Quote of the Week
“So, the peak oil theorists got lucky in that the industry experienced a large number of supply disruptions that raised prices, which seemed to confirm their arguments—just as the Iranian Oil Crisis of 1979 incorrectly convinced many that ever-higher crude prices were unavoidable and resource optimists naive. But by understanding that supply disruptions in Iraq, Libya, Venezuela and so on were responsible for higher prices, it is possible to recognize that political trends in oil exporting countries will determine prices, not resource scarcity. Recognizing the former means coping with cyclical prices, believing in the latter means getting blindsided by every major price decline.”
Michael Lynch, energy economist, from Forbes magazine article—“Whatever Happened to Peak Oil?”
Graphic of the Week
1. Oil and the Global Economy
2. The Middle East & North Africa
6. The Briefs
1. Oil and the Global Economy
In the two weeks since the OPEC+ coalition decided to increase oil production by an undefined amount, oil prices have risen steadily on fears that there will be oil shortages and higher prices in the coming months. New York oil futures closed above $74 a barrel last week and London closed above $79 on Friday. Driving the markets higher are disruptions to oil production in Venezuela, Libya, Canada, Nigeria, and the US efforts to force Iran to zero exports this fall. The situation is not helped by the slowdown in the increase in US shale oil production due largely to bottlenecks in moving Permian shale oil to markets. There is no sign of a letup in the global demand for oil which is expected to increase by 1.5 million b/d this year.
Taken together, it seems unlikely that Russia and the Gulf Arab states, which are the only countries with significant capacity to increase oil production, will be able to offset the increase in demand and supply disruptions elsewhere. Some observers are even talking about a return to $100 oil next year. The United States aims to reduce Tehran’s oil revenue to zero in an effort to force the Iranian leadership to change its behavior; Washington maintains there is enough spare global oil capacity to make up for lower supply from Iran.
Saudi Arabia is moving to increase production to a record high 11 b/d in July, according to Reuters. If this increase can be realized, it would be an incredibly rapid jump in production by more than 1 million b/d from May levels. President Trump said in a tweet on Saturday that the Saudis agreed to boost oil production by 2 million b/d. This assertion came as news to the Saudis. The White House quickly walked back the President’s tweet say that “In response to the President’s assessment of a deficit in the oil market, King Salman affirmed that the Kingdom maintains a two million b/d spare capacity, which it will prudently use if and when necessary to ensure market balance and stability.”
Historically, the Saudis have been reluctant to increase oil production to their maximum ability for fear there would be too little a supply buffer should there be more unplanned supply outages. Other gulf Arab countries, as well as Russia, have extra output capacity, but these capacities are far smaller than that of the Saudis.
According to Goldman Sachs an outage at Syncrude Canada’s oil-sands facility may lead to a 360,000 b/d shortage for July and shrink stockpiles at the US storage hub at Cushing, Oklahoma.
The OPEC Production Cut: Oil prices jumped 5 percent the Friday before last after the OPEC+ group announced a vague decision to maintain its collective oil production target while lifting country-specific limits. The result was viewed as only a modest increase, which could lead to tighter supplies. Saudi officials later sought to clarify the decision by noting that the move would lead to an increase of 1 million b/d. That caused prices to fall back a bit on Monday.
OPEC oil output rose last month as Saudi Arabia pumped at a near-record rate, a Reuters survey found on Monday. The cartel pumped 32.32 million b/d in June, up 320,000 b/d from May.
Saudi Arabia has invited Russia to become an observer member of OPEC. Russia and Saudi Arabia have increased ties in recent years out of a mutual desire to increase oil prices that underpin their economies. The OPEC /non-OPEC coalition now controls almost half of global crude production.
US Shale Oil Production: US crude production fell marginally by 2,000 b/d to 10.467 million in April from the highest on record in March, the EIA said in a monthly report last Friday. Baker Hughes reported another dip in the number of active oil and gas rigs in the US. Oil rigs decreased by four last week and the number of gas rigs by one. The pipeline constraints on Permian shale oil production are finally starting to bite, threatening to derail the boom that has been underway for the last few years. According to Bloomberg Permian drillers are “quitting new wells at a record pace.” The region’s pipeline network is nearly full, forcing steep and ever-widening discounts for the price of oil coming from West Texas. The number of drilled but uncompleted wells remains very high.
Oil production in the Permian is rising by 800,000 b/d annually, with current production at 3.3 million b/d. The total pipeline capacity is 3.6 million b/d, so producers—especially those that don’t have firm deals for pipeline transportation—will be hitting the limit of takeaway capacity in the next three to four months. Significant increases in pipeline capacity are not expected for another 18 months, suggesting that Permian production will plateau at 3.3 million b/d for the next year or so. While production at other shale oil basins continues to grow, nobody is expecting a substantial increase in oil production from these aging shale oil deposits.
2. The Middle East & North Africa
Iran: The US is pressing Iran’s oil customers to zero out their imports by November 4 and has no plans to issue sanctions waivers according to an announcement by the State Department. Tehran replied to the announcement by saying that removing Iranian oil from the global market by November as called for by the US is impossible. An Iranian official said, “Iran exports a total of 2.5 million b/d of crude and condensate and eliminating it easily and in a period of a few months is impossible.” The tone of Tehran’s reply suggests that the Iranians are worried that the pressure Washington is putting on its customers may have its intended consequences.
Last week India’s oil ministry told local refiners to get ready for a “drastic reduction or zero” oil imports from Iran, a sign that India—Tehran’s second-largest oil customer—is bowing to pressure from the US. European refiners also are cutting purchases of Iranian oil faster than expected as the US prepares to reimpose sanctions on Iran, with far more severe impact than the last round of punitive measures in 2012. Foreign companies would have to wind down their activities with Iran by November 4 or risk exclusion from the US financial system eliminating threatening sales and purchases to the US which in most cases are far more than any benefits to be gained from purchasing Iranian oil.
President Rouhani promised Iranians last Tuesday that the government would be able to handle the economic pressure of new US sanctions. This promise came a day after crowds massed outside parliament to protest at a sharp fall in the value of the national currency. The new protests are a fresh challenge to President Rouhani’s government just months after widespread street demonstrations. The rial is now at an all-time low, implying an inflation rate of 147 percent. Some believe that the Islamic Republic is in the ever-tightening grip of an economic death spiral and is more vulnerable to internal and external shocks than ever. Climate change which is eating away at Iran’s water supplies and its ability to grow crops remains a long term problem.
Iraq: The contested parliamentary election remains the top concern in Baghdad. Last week the Supreme Court issued a much-anticipated decision that substantially supported the Iraqi Parliament’s legislation, passed on June 6, which amended the country’s election law to mandate a full manual recount of all votes. Until the election is sorted out, there will be little movement in the country’s oil policy or new oil projects. A 12-person committee will study international best practices and develop recommendations for implementing a new law to re-create the Iraq National Oil Company. This is the first concrete step toward establishing a new national oil company which comes three months after the Parliament passed legislation that could restructure the management of Iraq’s oil sector.
The Federal Supreme Court has given lawyers until Aug. 4 to present additional documents in the federal government’s case against the Kurdistan region’s independent oil policy, and set the next hearing for Aug. 14.
Nationwide oil exports were virtually flat in June from a 2018 peak in May, with the largest monthly federal Iraq tanker loadings of the year offset by a multi-day outage in the pipeline sending Kurdistan oil to Ceyhan. Shell has handed over the operations of the Majnoon oilfield to the state-run Basra Oil Company. Last year, Shell said that it would sell its interest in the Majnoon oilfield after it and Iraq failed to agree on future production plans and investment budgets. Shell was the operator and holder of 45 percent of Majnoon, with Malaysia’s Petronas owning 30 percent, and Iraq’s Missan Oil Company holding the remaining 25 percent.
Saudi Arabia: Khalid al-Falih, the Saudi energy minister, told journalists that it was substantially increasing oil production to cool down rising prices and head off potential future shortages. The national oil company is already ramping up production to increase exports from Saudi ports in July. “Ships have been scheduled, and it will be hitting the markets. While declining to give a specific number, Falih said the kingdom would be increasing output by “hundreds of thousands, not tens of thousands, of barrels” — a substantial amount.
Russia and Saudi Arabia have agreed to extend their oil partnership indefinitely, with the agreement stipulating that they could move to regulate oil production at any time. The news is a confirmation that only Saudi and Russia are in a position to swing the markets and prices, while much of the rest of OPEC is largely window dressing representing declining ability to produce oil.
Crown Prince Mohammed bin Salman, the architect of Saudi Arabia’s economic overhaul, wants to speed up growth and create more opportunities for Saudi citizens. Companies, however, are struggling to meet the government’s demands to employ them. For decades, expatriate workers from countries such as India and the Philippines helped sustain Saudi Arabia’s high living standards by doing jobs Saudis wouldn’t do in kitchens or at construction sites. The kingdom has endowed citizens with what are essentially jobs for life in the public sector, which means the labor force doesn’t always have the skills, and lacks the motivation, to fill private-sector jobs. The new Saudi leadership has vowed to transform the kingdom into a dynamic economy. For the transformation to succeed, the Saudis must cut the bloated bureaucracy and find jobs for its citizens in the private sector. About two-thirds of working Saudis currently are employed by the state.
Libya: The future of Libya’s crude oil exports has fallen into greater uncertainty because of the widening rift opening between the Tripoli/Benghazi based National Oil Corporation and the so-called Libyan National Army over which controls the key eastern oil export terminals recently recaptured from a renegade militia. After driving out the renegades, Libyan National Army (LNA) handed over control of the ports to the new eastern National Oil Company. The LNA controls most of eastern Libya and backs a parallel government in Tobruk, but has supported the internationally recognized NOC based in Tripoli for the last two years. The uneasy accord between the LNA and NOC had been a key factor in allowing Libya to raise its crude oil production to stabilize at around 1 million b/d. But that now seems to have fallen apart.
Libya’s oil production was cut on Monday by 850,000 b/d from the 1 million the country had been producing because operations at two major oil terminals were suspended over the control dispute. The western Libyan National Oil Corp. suspended its contractual obligations for loading oil at the Hariga and Zueitina oil ports on Monday and declared force majeure. The suspension followed port blockades imposed by the Libyan National Army in violation of U.N. Security Council resolutions giving the traditional NOC control. A production cut of this size is nearly equivalent to the expected increase in Saudi production this month.
China has increased purchases of LNG, as it shores up supplies to avoid power shortages during a prolonged heat wave. Buying has picked up more than it usually would in the warmer summer months, as households are cranking up their air conditioners in the face of scorching temperatures in many areas. Some cities have rationed electricity. Beijing’s push to switch households and factories to cleaner fuel as part of a drive to clear the country’s toxic air and curb coal use has also stoked demand.
When China last set out a list of US exports threatened with retaliatory tariffs, almost all fossil fuels were covered, including oil, coal and liquefied petroleum gases such as propane. There was, however, one important exemption: liquefied natural gas. Beijing’s decided not to impose additional tariffs on US LNG. However, last week plans to export increased volumes of liquefied natural gas from the US to China were thrown into doubt because of the escalating trade dispute. Patrick Pouyanné, chief executive of Total, told reporters in Washington last week that a trade war with China would be “very bad news” for US exports of liquefied natural gas.
The International Energy Agency said in its Gas 2018 annual report last week that China will become the world’s top natural gas importer by next year. The government has mandated gas must make up around 10 percent of the country’s power generation energy mix by 2020, with further increases by 2030. Chinese demand for natural gas will rise by almost 60 percent between 2017 and 2023 to 376 billion cubic meters (bcm). This increase includes a rise in its LNG imports to 93 bcm by 2023 from 51 bcm in 2017. Global LNG imports will rise to 505 bcm by 2023 from 391 bcm in 2017, an increase of some 114 bcm.
Guidelines published by the Communist Party last week outline efforts to cut emissions by at least 15 percent by the end of the decade. The Central Committee outlined goals for air quality and the broader environment beyond 2020. President Xi has put health at the forefront of government policy.
Electricity output in May from China’s thermal power plants, mostly coal-fired units, rose 10.3 percent year on year and 3.6 percent from April. Total electricity output in China stood at 544.3 TWh in May, up 9.8 percent year on year. Strong electricity demand due to hot weather drove greater coal-fired power generation even as hydropower output reversed its downward trend of the previous two months, rising 6.9 percent year on year. “Hydropower is not picking up fast enough to derail thermal power generation growth.”
Russia’s budget received more than $63.5 billion in additional revenues thanks to the production cut deal which boosted oil prices according to Kirill Dmitriev, chief executive of the Russian Direct Investment Fund. “Thanks to the work of President Putin with the King and Crown Prince of Saudi Arabia, relations are in a unique phase, and this gave great boost to the budget.” In February, Russia’s Energy Minister said that due to the higher oil prices Russia’s federal budget had received so far $27 billion more, while the oil companies earned a combined $11 billion more since the beginning of 2017. Oil and gas exports account for around 40 percent of Russia’s federal budget revenues.
Germany has been assured by the US that any sanctions imposed on Russia will not affect the building of Nord Stream 2 gas pipeline to Europe. “We have received assurances that gas pipeline projects will be excluded from the sanctions,” the government spokeswoman said during a regular government news conference.
Long-term pressures on the oil sector in Venezuela won’t be resolved anytime soon, so production woes are expected to continue, according to a country report from the US Energy Information Administration. The report says the Venezuelan oil industry has been mismanaged for decades. More recently, some of the workers at state-run oil company PDVSA have been jailed on corruption charges. “This has caused a near-complete paralysis at the company.” For the Venezuelan economy, oil revenue was $22 billion last year, compared with about $70 billion in 2011.
The government continues to say that Venezuela can boost crude output by 1 million b/d by the end of the year in its bid to recover lost production, but the oil minister admits that this goal would be “a challenge.” PDVSA notified 11 of its international customers last month that it wouldn’t be able to meet contractual obligations of 1.5 million b/d. According to S&P Global Platts, PDVSA had only 694,000 b/d available for shipments. As workers have fled the country, PDVSA has had a difficult time maintaining crude output, let alone boosting production
6. The Briefs (date of article in Peak Oil News is in parentheses)
CAPEX growing: Higher oil prices, lower offshore development costs, and improved gas demand outlook have made the oil and gas industry more confident in approving investment in new projects whose total worth has exceeded $110 billion since the beginning of 2017, research and consulting firm Rystad Energy said. After oil and gas projects worth just US$50 billion were approved in 2016, the industry has vastly accelerated the pace of approving investments for new projects over the past 18 months. (6/28)
French oil and gas company Total SA expects the global natural gas market to grow far faster than that for crude oil over the next two decades thanks to booming demand for the cleaner-burning fuel in Asia, an outlook that underpinned Total’s recent big investments in the space. Total expects to close a $1.5 billion acquisition of Engie SA’s liquefied natural gas assets in July, making it the second-biggest producer of the super-cooled gas in the world behind Royal Dutch Shell Plc. (6/26)
Saudi Aramco agreed to supply Egyptian refineries with crude oil for another six months from July, Egypt’s Petroleum Minister Tarek El Molla said on Tuesday. Aramco would supply 500,000 to one million barrels per month. (6/19)
New Zealand’s ban on new offshore oil and gas exploration could cost it billions in lost revenues, the head of the country’s oil and gas industry body Pepanz said, adding that interest in New Zealand oil and gas had begun to recover after the oil price slump right before the ban was introduced. (6/26)
Ethiopia began on Thursday, June 28th, its first-ever crude oil production under a test production scheme that will see initial production of 450 barrels of oil per day. Ethiopia also plans to start in September the construction of a pipeline that would export natural gas via Djibouti, Ethiopia’s neighbor to the northeast that lies on the Bab-el-Mandeb Strait; the pipeline should be completed in two years. (6/29)
In Uganda, at least four in every 10 oil and gas contracts will be awarded to Ugandans, the government said. A Cabinet meeting reached the decision at State House Entebbe on Monday. The policy will help boost the human resource capacity in the industry. The Local Content Policy for the Oil and Gas Industry in Uganda demands that companies awarded oil contracts start training locals in the next two weeks in readiness for oil production by 2021. (6/27)
Offshore Angola, Italian energy company Eni said it discovered oil in its Kalimba prospect. The company said the discovery holds between 230 million and 300 million barrels of oil. (6/27)
The Panama Canal Authority will boost the number of daily reserved transit slots available for LNG vessels starting October 1 and will make improvements that will allow it to increase the number again by 2022 as it looks to keep ahead of demand, especially from US exporters. (6/28)
Canada has the world’s third-largest crude oil reserves, but production growth is slowing, especially when compared to its southern neighbor. In the US the number of oil and gas rigs is increasing. In Canada, on the other hand, there has been an exodus of oil majors including Shell, ConocoPhillips, and Equinor, among others. In the US, capex in the oil industry is forecast by an Oil & Gas Journal poll to rise by 9.1 percent to US$132.5 billion this year. In Canada, total oil investment is seen falling by 2 percent to US$30.11 billion. (6/28)
The US oil rig count fell by four to 858 rigs, and the gas rig count fell by one to 187, according to Baker Hughes. Oil rigs declined for the second consecutive week and gas rigs were down for the fifth time in six weeks. The US oil rig count has stalled as increasing discounts for oil in the Permian Basin deter developers from adding more rigs.(6/28)
US natural gas production edged up to a fresh record high this week, largely due to gains in Texas, the Southeast, and the Appalachia region. Modeled US production surpassed 79.8 Bcf/d on Sunday. (6/28)
U.S. natural gas production from shale fields can keep growing for decades, giving Washington a powerful diplomatic tool to counter the geopolitical influence of other energy exporters such as Russia, industry executives and government officials said at a conference. Already the world’s largest gas producer, the US can expand shale gas output another 60 percent in the coming decades, according to at least one estimate. (6/28)
GE offloading BHI: When General Electric Co bought oilfield services giant Baker Hughes last July, it created a global industry colossus with $22 billion in annual revenue. GE promised to digitalize oilfields worldwide, marrying its expertise in big data, analytical software and subsea equipment with Baker Hughes’ experience in drilling services, chemicals, and tools. Less than a year later, GE is bailing out of the deal, planning to sell its 63 percent stake in the combined firm over time as part of a larger move to simplify its business and reduce debt. The retreat comes amid slipping market share, management missteps and culture clashes that have unsettled employees and frustrated suppliers and customers. (6/27)
President Trump on Wednesday ended an eight-year-old policy to protect oceans, which was created as hundreds of millions of gallons of oil spilled into the Gulf of Mexico from a broken well, covering more than 65,000 square miles, killing untold numbers of wildlife and devastating fisheries in several Gulf Coast states. (6/25)
Pipeline bypass? The US government should help the natural gas industry push back against opposition by environmental groups to pipeline projects by adopting new regulations or laws that favor infrastructure, backers of the industry said at a conference this week. Suppliers have had a difficult time in recent years getting shipments to some regions, including fuel-hungry New England, as environmental lawsuits by states, green groups and property owners have tied up pipeline construction. (6/29)
A federal judge on Monday threw out a closely watched lawsuit brought by two California cities against fossil fuel companies over the costs of dealing with climate change. The decision is a stinging defeat for the plaintiffs, San Francisco and Oakland, and raises warning flags for other local governments around the United States that have filed similar suits. (6/26)
U.S. nuke sunset? There are 99 nuclear reactors producing electricity in the US today (down from 112 back in 1990). Collectively, they’re responsible for producing about 20 percent of the electricity we use each year. But those reactors are aging. The average age of a nuclear power plant in this country is 38 years old (compared with 24 years old for a natural gas power plant). Some are shutting down. Twelve nuclear reactors have closed in the past 22 years. Another dozen have formally announced plans to close by 2025. New ones aren’t being built. Since 1996, only one plant has opened in the US — Tennessee’s Watts Bar Unit 2 in 2016. At least 10 other reactor projects have been canceled in the past decade. And the ones still operational can’t compete with other sources of power on price. Combine age and economic misfortune, and you get shuttered power plants. (6/26)
Coal/nuke push: US Energy Secretary Rick Perry said on Thursday that bailing out struggling coal and nuclear power plants is as important to national security as keeping the military strong and that the cost to Americans should not be an issue. The DOE is currently studying ways to bail out coal and nuclear facilities, including potentially by mandating grid operators to purchase power from them. Federal energy regulators rejected a previous effort by Perry to require them to subsidize nuclear and coal plants for providing “resilience” to the grid. (6/29)
Huge wind farm: Turkey said on Thursday that it would be accepting applications for the construction and operation of a 1,200-MW offshore wind farm— the world’s biggest —by October 23. Turkey’s Ministry of Energy and Natural Resources set the ceiling for the price of one megawatt-hour at US$8. (6/22)
Power transmission: A new study commissioned by EIA examines the role of high-voltage direct current (HVDC) lines in integrating renewables resources into the electric grid. The review indicates that, although applications in the current electric transmission network are limited, HVDC lines have a number of potential benefits including cost-effectiveness, lower electricity losses, and the ability to handle overloads and prevent cascading failures. These attributes mean that HVDC lines could if properly configured, help mitigate some operational issues associated with renewable generation. (6/29)
Battery R&D: Rechargeable lithium-ion batteries have one big problem that researchers are dedicating a lot of time to: their cathodes. Now, a team from the University of Maryland, the Brookhaven National Laboratory, and the US Army Research Lab claims to have made a breakthrough in solving the problem. Cathodes, unlike anodes, tend to have a very limited capacity; cathode materials are seen as the bottleneck to further improving the energy density of lithium-ion batteries. So the team set out to improve the energy density of the cathode by using an unlikely material: iron. (6/19)
H2 avenue? Army researchers have developed a novel, structurally-stable, aluminum-based nano galvanic alloy powder that, when combined with water or any water-based liquid, reacts to produce on-demand hydrogen for power generation at room temperature without chemicals, catalysts or externally supplied power. (6/25)
The South Korean government and businesses will invest some $2.33 billion over the next five years in a public-private partnership to speed up the development of the country’s hydrogen fuel cell vehicle ecosystem, according to the Ministry of Trade, Industry, and Energy (MOTIE). The target is to be able to install 310 hydrogen stations by 2022 to supply 16,000 fuel cell vehicles. The funds will be spent on building plants for fuel cell vehicles and fuel cell stacks, manufacturing fuel cell buses and developing hydrogen storage systems. (6/26)
India is suffering from the worst water crisis in its history and around 600 million people face a severe water shortage, according to a government think tank. Approximately 200,000 people die every year due to inadequate access to clean water and it’s “only going to get worse” as 21 cities are likely to run out of groundwater by 2020. (6/18)
Iraqi drought: Iraq has informed farmers of a ban on planting rice and other water-intensive crops in the face of increasing shortages because of drought and shrinking river flows. A letter from the Minister of Water Resources Hassan al-Janabi to Prime Minister Haider al-Abadi’s office showed the ministry had decided to exclude rice and corn from the government’s summer agriculture plan to prioritize drinking water, industry and vegetables. (6/19)