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

1.  Oil and the Global Economy

Oil prices were volatile last week with New York futures trading around $55 a barrel and around $60 in London with little change at week’s end. In the absence of any solid news on supply or demand, traders jumped in and out of the markets in a attempt to find a price bottom.  On Thursday, London’s Brent closed below $60, the lowest close since May 2009, before rebounding, largely on optimism and technical issues, to close out the week at $61.38.

The issue of just where the bottom of the price decline will be found is the subject of much commentary. Most observers are saying that the markets will likely go lower next year as more supply is slated to come on line, and the markets are expected to remain weak. The UAE’s oil minister and President Putin both mentioned $40 a barrel in public recently.  A more sophisticated analysis was published by Reuters pointing out the reasons we could see a new trading range, with a bottom at $20 a barrel and a top at $55. Under this scenario, US shale oil producers, who can be very fast on their feet due to the large number of wells they must drill every year to maintain production levels, would become the new swing producers.

Evidence continues to accumulate that the growth in US shale oil production is starting to slow.  The monthly report from the Texas Railroad Commission suggests that there has been a slowdown in production in the state. As Texas allows some drillers to keep their successes or failures “confidential” for six months it will be several months before we know how Texas is doing since prices started to fall.  Numerous producers in the US and Canada have announced cutbacks in their capital spending for next year. As well-head prices for Bakken crude normally run about $20 below West Texas Intermediate, drillers are now getting around $35 a barrel for their oil at the well. The same phenomenon is true for tar sands “heavy crude” which fell below $40 a barrel for the first time in five years last week. It seems that despite all the brave talk of continuing increases in shale oil production, there will be cutbacks in the coming year. North Dakota already registered a small but unusual for the time of year drop in production between September and October.

A new study shows that the “water cut” which is the amount of water that comes up the well with the oil is increasing in the Bakken. The water cut normally increases as wells age, but in the case of North Dakota, the percentage of water that is showing up with the oil is increasing in newly drilled wells. This suggests production from the “sweets spots” which contain the highest oil saturation is declining as a share of the total oil coming from new wells.

A controversy has arisen over an article in the magazine Nature reporting on an ongoing study by the Bureau of Economic Geology at the University of Texas. The story suggests the Texas study will show that the EIA’s forecast that US shale gas production will not start declining before 2040 is wrong and that US shale gas production could start to decline as early as 2020. Needless to say the duration of US shale gas production is a key issue in deciding whether the US should permit the construction of expensive LNG terminals to prepare the gas for shipment overseas.

The Nature story brought sharp rebuttals from the EIA as well as the Bureau of Economic Geology who say the story is filled with inaccurate reporting and that it is premature to conclude that the EIA’s forecasts are wrong. Naturein turn rebutted the rebuttals saying it stands by the story.  Nature noted that before publication the EIA was given the opportunity to comment on some the specifics in the story but did not avail itself of the opportunity until the story made headlines.  This debate will likely continue until US natural gas production actually goes into decline – settling the issue once and for all. In the meantime we are likely to hear much more about the issue in the next few years as more LNG export facilities are built.

Natural gas futures, which traded above $3.90 per million BTU’s last Monday, closed on Friday at $3.46 down nearly 50 cents. Again robust production and the prospect of another week or so of warm weather in the US was enough to override the prospects of winter ahead.

2.  The Middle East & North Africa

Iraq: The US and coalition air strikes against ISIL forces and facilities are starting to have an effect in some parts of Syria and Iraq. Reports of falling morale are filtering out of ISIL controlled territory as its momentum slows; its casualties mount; Kurdish forces mass to retake the town of Sinjar; and many of the foreign fighters who have flocked to the ISIL flag are finding out that a brutal war with heavy casualties is not really the adventure they had hoped for.

Meanwhile, optimism is growing about the prospects for Iraqi oil exports despite the price slump. Production is growing in Kurdistan and the foreign oil companies developing the southern Iraqi oil fields are talking of substantial gains in output in the next few years.  The major political hang-up remains the dispute between Baghdad and Erbil over oil policy. While the recent settlement is a step forward, it is clear that the Kurds want unrestricted right to sell oil from Iraqi Kurdistan for their own account. They would also like to retain and operate the northern Iraqi oil fields around Kirkuk, which Erbil considers to be part of Kurdistan.  This situation still has a long way to play out.

Libya: Fighting continued in Benghazi last week as remnants of the Libyan army, now loyal to General Haftar and the internationally recognized government in Tobruk, sought to dislodge Islamist militias from Benghazi. Meanwhile, the Islamists who control Tripoli have set up their own government. Washington continues to worry about ISIL training camps that have been established in eastern Libya.

The major oil export terminals at Ras Lanuf and Sidra remain closed after Islamist militias attacked them a week ago. The Islamists say they attacked the ports fearing they were about to be reinforced by Egyptian forces. Cairo, fearing the ascendency of the Islamist movement in Libya, has been backing the Tobruk government with arms and has facilitated air support but has not moved ground forces into Libya.

In Tripoli where the Central Bank and the Libya’s National Oil Company are in Islamist hands, it has been difficult to determine just who is selling oil and receiving the revenue. Now the Tobruk government says it will set up a new payment system that will bypass the Central Bank. It is still difficult to determine just how much oil, if any, is really being exported from the country. With the major terminals closed, it is doubtful if the country has the capacity to export more than a few hundred thousand barrels a day beyond it domestic needs.  For now the markets see so much surplus production that the ups and downs of a few hundred thousand barrels per day from Libya no longer moves the markets.

3.  China

After completing a national economic census, Beijing announced that its GDP in 2013 was about 3 percent larger than previously believed. There remains considerable skepticism, however, over China’s economic numbers as the country refuses to comply with the international standard, “System of National Accounts,” when compiling its economic data. Ironically, outside observers believe that China’s GDP would be even larger if the international standard was used. The numbers are unlikely to have an impact or China’s growth this year. A new paper from China’s central bank says that GDP growth in 2015 is likely to decline from an estimated 7.1 percent this year although some outside observers believe this number is too high.

Newly released numbers show that China’s industrial activity declined in November and economists say it is likely to fall again in December. A report on China’s strategic oil reserves says that more than half of China’s increased demand for oil in the next two years will be used for filling Beijing’s new strategic reserve. The country has already built four tank farms for the reserve with a combined capacity of 60 million barrels and is likely to build another 100 million barrels of capacity now that oil prices have become relatively cheap.

4. Russia/Ukraine

Last week was the worst Russia has suffered since the fall of the Soviet Union. On Tuesday, Moscow’s efforts to defend the ruble by raising interest rates to 17 percent failed in a matter of hours sending the ruble down to 80 to the dollar before rebounding to stabilize around 60. The ruble has now lost half its value this year and with 55 percent of Russia’s consumer goods being imported, the impact on consumers is hard. Last week there was a run on retail stores with consumers trying to purchase anything of value before the ruble fall further. Numerous foreign companies including automakers have halted sales in Russia as the ruble is falling so fast they are unable to set a price for their products.

In a year-end press conference last week the President lashed out at the Western sanctions as an effort to “chain the Russian bear” and to steal Siberia’s resources.  The outlook for Russia is bleak. Some 80 percent of Russia’s exports come from oil, gas, metals, timber, and arms sales. In the coming year the country’s GDP is likely to drop precipitously. Moscow has some $414 billion in reserves, but also has some $700 billion in foreign debts with about $100 billion coming due in 2015 and again in 2016. Western banks are bracing for a wave of defaults as Moscow chooses which companies with large foreign debts to back, and which to let go under.

In October Moscow spent $30 billion trying to support the ruble before realizing this was not the right thing to do. This was followed by interest rate increases, which also did little good. The next step will likely be capital exchange controls, which will regulate the movement of capital in and out of the country. Some believe this may take place in stealth mode under which companies would be required to turn their hard currencies in to the government in exchange for rubles.

Where all this goes depends on oil prices.  Should oil trade around $60 or below for an extended period, Russia will clearly be into a deep recession in the coming year. Should oil rebound to trade around $80 things will not be so bad. Some are already worried about the economic and political consequences of a total collapse. Some see President Putin attempting to subvert the Baltic states with substantial ethnic Russian populations as a diversion from economic troubles.

5.  Quote of the Week

  • “[Drilling] Costs are falling nearly as fast as the price, which means oil producers can spend less to get the same or potentially even more in terms of production. While reductions in capex are coming faster than expected, it is unlikely to translate into less supply.“

                                  — Goldman Sachs report [dartboard alert]
6.  The Briefs

  •  Almost $1 trillion of spending on future oil projects is at risk after the plunge in oil prices, Goldman Sachs has warned. Any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the coming decade — or 8 per cent of current global oil demand. The findings suggest the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects.  (12/16)
  • OPEC revenues: EIA estimates that members of OPEC, excluding Iran, will earn about $700 billion in revenue from net oil exports in 2014, a 14% decrease from 2013 earnings and the lowest earnings for the group since 2010. (12/18)
  • Iran announced last Sunday that it has discovered a new large natural gas reserve in the southern part of the country, according to the national oil company’s managing director. (12/15)
  • The Rumaila Operating Organization—a partnership of South Oil Co., BP, PetroChina Co., and Iraq’s State Oil Marketing Organization—plans to increase production by 50% from Iraq’s giant Rumaila oil field to 2.1 million b/d by the end of the decade. The number represents an increase of 800,000 b/d from current production and will account for 3% of global oil production. (12/18)
  • Statoil said it awarded a drilling contract to Schlumberger for the Mariner field in the North Sea. Discovered in the early 1980s, production at Mariner was delayed because of technological limitations in extracting the denser type of oil. The field is expected to produce around 55,000 barrels of oil per day. (12/20)
  • Statoil, a week after signaling a slowdown, said it was investing $610 million to develop a North Sea discovery—Rutil, located in the Gullfaks reserve area of the North Sea. (12/18)
  • Production figures from Norway show average daily oil production at 1.46 million barrels a day, down about 5 percent year-on-year, a national regulator said in Wednesday report. (12/18)
  • In Norway, Royal Dutch Shell sold to Finnish fuels company ST1 parts of their downstream operations. The decline in crude oil prices, to nearly half of their June value, has forced some energy companies to streamline their portfolios to cope with the market stress. (12/19)
  • The European Union banned investment in the disputed territory of Crimea on Dec. 18, outlawing investment in Russian oil and gas exploration in the Black Sea and prohibiting European cruise ships from docking at Crimean ports. The new measures, which come into effect Dec. 20, are meant to pressure Russia following its annexation of the area. (12/19)
  • German chemicals maker BASF’s decision to call off a long-planned asset-swap deal with Russia’s Gazprom wasn’t the result of political pressure from the German government, the German Economics Ministry said Friday. (12/20)
  • Repsol, Spain ’s largest energy company, agreed to buy Talisman Energy for $8.3 billion, ending a months-long search for acquisitions to help boost crude reserves and production.  Repsol has been seeking to spend about $10 billion on takeovers since it received compensation in May from Argentina for the 2012 nationalization of YPF SA. In losing the Argentine producer, Repsol gave up almost half of its oil and gas reserves and has been looking for ways to replace them. (12/16)
  • In the Ukraine, Chevron said it opted to shelve a contract to tap the country’s shale gas potential. Ukraine is one of the Eastern European countries thought to be rich in shale gas and the government estimates there may be enough gas in shale plays to meet the country’s needs without imports. Peter Clark, country manager for Chevron, told the Kiev Post the company terminated the production agreement because of legislative hurdles in Ukraine. (12/17)
  • An Israeli energy company said it has discovered what may be the third largest natural gas basin in the eastern Mediterranean Sea. The so-called Royee field may hold around 3.2 trillion cubic feet of natural gas. Located in the eastern Mediterranean, it would be the third largest in the region after the Leviathan (est. 21.9 tcf) and Tamar (est. 8.5 tcf) fields if reserve estimates are correct. (12/16)
  • India imported an average 4.21 million b/d of crude oil in November, up 17.3% year on year, latest data obtained by shipping sources showed. (12/15)
  • In Australia, Woodside Petroleum agreed to pay Apache Corp. $2.75 billion for stakes in two liquefied natural gas projects, while delaying approval for its own $35 billion-development off the nation’s northwest coast. (12/16)
  • Nigeria’s petroleum industry unions suspended their nationwide multi-day strike on Friday morning.  Their action was in protest against several unresolved issues with the government, among which are unfair labor practices and non-passage of the Petroleum Industry Bill. (12/20)
  • Off the Congolese coast, Eni said it completed a production test well yielding more than 5,000 barrels of oil and 14 million cubic feet of natural gas per day in natural flow. The company said it estimates the discovery holds about 1 billion barrels of oil equivalent in place, of which 80 percent is oil. (12/16)
  • For Cuba, a key motive behind improving relations with the US is Venezuela’s diminishing oil gifts. Venezuela sent about 100,000 b/d to Cuba last year in exchange for medical personnel. Anecdotal evidence suggests volumes have already slumped to about 70,000 b/d. The move to normalize relations opens the door for the island nation to buy more oil on the open market. (12/20)
  • In Peru, the UN it was concerned by a Peruvian proposal to allow new oil operations in the northern Loreto region in one of the more desolate parts of the Amazon Rainforest, despite a legacy of heavy pollution and rights abuses. (12/16)
  • Canada’s share of US oil imports is dwarfing Mexico and Saudi Arabia, as the country is faced with few outlets for its growing oil sands production. In November 2004, each provided a bit more than 15 percent of demand. Canada’s share has climbed to about 42 percent while the other two combine for 24 percent, according to data compiled by Bloomberg. Canadian production rose 5.6 percent to a record last year and is projected by the EIA to reach 4.47 million barrels a day in 2015. (12/17)
  • Oil sands: Canadian heavy crude traded below $40 a barrel for the first time in five years just as a surge of new projects are scheduled to start operation. A total of 14 new oil sands projects are scheduled to start next year with a combined capacity of 266,240 barrels a day, according to data published by Oilsands Review. That’s 36 percent more than was started in 2014. (12/16)
  • Canadian oil producers deepened 2015 spending cuts, as Husky Energy (to cut 33%), MEG Energy and Penn West Petroleum joined those hacking back capital budgets in response to tumbling crude prices. Others on the cut-back list include include Cenovus Energy, Whitecap Resources, Tourmaline Oil Corp and Canadian Oil Sands Ltd, the largest-interest owner in the Syncrude oil sands project. (12/18)
  • The US drilling rig count dropped 18 units to settle at 1,875 rigs working during the week ended Dec. 19, pushed down by losses in North Dakota, Baker Hughes Inc. reported. That total, however, was trumped by the 40-unit drop in neighboring Canada.  The US has lost 45 units in the last two weeks. (12/20)
  • Supply from shale: US producers, pumping crude at the highest rate in more than three decades, may increase output further as costs decline almost as fast as oil prices, according to Goldman Sachs Group Inc. The slump in benchmark U.S. futures, down more than 40 percent this year, is driving producers to move drill rigs to lower-cost fields, Goldman said in a note e-mailed today. (12/15)
  • Marathon Oil Corp. plans to cut spending in 2015, the latest energy company to slim its spending plans amid tumbling oil prices. Marathon said it plans to spend $4.3 billion to $4.5 billion in capital projects, or about 20 percent less than in the current year, excluding its Norwegian business, which it sold in June for more than $2 billion amid a shift to focus operations on the U.S. Still, Marathon expects production to rise in the high-single digits. (12/18)
  • The average US stripper well yields less than 2 b/d.  There are more than 400,000 such wells in the US supplying about 11 per cent of US oil production. They produced 700,000 barrels per day in 2012, the latest year for which data are available. Now, with the price of US crude below $60 per barrel — down 46 per cent in the last six months ago — some operators plan to idle their stripper wells. (12/15)
  • In Exxon’s view, conventional production peaked around 2005 and is not projected to revisit this level until, at best, around 2040.  This is not particularly controversial, but it is interesting to see Exxon acknowledge it. (12/25)
  • Water problems: A new economic and policy analysis concludes that the hydraulic fracturing (HF) or “fracking” being done in Texas is adding to the state’s overuse of its water resources, but is only part of the state’s water problem. (12/18)
  • The North Dakota Industrial Commission issued an order on December 9th that will impose new regulations on oil producers. The new regulations will go into effect on April 1, 2015 and require that all new wells in the Bakken Petroleum System utilize equipment that controls vapor pressure in order to lessen the likelihood of explosions during transportation. (12/17)
  • Railway tanker car safety: Alan Stankevitz, an expert on the DOT 111 tanker car, explains in the Star Tribune that the standards set last week by North Dakota’s Industrial Commission, which includes Gov. Jack Dalrymple, are not enough to adequately address the problem. (12/18)
  • Keystone XL: TransCanada submitted the application to the US federal government necessary to build the pipeline across the U.S.-Canadian border more than six years ago. Last week, a memo sent to President Barack Obama from seven environmental groups argues the pipeline no longer makes sense because of market forces in addition to the climate change rationale. (12/20)
  • Keystone XL: Senate Republican Leader Mitch McConnell declared Tuesday that approving the Keystone XL pipeline will top the Senate agenda in January, potentially setting up an early veto confrontation with President Barack Obama. (12/17)
  • The US EPA is delaying plans to issue proposals to regulate methane emissions from oil and gas operations until 2015.  A recent poll by the American Lung Association shows that a large, bipartisan majority of American voters support a methane pollution standard that will protect public health. (12/20)
  • New York State will ban hydraulic fracturing after a long-awaited report concluded that the oil and gas extraction method poses health risks, Governor Andrew Cuomo’s administration said on Wednesday. (12/18)
  • Enacting a severance tax aimed at Pennsylvania’s unconventional natural gas production would substantially harm the commonwealth beyond the industry itself, three oil and gas trade association officials warned. Gov.-Elect Tom Wolf (D) made such a tax a major part of his campaign as a relatively quick way to increase revenue and begin bringing Pennsylvania’s budget in line. (12/18)
  • In Alaska: President Barack Obama announced he is indefinitely blocking oil and natural gas drilling in Bristol Bay, a move that drew cheers from wildlife groups and muted reaction from oil and gas proponents. Tuesday’s announcement is relatively noncontroversial, given the lack of oil development in the area. (12/17)
  • US drivers are paying less than $2.50 a gallon at the pump for the first time in more than five years. Retail gasoline averaged $2.477 a gallon Thursday. (12/19)
  • The average U.S. household is expected to spend about $550 less on gasoline in 2015 compared with 2014, as annual motor fuel expenditures are on track to fall to their lowest level in 11 years. Lower fuel expenditures are attributable to a combination of falling retail gasoline prices and more fuel-efficient cars and trucks that reduce the number of gallons used to travel a given distance. Household gasoline costs are forecast to average $1,962 next year. (12/17)
  • US electricity costs are poised to reach the highest level since 1999 because railroads are too clogged to deliver enough coal to power plants. Utilities are forecast by the government to end the year with the lowest stockpiles since 2005; the utilities were unable to rebuild inventories after last winter, when the cold weather helped draw down stocks to a seven-year low, due to railways being jammed with oil and grain shipments. (12/19)
  • US electric utilities will probably have to shut down some pools containing waste ash from coal-fired power plants under new rules released by federal regulators Friday. (12/20)
  • Out of 71 nuclear reactors being built globally, China is constructing 26, many built by foreign firms. Today, Chinese companies are competing for that business.  US and other foreign companies are now struggling to keep their hold in China, the industry’s biggest growth market and a rare bright spot. (12/16)
  • The Arctic continues to warm faster than the rest of the globe, and with greater repercussions, scientists are reporting. Snow cover, measured since 1967, was below average and set a record low in April in the Eurasian region of the Arctic. (12/18)