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Quotes of the Week
“The debt that fueled the US shale boom now threatens to be its undoing. Drillers’ debt ballooned to $235 billion at the end of the first quarter, a 16 percent increase in the past year, even as revenue shrank. The problem for shale drillers is that they’ve consistently spent money faster than they’ve made it, even when oil was $100 a barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years.
“The question is, how long do they have that they can get away with this. The companies with the lowest credit ratings “are in survival mode.”
Thomas Watters, oil and gas credit analyst at Standard & Poor’s in New York
“New scientific models supported by the British government’s Foreign Office show that if we don’t change course, in less than three decades industrial civilization will essentially collapse due to catastrophic food shortages, triggered by a combination of climate change, water scarcity, energy crisis, and political instability.”
Nafeez Ahmed, investigative journalist
Contents
1. Oil and the Global Economy
2. The Middle East & North Africa
3. China
4. Russia/Ukraine
5. Greece
6. The Papal Encyclical
7. The Briefs
1. Oil and the Global Economy
After the usual amount of volatility that we have seen for the last three months New York oil futures closed at $59.61 per barrel on Friday, down 35 cents for the week. London futures, which have been drifting generally downwards since the beginning of May, closed at $63.02, down $1.24 for the week and about $4 a barrel in the last ten days. If the major energy watchers are correct, the oil markets remain oversupplied by about 1 or 2 million b/d, which is setting the trend, but with numerous factors ranging from the Greek debt crisis to the US rig count influencing trader decisions, oil prices continue to be volatile with the markets reacting to the day’s news.
Last week, the Greek debt crisis which sent the euro and the dollar into gyrations seems to have been the chief mover of oil prices as traders largely ignored fundamentals pertaining to supply and demand. As the Greek debt crisis seems destined to continue for at least another two or three weeks with a still uncertain outcome, some analysts see continuing downward pressure on global oil prices stemming from the debt crisis in the immediate future.
There is still much confusion about the size of current US shale oil production and its course during the next six months. Obviously a 60 percent decline in the number of rigs drilling new oil wells should have some impact on production, but conventional wisdom is telling us that this drop is at least partially being overcome by the efficiencies of drilling only in the most productive spots; a large backlog of wells that have been drilled, but not yet fracked; and a major reduction in drilling costs due to surplus personnel and equipment. Some drillers are saying that if US oil prices stay above $60 a barrel they can increase drilling. A lot of this depends on how long investors are willing to continue financing losing operations. Much of the financial press is coming to realize that low oil prices are lowering the inherent value of many oil producers to the point they are no longer worth investing in.
New oil production data on Texas and North Dakota shale oil production was released last week that takes us through April. The new data seem to show that US shale oil production between December and the end of April dropped significantly. North Dakota says (and its numbers are usually pretty good) that its production dropped by 59,000 b/d from December through April. The EIA has US weekly oil production going up by 256,000 b/d in the same time period. This means that US production outside of North Dakota had to have increased by 315,000 b/d, a figure that is not supported by early production numbers from Texas. Analysis of the Texas numbers suggests that Texas production fell rapidly in January; was relatively flat in February and March and then took another tumble in April. There are clearly some major revisions in US oil production figures in the works as better production numbers are posted.
The EIA continues to say that US production will fall by 92,000 b/d by the end of July, while private forecasters say production will remain flat. Uncertainties about where US production is headed are clearly worse than at any time in the last few years when rapid and steady increases made forecasts relatively easy. Some see a jump in US and global oil production with better economic conditions coming as soon as next year, while others see slow economic growth and lower demand for abundant oil.
2. The Middle East & North Africa
Syria/Iraq: The decision to split Iraq’s crude exports from its southern fields into two grades – Basra light and Basra heavy – has allowed the country to increase its exports in June to 3.2 million b/d from 2.7 million in May. Exports via Turkey’s port of Ceyhan, which consist of crude from the Iraq’s northern oil fields at Kirkuk and from those in Kurdistan, have fallen to 200,000 b/d in June from 451,000 b/d in May. Technical difficulties, rather than the dispute over payments, are given as the reason for the decline.
There was little movement in the Iraqi civil war last week. The Pentagon reports it is having difficulty finding enough motivated Iraqis to participate in its stepped up military training programs. Bombing of ISIL’s military assets continues, but the insurgent group has become adept at imbedding itself into the civilian population offering few targets for air strikes. Baghdad’s financial problems, brought about by the drop in oil prices, have led to a fall in the dinar which in turn is causing other financial problems. Despite the increasing oil exports it is hard to see how Iraq, as currently constituted, can hold together much longer.
Syria, however, saw considerable military activity last week. Despite the Assad government’s increased use of chlorine gas barrel bombs against rebel held towns, Moscow reaffirmed its support for the embattled government. Syrian Kurds, backed by US airstrikes, drove ISIL forces out of a key town on the Turkish border. This action was a major blow to ISIL as it has reduced ISIL’s ability to move people and supplies in and out of Syria via Turkey. The victorious Kurdish forces are talking about moving onto Raqqa, the capital of the Islamic state—likely an impossible goal. Syria’s Kurds, the YPG, when combined with US airpower and adequate supplies, are proving to be the most motivated and effective force against ISIL in the region.
In retaliation for its losses ISIL has cut fuel supplies going into non-ISIL held rebel areas. This move is shutting down ambulances, medical centers, bakeries and most economic activity as people simply struggle to survive. Assad’s forces are dropping barrel bombs on medical centers adding to the misery. Egyptian President Sisi said last week that he expects Syrian President Assad “to fall at any minute.”
Iran: Despite numerous obstacles, there is much optimism in Tehran and Washington that a nuclear agreement lifting the sanctions on Iran will be signed in the near future. Washington seems to have dropped its demand that Tehran confess the details of past efforts to build nuclear weapons and is satisfied with a ten-year moratorium on further nuclear enrichment. The US State Department released a report chiding Iran for its continued involvement in terrorist activities and its broad support for the Assad government in Syria.
With a deal seeming to be close at hand, discussion has resumed on the impact Iran’s return to unfettered oil exporting will have on the global oil markets. Although about 1 million b/d of Iran’s exports have been shut-in by the sanctions, it is expected that it will take a year before pre-sanction production can be restored. However, Tehran is supposed to have some 30-40 million barrels of oil sitting in tankers that could be sold immediately. In the longer run, Tehran is anticipating major increases in oil and gas production. It is already making an effort to attract international oil companies that have the expertise and the capital to invest in Iran by offering improved oil-contract terms.
The Iranian nuclear issue looks as if it is heading for a climax. Even if we have more extensions to the negotiations, the issue should be decided one way or another before the end of the year.
Saudi Arabia/Yemen: The Geneva talks on Yemen ended on Friday without any agreement on a ceasefire. Saudi airstrikes, which are entering their fourth month, continue unabated. ISIL has joined the fray by setting off coordinated car-bomb attacks in Sana targeting Houthis who ISIL says are apostates. The casualty lists continue to grow; cities continue to be blown to pieces by the fighting and Saudi bombing; and the UN says that some 20 million people are in desperate need of food and water.
There is a growing danger that the Houthis, who are allied with most of Yemen’s armed forces still loyal to former President Saleh, will push the conflict into southern Saudi Arabia. In the past, the Saudis who have lots of fancy weapons, but not much in the way of effective fighting forces, have not fared well in encounters with Yemeni forces along their borders. Seizing a Saudi town or two would give the Yemenis good bargaining chips in negotiations with Riyadh. If a prolonged border war were to ensue there could eventually be repercussions for the House of Saud.
With temperatures running close to 110o F. in Riyadh this month, the Saudis are directing a larger share of their oil production to keeping cool. The Kingdom’s oil exports in April fell by 160,000 b/d to 7.73 million b/d down from 7.89 in March as more crude was being refined in its own refineries. The Saudis now own or have a stake in some 5.4 million b/d of refining capacity and more is under construction. It is not difficult to imagine that someday the Saudis will only be exporting oil products rather than crude, keeping the refining profits for themselves.
3. China
The future of the economy was the key issue coming out of China last week. Fears are growing that the current stock market bubble will burst before the end of the year. The crash may have already begun as last week Chinese stocks recorded their worst week since 2008. In the past year China’s market capitalization has tripled to $9.8 billion, 84 times projected earnings.
In the last 18 months, China’s demand for natural gas has slowed considerably. From double digit increases a few years ago, demand slipped to 8.6 percent in 2015, to 7 percent in the first quarter, and now down to 6 percent in April. As with the demand for electricity, China’s demand for natural gas is not a bad indicator of economic growth. We are starting to see hints that the government’s plan to achieve a 7 percent growth rate this year may not reach its goal.
So far this year China’s oil imports have been robust. This has been attributed to the building of strategic stockpiles during a time of low oil prices and the opening of large new refineries that will produce oil products that can be exported. It is too early to tell, but the era of Chinese demand driving the growth of the global oil market may be slowing.
4. Russia/Ukraine
Last week Russia held its annual St. Petersburg economic forum, attended by CEOs and officials from all over the world. President Putin gave a speech denouncing the extension of EU sanctions and announced he would retaliate by deploying 40 new ICBMs to add to the hundreds he already has. Sounds like what the superpowers did back in the cold war. Putin also took credit for saving Russia from a great economic catastrophe last winter but failed to note that the 40 percent jump in oil prices this spring helped his economy too.
As could be expected there were many announcements concerning Russia’s oil and gas industry during the forum. BP and Rosneft signed production, exploration, and refining agreements, and BP agreed to take a $750 million stake in a Siberian oilfield. The Saudi oil minister showed up and discussed a crude exporter cooperation pact with Russia’s oil minister. The Saudis would like the Russians to cut back on exports to help prices without cutting their own production.
The Prime Minister of Greece, Alexis Tsipras, who is not particularly popular in the EU at the minute, attended the conference to flaunt his newfound solidarity with Moscow. His meetings with President Putin raised speculation that Athens is going to help Russia circumvent the sanctions in return for financial help – which, of course, Russia is not in a good position to extend at the minute. No agreement on these issues was announced. It is difficult to imagine the EU bailing out Greece at the same time Athens is helping the Russians bypass the sanctions.
Moscow and Athens signed a preliminary agreement to build a natural gas pipeline through Greece. This is part of Moscow’s efforts to build a pipeline through Turkey to Europe thereby allowing it to sell its gas in the EU while bypassing the pipelines running through Ukraine. A new pipeline would allow Moscow to shut off the gas flowing into the Ukraine without harming the flow to customers in the EU. The course of this new Athens-Moscow relationship will clearly depend on the Greek debt negotiations. The EU has announced that it does not want any new Russian gas pipelines that bypass Ukraine coming into its territory.
5. Greece
On Sunday Greece submitted new proposals to settle the debt crisis in advance of the emergency summit meetings on the crisis that will take place on Monday. Athens is out of cash and without the funds to make a €1.6 billion payment on an IMF loan that is due the end of the month. The current Greek government was elected on a platform of not cutting pensions but may be agreeable to tax increases to satisfy its creditors. Greece’s economy is currently a basket case with GDP down 25 percent, pensions slashed, and 25 percent unemployed. The Germans, however, who have the most to lose, are adamant that they have given enough ground already.
There is general agreement that a Greek default and exit from the Eurozone would be a major disaster for Europe’s economy with unknown but serious consequences for oil.
6. The Papal Encyclical
The long-awaited Papal encyclical calling for swift action on climate change was first leaked as part of a Vatican power struggle, and then released formally last week. In the 184-page document, the Pope “described a relentless exploitation and destruction of the environment, for which he blamed apathy, the reckless pursuit of profits, excessive faith in technology and political shortsightedness.” Climate and environmental scientists who have reviewed the document have little quarrel with its contents and say that the Pope and his advisors got the science right. It is now known that groups denying climate change made efforts this spring to derail or soften the tone of the document fearing that it could have a major impact on the climate change debate.
In the US the document is already putting pressure on Catholic candidates for office that either deny man-caused climate change or attempt to bypass the issue. The encyclical stresses that the earth’s poor will be the first to suffer from climate change and that it is the moral duty of the rest of us to do something before it is too late. Polls say that public opinion on the issue is changing with more willing to believe what the climate scientists are saying about carbon emissions. The new document may make a major contribution to accelerating changing opinions on the issue.
7. The Briefs
Private-equity funds that once profited from energy deals in North American shale are hunting in a new bargain basement for cut-price oil-and-gas fields: almost everywhere else. Flush with cash from recent fundraising, the groups are looking for assets with owners who have been hurt by the precipitous fall in oil prices—from the North Sea to Nigeria, South America to Southeast Asia. (6/18)
Gazprom, the world’s top gas producer, said on Thursday that Shell and its long-time gas buyers in Europe – Germany’s E.ON and Austria’s OMV – had agreed to build two new Nord Stream gas pipelines under the Baltic Sea to Germany. CEO Alexei Miller said the agreement with Shell also foresaw an expansion of the firms’ joint $20 billion liquefied natural gas plant on the eastern island of Sakhalin as well as global upstream asset swaps. (6/19)
BP will pay Rosneft $750 million for a 20% stake in an East Siberian oil producer, following Royal Dutch Shell’s plans to expand a natural gas export project in Russia. Europe’s two biggest oil companies are looking for increased access to Russia’s vast energy reserves and their proximity to the markets of China and Japan, even as the world’s second-biggest oil and gas producing nation seeks to maintain sales to Europe in the face of U.S.-led sanctions. (6/20)
Russia has protested to the Belgian ambassador over the seizure of Russian state assets in Belgium – a move triggered by a court ruling over the now-defunct Yukos oil firm. The ambassador was told that the asset seizure was “an openly hostile act” that “crudely violates the recognized norms of international law”. (6/20)
China-Russia nexus: China has signed up to design a high-speed railway between the Russian cities of Moscow and Kazan, one of the first concrete examples of the new business with China that Russian officials have been pursuing with renewed vigor since falling out with the West. (6/20)
In Nigeria, the federal government and the oil and gas producing companies may have lost an estimated $11.5 billion due to the drop in the price of Brent crude oil from $115 per barrel in June to $68.62 yesterday. Nigeria says it produces about 2.4 million barrels per day and is exporting 2.2 mb/d. (6/19)
In Nigeria, the shale boom that has reduced US dependence on overseas crude is reverberating as Africa’s biggest oil producer cuts the pricing for its flagship grade to the lowest in a decade. Nigeria, which relies on oil for about 70 percent of its income, has been forced to scale back budgeted spending and devalue the naira currency. (6/20)
Colombia’s Cano Limon-Covenas oil pipeline, the country’s second biggest by volume, has been shut due to damage from bomb attacks by leftist FARC rebels which caused a significant spill that has contaminated two rivers, the army said on Wednesday. Revolutionary Armed Forces of Colombia rebels, known as FARC, have intensified attacks on infrastructure in the past few weeks after calling off a unilateral ceasefire. (6/18)
Venezuela’s biggest annual gathering of oil investors used to be a memorable affair, drawing up to 40,000 participants. This year’s event drew 3,000, and hundreds of those were PDVSA employees. The lower turnout is reflective of the decay in the investment climate in Venezuela’s vital oil industry after a decade of shaky relations between the Socialist government and foreign oil companies. (6/20)
As Venezuela’s economy totters thanks to low oil prices and years of mismanagement, a Chinese government-owned bank is badly on the hook. China Development Bank has lent nearly $37 billion to Venezuela since 2008, helping to prop up the regime of Hugo Chávez and his successor, Nicolás Maduro, while becoming one of the Latin American nation’s biggest creditors. But the strategy has gone awry. (6/19)
In Western Canada, Wood Mackenzie Ltd. believes the economics of core areas within shale plays will yield comparable returns to key producing plays in the US Lower 48. They anticipate growth beginning in 2016 and lasting through 2021. While their liquids growth outlook remains positive, there is a potential downside to the forecast: there are notable supply-infrastructure constraints from the lighter end of the NGL stream. (6/20)
In Canada’s oil sands, the era of the megaproject is fading. Crude’s price slump, pressure to get off fossil fuels and tax increases in Alberta are adding to high costs and a lack of pipelines, prompting producers from Suncor Energy to Imperial Oil to accelerate a shift to smaller projects. Companies are deferring new mines in favor of cheaper, bite-sized drilling programs that deliver quicker returns and require less labor. The moves will help reduce cost overruns and make Canadian companies more competitive with U.S. shale producers. (6/19)
In Canada, a new study calculates that 185,000 petroleum industry jobs will likely be lost this year due to the drop in oil prices. According to the study, in 2014, the oil and gas industry spent nearly $125 billion on exploration, development and production – which supported more than 720,000 direct and indirect jobs in Canada. About two-thirds of these jobs were concentrated in Alberta. (6/17)
The US drilling rig count posted its smallest decline during the week ended June 19—down just two units—of the now 28 consecutive weeks of losses. The total count settled at 857 rigs working, a decline of 61% since the total rig count peaked at 1609 in October last year. Oil-directed rigs dropped 2 units to 631, down 914 year-over-year. Gas rigs gained 2 units to 223. Canada’s rig count has risen to 136, still down 129 units year-over-year. (6/20)
In North Dakota, Governor Jack Dalrymple said that OPEC’s decision this month to maintain existing oil output will fail to push rival producers out of the market because rising global crude demand should soon lift prices and boost drilling activity. (6/20)
North Dakota data show activity in the exploration and production sector is in decline. State data for Tuesday show the number of rigs actively exploring for or producing oil and natural gas in North Dakota is 76, down nearly 60 percent from last year. (6/17)
North Dakota officials are warning that a new federal fracking rule will likely cost the state 1,900 jobs. The ruling is particularly significant to North Dakota because of its significant public lands. It is estimated that Bureau of Land Management has an interest in about a third of the drilling units in North Dakota that acquired the mineral rights on defaulted farms during the Great Depression. Lynn Helms, director of the Department of Mineral Resources, believes that the ruling will cause companies to leave North Dakota, which could cost the state $9.4 billion in royalties and taxes. (6/16)
Earthquake connection: Wastewater from oil and natural gas drilling that’s pumped underground for disposal is more likely to trigger earthquakes than extracting the fuel by fracking, according to a study by Stanford University researchers. The salty byproduct of hydraulic fracturing is often injected back underground where it penetrates fault lines and triggers seismic activity. The issue has gained attention in Oklahoma where a drilling boom has coincided with a surge in earthquakes. There were two-dozen magnitude-4 earthquakes last year compared with one or two a decade prior to 2008. (6/20)
Seattle kayaktivists: Fourteen activists from Greenpeace were arrested by federal authorities during a protest against Shell’s arctic Alaska program off the coast of Seattle. Activists took to kayaks to protest against Shell’s use of the Port of Seattle as a staging ground for summer plans to drill off the coast of Alaska. (6/17)
US retail gasoline prices are making a surprise surge as high demand and ongoing refinery issues crimp supplies. AAA reports a national average retail price for a gallon of regular unleaded gasoline at $2.80 for Tuesday. That’s up 10 cents over the last month to the highest price of 2015 to date. (6/17)
Trucking MPG: The government on Friday proposed new carbon-emissions standards for big trucks as part of President Barack Obama ’s broad climate-change agenda, a move many in the trucking industry cautiously support as a way to save money on fuel. (6/20)
In Wales, a 160-turbine wind farm—the second largest offshore facility, with 576 megawatts of generating capacity and costing $3.3 billion—was just brought on stream. (6/19)
London announced plans to end public subsidies for new onshore wind farms starting in April 2016. Last year, the $1.2 billion in government support helped onshore wind power generate 5 percent of total British electricity and bring the region closer to its climate change goals. (6/19)
The big aquifer drawdown: More than a third of the world’s biggest aquifers, a vital source of fresh water for millions, are “in distress” because human activities are draining them, according to satellite observations. (6/17)
North Korea is in the midst of a severe drought, its state news agency reported, raising fears of worsening food shortages in the impoverished country, where child malnutrition is a persistent problem. The UN says that 70 percent of the country’s 25 million people were “food insecure.” (6/18)
In California, things have never been this dry for this long in the state’s recorded history, and this has created an unprecedented water crisis. At this point, 1,900 wells have already gone completely dry, and some communities are not receiving any more water at all. As you read this article, 100 percent of the state is in some stage of drought. (6/20)
Alaskan melt: In a new study, scientists with the University of Alaska-Fairbanks and several other institutions report that glaciers of the United States’ largest — and only Arctic — state, Alaska, have lost a huge 75 gigatons (a gigaton is a billion metric tons) of ice per year from 1994 through 2013. For comparison, that’s roughly half of a recent estimate for ice loss for all of Antarctica (159 billion metric tons). (6/18)
US Feds peak oil deniers? Even the most ardent techno-optimists and economists admit there are limited supplies of fossil fuels, but that we don’t need to worry for a long time. It appears they have succeeded in convincing the government they’re right, because there are only 2 documents about planning for peak oil that appear at the federal level. (6/15)