Editors: Tom Whipple, Steve Andrews

Quote of the Week

“The shale boom that is providing the majority of all incremental supply relative to demand is much closer to its peak than was previously anticipated. Productivity from onshore wells appears to have topped out in 2017 and experienced declines in 2018 followed by further declines in 2019.”

Jeremy Thigpen, President, CEO and Executive Director of Transocean

 “We’ve always been clear that we will follow the science. We cannot be certain that shale gas can be extracted safely, and therefore we must impose this moratorium [on fracking] until the science changes.”

Andrea Leadsom, UK Business Secretary

Graphic of the Week

1.  Energy prices and production
2.  Geopolitical instability
3.  Climate change
4. The global economy and trade wars
5. Renewables and new technologies
6. Briefs

1.  Energy prices and production

On Wednesday, the price of oil came under pressure after the EIA reported a crude oil inventory build of 5.7 million barrels for the week to October 25.  Analysts had expected a much smaller build of 729,000 barrels after a 1.7-million-barrel draw interrupted a string of five weekly inventory builds.
On Thursday, oil prices quickly wiped off early gains after China reported six consecutive months of lower factory activity.  China’s Purchasing Managers’ Index dropped in October, compared to expectations of staying unchanged from September.  This exacerbated fears that the Chinese economic growth will further weaken, especially without a U.S.-China trade deal.
Oil prices rose nearly 4 percent on Friday on signs of progress in U.S.-China trade.  Brent crude ended the session up $2.07, or 3.5%, at $61.69 a barrel, but was still down about 0.4 percent for the week.  West Texas Intermediate crude settled $2.02, or 3.7% higher at $56.20 a barrel, but fell about 0.8% in the week. The first, and easiest to agree on, phase of the US-China trade talks is progressing, and Washington hopes to sign an initial deal this month.
OPEC’s oil production jumped by 690,000 b/d from September to 29.59 million b/d in October, as the Saudis saw their production surge by 850,000 b/d, to 9.9 million, according to the Reuters survey.  The Saudis are now pumping as much oil as they did before the attack in mid-September.  OPEC+ will, at the very least, extend production curbs beyond the March 2020 deadline.  Analysts believe any increase in OPEC+’s production in the immediate future would send oil prices “into the abyss” and is not in line with the group’s “long-held commitment to stabilize the oil market.”
The course of US shale oil production over the next five months will be important to what OPEC+ does this winter.  Russia’s Deputy Energy Minister Sorokin said last week that Russia is monitoring the growth in US shale oil production and that there has been a significant slowdown over the past three-four months.  He noted that drilling efficiency has stalled over the past two years.
The Trump administration, however, still sees the US shale oil boom barreling ahead, despite slowing production, falling rig counts, and investment in new production sagging.  Energy Secretary Perry said last week that. US shale production has turned the world “on its head,” and Goldman Sachs Group Inc. is “off a bit” in a report last week saying that the bonanza is fading.
The downturn in shale drilling has been so steep and fast that oilfield companies are taking the unprecedented step of scrapping entire fleets of fracking equipment.  With almost half of US fracking machinery expected to be sitting idle within weeks, shale drillers are retiring truck-mounted pumping units and other equipment used to fracture shale rock.  In previous market slumps, frackers parked unused equipment to await a revival in demand; This time it’s different, gear is being stripped down for parts or sold for scrap.
As oil prices remain low, talk has begun about the outlook for Texas’ economy.  According to a recent Reuters report, smaller independent oil and gas producers in the state are struggling to get loans from banks as the latter become increasingly wary of the ability of the borrowers to return the money when the time comes.  Jobs in the Texas oil and gas industry are falling, too. The Houston Business Journal reported this month that September saw a 1,100 decline in the number of jobs in the mining and logging sector—the category that includes oil and gas jobs.
Conventional oil and gas discoveries have fallen since the shale boom and the subsequent oil price collapse.  In fact, they’ve fallen to their lowest level in 70 years.  This year has seen new discoveries of nearly 8 billion barrels of oil “equivalent” (which includes natural gas) compared to 10 billion barrels of oil equivalent discovered last year.  But what’s most striking is that discoveries aren’t even close to keeping pace with the loss of conventional resources.  According to Rystad, the current resource replacement ratio for conventional oil is only 16 percent.  In other words, only one barrel out of every six consumed is being replaced with new resources.
Given that the world currently consumes some 35 billion barrels of oil per year, it is difficult to understand the optimism for the future of the oil industry.

2.  Geopolitical instability

Political turmoil continues to spread across the world with Chile, Algeria, Lebanon, Iraq, and Pakistan joining the growing list of countries where domestic unrest or international confrontations is threatening the well-being of many nations.  In several oil-producing states, including Iran, Syria, Yemen, Libya, and Venezuela, oil exports have dropped significantly or stopped altogether.

There are a variety of reasons for the current outbreak in domestic unrest which some have likened to a renewed “Arab Spring.”  Climate change is cutting crop yields and reducing water supplies in many countries.  Population growth has resulted in large numbers of unemployed youth.  In the Middle East, roughly 60 percent of the population is under 30 years of age.  Thanks to the internet and cell phones, communication among dissidents is much easier than ever before.  Finally, we have rampant corruption in many countries, especially oil-producing ones. Change in the political system is the predominant cry of the tens of thousands that have taken to the streets in recent weeks.

Aside from the multi-faceted turmoil in Syria, which has the potential to turn into a much larger conflict, the domestic situation in neighboring Iraq has deteriorated in the last two weeks. Protests have accelerated dramatically in recent days, drawing huge crowds from across sectarian and ethnic divides.  Tens of thousands of anti-government demonstrators amassed in central Baghdad and other Iraqi cities as one of Iraq’s most influential Shiite clerics, Moqtada al-Sadr, called for sweeping changes to the political system.  Iraqis flocked to the main squares across the country, including in the oil-producing Shiite heartland in the south, demanding a complete overhaul of the political order.  Tehran does not like the prospect of the current Iraqi government being ousted and has stepped in to prevent the ouster of Iraqi Prime Minister Mahdi.

At least 175 people were wounded on Friday, and 91 more on Saturday as protesters from across Iraq’s sectarian and ethnic divides thronged the center of the capital in a show of fury at a political elite.  They see the elite as deeply corrupt and responsible for widespread economic hardship.  Last week saw Iraq’s most significant wave of mass demonstrations since the fall of Saddam Hussein.  The root cause of grievances is the sectarian power-sharing system of governance introduced in Iraq after 2003.  “We want an end to sectarian power-sharing, jobs should not be doled out based on whether you are Sunni or Shi’ite. We want all these parties gone and replaced with a presidential system,” said 22-year-old law student Abdulrahman Saad who has been camped out in Tahrir Square for nine days.

Oil workers in Iraq’s southern provinces are beginning to join anti-government demonstrations which so far have not affected production or exports. However, the organized participation of oil workers – and the increasing willingness of protesters to target key oil sites – could introduce a new threat to the government and its economic lifeblood.

Operations at Iraq’s main Gulf port Umm Qasr have been at a complete standstill since Wednesday after protesters first blocked its entrance on Tuesday.  Umm Qasr receives the bulk of Iraq’s imports of grain, vegetable oils and sugar, needed to feed a country heavily dependent on imported food.  Trucks carrying goods have been prevented from entering or leaving the port. Some international shipping lines have halted operations because of the port’s closure, port officials said.  However, Iraq’s oil exports of some 3.5 million b/d take place mostly from offshore platforms that have not been affected.

In Pakistan, thousands of anti-government protesters demanding Prime Minister Khan resign over worsening economic conditions and alleged election rigging have gathered in the capital awaiting the arrival of a right-wing religious, political leader.  Fazl-ur-Rehman, chief of the Jamiat Ulema Islam-Fazl party, has led a five-day march from the southern city of Karachi and through the length of the country to reach Islamabad on Thursday.  “The government will have to hand over power back to the people,” he said on Wednesday night, addressing supporters in the central city of Gujranwala, about 124 miles south of the capital.  “They have destroyed the economy.”

3.  Climate change

A toxic cloud settled over India’s capital last week, sending people to emergency rooms and prompting officials on Friday to declare a public health emergency and close schools for days.  Air pollution in parts of New Delhi rose to levels around 20 times what the World Health Organization considers safe.  By Friday afternoon, officials in the capital region had halted all construction projects, planned to limit the number of vehicles on roads, urged people to stay inside and shut several thousand primary schools until Tuesday.

Every winter, as wind speeds slow and farmers burn their crops to make room for a new harvest, dirty air settles over India’s cities, putting hundreds of millions at risk. Adding to it, pollution in New Delhi got even worse after weekend celebrations of Diwali, the Hindu festival of light, when families set off fireworks despite government warnings against it.  India has struggled to get in front of its pollution crisis. Reports have found that the country’s children may be facing permanent brain damage from poisonous air and that millions of Indians have already died from health problems connected to living in polluted cities.

According to new research, rising seas around the world could affect three times more people by 2050 than previously thought, Sea levels are threatening to all but erase some of the world’s great coastal cities. The authors of a paper published Tuesday developed a more accurate way of calculating land elevation based on satellite readings, a standard method of estimating the effects of sea-level rise over large areas and found that the previous numbers were far too optimistic.  The new research shows that some 150 million people are now living on land that will be below the high-tide line by midcentury. 

Most of the newly discovered threat is to countries where the levels of coastlines are not well established.  This does not include the US and Europe, where coastline elevations are well surveyed.

The plan to build a petrochemical plant near the Iranian city of Firozabad had everything usually needed to get a project off the ground: approval from the nation’s top authority, funding from the Revolutionary Guards, and plentiful gas feedstock.  But a decade on, work at the site is only 10 percent complete because of a row over an increasingly scarce resource in Iran that is vital to keep the facility cool: water.  “In early project studies, there were some mistakes about the amount of water the plant would need,” according to one of the plant’s project managers. “They found the plant needs a lot of water that the region cannot provide.

The Trump administration is expected to roll back an Obama-era regulation meant to limit the leaching of heavy metals like arsenic, lead and mercury into water supplies from the ash of coal-fired power plants, according to two people familiar with the plans.  With a series of new rules expected in the coming days, the EPA will move to weaken the 2015 regulation that would have strengthened inspection and monitoring at coal plants.  This regulation would lower acceptable levels of toxic effluent and required plants to install new technology to protect water supplies from contaminated coal ash.  The EPA will relax some of those requirements and exempt a significant number of power plants from any of the conditions, according to two people familiar with the Trump administration plan.

The decision last week by several major automakers — including General Motors, Toyota and Fiat Chrysler — to back the Trump administration in a legal fight with California over fuel-efficiency standards has fractured the industry.  It also represents a calculated political risk, sowing doubt about the industry’s climate commitments and potentially backfiring if Democrats take back the White House in 2020.  The move has sparked a backlash among congressional Democrats historically allied with the auto industry and has angered some consumers, one of whom tweeted, “Boycott time!”

Last week in California, Pacific Gas & Electric had to resume electricity blackouts to 930,000 buildings affecting upwards of three million people around San Francisco. The crisis is caused by an extensive above-ground high voltage transmission network sparking wildfires in an increasingly arid environment.  The world that this transmission system was built for no longer exists.

What compounds the present difficulties is the unfortunate legacy of the Enron scandal in California and its political aftermath.  The introduction of electricity deregulation in the state was complete with price spikes, dodgy energy trading, rolling blackouts, and the bankruptcy of PG&E.  The villain then was Enron and its various schemes (one of which was called “Starve Granny”) to manipulate wholesale power prices.  Today’s “villain” is an inhospitable climate for conventional high voltage power transmission.

California Gov. Gavin Newsom is threatening a state takeover of PG&E Corp. unless the company exits bankruptcy and dramatically improves the safety of its electric grid before the next wildfire season.  Others are saying that a change of PG&E ownership or management will do nothing to improve the situation.  They believe that that state should assemble a panel of experts in electricity transmission to recommend the best ways to modify California’s electric grid.

4.  The global economy and trade wars

The United States and China on Friday said they made progress in talks aimed at defusing a 16-month-long trade war that has harmed the global economy.  US officials said a deal could be signed this month.  The Chinese Commerce Ministry on Friday said the two had reached a “consensus on principles” during a “serious and constructive” telephone call between their chief trade negotiators.  President Trump said he hoped to sign an agreement with Chinese President Xi Jinping at a US location, perhaps in the farming state of Iowa, which will be a crucial battleground state in the 2020 presidential election.

President Trump’s demand that Beijing commit to big purchases of American farm products has become a significant sticking point in talks to end the Sino-US trade war, according to several people briefed on the negotiations.  Trump has said publicly that China could buy as much as $50 billion of US farm products, more than double the annual amount it did the year before the trade war started.  US officials continue to push for that in talks, while Beijing is balking at committing to a large figure and a specific time frame.  Chinese buyers would like the discretion to buy based on market conditions.

The Federal Reserve cut interest rates again last week but signaled that it might be done cutting for the time being.  It was the third interest rate cut this year, which marked an about-face after successive increases over the previous few years.  The central bank was forced into monetary easing after the global economy showed signs of slowing down, made worse by the US-China trade war.  The US economy’s growth inched lower over the summer.  The gross domestic product grew at a 1.9 percent annual rate for the third quarter.  There is something of a tug-of-war going on between US consumers, who continue to spend, and businesses, which have sharply pulled back on investment.

Oil prices fell last week as data released in China reinforced signs that its economy is slowing. Profits at Chinese industrial companies fell for the second straight month in September as producer prices continued their slide, highlighting the impact of a slowing economy and protracted US trade war.  PetroChina reported on Wednesday a 58 percent plunge in its third-quarter profit as lower oil prices, fierce domestic fuel competition, and slowing gas demand growth weighed on earnings.

China’s listed manufacturers are increasingly putting their money into financial assets such as stocks and bonds rather than investing in their businesses, as the potential returns from capital expenditure wane.  The fall in investment by industrial groups is weighing on China’s economy at a time when it is facing a severe slowdown, growing at a 30-year low of 6 percent in the third quarter.

German exports will shrink next year for the first time since the global financial crisis over a decade ago, the DIHK Chambers of Industry and Commerce said on Wednesday, as Europe’s largest economy struggles to eke out growth in a slowing global market.  The export-reliant economy has been hurt by a worldwide slowdown, trade disputes caused by President Trump’s ‘America First’ policies, and business uncertainty linked to Britain’s planned but delayed departure from the European Union.

5.  Renewables and new technologies

Electric vehicle owners may soon be able to charge their cars in as little as 10 minutes, thanks to a new design that heats the battery to increase the reaction rate.  When lithium-ion batteries are charged rapidly – during which lithium ions move from the positive to the negative electrode – there is a tendency for lithium to form plate-like deposits on the negative electrode’s surface that can shorten battery life.  Chao-Yang Wang and his colleagues at Penn State University suspected that they could minimize this problem by first heating the battery to a temperature too high to allow lithium plating to form.  To test their theory, the team used micron-thick nickel foils in a stack of electrode layers.  Their findings suggest that the benefits of a short burst of high temperatures far outweigh the negatives. (11/1)

 In August 2019, the Japanese multinational holding firm SoftBank invested $110 million in Swiss company Energy Vault.  It was a significant boon for the company, which has a somewhat unique take on energy storage. It stores potential energy through the use of a 400-foot tall, six-armed crane that raises stacked concrete blocks that weigh almost 35 metric tons each.  As solar or wind energy is siphoned into an Energy Vault tower, a computer directs the concrete blocks to rise. When electricity is needed, the blocks are returned to the ground, and the kinetic energy generated from the falling brick is turned back into power.  Energy Vault claims the process had a round-trip efficiency between 80 to 90 percent.

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

Britain will impose an immediate moratorium on fracking, the government announced on Saturday, saying the controversial gas extraction technique risked causing too much disruption to local communities through earth tremors. Prime Minister Johnson’s government had previously signaled its support for the shale gas industry as it seeks ways to cut Britain’s reliance on imports of natural gas, which is used to heat around 80 percent of Britain’s homes. But fracking is fiercely opposed by environmentalists who say it is at odds with Britain’s commitment to reach net-zero carbon emissions by 2050. (11/2)

Denmark has granted Russia’s state-controlled energy company Gazprom permission to build a controversial gas export pipeline through Danish waters. The October 30 approval removes the last major regulatory hurdle for Gazprom to complete its 1,230 Km Nord Stream 2 pipeline along the Baltic Sea floor from Russia to Germany. The Danish decision puts more significant pressure on the US Congress to quickly pass a sanctions bill to halt the project before it is completed. (10/31)

In Russia, Rosneft is preparing to lead an Arctic oil field development project that will cost an estimated $157 billion. Reuters quoted Russia’s Deputy Energy Minister Pavel Sorokin as announcing the price tag of the Vostok Oil project to media last week, adding that the Kremlin had already agreed on a $940 million tax relief package that would help with the Arctic oil and gas push. (10/29)

The offshore market recovery is underway, albeit at a slow rate, and Transocean expects to capitalize on a tighter market and increasing demand for high-specification rigs, the company said Tuesday. Despite a dip in oil prices over the last couple of months, customer interest is now at a five-year high. (10/30)

OPEC’s top producer and de facto leader Saudi Arabia has informally asked Brazil to join the organization, Brazilian President Jair Bolsonaro said on Wednesday, adding that he would personally like his country to be a member of OPEC. Another large member would be rather convenient for OPEC, who has seen its influence wane in recent years thanks to growing US shale. (10/31)

Saudi Arabia’s state oil company finally kick-started its initial public offering on Sunday, announcing its intention to list nearly four years after Crown Prince Mohammed bin Salman first floated the idea.

In Saudi Arabia, the brutal killing of Jamal Khashoggi, a Washington Post columnist, prompted many companies and executives to shun the Saudi’s annual investment conference last year. But the Riyadh event was again teeming with the global elite this week as the conference opened with a clear message: Saudi Arabia is open for business. (10/30)

Iran’s government is currently reviewing a proposal by the Tehran Chamber of Commerce, Industries, Mines and Agriculture’s energy commission to sell shares in refineries and petrochemical firms to settle the vast debts it has accrued with private companies and contractors. (10/29)

In Libya, Egyptian oil companies that had operations in the country but pulled out during the civil war will return. NOC’s chairman Mustafa Sanalla said the Egyptian companies would help Libya’s NOC to boost oil production by resuming previously suspended projects and will also take part in expanding the country’s pipeline network, both for oil and gas. (10/30)

In Brazil, Exxon may not be interested in stepping up to the bidding plate for Brazil’s massive $50 billion transfer of rights auction next week, because the oilfields up for grabs come with a hefty price tag, Exxon’s president of exploration, Stephen Greenlee, said. Exxon already holds licenses offshore Brazil, but when it bought those rights, the assets were far less expensive than what the Buzios oilfield is expected to go for this time around. Apart from Exxon’s concerns, Total SA, Repsol, and BP Plc have said they are not interested. (11/1)

In Guyana, Hess Corp’s first oil, where it is a partner in the crude-rich ExxonMobil-led Stabroek offshore block, will be in December, ahead of the previously stated Q1 2020 date, a top company executive said Wednesday. Moreover, the partners have also selected two more exploration wells to drill in Guyana, following their 14th successful well there. (10/31)

In Venezuela, the major power outage in March this year disrupted severely the already crumbling oil production and threatened its oil exports. The massive outages in March may have made the headlines. Still, Venezuela continues to suffer to this day from frequent significant disruptions to the power supply for the capital Caracas, major cities, and oil processing sites. Outages in Caracas continue to occur at least several times a week, while other parts of the country, including the oil-rich state Zulia, experience blackouts practically every day. (11/1)

In Venezuela, PDVSA’s 2020 bond payment of $913 million is largely expected to go into default this week. Still, the collateral used to back the bond, the US-based Citgo refinery, may soon be separated from its disappointing parent. (10/29)

Pemex, Mexico’s debt-burdened state oil producer, has reported a fourth consecutive quarterly loss but lauded a slight increase in crude output as a hopeful sign for the strained finances of the country’s biggest company. Pemex posted a net loss of 87.9bn pesos ($4.6bn) in the three months that ended September 30. (10/29)

The US oil rig count dropped by five units, and the gas rig lost by three, according to weekly data from Baker Hughes Co. There are now 822 active rigs, down 245 from the count of 1,067 one year ago. (11/2)

Fracking rush: Eyeing more restrictions on drilling following the 2020 presidential election, some US oil and gas companies may accelerate fracking on public lands over the next year. Concho Resources said that to mitigate risk from a potential ban on fracking in 2021, the company is running rigs on its federal acreage now. (10/31)

ExxonMobil Corp. reported $3.17 billion in profits in the third quarter, nearly half of its profit from one year ago, according to the company’s third-quarter earnings statement. The oil major posted $2.17 billion in upstream earnings, down from $4.23 billion one year ago. Exxon did report an increase in liquids production by five percent from one year ago, driven by the Permian. (11/2)

LNG exports: The United States saw its net natural gas exports in the first half of 2019 more than double from the same period last year, thanks to more liquefied natural gas (LNG) export capacity coming online in recent months, the US EIA says. Between January and June 2019, US net natural gas exports averaged 4.1 billion cubic feet per day. (10/31)

Coal bankruptcy: Murray Energy, the US largest privately-owned coal producer led by outspoken Donald Trump’s ally Robert Murray, has filed for chapter 11 protection as fossil fuel’s role in the country’s energy mix continues to weaken. The Ohio-based miner, the eighth coal company to go under over the past year, said it had reached a restructuring agreement with lenders to restructure more than $2.7 billion of debt. (10/30)

MPG battle ongoing: GM said Monday they were intervening on the side of the Trump administration in an escalating battle with California over fuel economy standards for automobiles. Their decision puts them against leading competitors, including Honda and Ford, who this year reached a deal to follow California’s stricter rules. (10/29)

To boost electric vehicles, Senator Chuck Schumer, in an op-ed published Friday in the New York Times, revealed his plan—involving federal spending in industry, charging infrastructure, and a consumer incentive-and-buyback program– that could be the biggest of its kind since Cash for Clunkers. Schumer says the $454 billion plan— over ten years —is supported not just by environmentalists but by labor unions and large automakers. (10/28)

Cyber-attack on India nuke: India has confirmed its newest nuclear power plant was the victim of a cyber-attack, exposing the vulnerability of one of the country’s most critical sectors to cyber espionage. The Kudankulam nuclear power plant was hacked using malware designed for data extraction linked to the Lazarus Group, cyber experts said. The group is known to have ties to two North Korean backed groups. (11/1)

Credit lies? One thing that professional bank and fund traders know that others may not is to never trust the credit rating agencies in making trading decisions. The reason for this is simple: the credit rating agencies are paid to give a rating on the creditworthiness of the very company that is paying them for that rating. (10/30)