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Quote of the Week

“The world’s five major oil companies are “faced with the choice of managing a gentle decline by downsizing or risking a rapid collapse by trying to carry on business as usual.”

By Chatham House, a London-based think-tank, in a report from May titled “The Death of the Old Business Model.”

Graphic of the Week

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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 trended down last week to register the biggest loss in six weeks. At the close New York futures were at $49.27, down from $50.50 on Monday, and London was trading at $50.03.  There was a brief rally during the week when US crude stocks came in lower than expected, but the week’s decline came mainly because traders lost faith that OPEC will be able to reach agreement on a production freeze.

Last month in Algiers, OPEC agreed to reduce crude production to a range of 32.50 million to 33 million b/d. Another meeting was convened last Friday in Vienna to work out the details of the agreement which is to be confirmed by the OPEC oil ministers on November 30th. The Friday meeting, however, ended in deadlock as Iran and Iraq disputed the data being used to allocate production cuts. Both countries plan to increase oil production in the coming year and are not interested in cutting their production. Non-OPEC members met in Vienna on Saturday and took no action to limit production. The Non-members agreed to meet again before OPEC’s November 30th meeting.

Talk about a production cut has been going on since summer as various oil exporters, including the Russians, hinted that they might be able to agree on a production freeze to push oil prices higher. Futures speculators latched on to this talk and drove up oil prices by some $10 a barrel in the last three months. In this time there were a number of developments, such as a partial revival of production in Nigeria, and Libya and an increasing US drilling rig count, that combined increase world crude supplies even further. Several OPEC countries always expected to be exempted from any production cut, because of their poor economic condition and looked to the Saudis and the other Gulf Arab states to carry most of the burden.

Many market analysts consider the Algiers agreement to be a farce, intended only to drive prices higher and increase exporter revenues without cutting much of anything.  It should be noted that oil traders dealing with the supply and demand of the actual oil were always skeptical that the futures price increase was justified, while speculators were more optimistic that we would soon be seeing the good old days of $100 oil.

Many observers expect the fall in oil prices to continue as OPEC + Russia seem to be unable to come up with a formula that will share the burden of a production cut equitably among the various exporters. Some are talking of prices falling to $40 a barrel or lower in the next few months. One observer notes that there is a backlog of some 5,000 drilled but uncompleted wells in the US. These are likely to be completed quickly if oil prices increase to economic levels, possibly re-imposing an oversupplied condition on the oil markets.

While US shale oil production is forecast to drop by another 30,000 b/d in November as current drilling is inadequate to keep up with depletion, this would be the smallest monthly drop in a year and a half, a sign that the US shale oil decline may be bottoming out. Some 70 US oil and gas companies filed for bankruptcy in 2015 and 2016; however, these companies now still produce about 1 million b/d while bankruptcy proceedings continue. It is this situation that is partially responsible for the failure of prices to rise much above $50 a barrel.

2.  The Middle East & North Africa

Iran: Iranian oil exports are scheduled to decline by 5 percent in November as fall refinery maintenance in Europe and Asia cuts back demand – a pattern that has been normal in past years. Exports are expected in increase again in the winter.

The future of Iran is again up for discussion. Since the nuclear agreement, the country has been on a two-track program of increasing meddling in other countries in behalf of its Shiite brethren and opening up the West in an effort to revive economic development. It should be kept in mind the global warming is slowly taking a toll on the country’s economic viability. Currently, there is maneuvering in the struggle to succeed supreme leader Khamenei, who is 77 years old but still active. Although discussion of Iran’s continuation as a theocracy is taboo, some are beginning to question if this form of government, under which an elderly theologian has ultimate authority over major policy decisions should be continued.

Syria/Iraq:  The assault on Mosul continues with some 25,000 soldiers, police, Kurdish Peshmerga, Sunni tribesmen and Shiite militia, all backed by US and allied airpower, assaulting the city. ISIL has already created an environmental mess by firing the Qayarah oilfields, 30 miles south of Mosul. The fires have covered the region with thick smoke forcing the inhabitants to flee and making military activity difficult.

There is a new, and ominous wrinkle in the Iraq/Syrian war. A spokesman for the Iran-backed, Shiite manned, Popular Mobilization Units says they will help assault the outskirts of Mosul, but will not enter the Sunni-dominated city which many fear would lead to a massacre. This is good, however, the Shiite spokesman went on to say, that after finishing with Mosul, they will go on to Syria to help the Assad government defeat the Sunni insurgency.  The post-ISIL-as-a-government era is not looking good. ISIL is widely expected to morph into a guerilla force that will continue the struggle indefinitely.

Turkey’s announcement that it may join the battle for Mosul on behalf of its fellow Sunnis naturally has raised tensions with Baghdad. Shiite militias are poised to assault a Sunni Turkmen city west of Mosul, should the Shiites start harming ethnic Turks.  Ankara, which has very large ground forces, may feel the need to act.
The Turks feel that they can only have a place at the table in any regional settlement if they are in the field as the Iranians and the Americans and even the Russians are. It is hard to see how this deteriorating situation is going to be good for oil production in coming years.

Libya:  The prime minister said last week that Libyan oil production is now close to 600,000 b/d and that the government is negotiating with western municipalities to return another 380,000 b/d to production. If these negotiations are successful, Libya will be back to producing around 1 million b/d as compared to 1.6 million before the uprising. Further increases in production will likely require increased foreign oil company involvement and investment. This, in turn, will require a far more stable political situation than currently obtains.

Saudi Arabia: The Saudis and the other Gulf Arab states were reported to have offered to make a 4 percent cut in their oil production at the meeting which took place in Vienna over the weekend. As Iranian and Iraqi intransigence at the meeting led to no decision on oil production, the offer is probably moot. Negotiations will probably continue, but few foresee an agreement being reached.

Discussions are increasing as to the future of the Saudi Kingdom. Much of this has to do with the perceived Saudi effort to drive high-cost, shale oil, tar sands, and deep-water oil producers from the markets by not cutting back on production as the kingdom had done in previous years. The Saudis had a deficit equal to 16 percent of GDP last year and this year’s deficit is on course to be about 13 percent. The Saudis just completed a $20 billion bond offering which is insignificant compared to the speed at which they are burning through foreign reserves. The next effort is to sell off 5 percent of Saudi Aramco for a large amount of cash likely running into the hundreds of billions in order to maintain economic viability and perhaps diversify the economy away from oil.

People are beginning to notice that the Saudis are not necessarily a “low-cost” producer. While extracting oil from Saudi fields may be cheaper than many other forms of “oil” production, the Saudis have to pay an extremely high price to maintain social stability in the kingdom. In a country run by an extended family of princes, it is costing many billions in what amount to bribes to maintain social quiescence in a nation of 31 million. Should these expenditures be reduced, many fear social turmoil that could markedly reduce Saudi oil production. We are already hearing rumblings about the austerity measures the government has had to impose due to the 50 percent reduction in oil revenues. The future of the kingdom may not be as bright as 10 million b/d of oil production would seem to suggest.

3.  China

There was not much news from China last week. Cnooc’s oil production dropped 15 percent the 3rd quarter as production declined with capital spending. Spending cuts by China’s major state oil companies have resulted in 6.1 percent decline in the country’s crude production during the first nine months of the year. Falling Chinese production has led the IEA to forecast an increase in demand for imported oil next year and an increased global demand of 1.2 million b/d next year.

Angola overtook Russia to become China’s largest source of imported oil last month. Numbers from Chinese customs show oil from Angola at 1.02 million b/d; from Russia at 962,260; Saudi Arabia at 949,500; and Iraq at 989,400. The Saudis are still on track to become China’s largest source of oil for 2016, with imports averaging 1.03 million b/d.

In thinking about China, it is well to remember the host of environmental problems that are impacting the country. The Gobi Desert continues to expand to the east into the populated portions of the country; giant storms continue to tear up and flood the southeastern coast, and the water table in the north continues to drop. For a country with 1.38 billion people, these are serious long-term problems.

4. Russia

Due to the rapid devaluation of the ruble, the price of Brent crude in ruble terms has increased by 40 percent from 2010 levels, while decreasing 40 percent in dollar terms. Part of the decline came as part of sanctions imposed over the Ukrainian situation. The increase in ruble income has allowed Russian oil companies to continue drilling in existing fields and to slowly increase production. The real problem for the Russian oil industry is the sanctions which have cut access to Western technology that could be useful to expanding Arctic drilling and perhaps accessing shale oil.

5. Nigeria

The Niger Delta Avengers resumed hostilities last week by bombing a Chevron-operated export pipeline at Escravos. The attack came after three months of ceasefire and relaxation of security measures. The Avengers announced that the attack was a warning to all oil companies operating in the Delta not to make repairs to damaged pipelines and not to attempt to increase exports until negotiations with the people of the Niger Delta begin. So far, in keeping with government policy, Chevron is refusing to confirm or deny the attack or comment on its impact on oil exports. Due to the drop in oil prices, it is becoming more difficult for the government to pay off the militants as it did in 2009.

In the meantime, the government announced that it would spend $10 billion in the Delta region to end the insurgency by militants. The money would be used to build infrastructure and create jobs. The catch to this is that the money “would not necessarily come from the government, which would expect the oil companies, investors, and Individuals to contribute to the infrastructure projects.

Before the recent attack, the government had announced that oil production had climbed to 1.9 million b/d which is not far from the normal 2.2 million. It will take a while for information about the damage done by last week’s attack to filter out. The repair of the damage at the Forcados export terminal two weeks ago has allowed the resumption of up to 300,000 b/d. It was this repair that prompted the militants to launch another attack.

The Nigerian oil workers’ union announced last week that the major oil companies had recently fired about 3,000 local workers. The union is threatening a strike.  A recent Baker Hughes rig count for Nigeria shows that the number of offshore drilling rigs in operation has fallen from 11 to seven in the 3rd quarter. Funding cuts and security concerns are believed to be the reason for the decline. Exxon, however, announced last week that it has just discovered a new deposit of some 1 billion barrels of oil off the Nigerian coast.

6. Venezuela

Last week the national oil company, PDVSA, managed to put off bankruptcy for a few months by refinancing $2.8 billion out of a total corporate and state debt of some $65 billion. Outside of this, there was little good news. There is still not enough food or medicine, and oil production continues to fall.  The political tussle continues with the government blocking efforts to hold a recall election in the short term.

Recent demonstrations against the government were held in check by the police. On Sunday, another round of negotiations between the government and the opposition began, but few have any hopes for a favorable outcome. The presence of the Vatican envoy and former heads of state from Spain, Panama, and the Dominican Republic may help the discussions.

Few see any solution to the downward economic spiral short of a military coup. Even after a coup, it is doubtful that a handful of military officers could do much make the the country work again; Venezuela is on the way towards looking like a failed state.

7.  The Briefs

Oil consumption will stand at 87 million b/d by 2035, or 7 percent less than the current figures in the baseline scenario, according to the study conducted by Moscow-based VYGON Consulting. VYGON said that the total world oil demand will reach its peak by 2023, as it will increase by 3.3 percent as compared to 2015 and stand at 97 million b/d. Decrease of consumption in road transportation and energy sectors will be the main reason of the decline in world oil demand by 2035. “The oil consumption in the countries of the OECD will drop by 27 percent. The oil demand will increase by 11 percent in developing countries from 2015 to 2035, while it will begin to gradually decrease after 2029.” (10/25)

Global oil demand will rise by 1.2 million b/d in 2017, steady from 2016 global demand growth levels, despite gains in Chinese consumption, the chief of the International Energy Agency said on Tuesday. (10/25)

Refining woes: Oil majors enjoyed one of the best years for refining in 2015. The world’s biggest oil companies, supported during crude’s collapse by a buoyant refining business, have lost that buffer as brimming fuel stockpiles swamp demand. Profits from turning oil into gasoline and diesel contracted 42 percent last quarter from a year earlier to an average $11.60 a barrel, the weakest for the time of year since 2010. (10/26)

Statoil ASA, the first of the major oil producers to report third-quarter earnings, posted an unexpected loss for a second quarter in a row as maintenance and exploration expenses compounded the impact of lower crude and gas prices. (10/27)

Chopper cutback: Airbus Group SE announced the first of what may prove to be thousands of job cuts across its business, saying it will eliminate almost 582 posts at its helicopter arm following a slump in demand from the oil and gas industry and a fatal crash that grounded one of its most popular models. (10/27)

Russia’s Gazprom is on the verge of striking a deal with EU regulators to settle a half-decade old dispute over natural gas pricing, and the resolution could change the way Gazprom does business and lead to lower gas prices for much of Eastern Europe. The conflict began back in 2011 when EU antitrust regulators began investigating Gazprom for anticompetitive behavior, citing Gazprom’s practice of pricing natural gas differently to different countries depending on how compliant they were to Moscow. (10/28)

More Gazprom: The European Commission confirmed on Friday it had lifted limits on Gazprom’s use of a key link from its offshore Nord Stream pipeline to Germany, allowing Russia to pump more gas supplies to Europe bypassing traditional routes via Ukraine. The decision allows Gazprom to bid for an additional 7.7 and 10.2 billion cubic meters (bcm) more volumes at auction on top of its existing access to half of the Opal pipeline’s capacity. (10/29)

South Korea’s shipbuilding industry — home to the world’s top three manufacturers — has eliminated more than 20,000 jobs this year. The “Big Three” yards have lost a combined $5.8 billion in the last six quarters amid delivery delays and a plunge in demand for new vessels and shipping platforms used for drilling oil in deep sea. (10/26)

OPEC member Indonesia has declared its plans to raise oil output by 42 percent in 2017. A spokeswoman for Indonesia’s state-owned oil firm Pertamina said that the company seeks to raise its total output to 438,000 b/d next year, up from an average of 308,000 bpd in 2016. (10/26)

In India, monsoon torrents and regional civil disturbances did not affect the nation’s hunger for fuels last month, with local refineries processing 4.82 million b/d, up 9.27 percent on the year. (10/25)

In Egypt, the Parliament’s Energy Committee plans to contact its Ministry of Petroleum to get to the bottom of why the petroleum shipment from Aramco was suspended earlier this month. The Ministry will be asked to review Aramco’s five-year agreement to supply Egypt with petroleum derivatives. (10/25)

African commodity exporters risk a “disorderly” hit to their economies if they don’t adapt to the reality of low prices, said a senior official at the IMF. (10/25)

Angola overtook Russia as China’s biggest oil supplier last month, exporting 1.02 million b/d to the Asian country, up by 45.8 percent on the year. (10/25)

The Panama Canal is likely to attract up to 15 percent more tonnage next year after an upgrade which means it can now accommodate gas tankers previously too large to transit, its operator said on Thursday. The expanded canal opened in June, fitted with new locks that allow ships three times bigger than previously to pass through. (10/28)

The U.S. oil rig count declined by two last week to 441, ending a 17-week recovery when the industry added 113 to the rig count, Baker Hughes said.  The decline came even as crude prices mostly held over $50 a barrel this month, the key level analysts said should lead to more drilling. Despite the overall decline, drillers added five oil rigs in the Bakken shale in North Dakota, the biggest weekly increase in the region since August 2014, bringing the total there to 35. (10/29)

Spending increase? Analysts at U.S. financial services firm Cowen & Co said this week in a note that its capital expenditure tracking showed nine exploration and production (E&P) companies, including Cabot Oil and Gas Corp and Devon Energy Corp, planned to increase spending by an average of 42 percent in 2017 over 2016.  Cowen said that forecast 2017 increase followed an estimated 43 percent decline in 2016 spending below 2015 levels for the 65 E&P companies it tracks. (10/29)

In North Dakota, Native American protesters on Monday occupied privately owned land in the path of the proposed Dakota Access Pipeline, claiming they were the land’s rightful owners under an 1851 treaty with the U.S. government. (10/25)

Bankruptcies in the oil field services sector have boomed from about 20 last September to as much as 100 as of last month, according to a recent Haynes & Boone analysis. The total cumulative debt of U.S. oil field service providers reached $14 billion as of this September. (10/27)

Exxon Mobil on Friday posted a 38 percent decline in quarterly profit as revenue slid more than expected amid the prolonged swoon in oil prices. The company reported its eighth straight quarter of year-over-year profit declines and its ninth straight quarter of falling revenue. Debt has quadrupled over the past four years. For the first time since the Great Depression, Exxon lost its AAA credit rating this year. (10/29)

Exxon Mobil warned on Friday it may need to slash proved reserves on its books by nearly 20 percent—the biggest reduction in its history—if oil prices stay low for the rest of 2016. About 3.6 billion barrels of reserves in the Canadian Oil Sands and the equivalent of another 1 billion barrels of oil in other North American fields may be in jeopardy. Production sank to a seven-year low amid a prolonged slump in energy markets. (10/29)

Exxon Mobil is headed to a courtroom in New York for the first time to try to block the state’s demand for accounting documents about how climate change will affect its finances. Though seen by many as the best-run oil company in the industry, Exxon also been the slowest among its peers to face up to the risks that climate change poses to its business. (10/24)

At ExxonMobil’s annual shareholders meeting in May, CEO Rex Tillerson delivered a first: he addressed climate change head-on. For several minutes, he talked about Exxon’s investments in biofuel and carbon-capture technologies, its efforts to cut its greenhouse gas emissions by 8.8 million tons since 2011, equivalent to taking 2 million cars off the road, and how its scientists have spent decades studying climate change, a risk he said “warrants thoughtful action.” Tillerson had no choice but to address the elephant in the room. Six months earlier, Exxon had come under investigation by New York’s attorney general for allegedly misleading the public on climate change. (10/29)

General Electric is in talks to buy Baker Hughes, a transaction that would be the biggest in the history of the industrial giant and extend its bet on the battered oil industry. (10/28)

A pipeline leak late on Sunday prompted Enterprise Products Partners to shut its Seaway Crude Pipeline system, the largest conduit for moving oil from the major storage hub in Cushing, Oklahoma to Gulf coast refineries. News of the leak dragged U.S. crude prices lower on Monday on worries that shutting down the 850,000 b/d Seaway system would bottle up barrels in storage in Cushing Okla. (10/25)

In California, the land of liberal politics, electric cars and strict pollution controls might seem like an odd place to drop $1 billion into a 115-year-old oil refinery. Chevron Corp sees an entirely different landscape in California: a uniquely isolated market, closed to new competitors, where the price of gasoline can skyrocket when even one refinery goes down. (10/25)

The American Lung Association concludes in a new report that over-reliance on petroleum-based fuels for transportation costs the 10 ZEV states in the US (California and nine other states that have adopted the California Zero Emission Vehicle [ZEV] program) an estimated $37 billion in health expenses and climate costs every year—with California costs alone hitting $15 billion. (10/27)

For electric vehicles, the cost of Lithium-ion batteries has decreased 65 percent since 2010, back when they cost over $1,000 per kilowatt-hour. These batteries now cost under $350 and some companies are finding ways to produce them for even less. Many predict that lithium-ion batteries will be cost competitive with internal combustion engines once the new age batteries are as cheap as $100 per kilowatt-hour, a plausible figure for 2020. (10/28)

Renewables surge: About 500,000 solar panels were installed every day last year as a record-shattering surge in green electricity saw renewables overtake coal as the world’s largest source of new power capacity.  Two wind turbines went up every hour in countries such as China, according to IEA officials who have sharply upgraded their forecasts of how fast renewable energy sources will keep growing.  (10/25)

Renewables: After reviewing bids offered in a multi-state request for proposals, Massachusetts, Connecticut and Rhode Island are entering contract negotiations to buy power from six projects totaling about 460 MW, with most of the generation coming from solar projects. The smaller-than-expected procurement is “consistent with our understanding that the initial RFP was to be used as a procurement vehicle to test for market pricing.” (10/27)

NY wind: The U.S. Interior Department, in coordination with its Bureau of Ocean Energy Management, said it would open 79,350 acres off the coast of New York up for a commercial wind energy lease sale. About 1,780 acres was removed because of environmental concerns associated with a subsea feature known as the Cholera Bank. (10/29)

In Iceland, drilling into hot rocks to tap geothermal energy is one thing. Drilling deep enough to tap the energy from magma oozing into volcanoes is quite another, offering a massive increase in the potential to exploit Earth’s inner heat. That is the task of a rig now drilling 5 kilometers into the rugged landscape of old lava flows. (10/25)

CO2 symbolic record: The World Meteorological Organization reported that carbon dioxide, a potent greenhouse gas, reached 400 parts per million in the atmosphere last year for the first time on record. That represents a level that’s 44 percent higher than pre-Industrial Revolution levels. (10/25)

China’s deserts have spread at an annual rate of more than 1,300 square miles for many years. Many villages have been lost. Climate change and human activities have accelerated desertification. China says government efforts to relocate residents, plant trees and limit herding have slowed or reversed desert growth in some areas. But the usefulness of those policies is debated by scientists, and deserts are expanding in critical regions. Nearly 20 percent of China is desert, and drought across the northern region is getting worse. (10/24)