Quote of the Week

“Oilfield service companies have pressed fresh (green) blood into service amidst a vigorous ramp up in activity, and failure/HSE rates have already felt the negative impact. Not only is labor a bottleneck, it is shaping up to be the primary bottleneck in the early stages of the [North American] recovery…E&P’s will throw enough money at the North American labor problem to bring the sector back to equilibrium, sacrificing capital efficiency to hit production targets.”

James West, a senior managing director at Evercore ISI

Graphic of the Week

1. Oil and the Global Economy

With the advent of the Trump administration and Republican control of the Congress, the world oil situation seems likely to become more uncertain than usual. In the last two weeks, the new President has signed numerous executive orders that will have an impact on the oil industry in coming years. The President and the Republicans in Congress will soon have done everything they can to launch a new oil boom by reducing environmental and financial regulations; permitting whatever pipelines the oil industry wants to build; and opening federally-controlled property and offshore areas for drilling.  Republicans have long held that America would be energy independent were it not for the restrictions unfairly placed on the industry. While these measures may eventually spur more drilling, for the time being, however, oil prices and the demand for oil will still determine investment decisions. Some are questioning whether the Keystone XL will be built in the near future given the relatively low oil prices and the shale oil boom that have become important since the pipeline was planned.

In addition to all the de-regulation, the administration and Congress are looking at a “border tax” which could levy a 20 percent tax on imported petroleum as well as other goods brought into the US for sale. The impact of such a tax is already the subject of much debate as well as the likelihood that other countries will enact similar import duties. An important factor in what might happen to the US dollar is whether such a tax is enacted with some forecasting that it would raise the value of the dollar enough to offset the tax at the expense of other countries.

Last week Washington imposed new sanctions on Iran in response to missile tests and its alleged sponsorship of terrorism. For now, the standoff seems to be little more than the enmity that has been going on for the last 37 years However, fears are rising that the situation could escalate to the point where oil supplies from the region are affected.

Oil futures continued to trade around $53 a barrel in New York last week and $3 a barrel higher in London.  OPEC continues to make progress on its efforts to achieve a 1.6 million b/d worldwide production cut, and the US shale oil industry continues to activate drilling rigs at an impressive pace. Bloomberg estimates that OPEC production declined by about 840,000 b/d from December to the end of January with cuts of 500,000 b/d coming from the Saudis, 160,000 from the UAE, 150,000 from Kuwait, 120,000 from Iraq, and 70,000 each from Algeria and Venezuela. While the six members of OPEC doing the cutting reduced output by 1.07 million b/d, this was offset by production gains of 140,000 b/d in Nigeria, 70,000 b/d in Iran, and 60,000 b/d in Libya. Russia says it cut 117,000 b/d in January and is well on its way to cutting 300,000. OPEC’s output is still about 550,000 b/d above the target set on Nov 30th.

On the other side of the balance, the large OECD inventories remain in place. The week before last US crude stocks increased again; mid-Atlantic gasoline inventories hit a record high of 39.7 million barrels, and crude stocks along the US Gulf Coast now are nearly 11 percent higher than at this time last year. The US rig count climbed to a 15-month high of 583 last week, and the US has increased crude production by 500,000 b/d since July. Last week’s increase of 17 rigs was the most since October 2015 indicating that momentum to increase production is still underway. Together Brazil and Canada have increased production by about 700,000 b/d since July. All this suggests why the global crude inventory does not seem to be falling as much as OPEC would like.

The course of oil production this year likely will depend on prices and the success of the OPEC/NOPEC(non-OPEC) production cut. If the OPEC/NOPEC production cut reaches its goal of reducing production by 1.6 million b/d and can hold this level for awhile, then many believe we would see oil prices around $65 a barrel or higher and US production back over 9.5 million b/d up from the current 8.9 million. For OPEC/NOPEC to reach and sustain a 1.6 million b/d cut could be difficult as Libya, Iran, and Nigeria all have incentives to increase production during the coming year. The one major unknown is the possibility that Venezuelan production of about 1.8 million b/d could completely or partially collapse in the next year or so. Caracas’ oil production has been dropping steadily of late as the economic situation deteriorates and a further reduction in its production is almost certain. It likely would take a cut on the order of hundreds of thousands of barrels per day to have a major impact on prices.

A partially successful OPEC/NOPEC production cut of about 1 million b/d., including further increases from Iran, Nigeria, and Libya, would leave oil prices about where they are now. If prices stay under $60 per barrel US production likely would see a more modest rise of some 200,000 b/d to about 9.2 million b/d by the end of the year.

A total collapse of the production cut deal could send prices back to $40 a barrel, and US shale oil drilling would likely slow again as few sources of shale oil are profitable at this level.  A US border tax and increased tension with Moscow or Iran could send these projections off in another direction.

2.  The Middle East & North Africa

Iran: The imposition of new sanctions combined with the refusal to give US visas to Iranian citizens has pushed relations to a recent low. Tehran has replied with a ban on US citizens visiting Iran, but as the sanctions are largely symbolic, and do not affect oil exports for now, there should be little change in a rocky US-Iran relationship that has lasted for nearly 40 years. If anything, the Iranians may respond by increasing their oil production. Tehran’s adherence to the OPEC/NOPEC production cut agreement has always been tenuous. Last week Iran’s oil minister announced that the country was now producing 3.9 million b/d which is very close to its short-term goal of 4.0 million.

Iranian efforts to increase oil production continue. Despite the visa contretemps, Tehran announced that US oil firms are not banned from investing in increasing Iranian oil production provided they bring lots of money and new technology. The No. 2 Russian oil producer, Lukoil, announced that it would like to invest in Iran and will soon be making a decision on bidding for a contract.

Iraq:  Iraq’s oil exports fell in January by 187,000 b/d from a record high set in December.  Some are noting that the surge in exports during December gave Baghdad a higher base from which to make a cut so that the drop in January exports was not as significant as it appears. Washington’s ban on Iraqi citizens entering the US has raised a storm of protest from a country that is currently fighting alongside US forces to retake Mosul.  There are a lot of hurt feelings in Iraq these days.

Low oil prices are interfering with efforts to increase oil production in Iraqi Kurdistan. Erbil has been slow to make contractual payments to the oil companies, saying that people at war with ISIL have a more pressing need for the money. In return, the oil companies drilling in Kurdistan have been slow to invest, and there are reports that oil production at one Kurdish oil field is collapsing. The province’s contribution to the OPEC/NOPEC production cut is also an issue.

Saudi Arabia:  Last week the Saudis raised March crude oil prices for all its customers as the OPEC/NOPEC production cuts began to take hold. Other oil exporters are scrambling to replace the 500,000 b/d that the Saudis are withholding from export. The Saudis are clearly taking the brunt of the OPEC/NOPEC production cut and remain the world’s “swing” oil producer.

The Saudis say they are very pleased with the results of the audit that is supposed to establish how large the country’s oil reserves are in advance of the IPO of stock in Saudi Aramco next year. A reserve audit of an operation the size of the Saudi oil giant is a difficult task and some have doubts as to what an auditor can do in a very limited amount of time. The purpose of an IPO audit is not to verify current production which is well known but to determine the likelihood of sustained production in the years ahead.

In an interesting turnabout, the Saudis say they are now interested in investing in US oil now that a new fossil fuel friendly president is in office. The country is also talking about investing $5 billion in renewable energy firms as part of an effort to diversify.

All members of the Gulf Cooperation Council have implemented a 5 percent value-added tax as part of the austerity measures they are implementing. The Saudis have also made major cuts in fuel and utility subsidies as it seeks to balance its budget. The good times seem to be coming to an end for most Saudis, but lavish spending on the royal family seems to be continuing.

Libya:  The National Oil Company says it is now producing 715,000 b/d and expects to increase this to 1.3 million by the end of the year. Further increases will be more difficult to attain and the further increases will take more foreign assistance, probably taking another five years to reach pre-uprising production levels of 1.6 million b/d. The country is now seeking more foreign investors and is optimistic about its future.

The issue of migration out of Central Africa through Libya to the EU is still a key issue. Last week the issue came to a head at a summit conference on Malta where the EU agreed to pay money to Libya to stop the flood of economic refugees attempting to cross the Mediterranean in flimsy boats. Some 180,000 made it to Italy last year with at least 4,000 drowning in the attempt.  Although seen as a Libyan problem, the real culprit is climate change which is making parts of Central Africa uninhabitable and is forcing people to migrate north.

Platts reports that China’s apparent (they don’t release consumption figures) oil demand was down by 0.8 percent from the 7 percent growth seen in 2015. Although China’s GDP growth was down by only 0.2 percent from 2014, growth in fixed assets was down by 2 percent. This reduction in fixed investments pulled down the demand for gasoil which is used in transportation and construction by 5.4 percent. These fuels account for about 30 percent of Chinese oil product consumption. This trend in lower growth for fixed assets is expected to continue into 2017 as China attempts to reduce overcapacity in many key industries.

4. Russia

Russia’s only oil field in Arctic waters, north of the Arctic circle, doubled its production from 5.8 million barrels in 2015 to 15.7 million in 2016. While rather minor compared to Moscow’s crude production which is more than 10 million b/d it shows that some progress can be made even without Western help and technology. Before the sanctions, there were plans to move much more aggressively into drilling in Russia’s Arctic particularly now that the winter ice cap is receding rapidly. These plans were put on hold due to the Crimean sanctions.

Although there has been speculation that the Trump administration might remove at least some of the sanctions on Russia, this remains to be seen. The most effective of the US sanctions was to prohibit export to Russia of goods, services, or technology in support of deepwater, Arctic offshore, and shale oil production. Exxon is thought to have suffered a loss of $1 billion due to the prohibition.

5. Nigeria

Nigeria’s crude exports are slated to increase to 1.62 million b/d in March as compared to a loading schedule which envisions 1.48 million in February. As refining in Nigeria is now at a very low level due to mismanagement and lack of maintenance in refineries, most of Nigeria’s oil production is being exported.

Nigeria has kept its oil production around 2.2 million b/d in recent years until a new round of insurgent attacks on its oil facilities began last year. There is conflicting information on the status of the new insurgency. The militants say they have suspended attacks as long as no attempts are made to restore the damaged facilities. Some are reporting that the government is trying to buy off insurgent groups with lucrative contracts to “protect” the pipelines. We do know that some of the major oil companies that have been active in the country for several years are seeking to reduce their presence there or move operations offshore where they are safer from insurgent attacks.

6. Venezuela

The country will have some $10 billion in bond payments come due this year with $3 billion coming due this month. Venezuela’s total debt is thought to be around $71 billion, not including special deals with the Chinese in which loans are paid back in oil rather than hard currency. The government has not released its balance of payment numbers for the last 18 months, so analysts are just estimating how much trouble the country will have in the coming year. It appears that 550,000 barrels of crude per day will be sent to China this year, up from 355,000 last year, to pay off the special Chinese loans which may total $50 billion.

Outside analysts say that Caracas needs oil prices at $100 a barrel to remain solvent. Should oil prices remain around current levels, the possibility is high there will be further defaults.

7.  The Briefs

The Arctic [see graphic above] is so warm and has been this warm for so long that scientists are struggling to explain it and are in disbelief. Scientists say this warmth is so extreme that humans surely have their hands in it and may well be changing how it operates. 2016 was the warmest year on record in the Arctic, and 2017 has picked up right where it left off. At the North Pole, the mercury has rocketed to near the melting point twice since November, and another huge flux of warmth is projected by models next week. (2/2)

Oil markets mostly ignored the glum forecast from BP that the world is facing a long-term oil glut that won’t disappear for 50 years. (1/31)

Carbon Tracker, in its latest report, envisions a scenario in which 2 million barrels per day of oil demand are erased by 2025 because of the penetration of EVs in the transportation sector. Reducing global oil demand by 2 million b/d may not seem like much, but it is equivalent to the supply overhang that triggered the 2014 oil price meltdown. (2/3)

Norway’s Statoil said it closed on the sale of its entire oil sands operations in the Canadian province of Alberta. Statoil said it completed the sale of its oil sands division to Athabasca Oil Corp for $329 million in cash. (2/2)

Royal Dutch Shell, looking to pare debt swollen by last year’s acquisition of BG Group, accelerated its drive to shed assets on Tuesday by agreeing to the sale of fields in the North Sea and Thailand for as much as $4.7 billion. The disposals include the sale of about half the company’s North Sea oil and gas assets—currently producing 115,000 b/d of oil equivalent—for as much as $3.8 billion to Chrysaor Holdings. Earlier Tuesday, the company agreed to sell its stake in an offshore Thai gas field to a unit of Kuwait Petroleum for $900 million. (2/1)

Shell’s agreement with Chrysaor Holdings included the condition that Europe’s largest oil company covers $1 billion in decommissioning costs, leaving the private-equity-backed explorer with an estimated $2.9 billion of liabilities. Sharing end-of-life costs between buyers and sellers is likely to remain the trend in the North Sea, where the billions of dollars of spending required to remove aging platforms and pipelines over the coming years present a “real challenge” to deal-making. (2/1)

Shell reported fourth-quarter profits that missed analyst estimates after crude’s recovery drove up costs for refining while earnings from production did little more than break even. Profit adjusted for one-time items and inventory changes totaled $1.8 billion, a billion dollars short of analyst estimates. (2/2)

India plans to form a giant national oil company by combining other state-owned firms, finance minister Arun Jaitley said on Wednesday, as New Delhi wants to expand its foreign presence to meet growing domestic fuel demand. India, struggling to lift its local oil production, imports about 80 percent of its oil needs. (2/1)

Australian energy company Melbana said it was anticipating drilling success closer to home in New Zealand while keeping its eye on Cuban reserves. (1/31)

Egypt may announce new discoveries of natural gas by the second half of this year, its oil minister said, bringing it closer to its goal of self-sufficiency by 2019. Then Egypt hopes to start exporting natural gas in 2019. Yet this year it will import 43 to 45 cargoes of liquefied natural gas between March and December. (2/3)

West African oil producers will next month send the most crude to Asia in at least five years, the latest sign of how refineries in the world’s biggest demand region are scouring the world to replace supplies cut by OPEC’s Middle East producers. Shipments on the trade route, among the longest for supertankers, are set to soar to 2.19 million barrels a day in February. (2/1)

Pemex’s refinery output in 2016 fell to the lowest level in 26 years as government budget cuts forced the Mexican state oil company to delay maintenance. (2/1)

The US oil rig count increased by 17 in the week to Feb. 3, bringing the total count up to 583, the most since October 2015, energy services firm Baker Hughes said.  Gas rigs stayed the same for the week at 145 active units. (2/4)

E&P $$ up: Analysts at US financial services firm Cowen & Co said in a note this week that its capital expenditure tracking showed 31 exploration and production companies planned to increase spending by an average of 36 percent in 2017 over 2016. (4/2)

US gasoline stocks are rising much faster than normal at the start of the year, threatening to leave refiners struggling to clear an overhang of motor fuel later in the year. Gasoline stockpiles rose by almost 21 million barrels during the first 27 days of 2017, compared with an average increase of fewer than 12 million barrels at the same time of year during the previous decade. Stocks have only risen this fast on one other occasion in the last ten years, and that was in 2016. (2/4)

Asphalt pinch? Axeon Specialty Products LLC is shuttering the US’s largest asphalt refinery when the country might need it the most. The planned shutdown comes as President Donald Trump has pledged to build new roads, highways, and bridges across the country. The U.S. would need 63 percent more asphalt than its consumes now just to pave roads at the rate it reached a decade ago. (2/4)

Job blues: Bloomberg estimates that the oil price collapse eliminated 440,000 jobs, and anywhere from one-third to one-half of those jobs may never come back. Products such as those from National Oilwell Varco automate the process of doing tasks like connecting hundreds of segments of drill pipe as they are shoved through miles of ocean water and oil-bearing rocks. (2/3)

Megaprojects dying out? Does BP’s revised Mad Dog-2 design signal the end of the oil and gas megaproject era? For the most part, yes, industry insiders told Rigzone. Megaprojects, particularly for deepwater, might crop up occasionally over the next five to 10 years. However, Wood Mackenzie expects to see far fewer of these projects compared to the first half this decade, Caitlin Shaw, research director with WoodMac, said. The standalone projects that do move forward will likely be larger fields, say of 1 billion barrels, versus fields with 500 million barrels. (2/2)

Net exports: The US for the first time is pushing more crude and refined petroleum products into Latin America than it brings back, signaling a change in the global trade map that could be tested if President Donald Trump introduces border taxes. (2/1)

US crude exports averaged 527,000 barrels/day during the first 11 months of 2016.  Exports are poised to surpass production in four OPEC nations during 2017 and may grow even more if President Donald Trump honors pledges to ease drilling restrictions and maximize output. (2/2) (Editor’s note: the US remains a net importer of oil—at 5+millions of barrels/day.)

Trade war? Natural gas prices in the U.S. may tumble about 40 percent if President Donald Trump’s diplomatic showdown with Mexico becomes an all-out trade war. Prices could slide to $2 per million British thermal units or lower if U.S. gas exports to Mexico by pipeline are halted. (2/10)

Import ban hammer: Of all the sectors that may feel the pain of President Donald Trump’s order to temporarily ban people from seven majority-Muslim countries, oil and natural gas companies — industries he vowed to help during his election campaign — stand to be hit the hardest. (2/1)

The Army Corps of Engineers will proceed with the easement needed to complete the Dakota Access Pipeline, U.S. Senator John Hoeven of North Dakota said in a statement on Tuesday. (2/1)

Dakota pipeline: The chief executive of Phillips 66 said on Friday he expects the Dakota Access Pipeline to start operations in the second quarter, even though the project – which has sparked protests by Native Americans and environmentalists – is still in the midst of legal battles and a U.S. regulatory review. (2/4)

The Keystone XL Pipeline is a bet on much higher oil prices several years from now. It will take at least $85 oil prices to develop the new oil sand projects needed to fill the pipeline. It is also a bet that U.S. tight oil output will continue to grow and will need heavy oil to blend for refining. Both bets are risky. (2/4)

U.S. steel? When U.S. President Donald Trump signed orders to revive two controversial energy pipeline projects this week, he pledged to require new pipelines to use American-made steel, a gesture to workers in the hard-hit industry who helped propel him to power. But US steelmakers will receive negligible benefit from the multi-billion dollar Keystone XL project because they have limited ability to meet the stringent materials requirements for the TransCanada line. Economists said Trump’s order has many loopholes to enforcement and could violate international trade law. (1/31)

The Senate voted Friday to rescind a rule that would have required energy companies to report payments to foreign governments for the right to develop oil, gas and mineral assets, handing a victory to an industry that has spent nearly six years fighting the disclosures. Senators voted 52-47 to repeal the Securities and Exchange Commission regulation. (2/4)

US Republicans on Friday repealed a securities disclosure rule aimed at curbing corruption at oil, gas and mining companies and voted to ax emissions limits on drilling operations, part of a push to remove Obama-era regulations on the energy industry. (2/4)

The national average for gasoline prices declined for 21 consecutive days, buoyed by the increase in crude oil production in the US and lower driving demand, according to retail analysis. Regular unleaded gas averaged $2.27 a gallon, according to motor club AAA. GasBuddy also reported the average price at $2.27. Prices are 47 cents more per gallon than one year ago. (2/1)

Exxon Mobil said it would be able to more than double its output in the Permian Basin region of the US and maintain it at that level for decades, in a vote of confidence in the outlook for North American shale production. (2/1)

Exxon Mobil boosted its 2017 capital budget on Tuesday by about 14 percent on a bet that crude prices have stabilized, but posted its lowest quarterly profit since 1999 as it took a $2 billion charge from the purchase of natural gas producer XTO Energy. (2/1)

Retiring nukes: Entergy Nuclear and the state of New York reached an agreement last month to retire the two nuclear reactors at the Indian Point Energy Center, located about 25 miles north of New York City. Indian Point is one of the state’s four nuclear power plants and accounts for about 12% of total electricity generated from all sources statewide. Entergy will retire one reactor in April 2020 and the other in April 2021. (2/2)

At the Fukushima nuclear plant, radiation levels in one part of reactor no.2 are the highest since the disaster in March 2011, according to operator Tokyo Electric Power. Tepco inspected the site via a camera attached to a guiding pipe and the company has estimated that an area of the containment vessel was emitting radiation of 530 sieverts per hour–enough to kill a person in under a minute. Prior to this, emissions of up to 73 Sv/hour had been detected at the reactor after it was melted in the nuclear disaster almost six years ago. (2/4)

There’s no easy road to nuclear fusion. Whether one travels the large route forged by six decades of research on hundreds of machines, or whether one tries to open a way through uncharted and exotic territory, difficulties abound and challenges loom large. (3/3)

NY wind: Last week, New York Gov. Andrew Cuomo vowed to put his state in the national lead for wind energy after a state power authority voted for the 90-megawatt South Fork Wind Farm, which at peak capacity will be the largest in the nation. (2/3)

Jobs in R.E.: It may be up to the governments of US states to take the lead in the effort to advance a low-carbon economy, the Natural Resources Defense Council said. A review of federal data from the NRDC finds the US renewable energy sector was one of the largest job creators in recent years. The estimated 350,000 people tied to the solar energy sector is greater than some parts of the conventional fossil fuels industry and wind energy was moving in a similar employment direction. (2/3)

Cutting emissions: The European Union is taking the lead in the transition to a low-carbon era by meeting many of its stated goals, commissioners said Wednesday. Two years ago, greenhouse gas emissions in the European Union were 22 percent below a benchmark set to 1990 levels, beating the bloc’s goal ahead of schedule. (2/2)