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Thursday, 05/23/2019 10:12:53 PM

Thursday, May 23, 2019 10:12:53 PM

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Peak Oil Review: 8 April 2019

By Tom Whipple, Steve Andrews, originally published by

Quote of the Week

““Fast [nuclear] reactors are less safe, less secure and more proliferation-prone than light-water reactors. The US Department of Energy should not be asking taxpayers to spend billions on this dangerous reactor.” Ed Lyman, senior scientist with the Union of Concerned Scientists

1. Oil and the Global Economy

London’s oil prices broke through the $70 a barrel barrier last week to close at $70.34. New York futures were some $7 behind to close at $63. Oil prices gained around 30 percent in the first quarter with London and New York posting their best quarterly performance in the last ten years. Behind the unexpected surge in oil prices – US gasoline is up 50 cents a gallon – are the US sanctions on Iran and Venezuela and the OPEC+ production cut. The restraints on production joined with stronger-than-expected demand for oil products to produce the price increase.

Although the IMF is saying that the clouds of a global economic slowdown are gathering, for now the forces pushing prices higher have the upper hand. Last week what could be the beginning of a civil war broke out in Libya threatening the country’s 1 million b/d oil production. Heavy rains are flooding the region where most of Iran’s oil is produced – likely reducing output in the immediate future. Finally, Venezuela is moving towards a total societal collapse with the likelihood of much lower oil exports in the coming weeks.

Then we have indications that the rapid growth of US shale oil production may be slowing as Wall Street holds back on pouring still more money into a money-losing industry. This situation could change if oil prices return to levels of ten years ago or if the Sino/US trade dispute is settled. In sum, the global oil situation is more volatile than usual with many uncertainties ahead.

The OPEC Production Cut: The cartel’s production in March fell to its lowest level since February 2015, as Saudi Arabia cut more than it had pledged under the output deal and Venezuela continued to contend with the US sanctions and a series of power blackouts. There is an unusually large disagreement between Reuters and Platts, with the former estimating that OPEC’s production fell by 280,000 b/d last month and Platts suggesting it was 570,000 b/d. Much of this disagreement seems to be over how much oil Caracas was able to export between power outages that stopped exports for about a week last month. Iraqi exports were down by about 100,000 b/d due to bad weather at its export terminal.

The rate of compliance from the eleven OPEC members bound by the pact—with Iran, Venezuela, and Libya exempted—also suggests that the Saudis and their Arab Gulf partners are deepening the cuts in order to drive prices higher.

Various OPEC ministers have been suggesting during the last few weeks that the production cut needs to be extended when the cartel+ meets in June. Russia has been saying it sees no need for an extension, and with oil prices back above $70 a barrel, it is difficult to make a case for extending the cuts. Should production in Venezuela and Libya fall dramatically in the next two months the loss of exports from these two countries could be larger than the OPEC+ cuts.

US Shale Oil Production: Average daily crude oil production slipped during January for the first time in nearly six months, according to an EIA monthly report, which was based on better information than the weekly production estimates. January oil production for the US averaged 11.871 million b/d for January—down from 11.961 million b/d in December of last year. The January production decline, a falling-off in oil well productivity, a drop in the rig count, and reports that Wall Street is going to slow financing for shale oil drillers who consistently lose money all suggest that change is coming.

US crude production surged in 2018, with overall production rising by 1.7 million b/d to a record 10.9 million. That was the biggest year-over-year increase in output, according to EIA data going back to 1859. The 2018 surge led to optimistic predictions that large increases would continue for the next few years. Financial writers are now suggesting that rapid growth in US shale oil production will soon shift to a plateau, putting more pressure on the OPEC+ consortium to increase output in June.

Even the ever-optimistic EIA trimmed its 2019 production forecast from 12.4 million b/d to 12.3 million. Morgan Stanley also cut its projection for this year by 100,000 b/d due to well “productivity improvements slowing, the rig count rolling over” and guidance from exploration and production companies.

In response to the demands of investors, the small drillers have been cutting spending in response to years of losses. Although Exxon and Chevron are expanding in the Permian Basin, independent companies are not. While the major oil companies plan to spend about 16 percent more on US drilling and completions in 2019 versus last year, the independent exploration and production companies are expected to cut spending by around 11 percent.

Lower amounts of oil are also being delivered per well, slowing the rate of output growth. In the Permian Basin, per-well productivity is projected to fall by about 6 percent this month compared with a year ago, according to the EIA. This development likely reflects an inevitable reduction in the number of productive sweet spots which is forcing drillers to less profitable locations. The course of this trend and oil prices will determine just how much longer shale oil production in the US remains viable.

Another sign of trouble ahead is the drop in the value of merger and acquisitions deals in the US. In the first quarter, the value of these deals plunged 93 percent to a 10-year low as investors began insisting that shale oil producers start to show profits rather than just increased production.

Colorado’s legislature passed a sweeping overhaul of the state’s oil and natural gas laws, giving local governments more power to regulate drilling. The bill, which passed the state Senate amid intense industry opposition, now heads to the desk of the governor, a longstanding proponent of tightening public health and safety standards around oil and gas development. Much of the shale boom in Colorado is concentrated in the relatively dense suburbs north of Denver, which means, unlike the fracking in West Texas and North Dakota, drillers often bump up against homes, businesses, and schools.

Natural gas prices fell into record negative numbers in the Permian basin last week. Natural gas in West Texas is produced as a byproduct. This dynamic helps explain how natural gas prices at the Waha hub in West Texas can fall to a negative $3.38 per million BTUs as producers are paying others to take the gas away. In North Dakota, excess gas is flared despite restrictions, but Texas is imposing stiffer controls.

2. The Middle East & North Africa

Iran: Khuzestan province in southwestern Iran was hit by the worst flooding in 70 years last week. About 1,900 cities and towns have been affected, and some 100,000 people were evacuated to shelters. The province is the center of Iran’s oil industry which has undoubtedly been interrupted by the flooding putting still more pressure on the government which is having trouble coping with the US sanctions.

After a meeting with the Iraqi prime minister last week, President Rouhani said he is ready to expand gas and electricity trade with Baghdad and develop a plan to connect their railroad systems.

Washington’s sanctions waivers which allow eight countries to import oil from Iran are due to expire in six weeks. Oil prices are once again on the rise, as they were six months ago when the Trump administration buckled under the pressure of $80 oil and granted the waivers. Three of the eight countries with waivers have reduced their imports of Iranian crude to zero, and the US says it is not planning to extend them. In the last three months, however, oil prices have been climbing rapidly – partly due to the new US sanctions on Venezuela — with oil prices already in the low $70’s and likely will be higher in a month or so. This situation may force Washington to extend the waivers or face still higher oil prices.

Iraq: Oil exports fell to an average of 3.377 million b/d in March, the Oil Ministry said on Monday, as poor weather interrupted loadings. February loadings were 3.62 million b/d. The severe weather also forced a cut in production at some oilfields including Majnoon, where output declined in mid-March by 140,000 b/d from 240,000 b/d earlier in the month. Basra is close to Iran which currently is suffering from severe flooding so Iraq’s problem may continue into early April.

Iraqi Prime Minister al-Mahdi and Kurdistan‘s Prime Minister Barzani ignored a request to sign pleadings in the court case aimed at settling the long-standing oil dispute between the two governments. Observers say this is a sign that neither side is eager to have Iraq’s highest court decide on their disagreement over the division of oil revenues.

Saudi Arabia: In anticipation of its $10 billion international bond sale, Aramco was forced to issue its first public financial statement since the firm was nationalized nearly 40 years ago. Last year Aramco had earnings of $224 billion and said it has oil and gas reserves of 257 billion barrels which could last for 50 years at the current rate of production. The big surprise in the prospectus was the revelation that the giant Ghawar oil field is only able to produce 3.8 million b/d rather than the 5.8 million b/d that the EIA said it could produce last year.

The news sparked a debate as to whether Saudi production is starting to decline. During a presentation in Washington in 2004 Aramco tried to debunk the “peak oil” supply theories of the late US oil banker Matt Simmons by claiming the field was pumping more than 5 million b/d. The new maximum production rate for Ghawar means that the Permian in the US, which produced 4.1 million b/d last month, is already the world’s largest oil production basin.

Saudi Arabia is threatening to sell its oil in currencies other than the dollar if Washington passes a bill exposing OPEC members to US antitrust lawsuits. The chances of the US bill known as NOPEC coming into force are slim, and Saudi Arabia would be unlikely to follow through on their threat. Should the Saudis abandon the dollar, it would undermine its status as the world’s primary reserve currency, reduce Washington’s clout in global trade, and weaken its ability to enforce sanctions on nation states.

Libya: The political situation underwent a sea change last week when General Haftar, who controls eastern and southern Libya, ordered his troops to march on Tripoli to oust the UN-backed government and take over the country. Heavy fighting is taking place south of Tripoli and militias from Misrata are moving to support the government. The US is moving an unspecified number of troops somewhere in the area and foreigners are evacuating the capital.

When the order to attack Tripoli was given, the UN secretary-general was in Libya trying to broker a solution to the split government by organizing a conference scheduled for next week. This effort now is dead. Many Libyans distrust Haftar who they see as a potential dictator.

Libya has been split for five years between a UN-backed government in Tripoli and rival government in the east under the control of General Haftar. The Tripoli government is protected by an array of militias including a particularly strong one in Misrata. Haftar has been supported by Egypt, the UAE, and Russia.

An important question is what happens to oil production if the fighting is prolonged. Libya recently increased production to over 1 million b/d which could be threatened by a civil war. It was Haftar’s forces who recently moved on the Sharara 315,000 b/d oilfield and restored production there.

3. China

President Trump said last week that the US and China are hoping to reach a trade deal in the next four weeks, though he failed to announce a much-anticipated summit with Xi Jinping. Mr. Trump and his trade team say negotiations are in their final stages, but caution that daunting issues remain—including when to lift punitive tariffs against Chinese imports, protection of US intellectual property and enforcement of the pact’s provisions. There are “major issues left,” US Trade Representative Robert Lighthizer said. “We’re certainly making more progress than we would have thought when we started.”

Chinese factory activity unexpectedly grew in March for the first time in four months, suggesting that the government’s stimulus measures may be starting to take hold. If sustained, the improvement in business conditions could indicate that manufacturing is on a path to recovery, easing fears that China could slip into a sharper economic downturn. But analysts remained cautious, citing seasonal distortions due to the long Lunar New Year break in February.

China’s three state oil and gas companies plan to increase their spending on oil and gas by 20 percent this year, bringing the total to some $74 billion for the first time in five years. Some observers are skeptical that plowing this much money into aging oil fields will pay off with much of a production increase.

China will be able to build six to eight nuclear reactors a year once the approval process gets back to normal according to the chairman of the China National Nuclear Corporation. “That should be enough to meet our country’s 2030 development plans.” China did not approve any new projects in the wake of Japan’s Fukushima disaster until it permitted the construction of two new reactor complexes in southeast China earlier this year.

4. Russia

Moscow’s oil output declined to 11.298 million b/d last month, missing the target set under OPEC+ deal to cut oil production. The March output was down by around 112,000 b/d from the October 2018 level, the baseline of the global deal; however, Russia had pledged to cut its oil output by 228,000 b/d from the October level. Energy Minister Novak said last week that the country’s oil production in April would be in line with the OPEC+ deal.

Rosneft, the largest oil producer in the country, plans to develop an Arctic cluster of oil fields over the next five years. These plans fit President Putin’s ambitions to develop Arctic oil and gas resources and adjacent regions, as well as the Northern Sea Route to the Far East. Russia’s Arctic oil development has stalled in recent years due to the western sanctions that have had international majors, including ExxonMobil, pull out of some exploration projects in Russia.

5. Nigeria

Exxon Mobil may sell the oil and gas fields it holds in Nigeria and has commenced talks on the sales as it focuses on US shale and the new field offshore Guyana, industry and banking sources told Reuters. The potential sales are expected to include stakes in onshore and offshore oil fields and could raise as much as $3 billion. The development followed a statement from the Nigerian National Petroleum Corporation that it would no longer sign off any gas project without plans for stopping natural gas flaring.

Exxon declined to comment on the development, adding that the oil company, which is one of the largest oil and gas producers in Nigeria with 106 operating platforms, is producing about 225,000 b/d in the country.

Petroleum Minister Emmanuel Ibe Kachikwu admitted that reducing oil production to the quota assigned by OPEC is a challenge because of the start of production at the Egina offshore oil field with a capacity of 150,000 b/d.

The petroleum minister has tasked local Nigerian operators to step up their investments and take over operations from international oil companies, especially as many are already considering divesting and charting new paths. The minister emphasized the need to double oil production to 4 million b/d as against the current output of between 1.9 to 2 million b/d. According to the minister, changes in the global oil and gas industry are presently challenging the exploration and investment strategies as oil is fast becoming a degenerating asset with alternative sources of energy taking over.

6. Venezuela

President Maduro announced 30 days of electricity rationing after a third blackout hit the struggling the country early last week. Maduro said rolling blackouts would help the government deal with the power failures that have also affected water supply and communications.

Reuters says that PDVSA was able to keep exports near 1 million b/d in March despite power outages that halted pumps at the main export terminal for at least six full days. The company was able to offset the power failures by loading mainly very large tankers bound for Asia and the company already had the oil to be exported in storage. Venezuela at one time was shipping close to 3 million b/d and still appears to have the ability to load 1 million b/d in three weeks of pumping.

A more severe problem in the weeks ahead is the status of the four crude upgraders which convert the very heavy Orinoco oil into a transportable and marketable crude. The four upgraders have a combined capacity of 700,000 b/d and are mostly operated jointly with the help of partners from the US, Russia, France, and Norway. A large percentage of Venezuela’s crude exports is coming from these facilities as the rest of the country’s oil production is crumbling due to lack of maintenance.

Two of the upgraders have been out of service since the March 7th blackout while the other two stopped production after the March 25 blackout. Work continues on cleaning up the mess when the power goes off unexpectedly. Three of the upgraders may be back in partial operation later this month, but one is expected to be out of service indefinitely. One source told Reuters that PDVSA has canceled all shipments of upgraded crude during April. If this is true, and Venezuela does not have much marketable crude in storage, exports could plummet this month pushing oil prices much higher.

Vice President Pence announced that the US is adding 34 PDVSA owned or operated vessels to the sanctions list. The sanctions not only target the PDVSA vessels but also two firms that transport Venezuela crude oil to Cuba. Pence said that this may not be the final addition to the sanctions list as the US mulls even more sanctions, this time targeting the financial sector.

7. The Briefs (selections from the press – date of article in Peak Oil News is in parentheses – see more here:

EU oil Co’s to electricity: European oil companies have started to address what they worry may one day be an existential threat to their business — the end of a century of oil demand growth in a low carbon world. The emergence of the electric vehicle and demand among investors and consumers for cleaner energy to limit climate change has pushed the European side of Big Oil to take baby steps towards refocusing their businesses from oil production and refining to electricity via natural gas and renewables. (4/4)

Saudi Aramco made $111 billion in net income last year, according to rating agency Moody’s Investors Service, making the oil and gas firm the most profitable company in the world. Moody’s and Fitch Ratings published snapshots of Aramco’s financials on Monday as they rated the oil firm ahead of a $10 billion Aramco bond sale expected as soon as this week. (4/1)

Egypt will remove subsidies on most energy products by June 15 it told the International Monetary Fund in a January letter released as part of a review of Cairo’s three-year, $12 billion loan program with the lender. Removing the subsidies will mean increasing the price to consumers of gasoline, diesel, kerosene and fuel oil, which are now at 85-90 percent of their international cost. (4/6)

Tanzania’s government will start this month talks with major international firms to define the commercial terms for a deepwater liquefied natural gas project off the coast of the east African country expected to be worth $30 billion. Major international companies have been exploring for gas offshore Tanzania and have found sufficient quantities for a potential LNG plant. (4/5)

Ecuador loses again: The Supreme Court of Canada dismissed claims attempting to force Chevron Corp’s Canadian unit to pay a $9.5 billion judgment handed down in Ecuador against the US oil major over pollution in the Andean country. Residents of Ecuador’s Lago Agrio region have been trying to force Chevron to pay for water and soil contamination caused from 1964 to 1992 by Texaco, which Chevron acquired in 2001. The villagers obtained a judgment against Chevron in Ecuador in 2011. But the company has no assets in the country. (4/5)

In Colombia, state-run oil company Ecopetrol and Exxon Mobil have each signed joint contracts with Spain’s Repsol to explore for oil in offshore blocks in the Caribbean. Colombia recently modified contractual terms for offshore exploration and launched a permanent bidding process to boost its long-stagnant oil sector. Companies including Shell, Noble, and Parex have since signed on to operate new blocks. The two contracts will generate some $700 million in investment. (4/4)

In Canada, the stubborn, sharp rise in heavy crude prices may finally falter later this year, when swelling output overwhelms a pipeline system that will be lacking a key project producers had counted on, according to Deloitte. Western Canadian Select crude prices have more than doubled since the end of November, buoyed by the Alberta government’s output limits for drillers in the province. (4/4)

The US oil rig count increased last week by 15 to 831, up from 808 rigs one year ago, according to GE’s Baker Hughes. Active gas rigs climbed by four to 194, bringing the total rig count to 1,025. The following states added rigs: Texas (8) West Virginia (4) New Mexico (3) Alaska (2) Colorado (2) North Dakota (1). Among the major basins, the Permian saw the most gains as it added eight rigs while the Marcellus added another three. (4/6)

Total weekly US crude and product exports should be consistently outpacing imports starting in 2020. Thanks to hydraulic fracturing and horizontal drilling, crude production has boomed 140 percent over the past decade. During 2018, for instance, output rose nearly 25 percent, even more impressive since domestic prices (WTI) had fallen 23 percent to $46 per barrel by the end of December. (4/5)

SPR debate: US Congress should debate whether to reduce the emergency crude oil stored in the Strategic Petroleum Reserve (SPR) because America’s oil production boom has diminished its reliance on imports, US Secretary of Energy Perry said at a Senate hearing on Tuesday. The Strategic Petroleum Reserve is a US Government complex of four sites with deep underground storage caverns created in salt domes along the Texas and Louisiana Gulf Coasts. As of March 29, 2019, the SPR held a total of 649.1 million barrels of crude oil. (4/4)

Keystone pipeline…again: President Trump on Friday signed a new permission for TransCanada Corp to build the long-delayed Keystone pipeline for imports of Canadian oil, replacing his previous permits in a fresh attempt to get around the blocking of the $8 billion project by a court in Montana. (4/6)

In Colorado, new legislation changing regulation of the oil and gas industry is arguably much weaker than a public referendum from last year that would have imposed state-wide setback distances. The law in question only grants localities the ability to set their own, rather than state-wide setbacks. Moreover, there will be a lengthy rulemaking process, so any fallout for the industry won’t be immediate. Some localities in favor of drilling may not impose limits at all…While Wall Street has grown more skeptical of the shale industry in general, Colorado-focused drillers have been particularly hit. (4/5)

CA’s oil off-ramp: The shale revolution that has transformed the US oil and gas industry has completely passed California by. Not that long ago, California was the second most important US oil-producing state. Since peaking in 1985, however, output has plunged almost 60 percent to 460,000 b/d. This collapse is made even more discouraging by the fact that total US crude oil production has been soaring to record heights. The inevitable result of plummeting production amid high consumption is that California is forced to import 70 percent of the oil that it needs. With the collapse of Alaska’s production, foreign sources now supply almost 60 percent of California’s crude oil, compared to just 15 percent 20 years ago. (4/4)

In Ohio, Royal Dutch Shell is on track to revitalize the Rust Belt by building the first major factory in the region since 1992. The massive polyethylene plastics plant being constructed along the Ohio River 30 miles outside of Pittsburgh will cover a whopping 386 acres. The estimated price tag of $6 to $10 billion (with a $1.6 billion package in reduced taxes over 25 years granted to Shell by the state of Pennsylvania) makes the factory one of the most significant industrial projects ever developed in the area. (4/3)

California is escalating its battle with the Trump administration over cars and climate change, filing suit Friday to demand that two federal agencies release data they used to justify a rollback of auto emissions standards. The lawsuit by the state Air Resources Board says the Trump administration failed to show it met requirements to take meaningful input from state officials while it crafted a new proposal to ease emissions standards. (4/6)

MPG vs. vehicle type: Does the higher occupancy of SUVs compensate for their higher energy consumption per vehicle distance when considering energy consumption per occupant distance? Barely. The results from a recent study are shown in the table below (4/3):

EVs in NC: Duke Energy is proposing a $76-million initiative to spur EV adoption across the state of North Carolina—the largest investment in electric vehicle infrastructure yet in the southeastern US. In a filing with the North Carolina Utilities Commission, Duke Energy outlined its program that will provide incentives to customers. It will also lead to a statewide network of fast-charging stations to meet growing demand.

US weekly coal production was estimated to be 10.5 million tons for the week ended March 30, down 6.6 percent from the previous week and down 26.3 percent from the year-ago week, US EIA data showed Thursday. This was the fifth week in a row of decreases from the year-ago week. (4/5)

German coal shutdown: President Frank-Walter Steinmeier received on Wednesday the symbolic ‘last piece of black coal,’ marking the end of Germany’s two centuries of hard black coal production, while the country struggles to keep up with European peers in curbing emissions. Germany closed its last black coal mine in December 2018. In January this year, Germany became the latest important European economy to lay out a plan to phase out coal-fired power generation. (4/4)

Nuclear power appeals as being a source of reliable electricity without causing greenhouse gas emissions. But new reactors are so expensive that in many countries they are unable to compete with cheap gas and coal or renewable energy sources. If new nuclear plants are to play any significant role in curbing future emissions in developed economies, their costs are going to have to come down a long way. That is the argument underlying the recent upsurge in interest in new nuclear technologies, including small modular reactors (SMRs). (4/5)

The rapidly dropping cost of renewable energy has upended energy economics in recent years, with new solar and wind plants now significantly cheaper than coal power. But new research shows another significant change is afoot: The cost of batteries has been declining so rapidly that renewables plus battery storage are now cheaper than even natural gas plants in many applications, according to a new report by Bloomberg New Energy Finance. BNEF reports that electricity prices for onshore wind, solar PV and offshore wind have fallen by 49 percent, 84 percent, and 56 percent respectively since 2010. Costs for lithium-ion battery storage have dropped 76 percent since 2012 — and plunged 35 percent in the past year. (4/5)

Nuke $ overrun news: The flagship of the Trump administration’s advanced nuclear power research program could cost about 40 percent more than a government official estimated earlier this year, a US Department of Energy document shows. Energy Secretary Rick Perry has tried to breathe life into the country’s nuclear power industry, which is suffering in the face of competition from plants burning cheap natural gas as well as falling costs for wind and solar power. Perry announced the versatile test reactor, or VTR, in late February, saying it was a “key step to implementing President Trump’s direction to revitalize and expand the US nuclear industry,” and critical for national security. (4/5)

RE & batteries: Billionaires are spending more on renewable energy, storage, and battery technology. A group of them even set up a $1-billion fund, Breakthrough Energy Ventures, to encourage research in these areas, aiming “to make sure that everyone on the planet can enjoy a good standard of living, including basic electricity, healthy food, comfortable buildings, and convenient transportation, without contributing to climate change.” One big reason for this is that there is more technology to invest in. (4/2)

Corn production: A new study finds that environmental damage caused by corn production results in 4,300 premature deaths annually in the United States, representing a monetized cost of $39 billion. The paper, published in Nature Sustainability, presents how researchers have estimated for the first time the health damages caused by corn production using detailed information on pollution emissions, pollution transport by wind, and human exposure to increased air pollution levels. (4/2)

India’s polluted air: According to an independent study by the International Institute for Applied Systems Analysis (IIASA) and the Council on Energy, Environment, and Water (CEEW), more than 674 million Indian citizens are likely to breathe air with high concentrations of PM 2.5 in 2030 even if India were to comply with its existing pollution control policies and regulations. (4/1)

In Germany, a top Volkswagen group executive said that the group alone is responsible for around 2 percent of global carbon emissions, about the same amount that Germany emits. It’s almost one percent for cars and one percent for trucks. Germany, in comparison, accounts for nearly 2.2 percent of C02 emissions. (4/4)

British Columbia-based Carbon Engineering has shown that it can extract CO2 cost-effectively. It has now been boosted by $68 million in new investment from Chevron, Occidental and coal giant BHP. But climate campaigners are worried that the technology will be used to extract even more oil. (4/4)

Canada is warming twice as fast as the rest of the world, a landmark government report has found, warning that drastic action is the only way to avoid catastrophic outcomes. The report, released late on Monday by Environment and Climate Change Canada, paints a grim picture of Canada’s future, in which deadly heatwaves and heavy rainstorms become a common occurrence. (4/3)

PEAK WATER #board-12656