Peak Oil Review – 27 Feb 2017

Contents

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia
5. Nigeria
6. Venezuela
7. The Briefs

1.  Oil and the Global Economy

Oil prices moved to the top of their trading range last week as many traders believe prices are about to move higher. Even though the EIA reported that US oil stocks rose the week before last by 600,000 barrels to an all-time high of 518 million barrels, some traders are saying that we have reached the end of the buildup in US crude stocks which has been going on for the last two months. A drop in US crude imports is being interpreted as the result of the OPEC production cut. Many are expecting that US crude inventories will continue to fall on lower imports and increased US crude exports, which are now up to circa 1.2 million b/d, the highest on record. The surge in exports of crude seems to be due to lower availability of OPEC crude in Asia, and the gap between Brent and US crude prices which have averaged $2.24 in recent trading.

US hedge funds, which clearly are expecting higher prices ahead, have gradually increased their long positions to over 1 billion barrels. US gasoline stocks were down by 2.6 million barrels in last week’s report. This was largely due to lower gasoline production during the winter refinery maintenance period but also to a surge in gasoline exports to Latin American countries which have been having trouble refining enough gasoline in recent months. OPEC continues to trumpet its compliance to the production cut agreement which is now said to be at about 86 percent of the planned 1.8 million b/d cut.

As usual, however, there is another side to the story of higher price expectations. The US rig count continues to build, and some tanker trackers are saying that while exports from the parties to the agreement were clearly down in January, shipping schedules and tanker loadings suggest that there may be some rebound in February reducing the size of the production cut.  Another concern is the massive open positions that hedge funds are holding. At some point, a few holders of these positions could become tired of waiting for a price increase and start a selloff which could easily result in as much as a $10 a barrel collapse in prices before the dust settles. Many observers are already saying that the unprecedented size of the global inventory means that the production cut agreement will have to be extended at least to the end of the year given the expected increases in production from non-participating crude producers.

Another factor in the oil price story is how the Trump administration new oil policies will affect the markets.  There have already been executive orders and pronouncements from new administration officials aimed at reducing regulations on the fossil fuel industry and increasing its production. How effective these changes might be has become a matter of much debate. Nobody seems to believe that the US coal industry will be revived by Presidential fiat, as coal, particularly from the eastern coal fields, is no longer competitive with natural gas and renewables.  Moreover, unusually warm winter temperatures, which could become the norm, might result in lower winter demand for natural gas and lower prices. Opening more federal property for drilling with fewer regulations may be attractive, but it will take much higher oil prices and many years to launch significant new drilling outside of the basins currently being exploited.

Of more interest is the debate over the corporate tax overhaul which could bring about a major change for the US oil and gas industry with repercussions all over the world. Under the proposal, a border adjustment tax would eliminate the ability to deduct the cost of imported oil as a regular business expense and treat the profits from foreign sales of crude as non-taxable income. Such a tax law would make the circa 8 million barrels of crude that the US imports each day more expensive and the export of crude and oil products more profitable. As wide swaths of the US economy would be helped or hurt by such a law, there is likely to be a prolonged debate. President Trump has said he supports such a tax, but recently the White House has been sending out mixed signals. We should learn more from the President’s address to Congress later this week.

For now, oil prices are hovering around $54 a barrel in the US and $56 in London waiting for the next shoe to drop. Some are talking about $70 oil later this year, while others are warning that prices could fall into the $30s. From the peak oil perspective, it seems that while oil prices in the $50s may stimulate more marginally profitable shale oil production, prices will have to be much higher to support the exploring and drilling for the amounts of oil that many believe will be necessary to support the global economy 5-10 years from now.

2.  The Middle East & North Africa

Iran:  Tehran seems to be somewhat more realistic than other OPEC members. Last week the government said that increasing the price of oil to more than $55 a barrel would not help OPEC as higher prices would simply attract more oil from high-cost (read shale oil) fields. As one of the last places in the world where oil can be developed from low-cost onshore conventional wells, the Iranians are happy to hold prices at their current levels.

Tehran announced last week that it will be selling 100,000 b/d to Russia and will receive half the payment in cash and the rest in goods and services. This sounds like a semi-barter deal designed to get around banking restrictions. The Iranians have been purchasing an increased quantity of high-cost military equipment from Moscow recently.

Iraq: As the offensive to push ISIL out of Mosul continues to make progress, attention is starting to focus on what the region will look like after ISIL is defeated as a pseudo-state.  During the fighting with ISIL, the Kurds and their Peshmerga forces have managed to seize considerable territory, some of it containing sizeable oil deposits, that will make an excellent bargaining chip for the Kurds’ efforts to achieve independence. The Kurds have been looking for a way to get out from under Baghdad for nearly a century and see this as one of the best opportunities they have ever had.

Iraqi police arrested two men suspected of being agents of the Islamic State that were attempting to enter Shuaiba oil refinery near Basra. In recent weeks, there have been several reports of trouble around Basra which is Iraq’s oil capitol and is thought to be firmly under Shiite control. As it seems likely ISIL will soon be unable to control much territory and become more of a guerrilla insurgency, one of the top targets is likely to be the oil infrastructure in southern Iraq.

Russia’s Rosneft announced last week that it would begin buying crude from the Kurds in addition to stepping up its drilling in southern Iraq. Baghdad seems to be willing to acquiesce in the Russians dealing with both sides. It is a sign that Moscow is gaining more influence in the region.

Saudi Arabia:  Most of the oil news this week deals with the upcoming sale of 5 percent of Saudi Aramco to private investors both foreign and domestic. While the Saudis assert that the firm is worth $2 trillion so that the sale of 5 percent should bring in $100 billion, this claim is starting to get some pushback from foreign observers. After examining Aramco’s reserves, cash flow projections, and tax situation, some outside specialists are saying the firm is unlikely to be worth more than $1 trillion and possibly as little as $400 million.  Part of the problem is that the firm has never published financial statements or more than vague assertions about its reserves, and the company is so integrated with the Saudi government and royal family that the concept of taxes and royalties is nearly meaningless. Aramco is now supposed to be paying a 20 percent royalty and an 85 percent tax rate. While the government is the owner, nobody cares, but for a public offering, there has got to be at least some prospects for some earnings.

While the concept of turning some of Saudi Aramco into cash that can be used to diversify the economy so that it can survive the end of the oil age seems like a good idea, this may be more difficult to do than the Saudis believe. The plan for an IPO was first set for this year, now has slipped to 2018, or 2019, or even later.

Libya: Moscow announced last week that it is planning to purchase crude from Libya and is looking at investing in the North African country. Tripoli has been sending out signals for the last few weeks that the troubles are over and that it is now open for foreign investment. The political situation in Libya, however, is still fluid with fighting between rival groups taking place in Tripoli over the weekend. Whether the National Oil Company will be able to realize its plans for doubling oil production in the next year or so is still an open question.

3.  China

Much of the energy news from China last week had to do with the ban on North Korean coal imports. Coal exports to China have amounted to some 30-40 percent of North Korea’s foreign earnings in recent years so that the country will suffer badly as long as the ban continues. A UN resolution passed in November say that North Korea should not be allowed to export more than 57.5 million tons of coal. The ban temporarily affects some Chinese steel mills that were dependent on Korean coking coal.

In an unusual move, Chinese independent refiners are now importing oil from the US Gulf of Mexico. The Chinese refiners can handle heavy crudes which cost less and lead to higher profits. It is these heavy crudes which have been going to Asia that were cut in the OPEC production roll back. Venezuela which has been supplying heavy crude to China has been shipping less due to internal difficulties. Price increases for Middle Eastern heavy crudes have made it economical to shift similar crudes from the US Gulf Coast, around Africa, and on to China – a trip of some 55 days.

4. Russia

Saudi cuts in December left Russia as the world’s top oil producer by a slim 10.49 million b/d to 10.46 million. Given that the Saudis are likely to be cutting more oil production than Moscow, Russia is likely to hold the title for a while.

Russian oil companies have become more active in the Middle East of late signing new deals with Iran, Iraq, the Iraqi Kurds, and Libya. As Moscow does not particularly need oil from Iran or Libya, these deals likely come from a political motivation rather than the desire to acquire more oil.

5. Nigeria

With President Muhammadu Buhari, 74, apparently on an indefinite medical leave in London, there is more uncertainty than usual over the course of the government. Buhari, a Muslim, has not visited the mostly Christian Delta region. Buhari was also the one who cut stipends, or if you will “bribes,” not to attack oil facilities in the region. From 2009 to 2015 these payments allowed a restoration of Nigeria’s oil production to normal levels. During Buhari’s absence, Vice President Yemi Osinbajo, who used to be a Christian pastor, has been touring the Delta in an effort to patch things up. Osinbajo has been making an effort to give the impression that the country continues to function during the president’s unexplained absence.

Should President Buhari be unable to return, the change of national leaders might help settle the problems in the Delta and restore oil production.

6. Venezuela

A new survey shows that 75 percent of Venezuelans may have lost an average of 19 pounds in the last year as widespread food shortages continue. Nearly a third of the population are now eating two meals a day or less. The survey also shows that the average shopper spends 35 hours a month waiting in line to buy food and other necessities. A sense of hopelessness has engulfed the country, and most no longer have an incentive or the strength to protest against the government and its policies as was happening two years ago. Government roundups of opposition politicians continue. Venezuela is clearly well on its way to becoming a failed state.

Beijing, which is owed some $50 billion by Caracas, is doing its best to protect its investment and recently signed 22 new agreements to strengthen its ties with the Maduro government. Six of these involve energy, including a project to build a refinery in China that can process some 400,000 b/d of Venezuela’s ultra-heavy Orinoco crude. Another project is to increase the output of Orinoco processing facility by 165,000 b/d to 230,000 b/d.  Yet another is to build a new oil export facility in eastern Venezuela along with a network of pipes to move the Orinoco crude to the new terminal.

None of these plans are likely to affect Venezuela’s current economic crisis but are a sign that the country has the largest reserves of crude (albeit extra-heavy) in the world and Beijing seems determined to get its hands on it as domestic production withers.

7.  The Briefs

The Brent crude price benchmark for millions of barrels of physical crude sales each day is poised for its biggest shakeup in a decade with a new grade added to the mix from January next year. Norway’s Troll crude, which pumped more than 200,000 barrels each day last year, will from Jan. 1 be included alongside existing grades that make up the Dated Brent benchmark — Brent, Forties, Oseberg, and Ekofisk. (2/21)

Arctic: While Canada and the U.S. ban Arctic drilling for oil and gas motivated by environmental concerns, and majors such as Shell pull out of their Arctic projects due to financial pressures, Norwegian energy companies are planning to increase drilling in the country’s Arctic shelf in the Barents Sea. (2/21)

Kashagan: The North Caspian Operating Co., a joint venture operating the giant oil field in the Kazakh waters of the Caspian Sea, confirmed that production from Kashagan was holding steady at 160,000 b/d and production would accelerate to 180,000 b/d in the coming months. Once secondary production methods are optimized to increase pressure in the reservoir, a spokesperson for the NCOC said the first phase of Kashagan is expected to reach production capacity of 370,000 barrels per day by the end of 2017. (2/24)

Abu Dhabi awarded a 4 percent stake in its giant onshore oil concession to CEFC China Energy Co for a fee of $900 million. The stake is the last to be awarded in the concession after international energy companies including Total, BP, and China’s CNPC secured stakes. (2/21)

In Israel, the partnership in control of Leviathan, among the largest gas fields in the world, said they reached an investment decision that envisions flows by 2019. Delek Group and its partners said Thursday they’d spend about $3.75 billion on the development of the first phase of Leviathan, which envisions a production capacity of about 1.2 billion cubic feet per day. (2/24)

Offshore Senegal, Australian energy company FAR Ltd. said its estimate of oil reserves are far richer than initially expected. FAR has nearly 3,000 square miles under license and achieved discoveries already from its FAN and SNE wells. By the third quarter of 2016, the company said the SNE oil field, in particular, met the minimum threshold to be considered a commercial opportunity–less than two years after the field was discovered. By the company’s estimates, more than 1.5 billion barrels of oil may be in basins off the coast of Senegal. (2/24)

Offshore South Africa, future giant discoveries may be lurking in the Outeniqua Basin, according to Anongporn Intawong, a team leader geologist at Spectrum. Although Intawong didn’t speculate on the potential size of any future discoveries, previous finds in the Outeniqua Basin have yielded recoverable reserves of up to 314 million barrels of oil equivalent. (2/24)

Colombia’s Ecopetrol reported a 14 percent year-on-year reduction in proven reserves through December 31, a decrease that reflects three years of declining oil field investment in Colombia’s oil patch. Ecopetrol pegged year-end 1P reserves at 1.598 billion barrels, down 14% from 1.849 billion barrels at the end of 2015. Ecopetrol said the decrease was due to the “pronounced fall in oil prices” in 2016 that made a significant percentage of the company’s previously reported reserves uneconomical to produce. (2/22)

Mexico’s plans to develop its shale oil resources have finally taken a step forward following years of largely fruitless efforts by the state-owned company Pemex. Canada’s Renaissance Oil and Russia’s Lukoil are joining forces to develop the Amatitlan block of the Chicontepec region. They aren’t interested in the shallower tight oil, but in the stack’s deeper Pimienta shale formation, which is what they consider Mexico’s Eagle Ford. (2/21)

Oil-sands investments in Western Canada that gobbled tens of billions of dollars over the past decade are proving an Achilles heel for some of the world’s biggest energy producers. While prolific shale plays in Texas and Oklahoma are going through an investment boom with oil above $50 a barrel, the oil sands have fallen out of favor. Current investments in the region amount mostly to long-planned expansions by large Canadian producers like Suncor Energy Inc., while majors like Statoil ASA have sold assets. (2/24)

Oil sands reserves cut-back: ConocoPhillips kicked off the carnage on Tuesday, reporting that it has cut reserves by 1.2 billion barrels at four oil sands projects, with overall reserves from these plays dropping from 2.4 billion barrels to just 1.2 billion barrels as of the end of 2016. The driving force for the revision was lower oil prices. (2/25)

Exxon Mobil disclosed the deepest reserves cut in its modern history as prolonged routs in oil and natural gas markets erased the value of a $16 billion oil sands investment and other North American assets. The equivalent of about 3.3 billion barrels of untapped crude was removed from the so-called proved reserves category in Exxon’s books. The revisions were triggered when low energy prices made it mathematically impossible to profitably harvest those fields within five years. The sprawling, 3.5-billion barrel Kearl oil-sands development in western Canada accounted for most of the hit. (2/24)

The US oil rig count increased by five units to 602, up 286 units since the low in May of 2016, according to Baker Hughes Inc.  The gas rig count dropped two units to 151 with the combined number at 754 rigs operational (1 rig is unclassified). (2/25)

Rig company Transocean said that, after reporting an increase in revenues for the fourth quarter, recovery for offshore drillers was evident on the horizon. (2/24)

US crude oil exports hit another record. Producers and traders shipped out 1.21 million b/d of U.S. crude in the week that ended February 17, the most in EIA data going back to 1993. Domestic output increased to 9 million barrels per day last week, the fastest pace since April, while U.S. refiners used the least crude since October 2015. (2/24)

BofA’s Francisco Blanch says a drop in shale breakeven costs is what is currently the biggest wildcard in the global race to reach production “equilibrium,” and also says that U.S. shale oil production could surge 3.5 million barrels a day by 2022, prompting OPEC to boost production in hopes of recapturing market share. (2/22)

Texas crude oil production for 2016 was down 10 percent from the previous year, according to preliminary data the state government reported. The Railroad Commission of Texas reported a preliminary production rate for crude oil of 74.2 million barrels for all of December, down from the 76.7 million barrels reported for the previous month. (2/25)

Dakota pipeline: Billionaire Kelcy Warren, who faced months of protests over the Dakota Access oil pipeline, said his company—Energy Transfer Partners LP—followed every law and still fell into a “mess.” Warren “underestimated the power of social media” during the standoff with environmental and Native American-rights activists. (2/24)

Gas exporter: The United States is on track to become a net exporter of natural gas next year, driven largely by the growth of liquefied natural gas exports, according to the U.S. Energy Department. The U.S. started exporting LNG last year, courtesy of Houston-based Cheniere Energy, and the country is increasingly piping more natural gas to Mexico while, simultaneously, importing less gas via pipeline from Canada. (2/24)

Natural gas prices plunged to their lowest level since November on mild weather in the US, which has caused storage levels to decline at a much slower pace than expected. Contracts for March delivery on the Nymex exchange dipped to $2.63 on February 21, down a third since December. The bearish swing has come after successive EIA reports showing a modest drawdown in gas inventory levels. (2/22)

US natural gas speculators cut their net long positions for a fifth week in a row on forecasts that the weather will remain warmer than normal for the rest of the winter. (2/25)

The race for using high-performance computing in oil and gas reservoir simulation, management and development is on. Oil and gas supermajors are continuously pushing for higher efficiency and lower costs, all the more so since the oil price crash in 2014 caused them to cut exploration and production investments. The industry is increasingly relying on advanced technology in appraising oil and gas fields that would minimize downtime and maximize profits. Last week, ExxonMobil boasted that it had set a record in high-performance oil and gas reservoir computing. (2/22)

Biofuels brouhaha: Oil companies showed deepening divides on the future of the US biofuels program in solicited comments from the Environmental Protection Agency over a plan sought by some refiners to shift the program’s financial burden to retailers and blenders. All sides are pushing hard, seizing the opportunity to test President Donald Trump’s commitment to the program. (2/24)

Boosting coal: President Trump is ready to start signing executive orders that roll back Obama-era regulations on climate and water pollution. While both directives will take time to implement, they will send an unmistakable signal that the new administration is determined to promote fossil-fuel production. Trump signed legislation last week that nullified a recent regulation prohibiting surface-mining operations from dumping waste into nearby waterways. (2/24)

Auto mpg rollback? President Trump has vowed to roll back regulations on business, and automakers are wasting no time in pushing his administration to make good on the promise. Two lobbying groups representing auto manufacturers have written letters urging the new head of the EPA Scott Pruitt to reverse a decision last month by the Obama administration to move forward with tougher fuel-economy standards that carmakers are supposed to meet by 2025. (2/24)

RE vs. FF: In 2015, investments in oil and gas declined by 25%, while energy produced from renewables rose by 30%. Renewables are becoming increasingly competitive with fossil fuels in many sectors: according to the IEA, in the five years to the end of 2015 the price of solar energy dropped by 80% and wind power by a third. The big problem with renewables development has been storage, with a need for a system that comes in at less than $100 per kilowatt-hour of storage.  Harvard researchers say in an article published that they have now developed a long-lasting flow battery capable of storing renewable power that­ could operate for up to 10 years, with minimum maintenance required. A flow battery is a cross between a conventional battery and a fuel cell. (2/22)

H2 vs. EVs: In the UK, Cobham service station in Surrey will get its first public filling station for hydrogen-powered cars on Wednesday as part of a bet by Royal Dutch Shell on a technology vying with battery-powered electric vehicles to replace fossil fuels in road transportation. Shell is already part of a public-private consortium planning 400 hydrogen filling stations across Germany by 2023, together with partners including its French rival Total. (2/22)

Fusion:  The world is facing a deep decarbonisation challenge, and organizations such as the Breakthrough Energy Coalition and the newly-announced Breakthrough Energy Ventures are seeking new technologies, like fusion, as the solution. Tokamak Energy says it aims to put fusion power into the grid by 2030. (2/22)