Agency, eliminating its climate change programs and trimming back core initiatives aimed at protecting air and water quality, according to budget documents released on Thursday. (3/17)

MPG standards: Donald Trump on Wednesday ordered the reopening of a review of future fuel economy and emissions standards for US cars in a move that could slow down development of electric vehicles and new efficiency technologies. Regulations confirming standards for vehicle emissions in 2022-25, which were hurried through in the final fortnight of Barack Obama’s administration, will instead be reviewed next year. (3/16)

MPG standards: Administrator Scott Pruitt and Department of Transportation Secretary Elaine Chao announced that EPA intends to reconsider its final determination issued on 12 January 2017 which recommended no change to the greenhouse gas standards for light-duty vehicles for model years 2022- 2025. (3/16)

The Sierra Club said it filed a complaint against the EPA for violating integrity rules, following a review of fuel economy standards from the White House. (3/17)

The state of Texas and its economy are expected to be on the losers’ end should the border tax proposed by the Trump Administration pass as-is, even though the probability of the plan passing all legislative vetting is not considered to be very high. (3/15)

Eon, the German utility, recorded a net loss of €16bn for 2016 — the largest in his history — and unveiled ambitious measures to reduce debt by €7bn through asset sales and by cutting 1,300 jobs. The loss reflected impairments on Uniper, the new fossil fuel power company spun out of Eon last year, as well as payments Eon is having to make into a new state fund to cover the cost of disposing and storing Germany’s nuclear waste. But it said its balance sheet for 2016 will be the “last to reflect the burdens of the past,” leaving the company free to focus on its three core businesses — energy networks, customer solutions and renewables. (3/15)

Gas price bust? A drilling surge in America’s hottest oil play may prove to be a pitfall for natural gas bulls. As explorers extract crude from the Permian shale in West Texas, they’re also producing gas. A jump in the number of rigs operating in the basin is adding to the so-called fracklog, or the number of drilled wells that are waiting to be connected. That’s a sign that gas output from the region will jump by about 25 percent over the next year, threatening to send prices below $2 per million British thermal units, according to Tudor Pickering Holt & Co. (3/14)

In China, Premier Li Keqiang said Wednesday the government will set up a special fund and pool the country’s best scientists to find out the “unique” cause of smog that frequently blankets north China in winter. The government is determined to spend as much as needed for the research, he said, pledging that the country will fight and win the battle against smog. (3/15)

China is ramping up controls on imports of low-quality coal due to concerns about smog and overcapacity in the world’s top coal consumer. (3/15)