Editors: Tom Whipple, Steve Andrews

Quote of the Week

“For all its revolutionary impact on the oil industry, shale remains poorly understood.  Publicly available data based on old-fashioned company reporting have their limits. Hard measurements unlocked by new data technologies show that, contrary to public belief, there is no great buildup of DUCs [drilled but uncompleted wells] just waiting to be brought online. The whole idea that the market can rely on this sort of de facto spare production capacity is an illusion. The industry is actually running on a much tighter leash than that.”

Antoine Halff, Kayrros chief analyst and cofounder.

Graphic of the Week

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

1.  Oil and the Global Economy

The US oil and gas rig count fell by eight this week, according to Baker Hughes, adding to months of losses, as US oil production falls to its lowest level since October 2018.  The total number of active oil rigs in the United States fell by three, according to the report, reaching 776.  The number of active gas rigs decreased by 5 to reach 169.

The combined oil and gas rig count is now 946 for the week, with oil seeing an 85-rig decrease year on year and gas rigs down 17 since this time last year.  The combined oil and gas rig count is down 102, year on year.  Year-to-date, the oil rig count has fallen from 858 active rigs since the beginning of the year to 776, while gas rigs have fallen from 187 to 169 during that same time.

US production fell sharply for the week ending July 19 to 11.3 million b/d, more than 1 million barrels down from the all-time high in the United States, and the lowest production level since October of last year.  Canada’s overall rig count saw an increase this week of 9 after increasing by one last week.  Canada’s oil rigs are down by 69 year on year, with gas rigs down 27 year on year.
The American Petroleum Institute (API) reported a huge crude oil inventory draw of 10.961 million barrels for the week ending July 18.  This is in line with U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) that decreased by 10.8 million barrels from the previous week.  After the extra-large draw—the largest draw this year–the net build is now just 1.20 million barrels for the 30-week reporting period so far this year, using API data.
US Shale Oil Production: Three months ago, when Helmerich had 220 of its rigs hired out, Chief Executive Officer John Lindsay told investors the second quarter would be the nadir for his fleet.  But after the number of Helmerich rigs at work shrank to 214 a few weeks ago, Lindsay says his earlier projection was “premature.”  “The full effect of the industry’s emphasis on disciplined capital spending continues to reverberate through the oil field services sector,” he said in a Wednesday statement.  “We are reluctant to predict another bottom and see further softening during our fourth fiscal quarter as our guidance would indicate.”

The hired hands of the shale patch who drill and frack wells are suffering from a slowdown in North American spending brought on by investor demands for higher returns.  The US oil rig count has fallen 11% this year, according to Baker Hughes.  Fracking giant Halliburton Co. is eliminating jobs and warehousing equipment no one wants to rent.  Superior Energy Services Inc. said earlier this week that it’s looking for ways to cut costs and may sell assets to raise cash.  On Thursday, 28 of the 29 oil and gas industry stocks in the S&P 500 Index were falling.  The frack market “is a mess,” Brad Handler, an analyst at Jefferies LLC, wrote in a note to clients.  “With every passing data point/call, there is little to suggest this market gets any better, and so we hack away at numbers again.”

Helmerich’s smaller rival Patterson-UTI Energy Inc. also cut its forecast.  The Houston-based contractor said it expects to run 142 rigs on average during the third quarter, down 10% from the previous three-month period.  “E&P companies are being extra vigilant this year in monitoring their spend due to commodity price volatility and the increased focus on spending within their budgets,” Andy Hendricks, chief executive officer at Patterson, said in the statement.  Helmerich & Payne fell as much as 7.6% while Patterson dropped as much as 11% for its biggest tumble since February 2018.

Operators in the Permian have been failing to report the completion of some oil wells, according to one data analytics company.  Hydraulic fracturing (fracking) activity was underreported by 21 percent in the U.S.’ most prolific basin in 2018, according to Kayrros, a data analytics company serving the energy markets.  In findings released Tuesday, Kayrros claims that more than 1,100 wells were completed in the Permian Basin but not reported through state commissions or FracFocus – a public repository for information on chemicals used during fracking.  Kayrros said it uses optical and synthetic aperture radar imagery tracking along with proprietary algorithms to identify rigs and frack crews.  Using those methods, they counted a total of 6,394 completed wells in the Permian in 2018 – a 21 percent increase from the FracFocus estimate of 5,272 wells as of June 20, 2019.
With financial stress setting in for US shale companies, some are trying to drill their way out of the problem, while others are hoping to boost profitability by cutting costs and implementing spending restraint.  Both approaches are riddled with risk. “Turbulence and desperation are roiling the struggling fracking industry,” Kathy Hipple and Tom Sanzillo wrote in a note for the Institute for Energy Economics and Financial Analysis (IEEFA).  They point to the example of EQT, the largest natural gas producer in the United States.  A corporate struggle over control of the company reached a conclusion recently, with Toby and Derek Rice seizing power. The Rice brothers sold their company, Rice Energy, to EQT in 2017, but they launched a bid to take over EQT last year, arguing that the company’s leadership had failed investors.
US shale producers are poised to further trim spending this year, executives at companies that provide drilling and hydraulic fracturing services warned this week, as several took steps to idle more oilfield equipment.  Oilfield suppliers are idling more of the equipment used to fracture wells, and drilling contractors say they expect to run fewer rigs in the second half of the year than in the first.  The slowing pace comes as Wall Street pressures oil producers to focus on returns rather than expanding drilling operations.

2.  The Middle East & North Africa

Iran: Tehran is ready for “just” negotiations but not if they mean surrender, Iran’s President Hassan Rouhani said on Wednesday, without saying what talks he had in mind.  Rouhani seemed to be referring to possible negotiations with the United States. US President Donald Trump withdrew from a landmark 2015 nuclear deal with Iran last year but has said he is willing to hold talks with the Islamic Republic.  “As long as I have the responsibility for the executive duties of the country, we are completely ready for just, legal and honest negotiations to solve the problems,” Rouhani said, according to his official website.
The remaining signatories to the Iran nuclear deal met in Vienna on Sunday to try again to find a way of saving the accord amid mounting tensions between Tehran and Washington.  Envoys from Britain, France, Germany, China, Russia and Iran took part in the extraordinary meeting which comes a month after a similar gathering failed to achieve a breakthrough.  As US oil sanctions tightened in May, Iran said it would disregard certain limits the deal set on its nuclear program and threatened to take further measures if remaining parties to the deal, especially European nations, did not help it circumvent the US sanctions.  Pressure has continued to mount in the region with a string of incidents involving mysterious attacks on oil tankers and downing of drones.
The Trump administration’s plan to rally global naval powers to protect shipping lanes in the Persian Gulf is not progressing very well. After the President pulled back from a military strike on Iran last month, Plan B for the US was to convince interested parties to band together and escort oil tankers through the Strait of Hormuz.  Nobody wanted anything to do with a new war in the Middle East, but with roughly 20 million b/d passing through the Strait every day – or a fifth of global supply – building a coalition of naval ships from multiple countries would seemingly be a much easier lift.  Newly confirmed US Secretary of Defense Mark Esper said his top priority would be “Operation Sentinel,” as it is called, which would include getting other navies to help the US provide security in the Persian Gulf for oil tankers.

3.  China

Secretary of the Treasury Mnuchin and Trade Representative Lighthizer will resume trade talks in Shanghai on July 30, with a focus on agriculture, the trade deficit and other issues.  Analysts remain skeptical that the two sides can reach a broad deal to end the trade conflict that has slowed US exports of LNG, crude, soybeans and other agricultural products.
ClearView Energy Partners managing director Kevin Book said prospects still look dim for a deal that would address US demands for “substantial and durable Chinese reforms, expanded market access and intellectual property controls.”  Book said comments by President Donald Trump since he met with Chinese President Xi Jinping in June suggest “some willingness” to proceed with 25% tariffs on $300 billion worth of Chinese goods.
US crude exports to China dried up in August through November 2018 and again in January even though crude oil has not been officially targeted by retaliatory tariffs. The US exported an average of 62,000 b/d of crude to China in April, according to the most recent US Energy Information Administration data, well below the monthly peak of 510,000 b/d in June 2018.
The US has sanctioned a Chinese state oil trader for violating restrictions on Iranian crude, an attempt to tighten restrictions on the Islamic Republic and cut off one of its biggest buyers.
Zhuhai Zhenrong Co., the secretive company with links to the Chinese military, has a history of taking Iranian crude and fuel, at times as part of barter deals for goods or services, and then selling it on to refiners in China.  The US move comes at a delicate time for relations with Beijing as the two nations attempt to kick-start negotiations aimed at resolving their broader trade conflict.

4.  Russia

The blame game over a contamination scandal in Russia’s oil industry has breached President Vladimir Putin’s inner circle.  Igor Sechin, head of Rosneft, the world’s biggest publicly-traded oil company, and Nikolai Tokarev, the boss of Transneft, the world’s largest pipeline network, are embroiled in an unusually public and rancorous dispute over their companies’ responses to the contamination of Russia’s Druzhba (“Friendship”) pipeline, an episode that disrupted exports and tarnished Moscow’s image as a reliable energy supplier.

Publicly, Putin has remained on the sidelines while the two men wage a war of words by news release leveling allegations of treachery and incompetence.  A third government source said he thought Putin was letting the dispute play out because it helped distract from a central and unanswered question: who was to blame for the dirty oil scandal.

Since the contamination was uncovered in April, Rosneft has publicly accused Transneft of fumbling its response and of failing to devise a plan to prevent it happening again, while Transneft has accused Rosneft of getting its facts wrong and of making unsubstantiated compensation claims.

Transneft needs a truce with its largest customer if it is to draw a line under the scandal and agree to compensation deals with it and other oil producers.
The row hit a low point earlier this month when Transneft curbed oil intake from Rosneft, cutting Russian production close to a three-year low. The curbs have since been lifted and output levels have been restored, Energy Minister Alexander Novak said last week.

Last week, Reuters cited an official at PKN Orlen, Poland’s biggest refinery, as saying that Russian crude oil has been deteriorating in quality–despite the ongoing cleanup following that April contamination scandal that disrupted supplies and launched a tense backlash among buyers. 

At the same time, one of the key suspects in the ongoing Russian investigation into the contamination, Roman Ruzhechko, is seeking political asylum in Lithuania–where PKN Orlen also has a refinery, Reuters reports separately.

Just over a week ago, Lukoil, Russia’s second-largest producer, managed to fully restore supply volumes after contamination on the Druzhba oil pipeline disrupted Russian crude supplies in late April. 

The oil was contaminated with organic chlorine, a substance used in oil production to boost output but dangerous in high amounts for refining equipment.  The amounts of the chemical were found to be at levels much higher than the maximum allowable amount.

Having launched an investigation into the incident, Russia concluded that the contamination was deliberate, and Ruzhechko is one of the main suspects.  In fact, Russia believes this was a criminal conspiracy coordinated in part by the small oil transport company of which Ruzhechko is an executive.

5.  The Briefs (date of the article in the Peak Oil News is in parentheses)

In China, a wave of new production and slowing domestic demand have forced China to export petrol cargoes to Nigeria and Mexico as the Asian country ramps up petrol exports in July and August to near-record levels. The surge in Chinese exports will fill a supply gap caused by refinery outages in the United States and the Middle East.  It is also likely to accelerate a plunge in Asian petrol margins. (7/27)

Nigeria is currently losing $25 billion annually to illegal oil bunkering and insecurity on the nation’s waterways. This was disclosed by the immediate past minister of transportation over the weekend. (7/22).

Venezuela and Chevron:  Chevron Corp, the last US oil company operating in Venezuela, said on Thursday it hopes to be able to remain in the Latin American nation as the Trump administration mulls whether to renew its license, expiring on Saturday, to do business there. The administration said a decision will be made soon on the renewal of Chevron’s six-month US Treasury Department license to operate in Venezuela, with billions of dollars in the company’s investments at stake. (7/26)

Curacao’s prime minister and Venezuela’s oil minister discussed the possibility of Venezuelan state oil company PDVSA remaining as the operator of the Caribbean nation’s 335,000 b/d Isla refinery, Curacao’s government said on Monday. PDVSA’s contract will expire at year-end, and the government-owned refinery has been searching for a business partner to replace it. A lack of crude shipments has left the facility largely idle. (7/23)

In Canada, an increasingly tighter supply of heavy crude elsewhere will in all likelihood help Canada’s oil industry weather the unfavorable effects of the so-called IMO 2020 rules, which stipulate a much lower allowable level of sulfur in bunkering fuel. The combined effect of US sanctions against Venezuela and Iran have significantly changed the demand and supply picture for heavy oil, and this is benefiting Canadian producers. (7/24)

The US oil rig count fell by 3 to 776 while the gas rig count declined by 5 to 169, according to GE’s Baker Hughes. The combined oil and gas rig count is now 946 for the week, with oil seeing an 85-rig decrease year on year and gas rigs down 17 since this time last year. Year-to-date, the oil rig count has fallen from 858 active rigs since the beginning of the year to 776, while gas rigs have fallen from 187 to 169 during that same time. (7/27)

Fraudulent fracking data? Hydraulic fracturing (fracking) activity was underreported by 21 percent in the U.S.’ most prolific basin in 2018, according to Kayrros, a data analytics company serving the energy markets. Kayrros claims that more than 1,100 wells were completed in the Permian Basin but not reported through state commissions or FracFocus – a public repository for information on chemicals used during fracking. This implies two things: 1) The belief that shale operators have a large backlog of DUCs that can quickly be brought to production in the event of an oil crisis without further drilling is misleading; and 2) the average well is less productive and of higher cost than is reflected in public data. (7/24)

Shut down Line 5? Democratic presidential hopeful Bernie Sanders has called for the controversial Line 5 oil pipeline to be shut down. Sanders became the second 2020 Democratic primary candidate to seek the closure of the oil pipeline that crosses a channel linking two of the Great Lakes in Michigan. His call for shut down of this 66-year-old pipeline comes right on the 9-year anniversary of Enbridge’s disastrous oil spill in Michigan when 1 million gallons of oil were spilled into the Kalamazoo River. (7/27)

Renewable natural gas—methane collected from waste and manure—is a popular source of energy in Europe, but in the United States, it has yet to establish itself as a viable alternative to fossil fuel gas. Thanks to tax incentives and improving technologies, however, companies are making increasingly wider inroads into this segment of the renewable energy industry. Earlier this month, New York became the latest city to join a growing network of 530 fueling stations featuring renewable natural gas (RNG) that are run by a T. Boone Pickens company, Clean Energy Fuels. (7/27)

Fusion a step forward: A multination project to build a fusion reactor cleared a milestone yesterday and is now 6 ½ years away from “First Plasma,” officials announced. Yesterday, dignitaries attended a components handover ceremony at the construction site of the International Thermonuclear Experimental Reactor in southern France. (7/26)

French nuclear generation fell to 38 GW Wednesday as 4 GW of heat-related restrictions took effect at the Golfech and Saint Alban nuclear plants in southern France, data by grid operator RTE showed. The current heatwave forced nuclear operator EDF to take its 2.6 GW Golfech plant on the Garonne river offline Tuesday afternoon. (7/24)

A historic heat wave inflicted life-threatening temperatures on Europe and shattered all-time highs in multiple countries Thursday. Paris registered a jaw-dropping 108.7 degrees, according to Météo-France, the national weather service, breaking the record of 104.7 degrees set in 1947. Belgium, Germany and the Netherlands all saw new national records Thursday, beating highs set just the day before. (7/26)

Russian coal doldrums: Low European-delivered thermal coal prices and high utility inventories caused May exports of Russian thermal coal to dip for the first time in ten months, according to trading sources. Russian thermal coal exports in May fell 4.3% on the year while the per-ton price dropped 41.7% year-over-year (7/23).

India may be planning its own EV battery gigafactory, LiveMint reports, citing an unnamed government official. According to the report, the facility would cost US$4 billion to build. This is not the first-time media have reported on plans by New Delhi to start building its own battery manufacturing capacity. (7/27)

In China,BMW Brilliance Automotive has become the first automobile manufacturer to enable full 5G wireless coverage at all its plants. The new wireless standard allows large quantities of data to be transferred within a very short space of time, since data will now be processed in small, high-performance computer centers directly on-site and no longer has to travel long distances. (7/22)