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Tom Whipple, Editor

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

1.  Oil and the Global Economy

Last week the oil futures markets were driven by the prospects for more cold weather in the US and mixed reports concerning the outlook for the US and Chinese economies.  NY oil prices jumped $3 a barrel on Tuesday and Wednesday to $103, but then slipped to close on Friday at $102.48. Wednesday’s close of $103.31 marked a 10 percent increase in the last six weeks and was the highest close since last October.
The London oil market participated in the Tuesday price jump, sending Brent crude up to $110.50 where it stayed until Friday when in slipped back to close at $110.32.

Traders are watching the size of US crude stocks which has been growing for over a month.  The US is entering the winter/spring maintenance and changeover-to-summer-blends season when many refineries are closed, reducing the demand for crude. Many traders believe that after six consecutive weekly gains, oil prices are as high as they will be going for a while. The winter heating season will soon be ending; the demand for heating oil was not as much as analysts had been expecting the week before last; and the demand for gasoline remains weak.

London futures prices have been more sensitive to supply disruptions particularly in Libya which is exporting very little crude again as the various tribes and militias jockey for influence.

Continuing cold weather in the US sent natural gas prices soaring last week to a five-year high of $6.40 per million BTUs on Thursday – gas was trading around $4.60 two weeks ago. Last week’s natural gas stockpile report came in slightly higher than analysts had been expecting sending prices down on Friday. The stocks however are at their lowest level for any week in February since 2004 and many are worried that additional cold weather will draw them down to the level where they cannot be replenished in time for next winter’s heating season.

There was much discussion last week about how the major international oil companies are making cuts in their spending for exploration due to increasing costs and the inability to find enough new oil. Most of the cutbacks are being directed towards arctic and very deepwater exploration where the costs are very high. With many believing that oil prices will soon be falling, lower prices would bring additional pressures on oil companies to cut back on new exploration and drilling projects. In a few five years these cuts could have a major impact on the industry’s ability to maintain, much less increase, current rates of oil production.

2.  The Middle East & North Africa

Iran:  On Thursday, the six world powers and Iran announced that they have agreed on a schedule to reach a comprehensive agreement on Tehran’s nuclear program before the current agreement expires in July.  Both sides are expressing general optimism that an agreement will be reached, but Washington continues to warn that there are many serious issues to be overcome. In the meantime Tehran continues on its offensive to attract foreign investment in its stagnant oil and gas industry.

Over the weekend, the Iranians announced a “new model oil contract” that will be more attractive to international oil companies than the tight-fisted deals Baghdad has been offering. Given the political stability of Iran as compared to the rest of the Middle East and a fair return on investment, doing business with Iran could be very attractive to oil companies starved for access to new sources of oil and gas. This in turn could bring more pressure on Western governments to settle with the Iranians. The next round of talks is scheduled to resume on March 17th.

Iraq: The turmoil is beginning to affect Iraq’s oil exports which slipped by 4.8 percent from December to January. Most of the loss was due to attacks on the northern export pipeline which is out of service nearly half the time. There has been no progress in the dispute with the Kurds who maintain they will not export oil in conjunction with Baghdad’s State Marketing Organization.

The sectarian bombings, which have killed 1,500 in the last two months, continue at about the normal pace and there has been little progress in driving the al Qaeda insurgents from towns in Anbar province. Over the weekend, a 72 hour cease fire was announced for the province, raising the possibility that a deal is in the offing. The UN says that 370,000 people have now been displaced by the fighting in Anbar.  The fighting has slowed plans to develop the Hamrin and other oilfields in northern Iraq as it simply is not safe to drill for oil with open warfare going on in the region.

Libya: Oil production is now back down to 230,000 b/d after the El Sharara oilfield was shut down due to protests and clashes in the area. Nearly all of this production is going for domestic consumption leaving little for export. In the meantime, two powerful militias told the Parliament to step down or face arrest. Parliamentary leaders are trying to arrange for a constitutional convention which could lead to a new government. The bottom line is not to expect much oil will be coming from the country until major changes in what passes for government occur.  Partition into three or more states looks like a better bet all the time.

3. Venezuela 

Hundreds of thousands of Venezuelans took to the streets in several cities over the weekend to protest the deteriorating economic situation and the shortages of food and other vital commodities. The country is badly split so that a much smaller group who directly benefited Chavez presidency also took to the streets to support the government. Most of the oil production and exporting infrastructure is located far from the urban areas where the protests are taking place and as yet not been affected by the disturbances.

The government is under stress with President Maduro simultaneously blaming the protests on Washington, while at the same time asking President Obama to send negotiators to help settle the crisis. Given the state of Venezuela’s economy, there is little the government can do to satisfy the underlying complaints of shortages in the short term.

4.  Quote of the Week

  • “We are already having important discussions with players, not only in deep water, but in mature fields and other areas in Mexico. We hope to be announcing some deals towards the end of 2014, early 2015.”

— Emilio Lozoya, the CEO of Petroleos Mexicanos, or Pemex

5.  The Briefs

  • Pemex, the third-largest oil exporter to the U.S., has seen production decline for nine consecutive years, as output fell to 2.52 million barrels per day in 2013 from 3.3 million barrels per day in 2004. Given a new law enacted by President Enrique Pena Nieto on Dec. 20, the company intends to partner with foreign companies for the first time in 76 years to boost production to as much as 4 million barrels per day by 2025. (2/18)
  • Notable exploration failures in high-profile places such as Africa’s west coast, from Angola all the way up to Sierra Leone, have pushed down valuations for exploration-focused firms and are now forcing oil majors to change tack. (2/18)
  • Combined output of crude and other liquids by the seven biggest western majors — ExxonMobil, Shell, BP, Chevron, Total, ConocoPhillips and Eni — amounted to 9.517 million b/d last year, down 2.2% from 2012 and marking the fourth consecutive year of decline. Liquids’ output from the same group has been falling every year of late, having been as high as 10.865 million b/d in 2009 and having dropped 12.4% since 2009. (2/18)
  • Saudi Arabia, the world’s biggest crude exporter, probably needs to boost shipments this year above last year’s 7.54 million b/d in order to keep pace with record government spending, according to a former adviser to the nation’s finance ministry. (2/20)
  • Ecuador’s average oil output rose 4% to 526,000 b/d last year, from 504,000 the same period a year before, the central bank said. (2/22)
  • A deal between the world’s largest gas exporter (Russia) and one of the world’s fastest-growing gas markets (China) seems within reach.  Russia says the two sides have agreed on a price formula, but not an actual price. Gazprom charges European customers $11 per million BTU, which has dropped as it gives discounts to ward off competition from countries such as Norway. Meantime, China pays roughly $10 per million BTUs for pipeline gas from Turkmenistan and Myanmar.  Within three years, downward pressure on international prices is expected from some LNG exports from the U.S. plus a surge of seven Bcf a day of LNG from Australia during 2017. (2/18)
  • The leader of Nigeria’s Islamic uprising is threatening to attack oil interests more than a thousand miles from the northeastern base where his fighters are accused of killing more than 250 civilians this month. Abubakar Shekau also warns leading Nigerian Muslim politicians and religious and traditional leaders that his fighters will target them for pursuing democracy and Western-style education. He says his struggle to transform Africa’s biggest oil producer into an Islamic state is only just beginning. He plans to destroy oil refineries “in coming days.” (2/20)
  • Nigeria is to carry out a forensic audit of the state oil company over an alleged $20 billion subsidy racket that officials say may help explain what happened to $50 billion in oil revenues that the governor of the central bank says is missing. The audit was ordered last week by a Senate committee investigating allegations of corruption in the oil industry. (2/20)
  • Venezuela on Tuesday renamed its largest crude reserve, traditionally known as the Orinoco Belt, after the country’s late leader–the Hugo Chavez Oil Belt. Chavez’s detractors accuse him of squandering a decade-long windfall and leaving behind an economy weakened by state controls. (2/20)
  • Chinese gold retailer agreed to acquire a Texas-based oil-and-gas producer for at least $665 million as part of a strategy to diversify away from processing gold jewelry. (2/18)
  • North America will become the world’s cheapest source of energy if Canada, Mexico and the US pool their resources to reduce costs and generate industrial growth across the continent, the chief executive of Mexico’s state-owned oil producer said in an interview last week. (2/18)
  • US drilling rigs targeting oil and natural gas increased by seven this week to 1,771, according to Baker Hughes Inc. Oil rigs rose by two to 1,425. The gas count advanced five to 342. The total rig count rebounded after storms that poured rain, snow and ice across the eastern half of the U.S. slowed oil- and gas-drilling operations in major basins. (2/22)
  • The American Petroleum Institute said US crude oil imports of 7.5 million b/d marked a 5.2 percent decline year-on-year and the lowest level in 17 years. (2/22)
  • ConocoPhillips CEO Lance targeted shale boom skeptics Friday, refuting arguments that the surge in oil and gas production will be short-lived. Speaking at Rice University’s Baker Institute for Public Policy, Lance said he believes the country’s shale revolution is only in the “first inning of a nine inning game,” and critics shouldn’t assume growing shale oil production will stop any time soon. (2/22)
  • Hydraulic fracturing: Scientists and environmental activists are raising questions about whether millions of gallons of contaminated drilling fluids could be threatening water supplies and human health. In Pennsylvania’s Washington County, millions of gallons of wastewater from hydraulic fracturing wells are stored in large impoundment ponds and so-called “closed container” tanks. The wastewater is then piped to treatment plants, where it is cleaned up and discharged into streams (50%+); trucked to Ohio and pumped deep down injection wells; or reused in other fracking operations. (2/19)
  • A group of residents from a heavily drilled Texas town have banded together in an effort to ban hydraulic fracturing in their city. If they are successful, Denton would become the first city in the state to ban fracking outright. (2/20)
  • XL pipeline route delay: Judge Stephanie Stacy in Lincoln last week invalidated legislation that let Republican Governor Heineman approve the route and bypass the state Public Service Commission. TransCanada Corp. now will need commission approval, a process that by state law can take seven months unless the ruling is overturned on appeal. (2/20)
  • US rail delivery of petroleum and petroleum products was 9.9 million barrels last week, up 7.9 percent from the same period in 2013, the American Association of Railroads said. (2/22)
  • At least 10 times since 2008, trains hauling oil across North America have derailed and spilled significant quantities of crude, with most of the accidents touching off fires or catastrophic explosions. The derailments released almost 3 million gallons of oil, nearly twice as much as the largest pipeline spill in the U.S. since at least 1986. (2/18)
  • Federal regulators and the rail industry said Friday they agreed to new voluntary measures aimed at making it safer to ship crude oil by rail, including increased track inspections and lower speed limits in some urban areas. The agreement comes after several recent accidents involving tank cars containing crude—including a fiery derailment in Quebec last July that killed 47 people. (2/22)
  • The US government introduced ambitious fuel-economy standards for passenger vehicles back in 2012, which aim to cut U.S. oil consumption by two million barrels a day by 2025. But there’s one big challenge in promoting fuel-efficient vehicles: without rising gas prices, it’s getting harder to convince consumers to buy small, economic cars. (2/19)
  • In the UK, Cuadrilla said it plans to apply for a permit to conduct a hydraulic fracturing program that will test for the flow of gas from wells at two separate sites. Cuadrilla Chief Executive Officer Egan said it is seeking public engagement as part of their evolving business model. (2/18)
  • Israel’s recently discovered offshore natural gas is generating momentum for politically important supply deals that could alleviate energy shortages in Jordan and Egypt. The drilling consortium said Wednesday it signed a deal to supply gas to chemical companies in Jordan, marking Israel’s first energy export deal and bolstering ties between the neighboring countries. (2/20)
  • US Energy Secretary Ernest G. Moniz called for more scrutiny of methane emissions from natural gas operations beyond exploration and production. “We certainly need more data not just from production wells, but also from transmission and distribution systems. (2/20)
  • China can still prosper economically while removing coal from its power mix over the next 30 years, a report from the World Wildlife Fund said Wednesday. The report encourages China to fully embrace energy conservation, efficiency and renewables.  (2/20)
  • Seven years after a landmark Supreme Court ruling cleared the way for federal regulation of greenhouse gases, the justices will consider whether the Environmental Protection Agency has stretched its powers too far in applying new emissions rules. The stakes are high for both the EPA and the industries it is targeting to help curb pollution. (2/19)
  • Secretary Ernest Moniz will travel to Waynesboro, Georgia to issue approximately $6.5 billion in loan guarantees for two new nuclear reactors at the Alvin W. Vogtle Electric Generating Plant. The reactors will be the first new nuclear facilities constructed in the US in three decades. (2/22)
  • Shipbuilders are cranking out ever-bigger container vessels and the world’s major ports are dredging deeper, in preparation for an ambitious multibillion-dollar project to widen the Panama Canal—an endeavor currently stalled by a contract dispute. (2/18)
  • California drought: Cal Berkeley paleoclimatologist Lynn Ingram fears, if very long-run history repeats, the state should brace itself for a mega drought–one that could last for 200 years or more. California is experiencing its worst drought since record-keeping began in the mid-19th century. (2/19)
  • California: where there’s historic drought, there’s fire. In the thick of winter and normally wet months, 545 fires have broken out so far this year–a staggering 330 percent increase in fires over the same Jan. 1 to Feb. 15 period last year. Current conditions are as severe as during the hottest summer months, and Cal Fire is bracing for the worst. (2/22)
  • The drought in Brazil is so bad that some neighborhoods are only being allowed to get water once every three days.  At this point, 142 Brazilian cities are rationing water and there does not appear to be much hope that this crippling drought is going to end any time soon. (2/21)