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Quote of the Week

Electricity generation is a significant consumer of water: it consumes more than five times as much water globally as domestic uses (drinking, preparing food, bathing, washing clothes and dishes, flushing toilets and the rest) and more than five times as much water globally as industrial production…If policymakers fail to take into account the links between energy and water, we may come to a point in many parts of the world where it is water availability that is the main determinant of the energy sources available for use.”

Gary Bilotta, University of Brighton

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

1.  Oil and the Global Economy

The oil markets remained volatile last week, trading around $48-50 a barrel, amidst much uncertainty about the future of crude prices. In the wake of the Brexit vote, analysts are all over the board as to where prices will be by the end of the year. Some are talking about $85 a barrel while others are looking for a retreat to less than $30 again. Nearly all agree that the markets will “rebalance” with supply and demand coming together as demand increases and the supply continues to drop as the impact of the much lower investment levels during the last two years reduces supply.  For the next six months, however, there is uncertainty especially concerning the spate of unplanned outages that have taken place in the past few months. Oil worker strikes such as in France and Norway likely will be settled quickly, and Alberta tar sands production will soon be back to normal by the end of the summer. The outages in Libya, Nigeria, and Venezuela, however, are more uncertain and seem to be getting worse rather than better in the immediate future.

There were several interesting developments in the US last week. Baker Hughes reported that the oil rig count rose by 11 units to 341, presumably due to drillers anticipating that prices will soon be above $60 a barrel, a level at which some shale oil production is marginally profitable. This number, however, is still 47 percent below the 640 rigs that were working in the same week last year.  US crude stocks dropped the week before last again, but this is normal for the time of year and the impact of lower Alberta oil production in recent weeks must be taken into account. There is still an abnormally high quantity of crude being held in US storage depots. The biggest revelation last week was that US gasoline consumption this year has not been as high as estimated due to larger exports. The EIA gets weekly reports on how much gasoline is produced and how much is imported, but must estimate how much is being consumed and how much is being exported until the Treasury Department reports actual export amounts several weeks later.  While US demand for gasoline was up to 9.2 million b/d in April, this was well below the 9.5 million that weekly EIA estimates suggested was taking place.

US natural gas prices saw a significant jump in the last few month going from under $2 per million BTU’s to nearly $3 last week.  This move has been occasioned by a 1 percent drop in US shale gas production, the switch from coal to natural gas by many electricity producers, and forecasts of warmer weather this summer. Analysts are starting to say that the fast rise in prices will soon lead to more drilling and that production will start rising again. It should be remembered that outside analysts say that at least $6 per million is necessary for most shale gas wells to be profitable and that we are still way below profitability.

2.  The Middle East & North Africa

Iran: Oil exports are due to fall to 2.14 million b/d in July from 2.31 million in June as the Koreans cut back on their purchases of condensate and the National Petroleum Company lost the ability to squeeze much more production from aging oil fields.  Iran’s new oil minister is making an effort to conclude new oil deals this summer before next year’s presidential elections. These new types of petroleum contracts, remain highly controversial in Tehran as hardliners refuse to agree to any wordage that even remotely imply that Iran’s oil reserves are owned or under the control of foreigners. Outside of Chinese and Russian companies, that must comply with state foreign policy, most international oil companies are unwilling to invest scarce investment funds for little return. Moreover, investing large amounts of money in the volatile Middle East carries considerable political risk. A minor incident anywhere in the region could easily evolve into conflict or re-imposition of sanctions on Tehran.

Iraq: As Iraqi forces, backed by heavy Western airstrikes continue to push back ISIL ground forces, the caliphate continues to resist with the only remaining resource at its disposal – the suicide bomber. Last week saw the bombing at the Istanbul Airport as well as massive attacks in Baghdad that killed at least 200 and wounded many more.

Baghdad’s oil exports slipped by 200,000 b/d in the last two months. Some of the decline has been due to bad weather, but ISIL insurgents have increased activity against oil installations in Diyala province which is supposed to be under government control. The recent increase in oil prices has helped Baghdad’s budget, with Iraq earning more than an average of $40 per barrel for the first time since last September.

Lower oil prices have forced cutbacks in foreign oil companies’ investment in increasing oil production. Foreign observers say that the current pace of investment is enough to keep production growing slowly in the near term; however, over the medium term expensive projects such as water flooding of aging wells will have to be implemented to keep production growing.

Saudi Arabia: Saudi oil exports have been dropping of late as more crude is being redirected to generate power for summer air conditioning. This shift, which has become normal in recent years as summer temperature rises and the population grows, has some analysts wondering whether the Saudis are no longer as interested in maintaining market share against Iran, Iraq, and Russia, as they are interested in seeing higher oil prices. Riyadh, however, cut oil August oil prices for customers in Asia and the US, suggesting that market share remains a factor. The Saudis also have drawn down their oil inventories for six consecutive months, the longest contraction in the last 15 years.

The future of Saudi Arabia has come in for much discussion of late. The plan to shift the country away from dependence on oil that is being pushed by Deputy Crown Prince Mohammed bin Salman has many concerned about the future of the country and its massive oil exports. The 30-year-old prince rose to unprecedented power ahead of many of his relatives and is currently embarked on a major restructuring of the Saudi economy. Parts of the oil company are up for sale; there is to be increased reliance on solar power; the petrochemical industry is to expand so that more revenue will come from refining and processing rather than selling oil.

The fundamental problem is that the country is ruled by an 80-year-old absolute monarchy based on medieval legal conceptions and is out of touch with much of the 21st century. There is little tourism in the country for fear of contamination by Western influences. For now, large  subsidies are keeping the populace quiescent, but this situation is unlikely to obtain over the longer term.

3.  China

The state of China’s economy remains a key question for the future of the global oil market. China’s imports have been so large in recent years that the country and its suppliers have been the major driver for increased oil while demand in the West largely stagnated. Factory activity in China has remained flat last month while state-sponsored growth in construction continues to climb. A new study shows that the share of China’s total commercial debt owed by private enterprises has shrunk from 48 percent to 35 percent in the last seven years as large state-funded companies expanded to take on infrastructure projects such as housing and transportation. Given that there is considerable overcapacity in the state-owned sector, this situation does not bode well for China’s future and its demand for oil.

To combat this situation, Beijing plans to cut its steel output capacity by 45 million tons in 2016 and coal production capacity by 280 million tons. These reductions will force the relocation of some 1 million workers which is bound to result in even more economic problems.

Beijing has been on a wind power binge in recent years and now leads the world by installing 1-in-3 of the new wind generators. Unfortunately, the Chinese are installing smaller, less productive turbines in less favorable locations, and are not building out the necessary grid infrastructure to handle the increased electricity production. This has resulted in smaller amounts of electricity being produced than would be expected in the West where profitability demands that new wind installations be properly planned and installed.

China’s oil production in May dropped by 7.4 percent year over year as low prices have forced the closure of older oil fields that were still producing unprofitable oil.  To make up for its declining production, Beijing continues to import increasing quantities of oil from Russia, which is a highly stable partner as compared with dealing with other exporters such as Venezuela, Nigeria, and the Middle East. The new series of deals allows Moscow to maintain its revenues in the face of continuing sanctions for the Ukrainian situation.

4. Russia

Ankara has apologized to Moscow for shooting down one of its fighter planes earlier this year, thus putting the Turkish Stream gas transport project back on the agenda. Moscow has been eager to find another way to get its natural gas production into Southern Europe without passing through Ukraine. The Southern Stream project which envisioned a pipeline through Bulgaria had been shelved indefinitely by the European Commission. A pipeline into Turkey would enable Russia to become a major natural gas supplier to the Turks by dropping off in Turkey some 16 billion cubic meters per year of the pipeline’s projected capacity of 63 billion cubic meters.  This project could undercut Iranian efforts to get natural gas pipelines into Turkey and Europe.

Some believe that Moscow is significantly under-reporting the size of the global-warming-induced forest fires that are sweeping across Siberia. The actual scope of these fires is being monitored by Western satellite photography.

5. Venezuela

PDVSA, the national oil company, announced on Saturday that its 2015 revenues were down 41 percent from the previous year. In 2016, the situation is likely to be much worse. On Friday, President Maduro announced that the onset of the rainy season means that the country’s hydro-generated electricity situation will return to normal and that rationing will end.  There were frequent blackouts in Venezuela before rationing began, so it is doubtful that more rain and an official pronouncement will help the situation very much.

Venezuelans continue to storm supermarkets and highjack food trucks to find something to eat. There has been no word on the talks with the US, which offer the best hope of supplying the massive humanitarian aid necessary if mass starvation is to be avoided.

The debt owed to foreign oil service contractors who do much of Venezuela’s drilling has now reached some $1.2 billion. The oil service companies, which have been doing business in Venezuela for decades, are reluctant to break relations with the government but seem to be reducing the scale of their work to pressure the government into coming up with some form of payment. The current size of Venezuela’s oil production remains murky as the government has no interest in releasing actual numbers which have been fudged for years.  Whatever the actual situation, it is likely there is less production than is generally accepted as most workers are spending time searching for food.

6. Nigeria

Last week there was some optimism that the ceasefire with the Niger Delta Avengers that was announced a month ago was holding and that oil production would soon be rising again. The Avengers had not made any new claims of attacks since June 16th although there had been announcements of attacks by new groups. Government sources were leaking stories as to how production would soon be back to 2.3 million b/d. On Sunday, however, the Avengers announced they have carried out five new attacks on pipelines and other oil facilities in the last three days, leaving the current level of oil production an open question.

As usual, the government bans the oil companies from providing information on attacks until they are forced to announce force majeure when contractual obligations to ship oil cannot be met. Estimates of Nigerian oil production have been all over the map in recent weeks, but universally down from the 2.3 million b/d produced before the current round of insurgent attacks.

7.  The Briefs

Brexit: The departure of the EU’s second-largest economy could have unsettling implications for the Paris climate accord. UK voters’ decision to exit the European Union sent shock waves through world markets, including the energy sector. (6/28)

The UK’s Brexit vote is expected to have a bearish effect on the global LNG market due to the weakening of European currencies. News of the UK’s decision to leave the EU on Friday caused both the pound and the euro to weaken against the dollar, the currency in which LNG is traded. (6/27)

In the Amsterdam/Rotterdam/Antwerp region, swelling crude oil stockpiles add to signs of a short-term supply surplus. Europe’s oil-trading hub is fast filling up with what may be record amounts of crude. Strikes in nearby France are to blame. (6/28)

The IEA released a sobering report on Monday that says air pollution has become a major worldwide public health crisis leading to around 6.5 million deaths each year, with “many of its root causes and cures” found in the energy industry. (6/28)

China is ready to emerge as one of the larger trading partners with Russia in a relationship that extends from military to energy. Russian President Vladimir Putin wrapped up a weekend tour of China with a new legal framework that outlines evolving ties with the Asian superpower. China was among those investors named as a possible new stakeholder in Russian oil company Rosneft, on the table as a possible target of a privatization scheme meant to help pull Russia’s energy-based economy out of recession. (6/28)

In Azerbaijan, Exxon Mobil and BP are at loggerheads over a giant oil production deal, blocking renewal of what was once called “the contract of the century.” BP operates the Azeri-Chigar-Guneshli (ACG) fields in the Caspian Sea, relies on them for a tenth of its global output, and has agreed to a new deal with the government. But Exxon, which gets around one percent of its hydrocarbon production through its stake, has been holding out for a better deal since the halving of world oil prices in 2014. (7/2)

Azerbaijan is positioned to become one of the region’s key players in natural gas. A review from the EIA finds Azerbaijan has been a legacy oil producer, with some fields in production since the early 1950s. Natural gas reserves, meanwhile, exceed 30 trillion cubic feet and most of that is in the Shah Deniz field. (6/30)

In Kazakhstan, Chevron may shortly give a green light to the most expensive oil project ($40 billion) in the world this year as the industry digs out from the worst slump in a generation. The decision on expanding the Tengiz development will be made in mid-2016. The investment was put on hold last year after cost estimates ballooned amid plunging oil prices. The project represents a bullish bet that oil demand will continue to grow through the next decade and beyond. Tengiz produced about 595,000 b/d last year. The expansion will involve pumping sulfur-laden gas back into the rocks to force out an additional 250,000 to 300,000 b/d. The combination of new Tengiz supplies and output from the Kashagan project set to come online later this year could boost Kazakhstan’s daily output to more than 2 million b/d. (7/1)

Qatar:  Total SA said Tuesday it would send its best talent to Qatar to help advance production at an offshore oil field through a new joint venture. Total signed an agreement with Qatar Petroleum to take on a 30 percent stake in a concession covering the offshore al-Shaheen field. (6/29)

India’s $13 billion pay increase for federal employees will boost car and motorcycle purchases, increasing fuel use in a country with the world’s fastest oil demand growth. (7/1)

Offshore Ghana, the Tullow Oil operated Tweneboa Enyenra Ntomme field is expected to start production in the next few weeks. A gradual ramp-up in oil production towards the FPSO capacity of 80,000 barrels of oil per day is anticipated around the end of 2016. (7/1)

Offshore Guyana, Exxon Mobil’s oil discovery may hold as much as 1.4 billion barrels, twice the size of the previous estimate, making it potentially worth about $70 billion based on current prices. The Liza field 120 miles off the coast of Guyana is a “world-class discovery” that probably will yield the equivalent of 800 million to 1.4 billion barrels of crude. (7/1)

The LNG Canal? The newly expanded Panama Canal will be able to accommodate 90 percent of the world’s current liquefied natural gas tankers with LNG-carrying capacity up to 3.9 billion cubic feet. Prior to the expansion, only 30 of the smallest LNG tankers (6 percent of the current global fleet) with capacities up to 0.7 Bcf could transit the canal. The expansion has significant implications for LNG trade. (7/1)

In Panama, analysts said the rank of those leading the delegations attending the opening of the expanded canal was affected by the Panama Papers scandal, in which millions of documents were leaked from law firm Mossack Fonseca, revealing how some of the world’s richest people use offshore companies to avoid taxes  and launder money. (6/27)

Canada’s oil sands production will grow by 42 percent to 3.4 million barrels per day by 2025, most of which will come from the expansion of existing facilities rather than new projects, analysts at IHS Energy said on Monday. (6/28)

In Canada, a high court dealt another blow Thursday to Enbridge’s proposed Northern Gateway pipeline after it overturned a 2014 government order granting the company permission to build a corridor connecting Alberta’s landlocked oil sands with the Pacific coast. Canada’s Federal Court of Appeal ruled in a 2-1 decision that the former Conservative government didn’t fulfill its legal duty to properly consult affected aboriginal communities in British Columbia about the pipeline’s impacts. (7/1)

TransCanada Inc. filed a request for arbitration Friday under the North American Trade Agreement, arguing that the State Department’s actions led the company to believe the project would win approval. The Calgary-based company argues that it moved forward with the project under the assumption that it would win approval, given numerous federal reviews and the government’s approval of the original Keystone pipeline.  The company is seeking $15 billion in damages. (6/28)

The leaders of the United States, Canada and Mexico will pledge on Wednesday that by 2025 half of their overall electricity generation will come from clean power sources, according to administration officials. The commitment — which will be a joint one, rather than an individual commitment by each nation — represents an aggressive target given the reliance by the United States and Mexico on fossil fuels for much of their electricity supply. (6/28)

The US oil rig count rose by 11 over the past week to 341, according to Baker Hughes Inc. That marks the fourth week of rises in the past five weeks. Last week, the number of oil rigs dipped after three weeks of modest gains. The number of gas rigs dropped one, bringing the total oil and gas rig count to 431—exactly half of the total rig count (862) last year at this time. (7/2)

Bakken bust? About nine months ago, analysts at Petrologica began questioning the oil production data coming out of North Dakota.  Their analysts believed that the supply picture could be more dismal than initial state data led many to believe. By using new technology and a variety of innovative drilling and completion techniques, these analysts said, North Dakota producers may have been boosting near-term production to the detriment of long-term supply. Petrologica analysts believe their theory proved true last week when the North Dakota’s Department of Mineral Resources announced that just over 1.04 million b/d of oil was produced in North Dakota in April, a drop of more than 70,400 b/d from March, the largest supply drop in state history. (6/28)

A North Dakota refinery that was the first to be built in the United States since the 1970s has been sold at a loss, with profit elusive since it opened last year, crimping the appetite for diesel. The sale to Tesoro Corp, which owns the only other refinery in the state, makes it unlikely another refinery will be built in the United States in the near future. (6/29)

In Oklahoma, the number of earthquakes has fallen 25 percent in 2016 compared with a year earlier, a decline attributed in part to actions by state regulators to police the oil and gas industry’s practice of pumping wastewater from its operations deep underground. (7/1)

The US Gulf Coast crude market saw regional sour grades strengthen Wednesday after reports of shuttered production at the BP-operated Thunder Horse platform in the US Gulf of Mexico. Crude production at Thunder Horse was halted following the explosion and fire Monday night at Enterprise Products Partners’ Pascagoula, Mississippi. (6/30)

Exxon Mobil is ramping up its lobbying of other energy companies to support a carbon tax, marking a shift in the oil giant’s approach to climate change as the industry faces growing pressure to address the politically charged issue. Exxon’s official position has long been the same—a carbon tax is the best way to address the risks of warming temperatures—but it has done little to actively advocate for that goal in recent years. (6/30)

Hurricane season: Colorado State University edged up its seasonal Atlantic hurricane forecast to 15, three more than in an average year. The new prediction is that six of those storms will become hurricanes and two will grow into major systems. (7/2)

CA blackouts: The shutdown of the leaking Aliso Canyon underground gas storage facility has caused a loss of about 70 billion cubic feet of stored gas that Southern California utilities have historically counted on to see them through the hot, high-demand summer months. The California Independent Service Operator, which manages the California grid, estimates that as a result, all customers should expect to be without power for a total of 14 days this summer. (7/2)

Gasoline prices: Higher refinery output in the US and troubling economic news overseas could put downward pressure on retail gas prices. Motor club AAA reports that year-on-year, the price at the pump is already 17 percent less. (6/29)

Gasoline price posse: California has issued subpoenas to Valero Energy and Chevron as part of a probe into whether oil refiners in the state have manipulated gasoline prices since 2014. Shell, Tesoro, Phillips 66, and Exxon Mobil and other major refiners are also under investigation. (7/1)

Coal layoff looms: Murray Energy, the largest privately held coal miner in the U.S., has warned it may soon undertake one of the biggest layoffs in the sector during this time of low prices. In a notice sent to workers this week, Murray said it could lay off as many as 4,400 employees, or around 80% of its workforce, because of weak coal markets. (7/2)

Electric vehicle growth: Navigant Research forecasts that plug-in electric vehicle (PEV) sales in the US and Canada in 2016 will near 200,000 unit sales, growing by around 62% year-over-year. Navigant further expects significant growth in the North American PEV market over the next few years: 60% during 2017 and nearly double in 2018, thanks to the introduction of battery-powered vehicles with 200+ miles of range for under $40,000. (7/1)

EVs: Led by Tesla, China’s BYD, and Volkswagen, the battery market for plug-in vehicles will rise to $10 billion in 2020, with electric vehicles (EV) emerging as the drivetrain of choice, according to a new forecast by Lux Research. Volkswagen will show the most growth as it focuses on plug-ins following its emissions scandal. (6/29)

Floating solar panel arrays are increasingly being deployed in places as diverse as Brazil and Japan. One prime spot for these “floatovoltaic” projects could be the sunbaked U.S. Southwest, where they could produce clean energy and prevent evaporation in major man-made reservoirs. (6/30)