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By Tom Whipple.
1. Oil and the Global Economy
2. The Middle East & North Africa
4. Quote of the Week
5. The Briefs
6. Commentary: U.S. Crude Oil Exports, Really? – A Look at the UK
1. Oil and the Global Economy
Last week oil prices were moved upwards by the polar vortex which engulfed much of the central and eastern US sending the demand for heating fuels to record levels. Contributing to price volatility was the growing concern about the economic outlook for the emerging nations including China. During the week, NY futures touched the highest level of 2014 as the demand for heating oil in the northeast surged. On Thursday NY oil was trading above $98.50 a barrel, but then slipped on Friday to close out the week at $97.49. London oil traded around $108 for most of the week but also slipped on Friday to close at $106.40. The week ended with the premium of London over WTI down to $8.91.
The cut in US Federal Reserve bond buying is hurting the emerging economies as Washington’s bond-buying program has sent considerable capital flowing to emerging economies in search of higher interest rates. Deflation in Europe remains a concern as the inflation rate in the EU remains at less than half of the Central Bank’s target.
US natural gas futures soared to a four-year high on Wednesday of 5.50 per million BTUs. On Thursday, however, revised weather forecasts of above normal temperatures across the northeastern US for the next two weeks sent prices plunging to $4.94. There is still concern about the longer term prospects for the US natural gas supply, however. Extremely cold weather has been interfering with production and transportation of the gas as well as slowing the drilling of new wells which are necessary to keep production level. Last week’s EIA report showed that natural gas inventories have fallen by 40 percent since November and are now 17 percent below the five-year average for the date. Given the increased use of natural gas by electric utilities, the prospects for increased exports, and lack of profitability for much of the gas industry, higher prices and possibly shortages may be ahead.
The major news of the week was lower production and falling earnings reported by several of the major international oil companies. Chevron says that its fourth-quarter earnings were down 32 percent from last year. Production for the quarter was 2.58 million b/d, down from 2.67 in the forth-quarter of 2012. Shell’s quarterly profit was down 48 percent from last year and its production of oil and gas fell by 2 percent to about 3.2 million b/d. Exxon’s profit was down by 16 percent from the fourth-quarter of 2012. The companies cited lower oil prices, declining production, and rapidly increasing costs of production as the reasons for the decline.
Exxon, however, still expressed optimism for it future, citing major new projects in Tanzania, Argentina, Iraq, Canada, and Russia, as well as increased shale drilling in the US. Shell, on the other hand, seemed more uncertain about its future and announced a program to sell off some $15 billion in assets in order to improve profitability and finance investments. Among the major curtailments which Shell announced last week was the suspension of drilling off the north coast of Alaska for an indefinite period.
The long-awaited report on the environmental impact that the Keystone XL pipeline would have on the global climate was released last week. The report echoed an early draft which said that the pipeline would have little impact on the pace at which the Alberta Tar Sands would be developed as Canada would simply find other outlets for its oil either by rail or new pipelines to the west coast. The report is widely considered a serious blow to environmentalists’ hopes that the Obama administration would block the pipeline. While the report does not explicitly recommend approval of the pipeline it will make it very difficult for the President to veto the plan in the face of drumbeat calls from Congressional Republicans, the Canadian government, and oil interests to approve it.
2. The Middle East & North Africa
There was little progress in the numerous confrontations going on across this region of the world last week and if anything, several situations seem to be getting slowly worse. The Syrian peace talks have gotten nowhere as have efforts to get food supplies to civilians surrounded by government forces. Damascus is starting to miss deadlines for sending its chemical weapon stocks out of the country. The Lebanese are trying to form a new government. One of the key issues is control of the Energy Ministry which will oversee the development of the country’s offshore gas deposits. In Libya, the administrator of Cyrenaica says oil will not flow from his province until Tripoli meets all of its demands.
Egypt: Defense Minister Sisi, with the new title of Field Marshal, took the first step towards running for President, despite earlier pledges to keep the army out of politics. Sisi insisted he was yielding to the “free choice of the masses” and “the call of duty.” The news was accompanied by an increase in terrorist activity including a major bombing of a security headquarters in Cairo and the downing of a military helicopter in the Sinai. The helicopter was downed by a missile, confirming that some of the vast stocks of advanced weapons left behind by the Gadhafi regime in Libya are likely making their way into Egypt and will play a part in troubles to come. The government is back to dictating the themes of weekly sermons at mosques, locking up journalists, and trying former President Morsi.
The British oil company, BG Group, which is a major producer of natural gas in Egypt, issued a Force Majure last week, saying that the government was forcing it to divert gas to domestic use that had been slated for export. The possibility that increased insurgent activity in the Sinai may eventually lead to some sort of blockage of the Suez Canal or damage to the Su-Med pipeline is growing stronger.
Iran: The nuclear talks, which resume in New York on February 18th, seem to be going well. A new round of talks with the IAEA on implementing the agreement is set for this week. Washington continues to warn Tehran not get too far ahead of the negotiations in claiming that the sanctions are about to be lifted and unrestricted Western investment is now possible. Iran’s official news agency reports that senior Iranian clerics have given their blessing to Rouhani government’s position in the talks. There is still major opposition to the general thrust of the talks by the Israelis and their supporters who insist that Iran halt all nuclear enrichment activities. Likewise, hardline clerics and their allies in the Revolutionary Guard are loath to see the 35-year standoff with the West come to an end as it provides the basis for their power and influence in Tehran.
At least one Western analyst, from FACTS Global Energy, says that although Tehran could increase its exports by 200,000-300,000 b/d rather easily, it will take several years to increase exports by 1.2 million b/d to the pre-sanction level. Some of the delay will be from what are expected to be lengthy negotiations to settle all the issues surrounding Iran’s nuclear programs and its involvement in the region in behalf of Shiite causes.
Iraq: The pace of violence continues about the same; however a government push in Anbar will likely result in heavy fighting. The UN says some 700, mostly civilians, were killed during January without counting whatever happened in Anbar province which has seen major fighting as portions of the two major towns have been taken over by al Qaeda. The government puts the death toll at 1,000. There are reports that the government and loyal Sunni tribesmen have launched an offensive to clear al Qaeda from the province. More than 140,000 residents of Anbar have fled the province in the last month.
The Kurds seem to have stopped exporting oil to Turkey in the midst of the 2014 budget negotiations. The central government has halted all payments to the province in retaliation for the oil shipments. The Kurds may have figured out that they still need Baghdad and its oil money for the time being.
In a wide-ranging review of what is happening in the country, Deputy Prime Minister for Energy, al Shahristani, said that the spill over from the Syrian uprising is having a serious effect on Iraq’s oil exports. The vast desert areas between Iraq and Syria have become bases for al Qaeda in the Levant (ISIL) which are attacking energy infrastructure to weaken the government. The northern export pipeline was blown up 54 times during 2013, but still managed to move an average of 250,000 barrels of crude per day. So far the troubles have been confined to the north with little effect on the southern oil fields.
Despite the violence al Shahristani insists that Iraq is on its way to much higher production which should reach 4.7 million b/d by 2015 and 9 million by 2020 making the country one of the largest oil producers in the world. Many are skeptical of these claims given the increasing pace of the violence
Manufacturing in January slipped to the lowest level in six months. Various indices point to a slowing economy in the next six months. New government projections show that Beijing hopes to increase energy efficiency in the coming year so that total energy consumption will only increase by 3.2 percent. Coal consumption is to increase by 1.6 percent in 2014 to 3.8 billion tons while oil demand will increase by 1.8 percent. In contrast with the dirtier fuels, natural gas consumption is to increase by 14.5 percent in 2014. In December, China’s apparent consumption of natural gas increased by 14 percent.
Premier Li Keqiang said last week the China’s governments should take the lead in using alternative-energy cars. China plans to have 5 million such vehicles in operation by 2020 in an effort to curb rampant air pollution. China’s auto sales hit 20 million last year, up 14 percent over 2012. China still has only 100 cars per 1000 people on the road as compared to 800 for the US, so there is still a ways to go. The 20 million new cars will not do much for air quality, but should increase the demand for gasoline.
4. Quote of the Week
- “Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell spent more than $120 billion in 2013 to boost their oil and gas output. But the three oil giants have little to show for all their big spending. Oil and gas production are down despite combined capital expenses of a half-trillion dollars in the past five years. One of the biggest problems: Costs are soaring for many of the new ‘megaprojects’ to tap petroleum deposits needed to replenish depleting fields.”
— The Wall Street Journal, January 29
5. The Briefs
- Iraq has for the first time begun preparing for a return to the OPEC production quota system in a shift of policy that reduces the prospect of oversupply and lower prices in global oil markets. (1/29)
- Iraq is nearing the start-up of a gasoline-producing unit that will boost overall processing capacity to more than 210,000 b/d at state-owned South Refineries Co.’s 140,000-b/d refinery in Basra Province. The 70,000-b/d unit is designed to help the country’s manufacturing sector reduce the need for imported oil-derived products. (1/29)
- In Iraq, BP and Royal Dutch Shell are poised to benefit from the nation’s ambitious production plans. Both companies are already managing two huge oil fields in southern Iraq which are vital if Baghdad is to achieve its oil production goal. (1/29)
- Venezuelan energy sales to the U.S.—792,000 barrels/day—are heading for the lowest levels in 28 years as President Nicolas Maduro steps up shipments to his main lender China and the shale boom floods North American refineries. (2/1)
- China’s first direct coal-to-oil project produced 866,000 tons of oil products last year. It produces 3,000 tons of oil products (approx. 17,000 b/d) with consumption of nearly 10,000 tons of coal per day. With an investment of 12.6 billion yuan (2.06 billion U.S. dollars), Shenhua Group began construction of the project in 2004. The project began trial production at the end of 2009 with a designed annual capacity of 1.08 million tons of diesel, naphtha and liquefied petroleum gas. (1/29)
- Soaring fuel imports in the aftermath of Japan’s 2011 Fukushima nuclear disaster, amid a weaker yen, have contributed to the country’s record annual trade deficit, a government official said. Japan reported a trade deficit of $112.07 billion in 2013, up 65.3 percent from the previous year. (1/28)
- Shell said it had agreed to sell a stake in one of its Brazilian offshore assets to Qatar’s state-owned oil and gas company for $1bn. Shell has been accused by investors of spending too much in recent years so their new CEO is under pressure to improve capital discipline. (1/29)
- The US drilling rig count gained 8 units to 1,785 rigs working last week, Baker Hughes reported. Fifty-seven units are offshore, 20 are in inland waters and 1,708 are land-based. Oil rigs were at 1,422 while gas rigs were at 358. Horizontal drilling rigs are at 1,173 with directional drilling rigs at 220. Canada’s rig count rose 18 units to 608, with oil rigs at 404 and gas rigs at 204. (2/1)
- The American Petroleum Institute, an industry lobby representing more than 580 companies, said a study it commissioned from energy consultant group ICF International indicates exporting crude oil from the United States could translate to $6.6 billion in savings for U.S. consumers by 2020. (2/1)
- Senate Energy Committee Chairman Ron Wyden said at the first hearing on US crude exports that the U.S. must weigh the costs to consumers before ending the 40-year ban on crude exports and he predicted a prolonged debate. (1/31)
- Exxon Mobil’s push to export U.S. oil overseas is facing a new obstacle: falling gasoline prices. A flood of new oil from Texas to the Great Plains has swamped refineries, driving down prices at the pump 10 percent since March, while global oil prices have hovered at about $107 a barrel. US supplies are having a greater impact because they’re making up a bigger part of the gasoline market, supplying about 53 percent today, compared with 34 percent less than three years ago. As cheaper oil translates to cheaper gasoline, Exxon and ConocoPhillips will have a tougher time convincing legislators that ending export restrictions that date back to 1970s oil shortages would benefit the nation. (1/29)
- ExxonMobil continues to add oil and liquids-directed rigs to drill in large North American unconventional and shale fields, gaining expertise in diverse resource plays which is showing up in rising crude oil volumes. (1/31)
- Texas is poised to join Saudi Arabia as a supplier of oil to California, via tanker through the Panama Canal as the mounting glut of crude on the US Gulf Coast makes the trade profitable.(1/30)
- Valero Energy said the company needs to overhaul some of its refineries in Texas to handle more light sweet crude output from the Eagle Ford shale. The Valero refinery in Houston can process 160,000 b/d while its Corpus Christi facility can handle 325,000 bpd. The company said it plans to spend $730 million to upgrade the refineries to add a combined 160,000 b/d to capacity. (1/31)
- US ethanol makers are banking on export markets as they grapple with the Obama administration plans to cut US consumption requirements, but the industry is hampered by a distribution structure built almost exclusively around the domestic market. (1/28)
- The carbon intensity (CI) of corn ethanol—i.e., the greenhouse gas emissions produced via the production of a volume of the fuel—is declining, while the average CI of gasoline produced from petroleum sources is gradually increasing, according to a recent report prepared by Life Cycle Associates, LLC for the Renewable Fuels Association (RFA). (1/31)
- A shortage of propane heating fuel during a brutal U.S. cold snap this month threatens to sharpen the year’s most urgent energy policy debate – how much of its newfound shale oil and gas should America export? While the shortage was likely caused by a confluence of events, including extraordinary cold, a temporary pipeline shut-down, and low stocks, some industry observers and at least one politician blamed the spike in part on soaring exports of liquefied petroleum gases (LPGs) such as propane. (1/27)
- Living near hydraulic fracturing sites may increase the risk of some birth defects by as much as 30 percent, a new study by the Colorado School of Public Health suggests. In the U.S., more than 15 million people now live within a mile of a well. (1/31)
- Peru is pushing forward with an expansion of the country’s biggest natural gas project despite concerns about its potential impact on indigenous tribes living deep inside a remote Amazon reserve. (2/1)
- Shell will spend at least $10 billion on a 1,600-foot-long floating gas liquefaction ship now being built in South Korea. The boat will drop anchor in a natural-gas field, chill the gas into liquid and pump it into LNG tankers. The company says the giant project will help Shell develop gas fields that are too small or far-flung to justify the expensive pipelines and onshore processing plants needed for offshore gas fields. (1/29)
- Crews worked Friday to stop natural gas from escaping an underwater well where a rig was drilling off the Louisiana coast. The Coast Guard said workers had cut the flow in half since losing control of the well a day earlier. No injuries or water pollution have been reported. (2/1)
- American Energy Partners, led by Aubrey McClendon, continues to bulk up in Ohio’s Utica Shale, purchasing natural-gas fields from Hess Corp. for $924 million. (1/31)
- North Dakota’s governor said building a 375-mile natural gas pipeline in the state will reduce the amount of gas wasted during oil production. (2/1)
- WBI Energy Transmission launched an open season for the sale of long-term firm natural gas capacity on the planned Dakota Pipeline, which will connect Bakken Shale production to the Emerson hub in northwestern Minnesota. WBI said it expects the pipeline to enter service on November 1, 2017. (1/31)
- The South Korean government has granted final approval to build two nuclear reactors at the Shin Kori Nuclear Power Plant in Ulsan, about 255 miles southeast of Seoul. Construction on the $7.09 billion project is scheduled for September, with completion slated for December 2020. (1/30)
- A report published by The Solar Foundation, a 37-year-old non-profit focused on solar power, said there were 142,698 people in the United States employed in the solar industry as of November, a 19.9 percent increase since September 2012. (1/29)
- A group of state-owned Indian companies have signed an initial agreement for setting up what the government says is the world’s largest solar power plant. The 4,000-megawatt plant in the northwestern state of Rajasthan would be spread across 19,000 acres. (1/31)
- China can boast a new record: It has installed the most solar PV in one year. Preliminary figures released by Bloomberg show that China installed 12,000 megawatts of solar in 2013 — beating Germany’s record of 8,000 megawatts in 2010. These figures merit close scrutiny since China’s Renewable Energy Industries Association puts its preliminary estimate between 9,500 megawatts and 10,660 megawatts. But while the range of projections varies, they all tell the same story: China’s domestic solar market is now a major force. (1/30)
- Britain announced their new Go Ultra Low program, backed by major vehicle manufacturers, with a goal of making the country a world leader in electric and hybrid cars. (2/1)
- Hydrogen cars: after a long and bumpy road from futuristic concept car to real-world production vehicle, the first mass-produced hydrogen-powered cars will hit dealerships this spring in the US. Toyota, Honda and Hyundai — the latter of which will soon begin selling its first hydrogen-powered vehicle in parts of California where fueling stations already exist — say this new propulsion system tackles the age-old pollution problems of standard gasoline engines without many of the limitations that have held back the market for battery-powered and other alternative fuel vehicles. (1/28)
- California water officials, in the throes of an epic drought, announced they won’t send any water from the state’s vast reservoir system to local agencies beginning this spring, an unprecedented move that worsens a precarious situation for 25 million people and 1 million acres of farmland. (2/1)