Editors: Tom Whipple, Steve Andrews

Quote of the Week

“The debt-fueled shale drilling boom is facing a reckoning. Around 200 North American oil and gas companies have declared bankruptcy since 2015, but the mountain of debt taken out a few years ago is finally coming due. Roughly $41 billion in debt matures in 2020, which ensures more bankruptcies will be announced this year. The wave of debt may also force the industry to slam on the breaks as companies scramble to come up with cash to pay off creditors.”

Not only do US shale drillers have financial problems, but operationally, the challenges are also mounting. 2019 saw deflated hopes surrounding well density, with a few high-profile disappointments related to parent-child well interference. There is also evidence that the tendency of shale wells to produce more gas over their lifetimes is a worse problem than previously thought. Meanwhile, the WSJ reported that shale wells are not producing as much as companies once promised. 2020 could offer more unwelcome surprises from the shale patch.

Nick Cunningham, Oil Price.com

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

Brent crude futures jumped nearly $3 a barrel on Friday after a US airstrike killed top Iranian and Iraqi military commanders in Baghdad.  Brent crude futures hit an intraday high of $69.16 a barrel, their highest since Sept 17th, before easing down to $68.60, up $2.35 for the day.  West Texas Intermediate futures were up $1.85 or 3.04 percent to $63.05 a barrel, having earlier spiked to $63.84 a barrel, their highest since May 1. 
The assassination boosted the risk premium on oil prices in the short term.  However, analysts disagree as to how long the market can hold onto that premium.  There are ample global oil supplies, and the lack of a sustained price spike after the Abqaiq attack in September shows the markets are becoming less concerned about “threats” to oil supplies. However, in the longer term, the retaliation promised by Iran raises the risks to US interests and oil infrastructure in the region.  Tehran pledged “severe retaliation.”  At a minimum, attacks on US military installations in the Middle East are expected, and many fear a broader regional war.
On Tuesday, the American Petroleum Institute reported a draw of 7.8 million barrels from US stocks for the week ended December 27th — sending prices higher.  However, when the official EIA numbers were released on Friday, the decline in US commercial crude stocks was an unusually large 11.5 million barrels.  The crude inventories are just about at the 5-year average for this time of year.  The EIA estimated that US crude production remained steady at 12.9 million b/d while US crude exports are now in the vicinity of 6 million b/d. 
Exports from the Gulf of Mexico are likely to increase in the next two years as five new oil pipelines are set to open in the Permian Basin through 2021.  Producers in West Texas and New Mexico are producing about 4.7 million b/d, according to Rystad Energy.  That compares with nearly 6 million barrels of pipeline capacity already in place that could rise by about 3.5 million barrels in the next two years.  New gas pipelines also are under construction, which should relieve the natural gas glut in the basin, which has caused a substantial increase in flaring in the last few years.
As 2020 begins, the question of how much growth remains in the US oil and gas industry has become a top issue.  The rig count continues to drop, and recent analyses show that production coming from shale oil wells is lower as companies are running low on the best acreage.  If trends in the EIA’s Drilling Productivity Report are projected ahead, a case can be made that US shale oil production could reach a peak this spring. Whether this is a temporary peak of whether much higher prices will lead to still more shale oil is unknown.
North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years, starting with more than $40 billion in 2020, according to Moody’s Investors Service.  Banks and other investors are willing to loan more money only to the best of the shale oil drillers. Some analysts are saying that the shale oil business is in such bad shape that even significant increases in oil prices that could result from the US-Iran confrontation would not be sufficient to encourage significantly increased production.
While Chevron and Exxon remain optimistic about their substantial investments in the Permian Basin, analysis of their company reports suggest they are suffering considerable losses from US operations that are covered by profits elsewhere.

2.  Geopolitical instability

It has been many years since the geopolitical situation in the Middle East was so precarious. Teheran has many options to take when seeking “harsh retaliation” for the assassination of General Soleimani.  However, Iran’s leaders must tread a fine line between an attack on US personnel or interests adequate to show they are not backing down, and at the same time, not provoking Washington to launch air and missile attacks on Iran.  

On Sunday, Iraq’s parliament unanimously passed a non-binding resolution telling the government to end the presence of foreign troops in Iraq and ensure they do not use its land, air, and waters for any reason.  Observers note that those voting on the resolution were mostly hardline Shiites while the Sunni and moderate members boycotted the vote. Until a new prime minister is selected nothing will happen to the US forces in the country.

Tehran also announced it was pulling out of the 2015 nuclear deal, leaving the country free to develop nuclear weapons.

In the midst of all this turmoil is the Hormuz Straits through which 17 million b/d of the world’s oil supply passes.  Tehran frequently threatens to close the Straits and cut off that flow of oil. In recent months they have stopped or blown small holes in tankers transiting the straits; however, these were intended as warnings of what they could do if provoked. 

In the meantime, many related developments are underway.  Washington has issued a world-wide warning to be on alert for attacks on US facilities by Iran or its many proxies.  The US is sending some 3500 troops to the Middle East, a force sufficient to defend the US embassy in Baghdad should Shiite militias attempt to overrun it.  The State Department has warned all non-essential US citizens to leave Iraq. 

Iraq’s oil sector is operating without disruption, despite the evacuation of some foreign oil workers in the aftermath of the assassination.  “The ministry confirms that the situation is normal at oil fields in Iraq, and production and exports have not been affected,” the Oil Ministry said in a statement Friday.  Iraq’s nationwide crude exports fell by more than 3 percent to an average of 3.87 million b/d in December, but revenues continued to increase on stronger oil prices.  The decreased oil sales appeared to reflect Iraq’s decision to throttle back production to comply with an OPEC agreement – a strategy that seems to be bearing fruit, as high oil prices helped increase government revenues despite the export dip.

The fortunes of Libya’s oil industry hinge on how the battle for Tripoli ends as the protracted conflict between the Libyan National Army and the UN-backed Government of National Accord enters its 10th month.  Despite the political uncertainty and violence, state-owned National Oil Corporation has managed to grow oil production by adding barrels and storage capacity at critical sites.  The company, headed by chairman Mustafa Sanalla, has also managed to convince some international oil companies to come back to the country and help rebuild its oil sector.

Libya’s government of national accord is recognized by the UN as the legitimate authority in Libya and has been struggling to fend off an offensive on Tripoli by forces loyal to military strongman General Haftar.  Two weeks ago, Tripoli requested military support from Turkey to help it counter Gen Haftar’s assault, making a formal request for the first time. Gen Haftar controls most of Libya and is backed by Turkey’s regional rivals Egypt, Saudi Arabia, and the United Arab Emirates, as well as Russia. 

Turkey’s parliament authorized the government to dispatch troops to Libya last week.  A resolution approved during an emergency parliamentary session on Thursday gives Turkish President Recep Tayyip Erdogan full authority over the coming 12 months to decide on the scope and exact assignments of any deployment to Libya.  The move adds a central Mediterranean theater to Ankara’s active agenda in the Middle East.  Mr. Erdogan deployed the Turkish military in northeastern Syria in October as part of an offensive aimed at repelling a U.S.-backed Kurdish militia from the Turkish border.  He has also threatened to resort to military force to establish Turkish claims over offshore oil and natural gas reserves around Cyprus, which Turkey doesn’t recognize, and counter efforts by countries such as Greece and Israel to develop them.

3.  Climate change

Ten years ago, the UN released its first “emissions gap” report detailing the disparity between commitments made by nations to reduce greenhouse gases and what is needed to meet global temperature targets.  At the time, the UN estimated that countries should be curbing emissions about 3 percent per year.  The 2015 Paris climate accord — the first-ever global agreement to limit warming to “well below 2 degrees Celsius” — was necessary.  But the promises made at that meeting fell short.  According to the latest emissions gap report, temperatures can be expected to rise 3.2 degrees Celsius above preindustrial levels by the end of the century unless the world’s top emitters increase their Paris commitments.

Right now, most aren’t on track to meet even their most modest targets.  The world is already about 1 degree Celsius warmer than it was before humans started burning fossil fuels.  Global annual emissions have increased 4 percent since the Paris agreement was signed.  And the average concentration of carbon dioxide in the atmosphere — a number that ultimately determines our fate — is the highest in human history.  Meanwhile, improved scientific models found that even 2 degrees of warming — once thought to be a reasonable target — could be practically intolerable in parts of the world.  To get on track to achieve a less disastrous 1.5-degree temperature rise, the UN report found that nations must nearly halve emissions by 2030.

Last week saw the usual stream of weather extremes across the globe. In Australia, scores of fires are burning out of control amid a heatwave that has seen temperatures exceed 104 degrees F in every state.  The most dangerous fires were in the state of Victoria.  About 30,000 residents and tourists were urged to flee East Gippsland – a popular holiday region – but evacuations were later deemed too risky as fires encroached on major roads.  The bushfires ravaging Australia are generating so much heat that they are creating their own weather systems, including dry lightning storms and fire tornadoes.  These weather conditions are the results of the formation of pyrocumulonimbus clouds.  Such clouds have been recorded all over the world, but as the global climate changes, they may become a more frequent occurrence for Australia.

Away from the flames, millions of Australians are breathing unhealthy air this summer as smoke from the wildfires clouds skies from Sydney to Canberra to Melbourne.  Australia’s capital, Canberra, has been blanketed by a thick haze of smoke from nearby fires for more than a week.  The city recorded its worst air quality day on Jan 2nd, with readings of dangerous fine particulate pollution spiking to over 200 micrograms per cubic meter.  The brush fires in Australia and California this year, and in Siberia a few years back, should give us all a clue as to what the world will be a few decades from now as the average temperatures move inexorably higher. 

As the warmest December on record in Moscow drew to a close, little snow had fallen, so the city made artificial snow and trucked it to parts of the city center — where much of it quickly melted into slush.  Meanwhile, a cold wave swept into northern India, blanketing streets in freezing fog, intensifying pollution, disrupting hundreds of flights and prompting school closures.  India’s capital, New Delhi, experienced its coldest day in 119 years last week, with the maximum temperature dipping below 49 degrees Fahrenheit, about 20 degrees below the average for December.

At least 21 people died in flooding in the Indonesian capital, Jakarta, after the city had its most intense rainfall for at least 24 years.  The meteorology agency measured 14.8 inches in 24 hours, the most in 24 years.  The agency said the intensity of the rain was due to several factors.  These include the monsoon season, as well as a high amount of water vapor in the air.  At least 62,000 people were evacuated out of the city.

Energy companies are starting to publicly acknowledge the threat posed by climate change and the need for society to reduce greenhouse gas emissions.  However, at the same time, oil and gas production in the US and globally continues to soar.  Major oil companies have announced a series of commitments to reduce their emissions, even as they continue to invest in new projects that will boost production of the very fossil fuels that are driving climate change.  This tension has given rise to statements that seem to defy logic.  In October, Michael Rubio, Chevron’s general manager for environmental, social, and governance engagement told The New York Times that “you can increase your fossil-fuel production, deliver superior returns for your shareholders, and still be compliant with Paris” climate accord.

4.  The global economy and trade wars

President Trump said on Tuesday that Phase 1 of the trade deal with China would be signed on Jan. 15 at the White House, though considerable confusion remains about the details of the agreement.  No version of the text has been made public, and Chinese officials have yet to commit to critical planks publicly.

The president tweeted that he would sign the deal with “high-level representatives of China” and that he would later travel to Beijing to begin talks on the next phase.  Last week, Trump said he and Chinese President Xi Jinping would host a signing ceremony for the Phase 1 deal. The deal, struck earlier this month, is expected to reduce tariffs and boost Chinese purchases of American farm, energy, and manufactured goods while addressing some disputes over intellectual property. 

China’s central bank said last Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around $115 billion in funds to shore up the slowing economy.  The People’s Bank of China said on its website it would cut banks’ reserve requirement ratio by 50 basis points, effective Jan. 6.  The move would bring the level for big banks down to 12.5 percent. The PBOC has now cut requirements eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

Natural gas consumption in China rose by 4 percent year on year in November 2019.  This was a much slower growth pace than the 20-percent rise in November 2018 and a sign that Chinese gas demand growth has slowed down significantly over the past year. The slower growth in natural gas consumption has been evident this past year due to slower overall economic growth in China and the less-aggressive policy of switching millions of users from coal-fired to natural gas-fired heating and electricity generation.

The US manufacturing sector contracted in December at its quickest pace since the financial crisis.  The Institute for Supply Management said on Friday its purchasing managers’ index fell to 47.2 in the final month of 2019, from 48.1 in November.  That was its lowest reading since June 2009.  Economists had forecast the index would rise to 49, still keeping it below the threshold of 50 that separates economic expansion from contraction.

British factory output fell in December at the fastest rate since July 2012 as a tepid global economy hurt demand, and businesses further reduced stocks of goods they had built up in case of a no-deal Brexit.  Official data last month showed British economic growth slowed to an annual 1.1% in the third quarter of 2019, and it has not been this low since 2010, and industrial output dropped by 1.3% year-on-year.

German employment reached a record high in 2019 as higher labor-market participation, and increased immigration of foreign workers offset demographic change, the statistics office said on Thursday.  The number of people with jobs rose by 402,000 to 45.3 million despite weaker economic growth last year.  However, German unemployment rose more than expected in December, adding to signs that weakness in the manufacturing sector is hurting the labor market in Europe’s biggest economy.

5.  Renewables and new technologies

The world’s laboratories keep on churning out new or improved battery technologies that someday may prove useful to help with the energy transition.  An international team of researchers led by Monash University in Australia has developed an ultra-high capacity Li-S battery that has better performance and less environmental impact than current lithium-ion products.  Using the same materials in standard lithium-ion batteries, researchers reconfigured the design of sulfur cathodes so they could accommodate higher stress loads without a drop in overall capacity or performance.

Researchers in Israel announced a new way of splitting water into oxygen and hydrogen – a non-polluting fuel.  The development was inspired by natural photosynthesis which combines light-harvesting and electrochemical conversion of electricity into chemical energy stored in hydrogen bonds.  The system may solve one of the most significant challenges in large-scale splitting of water into its component elements. 

At Keel University in the UK, scientists are blending some 20 percent hydrogen into natural gas used for heating and cooking. Such a blend will reduce the amount of CO2 that is produced when the mixture is burned.  The problem is getting a supply of hydrogen at affordable prices.  The firm that supplies the hydrogen to a trial project in the UK suggests the hydrogen could be generated pollution-free by using surplus wind power at night to split water molecules using electrolysis.

Engineers at the University of Illinois have developed an electrolyte that could help manufacturers produce recyclable, self-healing commercial batteries.  The researchers said they had created a solid polymer-based electrolyte that can self-heal after damage—and the material can also be recycled without the use of harsh chemicals or high temperatures.  Liquid electrolytes in lithium-ion batteries address the issue of these batteries developing dendrites or branchlike structures of solid lithium after going through multiple cycles of charge and discharge.

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

Big oil selling image: If you’ve ever seen an ad featuring ExxonMobil scientists handling beakers of green goo, the algae that will supposedly fuel the future, you’ve been the target of an oil company’s advertisement.  Exxon isn’t trying to sell you a product, exactly — but it is hoping to sell you on the idea that it’s committed to a greener future. Over the past 30 years, the world’s five biggest oil companies have forked over more than $3.6 billion for reputation-building ads like this one. (4/4)

Offshore Norway: The Johan Sverdrup field, located in Norwegian waters not far from the border with the UK, does not officially open until January, but has already polarized opinion. For proponents, it marks nothing less than the revival of Norway’s oil industry; for critics, it is an environmental tragedy that shows just how hard climate change will be to stop. (1/1)

A NO in Norway: The largest party in Norway’s parliament has delivered a significant blow to the country’s oil industry after withdrawing support for explorative drilling off the Lofoten Islands in the Arctic, which are considered a natural wonder. The country currently pumps out over 1.6 million barrels of oil a day from its offshore operations. It is thought there are between 1 billion to 3 billion barrels of oil beneath the seabed off the Lofoten archipelago. (12/31)

In Belarus, Russian crude deliveries to local refineries have been suspended since January 1, a spokesman for Russian pipeline operator Transneft said Friday, after the former Soviet republic failed to agree on terms of crude Russian deliveries for 2020. (1/4)

China issued the first batch of oil product export quotas to domestic refiners for 2020, and they are 53 percent higher than in 2019. At 28 million tons, the oil product export quotas will likely deepen an already severe glut of oil products on Asian markets that have eaten into refiner’s bottom lines. (1/1)

Algeria has appointed a new government as the country faces its biggest political crisis in decades and a raft of economic problems caused by falling energy revenues. Mass protests that broke out in February succeeded in unseating veteran president Abdelaziz Bouteflika in April. An election to replace him was postponed twice as protesters said it would be illegitimate while the ruling elite stayed in place. (1/3)

In Nigeria, the last decade was an utterly wasted one. Unfortunately, nothing in the behavior or the mindset of Nigeria’s leaders suggest they are willing to stop institutional sclerosis that has gripped this country and stunted its progress. Last year, oil revenue projection fell below target by 49% due to instability in world oil prices and other domestic production issues. (1/2)

Offshore Ghana, the latest oil discovery by Tullow was disappointing, as it encountered only about 4 meters of net oil pay. Tullow’s shares took a beating Thursday after the announcement. (1/3) 

Guyana recently became an oil producer when on December 20, an ExxonMobil-led group announced its long-awaited production of first oil from the offshore Liza field. Liza Phase 1 is producing from the Destiny floating, production, storage, and offloading facility and will peak at 120,000 b/d of oil over the next several months. Liza Phase 2, which was sanctioned last year, is expected to produce up to 220,000 b/d when it comes online in mid-2022. (1/3)

In Venezuela, drivers have faced widespread gasoline shortages since Monday despite the world’s largest oil reserves, as the government failed to deliver supplies to gas stations on time. In the capital of Caracas, many service stations have had long lines with drivers waiting up to an hour. Officials said the lack of fuel was the result of the paralysis of many of the country’s oil refineries, all of which are state-controlled. (1/4)

In Venezuela, bouncing back from a string of blackouts, outages, and fires, PDVSA managed to increase its oil output; the December average stands so far at 0.91 million b/d. This move corresponds with China’s return to official dealings with PDVSA. Increased production volumes also mean quicker paying-off of debts for PDVSA; by the summer of 2020, PDVSA would entirely absolve itself of all arrears vis-à-vis the leading marketer of Venezuelan crudes now. (1/1)

The US oil rig count decreased by seven rigs last week to 673, according to Baker Hughes’s weekly count. Operating gas rigs fell by 2 to 123. The total rig count stands at 796 rigs, down 279 from last year at this time. (1/4)   

Appalachian gas production last month registered its first monthly decline since May as producers in the US Northeast shale basin responded to low prices and growing pressure from the investment community with reduced drilling. Production is down 3 percent since a mid-November peak. (1/4)

US coal production totaled 10.4 million tons in the week ended December 28, down 18.1 percent from a week ago, US EIA data showed Friday. The declines were primarily led by less production from Wyoming and Montana. Total US production in 2019 was about 703 million tons, down 6.6% from 2018. (1/4)

Germany is shutting nukes: Germany is going forward with its plan to phase out nuclear reactors by 2022 as another nuclear power plant is going offline on December 31. This leaves Germany with six nuclear power plants that will have to close by 2022. In the wake of the Fukushima disaster in Japan in 2011, Germany ordered the immediate shutdown of eight of its 17 reactors and made plans to phase out nuclear power plants entirely by 2022. (12/31)

Tesla beat Wall Street estimates for annual vehicle deliveries and met the low-end of its target, sending shares to a record high in a vindication for Chief Executive Elon Musk after a few turbulent years. Tesla delivered 112,000 vehicles in the fourth quarter, which was above expectations of 104,960 cars. (1/4)

In Korea, Hyundai Motor Group will invest more than $87 billion over the next five years to enhance its leadership in vehicle electrification, autonomous driving, and mobility services said a senior executive at the company’s 2020 New Year ceremony at its headquarters in Seoul. (1/2)

EU ditching diesel: As if the downturn due to a trade-war-induced slowdown in China were not enough, the European automotive industry is facing the challenge of a rapid switch from diesel to petrol engines that has been gathering pace for the last two years. At the same time, the industry has also had to deal with the implementation of new legislation designed to reduce car makers’ overall fleet emission levels. (12/30)

EU’s EV push: The long-awaited light-duty vehicle emission rules will hit light-duty vehicle makers working in EU member countries on January 1. Vehicle manufacturers will have to sell many more hybrid and electric vehicles or pay costly fines, a situation similar to China’s rules. For automakers with product lineups with few EV offerings, they’ll need to sell lots of conventional cars and trucks and use the profits to pay the fines. (1/2)

Population growth in the US crept along at its slowest pace in decades in 2019, hindered by a sharp decline in the number of new immigrants, fewer births, and the graying of America, new estimates from the Census Bureau show. The US population, which is now 328,239,523, grew by 0.5 percent from July 1, 2018, to July 1, 2019. (12/31)

Stranded fossil fuel assets: Bank of England governor Mark Carney has reiterated his warnings over the risks of financial exposure to fossil fuels, saying pension funds were particularly vulnerable as oil, coal and gas investments could become “worthless” over time. Up to 80 percent of global coal assets and up to half the world’s proven oil reserves could become stranded assets as the world moves to curb carbon emissions and supplies, and renewable energy continues to replace fossil fuels, Carney told BBC Radio. (12/31)

Climate policies to be frozen out: Federal agencies would no longer have to take climate change into account when they assess the environmental impacts of highways, pipelines, and other major infrastructure projects. A proposed Trump administration plan would weaken the nation’s benchmark environmental law. The planned changes to the 50-year-old National Environmental Policy Act could sharply reduce obstacles to the Keystone XL oil pipeline and other fossil fuel projects that have been stymied when courts ruled that the Trump administration did not adequately consider climate change when analyzing the environmental effects of the projects. (1/4)

Dementia and lead exposure: Several studies from the US, Canada, and Europe suggest a promising downward trend in the incidence and prevalence of dementia. A new hypothesis recently published in the Journal of Alzheimer’s Disease suggests that declining dementia rates may be a result of generational differences in lifetime exposure to lead. (1/2)