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Quotes of the Week

“We’ve long been of the opinion that demand will peak before supply. And that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

Simon Henry, Chief Financial Officer for Royal Dutch Shell

“The oil demand growth is not coming from cars; it’s from trucks, aviation and the petrochemical industry and we don’t have major alternatives to oil products there. I don’t buy the argument that electric cars alone will cause a peak in oil demand at least in short and medium term.”

Fatih Birol, Executive Director of the International Energy Agency

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

1.  Oil and the Global Economy

Oil prices continued to slide last week with New York futures down by nearly $8 a barrel from the recent highs set in mid-October. The week closed out with NY at $44.07 and London at $45.58.  The hype over an OPEC production freeze which has been driving prices up since last spring is no longer moving prices higher. OPEC and Russia have to come up with a significant production cut in the next three weeks or be faced with lower prices until supply and demand come back into balance from economic forces. The final OPEC meeting to approve a cut is only three weeks away (November 30th) and so far no progress has been made at preliminary meetings that were intended to work out details.

Occasionally an OPEC spokesman will issue an encouraging statement talking of progress, but these have been drowned out in a continuing stream of squabbles about which countries should cut production and by how much. Most OPEC members would like to see the Saudis and its Gulf Arab allies make the bulk of the cuts, something which Riyadh is unwilling to do.

Conventional wisdom is saying that oil prices over the next year or so are in OPEC’s court.  If there is no agreement to cut production, then some see oil prices falling to a range of around $40 a barrel – not that far from where they are now. To spark a price rebound, significant cuts would have to be made as more oil is scheduled to come onto the market in the next year. Nigerian production is back to near normal – at least for awhile; Iran and Iraq are working to increase production; Libya seems to be getting oil exports going again despite the political turmoil; Russia keeps setting new post-Soviet production records every month due to the weak ruble; and finally, the decline in US shale oil production seems to be slowing as “zombie” (bankrupt) oil producers continue to pump out oil as if they were making a profit, the US rig count continues to grow and the fracking sand industry is rebounding to 2014 levels.  If an OPEC production cut is agreed on in the next three weeks, it is facing strong headwinds.

Among the more interesting developments last week was an unprecedented increase of 14.4 million barrels in US crude stocks, which helped pushed prices down in the second half of the week. This was the biggest build in the history of EIA reporting. However, people who watch US oil imports via Custom invoices say that the EIA has been under-reporting imports since mid-October. The big import jump the week before last therefore was the result of the EIA’s bookkeepers playing catch-up on barrels that were under-reported in the two preceding weeks.  At any rate, there seems to have been a substantial build in US inventories during the last month. Private reporting on the crude inventories at Cushing, Okla. also showed an increase last week.

The ongoing decline in oil prices has industry watchers ruminating on the future of “big oil.” These giant firms have been making their money by investing in “megaprojects” – mostly offshore – that can cost billions but can produce prodigious quantities of oil when they come into production. The massive loss of revenue in the last two years, however, has most of the international oil companies in unprecedented financial trouble with some reporting large losses. Unlike the small shale oil drillers, these companies have been making substantial profits and paying steady dividends for decades, an obligation they are loath to stop.  In recent weeks several companies have felt impelled to cut claimed reserves, as much of this oil would be so expensive to produce at today’s selling prices it can no longer be considered an asset. With oil now being produced faster than new reserves are found, it is only a matter of time before major changes in the industry take place.

The explosion on Colonial Pipeline’s Line 1 last week cut off 1.4 million b/d of gasoline supplies being moved from Gulf refineries to the East Coast. The pipeline was reopened Sunday morning. The closure of the pipeline drove up gasoline prices for a few days and shows how vulnerable the US gasoline supply is in some sections of the country.

Talk is increasing as to what the likelihood of cheaper and better batteries for electric cars could do to the demand for oil. In the US transportation uses currently consumes about 47 percent of the oil supply. Battery powered motor vehicles are considered to be superior to internal combustion ones for many reasons, including lower pollution (depending on electricity source), lower maintenance, cheaper fuel costs, etc.  Until recently, however, it has been the absence of satisfactory batteries that has held back their wider acceptance. Not only are current batteries very expensive, but they are slow to recharge and it has been difficult to find charging facilities as compared with gas stations.

There are indications that these drawbacks will be eliminated in the next few years, however. Batteries are getting better, breakthroughs in battery technology are on the horizon and Fitch Ratings recently published a report questioning what the demand for oil will be 10 or 15 years from now. The Obama administration announced a plan last week to build electric car recharging stations along many US interstate highways. Analysts say that once the cost of electric car batteries drops below $100 a kilowatt hour from the current $250, and $1000 five years ago, electric car sales will take off. Last week, however, the executive director of the IEA said that he does not buy the argument that electric cars will start eating into the demand for oil in the “short or medium” term.

2.  The Middle East & North Africa

Iran:  A new report says that Iran has boosted its export volume to a new high of 2.6 million b/d. Iran’s oil minister recently said his country was exporting 2.44 million b/d. With negotiations over exports cuts still underway, there is a strong incentive to fudge their export numbers in case a cutback comes to pass. About half of Iran’s exports are going to China and India these days. Sales to Japan and Korea have been dropping.

Further increases in Iranian exports may have to await further development of Iran’s oil fields.  Tehran is having a problem persuading Western oil companies to return and invest in developing Iranian oil. Much of the problem comes from internal tensions within the Iranian government. Hardliners are insisting on oil contracts that are not as generous as can be obtained elsewhere. Political relations in the region continue to deteriorate, especially with Iran’s heavy involvement in Syria. The possibility exists that some incident or outrage could easily result in new sanctions against Tehran putting oil company investments at risk. At a time of major reductions in international oil company capital expenditures, the risk of investing in Iran is too large.

Syria/Iraq:  In an unusual move, Baghdad and the Kurds released detailed data about their oil production last week. The data was released in order to bolster positions during the negotiations for a production freeze and as part of the revenue dispute between Baghdad and Erbil. The Kurds claim their crude production in September was 290,000 b/d lower than the central government, OPEC, and outside analysts are saying.  The Kurds released their data after Baghdad released detailed field by field data showing that, including Kurdistan, it produced 4.7 million b/d in September. There is a discrepancy of about 300,000 b/d between what Baghdad and outside observers are saying came from the Kurdish-controlled fields inside Kurdistan and in northern Iraq claimed by the Kurds.

Baghdad has asked the international oil companies doing business in Iraq to shut down the prestige offices they maintain in the “glittering towers” of Dubai. The Iraqis say these offices are too expensive and their cost is charged as an expense of producing oil in Iraq thereby lowering revenues for Baghdad.

Saudi Arabia: There has been much discussion of Riyadh’s oil policies during the past week. As the largest producer in OPEC and the country best positioned to make substantial cuts in production the Saudis are under pressure to come up with a solution to the current price/production impasse. The rivalry between Saudi Arabia and Iran intensified last week as Iran steadfastly refuses to make cuts. This resulted in Saudi threats to raise production which is exactly what the freeze advocates do not want. Reports of this dispute contributed to oil prices falling towards $44 a barrel on Friday.

The Saudis replaced their long-time finance minister last week. This move was another of numerous shake-ups the Saudi government has undergone as it attempts to remake its economy in the wake of low oil prices. Last year the Saudis’ budget deficit reached nearly $100 billion and was covered by its rapidly depleting sovereign wealth funds.

3.  China

It appears that Beijing has cut its domestic coal production by too much, too quickly, to clean up its toxic air. As winter temperatures settle in over northern China, the government is scrambling to overcome a coal shortage to produce the power needed to heat homes. Coal inventories are below 20 days, well below the five-year average and coal is being imported at a record pace. Prices have surged with prices doubling in the past year. Benchmark Newcastle coal reached $115 last week, its highest since 2012. The coal crunch comes after an unusually cold winter last year and unusually warm summer that drained coal inventories to run air conditioners. Low water levels at the Three Gorges Dam is shifting some of the burden of generating electricity to coal-fired plants. Beijing is increasing its coal production, but it will be well into 2017 before this can make up for the shortages.

As China’s economy slows, easy loans and efforts to stimulate growth have left too much money chasing a limited number of assets which has resulted in serious bouts of inflation. In the past year, there have been inflationary bubbles in numerous asset groups ranging from housing and food to antiques and art. Total debt as a percentage of GDP has grown from 100 to 250 percent in the last 16 years. Fears are increasing that this situation could one day soon become a danger to the global economy should China suffer the proverbial “hard landing.”

China’s oil output likely will continue to fall as its big three oil producers continue to cut back on capital spending in line with the rest of the world industry.

5. Nigeria

In the wake of a government announcement last week that repairs to damaged pipelines had been made and that oil production was nearly back to normal, there was a report of a new attack. This time the Movement for the Emancipation of the Nile Delta (MEND) which has not conducted any attacks since May 2014 under a ceasefire agreement with the government admitted that a “rogue member” of the organization had carried out the attacks. As the government suppresses any indication of the amount of oil shut in by terrorists’ attacks, it will be a while before we learn the significance of last week’s attack.

Nigeria’s Senate approved the second reading of an oil industry overhaul that has been in the works for the last ten years. The bill would establish a regulatory commission that would deal with the distribution of oil revenue, the subject that has led to the formation of several militant groups over the last decade. It has long been accepted that Nigeria is rife with corruption and that billions of dollars in oil revenues have been stolen from state coffers.

Some feel that the problem is too ingrained in the society and that revisions to the country’s constitution will be necessary before any meaningful reforms can be carried out.

6. Venezuela

In the wake of the government’s blockage of a recall election, the Vatican stepped in to arrange negotiations between the government and the opposition which controls the Congress. The opposition has suspended a march on the Presidential Palace which has the potential for violence. Washington is backing the talks as a way out of the crisis, and the Vatican’s envoy is warning about the likelihood of bloodshed unless the two sides work out a political compromise.
In the meantime, the economic situation continues to deteriorate. Inflation is in triple digits. Prices are so high that the government contracted with a US firm to print 500 and 1000 bolivar notes now that the currency is down to some 1600 to the dollar on the black market. Foreign banknote printers will deliver currency with a face value of up to 20,000 bolivars – currently, the 100 bolivar note is the largest in circulation meaning that even small purchases require bags of currency.
The government’s latest solution to the food shortages which is slowly starving a substantial portion of the population is to tell people to go out and grow their own food. Not a good short term solution if you are hungry.
Venezuela’s crude sales to the US declined by 23 percent to 600,000 b/d as fewer shipments of the imported light oil needed to dilute the heavy Orinoco crude for export are getting into the country. As of last week, some one dozen tankers carrying naphtha and other light oils were waiting off Venezuela to be paid before discharging their cargoes. This situation is especially serious as the US actually pays for Venezuelan oil. About a third of Venezuela’s oil production is sent to China to make bond payments and does nothing to earn money for food and other necessities.
7.  The Briefs

Oil producers in the North Sea, home to one of the world’s key crude-price benchmarks, are poised to ship the most crude in more than four years. The surge takes place just as OPEC tries to contain a global surplus with coordinated output cuts. Shipments of North Sea grades will increase 10 percent month-on-month to about 2.16 million barrels a day in December. (11/4)

In Norway, Statoil’s patience is paying off for an oil reserve area discovered 30 years ago that’s now ready to deliver at a lower cost. The Norwegian energy major said it submitted a plan for development of the Trestakk discovery. Confirmed in 1986, the discovery holds about 76 million barrels of recoverable oil equivalent. (11/2)

Royal Dutch Shell thinks demand for oil could peak in as little as five years, a rare statement in an industry that commonly forecasts decades of growth. Shell’s view puts it at odds with some of its biggest competitors. Exxon Mobil Corp. said in its annual outlook that “global demand for oil and other liquids is projected to rise by about 20 percent from 2014 to 2040.” (11/3)

Royal Dutch Shell reported a marked increase in third-quarter profit Tuesday, reversing a successive decline in earnings this year. The company said its quarterly profit on a current cost-of-supplies basis—a number similar to the net income that U.S. oil companies report –was $1.4 billion, up from a loss of $6.1 billion in the third quarter of 2015 and sharply higher compared with the previous quarter. (11/1)

BP’s third-quarter profit rose 35%, reversing three successive quarters of losses, as the company began to feel the benefits from cost reductions that are helping to offset continued weakness in oil prices and sliding refining margins. (11/1) Underlying replacement cost profit, BP’s definition of net income, dropped to US$933 million for the third quarter from US$1.819 billion for the third quarter last year. (11/2)

In Russia, BP confirmed a pledge to invest as much as $300 million in developing reserves alongside oil company Rosneft in two inland basins. Starting in late 2016, both sides will carry out preliminary seismic surveys to get a better understanding of the resource potential there. (11/2)

Iran once again suggested it was moving forward on plans to build a long-delayed natural gas pipeline to Pakistan, this time with the help of China. (11/5)

Financing world oil—Ghana Style: The current downturn in the global oil and gas sector is yielding some innovative approaches to project finance. For example, the West African country of Ghana’s government says it is close to a deal to “mortgage” its petroleum reserves to Chinese development banks — in exchange for massive loans needed to build production equipment. (11/5)

Brazil: The chances of curbing global oil supply are getting slimmer by the day. OPEC members are arguing among themselves who needs to cut how much; Russia is turning vague remarks into an art form. Then there’s Brazil’s energy secretary who said Brazilian production is increasing and that they have plans to continue expanding production for “the next few years.”  (11/2)

Argentina’s state energy firm Enarsa has reportedly levelled a fine of $2.1 million against Bolivia’s YPFB for failing to meet contract volumes for imported natural gas. But such small penalties are unlikely to deter Bolivian officials from resuming higher exports at the expense of Bolivia’s growing domestic market.  All of which means that supply could be about to get even tighter in Argentina. That puts further pressure on their lawmakers to raise prices in order to spur domestic production. (11/2)

The Panama Canal Authority has launched the Environmental Premium Ranking, a new initiative to reward shippers with vessels meeting high environmental efficiency standards starting January 1, 2017. The new incentive will award customers with points to improve their position in the canal’s customer ranking system when booking for transit through the Panama Canal. (11/4)

The US oil-rig count rose by nine in the past week to 450, according to Baker Hughes. The oil-rig count has generally been rising since the beginning of summer. The nation’s gas-rig count rose by three to 117 in the past week. The U.S. offshore-rig count fell by one from last week to 21, which is 11 fewer than a year ago. (11/5)

US crude exports rose 35,000 b/d to a record 692,000 b/d in September after Brent’s premium to WTI widened from 34 cents/b in May to average $1.88/b in August and $1.66/b in September. (11/5)

US crude oil production is set to decline this year by 800,000 b/d as OPEC struggles to put a dent in global oversupply, according to the head of the US EIA. That would be the first drop in US production since 2008. (11/2)

Busted pipeline: More than 60 percent of US fuel pipelines were built before 1970. Recent disruptions on Colonial Pipeline Co.’s Line #1 running up the East Coast show why some energy observers worry that this is a problem. The pipeline, which began operating fully in 1964, was partially shut down for nearly two weeks in September. Fuel prices spiked throughout the Southeast, rising more than 20 cents a gallon in places like Atlanta. The 5,500-mile pipeline was struck by construction equipment Monday, killing one person and injuring several others. (11/3)

Jet fuel: Major airlines including Delta, United and American could face higher fuel costs if U.S. regulators allow Colonial Pipeline Co to stop shipping a dirtier blend of jet fuel by 2018. (11/2)

Several damaging Los Angeles-area earthquakes of the 1920s and 1930s, including the deadliest ever in Southern California, may have been induced by oil production during the region’s drilling boom of that era, U.S. government scientists reported on Tuesday. (11/2)

The movement to ban fracking is winning victories across the US.  Yet the campaign has largely failed to win where it matters most—in places oil and natural gas are produced. (11/4)

Fracking ban? A new study released by the US Chamber’s Institute for 21st Century Energy says a complete ban on hydraulic fracturing would be detrimental to the US economy. If an outright ban on hydraulic fracturing began the first of 2017, it would cost the United States 14.8 million jobs by 2022. (11/5)

Natural gas may surge to $20 to $25 per million British thermal units in New England this winter, the highest in the world, as pipeline bottlenecks limit supplies during frigid weather. Prices have collapsed across the rest of the globe amid tepid demand growth, rising exports and a plunge in crude oil prices earlier this year. Competition for pipeline access into New England is poised to intensify as the power grid, already getting more than half of its supply from gas, becomes even more reliant on the fuel as coal-fired plants shut. (11/2)
Wall Street’s oil analysts are getting harder to impress. After two straight quarters when the US shale industry posted outsized oil production figures that beat expectations, explorers are finding it more difficult to be overachievers. (11/4)

Apache Corp. reported net production from North American of around 270,000 barrels of oil equivalent per day during the third quarter, a level that represented more than half of its global output. It took a loss of $607 million for the third quarter but ended the period with $1.2 billion in cash, unchanged from the previous quarter. (11/4)

Occidental Petroleum on Tuesday reported a quarterly loss of $241 million on a continued decline in revenue, as the oil-and-gas company deals with low energy prices. However, that compares favorably with its loss of $2.61 billion a year prior. (11/2)

General Electric Co said on Monday it would merge its oil and gas business with Baker Hughes Inc, creating the world’s second-largest oilfield services provider as industry competition heats up to supply more-efficient products and services to the energy industry. The deal to create a company with $32 billion in annual revenue will combine GE’s strengths in making equipment long-prized by oil producers with Baker Hughes’s expertise in drilling and fracking new wells. (11/1)

General Electric is taking advantage of a prolonged energy slump to become a bigger player in the oil and gas drilling business, a bet that could pay off big when prices recover. GE and Baker Hughes will combine their oil and gas operations, creating a major player in the oilfield-services industry at a time when the energy sector is bogged down by weak and volatile commodity prices. The new publicly traded company will still be called Baker Hughes, but GE will own 62.5 percent of it. (11/1)

$32 billion merger: Positioning itself to become the second largest oilfield services provider is one thing, but whether the mega-merger of GE Oil & Gas and Baker Hughes signals an abrupt end to the industry’s bloodletting is quite another. (11/2)

New coal plant a $$ killer: Mississippi Power Co. now says it won’t complete its Kemper County power plant until the end of the year, a delay of a month that pushes up the price tag by $25 million to nearly $7 billion. The plant and associated coal mine were originally supposed to cost $2.9 billion at most, and earliest estimates were lower. Once operational, the 583 MW Kemper Project will be a first-of-its-kind electricity plant to employ gasification and carbon capture technologies at this scale. (11/5)

US nukes: Energy companies are shutting down their nuclear power plants and resorting to other forms of production. This is primarily due to the lack of funding and cheaper alternatives. Nuclear facilities are no longer considered cost-effective. Bloomberg reports that the cost to build a nuclear reactor could be more than five times the cost to build a gas-fired reactor. (11/2)

Elon Musk captured public attention by announcing SolarCity Corp.’s latest upcoming project: solar roofs along with the Powerwall 2.0 energy storage battery. Musk plans to make roofs entirely out of solar panels instead of installing them on top of buildings afterward. The solar roof idea isn’t completely original. Other companies have attempted such a feat before but most have been unsuccessful. Near the end of June, Dow Chemical Company made the decision to halt production of their Powerhouse that used solar roofs. (11/1)

3D printed magnets: Researchers at the DOE’s Oak Ridge National Laboratory and colleagues have demonstrated that permanent magnets produced by additive manufacturing can outperform bonded magnets made using traditional techniques while conserving critical materials. NdFeB magnets are used in a range of applications from computer hard drives and headphones to clean energy technologies such as electric vehicles and wind turbines. (11/2)

Electric vehicles: Bloomberg New Energy Finance estimates that plug-in cars will displace 13 million barrels of oil a day by 2040. Fitch Ratings reported Oct. 18 that battery technologies used by electric cars could trigger a “death spiral” for investors with securities linked to fossil fuels. (11/4)

Maxwell Technologies, Inc., a leading developer and manufacturer of ultracapacitor-based energy storage and power delivery solutions, announced the first commercial application of lithium-ion capacitors, developed in conjunction with China’s largest rail manufacturer. The technology will be used for rapid energy regeneration in the trolley system in the capital city of Hunan province in China. Compared to traditional ultracapacitors, lithium-ion capacitors triple energy density and reduce the total weight of the energy storage system by 50%. (11/2)

The 2015 Paris Climate Agreement formally started on Nov. 4 after winning support from major greenhouse gas emitters led by China and the United States. (11/4)

Climate $$: More than a quarter billion dollars will go to help members of the European Union transition to a low-carbon future, the governing body said. (11/4)

Climate and natural gas: Technological improvements are required if gas is to serve as a long-term fuel, according to an International Energy Agency report released in time for the official launch of the Paris Agreement reached at COP21 in December 2015. The list of such mitigating improvements includes carbon capture and storage. (11/5)

Finland is considering banning all coal-fired power stations by 2030 to help meet emission reduction goals. Coal-fired power generation accounted for 7 percent of Finland’s electricity production last year, with 45 percent coming from renewable sources and 34 percent from nuclear. (11/3)

Decarbonizing: Ten of the world’s biggest oil companies plan to invest an average of $100 million annually over the next 10 years in low-carbon technologies, the companies said Friday. The Oil and Gas Climate Initiative, which includes state-owned Saudi Arabian Oil Co., Royal Dutch Shell PLC and BP PLC, said its investments will initially focus on carbon capture and storage technology and efforts to reduce methane emissions from the oil-and-gas industry. (11/5)