Quote of the Week

“The fact is, oil at $50 a barrel makes Arctic oil uncompetitive. In terms of what’s going to happen down the road, I saw a World Bank report placed the oil in nominal dollars at $80 a barrel in 2030. That’s still way below break the price for Arctic oil.”

Stephen M. Carmel, senior vice president of Maritime Services at Maersk Line Ltd. (7/21)

Graphic of the Week


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

The markets remain confused about the future of oil prices as analysts attempt to interpret alternating bullish and bearish signals. Last week prices rose on Tuesday and Wednesday while falling on MondayThursday, and Friday leaving US futures at $45.77 or about $1 below where they started the week.  With the US now exporting circa 1 million barrels of oil each day and imports up only about 300,000 b/d over last year, US stocks have been falling of late.  There has been some increase in US consumption, but a rapid rise in US oil product exports is clouding the picture as to whether the high levels of US refinery output are being consumed domestically or being shipped abroad.

While the US oil-rig count fell by one last week, the Canadian count gained by 15. As most increases in Canadian crude production end up in the US, a small drop in the US rig count is meaningless in comparison to the Canadian increase. OPEC, as well as US production, continues to increase suggesting that the market will not come into balance soon without a radical change in the equation.

The OPEC Production Cut: Attention continues to focus on the future of the cut. Most observers agree that without a substantial increase from 1.8 million b/d, the cut is being largely offset by increasing production in the US, Canada, Libya, and Nigeria. Smaller adherents to the cut have begun to drop out of the program, and there are indications from tanker trackers that OPEC exports will increase in July, exceeding 33 million b/d. On Monday, July 24th, the production cut participants will meet in St. Petersburg to discuss the futures of the cuts. So far there does not seem to be much enthusiasm for an additional large cut that will drive up prices and will only encourage more US shale oil production. Some are calling on Libya and Nigeria to stop increasing production, but neither seems willing to do to so at current production levels.

Currently, there seems to no plan to end the oil glut in sight. The glut seems likely to continue into next year unless a geopolitical upheaval in Venezuela or the Middle East brings about large, unplanned production cuts.

US Shale Oil Production: Last week a $2 billion private-equity fund heavily invested in oil and gas wells went bust, raising the question of whether this is about to happen to other investors. With oil prices in the $40s, many drilling operators are losing money with every barrel of oil they produce.  These losses ultimately flow back to the investors that acquired their oilfield assets back when oil was selling for over $100 a barrel.

US shale oil production in June posted the first double digit monthly gain since mid-2015. Over the past year, US shale oil production climbed by 525,000 b/d nearly all of which came from horizontal wells in the Permian Basin.  US shale oil production is now believed to be around 5.5 million b/d and some optimists see this rapid growth continuing due to “technological advances.” The most optimistic of all is Goldman who expect that US shale oil production will increase from 5.5 million b/d to 12 million b/d by the mid-2020s. Goldman predicts that dropping costs of production will lead to an 800,000 b/d annual increase in production in 2018-2020 and a 700,000 b/d annual increase between 2021 and 2025. Under this scenario, the cost of US shale oil production is expected to fall below that of the lowest-cost OPEC producers such as Saudi Arabia, Iran, and Iraq.

However, there is another side to this rosy picture of “American energy dominance.” If spectacular increases in US oil production are to come in the five to eight years, most analysts say it must come from the Permian Basin which is the only shale oil play currently experiencing rapid growth.  The Eagle Ford and Bakken shale oil deposits peaked four years ago and have not enjoyed much growth recently and without a substantial increase in investment, there is little hope that there will be substantial growth in the Gulf of Mexico oil fields.

This leaves the Permian Basin as the one oil play that could give America “energy dominance” by pushing up US shale oil production from 5.5 million b/d to 12 million. For this to happen, there must be enough oil in the Permian oil play that can be exploited at prevailing prices.  A recent analysis of likely Permian reserves by Arthur Berman concludes that the total recoverable oil in the Permian Basin is likely to be on the order of 3.7 billion barrels and not the 160 billion barrels that the CEO of Pioneer Natural Resources recently was claiming could be recovered from the Permian. The two leading producers of Permian shale oil are anticipating peak production in 2019, which is not that far away.

If the shale oil from the Permian turns out to lead the US to dominance of the world oil markets by allowing the US to produce 12 million b/d of cheap shale oil, it will certainly come as a big surprise.

2.  The Middle East & North Africa

Given the amount of unrest in the Middle East these days, it seems possible that any of the serious confrontations going could morph into a situation than damages oil supplies. From the Qatar and Yemen vs. the Saudis, thru Syria, Russia, and ISIS, to the Trump Administration vs. Iran, there are numerous opportunities for hostilities affecting oil exports to emerge.  While there is much happy talk about Iran, Iraq, and even Egypt enjoying substantial increases in their energy production in coming years, not only are there growing geopolitical confrontations, but climate change accompanied by record breaking temperatures is beginning to affect the region.

Iran:  Last week Tehran and Washington announced that they would keep the nuclear pact in place for the time being. These announcements come despite much hardline anti-Iran talk from the Trump Administration and Tehran’s complaint that new US sanctions in response to Iranian missile tests violates the nuclear treaty.

Iran says it wants to sign ten new oil and gas deals before March 20th.  Since the nuclear sanctions were lifted in January 2016, Tehran has increased its production to 3.8 million b/d in May 2017 and has a goal of 4 million b/d by March 2018 and 4.7 million by 2022.  Given the hardships of the sanctions, Iran was allowed to exceed 3.7 million b/d under the OPEC production freeze agreement. Now with other OPEC members, including the Saudis violating the agreement, Iran likely feels free to produce above its limit.

US oil companies are barred from doing business in Iran, but Tehran claims that 25 new oil contracts are currently being negotiated. It remains to be seen how many of these contracts bring substantial investment in increasing Iranian oil production with them.

Saudi Arabia: The kingdom’s crude inventories continued to decline and are now 71 million barrels below the October 2015 peak. By drawing down stockpiles, the Saudis have been able to maintain customer shipments despite lower production. Last month, however, the Saudis increased production claiming they needed the extra production to support air conditioning. Rumors continue to circulate that the Saudis are planning to make a 1 million b/d production cut.

Most of the news last week was how 31-year-old Prince Mohammed bin Salman managed to unseat his 57-year-old cousin, Mohammed bin Nayef, to become the next in line for the throne.  The story being circulated was that bin Nayef was so badly wounded in a terrorist suicide bomb attack a few years ago that he had become so addicted to pain-relieving drugs that he could no longer function and was in no shape to become the next king.

In the wake of the power shift, the king began increasing Saudi Arabia’s security service to reduce the possibility that allies of bin Nayef could stage a counter coup against the current king and his son. There is much resentment over what has happened within the Saudi royal family which someday could have important consequences for the stability of the kingdom and its 10 million b/d of oil production.

Libya:  The head of the National Oil Company led a delegation to St Petersburg to share his country’s production plan with fellow OPEC members. Libya has increased its oil production by some 600,000 b/d in recent months wiping out much of the OPEC production cut. Whether any agreement to cap production comes out of the meeting will be known this week.

3.  China

Beijing’s economy is having a good year with GDP up 6.9 percent in the second quarter; industrial output up 7.6 percent YoY in June; fixed asset investment up 8.6 percent in the first half; and retail sales up 11 percent YoY in June. Analysts say the economy is on course for the first annual increase in economic growth since 2010. In the medium term, however, the economy faces risks from rising debt, overcapacity in much of the manufacturing sector, and a housing bubble in large cities.

China’s coal output in June was up 11 percent YoY. During the first half of the year coal production was up 5 percent YoY.  Heavy rains and the consequent flooding this spring has forced the shutdown of significant portions of China’s hydroelectric production including a two-thirds reduction of output from the giant Three Gorges Dam.  GDP growth, especially in China has always required growth in electrical energy production which means more coal. Despite massive efforts to cut back air pollution in major cities, when it comes to growth vs. the environment, growth has always won in contemporary China.

Beijing has issued new draft rules regarding the storage of oil in the country. The main change in the draft is that it removes requirements for distributors and storage companies to have secure and steady supplies of refined products, a condition that only state majors like Sinopec and China National Petroleum Corp could comply with in the past.  Under the new proposals, companies must have a minimum capacity of 200,000 cubic meters for the distribution and storage of crude oil and 20,000 cubic meters for refined projects before applying for permits to store oil and products. This is about half the requirement under the 2006 rules and should allow many smaller companies to enter the business.

4. Russia

With the country still heavily dependent on oil and gas sales for much of its income, the drop in prices over the last few years, combined with the Western sanctions, have created much havoc in Russia’s economy.  Last week the IMF issued a report saying that the recent stabilization of oil prices around $50 a barrel should enable Moscow to grow its GDP by about 1.4 percent next year and maintain a growth of about 1.5 percent over the medium term. The main risk to this outlook is oil prices.

A recent survey shows that many Russians remain concerned about inflation and political tensions with foreign powers.

US oilfield services company Schlumberger announced that it is to become the majority owner of Russia’s largest drilling and oil services contractor, Eurasia Drilling Co. Ltd. This company says it has one of the largest inventory of onshore drilling rigs in the world and is the premier supplier of services in the Caspian region. This deal will test the exact nature of US-Russia ties under the Trump administration.  There is already controversy over a $2 million dollar fine that the US Treasury imposed on Exxon for continuing to do business with Russia during the sanctions.

Moscow is trying to find a way around the problems that might arise after it acquired a 49.9 percent stake in the Venezuelan-owned US Citgo oil company. The acquisition has already caused quite a stir in Congress where many members do not want to see Russian ownership of a major piece of a US energy company.

5. Venezuela

There was little change in the situation last week. The daily confrontations between the government and the security forces continue. The opposition called a general strike last week that was partially successful. The Trump Administration is trying to figure out how to intervene in the situation. In addition to personal sanctions against several senior Venezuelan officials, the US is considering sanctions on Caracas’s oil exports.  There is a debate going on within the administration whether this would do more harm than good.

In the meantime, Venezuela’s oil situation is going downhill.  Refineries are working at less than 40 percent of the 2016 average, and the country must import some 200,000 barrels of oil and gasoline to keep the economy running. PDVSA’s exports to the US, its major cash customer, fell to 491,000 b/d in June, the lowest level in 14 years.  Oil production is still said to be 1.93 million b/d but falling.  The Maduro government is working on a new constitution which is said to nationalize the oil industry including the assets of private companies working in Venezuela.

The government is planning a vote on a revised constitution this week that would turn the country into a dictatorship. This is one reason Washington is considering an oil embargo. Any embargo is likely to send oil prices higher and impose yet more hardships on the Venezuelan people.

6.  The Briefs

Cost cutting: After a brief respite at the start of the year, the world’s top oil and gas companies are set to double down on cost cutting as a recovery in crude prices after a three-year slump falters. (7/22)

Offshore Norway, the giant gas field Troll that holds around 40 percent of total gas reserves on the Norwegian Continental Shelf (NCS) is set to produce a record amount of gas this year, just as gas demand in the UK is on the rise. (7/18)

In the Netherlands, the largest and oldest-producing gas field in Western Europe, the Groningen field, is on the verge of being shut down. If that happens, it will greatly reduce the nation’s indigenous gas production, making it a net gas importer. Residents from the Groningen area, joined by environmental groups, are asking for the complete closure of the Groningen, citing frequent, albeit low magnitude, earthquakes as a significant nuisance. The phenomenon is no novelty, with 80,000 damage claims totaling €1.2 billion having been filed with the government…It remains to be seen if an abrupt shutdown of gas production in the Netherlands is in anybody’s best interests. (7/21)

Nobody doubts Qatar has a lot of money to resist economic sanctions imposed on it early last month when Saudi Arabia and three other Arab states cut diplomatic and transport ties. The central bank governor said last week that Doha could employ about $340 billion of reserves: some $40 billion plus gold at the central bank, and $300 billion at the Qatar Investment Authority, the sovereign wealth fund. (7/20)

Saudi Arabia’s Energy Ministry has invited bids for a 400-MW wind power plant to be built in northwestern Saudi Arabia. The Dumat Al Jandal wind power plant will be the first utility-scale wind project in the Kingdom. The plant’s construction is part of a large-scale program to shift away from the Kingdom’s heavy reliance on oil and gas, stipulated in the Vision 2030 initiative. (7/18)

In Egypt, three recently discovered gas fields are expected to raise the nation’s natural gas output by 50 percent in 2018 and 100 percent in 2020, the petroleum ministry said. (7/18)

South Korea is set to ease restrictions for international oil traders to blend fuels at the country’s oil storage terminals in its attempt to become a trading hub in Northeast Asia, which could potentially pose a challenge to the established oil hub in Singapore. (7/21)

In North Korea, China National Petroleum Corp (CNPC), a state-controlled company, halted diesel and gasoline sales “over the last month or two”, amid international pressure on Pyongyang to curb its nuclear and missile programs, Reuters exclusively reported on June 28. Scrutiny of China’s commercial ties with its isolated neighbor intensified further following North Korea’s first test of an intercontinental ballistic missile two weeks ago. (7/17)

In Cuba, amendments to a work plan for oil assets open the door for drilling exploration wells by the first half of next year, Australia’s Melbana Energy said. Melbana is one of the few Western oil companies, and the only one listed on the Australian exchange, with a footprint in Cuba. (7/20)

The US oil rig count declined by 1 last week to 764, only the third weekly decline during 2017, according to Baker Hughes Inc. They also reported today that Canada’s rig count increased by 15, erasing—and then some—any optimism that may otherwise have come from the slight decline in the US (7/22)

Shale oil record: as of July, the total US shale basin is producing a record amount of crude oil, which the EIA pegged at 5.472 million b/d, up almost exactly as predicted, and is expected to rise by a further 113,000 b/d in August to a new all-time high of 5.585 million b/d. (7/19)

Oil price sheet: Despite the oil industry being arguably the most vital and influential sector in the world, the average member of the public knows relatively little about its inner workings. Oil prices for roughly 1,000 different grades of oil are possibly the most obvious example of this. All those prices are now available on-line at no cost. (7/22)

FERC okays pipeline: Dominion Energy’s Atlantic Coast natural gas pipeline Friday received a broadly favorable environmental impact statement from Federal Energy Regulatory Commission staff, marking a major milestone for the 600-mile, 1.5 billion cf/d line, among several high-capacity projects designed to bring gas to the Eastern Seaboard. The greenfield project would move gas to points along its mainline in West Virginia, Virginia and North Carolina. (7/22)

Pipe backfire? Donald Trump’s allies in the oil industry are warning the president that his bid to boost US steelmakers could backfire against their efforts to achieve his goal of “American energy dominance.” The intense lobbying effort comes as the Commerce Department faces a Sunday deadline to give the president a plan to require oil and gas pipelines to use American-made steel, an idea Trump embraced in the initial days of his presidency. While the US has imposed “Buy American” rules on government purchases for decades, it would be unprecedented to force those obligations on privately funded, commercial projects. (7/22)

SPR: President Donald Trump wants to sell part of the Strategic Petroleum Reserve (SPR). On July 21, 1977, the US government began stockpiling oil. It started small. Just 412,000 barrels of Saudi Arabian light crude stashed in a Southeast Texas salt cavern. In the wake of the Arab oil embargo, which sent prices through the roof and forced Americans to ration gasoline, creating a national reserve seemed like an obvious way to protect US consumers from global supply shocks. Forty years later, the world has changed, and Washington is torn on whether the SPR has outlived its usefulness. (7/22)

Fight in a phone booth: Two of President Trump’s most senior cabinet members became embroiled Thursday in an unusual legal battle over whether ExxonMobil under Secretary of State Rex Tillerson’s leadership violated US sanctions against Russia. Treasury officials fined ExxonMobil $2 million Thursday morning for signing eight business agreements in 2014 with Igor Sechin, the chief executive of Rosneft, an energy giant partially owned by the Russian government. (7/21)

Spill: Accidents happen, but these were expensive ones by any measure. Energy Transfer Partners had hoped to have the first phase of its massive Rover pipeline up and running by now, transporting natural gas from America’s most prolific natural gas basins to other parts of the country. Rushing to complete construction in a tight regulatory window, the company allegedly spilled drilling fluid into a protected wetland. (7/21)

Aliso Canyon reopens: An underground natural gas storage facility near Los Angeles that leaked methane for several months in 2015 is safe to reopen at a reduced capacity, California regulators said. (7/21)

Drill ANWR? Two US senators are promoting a federal budget proposal to drill for oil and natural gas in the Arctic National Wildlife Refuge — at a time when many countries are also eyeing resources in the region. (7/20)

Dark cloud over oil? Like many industries today, the oil industry is trying to sell its many job opportunities to the fastest growing portion of the global workforce: Millennials. But unlike any other industry, oil and gas are facing more challenges in persuading the environmentally-conscious Millennials that oil is “cool”. Despite a Super Bowl ad by the API pitched to the Millennials’ language and to reach out to the elusive generation, the ad sparked anger with many consumers and viewers. (7/20)

Oil $$ bust: A $2 billion private-equity fund that borrowed heavily to buy oil and gas wells before energy prices plunged is now worth essentially nothing, an unusual debacle that is wiping out investments by major pensions, endowments, and charitable foundations. EnerVest Ltd., a Houston private-equity firm that focuses on energy investments, manages the fund. (7/17)

“Not off our coast:” Under pressure from President Donald Trump, North Carolina Gov. Roy Cooper (D) announced his opposition on Thursday to drilling for natural gas and oil off the Atlantic coast, saying it poses too much of a threat to the state’s beaches and tourism economy. (7/21)

Coal + fossil fuel downer: One of the largest haulers of US coal says fossil fuels have no future, despite pledges to the contrary from President Donald Trump. CSX, a freight railroad company with origins in the bituminous coal seams of Appalachia, will not buy a single new locomotive to pull coal trains, chief executive Hunter Harrison told analysts on Wednesday. “Fossil fuels are dead,” Mr. Harrison said. “That’s a long-term view. It’s not going to happen overnight. It’s not going to be in two or three years. But it’s going away, in my view.” (7/20)

In Japan, toxic waste produced by one of the world’s worst nuclear disasters will be dumped into the sea, according to the head of the Japanese company tasked with cleaning up the radioactive mess, despite protests from local fishermen. (7/17)

Perry’s surprise: A leaked draft of Energy Secretary Rick Perry’s grid study obtained by Bloomberg debunks his attack on renewable energy. ThinkProgress has now obtained a copy of that draft, and it has many more surprises — or, rather, findings that are well known to energy experts but may come as an unpleasant surprise to Perry and the White House. For instance, a large fraction of America’s aging fleet of coal and nuclear plants are simply not economic to operate anymore. (7/19)

Renewable energy gives Portugal, which imports all its oil and gas, a way to gain a degree of independence over its economy, a European energy official said. Largely isolated from European energy networks, the EU leader said renewable energy was helping Portugal gain economic leverage. (7/18)

Electric cars, considered curios for the rich or eccentric or both not that long ago, are now entering the mainstream. A slew of recent announcements by researchers, auto companies and world leaders offer real promise. First up, a forecast by Bloomberg New Energy Finance said that electric cars would become cheaper than conventional cars without government subsidies between 2025 and 2030. (7/19)

Climate skeptic: President Trump on Wednesday nominated Sam Clovis, a former college professor and talk radio host who has challenged the scientific consensus that human activity has been the primary driver of climate change, to serve in the Agriculture Department’s top scientific post. (7/21)

California Gov. Jerry Brown scored a major win for his climate-change agenda Monday night when the Legislature approved an extension of the state’s cap-and-trade program. Mr. Brown had struggled to get Democrats on board, with some more business-friendly members concerned about the program’s effect on jobs and some environmentalists objecting that it gives too much to industry. (7/19)