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Quote of the Week

“The OPEC drama is behind us (for now) with the cartel and its friends agreeing to a peak supply. But the topic that’s talked about behind the scenes in Viennese cafes is that of ‘peak demand.’ Every pundit has an opinion about when peak demand will happen. Articles, podcasts, and snappy videos mostly debate in what year our 150-year addiction to the product will begin to wane. Some think it’s as early as 2020; the authoritative International Energy Agency conjectures 2040.”

Peter Tertzakian, Chief Energy Economist and Managing Director, ARC Financial Corp. (12/2)

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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

The agreement between OPEC and Russia came as a surprise for most. Until the Vienna meeting started, there was much pessimism that a deal would be reached and all indications had been that negotiations were deadlocked over the issue of who would cut by how much.  The breakthrough seems to have come when Moscow changed its position from “freeze but no production cut” to agreeing to reduce output by 300,000 b/d from the 11.2 million b/d it reached in November.  This change, plus the agreement by Baghdad to cut oil production by 210,000 b/d, was enough to convince the Saudis to cut by 486,000 b/d and the other Gulf Arab states would join in for at total Gulf Arab cut of 786,000 b/d. Libya, Nigeria, and Indonesia were left out of the agreement and Tehran was allowed to increase production by 90,000 b/d to 3.8 million – somewhat short of their 4 million b/d goal. Given the bad relations between Riyadh and Tehran, allowing the Iranians to continue increasing production was the toughest part of the deal for the Saudis to swallow.

The total cut by OPEC members is supposed to be 1.2 million b/d to which a non-OPEC cut of 600,000 b/d, including Moscow’s 300,000 b/d, would bring the cut up to 1.8 million b/d. This assumes that everybody involved adheres to the agreement. Given the organization’s track record on production caps over many decades, there is little reason for optimism that we will see a 1.8 million b/d cut. The agreement is to start in January, last for six months, and can be renewed. OPEC officials say they have rounded up additional an 300,000 b/d of production cuts from non-OPEC countries beyond the 300,000 b/d announced by Moscow.  Countries mentioned as possible additions to the non-OPEC cut include Azerbaijan, Kazakhstan, Mexico, Oman, and Bahrain.

The oil markets reacted sharply to the news of the agreement with oil up from circa $46 to a close of $51.62 in New York and $54.46 in London.  After a sharp jump on Wednesday as details of the agreement filtered out of the meeting, the increases continued on Thursday and Friday but at a slower pace. Prices still are not quite as high as they were in May and June and then again in October on previous bursts of optimism about oil supplies.

There seems to be general agreement that an actual cut of 1.8 million b/d will eliminate any production surplus in 2017, but whether it will bring the surplus crude in storage back down to normal levels is still up in the air. A meeting is scheduled for December 10th in Moscow to round up the last 300,000 b/d, but there are still a few unknowns in production next year. Libyan production could grow by another 400,000 b/d or so next year. Nigeria could settle its insurgency problems and add another 200,000 b/d.

The great unknown for the next year or two is what will happen to US production which has dropped by roughly 1 million b/d in the last two years. While the US rig count has been rising steadily for the past few months, it is still way below the high seen in 2014. Opinions as to the efficacy of the cuts varies. Some such as Goldman Sachs see prices above $60 a barrel shortly if the agreement is completely fulfilled; however, this price level is likely to trigger a resurgence of US shale oil production. Others such as the Fitch rating agency expect London’s Brent to average $46 a barrel next year, up by only $1 a barrel from 2016. Fitch sees more problems on the demand side.

“Peak oil demand” is getting a lot of attention in the financial press these days. Now that the OPEC production cut drama is over for a while, the discussion is turning toward whether the global demand for oil will peak in the foreseeable future and start to trend downwards.  A peak in the demand for oil would is seen as being caused by increasing efforts to combat climate change by reducing carbon emissions. While US policy towards the environment, which is in flux at the moment, is important, it is not the complete determinant of oil demand. China and India are suffering from near-lethal air pollution. The EU is on its way to making drastic cuts in fossil fuels, as witnessed by the recent advisory vote in German to ban the sale of internal combustion cars after 2030. The likelihood that an increasing proportion of new cars will be electrically powered in the next decade also has many in the oil industry concerned. We are starting to see many forecasts of much-reduced demand for gasoline, but these are usually discussed as though they will not come for another 15-25 years.

The movement to eliminate fuel prices subsidies across the underdeveloped world has been picking up steam. This development has seen higher fuel prices in many countries which in turn is reducing the demand for oil. Given the massive cutbacks in the oil industry’s capital expenditures in the last two years, the possibility that oil production will be slowing around 2020 is also a reality.  This could, in turn, move oil prices much higher again and reduce the demand for oil.

2.  The Middle East & North Africa

Iran: Despite the rhetoric from the coming US administration about tearing up the nuclear agreement and the vote on Friday in the US Senate to extend sanctions on Iran, the leading US oil services company has signed an agreement to work in Iran. Schlumberger was active in Iran before the 1979 revolution and is eager to obtain new customers in the wake of the collapse in new drilling for shale oil in the US. The situation is complicated, however, by a US government imposed a 3-year ban on Schlumberger’s working in Iran. This “probation” was imposed after a six-year investigation into Schlumberger’s repeated violation of sanctions bans against Iran and Syria. As part of Schlumberger’s agreement with the government, the company paid some $233 million in fines and reparations. Schlumberger says the deal is for “the non-disclosure of data required for a technical evaluation of field development prospect” and does not involve any oilfield services.  The company has figured out that it can do business in Iran through a subsidiary in the Caribbean that can export to Iran but does not involve any US citizens or US-made equipment.

Now that Iran is “free” to continue increasing production (whether there really is a 3.8 million b/d production cap is murky), it is increasing its efforts to gain foreign investors. Tehran is looking to attract $60 billion to grow its petrochemical industry and is currently in talks with Asian companies for a $1 billion expansion project.

Syria/Iraq:  It appears that the Assad government aided by Russia and Iran will soon be in control of all the major cities and most of the population of Syria. The insurgents are likely to move to the countryside and a low-level insurgency will continue indefinitely depending on outside support. Europe will continue to be threatened by the possibility that millions of Syrians will seek to enter the EU which is unwilling to absorb them. Other than the growing hatreds between the region’s Sunni and Shiite populations it is difficult to predict the outcome of the Syrian civil war for the region’s oil exports other than to say the overall political situation continues to deteriorate. At some point, this may engulf one or more of what now appear to be relatively stable oil-exporting states.

Baghdad announced last week that its oil exports including those from Kurdistan rose above 4 million b/d with a combined export of 4.051 million b/d. The OPEC production cap of 4.351 million b/d will force the country, including the Kurds, to cut production by more than 200,000 b/d. Whether the lost revenue will make up for the lost sales and whether the Kurds will pay any attention to the agreement remains to be seen.

The battle for Mosul continues with the humanitarian situation in the now isolated city becoming more serious all the time. ISIL, with nowhere else to go, is putting up a strong defense and appears willing to sacrifice thousands of civilians who are being used as civilian shields. The fighting appears destined to continue for an extended period, but except for the few oil wells that were fired by retreating ISIL forces does not seem to be having an effect on oil production. Sunni lawmakers in Baghdad have challenged a new government law that formalizes the participation of Shiite militia in the fighting against ISIL. As the fight against ISIL is taking place in Sunni-dominated cities, and the Shiite militias have a record of atrocities against Sunnis, this could become one more factor in the ever increasing Sunni-Shiite tensions in Iraq.

Shell is considering withdrawing from it oil activities in Iraq but maintaining its natural gas interests. Shell holds a 45 percent interest in the Majnoon field, which produces 200,000 b/d. The harsh terms that Baghdad has imposed on foreign oil companies operating in the country means that Shell has gained very little benefits from doing business in Iraq and now seeks to get out after more than a century operating in the country.

Saudi Arabia: The kingdom is facing real challenges for the first time since oil was discovered decades ago. Although production recently has been close to an all-time high, it has been maintained only through increased drilling of new wells that has continued through the price slump. While exports to India and China have increased, the Saudi market share is gradually being eroded by other Middle Eastern exporters, particularly Iran. While the Saudi oil is very profitable, even at current prices, the country has gotten itself into a position that it must spend billions to maintain political stability in a country of 30 million inhabitants run by a small royal family. Thus the real cost of Saudi oil production is much higher than it appears.

There is also the issue of how the Saudi’s gamble on a production freeze will pay off. Should prices be forced up to the place where US shale oil comes storming back into production, the OPEC freeze could come to naught and prices will fall again.

The country is desperately trying to diversify away from oil realizing that global prices may not be rising into the hundreds any time soon. Last week the king inaugurated a new $35 billion mining complex that it is hoped will allow some diversification away from near-total dependence on oil and gas revenues. The country is also making an effort to triple chemical output to 34 million tons per year by 2030, thus gaining more revenue from refining and reformulating the raw crude.

There was a report last week the kingdom was recently subjected to state-sponsored hacker attacks on its computer banks, possibly from Iran. Although the government is saying little, several government agencies and the country’s airports had data erased by the attacker causing an unspecified amount of havoc.

3.  China

Most of the news from China last week dealt with economic development and growth which eventually impacts the demand for oil. As its economy slows, Beijing has loosened its job security law which rolls back protections for workers in order to keep companies afloat. The law was passed during the boom times of 2008 so that workers could share in growing economic wealth. Now the leadership is reconsidering whether it is more important to preserve overall employment levels as the economy slows.

A new white paper on economic development stresses that economic growth must be undertaken in an environmentally friendly way. “China is committed to the concept of environment-friendly development and strives to expedite the country’s ecological progress to deliver a more livable and beautiful environment for the people.” “It aims to make a good eco-environment a focal point for improving people’s living standards, and create sustainable development that benefits all the people.” The bad air in Beijing continues to impact policy.

4. Russia

Moscow’s energy minister said that the Russian oil industry, most of which is state-owned, will have no trouble complying with the 300,000 b/d cut it agreed to at Vienna.  In October, Russia produced 11.23 million b/d and in November 11.21 million implying a production cut of about 2.68 percent. These cuts are to be spread proportionally among all Russian oil producers. Some are skeptical that these limits will be as easy to achieve as the government claims.
Moscow’s efforts to establish an oil futures market in St. Petersburg is off to a slow start. So far there has been little foreign participation and low liquidity. President Putin has been trying to establish this market since 2006, but previous attempts have failed due to lack of interest. Proposals to privatize Rosneft, Russia’s largest oil producer, were due in the Kremlin by December 1st with the aim of completing the deal by January 1st.  Gazprom Neft has started sea trials on an icebreaker to support drilling in the Arctic ice. “The purpose of the vessel will be ice-breaker tanker support, assistance in mooring and loading, rescue operations, vessel towing, firefighting, and oil-spill response.”

Moscow says that it economy which consists mostly of exporting oil, arms and some grain should catch up with the rest of the developed world in ten years.

5. Nigeria

There were no new pipeline attacks last week so we can presume that oil production is somewhere in the range of 1.5-2 million b/d until further notice. Nigerian President Buhari told the Nigerian Academy of Engineering that he was impressed by the technical sophistication of the insurgents’ attacks on Nigeria’s oil infrastructure – doing the most damage with the smallest amounts of explosive in just the right places. Buhari suspects that the rebels are getting help from professionals inside the oil industry who understand the vulnerabilities of the oil transport system.

Being exempt from the OPEC production cuts, Nigeria is hoping that higher oil prices will increase its revenues in the coming year. The Nigerian cabinet has approved a 20 percent increase in government spending for 2017 on expectations of better times.

6. Venezuela

The economy in Venezuela is melting down before our eyes as the value of the bolivar fell 65 percent last month. On Friday the black market of the bolivar was down to 4400 to the US dollar. There are no longer enough banknotes in circulation to keep the economy functioning, but larger denomination currency, up to 20,000 bolivar notes (worth 4-5 dollars), will be issued later this month. With daily withdrawals from banks limited to 10,000 bolivars or a little over $2, there is little left of the economy. Government imposed price caps at food stores keep mass starvation from taking place as the Army guards and controls food distribution.

Caracas has been suspended from the regional South American economic group, Mercosur, for failure to maintain democratic principles. Venezuelan oil exports seem likely to fall much lower if not disappear completely as the country edges toward total societal collapse.

7.  The Briefs

Decommission spending for aging offshore oil and gas assets is on track to increase dramatically from $2.4 billion in 2015 to $13 billion each year by 2040, according to an IHS Markit study. During the next five years, more than 600 projects are expected to be decommissioned in the UK, Norway, the U.S. Gulf of Mexico and Australia. (12/3)

Brent pricing: Oil pricing agency Platts is considering the first major overhaul in nearly a decade of its benchmark dated Brent, which is used for most of the world’s crude trade. It may add Norwegian light sweet Troll crude to the basket of oil flows it uses to set the price of dated Brent. (12/3)

In Norway, consent by regulatory authorities has been given to energy company Statoil to start drilling an appraisal well in the Johan Sverdrup oil field in the North Sea. Drilling is scheduled to start in December and should last 30 days. The field is under development and production is planned to start in 2019. Developed over a series of phases, operator Statoil said the Johan Sverdrup oil field should account for up to 25 percent of total Norwegian petroleum production once at peak capacity. (11/29)

Royal Dutch Shell expects to pump out all the fossil fuel reserves listed on its balance sheet, its chief executive said, dismissing concerns that production limits in the wake of the Paris climate accord could hit the energy giant’s valuation by creating “stranded reserves.” (11/28)

Due to an anticipated peak in demand for oil, the Hungarian company MOL is rethinking its traditional focus on fuel supply and shifting investment to petrochemicals, the key ingredient of everyday plastic products and a sector where MOL believes growth will continue even when its fuel business flattens. (11/28)

Offshore Israel, Delek Drilling, Texas-based Noble Energy, Israel’s Avner Oil and Ratio Oil, a collective working to exploit the Leviathan natural gas field in the Mediterranean Sea, said they reached a $2 billion agreement with Dalia, the largest private power plant in Israel, to supply fuel for up to 20 years once production begins. (12/2)

Vietnam is seeking about $1.2 billion in overseas loans for its only oil refinery before a share sale in 2017 to increase output and meet demand in one of Southeast Asia’s fastest growing economies. When completed in 2021, the expanded Dung Quat Refinery will be able to meet half of Vietnam’s fuel needs, rising from about one-third now with its current capacity of 148,000 b/d. Vietnam’s demand for petroleum products is increasing, and imports of such goods rose 18.7 percent during 2015. (12/2)

Indonesia has suspended its membership in the Organization of Petroleum Exporting Countries (OPEC) less than a year after rejoining the cartel, as the net oil importer said it could not agree to the group’s production cuts. OPEC had proposed Indonesia cut oil production by about 37,000 b/d, or about 5 percent of its output. (12/2)

Indonesia’s withdrawal from OPEC membership is unlikely to affect the country’s oil supply security, given the limited benefits seen since it rejoined the group on January 1 this year. The net importer of crude oil had expected OPEC membership re-activation as a step towards energy security but saw little benefit in terms of price and supply from other group members. (12/1)

In Algeria, the Energy Minister’s shuttle diplomacy between Tehran, Moscow and Vienna before OPEC’s meeting on Wednesday underlines the North African nation’s desperation for a deal. The oil-market rout has seen Algeria burn through cash set aside during the boom years to plug a widening budget deficit. (11/29)

Offshore Senegal, oil companies working to exploit frontier reserves are working to submit field development plans as quickly as possible. Africa-focused FAR Ltd. said the SNE offshore field, which could hold up to 641 million barrels of oil, is in the development planning stage. (12/2)

African pipeline: The work towards the construction of a crude oil pipeline between Uganda and Tanzania is officially on. To be known as East African Crude Oil Pipeline, the project – which will transport Ugandan crude to Tanga Port in Tanzania – will be built jointly by a French oil giant Total, the UK-based Tullow Oil and Chinese state-owned oil company Cnooc. (12/2)

Mexico is preparing to auction rights to drill in the oil-rich deep waters of the Gulf of Mexico, considered the crown jewel of the country’s energy industry, which only opened to foreign investment three years ago. Monday’s auction is seen as the first major test of Mexico’s ability to work with the world’s biggest players. (12/3)

In Mexico, Chevron Corp. has joined forces with Petroleos Mexicanos and Japan’s Inpex Corp. to bid this week for the right to explore for oil and natural gas, the first time the state-owned operator will partner with private companies to develop crude in the Gulf of Mexico. Seven groups and eight individual bidders have been qualified to participate in the Dec. 5 auctions that include the Trion field joint-venture with Pemex and other ten deepwater blocks. (11/29)

The US oil rig count grew by three in the week of Dec. 2 to 477, said Baker Hughes.  That stretches the gains to 161 rigs added over the course of seven consecutive months from the low of 316 hit last spring.  That’s still a far cry from the height of the boom—1,609 oil rigs active during early October 2014. Rigs in the Permian now stand at 235—which is 18 rigs more than this time last year—and has the distinction of being the only basin other than Cana Woodford to have more rigs in production now than a year ago. (12/3)

US crude oil production dropped by 1.9 percent to 8.580 million b/d in September from 8.747 million b/d in August, the US EIA said in a report Wednesday. Last year in September, US crude oil output stood at 9.423 million b/d. (12/2)

The Railroad Commission of Texas reported preliminary production of crude oil averaged 2.38 million barrels per day in September, less than 1 percent lower than the previous month and 1.6 percent lower than for September 2015. Texas is the No. 1 oil producer in the US and, over the past 12 months, produced just under 1 billion barrels of crude oil. (11/30)

US oil demand in September rose by 2.3 percent, or 446,000 b/d, from a year ago to 19.86 million b/d, according to the EIA. Demand growth was led once again by gasoline, which rose by 2.2 percent from a year ago to 9.49 million b/d in September. Gasoline demand surged over the summer, including record numbers in June. Despite steady demand, U.S. refiners are still battling weak margins due to stubbornly high gasoline inventories built up during the boom years of 2014 and 2015. (12/1)

Bankruptcy Update: As the oil and gas industry downturn cycles into 2017, dozens of exploration and production (E&P) companies remain vulnerable to market whims that threaten bankruptcy. Since January 2015, more than 100 North American exploration and production companies have filed for bankruptcy, according to the Haynes & Boone law firm. As of Oct. 19, those bankruptcies and other restructuring arrangements involved almost $70 billion in cumulative secured and unsecured debt. (12/1)

BP has approved a $9-billion investment in its Mad Dog project in the Gulf of Mexico, its first major new platform in the region since a 2010 explosion at its Macondo well led to the worst offshore disaster in U.S. history. The decision shows confidence that the company can safely operate in the region and is a bet that oil produced in the deepwater offshore can compete with rival on-shore production. (12/2)

Delays to the Dakota Access Pipeline have added millions of dollars to Energy Transfer Partners’ construction tab – but even if the line is approved, the freezing temperatures will bring their own challenges to finishing the drilling process. Frigid weather makes some aspects of pipeline construction more difficult, though not impossible. The majority of the construction on the 1,100-mile (1,770 km) line is already complete. (12/2)

US pipeline exports of natural gas continued to grow in 2016, and they have doubled since 2009. Almost all of this growth is attributable to increasing exports to Mexico, which have accounted for more than half of all US natural gas exports since April 2015. U.S. daily pipeline exports to Mexico through August 2016 are at a yearly average of 3.6 Bcf/d, 25% above the year-ago level and 85% above the five-year (2011–15) average level. (11/30)

The U.S. has become a net exporter of natural gas, further evidence of how the domestic oil and gas boom is reshaping the global energy business. The US has exported an average of 7.4 billion cubic feet a day of gas in November, more than the 7 billion cubic feet a day it has imported, Platts reported. It has been nearly 60 years since the US last shipped out more natural gas than it brought in annually. (11/29)

LNG exports: The US Dept. of Energy on Thursday granted authorization for a proposed liquefied natural gas terminal in Lake Charles, La., to export LNG to countries with which the United States has not entered into a free trade agreement (non-FTA approval). (12/2)

The US government said it was revising how it plans for oil and gas drilling, and other resource activity so more of the focus will eventually be put at the front-end. The Bureau of Land Management published an updated rule on how it plans activities on public lands. (12/3)

State budgets: Low oil, natural gas, and coal prices will continue to put downward fiscal pressure on states that rely on those resources to fund their budgets, rating agency Fitch said on Thursday. While OPEC’s agreement to implement production quotas boosted oil prices this week, Fitch’s long-term base case price forecast remains $45 a barrel in 2017, $55 a barrel in 2018 and $65 a barrel in 2019. (12/2)

Oilfield services company Baker Hughes said it formed a business venture with Goldman Sachs and others that would focus on North American hydraulic fracturing. Baker Hughes will own a 46.7 percent stake in an entity created with CSL Capital Management and Goldman Sachs that includes services tied to hydraulic fracturing operations in the United States and Canada. The new company will operate under the brand of BJ Services with headquarters in Tomball, Texas. (12/1)

Delta Air Lines is preparing to market gasoline from a refinery it owns outside Philadelphia, signaling a shift in strategy for managing the plant as a commercial refiner rather than a dedicated jet fuel supplier. Delta became the first airline to own a refinery when it bought the shuttered plant in 2012, hoping to turn the facility into its own jet fuel supplier and capitalize on cheap oil supplies from a boom in U.S. shale output. (12/3)

Energy mogul Harold Hamm will not be taking President-Elect Trump up on his offer to name him Energy Secretary. Hamm serves as the CEO of Continental Resources, which is clearly a full-time gig when he’s not busy raking in billions on the back of OPEC deals. (12/2)

Harold Hamm, the wealthiest energy billionaire in the U.S., became $3 billion richer Wednesday morning when shares of his Continental Resources Inc. rallied as high as $10.58 a share during morning trading in New York, a 22 percent increase. Hamm is the world’s 66th richest person on the Bloomberg Billionaires Index, with a net worth of $13.8 billion. (12/1)

Biofuels: The Obama administration signed its final plan for renewable fuel use in the United States last week, leaving an oil industry reeling from the most aggressive biofuel targets yet as President-elect Donald Trump takes over. The Renewable Fuel Standard (RFS) program, signed into law by President George W. Bush, is one of the country’s most controversial energy policies. It has pitted two of Trump’s support bases against each other: Big Oil and Big Corn. (11/28)

Coal conundrum: In northeastern England, a battle is raging between grass roots campaigners and a company intent on digging a new open cast mine as world coal prices soar. A year after Britain closed its last deep coal mine and pledged to phase out coal-fired power generation, the economics of mining have been transformed. Coal prices have risen by well over 100 percent this year to $100 a ton. (11/28)

Wind giants: As of the end of 2015, just three manufacturers— General Electric, Vestas, and Siemens—accounted for 55 gigawatts (GW), or 76%, of installed wind generating capacity in the United States. Of the 8.2 GW of total wind capacity installed in 2015, these three companies’ combined share is even greater, representing more than 92% of new capacity. (11/29)

A boom in electric vehicles made by the likes of Tesla Motors Inc. could erode as much as 10 percent of global gasoline demand by 2035, according to oil industry consultant Wood Mackenzie Ltd. While battery-powered cars and trucks today represent less than 1 percent of total vehicle sales, they are expected to take off after 2025 as governments move to tackle pollution and costs fall. (12/3)

The California Air Resources Board released its initial draft plan to reduce greenhouse gas emissions by 40% below 1990 levels by 2030—the most ambitious target in North America. The 2030 Target Scoping Plan Discussion Draft builds on the state’s efforts to reach its more immediate goal of reducing greenhouse gas emissions to 1990 levels by 2020 and outlines the most effective ways to reach the new 2030 goal. (12/3)