22 September 2014                                                                              Tom Whipple, Editor

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

1.  Oil and the Global Economy

After climbing to a mid-week high of circa $95 a barrel, New York futures settled on Thursday and Friday to close up a few cents for the week at $92.41. An unexpected increase in US crude stocks which are already abnormally high for this time of the year and a stronger dollar brought about by fears of an interest rate increase are thought to be behind the drop in US oil prices.  London oil prices were slightly stronger last week, rising 0.4 percent on concerns about the closure of a recently reopened Libyan oilfield. Traders say that the abnormally low inventories at the Cushing, Okla. oil depot are partially supporting US oil prices. Supplies at Cushing, however, are likely to increase over the next few weeks as more refineries close for fall maintenance. Most of the geopolitical news last week was not particularly threatening to oil supplies.

There are concerns that OPEC may lower its official but largely meaningless output quotas when it meets in November. The recent decline in oil prices of nearly $15 a barrel is tempting speculators to store oil aboard tankers until prices recover. In recent weeks, traders are reported to have stashed away some 50 million barrels aboard floating storage. Most of this is taking place far from the US where next year’s oil futures remain closer to the current month. The US shale oil boom is expected to continue into 2015 with steadily increasing production for at least another 12 months. After that some believe that the spectacular increases in shale oil production will slow and that rapid declines will not be far behind.

Investor concerns are rising about the economic viability of shale oil as selling prices decline.  According to the North Dakota government, Bakken shale oil currently is going for around $74 a barrel, down from $90 in June.  Despite the major gains in reducing the costs of shale oil production, some are saying that it still costs $60 to $80 to produce oil from the Bakken shales. Some wells may already be economically marginal and others will join this category if prices fall further. Last week Continental Resources, the largest driller in the Bakken, announced that they were raising their capital budget for this year by $500 million to $4.55 billion because well completion techniques were becoming costlier.

Natural gas prices have been volatile in the last two months, cycling between $3.80 and $4 per million BTU’s as increases in production and a mild summer have gone a long ways to refilling US storage caverns. These summer surpluses have been offset by fears that a winter similar to last which nearly emptied out the storage caverns may be in the offing.  AccuWeather and the Commodity Weather Group are predicting below normal temperatures for much of the US this winter.

2.  The Middle East & North Africa

Iraq: Washington’s coalition building continued last week as the US Congress authorized money to help “moderate” Syrian rebels. US airstrikes on IS targets in Iraq continued along with speculation that they would soon be expanded to Syria. All sides seemed resigned to the idea that a struggle with the IS lasting many years is now underway. No progress seems to have been made on establishing a unified Iraqi government.

Except for oil production from Kurdistan where the situation is relatively secure, production from northern Iraqi oilfields is clearly on hold until the security situation improves. Total Iraqi exports were down 2 percent in August from July,

A major part of the plan to increase Iraqi oil production from the southern Iraqi oil fields has been the construction of a multi-billion dollar sea-water injection system to force more oil to the surface from aging fields.  Delays in building these facilities which were designed to pump 5.2 million b/d of treated seawater to the southern fields have extended the completion date from 2013 to 2018/19.  The lead firm on the project was originally Exxon which pulled out in 2012 over disagreements as to the economics of the project leaving the effort in the hands of Baghdad’s state-owned Southern Oil Company.

Increased production from fields newly reworked by foreign oil companies has already started to suffer. Baghdad has lowered its 2014 production goal to 3.7 million b/d from 4.5 billion. Given the turmoil in Iraq, the chances of completing a project of this scale in the immediate future do not seem good nor do the chances of major increases in Iraqi oil production during the rest of the decade.

Libya: The turmoil continues with assassinations of 14 prominent figures in Benghazi. An announcement by “Libya Dawn”, the Islamist militia that controls Tripoli, claims that it has established a new security force making it is safe for foreign businesses and embassies to return. A third mystery airstrike took place last week with aircraft of unknown origin bombing an ammunition depot held by Libya Dawn. The country’s two prime ministers are busy issuing denunciations of the other and trying to round up foreign support.

The oil situation remains bizarre with The National Oil Company announcing that production was up to 870,000 b/d early last week. Then there was a rocket attack on the Zawiya refinery, which did no damage, but led to the closure of the Sharara oilfield, which had been producing 250,000 b/d.

It is difficult to sort this out. The financial press hypes the “return of Libyan oil production” then bemoans the supposed drop in production. Refugees from Tripoli speak of total turmoil — no gasoline, food shortages, and few people working. The occasional report of a tanker leaving an oil terminal suggests that exports are well below what we would see if nearly 900,000 b/d of crude were being produced and exported. While remote desert oilfields may be able to produce substantial quantities of oil for a while, the marketing systems that sell this oil to foreign buyers and accept money in return is clearly broken. It is remains likely that very little crude is actually leaving the country.

Iran:  The nuclear talks resumed after a two-month gap last week, this time with the added complication of the IS and Iran’s growing involvement on behalf of Baghdad. Some see the next few months as critical to successful conclusion of a treaty. US officials say that it is clear that Tehran has come to the negotiations ready to talk, but are not optimistic that any breakthrough is in the offing due to Iran’s devotion to its nuclear enrichment programs as being critical to its national self-image and future well-being.

With Washington and Tehran on the same side against the IS suggesting this should be the time for compromise, in recent days the Iranian’s seem to be taking a harder line. Washington still has to convince Israel that any agreement will guarantee a nuclear weapons free Iran for at least the immediate future. Israel’s threat to bomb Iranian uranium enrichment facilities is still on the table and Tehran’s threat to close the Straits of Hormuz in retaliation, shutting off much of the world’s oil exports, is still out there.

There has been no word on Moscow’s efforts to reach an oil swap agreement with Tehran that could side-step the sanctions and reduce pressure to negotiate.

3. Russia

Despite numerous ceasefire violations over the weekend, the newly signed ceasefire in Ukraine seems to offer the promise of an eventual settlement. The new agreement which gives eastern Ukraine substantial autonomy, pulls Russian forces out of country, and establishes a 30 km zone free from heavy weapons seems to be the best solution for both sides. Moscow weakens what it sees as European encroachment into its sphere of influence and Ukraine ends a bloody war with Russia which it cannot possibly win.

In the meantime Moscow is suffering from the sanctions and the drop in the value of the ruble which is now down some 40 percent. Some $110 billion in foreign investment is being withdrawn from the country and economists are predicting an extended period of recession for Russia.

The $15 a barrel drop in oil prices this summer has not helped Moscow’s revenue stream either. Although the sanctions on Russia have little effect on modifying Moscow’s immediate policies towards Ukraine, over the longer run the sanctions could be significant should they remain in place and not be eased as part of a Ukrainian settlement.

There is general agreement that oil production from current Russian oilfields is peaking. Seaborne exports of some Russian crudes are expected to be down by 6 percent in the 4th quarter.  Moscow urgently needs help from foreignoil firms to quickly develop arctic and possibly Siberian shale oil fields. In addition, it needs foreign loans and investment to finance increasingly expensive oil development projects. The latest round of sanctions have blocked Exxon from continuing to drill in Russia’s Kara Sea, but the company did receive dispensation from Washington to shut-down work on the $700 million project properly. The EU sanctions have not been as tough as the ones Washington has imposed so Total and Shell will continue to work on Russian projects for the time being.

4.  Quote of the Week

  •  “The world has been lulled into a false sense of security because of what’s going on in the US [the current shale oil boom].  When US supply peaks, where will the new supply come from?”

—  Tony Hayward, former CEO of BP, in an interview with the Financial Times

5.  The Briefs

·         EU vs. Russia:  The European Union again postponed a decision on whether to grant Russia full access to its OPAL natural-gas pipeline, frustrating Moscow’s efforts to boost energy exports to the 28-country bloc. (9/16)

·         Western sanctions against Russia, coupled with ongoing political instability in Libya and the advance of ISIS militants in Iraq, could leave the global oil supply exposed and could push up oil prices to $150 per barrel, former BP chief Tony Hayward has warned. Hayward said the recent boom in US shale production has painted an unrealistic image of the world’s global oil supply. (9/16)

  • In Russia, oil company Gazprom Neft said it reached a milestone with the production of its 1 millionth barrel of oil from the arctic Prirazlomnoye field. Gazprom Neft Board Chairman Alexander Dyukov said his is the first Russian company to pull oil from Russia’s arctic shelf. (9/16)
  • Denmark is the European Union’s only net exporter of oil. The Nordic state’s exports totaled approximately 13.7 million barrels of oil equivalent [37,500 boe/d] in 2013. This is in stark contrast to the EU’s only other significant oil producer, the UK, which became a net importer in 2004 and has experienced a steep decline in output from its North Sea fields since. Denmark has maintained its status as a net exporter despite peak oil production in 2004. A strong shift towards wind power has seen a decrease in oil used for electricity generation while district heating systems are now switching to natural gas and renewable sources. (9/17)
  • Beijing said it expects to get at least 60 billion cubic feet of natural gas per day from shale deposits by 2020. Production this year will be around 1.5 bcf, but could increase tenfold within the next two years. By 2020, Beijing expects the share of natural gas in the energy mix should be about 10 percent, about double the current footprint. (9/19)
  • In Australia, energy company AWE said it may have made the largest onshore natural-gas discovery in Western Australia in 50 years. The Waitsia field could contain more than one trillion cubic feet of natural gas. (9/18)
  • In Nigeria, oil unions called off a four-day strike, averting a threat to exports from a nation whose shipments equate to about 2 percent of global demand. (9/20)
  • Kenya expects its estimate of oil resources to almost double to 1 billion barrels as well-drilling climbs and the government forges ahead with plans to build an export pipeline. Initial data acquired from northern Kenya indicates the figure for estimated oil resources is set to rise with increased drilling. (9/18)
  • In Angola, Eni SPA has made an oil discovery on Block 15/06 in the Ochigufu exploration prospect offshore. It is the 10th commercial oil discovery for the block, and is estimated to hold 300 million barrels of oil. (9/18)
  • In Ecuador, Italian energy company Eni said it made an oil discovery that could hold as much as 300 million barrels. (9/19)
  • Panama Canal expansionThe Panama Canal’s current size restrictions means smaller vessels, with capacities of approximately 400,000-550,000 barrels of crude, are the only ships that can transit the canal. These smaller ships lead to a higher per-barrel cost. However, the expansion will allow passage of vessels with capacities of approximately 400,000-680,000 barrels of crude oil. In addition to oil transit, the expansion of the canal, now slated for late 2015, will be able to provide passage for up to 80% of liquefied natural gas (LNG) carriers. It currently allows passage of the smallest of LNG tankers. (9/18)
  • Oil sands: Canadian Natural Resources Ltd. will be allowed to resume production at an oil-sands site in northern Alberta plagued by unexplained leaks of crude that seeped to the surface. The decision partially lifts restrictions on the company’s operations that had been in place since mid-2013 after mysterious leaks of crude were detected at four separate locations at the site. (9/16)
  • Mexico and US oil swap? Two of the biggest energy stories of the last 12 months have been the reform of Mexico’s oil sector after 75 years of state monopoly and the US oil industry’s drive to gain approval to export a growing surplus of domestic light crude oil. The prospect of exporting US oil to Mexico connects these developments in a surprising way. It should make sense geographically and economically to exchange our excess light crude oil (Mexico’s production of light oil is declining) for their heavy oil. (9/16)
  • Keystone XL: TransCanada Corp.’s chief executive said the cost to build the pipeline, currently estimated at $5.4 billion, is expected to double by the time the U.S. government completes its review of the largest part of the project. (9/19)
  • US oil: API said in its monthly report on trends in the U.S. energy sector that crude oil imports of 7.6 million b/d in August were 6.2 percent less than last year and the lowest level for August since 1996. Total imports of petroleum products were down 10.2 percent year-on-year. August crude oil production of 8.6 million bpd, meanwhile, was the highest for the month in nearly three decades. Production was boosted largely by output from North Dakota and Texas. In terms of demand, API said its petroleum delivery metric showed a 1 percent increase year-on-year to 19.3 million bpd, the highest in three years. (9/20)
  • The US drilling rig count was unchanged at 1,931 rigs working during the week ended Sept. 19, Baker Hughes reported. Canada’s rigs count lost 28 units during the week, settling at a total of 377, down 11 units compared with this week a year ago. (9/20)
  • Some of North Dakota’s oil companies likely will experience a production dip starting next month as they try to meet aggressive new flaring standards, Governor Jack Dalrymple said last week. In an effort to curb the problem, which harms quality of life and reduces tax revenue, state regulators will require companies to flare no more than 26 percent of produced natural gas starting Oct. 1, with standards tightening in the future. If producers fail to meet the standards, they will have to curb production. (9/19)
  • Shipping companies probably will miss out on exports from the record US grain harvest because the shale-oil boom is clogging up rail lines to ports. While the U.S. will reap the most crops ever, fourth-quarter export cargoes will be 15 percent lower than last year.  The U.S. shale-oil boom means energy shipments are dominating rail networks at the expense of grains. (9/19)
  • Ultra deepwater: BP, even as it faces $50 billion in potential liabilities from the worst U.S. offshore oilspill, is leading the effort to extract crude from deep below the sea. BP, Chevron and Royal Dutch Shell are among companies developing a new generation of oilfield technology to reach through more than seven miles of water and rock, where temperatures can reach 400 degrees Fahrenheit and the pressure hits 20,000 pounds per square inch. (9/18)
  • The Powder River Basin is experiencing a turnaround in oil production. Production has doubled from a low of 38,000 b/d in 2009 to 78,000 b/d during first-quarter 2014. Although US oil production growth is occurring primarily in the Bakken, Eagle Ford, and Permian Basins , the Powder River Basin is among other regions of the country that have also benefitted from the application of horizontal drilling and hydraulic fracturing . (9/16)
  • Well leaks: A new study says that fracking didn’t cause the much-publicized cases of tainted water, blaming contamination on leaky wells instead. The study finds that eight hydraulically fractured wells in the states of Pennsylvania and Texas leaked gas because the piping and cement seals in the wells themselves weren’t working properly. (9/16)
  • Well leaks: Homes in a Texas community face worsening water contamination caused by nearby gas production, according to another new study. The findings from an analysis by independent academics counter statements by driller Range Resources and state regulators, who have said their evidence shows gas drilling wasn’t responsible for the presence of explosive methane in the homeowners’ water wells. (9/16)
  • Shale gas water supply constraints: The World Resources Institute found that 38% of shale gas resources worldwide are located in areas that are either naturally arid, and so have limited water overall, or in areas with high to extremely high levels of water stress, which means that competition for water is already keen if not intense.  Each fracking well can require up to 6.6 million gallons of water. WRI reports that little is being done to address impending conflicts. (9/20)
  • Gas producers in the Appalachian basin will benefit unevenly from markets opening for natural gas from the Marcellus and Utica shales. Pipeline projects due on stream soon will alleviate a surplus in the southwestern part of the basin. But the gas price will remain weak in the northeastern Appalachian basin until markets begin opening for supply there in 2016. (9/16)
  • Energy bill: A bill that passed through the U.S. House of Representatives will bring relief to consumers feeling the “squeeze” of high gasoline prices, backers say. The House of Representatives passed a measure largely along party lines that supporters said would lower energy prices and expand US energy production. The measures are likely to die in the Senate amid criticism House leaders are pushing their energy agenda in the run up to November elections. (9/20)
  • The White House on Tuesday said it plans to veto a sweeping energy bill the Republican-controlled House is expected to approve this week. In a statement of administration policy, the White House’s Office of Management and Budget said the bill, HR 2, could imperil oil and gas pipeline approvals and endanger public health and the environment. (9/17)
  • Mineral owners left out of the energy boom in Colorado and other states are mobilizing to fight local fracking bans they say are depriving them of billions of dollars in oil and natural-gas royalties. From California to New York, royalty holders are joining forces with oil companies to make their voices heard in the debate over hydraulic fracturing (9/17)
  • A California-based company, Siluria, claims that it has found a commercially viable technique to directlyconvert natural gas into liquid fuels or petrochemical building blocks. Neither Siluria’s oxidative coupling of methane process nor the quest to make it commercially viable is new, but the company is confident that it has found the right ingredients and the right partners (including Saudi Aramco) to achieve an outcome that has eluded others for decades. (9/19)
  • Nigeria is considering offers of more than $20 billion for the assets of its national electricity transmission company as it struggles to provide adequate power to Africa’s largest economy. (9/16)
  • The Chinese exploration rig at the center of a tense maritime standoff with Vietnam earlier this year has made its first deep sea gas discovery in the politically volatile South China Sea. The discovery by China National Offshore Oil Corp. was made about a month after its rig withdrew from Vietnam’s exclusive economic zone to waters closer to China. It’s unclear whether the discovery will become commercially viable, but the announcement represents a significant step in China’s ability to seek resources beneath the South China Sea. (9/16)
  • Vietnam and India have struck a deal to expand oil and gas exploration and production in the South China Sea, despite previous Chinese claims that it violates China’s sovereignty. (9/16)
  • The possibility that the world’s population will climb to 11 billion by the end of the century is gaining traction now that demographers are using probability methods for their projections. (9/19)
  • Xingtai, a coal-mining hub with 7.6 million people, has the worst air quality of any Chinese city. Jizhong Energy Resources operates six large coal mines and dozens of related facilities in this industrial center. Now, Jizhong is moving to clean itself up, reflecting the balancing act taking place across China as regional governments and businesses, under pressure from China’s growing middle class, try to tackle runaway pollution without wrecking local economies. (9/17)
  • China will ban sales and imports of coal with high ash or sulfur in a move to promote cleaner types of the fuel and improve the nation’s air quality. Coal with ash content of more than 40 percent and sulfur of more than 3 percent is banned from sales and imports into China starting Jan. 1. (9/16)