Peak Oil Review – 3 Apr 2017

Contents

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

Crude prices rebounded sharply last week erasing nearly half the $7-8 selloff that began in early March. The March price drop came on the consensus that increasing crude inventories and ever higher rig counts would offset the 1.8 million production cut that OPEC was trying to orchestrate. At the close Friday, New York futures were at $50.85, and London was at $53.83.

Last week’s change in market sentiment was due to several factors. The dollar was somewhat weaker; the OPEC/NOPEC production cut seemed to be on course for complete implementation and extension for another six months; disruptions in Libya which cut oil production by about 250,000 b/d; and a US stocks report showing a larger-than-expected decline in gasoline and distillate stocks. Even though US crude inventories continued to climb in the week ended March 24^th and the US rig count continued to grow, the markets concluded that the various reports indicated higher oil prices ahead.

Despite trader enthusiasm, the Director of the IEA said last week that he does not expect a major increase in global oil prices despite the 1.8-million-barrel supply cut. The IEA bases its judgment on the extraordinary size of the global oil glut, and the likelihood that any substantial price increase would bring more oil from the US, Canada, and Brazil to the market. The backlog of shale oil wells that have been drilled but not yet fracked continues to grow as oil producers hold wells out of production awaiting higher prices. Many of these wells have been drilled only to meet contractual obligations to drill within a specified time or lose the lease.

President Trump’s new executive order undoing much of Obama administration’s efforts to reduce carbon emissions came in for much discussion last week. As could be expected, producers of fossil fuel were ecstatic about the order and environmentalists were devastated. The stated goal of the new executive order is to increase the “energy independence” of the US and increase the number of jobs for coal miners. So far nobody, even those in the coal industry, believes that more coal miner jobs will be created by reducing environmental regulations. The decline in coal mining in recent years has been largely due to abundant supplies of low-cost natural gas and mechanization of the mines. No one expects this trend to change significantly.

The elimination of the Obama administration’s efforts to control power plant emissions is another story. Fears are rising that the precedent of ignoring global warming being set by the new administration in Washington will be adopted by many other countries leading to an environmental disaster of unprecedented proportions.

2.  The Middle East & North Africa

Iran: Oil Minister Zanganeh said last week that the OPEC oil production agreement is likely to be extended, but time is needed to discuss the matter first. For several months now, Tehran has been purposely vague about just what its commitment to cut oil production is. The country is currently producing about 3.8 million b/d.

In the wake of the Iranian nuclear accord, foreign investors have been signing many new agreements with Tehran. Most prominent among the nations opening new economic relations with Iran is Russia. The trade volume between the two countries could exceed $10 billion this year as Moscow seeks to extend its influence in the region.

In the meantime, Iran’s relations with Washington continue to deteriorate. Except for a deal with Boeing to sell 80 aircraft to Iran, there have not major economic deals announced. A bill is working its way through the Congress to punish Iran for its ballistic missile tests. The measure would impose US sanctions on companies helping the Tehran’s ballistic missile program. At one time President Trump was talking about trashing the nuclear agreement. For now, Washington and Tehran seem to be eyeing each other warily.

Saudi Arabia:  The top story from Riyadh last week continued to be the atmospherics surrounding the forthcoming Aramco IPO and how much money a sale of 5 percent of the company will bring the Saudi Government. Last week the Saudis cut the lowered rate that Aramco paid from 85 to 50 percent. Under the old rate, there would have been little or no money for the company to pay dividends to foreign investors making it unlikely that many people would in interested in owning the shares. Although the Saudis maintain the company is worth $2 trillion and the IPO will bring in $100 billion, outside observers are saying that even after the tax cut the company net worth is more on the order of $1 trillion.

Aramco produces about two and a half times more crude each day than does Exxon which is valued at about $337 billion. In addition, Aramco has direct access to billions of barrels of cheap-to-produce crude under Saudi territory. However, even the rough size of Saudi oil reserves has been a matter of debate by outside observers for many years. The Saudis continue to talk about 264 billion barrels, but most consider this an exaggeration.

China’s Sinopec says that the Saudis have invited it to invest in Aramco and that talks are going on. As Beijing’s domestic oil production slips, the Chinese have been scurrying around the world trying to lock up as many oil deals as they can.

Last week it was reported that Aramco had added JPMorgan, Morgan Stanley, and HSBC Holdings to the list of firms that will help with the IPO. The project seems to be picking up momentum.

Libya: A major impetus for the surge in oil prices last week was the drop in Libyan oil production to about 500,000 b/d from 700,000 b/d, the lowest since last September. The drop was caused by a shutdown of the pipelines from the El Sharara oilfield to the Zawiya terminal in the west of the country by an armed group. So far no one has claimed responsibility for the blockage. In recent weeks, General Haftar’s forces, who are loyal to the Eastern government have had success in opening the terminals in central Libya, but this blockage seems to be in an area far to the West of Haftar’s forces.

The situation in Libya is so fluid it is impossible to foresee where it is going or whether there soon will be a government capable of controlling the incessant shutdowns of oil production as various factions jockey for a bigger share of oil revenues.

3.  China

As it domestic oil production shrinks, the Chinese are scouring the world to ensure that there will always be sufficient oil to maintain and grow a nation of 1.3 billion people. With its large foreign currency reserves, Beijing has been making new deals and buying up oil assets in many regions. Last week it established a partnership with an Australian company to explore an area off of Gambia and Senegal. The Chinese also bought a majority stake in Glencore’s petroleum products and logistics business for $775 million. Sinopec is planning to increase crude purchases from Brazil, the US, and Canada.

In the last few years, China has increased its purchases of Russian crude which Beijing is coming to see as a more reliable trading partner. Until recently, China imported most of its crude from the Middle East, but the region is becoming increasing unstable. By diversifying the sources of its supply, Beijing is doing its best to reduce the possibility that its economy could be crippled by instability in any given region.

Despite the push for renewables, the percentage of China’s electric power production that comes from burning coal increased from 73 percent in 2015 to 78 percent in the first two months of 2017. This implies that China burned an additional 65 million tons of coal to keep the lights on.  Hydropower production was down 5 percent year over year in the first two months increasing the need for thermal power. Erratic climate-change weather may be responsible for the lower hydropower production.  Although wind, solar, and nuclear are growing rapidly they still amount to less than 6 percent of total power generation.

4. Russia

Energy Minister Novak says that Russia has cut its crude production by 200,000 b/d. Considering that Moscow surged its production by 230,000 b/d in November, the month used as the basis for production cuts, the impact on the world oil supply by Russia’s actions could be minimal . Moscow has never shown any real enthusiasm for cutting production and has not yet definitively said when it will cut production by the full 300,000 b/d.

Russia’s economy may have returned to growth in the last quarter of 2016, after contracting for seven consecutive quarters, although the growth was reported as only 0.3 percent. Officials in Moscow are optimistic that the economy will grow by 2 percent this year.

5. Venezuela

It was a lively week in Caracas when the Venezuelan Supreme Court which is firmly in the hands of the Maduro government stripped all power from the opposition-controlled National Assembly for being in “contempt of the law.” Two days later the court (read the government) was forced to rescind the order under a storm of protest from around the world.  The issue prompting the upheaval was the $3 billion in bond interest coming due in about two weeks.  With the National Oil company nearly out of cash, the Maduro government has been working on a deal with Russia’s Rosneft to pay the interest in return for a stake in Venezuelan oil fields. The alternative could be a default on PDVSA, the National Oil Company’s bonds.

Under the constitution, the National Assembly must approve contracts of “national public interest.” Given the current political situation an approval of the Rosneft deal was unlikely, hence the attack on the legislature and the assumption of its powers by the Supreme Court. Even the revised court order stripped the National Assembly of the ability to interfere with joint oil ventures. The National Assembly claims the “packed” Supreme Court is illegal as it rules for whatever suits the government at the minute. Legal tangles like this will continue until there is a fundamental change in the political situation such as a complete economic collapse or a military coup.

If the Maduro government succeeds in pulling off its deal with Moscow and obtaining enough money to keep afloat for a while, the deal is likely to deter other investors from dealing with Caracas.

The downward economic spiral still has millions skipping meals and has left PDVSA strapped for cash. In the last few weeks, a nationwide gasoline shortage has made the situation worse. The company can no longer afford to import the light oils needed to prepare its heavy crude for export.  The next few weeks could either result in a default or the Maduro government selling off more of its assets to Russia in order to remain in power.

A total collapse of Venezuelan oil exports would result in substantial turbulence in the oil markets and higher oil prices.

6.  The Briefs

North Sea decommissioning: Operators are improving the ways in which they search for North Sea decommissioning staff, according to a new report by the Boston Consulting Group. BCG highlighted that many engineers acknowledged that decommissioning is the future of the industry in the region, but revealed that a significant portion of engineers with relevant experience is at or close to retirement. (3/31)

Denmark plans to build the 600-megawatt Kriegers Flak, one of the larger wind farms in European territorial waters with a peak capacity to supply nearly a quarter of all average households in the country. Vattenfall, a state-owned Swedish energy company, secured the bid to build Kriegers Flak in late 2016. Its winning bid of $54.10 per megawatt-hour made the project one of the least expensive offshore wind projects in the world. The Danish Parliament in 2012 voted to develop an economy entirely independent of fossil fuels by 2040. (3/29)

Russia can wait for a sustained recovery in oil prices before drilling again in Arctic waters, relying for now on less costly regions even as rival producer Norway accelerates development of its northerly fields. Russia estimates production costs for the Russian Arctic offshore in the range of $70 to $100 a barrel.  Thus they view artic reserves as “back-up stock.” (3/29)

Oil-for-loans deals: Oman has struck a deal with several banks for a $4 billion loan to be repaid in future oil deliveries. Abu Dhabi signed a contract with commodity trading giant Vitol to supply it with over half a million tons of liquefied petroleum gas annually over the next decade in exchange for an upfront payment. According to the Wall Street Journal, other Middle Eastern producers are also considering oil-for-loan schemes, desperate for cash as oil prices stubbornly refuse to go up to the levels they need. (4/1)

Glencore PLC, one of the world’s biggest oil traders, has agreed to sell a majority stake in its petroleum products storage and logistics business for $775 million in cash to Chinese conglomerate HNA Group. The move comes as China’s demand for oil storage ramps up amid rising consumption by its expanding urban population. (4/1)

Offshore Australia, the third production facility at the Gorgon liquefied natural gas facility is now in service. Bringing the third production facility, or train, online means Chevron’s flagship LNG project in Australia is in full service. The first shipments of LNG left Gorgon in March 2016. The project will eventually produce 15.6 million tons of LNG products per year. (3/30)

Egypt expects to cut the $3.5 billion euros it owes to international oil companies by around half in coming weeks, the Egyptian oil minister said on Wednesday. He said the country should be self-sufficient by the end of 2018, with exports possible starting in 2019. (3/30)

In South Sudan, Nigeria’s Oranto Petroleum International Ltd. plans to bet half a billion dollars that Africa’s newest nation can end a three-year civil war and create the conditions to revive its oil industry. (3/29)

Offshore Senegal, Australian energy company FAR Ltd. said it has gone eight-for-eight in successful discovery wells since work started in 2014. FAR expects an upward revision to reserve estimates it stated earlier. (3/28)

Offshore Guyana, a discovery of oil by Exxon Mobil announced this week suggests the country is emerging as the sector’s next major hot spot, a regional player said. It’s the third such discovery for the supermajor and drilling was in reservoirs similar to those previously encountered. In its declaration of discovery, Exxon said Snoek was part of a “significant,” but technically complex, offshore prospect. (4/1)

Brazil is in the process of preparing two new floating production, storage and offloading vessels, or FPSOs, to start oil and natural gas production in the country’s record-setting subsalt frontier. The new floating production units are part of eight that will be installed offshore Brazil over the next two years. The ultra-deepwater region accounted for nearly 50% of Brazil’s total crude output in January, including a record 1.276 million b/d of oil and 49.53 million cu m/d of natural gas from 73 wells. (3/31)

In Ecuador, OPEC production cuts and economic woes are complicating Schlumberger’s efforts to collect $1.1 billion from state-owned Petroamazonas, casting a cloud over the oil services company’s first-quarter results. (3/29)

Mexico’s existing oil reserves are dwindling so fast the country could go dry within nine years without new discoveries. That’s the message from the National Hydrocarbons Commission, which said Friday that the reserves fell 10.6 percent to 9.16 billion barrels in 2016, from 10.24 billion barrels a year earlier. Once the world’s third largest crude producer, Mexico’s proven reserves have declined 34 percent since 2013. The decline in proven reserves is driven by record-low drilling activity the last three years. (4/1)

In western Canada, ConocoPhillips announced it will sell its 50 percent ownership interest in the Fossil Creek Christina Lake oil sands joint venture to its partner there, Canada’s Cenovus. COP also sold off most of its Western Canada Deep Basin gas assets. The deal value? Including a cash payment of $10.6 billion and contingency payments, it’s worth a cool $13.3 billion, erasing balance sheet concerns. (4/1)

Oil sands brouhaha: According to the Canada West Foundation, keeping the oil sands in the ground and stopping new pipelines “will actually increase greenhouse gas emissions” – wait, what? (3/31)

The oil market is risking a supply crunch as producers cut spending on major projects to focus on short-term, low-cost shale output in the US, according to some top crude oil traders. With oil prices hovering around $50 a barrel, current project spending is focused on “short-cycle” projects involving US shale deposits. Hedging activity by these same producers is keeping future prices low until 2020, which is dissuading investment in major oil projects. Doubts are there that we won’t be able to satisfy demand with short-cycle barrels. (3/30)

The US oil rig count increased by ten rigs to 662 while gas rigs climbed five to 160, according to Baker Hughes Inc. US drillers added oil rigs for an 11th week in a row in the best quarter for boosting the rig count since the second quarter of 2011.  From the October 2014 high of 1,609 oil rigs, the industry hit bottom in February last year at 316 but has since added 350 rigs. Analysts at Cowen & Co. said that 57 E&P companies expect to increase capital spending by an average of 50% this year over 2016, which points towards continued growth in the oil rig count. (4/1)

Shaving costs: US shale producers can compete in a $50-per-barrel oil market, and about a dozen shale companies are seeking to cut costs further by analyzing DNA samples extracted from oil wells to identify promising spots to drill. The technique involves testing DNA extracts from microbes found in rock samples and comparing them to DNA extracted from oil. (3/28)

Oil production in West Texas is about to outgrow pipeline capacity, a combination that knocked down crude prices in the region three years ago. Permian output is expected to rise to 2.65 million barrels a day in December. In comparison, takeaway capacity in the region may only reach 2.54 million barrels a day by end of this year. (4/1)

In the Permian, Royal Dutch Shell and Anadarko Petroleum may let a 10-year joint venture in the oil-rich Texan basin expire and split their properties, hoping to speed up development. The divorce and re-parceling of acreage would let each company drill and develop new wells at its own pace. (3/28)

The iSteer app: A geologist for EOG Resources Inc., using the proprietary app, dashed off instructions to a drilling rig 100 miles away. This tool is among the reasons the little-known Texas company says it pumps more oil from the continental US than Exxon Mobil Corp.—or any other producer. A rig worker received the iPhone alert and tweaked the trajectory of a drill bit thousands of feet underground. (3/31)

SPR sale: The US is the world’s largest holder of emergency crude stockpiles, but now it’s selling off reserves, while China, the second-largest, is taking advantage of low crude oil prices to fill storage. China bought crude oil from the US Strategic Petroleum Reserves (SPR), scooping up 550,000 barrels for US$28.8 million. So while China is stockpiling emergency reserves at a time when crude prices are low, the US appears to have come to the view that its SPR is no longer a critical part of energy security, or a critical element in the case of disruptions. It is, after all, expensive to keep up this storage, and part of the reason for the US sell-off is to finance the upkeep. (3/30)

US natural gas output in the lower 48 states declined for a second month in a row to 78.3 billion cubic feet per day (bcfd) in January, the US EIA said on Friday. Production peaked at 82.6 bcfd in February 2016. (4/1)

LNG exports: the US is expected to become the world’s third-largest exporter of liquefied natural gas (LNG) in 2018. By the end of next year, US LNG export capacity in the lower 48 states will top 6 billion cubic feet per day, or 8 percent of the country’s domestic consumption, up from zero at the beginning of 2016. (3/29)

The Haynesville shale play in east Texas, northwest Louisiana, and southwest Arkansas surpassed the Barnett Shale in Texas back in early 2011 as the highest-producing shale gas play in the US. Since 2013, however, Haynesville production has been falling amid low gas prices, and the shale play has been outrun by the lower-cost Marcellus and Utica basins in the Northeast. But recent production forecasts and Haynesville’s geographical proximity to the Sabine Pass LNG terminal and other planned LNG export facilities, as well as its proximity to planned additional pipeline capacity to Mexico, may help Haynesville come back to life again. (3/31)

BP plans to sell more refineries without investing in new plants despite growing oil production and will focus on modernizing existing operations while expanding its network of filling stations to generate $3 billion in additional cash. (3/30)

The newest oil refineries in Texas are looking to join the hottest two plays in the North American oil industry. Raven Petroleum LLC and MMEX Resources Inc. are building refineries in the Eagle Ford and Permian Basin that will process ample local supplies of light crude into gasoline and diesel. The fuel will be shipped on existing rail lines across the border to Mexico, where the government has opened the market to foreign competition, attracting companies including BP Plc and Glencore Plc. (3/29)

Bankruptcy: Offshore drilling contractor Ocean Rig UDW Inc. filed for bankruptcy protection in the US to block distressed debt investors from interfering with a debt restructuring that will slash $3.7 billion in debt from its books. (3/29)

Coal bluster? US President Donald Trump’s administration has billed his move to re-open federal lands to new coal leases as a win for miners seeking to expand production. But a review of company filings shows that coal miners with the most to gain already have enough leases in hand to last well over a decade. (3/29)

Coal’s uphill fight: The Trump administration’s expected move to roll back President Obama’s signature climate-change policy may extend the life of some aging coal-fired power plants, but companies and energy experts say it is unlikely to reverse the US utility industry’s shift to natural gas, solar and wind as leading sources of electricity. (3/29)

Westinghouse Electric Co, a unit of Japanese conglomerate Toshiba Corp, filed for bankruptcy on Wednesday, hit by billions of dollars of cost overruns at four nuclear reactors under construction in the US southeast. The bankruptcy casts doubt on the future of the first new US nuclear power plants in three decades, which were scheduled to begin producing power as soon as this week, but are now years behind schedule…States regulators have approved costs of around $14 billion for each project but Morgan Stanley has estimated the final bill of around $22 billion for the South Carolina project and around $19 billion for the Georgia plant. The bankruptcy could embroil the US and Japanese governments, given the scale of the collapse and the $8.3 billion in US government loan guarantees that were provided to help finance the reactors. (3/30)

The International Renewable Energy Agency reported total global renewable energy capacity increased by a record-setting amount last year, 161 gigawatts, reaching 2,000 GW by year’s end. For the first time, new solar generation additions for the year exceeded new annual wind-power generation. (3/31)

Exxon Mobil Corp.’s attempt to derail a multistate fraud probe into whether the company fully disclosed to investors the financial risks of climate change was dealt a major blow after a Texas judge moved the case from its home turf to a federal court in Manhattan. (3/30)

ExxonMobil has written to the Trump administration urging it to keep the US in the Paris climate accord agreed upon at the end of 2015. In a letter to President Donald Trump’s special assistant for international energy and the environment, Exxon argues that the Paris accord is “an effective framework for addressing the risks of climate change”. Exxon argues in its letter that there are several reasons for the US to stay in the Paris accord, including the opportunity to support greater use of natural gas. (3/29)

Climate rebuke: European officials issued rebukes and officials around Asia said they would continue their drive toward cleaner fuels after President Donald Trump laid the groundwork to reverse his predecessor’s climate-change policies. Mr. Trump, citing the need to revive the US coal industry and ease the regulatory burden, began Tuesday to repeal the Obama administration’s Clean Power Plan of stricter carbon-dioxide limits on utilities. (3/30)