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Quote of the Week

Exxon Mobil and climate change spin: “This could open up years of litigation and settlements in the same way that tobacco litigation did, also spearheaded by attorneys general. In some ways, the theory is similar — that the public was misled about something dangerous to health. Whether the same smoking guns will emerge, we don’t know yet.”
Brandon L. Garrett, professor at the University of Virginia School of Law

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

1.  Oil and the Global Economy

After a bounce last Tuesday, oil prices continued to fall closing on Friday at $44.29 in New York and $47.42 in London, down 4.9 percent and 4.3 percent for the week respectively. While oversupply and weak demand remains the basis for the price decline, the jump in US employment with the prospects of higher interest rates and a stronger dollar helped with the decline on Friday. The Wall Street Journal’s Dollar index was recently at its highest level in 13 years against the euro, yen and other currencies.

Last week was also a bad one for the fossil fuel industry with President Obama rejecting the Keystone Pipeline proposal which has been under consideration for seven years and Exxon being subpoenaed after evidence emerged that it has been deceiving the world about the effects it had discovered about carbon emissions and climate change. Finally, Beijing said it has been burning 17 percent more coal in recent years than it has been publically admitting raising a new issue for the Paris climate change conference due to start next month.

All this leads to the conclusion that a changes are taking place in the way fossil fuels are perceived. The Keystone decision, much to the surprise of official Washington, was partially brought about by a wave of citizen activism by people unusually concerned by carbon emissions and climate change. Environmentalists are saying that the earth has about five times the fossil fuel reserves that it is safe to burn without destroying the atmosphere. Concerns about climate change may come to occupy a growing place in decisions as to the use of energy.

In recent years conventional wisdom has held that while some day the earth will be powered by renewables, these will be so slow in coming into widespread use that we will have to keep on burning fossil fuels at roughly the current pace for many decades. The fossil fuel industry has considerable fiscal and political resources built during centuries of supplying the energy needed to build and run our civilization. It also has many political allies in the US and around the world. Many countries have few sources of revenue other than extracting and exporting fossil fuels adding to the reluctance to reduce consumption. As we have seen in the recent price drop, the loss of this revenue can be very painful to oil exporting nations.

Gloom and doom continued across the oil industry last week. The US rig count fell for the 10th week in a row. Federal regulators issued a report saying that non-performing energy loans have quadrupled to $34.2 billion in the past year as oil prices fell. This now amounts to about 12 percent of the banking industry’s $276 billion worth of oil and gas loans to the industry. In the Persian Gulf, oil producers are delaying projects and squeezing their contractors for hundreds of millions in savings. The Saudis recently postponed a $3 billion expansion project; the UAE another $3 billion project; and in Oman a critical $1.4 billion pump installation was delayed until better times.

A new study of the Bakken shale oil fields in North Dakota says that only about 1 percent of the region has “sweet spots” rich enough to produce shale oil at a profit while oil currently is selling for $30 a barrel at the wellhead. Only 4 percent of the horizontal wells drilled in the Bakken in the last 15 years can make a profit at this price. Production companies are losing from $11 to $38 a barrel on their shale oil which is why Wall Street is becoming increasing skeptical about continuing to finance these projects. Some two dozen companies operating in the state have filed for bankruptcy in the past year.  Last week several major shale oil producers released preliminary plans to cut capital spending in 2016 indicating that spending may again fall by double digits after reductions of 30 to 40 percent in 2015. Some East Coast refiners that have been using oil from the Bakken in recent years are said to be looking to import foreign crude as North Dakota production declines and the price of imported crude falls.

Despite the recent price drop, however, many producers have been able to sustain a substantial proportion of their peak shale oil production by using various stratagems to increase efficiency. Production has not as yet fallen anywhere near as far as the drop in drilling rigs and capital expenditures would suggest.  A handful of producers are even talking about increased production next year.

Oil production from “megaprojects” — Arctic, ultra-deep, oil sands, and even Gulf of Mexico production — are in trouble too because of mounting costs. ConocoPhillips recently said it will be out of deepwater oil and gas exploration by 2017. Some say other companies active in deepwater exploration and production may have to resort to mergers and acquisitions to survive the unprofitable selling prices for oil.

Change is clearly taking place. Some believe, thanks to the ongoing price declines, that world oil production may have already reached some sort of a “peak” – either temporary or forever, whereas BP is saying that thanks to new technologies global fuel reserves will double by 2050 to 4.8 billion barrels. Industry leaders seem to be saying that scarce oil is not a problem (they of course leave out the growing costs of extraction) but that the falling demand — which results in a peak.

2.  The Middle East & North Africa

Iran: As movement towards lifting of the sanctions continues, a debate has started as to how fast Iran can gain what it calls “its rightful” share of the global oil market. Tehran claims it can increase production and exports by 1 million b/d within weeks of of the sanctions being removed. The IEA says it could increase production by about 800,000 b/d within six months, but other remain skeptical that it can find markets in an oversupplied world with many sellers willing to cut prices to make a sale.

Some see Europe as the best place for Iran to sell its oil sales. Given the obvious interest in the EU on reducing dependence on Russia for oil and gas, much the continent would seem to be a prime market. It all depends on who can offer the best prices and where geopolitical considerations go in the next few years.

Efforts by hardliners in Tehran to disrupt what they see as a threat to their power and influence from the growing rapprochement between the Rouhani government and the West, particularly the US, continue. The arrest of journalists and representatives of western companies (mostly Iranian-Americans) by security personnel who are outside of the Rouhani government’s control could lead to more trouble and a setback in relations.  Tehran’s deep involvement, at both the military and political level, in the rapidly changing and highly unstable situation in Syria is another factor that could complicate Iranian oil sales.

Syria/Iraq: Confirmation that the Russian tourist plane downed in the Sinai was due to a terrorist bomb begins a new page in the Middle Eastern story. The immediate response was an increase of bombing of ISIL targets by Russia, but there is still more to come. Tehran seems to have brought back to participate in peace talks, possibly  by Moscow, and there are reports of more non-combat Russian military personnel appearing around Syria. In the meantime, we have heard little of the much-heralded government/Russian offensive to drive rebels out of Aleppo. Indeed, there have been reports of rebel advances in the West despite the addition of Russian air power and possibly artillery, and more Iranian “volunteers” to the fighting.

This uprising is becoming increasing brutal. In response to government shelling of a rebel-held suburb of Damascus which is causing significant casualties, the rebels now say they will place captured government officials and their families in cages atop buildings being subjected to shelling. The refugee crisis can only get worse as Russian and Iranian participation increases.

A new report from the IMF says that Iraq needs an additional 1.3 million b/d in oil exports and the return of $70 a barrel oil to balance its budget. At current prices however, production can only contract due to the lack of capital to expand production.

Libya: The conflict between the two governments affected oil exports last week. Libya’s Petroleum Facilities Guard halted oil shipments from Zueitina indefinitely last week. The guard seems to be siding with the Tobruk government in Tripoli by demand that any tanker shipments have the approval of the eastern government’s oil company.

Tripoli’s National Oil Company Chairman Mustafa Sanalla says current national production is around 415,000 b/d with exports at 320,000-330,000 b/d, mainly from AGOCO and Sirte oil units, Mellitah complex and an offshore field.
Saudi Arabia/Yemen: There has been little progress in the Saudi-led drive to push the Houthi rebels out of the capital and back into their northern homeland. Operations were slowed last week by two major storms – highly unusual for this part of the world – that hit the Yemeni coast.

Much of the reporting on Saudi Arabia this week has centered on the state of its economy now that it is running large deficits as the monarchy tries to keep its populace happy with massive subsidies; fights and/or finances proxy wars in Yemen and Syria; maintains its share of the global oil market; and attempts to drive US shale oil producers out of business.

The Saudi Interbank lending rate rose to a six year high last week as the government and companies continue to borrow at an increased rate. Bank loans were up by 9 percent year over year in August. The oil minister has rejected calls to reduced the oil subsidy which has gasoline going for 46 cents a gallon. Any move to increase gasoline prices is likely to result in a backlash from motorists who have become accustomed to cheap fuel. Observers in Riyadh report that Saudi consumers are still spending as if there were no oil price crisis. It is the monarchy’s policy to share much of its oil revenue through generous subsidies with the Saudi people who in return let the royal family run the country. For now the monarchy seems willing to run large deficits rather than risk the Saudi version of a “social contract” between rulers and ruled.

Saudi Arabia’s financial problems are not yet acute, but given the course of events in the Middle East they seem likely to become so by the end of the decade.

3.  China

Chinese factory activity continued to shrink in October with the Purchasing Managers Index coming in just a hair into the contraction side of the equation. As the core justification for Communist Party rule in China rests on maintaining policies that foster rapid economic growth, official numbers dealing with the state of China’s economy need to be carefully watched. A large amount of more detailed data on China’s economy is due to be released in the next couple of weeks which should give outside observers a better picture of what is going on.  President Xi set a new floor for China’s annual GDP growth of 6.5 percent, suggesting that will be all the lower official Chinese growth numbers will go for some time to come.

The admission last week that China has been burning 17 percent more coal than has previously let on comes as a shock. The new data was released without fanfare in China’s annual statistical yearbook, and shows that coal consumption has been underestimated for the last 15 years and has been particularly off the mark in recent years. The data is said to have come from a 2013 economic census which for the first time included information from small coal companies and small factories.

Given the size of China’s economy, a 17 percent discrepancy is highly significant adding about 600 million tons to China’s coal consumption in 2012 – an amount which is about 70 percent of all of the coal consumed in the US. The newly released data started a round of discussions as to how much China’s emissions data will have to be revised and what the impact will be on climate change negotiations. It is now known that China burned some 4.3 billion metric tons in 2013, but as the newly discovered coal is likely to be of lower quality and less energy content, it is difficult to to say how much greater carbon emissions have been in recent years. Initial estimates range from 4 to 11 percent.

Arrivals of large crude carriers into Chinese ports last week fell to 12 from 20 the previous week. If this situation continues we will be seeing a drop in China’s crude imports which have remained stronger than the state of its economy would suggest. This is believed to be caused by imports of cheap crude to fill the newly created strategic reserve tank farms and the opening of several large new refineries.

4. Russia

Moscow is faced with some hard choices in the wake of the bombing of its airliner over the Sinai, likely in retaliation for its increased intervention in the Syrian civil war. After suspending all air traffic to Egypt, leaving some 50,000 Russian tourists stranded, Putin seems to be stepping up air strikes on ISIL targets instead of concentrating on rebel forces posing an immediate threat to the Assad government. Russia has called for renewed efforts to reach a peace settlement, and likely played a role in convincing the Iranians to rejoin the talks. Recent reporting suggest that Moscow now has some 4,000 military and paramilitary personnel aiding the Assad government at several critical locations around Syria.

Russia has moved surface to air missiles in Syria, obviously out of fear that some foreign power might launch air strikes on its airbase and logistics facilities in Syria.  Neither ISIL or any other rebel groups have military aircraft, but the US, Israel, Turkey and several other western powers operating in the area do.  Recent reports from Syria suggest that after the initial shock, the Russian air strikes on rebel held territory are not particularly effective, but are causing an inordinate number of civilian casualties. This whole situation looks like Moscow is being slowly drawn into a quagmire.

The European crude market picked up when a Swedish refiner bought it first cargo of Swedish crude in two decades. The Saudis and soon the Iranians will be competing for a market that has bee dominated by Russia for decades. Needless to say, given Russia’s behavior towards Ukraine and Syria, most of Europe would love to reduce its dependence on Moscow’s oil.  Last week the head of Russia’s Central Bank acknowledged that there may be a sustained slump in crude oil prices and that the country may be facing a prolonged economic downturn.

5.  The Briefs

In the North Sea, the pressure is building on drillers, starved of contracts as Statoil deepens cuts in investment, to cope with a collapse in crude prices. In less than 18 months, Norway’s biggest oil company has scrapped four years worth of drilling by canceling or suspending rig contracts. By the time the market turns, drillers may be forced to scrap as many as 20 units in Norway and the U.K. (11/3)

In the North Sea, the reality of oil prices halving and staying that way is hurting. That companies have hesitated to decommission aging facilities is perhaps unsurprising. But a decision by Fairfield Energy to decommission the Dunlin fields, northeast of the Shetland Islands, has sounded alarm bells, partly because the fields still hold significant reserves, but also because of the impact on the viability of the Brent pipeline system. (11/5)

North Sea duality: Faced with the collapse in oil prices, the two dominant North Sea producers are taking opposite approaches to bolster dwindling investment: The U.K. is offering carrots (tax breaks), while Norway is wielding a stick (threatening removal of access to licensing). (11/6)

The Swiss are praying for rain on the Rhine River before winter as low water levels restrict barges transporting supplies of heating oil to the land-locked European country. Water levels have slumped to the lowest in a decade, leaving fuel supplies stuck in the Netherlands and Belgium, where stockpiles are already at a seasonal record high because of a global glut. Vessels must sail with smaller-than-normal cargoes to avoid getting held up. (11/6)

Maersk Oil, Denmark’s biggest company, said profit at its oil unit dropped 86 percent in the third-quarter—to $32 million this September from $222 million in 2014—as energy prices fell.  (11/6)

European Union regulators are preparing a strategy to import more liquefied natural gas (LNG) while scrutinizing Russia’s plans to expand its pipeline capacity to Germany, a draft EU document says. The document is part of the European Commission’s efforts to enforce a single energy market, based on regional cooperation and diverse sources of energy shared across the 28-member bloc. (11/4)

Ukraine, an important consumer of liquefied petroleum gas (LPG), is tentatively turning to Western suppliers as it aims to wean itself off potential supply disruptions of Russian and Belarusian imports. (11/4)

LNG slump: When the IEA published a report four years ago heralding a “golden age of gas” it seemed little could derail a bright future for the energy source. Now, with prices slumping and demand in key consuming countries like China looking shaky, the energy industry’s optimism about gas seems to have fizzled out. Particular concern hovers around the market for liquefied natural gas. (11/2)

Japan’s Toshiba, struggling with a major accounting scandal, is trying to sell down a $7.4 billion commitment to U.S. liquefied natural gas which it signed two years ago as part of a plan to sweeten sales of turbines for power plants. A plunge in Asian gas prices means an expected U.S. export bonanza has fizzled out before it even started. (11/6)

In Russia, one of the nation’s most powerful men said the country has the reserves on hand to satisfy Japan’s entire demand for liquefied natural gas. The invitation to do so came as Russian Prime Minister Dmitry Medvedev outlined a $1.1 billion investment program for development in eastern Russia. (11/7)

Global demand for OPEC’s crude oil will remain under pressure in the next few years, the producer group said in an internal report, potentially fueling a debate on its strategy of defending market share rather than prices. The draft report of OPEC’s long-term strategy forecasts crude supply from OPEC – which has an output target of 30 million barrels per day – falling slightly from 2015’s level until 2019, unless output slows faster than expected by rival producers. (11/5)

Israel’s economy minister resigned on Sunday, allowing the government to move ahead with stalled plans to develop two offshore gas fields—Leviathan and Tamar—after nearly a year of political wrangling. The government will push through a framework to develop the gas fields despite the plan having been ruled anticompetitive by the country’s regulator last year. (11/2)

In Nigeria, Royal Dutch Shell lied when it claimed it had cleaned up heavily polluted areas of the Niger Delta, according to Amnesty International and the Centre for Environment, Human Rights and Development (CEHRD) in a new report published on Tuesday. The report titled, “Clean it up: Shell’s false claims about oil spills in the Niger Delta”, documents ongoing contamination at four oil spill sites that Shell said it had cleaned up years ago. (11/4)

Nigeria’s National Petroleum Corporation will sell crude oil directly to refiners and purchase refined oil products from them, a measure intended to cut out roughly 44 middleman companies and curb graft from the oil sector. (11/7)

Chevron said the development of oil reserves straddling the maritime border of the Republics of Congo and Angola could serve as a model for Africa. Chevron’s subsidiary in the region announced it started oil and gas production from the Lianzi field in a unified offshore economic zone. (11/4)

In Brazil, growing friction between the CEO of state oil company Petrobras and its board is threatening to hamper the company’s efforts to shore up its finances. An oil-workers strike launched Sunday has shut down up to 13 percent of Petrobras’ daily crude production, crimping the company’s already weak cash flow. In addition, continued upheaval in the boardroom is raising fresh concerns about a leadership vacuum as the company struggles to pare a mountain of debt. (11/6)

At Petrobras, a four-day strike gathered steam on Wednesday, cutting crude and natural gas output from the No. 2 South American oil producer and threatening to become the most disruptive walkout at the state-run oil company in 20 years. (11/5)

Venezuela wins: President Barack Obama’s rejection of TransCanada Corp.’s proposed Keystone XL pipeline could give Venezuela’s ailing economy a lifeline. The South American country produces heavy crude that’s similar in consistency to the one coming from Canada’s oil sands, and its economy relies largely on shipping it to the same US Gulf Coast refineries that Keystone XL was meant to supply. (11/7)

Mexico reduced its crude exports to the US in September to the lowest level in more than 25 years as it looks further away for buyers, with Gulf Coast refiners flooded with shale and oil sands. Petroleos Mexicanos, the state-owned oil company, shipped 550,000 b/d to the US in September. That’s the lowest level in Energy Ministry records dating back to 1990. (11/4)

The Keystone XL Pipeline announcements last week, first by TransCanada and then by President Obama, won’t have much effect on the U.S. energy industry, experts say, largely because American refiners have found other ways to get crude oil from Canada. Oil imports from Canada set a new record in August, averaging 3.4 million b/d. (11/4)

The U.S. oil rig count declined for a tenth week in a row this week, though the rate of decline moderated. Drillers removed six oil rigs in the week ended Nov. 6 to 572, around a third of the 1,568 oil rigs operating in same week a year ago. Over the last 10 weeks, drillers cut 103 oil rigs. (11/7)

Exxon Mobil in the hot seat: The New York attorney general has begun a sweeping investigation of Exxon Mobil to determine whether the company lied to the public about the risks of climate change or to investors about how those risks might hurt the oil business. (11/6)

New York’s decision to probe climate change disclosures by Exxon Mobil marks the most aggressive state action yet on the financial effects of burning fossil fuels. The investigation is seeking information on whether the world’s biggest oil explorer lied to investors and the public for almost 40 years about the impact of climate change on profits. (11/6)

At Exxon Mobil, whoever succeeds Rex Tillerson as CEO will inherit a company that’s far poorer and without obvious growth opportunities. When Tillerson took over, Exxon had $28.7 billion in cash and was pumping almost 4.3 million barrels of crude daily. Today, Exxon’s output is down to 4 million barrels a day, and its cash reserves have declined 85 percent, to $4.3 billion, eroded by soaring project costs and collapsing energy prices. (11/6)

Working natural gas in storage reached 3,929 billion cubic feet as of October 30. This level matches the previous weekly record of 3,929 set November 2, 2012. Largely depending on the weather, inventories could surpass 4 trillion cubic feet in the coming weeks. (11/7)

Sales of trucks powered by natural gas are sputtering and growth will be far weaker this year than last as tumbling diesel prices prevent drivers from switching over to the cleaner-burning fuel even though it is cheaper than it has been in years. Sales of medium and heavy duty natural gas trucks are expected to rise less than 1 percent this year after climbing nearly 27 percent in 2014. (11/5)

North Dakota turn-down? A sudden lack of interest in Bakken crude by at least one east coast refinery reflects a dramatic recent change in the way East Coast refineries are sourcing the crude that they turn into everything from gasoline to heating oil and jet fuel. A slight drop in daily production in North Dakota means that it is slightly more expensive, after transport costs, than oil shipped from Latin America, the Middle East and Africa, prompting East Coast refiners to return to a foreign crude diet they derided as unprofitable five years ago. (11/5)

Alaska, for its entire history as a state, has made money, sometimes billions of dollars a year, by taxing the oil pumped from its wells. That 56-year winning streak is over. (11/2)

In deepwater Gulf of Mexico, Noble Energy’s two long-awaited fields came on stream ahead of schedule in late October and should reach peak in the next couple of weeks, the company’s CEO said Monday. The Dantzler and Big Bend fields, in water depths around 6,000 feet, are set to deliver over 45,000 b/d of oil equivalent gross combined at peak, and should produce at maximum of 25,000 boe/d and 20,000 boe/d, respectively. (11/3)

The Texas Railroad Commission on Tuesday accepted the findings of the commission staff that two oil and gas wastewater disposal wells were not the likely cause of a series of earthquakes that shook parts of North Texas in late 2013 and early 2014. The decision, which the commission made in an open conference meeting Tuesday morning, clears the two injection wells, owned by Houston-based Enervest and ExxonMobil subsidiary XTO Energy, respectively, of responsibility. (11/4)

Gasoline prices go up and down in tandem with crude oil. But recently, oil prices have been falling much faster than gas prices. Drivers have paid at least $1 billion more for gasoline than they would have if the historical pattern had continued this year. (11/3)

World of plenty: The world is no longer at risk of running out of oil or gas for decades ahead with existing technology capable of unlocking so much that global reserves would almost double by 2050 despite booming consumption, oil major BP’s David Eyton, Group Head of Technology said on Monday. “Energy resources are plentiful. Concerns over running out of oil and gas have disappeared.” (11/3)

The federal Renewable Fuel Standard (RFS) has created problems that require congressional attention 10 years after the 2005 Energy Policy Act (EPACT) established it, witnesses generally told a joint hearing of two US House Science, Space, and Technology subcommittees. But they disagreed on their recommendations, which ranged from adjusting provisions under EPACT and the 2007 Energy Independence and Security Act (EISA), which expanded RFS quotas, to repealing the entire statute. (11/5)

Floating wind? The Scottish government said it granted a license to the operators of what Edinburgh said may be the world’s largest offshore floating wind energy development. Norway’s Statoil was granted a license for its Hywind pilot project that envisions up to five turbines installed by an anchoring system that developers said would facilitate deep-water installation. (11/3)
“”The industry is under so much pressure that you need to have a clear plan. You need to balance capital expenditure against production. Our capex in 2015 will be around 30 percent lower than in 2014.”
BG Group CEO Helge Lund [Q: how will that impact production in 3-5 years?]

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia/Ukraine
5. The Briefs

1.  Oil and the Global Economy

It was a volatile week with oil prices falling on Monday and Tuesday, surging 6 percent on Wednesday and then stabilizing on Thursday and Friday. When it was over, prices were up for the week about 4.5 percent to $46.59 in New York and 3.3 percent to $49.56 in London. Crude prices have been more volatile this year than anytime since the 2008 crisis. Some of the large percentage moves we are seeing, however, are due to the relatively low prices as compared to recent years. The move on Thursday was generally assessed as being caused by computer trading signals coupled with a slightly bullish weekly stocks report. The report showed decreases in oil product stocks and crude in storage at Cushing, Okla. while overall US crude inventories continued to climb.  On Friday another drop in the US oil-rig count was reported which led to a small price jump at the end of the day.

The general consensus among the analysts that markets are still oversupplied continues and that it will be at least another year before supply and demand come back into balance. Some brokers say the global build in oil stocks this year will be at an average rate of 1.7 million b/d. This may become smaller next year, but the oversupply will continue as the stocks awaiting consumption continue to reach all-time records.

Goldman Sachs continues to talk about the possibility of a major price drop in the next year as global capacity to store more crude and oil products runs out. There have been a number of analyses concluding that this will never happen, however, as there is still much storage space available. People with greater insight into this issue point out the problem is much too complex to be determined with a simple recitation of EIA tank capacity.  Serious storage problems could still arise due to the spare storage capacity being in the wrong place or being of the wrong type for the liquid needing to be stored.  The EIA says it really cannot calculate the amount of “swing space” necessary to keep operations flowing smoothly. There have already been reports of shortages of distillate storage in the New York area.

It is generally believed that US shale oil production will drop further in the coming year but that it will be offset by increased production overseas. Iran announced this week that it is preparing to increase its production by 500,000 b/d, which should be enough to offset a large part of the decline in US production we have seen in recent months. This assumes that Tehran can sell its additional barrels which may be difficult without substantial price discounts. The future of the Chinese and US economies remains the major unknown. Chinese crude imports have held up pretty well this year despite its economic slowdown. Much of this is due to low prices which have allowed Beijing to fill its newly built strategic stockpile tanks and to feed new refining capacity. These new refineries are simply dumping more oil products on the world markets rather than increasing domestic oil consumption.

Like the Chinese economy, that of the US seems to be slowing of late. While there has been much publicity about growing gasoline consumption in the US, this is obviously due to low prices which now average about $2.18 a gallon. The weak earnings reports from the oil industry and announcement that GDP growth fell to 1.5 percent in the third quarter from 3.9 percent in the second quarter raises questions about how long US demand for oil products will hold up. There are already tentative indications that the recent growth in gasoline consumption is starting to slip despite the falling prices.

Much of the oil news last week came from the quarterly financial reports that were released by publically traded oil and oil service companies. As could be expected with oil below $50 a barrel, the reports were universally bad. Earnings were down with many large companies suffering multi-billion dollar losses. Spending is being curtailed on almost everything, except dividends. Only Exxon, which has a large and profitable refining operation did better than average, buts earnings were still down 47 percent year over year to $4.2 billion. The company has managed to keep most of its workforce intact as industry-wide layoffs top 200,000 worldwide.

Given the size of the cutbacks currently taking place, it is clear that oil production is going to much lower three or four years from now and that it would be well into the next decade before high-cost deep sea and tar sands production could grow enough to offset depletion of conventional oil fields.

US natural gas prices rallied last week on forecasts of colder weather, closing at $2.31 per million BTUs. Overall gas prices have been a disaster of late, falling for four straight months, the longest losing streak since 2011. Many are warning that warmer than usual weather this winter will send prices to new lows.

2.  The Middle East & North Africa

Iran: Tehran will officially notify OPEC next month that it plans to increase production by 500,000 b/d and that it expects other OPEC members to cut production by enough to keep the cartel’s production below the agreed-upon 30 million b/d ceiling.  OPEC has been producing about 1.7 million b/d above this ceiling lately.

Iran has proposed establishing an oil and gas swap with Russia as it has had in place with Turkmenistan, Kazakhstan, and Azerbaijan for over a decade. Under this arrangement, the Iranians would receive gas and oil along their northern border for domestic consumption and then ship a similar quantity from its Gulf ports to Russia’s customers. This presumably would save on transportation costs and difficulties in moving oil and gas produced in Central Asia to world markets.

In the wake of the nuclear agreement Tehran has been feeling its oats by announcing plans to become the largest oil and gas producer. At a conference last week, the Iranians said they will need about $250 billion in new investment in the next ten years. Given the massive cutbacks by nearly all the international oil companies in recent months, the possibility of foreign investment on such a scale is remote.

Tehran has made clear in recent weeks that it does not want better relations with the West. This was underscored by the arrest of an Iranian-American oil company executive last month – likely on trumped up charges of espionage, which has a very flexible definition in Iran these days. The Iranian theocracy still remembers the large scale riots protesting election results that took place a few years back and likely are concerned that a new generations of Iranians are not as inspired with revolutionary fervor.  All this says that there are still many problems ahead in developing Iran’s oil industry at the pace it would like.

Iran’s deep involvement in the confrontations in Syria, Lebanon, and Yemen is also adding to its problems. Tehran, however, was given a seat at the latest round of Syrian peace talks last week, acknowledging that no settlement is possible without Iranian involvement.

Syria/Iraq: The war goes on with no end in sight despite a new round of peace talks and increased foreign involvement. The US and Russian continue to bomb ISIL military positions, and in the case of Russia other rebel forces and civilians opposing the Assad government. The US announced last week that it will be sending small numbers of special forces into Syria to assist local militias fight ISIL forces. It is apparent that the year-old US bombing campaign against ISIL is not achieving the hoped-for results.

There is little word on whether the Russian/Iranian/Hezbollah offensive to drive rebel forces out of Aleppo is making much progress. While the Russians likely found many lucrative rebel targets in the first few days of their aerial offensive, such targets are becoming harder to find so that Russian aircraft are reduced to more indiscriminate bombing of villages in the path of the offensive.  Despite the increased foreign involvement this civil war still has a long way to go. There will be little impact on the oil markets in the short term, but in the longer term the ever increasing animosities threaten still more disorder in the region and an increased flow of refugees into Europe.

Down in Iraq things are not much better. The cholera epidemic is spreading and the World Health Organization has announced plans to vaccinate some 255,000 Iraqis to contain the outbreak which was occasioned by the ever deteriorating sanitary and water situation.

Kurdistan’s decision to walk away from its oil deal with Baghdad in June and try to survive by selling its own oil and that produced from the northern Iraq oilfields is not going well. Recent reports say that the Kurds are not paying the companies producing the oil and are using all the revenue to run the government and feed the ever increasing numbers of refugees fleeing into their province.

Saudi Arabia/Yemen: To add to its troubles, Yemen is about to be hit by a hurricane, the first in recorded history, that could bring as much as eight years rain to parts of the country in one day. The indiscriminate Saudi bombing and coalition offensive against the Houthis continues. Yet another peace conference is scheduled for the middle of the month while the humanitarian crisis continues to get worse.

Standard and Poor’s has downgraded its credit rating of Saudi Arabia due to the low oil prices, the size of the national deficit, and the pace that it is burning through its currency reserves. A new analysis says that the Saudis now require $100 a barrel oil in order to sustain their current budget. This is up from the $69 dollars a barrel it took to sustain the budget in 2010.

Riyadh is looking to reduce its budget expenditures. However, this comes at a time when the monarchy is expanding its involvement in regional affairs and is buying peace at home with generous subsidies. The gasoline subsidy that costs the government some $86 billion and results in 46 cents a gallon gasoline is under study as a candidate for the much needed belt tightening.  Although such a move would result in a backlash from a population that has become used to cheap gasoline, the government may have little choice left. As the situation now stands, the Saudis are on course to deplete their fiscal reserves by the end of the decade unless there is a substantial increase in oil prices or a reduction in government spending.

Concerns are rising about the slowly increasing average temperatures that are engulfing the region. A recent report says that much of the Middle East around the Gulf may not be inhabitable by the end of the century much less be capable of producing oil. Even this report may be too optimistic as last summer work in some cities around the gulf had to be suspended due to unbearable temperatures. The issue seems to be just how long it will take for temperatures and the lack of water to impact the oil industry.

3.  China

PetroChina announced last week that its net income for the third quarter has fallen by nearly 89 percent year over year while product sales were down about 2 percent.  As could be expected, the company attributed this decline to low oil prices, a weak global economy, and slow domestic economic growth. China Petroleum & Chemical Corp. (Sinopec) suffered a 92 percent drop in earnings.  Sinopec’s sales in the quarter declined by 3.4 percent as contrasted with 5.3 percent growth in the 1st half of the year. It is numbers like these that are raising concerns as to whether China’s GDP is really increasing at around 7 percent as the government is claiming.

Few realize that China’s steel industry has exploded in the last 15 years with production increasing from 128 million tons in 2000 to 823 million in 2014.  This boom led to large increases in imported iron ore which in turn led to mini-booms for key suppliers such as Australia. The increased steel production went to build the forest of new high-rise buildings that now dot China’s landscape. With the slowing of the building boom Chinese steel companies shifted to exports which hit 11 million tons a month or 80 percent of the steel production of the EU. President Xi recently told the British that China was committed to eliminating excess capacity and that more reductions are planned beyond the 78 million tons that have already been shut down.

Some say that China’s gross steel making capacity may be as high as 1.2 billion tons per annum and that at least 300 million tons is excess to the country’s needs even with the large exports. Here again we have evidence of deep-seated troubles in China’s economy which could curtail oil imports in coming years.

In the last two years, a combination of a slowing economy and efforts by the Communist Party to clean-up the life-threatening air which exists in parts of China has resulted in a 2.9 percent drop in coal consumption in contrast to a recent annual growth of about 9 percent. This change in policy could result in a more cooperative Chinese position at the December climate control talks. The decline in the growth in China’s demand for electricity to nearly flat this year and a estimated modest 4 percent growth rate between now and 2020 should allow renewables, natural gas and nuclear to satisfy the need for more electricity burning coal. As in the case of declining steel production, a 4 percent or less rate of growth in electrical power consumption is hard to square with claims of a circa 7 percent GDP growth. Beijing says that its economy is switching to more services and does not require as much electricity to grow.

4. Russia/Ukraine

In October Moscow’s oil production may have set a post-Soviet production record of 10.77 million b/d. The Russian oil industry has been able to withstand the low prices simply because export and oil-extraction tax rates fall along with prices and the devalued ruble has kept the ruble value of Russian oil exports roughly level. For Russian energy firms, the costs of extraction are paid in rubles. In short, Russian oil companies have been insulated from the immediate effects of the sanctions and the low prices. The Russian government has been bearing the brunt of the lower oil prices because of its tax policies and is considering a tax increase. In the meantime, Russia’s sovereign wealth fund is falling rapidly. Moscow’s finance minister said last week that after 2016 the fund will be depleted should it continue to be used to cover budget deficits.

Like its oil industry, Russia’s steel industry had been doing well on its exports due to the devaluation of the ruble. As the year rolled on however a 40 percent drop in steel prices eliminated the advantage Russian steelmakers had in competing with foreign producers. Russian demand for steel this year now is estimated to fall by 10 percent as compared with 2014.

The efficacy of Moscow’s intervention in Syria is starting to be questioned. Although the indiscriminate bombing of rebels and towns opposed to the Assad government has bought some time and certainly has jump started negotiations about the future of Syria, many are starting to say that Russia is getting itself in a quagmire. Should the downing of a Russian tourist plane over the Sinai last week turn out to be the result of a terrorist bomb, Moscow will start to appreciate just what it is getting into.

5.  The Briefs

LNG worries: When the International Energy Agency published a report four years ago heralding a “golden age of gas” it seemed little could derail a bright future for the energy source. Now, with prices slumping and demand in key consuming countries like China looking shaky, the energy industry’s optimism about gas seems to have fizzled out. Particular concern hovers around the market for liquefied natural gas. (10/30)

The Trans-Adriatic Pipeline Consortium planning to send more non-Russian gas to the European market said it was on pace to start construction by next year. TAP is slated to transport natural gas from the second phase of the Shah Deniz natural gas field off the coast of Azerbaijan as early as 2019. (10/30)

Turkmen pipeline: Roughly 15 years in the making, a multilateral agreement on the planned Turkmenistan- Afghanistan-Pakistan-India natural gas pipeline was signed during meetings in Ashgabat, the capital of Turkmenistan. (10/27)

Norway’s sovereign wealth fund, the world’s largest thanks to its decades of oil exports, posted its biggest loss in four years, dragged down by Chinese stocks and Volkswagen AG, just as the Norwegian government prepares to make its first ever withdrawals to plug budget deficits. The $860 billion fund lost $32 billion in the third quarter, or 4.9 percent. (10/28)

Eni, Italy’s largest oil producer, reported a net loss in the third quarter after crude prices slumped. The adjusted net loss was 257 million euros compared with net income of 1.17 billion euros a year earlier. (10/29)

Royal Dutch Shell reported its biggest net loss in at least a decade as it wrote down the value of assets and lowered its oil-price expectations. The company, which is buying BG Group Plc in the industry’s largest deal this year, reported a third-quarter net loss of $7.42 billion, compared with a profit of $4.46 billion a year earlier. It took charges totaling $7.89 billion following its withdrawal from Alaskan offshore exploration and a Canadian oil-sands project. (10/29)

BP said that its capital spending, known as capex, for this year would now come in at close to $19 billion, down from a previous estimate of under $20 billion, and capex would fall to $17-19 billion a year through to 2017. This is the third time the company has reduced its 2015 capex target from an original goal of $24-$26 billion. (10/27)

In Saudi Arabia, government spending has increased substantially in recent years. Consequently, the breakeven oil price rose to $106 a barrel in 2014 from $69 a barrel in 2010. As a result, with the large decline in oil prices, the fiscal deficit has increased sharply and is likely to remain high over the medium-term. (10/27)

Iran has proposed to swap oil and gas with Russia.  According to the proposal, Iran would receive natural gas, oil and oil products from Russia through its northern terminals and would sell equivalent volumes of the same products to Russia’s clients through its southern terminals. (10/26)

China’s private energy company ENN Energy Holdings is in negotiations with several LNG suppliers to secure more than 1 million mt/year of LNG over a five- to 10-year period starting from 2018. (10/29)

A Chinese holding company signed a letter of intent to purchase oil and gas assets in the Permian basin of West Texas for $1.3 billion through a limited liability partnership. (10/27)

In Nepal, the ‘unofficial’ border blockade by India has hit the business sector hard. Many industries across the county are on the verge of closure while there is an acute shortage of essentials, especially petroleum products. (10/31)

Fuel-starved Nepal has signed an agreement with China to import gasoline, diesel and cooking gas, effectively ending a monopoly on supply from India, which has restricted fuel convoys as a result of political protests in the Himalayan nation. (10/31)

Offshore Mozambique, Statoil and Eni were among those winning bids to explore for potential reserves in waters where depths range from 650 feet to 5,900 feet. A Statoil official said Mozambique waters are among the more promising frontier basins in the area where the oil potential is said to be “significant.” (10/31)

In Africa, sliding commodity prices have put currencies from Ghana to Zambia under pressure, forcing governments to scale back spending as debt rises and prompting central banks to implement aggressive monetary policy tightening to curb inflation. Resisting currency pressure depletes foreign-exchange reserves and results in weaker imports and economic growth, The IMF recommends that Sub-Saharan African countries allow their currencies to weaken to absorb shocks to their economies. (10/27)

Angola is Africa’s second-largest oil producer and is one of the countries hardest hit by the fall in oil prices. The oil crash forced Angola to slash its 2015 budget by US$17 billion (a 25% reduction). Construction companies are having difficulties paying their workers, and the Angolan central bank has devalued the currency. (10/30)

Nigeria’s economy is growing at the slowest pace this decade as oil prices drop. Companies are complaining they can’t get the dollars they need to do business. And trading in the naira has long since dried up. While Nigeria has chosen currency stability, other oil exporters from Russia to Colombia and Malaysia have let their currencies slide.  The cost to Nigeria is slowing growth. (10/30)

Venezuela is running out of money fast and has started selling its gold. The cash-strapped country could default by next year when $15.8 billion of debt payments are due. Venezuela’s reserves, which are mostly made up of gold, have fallen sharply this year as the country needs cash to pay off debt and tries to maintain its social welfare programs. (10/30)

For Brazil’s pre-salt formations, oil majors had big plans, but you can’t tell by looking at the country’s offshore drilling these days. Nine years after the major discoveries, the promise remains unrealized: Spain’s Repsol SA and China Petrochemical Corp. are the only foreigners operating an offshore drilling rig. While the crude-price collapse and an ongoing graft probe are part of the story, Brazilian officials who failed to auction enough exploration licenses and slowed approvals with miles of red tape were also major contributors to the boom that never came to be. (10/29)

Suncor, the largest energy company in Canada, reported total production for the third quarter of 566,100 barrels of oil equivalent per day, up 9 percent year-on-year, because of strong results from British output and Canadian oil sands operations. (10/30)

In Western Canada, Royal Dutch Shell said Tuesday it would abandon the undertaking of a major oil-sands project and take a $2 billion write-down, a stark reflection of the challenging economics for unconventional oil projects amid a sharp slump in crude prices. (10/28)

In Canada, Justin Trudeau’s rise to power has met with anxiety in the oil patch, where the legacy of his father’s wildly unpopular energy policy still incites “riots at cocktail parties”. Oil executives face the end of nearly a decade of oil-friendly Conservative power under Stephen Harper. (10/28)

Keystone pipeline: Years of politicking has held up construction of the pipeline, but the political winds are shifting and the heavy crude is making its way to refineries by other means. After almost a decade, barrels of Canada’s heavy oil sands have made their way to the Gulf Coast by hook or by crook – or, more often by rail or by truck – while the KXL remains in limbo. (10/30)

US natural gas futures tumbled below $2 per million British thermal units Tuesday amid mild weather and surging output from shale basins. Supplies on the Gulf Coast, the biggest onshore producing region, are already breaking records, and U.S. inventories are poised to reach unprecedented levels before winter temperatures boost demand. If meteorologists’ predictions of a warmer-than-normal winter are correct, a stockpile glut to the five-year average will persist into next year. (10/30)

The US reported stocks of crude and refined fuels continue to climb. Most of the stock build has occurred in crude petroleum and the middle distillates used for road diesel and home heating oil, while gasoline stocks have remained relatively normal. The result has been a marked weakening of diesel prices relative to gasoline since the second quarter of the year which has spread from the United States to Europe. (10/27)

US exports nixed: Several US companies have sought permission from the Obama administration to export crude oil to European, Asian, African and Latin American countries, but have been rejected because they have failed to qualify for strict exemptions to long-standing crude export restrictions. Specifically, the companies could not prove the oil could not be remarketed in the US. (10/30)

Modest reset: A pipeline to America’s largest oil hub is about to find itself in an unfamiliar position: not full. The drop in supply this December coincides with the opening of a pipeline to Quebec, giving shippers the option of diverting some oil from the middle of the U.S. One analyst anticipates “some significant rebalancing of where oil flows in North America.” (10/27)

SPR sales: The U.S. plans to sell 58 million of barrels of crude oil from its Strategic Petroleum Reserve from 2018 through 2025 under a budget deal reached on Monday night by the White House and top lawmakers from both parties. The proposed sale equates to more than 8 percent of the 695 million barrels of reserves. (10/28)

The US oil rig count has now declined for nine consecutive weeks. There are now 64% fewer rigs from a peak of 1,609 in October 2014. According to Baker Hughes, the number of gas rigs rose by four to 197 while oil rigs declined by 16. (10/31)

Offshore Atlantic: Industry supporters have started an ad blitz in southern U.S. states, arguing offshore oil and gas exploration can exist side-by-side with the environment. They say opening Atlantic basins up to oil and gas drillers would bring net benefits to the region. (10/31)

Oil output angle: A year after the bear market in crude began, oil companies have cut workers, are using fewer rigs and have less money to spend. But they’re still pumping more oil. Total U.S. output is about 1.6 percent higher than at this time last year, even as drilling rigs have fallen by 63 percent. (10/31)

The Texas Railroad Commission, the state’s energy regulator, reports a preliminary estimate of crude oil production in August was about 2.41 million barrels per day. That’s an increase of nearly 8 percent year-on-year. (10/28)

Cost declines nearly over? In West Texas, Occidental said the cost for a 4,500-foot well has fallen 45 percent from a year earlier to $6.3 million now. The company said on a call with analysts it expects costs to come down more, but did not say by how much. Mark Hanson, an analyst for Morningstar in Chicago, said the days of huge price cuts are nearly over. “I don’t think there is going to be meaningful reduction from here,” he said. “To use a baseball analogy, you are probably in the seventh or eighth inning.” (10/31)

Oil executives of most large investor-owned companies are standing by promises to protect dividend payouts from the collapse in crude prices even as they fire workers, cancel drilling projects and sell everything from oil fields to aircraft to conserve cash. (10/30)

Oklahoma Gov. Mary Fallin signed an executive order calling on all state agencies, boards and commissions to outline plans to cut non-essential expenses by 10 percent for the rest of the fiscal year and for the 2017 fiscal year, which begins July 1, 2016. Lower tax collections from oil and gas production in the state are cited as a key factor, given that the energy industry is the state’s largest private sector employer.  The state’s rig count is presently at 90, down 55% from last year at this time. (10/28)

In Alaska, lawmakers are wrestling with a stark reality: if they tap the state’s supply of natural gas in order to ship LNG, they’ll end up with less oil. That’s because the natural gas in fields like Prudhoe Bay is re-injected into wells to pressurize the oil field and increase oil production. Take away that gas and access to some of the 2.5 billion barrels of producible oil in Prudhoe Bay is lost. (10/28)

Macondo effect: The ripples of BP’s Deepwater Horizon disaster have been clearly felt by the industry. That experience informed the decision by US regulators to require Shell to have a containment dome on site in Alaska’s Chukohi Sea and to have a backup rig available to drill a relief well in the case of a blowout in the harsh Arctic. Shell, to its credit, complied with all that was asked. But as a result, it became economically impossible to carry out a robust exploration program offshore Alaska. That reality led the Interior Department to cancel the remaining lease sales. (10/27)

BP has been complaining for a long time that many claims filed after its April 2010 oil spill in the Gulf of Mexico were phony. Now there’s more evidence to back that up, including a $46,000 claim filed on behalf of a dog named Lucy Lu. (10/31)

Marathon Oil becomes the first major shale producer to cut its quarterly dividend, reducing it by 76% in an effort to prop up cash holdings as oil prices hold below $50 a barrel. (10/30)

Marathon Petroleum Corp., citing “market conditions,” has canceled a major upgrade of its 522,000-b/d Garyville, La., refinery. The company referred to what would have been a $2.2-2.5-billion project as ROUX, for “residual oil upgrade expansion.” (10/31)

Occidental Petroleum Corp. reported a third-quarter loss on sliding crude prices, a slump in production tied to the spin-off of the company’s California business, and write-downs of the value of oil and natural gas fields. The company lost $2.61 billion, or $3.42 a share, compared with net income of $1.21 billion, or $1.55, a year earlier. (10/28)

ConocoPhillips’ good news/bad news: Conoco’s net production from the US, including struggling Alaska, increased over the last 12 months. From lucrative Texas and North Dakota shale basins, output increased by 10 percent from third quarter 2014. From Canada, production increased 14 percent and, from the Middle East and Asia, output increased by 10 percent from last year. However, Conoco also reported a third quarter net loss of $1.1 billion, compared with a net profit of $2.7 billion in third quarter 2014. Capital spending for 2015 was lowered by about 7 percent to $10.2 billion. (10/31)

Anadarko Petroleum reported an overall loss of $2.24 billion compared with a profit of $1.09 billion a year earlier. (10/28)

Batteries: A breakthrough in electrochemistry at Cambridge University could lead the way to rechargeable super-batteries that pack five times more energy into a given space than today’s best batteries, greatly extending the range of electric vehicles and potentially transforming the economics of electricity storage. Chemistry professor Clare Grey and her team have overcome technical challenges in the development of lithium-air batteries. (10/30)