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Quote of the Week

“The widely recited rhetoric that Canada must continue its de facto energy strategy of liquidating its remaining non-renewable resources as fast as possible to maintain the economy has no credibility.”

David Hughes, researcher and geologist, in a recent report “Can Canada Expand Oil and Gas Production, Build Pipelines and Keep Its Climate Change Commitments?” 

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3. Russia
4. Nigeria
5. Venezuela
6. The Briefs

1.  Oil and the Global Economy

Oil prices hovered just below the $50 level last week with Brent closing just above $50 on Thursday before settling at $49.46 on Friday.  As has been the case lately, there were numerous factors pressuring oil prices one way or another. The week opened with much enthusiasm that OPEC would agree to a production freeze, but this went away when the OPEC meeting failed to take any action. The major factor pushing prices higher last week was the unplanned production outages in Alberta, Nigeria, and Venezuela. Although the fires are now well past the Alberta tar sands, it will be several weeks before the 1 million b/d of production that had to be shut down during the firestorms can return fully to production. In the meantime, the Alberta outage and the one in Nigeria have likely removed much or all of the production surplus that has overhung the markets and for now, there may be a rough balance of supply and demand.

While production in Alberta is returning to normal, the political/economic situations in Nigeria and Venezuela continue to get worse with the likelihood that both countries will soon see a significant drop in oil production – possibly enough to offset surplus production elsewhere.  There is no end in sight to the problems in either of these countries, and their situations seemed destined to get worse before they get better.

The US crude inventory saw a small drawdown last week, which is not surprising considering the outages in Alberta over the past month.  The EIA continues to estimate that US production is still dropping.  However, the US oil rig count climbed by nine units last week as drillers responded to oil prices approaching $50 a barrel coupled with a buyers’ market for oil production services and oilfield workers. The meager increase in US employment last week has some worried about the outlook for US economic growth in the near future. At a minimum, the widely expected interest rate increase by the Federal Reserve is likely to go on hold for a while.

The problems of the oil industry continue, however, with US bank earnings down 2 percent in the first quarter largely due to delinquent loans to the oil industry where bankruptcies continue to be announced. Observers are starting to talk about the inevitable decline of the large international oil companies.  These companies are finding it increasingly difficult to find new reserves to exploit and those that are available are mostly in deepwater projects where the costs of extraction are well above the current selling price of oil. In recent years, these companies have seen a string of massive cost overruns such as in the Caspian and Bering Seas, and disasters such is Deepwater Horizon in the Gulf of Mexico. Last year the oil industry discovered only 12 billion barrels of new reserves, about a third of annual global consumption.

Nearly all of the major oil companies reduced capital spending to less than half of what it as been in recent years.  With decreasing oil production, supply is likely to start falling short of demand later this year, if it has not already, due to the various outages. Global crude reserves are still at record levels, so daily shortages of even a million b/d or two are unlikely to send prices into three figures right away. By 2020, give or take a bit, prices are likely to start climbing into new territory as shortages become larger, and rationing-by-price again comes into effect.

2.  The Middle East & North Africa

Iran: Tehran had a good week as its fellow OPEC members agreed to accept its right to increase its oil output to pre-sanctions levels or higher. The recent increase in oil prices from $30 to circa $50 a barrel clearly helped the decision to maintain output. Nearly all OPEC oil production comes from cheap, vertical, land-based wells which are profitable at $50 a barrel.

The Iranians are planning on a massive injection of foreign investment, some $185 billion, to overhaul its long-neglected oil infrastructure and to increase production. The heart of this effort is the contract that Iran will offer foreign investors. Under the old contract system, the Iranian government maintained full control over the development of an oil field, while the new contract will have foreign companies working with local partners and they will be paid in cash and crude for their services. The terms of the proposed “new” contract have sparked a major debate amongst the ruling circles in Tehran with conservatives maintaining that the new contract is nothing but a license for foreigners to steal Iran’s oil.

We have heard this theme many times in the past when national oil companies try to contract for foreign investment and production services they cannot manage by themselves. Another aspect of the problem is that the Iranians are seeking long-term contracts, make it more difficult for foreign companies to pull out should sanctions be re-imposed. Parts of Iran’s government fear the danger that Western influences will eventually subvert their society and continue to run a never-ending culture war against the West accompanied by much rhetorical bombast. The Iranian Oil Ministry, however,  said it will start soliciting bids to participate in the development of Iranian oil before the end of the month. Iran is supposed to have some 157 billion barrels of cheap-to-exploit oil and has a highly secure environment as compared to much of the Middle East. This makes the country a very attractive proposition in these days of relatively low oil prices.

A long-discussed set of pipelines between Iraqi Kurdistan and Iran is again under consideration. The deal would bring Iranian gas to Kurdistan and would give the Kurds an alternative path to export their crude rather than being dependent on Turkey’s self-interest and goodwill. Tehran, which already has a deal to export natural gas to Iraq, is seeking Baghdad’s approval for the new pipelines. Considering the convoluted relations among the Kurds, Turkey, Iraq, Iran, Israel, and Syria in the region, nothing is certain.

Syria/Iraq: Offensives are underway against the Islamic State on several fronts and appear to be making some progress. In Syria, government and allied forces are moving towards ISIL’s “capital” city of Raqqa and are now only 50 miles away. The ground offensive is accompanied by heavy Russian airstrikes. Also in Syria, US-backed Kurdish Syrian Democratic Forces are moving on Manbij, which lies on a key supply route between Raqqa and the Turkish border.  Many are suspicious that Washington and Moscow are coordinating this joint assault on ISIL. An initial objective of the government is likely the Tabqa air base that was captured by ISIL two years ago. Should the Russians be able to set up an advanced air base only 30 miles from ISIL’s capital, they would be in a position to bring considerably more airpower against Islamic State forces.

These attacks are being supported by US and allied air strikes. In Iraq, government forces and Shiite militias are slowing moving against Fallujah, once again accompanied by US airstrikes.

While ISIL has little to defend itself against modern air forces in open country and small villages, once it is ensconced in the larger cities amongst ten of thousands of civilians the equation changes.  There is considerable reluctance in the West to strike large concentrations of civilians suggesting that the struggle may continue for a long. Concerns are rising again as to whether the Shiites and their militias that control Baghdad will ever be successful in governing large Sunni cities such as Falluja and Mosel. This war clearly has a long way to go.

Thanks to rising oil prices, Baghdad earned $3.74 billion on exports of 3.2 million barrels last month. This is the largest monthly earning from oil exports since August 2015. Baghdad is planning to increase its exports to 3.5 million b/d in June. The Saudis, Kuwait, Iran, and the UAE also plan to increase exports in coming months.

Libya: Brigades from Misrata, who are loyal to the UN-backed government in Tripoli have captured an air base south of Sirte in preparation for a move against the Islamic State stronghold. The IS has controlled Sirte since last year and has occasionally launched forays against oil facilities. A small number of US and EU special forces are assisting the government. While progress on the ground against a common enemy is going well, the UN-backed government has yet to succeed in uniting the diverse tribes and militias to acknowledge its rule. Neither has it made much progress in restoring oil production to pre-uprising levels.

The CEO of Italy’s Eni visited Tripoli to discuss ways of increasing production which remains stuck at 300,000 b/d as compared to a pre-rising 1.3 million. As Libya was once an Italian holding, the country has a strong sentimental and geographical relationship with Italy and it is probably in the best position to boost the country’s oil production.

Saudi Arabia:

The Saudi’s new energy minister, Khalid Al-Falih, told reporters in Vienna that the Kingdom currently can produce 12.5 million barrels of crude per day, but plans to keep some of this in reserve despite the privatization of a small part of the company by 2018. He also told the reporters that the Saudis will no longer be the world’s “swing producer” and will no longer control prices by raising and lowering production through OPEC quotas.

The Saudis are preparing to borrow some $15 billion by July to cover state budget deficits that reached 15 percent last year. The government’s new “National Transformation Plan” that will be unveiled shortly envisions cutting subsidies and other measures that will produce $100 billion in non-oil revenues. The Saudis are even talking about more women joining the work force – an anathema to religious conservatives.

Saudi Aramco is planning to increase its cross-country pipeline that can now move some 5 million b/d from the eastern oil fields to the west coast where it is planning to expand its refineries and petrochemical plants.

The Saudi’s deputy crown prince and de facto ruler of Saudi Arabia will be visiting Washington in mid-June to discuss a number of growing frictions between the two countries.

4. Russia

Moscow says its crude production will increase by 185,000 b/d this year.  This comes as a surprise to outside analysts who have been expecting Russian output to start declining by now. Russia has been able to increase production by infield drilling in aging oil fields and opening a limited number of new fields. There has been some success with enhanced recovery techniques, but so far Moscow has been unable to begin large-scale Arctic or horizontal drilling to exploit what are said to be large deposits of shale oil.

Russia’s GDP which suffered a 3.7 percent decline in 2015 and a 1.2 percent decline in the first quarter is slowly on the mend.  Officials expect growth will climb to zero around the middle of the year and be positive after that as oil prices increase.

5. Nigeria

A series of new attacks by the Niger Delta Avengers militant group has brought oil production to new lows. On Thursday, the country’s oil minister announced that production was back up to 1.6 million b/d from 1.6 million as some pipelines were repaired, but on Friday and Saturday new attacks sent production lower. Sorting out the exact production level in Nigeria is difficult as government policy forbids oil companies from reporting how badly production has been hurt by specific insurgent attacks.  As damage is constantly being repaired, and new attacks against previously damaged lines are taking taking place, actual production can be highly variable.

The Niger Delta Avengers, which are obviously very good at what they do, say Nigerian oil production is now down to 800,000 b/d. This seems low, but pipelines traversing jungle swamps are easy to attack.  The group has an announced objective of stopping all oil production in Nigeria – even that taking place offshore – and warn that the fight is about to get bloody. They maintain that the oil being produced in the Niger Delta is providing nothing for the people residing there, and all the money is going to the capital where much of it is being stolen by government officials.

So far the government has been powerless to stop the attacks by a group that seems more effective than the Movement to Emancipate the Nile Delta (MEND) that was active eight or nine years ago. The MEND was finally bought off by the government who made large payments to the insurgents to guard the pipelines and stop blowing them up. This time around low oil prices is keeping the government from buying off the insurgency.

The former president, Goodluck Jonathan, who negotiated the last truce, seems to be staying out of the country to avoid arrest for the money he stole during his incumbency. Last week the government announced that it has recovered some $9 billion in stolen state money and assets. Billions more are still missing and the government has asked the British government for help in the search for stolen money that has been sequestered in London.

Nigeria is a country of 180 million people and is mostly dependent on its oil revenues. There is a serious insurgency in the North and the country is currently plagued by fuel shortages as it has little refining capacity left. In recent years the major international oil companies that developed Nigeria’s oil have been attempting to pull out of the country amid the everlasting insurgent attacks. Most pipeline bombings result in large oil spills that are generally held to be the responsibility of the oil companies. Much of the oil province has been polluted by these spills.

Should the insurgents succeed in shutting down most of the 2.3 million b/d of uninterrupted production, this could easily have an impact. Although most pipeline bombings can be repaired relatively quickly, should they be re-attacked, the oil companies are likely to call a moratorium on repairs until a political settlement is reached. This situation certainly has the potential to end the global oil glut rather quickly and force prices higher.

6. Venezuela

The situation became worse last week went it became apparent that four large oil tankers carrying more than 2 million barrels of light oil that is used to process the heavy Venezuelan crude so that it can be sold are unable to land their cargoes. The country simply does not have enough foreign currency to pay for the imported oil and the sellers are unwilling to join the ranks of the foreign companies that are owed billions by Caracas. Unless this situation can be remedied, Venezuelan oil exports seem headed for a dip unless the heavy crude can be sold and diluted elsewhere.

The country continues towards a total societal collapse. There are major shortages of nearly everything, particularly food, electricity, water, and medicines. People are dying by the hundreds for lack of medical care. The opposition is trying to impeach the President who is fighting to stay in power. The currency is becoming meaningless.  With the largest banknote being only 100 bolivars and lunch costing 14,000, people are having trouble carrying enough money around to buy things. The police have given up the streets at night, but return in the day to guard food supplies and break up riots demanding food including a protest last week at the presidential palace. Foreign airlines are either eliminating or making large cuts in their service to Venezuela further isolating the country.

There is nothing in sight to break the downward spiral and the situation seems likely to get far worse before it gets better.

5.  The Briefs

Top oil dog? In 2015, the U.S. was the largest producer of petroleum and natural gas hydrocarbons in the world by a wide margin, according to U.S. EIA estimates. if you dig a bit further below the surface and unravel the creative mathematics, the details of this story become a bit less impressive. And even less so when we consider that U.S. production of crude oil—the crème de la crème of petroleum products—is falling, and both Russia and Saudi Arabia produce more oil than the U.S. (6/2)

Global airline earnings are set to be $3.1 billion higher this year than previously estimated as the impact of lower fuel costs makes up for a slowdown in passenger growth, according to the industry’s main trade group. Net profit across the sector is likely to reach $39.4 billion in 2016, extending a record result set last year. (6/2)

European researchers have devised a new way to make nanoparticles that could replace rare-earth material used in magnets inside of electric motors. (6/2) The researchers used a mixed iron-cobalt oleate complex in a one-step synthetic approach to produce magnetic core-shell nanoparticles. The resulting materials showed strong magnetic properties and energy-storing capabilities. (6/2)

In Ireland, the response to the latest offerings for the rights to examine the oil and gas potential off the coast has been significant, the government said. It added that the industry interest so far shows that most players are confident about the prospects for reserves off the Irish coast. (6/4)

The Scottish Parliament voted to ban fracking countrywide on Wednesday, making a moratorium on the controversial technique a permanent affair. The narrow vote (32-29) came after the legislative body temporarily outlawed fracking in January 2015 while it conducted a public health impact assessment and consulted environmental experts. (6/3)

French refineries and ports continued to face disruptions Wednesday as the strike called by the CGT union against changes in labor legislation entered its second week and is also spreading into other sectors, including the railways, metro and air traffic control. Of France’s eight refineries, four remain at a complete standstill. (6/2)

The Israeli government approved Noble’s proposed development plan for the offshore Leviathan field, following the implementation of measures to address concerns over control of Israel’s natural gas market. (6/3)

India desperately needs to build energy infrastructure and find innovative ways of providing energy to its rapidly expanding population. One unorthodox system would use stationary bikes to generate free electricity using a battery attached to the bike. That battery is charged as the rider pedals the bike. Pedaling turns a generator, which in turn produces electricity that can be stored in the battery. The battery can then be used to run appliances through a house. The current design of the bike provides a day’s worth of energy with only an hour of pedaling. (6/3)

In Algeria, after factoring in premeditated attacks on oil and gas properties, it can be argued that terrorism, not global oil prices or Algeria’s chronic dependency on hydrocarbons, represents the greatest threat to the country’s stability. (6/1)

In Angola, long-time President Jose Eduardo dos Santos has appointed his daughter to lead the oil-rich country’s state-run oil giant Sonangol after firing the entire board and replacing all executives. It’s a significant move as Angola surpasses Nigeria as Africa’s number one producer, with an official press release noting that the Sonangol purge is “part of a plan to restructure the business so it runs more efficiently”. Angola’s economic growth will probably slow to 2.5 percent this year from an estimated 3 percent last year and 6.8 percent in 2013 (6/4)

The Panama Canal’s new set of expanded locks are working at full capacity and ready to receive their first ships as of Tuesday. The locks are designed to accommodate massive ships known as “New Panamax” that are too large for the previous ones. (6/2)

The US oil rig count was up by nine this week, to a total of 325 rigs in what is the largest increase in the weekly rig count since December last year. Oil prices dipped lower Friday afternoon on the news. The number of US gas rigs fell by five in the latest week to 82. (6/4)

US diesel futures have soared about 40 percent in the last two months, prompting independent refiners to pounce, selling future output on the view that resurgent domestic demand and higher exports may turn out to provide only a brief boost. (6/3)

Royalties increase? Companies extracting oil, gas, and coal from U.S. federal lands will see royalties increase if Hillary Clinton becomes the country’s next president, the candidate’s campaign said. The current 12.5-percent rate would be raised to be in line with the 16 percent to almost 19 percent that some states already impose. (6/3)

BP said it agreed to pay $175 million to settle claims by US investors that its managers lied about the size of the 2010 Gulf of Mexico oil spill to prop up its stock price, leading to massive losses when the true scope of the disaster was revealed. The investors had sought as much as $2.5 billion, and their case was the last major overhang from the 2010 spill for BP. (6/3)

Bankruptcy filed: Denver-based Warren said lenders led by GSO Capital will swap $248 million they are owed for an 82.5% stake in the reorganized company. The investment firm has also agreed to provide it with a $130 million bankruptcy-exit loan and an additional $20 million to fund the chapter 11 case. (6/4)

US banks have seen their earnings drop 2 percent in the first quarter of this year as low oil prices have finally turned into unpaid energy loans.  According to the data, this quarter saw the largest increase in delinquent loans—up 65.1 percent—since 1987. (6/2)

Lending landscape shifts: Banks are increasingly requiring US oil and gas companies to maintain minimum levels of liquidity, an unusual step that could help reduce the risk of being exposed to companies struggling to maintain operations and repay debt. One of the energy companies hardest-hit by so-called minimum liquidity covenants is Chesapeake Energy Corp. Chesapeake must maintain $500 million in cash and other assets that can be easily converted to cash at all times, even as it posts losses and could be faced with nearly $1 billion in collateral calls. (6/3)

Many major fossil-fuel projects across the US, from pipelines to export terminals, have been shelved or significantly delayed because of a confluence of new regulations, grass-roots opposition and a drop in energy prices. Overall, more than a dozen projects, worth about $33 billion, have been either rejected by regulators or withdrawn by developers since 2012, with billions more tied up in projects still in regulatory limbo. (6/2)

Offshore pullback: Exxon Mobil just paid Seadrill $125 million in cash to get out of its commitment to use the West Capella drillship. The contract that Exxon had on the Seadrill had an expiry date of April 2017. Exxon couldn’t wait that long and instead decided to pay the equivalent of $370,000 per day to just get out of the deal. Had Exxon used the West Capella it would have been paying $627,500 per day. (6/1)

Cheniere Energy has completed the commissioning of its first liquefaction train at the Sabine Pass liquefaction project in Cameron Parish, Louisiana. Cheniere is taking control of Train 1 “months ahead of the guaranteed completion date and on budget,” CEO Jack Fusco said. Sabine Pass LNG shipped its first LNG export cargo in February of this year. (6/1)

A multi-car oil train derailed in northern Oregon on Friday, about 70 miles outside of Portland; there were no initial reports of injuries. Black smoke could be seen following the accident. The damage was confined to the railroad. (6/4)

Exelon Corp. said Thursday that it will retire two money-losing nuclear plants in Illinois during the next two years after state lawmakers declined to pass legislation that would have helped keep them running. The plants lost $800 million in the past seven years. (6/3)

Nuclear angle: as the Paris agreement on climate change has put pressure on the U.S. to reduce greenhouse gas emissions, some state and federal officials have deemed nuclear energy part of the solution. They are now scrambling to save existing plants that can no longer compete economically in a market flooded with cheap natural gas. (6/1)