Quote of the Week



"We think 1,000-1,200 [U.S. oil] rigs will keep production steady. With 800 rigs [now], we should see production decline in the second half of the year. We might see a little more rigs lost, but the majority of the fall is behind us."

— Francisco Blanch, analyst at Bank of America



1. Oil and the Global Economy



It was another volatile week with trading dominated by the prospects for the Iranian nuclear agreement. When the preliminary agreement outline was announced on Thursday, oil prices dropped, but rebounded as it became clear that a final nuclear agreement that would allow increased Iranian exports is still many months away. At the close Thursday (Friday was a holiday), oil was trading at $49.14 in New York and $54.95 in London, which left the WTI/Brent spread at $5.81 down from $7.01 on Wednesday.



US employment figures released last week showed an abrupt slowdown in hiring during March. This news will likely lead to a slowdown in any Federal Reserve plans to increase interest rates and thereby strengthen the dollar which in turn would bring downward pressure on oil prices.



The steep decline in oil prices and the drop in drilling rigs has left the markets more confused than usual as to where prices will be six months from now. Current estimates by major financial institutions range from roughly $50 to $90 a barrel, which is the widest spread in the last eight years. Among the major factors bearing on prices in coming months are the pace of the decline in US shale oil production; the increase in demand brought on by low prices; the course of China’s economy; and whether a nuclear settlement with Tehran will actually come into effect.



The precipitous drop in the US drilling rig count has slowed considerably in recent weeks, with the count down by only 23 rigs in the last two weeks as compared to a drop of 94 rigs during the last week in January. A new study by David Hughes of the Post Carbon Institute concludes that the hype about large increases in productivity due to “new technology” from shale oil rigs simply is not true. Hughes concludes from recent data that productivity of new shale oil wells is declining despite the concentration on sweet spots and reduction of well spacing. The bottom line is that the US shale oil boom seems to be drawing to a close for geologic reasons as well as uneconomic oil prices. This suggests that US shale oil production will decline in coming years even if there is a substantial jump on oil prices and that little further increase can be expected.



There was news last week on climate change policy and emissions regulations that are likely to have an impact on oil and other fossil fuel consumption in coming years. California has been forced to impose its first mandatory water restrictions. Local water supply agencies in the state will be forced to reduce water supply by 25 percent to non-agricultural customers. Moreover, the hydrologists are telling us that aquifers under the state are dropping rapidly so that they can no longer serve as a backup source of water during droughts. At some point the situation in California seems likely to become so serious that the majority of the Congress will have to reconsider climate change policy.



On Tuesday the President revealed his plans for cutting greenhouse gas emissions in the US by nearly a third over the next decade. The new plan came as part of the US submission to the UN in advance of its next meeting on global climate change to be held in Paris this December. The recent EPA rules on emissions from power plants are currently being considered by the Supreme Court as lawyers for some power companies and some states seek to have them overturned on the grounds that they are too costly and unnecessary. As could be expected, the court seems to be dividing along ideological lines.



2. The Middle East & North Africa



Iraq/Syria : The situation continues to deteriorate. ISIL’s forces have been cleared from Tikrit, after collation aircraft began bombing ISIL strong points with precision munitions. As could be expected, the Shiite militias that overran the city engaged in widespread looting and burning of homes and summarily executed some of the Sunnis who did not flee the city. The situation became so bad that some militias had to be sent back to Baghdad. This development, which was widely expected, dampens the possibility that there will be a meaningful reconciliation between the Sunnis and Shiites in Iraq which has been the basis of US policy towards the country. The battle for Tikrit is just a harbinger of what will happen when Baghdad’s counterattack gets to Mosel.



Baghdad’s oil situation is doing somewhat better, despite the 50 percent drop in oil prices. Iraqi crude exports rose 15 percent in March to the highest in 35 years despite bad weather at the Basra export terminal. A four-mile line of supertankers is sitting off Basra waiting to haul away oil. Contract renegotiations with the foreign oil companies that are producing all this oil have begun. The original contracts, which left the foreign oil companies with little or no profit from their efforts, specified a fee in money for each barrel produced. The fee was to be paid in oil so that as the price of oil fell, the amount due the foreign oil companies are due has doubled. This has Baghdad very unhappy so that it has asked to renegotiate the contracts so that the foreigners don’t get so much oil.



Things are not going well for the Assad government in Syria. A rebel force, composed of US sponsored Free Syrian Army and al-Qaida affiliates have captured the main border crossing point into Jordan, a major trade route for Syrian merchants. The insurgents looted everything in sight at the crossing point and are holding 10 to 20 Lebanese truck drivers as hostages.



ISIL forces have overrun the Yarmouk Palestinian refugee camp just outside Damascus. The Assad government has formidable defenses between the camp and the city so there would seem to be little chance that ISIL will get into Damascus in the near future. The possibility of a still worse humanitarian crisis for the 18,000 out of the original 160,000 refugees still living in the camp is growing.



The overall situation in Syria/Iraq continues to deteriorate. While oil production from the rich oil fields of southern Iraq continues to increase, the geopolitical situation gets worse with every passing day despite the involvement of the US and other coalition forces. As fighting takes place, much of the two countries is being turned into rubble with refugees streaming towards foreign lands which are increasingly reluctant to let them in.



Libya : The ever-optimistic National Oil Company, which does not seem to be under much control of any government, said last week that oil production was up to 564,000 b/d and is expected to increase. The internationally recognized government in Tobruk is still planning to divert oil revenue to an account in the UAE and not to the National Oil Company accounts in Tripoli that are accessible to the rival government.



Switching the oil revenues would destroy the time-tested central banking system which continues to keep the country functioning by paying the salaries of the many Libyans on all sides of the conflict that are considered to be working for the government. Destroying the central banking system would almost certainly send the country into yet deeper chaos.



Iran : It will be some time before we know just whether the preliminary nuclear accord will change relationships in the Middle East or simply become another in a long line of failed negotiations. With three months to go before the final treaty is to be signed, opponents of the deal in Washington, Tehran, Israel, and elsewhere are doing their best to derail an accord. Nearly all observers agree that it will be 2016 before the deal could have a major impact on Iranian oil exports. The only exception to this is the 20-30 million barrels that Tehran is believed to have accumulated in floating storage, which could be sold immediately if the sanctions are lifted. This is a relatively small amount as compared to the 1 million barrels a day that is being shut-in by the sanctions, so that its impact on prices would be likely to last only a few weeks.



It should be clear by now that the US cannot do sufficient damage to Iran’s economy with its own sanctions, but that a program involving the UN, the EU, and even some help from Iranian oil consumers such as India and China is needed to really hurt Tehran. If an agreement is not reached in June, it is unlikely that the US by itself would be able keep sufficient pressure on Tehran should the EU and most other countries pull out of the current sanctions programs. Should the talks fail, and given the current state of the Middle Eastern situation, Tehran would likely fell impelled to move ahead on building a nuclear deterrent against the Israelis and anyone else who could threaten it. This could set off a nuclear arms race, with the Saudis making efforts to obtain nuclear weapons, possibly from Pakistan.



If the Israelis should decide to take preemptive action against Iran, the region would be in for a lengthy round of hostilities, which would be almost certain to slow or even stop oil exports from Gulf. Given the nature of the alternatives to the accord in its present form, other options would seem to lead to situations that are much worse or utter disaster if major hostilities were to ensue.



Yemen : Heavy fighting continued around Aden over the weekend. Foreign countries are evacuating their nationals; the power is out in many places; food is running short; Saudi bombing is continuing; and the UN fears that a major humanitarian crisis is brewing. So far there has been no threat to the oil shipments passing by Yemen, but the situation is only in its early stages with many possibilities in the future.



3. China



The state of China’s oil storage capacity is now seen key as to whether oil imports will continue at the current pace. While strategic and commercial reserves are a state secret in China, at the end of March a senior official in the oil industry said that China’s storage capacity was almost full. However, some observers believe that 132 million barrels of new storage capacity that was due to be completed last year will not be available until the second half of 2015, leaving still more storage tanks to be filled.



In the first two months of this year, Beijing imported an average of 6.62 million b/d and produced another 4.33 million domestically for a total available crude supply of 10.84 million b/d. Refinery runs in January and February were about 10.22 million barrels per day implying that 620,000 b/d have been going into storage in recent months. If large numbers of strategic storage tanks are still to be completed this year, it implies that Beijing may continue to import crude in excess of its current needs for many months.



4. Russia/Ukraine



Russian oil production in March hit a new post-Soviet high of 10.71 million b/d. Oddly enough, it was the weak ruble that allowed this increase to occur. Most revenues from the export of Russian oil come in hard currencies from foreign buyers. As the ruble fell the oil income when converted to rubles would buy more and more domestic services that the oil industry needs to increase production offsetting the decline in world oil prices if you are interested in buying goods and services inside Russia.



Last week Moscow signed a three-month agreement with Ukraine to sell Kyiv natural gas at $248 per thousand cubic meters vs. the $329 Kyiv paid in the first quarter. Moscow has been using natural gas prices to reward friends and punish enemies so that the price of gas is one of the major issues between the two countries outside of the separatist rebellion.



5. The Briefs



In Russia, ExxonMobil Corp. is seeking to change the way the taxation clause in the agreement on Sakhalin-1 –an oil and gas project in Russia’s far east in which it holds a 30% stake–is interpreted. ExxonMobil is seeking to be reimbursed for part of the income tax it has overpaid over the past six years, worth $500 million. (4/4)



Danish energy company Maersk Oil said it started production from Tyra Southeast-B, a North Sea platform that should provide Denmark with new reserves for the next 30 years. Peak production is expected by 2017 through investments of more than $650 million. The investment represents the largest ever made by a Danish energy consortium. (4/2)



Germany’s cabinet approved draft legislation effectively banning shale gas fracking for at least five years despite growing concern among business and western allies that the country is too reliant on gas imports from Russia. (4/2)



Saudi Arabia may issue sovereign debt for the first time since 2007 this year after oil’s decline sent its cash reserves plunging. Assets of the biggest Arab economy’s central bank tumbled by $20 billion in February, the largest monthly drop since at least 2000. The country has a debt-to-GDP ratio of about 2.6 percent, according to International Monetary Fund estimates, among the lowest in the world, and may now take advantage of record low interest rates and ample bank liquidity. (4/2)



India has bought the first oil for its strategic petroleum reserve trade sources said on Monday, marking the start of a round of purchases by the world’s fourth-biggest oil consumer to build up emergency stockpiles. (3/31)



In Australia, Chevron Corp.’s decision to pull out of a shale gas project after a plunge in oil prices follows earlier departures by ConocoPhillips, Hess Oil, and Statoil and is a signal it’s going to take even longer for the nation to realize its shale ambitions. Tapping Australia’s shale oil and gas was already challenging due to high drilling costs and the remote locations of its fields, with significant production forecast to be at least several years away. The languishing oil prices are stalling efforts to replicate the U.S. shale boom globally. (4/1)



The African Petroleum Producers Association, which represents oil and gas producers from Algeria to South Africa, called for a cut in oil output globally. It’s starting an initiative, led by Angola and Algeria, to seek collaboration between members of OPEC and other oil producers to reduce output and stabilize oil prices. (4/4)



In Nigeria, revenue received from crude oil sales, taxes, royalties and cash calls has decreased from $45 billion in 2011 to $32.3 billion in 2014, according to an IMF report. Additionally, between 2011 and 2014, oil production fell 7.5% from 2.38 to 2.19 million b/d largely due to stoppages associated with pipeline vandalism. (4/1)



In Nigeria, French oil giant Total said last Monday that it has sold its stake in an onshore oil field to a local company. Total’s sale comes after the French group made two similar divestments in Nigeria. The three transactions reached a sum of $1 billion. (3/31)



In the Falkland Islands, three oil companies announced Friday that they have discovered oil and gas at their jointly owned Zebedee well. The well will now be plugged and the rig will then drill the first exploration test in the southern part of the North Falkland basin. (4/2)



In Argentina, experts have kept a watchful eye ever since the US EIA identified the nation as holding the world’s second largest shale gas and fourth largest shale oil reserves. This translates to an estimated 802 trillion cubic feet of technically recoverable shale gas and 27 billion barrels of oil. Yet Argentina’s vast shale plays have remained comparatively idle. Politics and economics are largely to blame. Investor confidence in Argentina has been damaged by heavy-handed nationalist politics. Exploration and production in Argentina is also expensive. It costs an estimated $11 million per well, a figure drillers hope to bring more into line with international standards of $7 million by the end of the year. Whether this target is feasible remains to be seen. (4/2)



In Mexico, at least four people died after a fire broke out on an oil-processing platform in the Gulf of Mexico early on Wednesday, leading to the evacuation of 302 workers. The fire, which burned throughout the day, erupted overnight on the Abkatun Permanente platform in the oil-rich Bay of Campeche. Forty-five people were treated for injuries and 16 of them were hospitalized, two with serious injuries. (4/2)



In Texas, a new 200-mile long pipeline will carry natural gas from the Permian shale basin to an international connection at the Mexican border. When completed in 2019, the Roadrunner pipeline will have a capacity of 640 million cubic feet per day, at a construction cost of $450 to $500 million. (4/3)



US crude oil production (including lease condensate) increased during 2014 by 1.2 million b/d to 8.7 million, the largest increase since recordkeeping began in 1900. On a percentage basis, output in 2014 increased by 16.2%, the highest growth rate since 1940. Most of the increase during 2014 came from tight oil plays in North Dakota, Texas, and New Mexico. (3/30)



The number of US oil drilling rigs declined by 11 this week to 802, the smallest decline since December, oil services firm Baker Hughes said. The data compares with declines of 12 and 41 rigs in the prior two weeks and is a sign the collapse in drilling over the past few months has reached its low point. The total of 1,028 is the lowest count since Oct. 2, 2009, and 790 fewer units compared with this week a year ago. Despite the continued declines, Rystad Energy estimates US annual oil production —crude oil plus lease condensate—will peak at 9.7 million b/d in September assuming WTI averages $55 per barrel. (4/3)



US refiners are relying more on North American crude than at any time since 1986 as a glut of supply makes local oil cheaper than imports from overseas. Domestic production and imports from Canada and Mexico made up 85 percent of crude processed at U.S. plants in January, the most since March 1986. (4/2)



Exxon Mobil is considering scaling up plans for a multibillion-dollar expansion of its Beaumont, Texas, oil refinery to make it one of the largest in the world. Initially the company was considering doubling the current 344,600 b/d capacity by 2020. Now it may go as high as 850,000 b/d by the end of the decade, a figure that would make it the largest U.S. plant and fourth-largest in the world. (3/30)



For the Chukchi Sea off Alaska, the US Interior Department on Tuesday upheld a 2008 lease sale, moving Royal Dutch Shell a step closer to returning to oil and gas exploration in the Arctic since it suffered mishaps in the region in 2012. (4/1)



ConocoPhillips warned that workforce reductions should be expected at the company, driven by lower exploration and production activity due to low oil prices. (4/2)



In the thriving oil town of Midland, Texas, sales tax receipts fell during March, only the second decline in five years and one of the first signs of how low oil prices are beginning to ripple beyond oil company bottom lines and into the wider economy. (3/30)



In North Dakota, the clock kept ticking in March on a potential $5.3 billion, two-year tax break for the state’s oil industry after a calculated average of the month’s crude price fell below $52.59 per barrel. The state waives its 6.5 percent oil extraction tax if the monthly price of benchmark WTI crude at the Cushing, Oklahoma, transport hub falls below an inflation-adjusted limit, set at $52.59 per barrel for 2015, for five consecutive months. March’s price was $47.76 and February’s was $50.86. (4/4)



North Dakota will, starting Wednesday, require the more-than 1.2 million barrels of crude extracted each day from the state’s Bakken shale formation be run through machines that remove volatile gases linked to recent crude-by-rail disasters. The controversial step is designed to abrogate the damage North Dakota crude oil – 70 percent of which is transported via rail – can cause during derailments. (4/1)



Railed oil: EIA is providing monthly data on rail movements of crude oil, which have significantly increased over the past five years. The new data on crude-by-rail (CBR) movements are integrated with EIA’s existing monthly petroleum supply statistics, which already include movements by pipeline, tanker, and barge. Total CBR movement in the United States and between the United States and Canada was more than 1 million b/d in 2014, up from 55,000 in 2010. (4/1)



BNSF Railway aims to eliminate older tank cars from crude oil service and take additional steps to improve safety in North Dakota, the state’s governor said. Starting Wednesday, the rail company will require trains hauling crude oil to reduce their speeds in communities with more than 100,000 residents and work to remove all rail cars designated DOT-111 from service within a year and phase in newer CPC 1232 models. (4/2)



Enforcement: The Natural Resources Defense Council finds “it is virtually certain” many oil and gas violations are never reported because of inadequate enforcement. For example, Colorado, one of the states with an emerging shale oil and gas sector, had fewer than 40 inspection staff on hand to survey more than 52,000 wells. (4/3)



Big Oil pressure on scientist? In November 2013, Austin Holland, Oklahoma’s state seismologist got a request during a meeting with Continental Oil’s CEO Harold Hamm that that made him nervous. Hamm requested that Holland be careful when publicly discussing the possible connection between oil and gas operations and a big jump in the number of earthquakes, which geological researchers were increasingly tying to the underground disposal of oil and gas wastewater, a byproduct of the fracking boom. Before Holland became Oklahoma’s seismologist in 2010, there wasn’t much for Big Oil and state researchers to argue about. Over the previous 30 years, Oklahoma had averaged fewer than two earthquakes a year of at least 3.0 in magnitude. In 2015 the state is on pace for 875, according to Holland. Oklahoma passed California last year as the most seismically active state in the continental U.S. (3/30)



The North Dakota Industrial Commission has voted to join Wyoming in a lawsuit challenging a new rule issued by the US Department of the Interior’s Bureau of Land Management, which includes requirements for publicly disclosing chemicals using in hydraulic fracturing. (4/2)



The National Oceanic & Atmospheric Administration will be flying, for the rest of the month, above the basins from North Dakota to Texas collecting air samples to document if drilling is adding to ground-level ozone. (4/2)



In Texas, the House of Representatives’ Energy Resources Committee passed a bill that would rescind the fracking ban in Denton and other efforts by local Texas municipalities to protect themselves from the oil and gas industry. Once language in the bill is finalized, the legislation will make its way to the full Texas Senate for a vote. (4/3)



California oil producers used 214 acre-feet of water, equivalent to nearly 70 million gallons, in the process of fracking for oil and gas in the state last year, less than previously projected. The practice has been criticized in the state, which is suffering from a drought so severe that Governor Jerry Brown announced the first-ever mandatory 25 percent statewide reduction in water use on Wednesday. “Hydraulic fracturing uses a relatively small amount of water – the equivalent of 514 households annually,” said Steven Bohlen, the state oil and gas supervisor. (4/4)



Power switch: A city in the heart of the oil state of Texas is set to become one of the first communities in the US to wean its residents off fossil fuels. The municipal utility in Georgetown, with about 50,000 residents, will get all of its power from renewable resources when SunEdison Inc. completes 150 megawatts of solar farms in West Texas next year. (3/31)



Grid storage: Although pumped hydroelectric storage makes up most of the total electricity storage capacity in the United States, non-hydro storage has doubled in the electric power sector capacity from 160 megawatts to nearly 350 over the past five years. Non-hydro storage systems, which include compressed air, batteries, and flywheels, can provide fast-ramping capacity to cover sudden and unexpected gaps between electric demand and supply. (4/4)



In Turkey, a massive power failure that crippled life for almost 10 hours on Tuesday highlights the threats facing grids worldwide. Turkey’s most extensive power failure in 15 years, which left people stranded in elevators and traffic snarled, wasn’t the result of a lack of electricity. The prime minister said all possible causes — including a cyber-attack — were being investigated. (4/2)