Quote of the Week

“When interest rates fall, this tends to allow oil prices to rise, and thus allows increased production. This postpones the Peak Oil crisis, but makes the ultimate crisis worse…Falling interest rates between 1981 and 2014 are one of the things that allowed Peak Oil to be postponed for many years…. Peak Economy is likely not very far away. We do not need to encourage it, by raising interest rates and selling securities held by the Federal Reserve. We badly need more people to understand the connection between interest rates and oil prices, and how important it is that interest rates not rise.”

Gail Tverberg, actuary and commentator (8/16)

Graphic of the Week

1. Oil and the Global Economy

Oil continues to trade in one of the narrowest ranges seen in the last decade as the efficacy of the OPEC production cap weighs against increasing US and other production increases and slowing Chinese demand. Last week saw oil prices falling for three days and then rebounding sharply on Friday to close at $48.50 in New York as a combination of a large drop in US crude stocks, a weaker US dollar, and a falling rig count supported prices.

Some see a rebalancing of the markets underway as US crude inventories fell for the seventh consecutive week and the oil markets moved into a state of “backwardation,” which is when near-term futures contracts trade at a premium to contracts dated further in the future. This is the first time in years that backwardation has been seen, and many analysts are taking it as a sign that the markets are rebalancing.

Some are starting to predict that oil prices will move back above $100 a barrel by 2020. They maintain that US shale and other new oil production will not be able to keep up with the growth in global demand and point to the sharp drop in the oil industry’s capital expenditures in the last few years. There would seem to be little to refute the argument that three or four years from now oil prices will be substantially higher.

The more immediate issue is what will happen in the next 18 months. Will oil be stuck in the current trading range around $50-60 a barrel? Will increasing US shale oil production, back-sliding OPEC members, and weaker Chinese demand push prices lower? Or will the increase in US shale oil production slow as production costs increase and Wall Street loses interest in financing failing companies. Arguments are being made on all sides of this issue.

The OPEC Production Cut : Another meeting of the OPEC/NOPEC joint technical committee is scheduled for Monday, August 21st to evaluate the production freeze and recommend changes. There seems to be a consensus that unless deeper production cuts take place, the desired rebalancing and higher prices will not return in the immediate future. Many believe that higher prices in the immediate future will simply encourage more US shale oil production that will replace OPECs shut-in oil production. Some fear that ending the production cap too quickly will force oil prices back to $40 or lower. Many believe the only viable option is to wait for another seven months until the current production cap expires at the end of next March and see what prices are next spring.

The wildcard in this situation is Venezuela where the geopolitical situation is deteriorating and likely will lead to an unintended cut of nearly 2 million b/d in global production. If Venezuela collapses in the next year or so we will undoubtedly see higher oil prices. Although some believe that higher prices are all the US shale oil industry needs to bring forth considerably more oil, others see trouble ahead as the lower cost sweet spots in the US start to run dry.

US Shale Oil Production : The EIA reported last week that total US crude production increased to 9.5 million b/d for the week ending 11 August, up 79,000 b/d from the week earlier. This puts US crude production at the highest level in two and a half years. It is interesting that production gains continued through the price downturn in June that brought prices close to $40 a barrel. While a few producers may be making money at this price point, most need oil to be above $50 a barrel to turn a profit.

Wall Street has been patient with the shale oil industry allowing debt levels to climb while looking forward to large profits when oil again is selling for above $70 a barrel again. Lost in all this exuberance is the issue of how much the “efficiencies” the oil industry is claiming to have accomplished in the last few years are simply due to price deflation for oil field services. Now that the industry is booming again and demand for services is well above supply, the breakeven prices could be moving much higher soon, especially as the more productive sweet spots are becoming harder to find.

Optimism for the future of the US shale oil industry is not hard to find. Industry-friendly analytical firms continue to crank out reports saying that US shale oil production will be hundreds of thousands of barrels higher by the end of the year and keep growing. These reports, of course, are aimed at persuading Wall Street to keep financing losing propositions. A few remain skeptical that shale oil boom will last much longer and say there are already solid indications that rates of growth are starting to slow. Some are saying that by the early 2020s, the great US shale oil boom will be over and production will be falling rapidly.

2. The Middle East & North Africa

Iran : Most of the important news from Iran last week has to do with President Trump and the possible canceling of the nuclear treaty. Most observers believe that Tehran is complying with its end of the deal and are concerned that the US continues to pile on sanctions making it harder to revive its economy amidst low oil prices. Iranian President Rouhani is threating to revive its nuclear programs probably including nuclear weapons development “within hours” should the US renounce the agreement. Given the disarray in the White House at the minute, it is difficult to see where this issue is going. The US’s partners in the agreement are dead set against a US pull-out which in the end could settle the matter.

In the meantime, Moscow and Tehran are concluding a deal which would barter 500,000 b/d of Iranian oil in exchange for Russian goods and equipment. This would remove the problem of any banking sanctions imposed on either country.

Saudi Arabia : The Saudis produced some 10.0 million b/d of crude in June and exported 6.8 million b/d of those barrels. As usual, the kingdom increased its direct-burn use of crude in June to produce the electricity needed to air condition the country during increasingly warmer summer months. Saudi domestic oil consumption is now running about 2.6 million b/d.

The Finance Ministry reported Saudi oil revenue in the second quarter was around $269 billion which is up 28 percent from the same quarter last year. With the price of Brent up by only $4.40 or 9 percent from last year, the jump in Saudi oil revenues shows how sensitive the Saudi oil industry is to even minor changes in price.

Libya: Libya’s Sharara oilfield, the country’s largest, has been shut down since Saturday because of a pipeline blockade. State-owned National Oil Corporation (NOC) declared force majeure on loadings of Sharara crude from the Zawiya oil terminal on Sunday. Sharara had been producing up to 280,000 b/d in recent weeks. The field has experienced several temporary shutdowns because of protests by armed groups and oil workers since it reopened last December after a two-year pipeline blockade.

Libyan National Army (LNA) commander Khalifa Haftar—the man responsible for recapturing the country’s oil ports and essentially restarting production—is meeting top officials in Moscow. Haftar is the key political and military rival to the Western-backed central government in Tripoli, and his trip to Russia indicates a fragile game of alliances that could upset the delicate balance of control over Libyan oil. Haftar has visited Russia at least twice in the past year and has been forging friendly relations with Moscow, while the US supports the internationally recognized Government of National Accord (GNA).

3. China

One of the most influential analysts of China’s financial system believes that bad debt is $6.8tn above official figures and warns that the government’s ability to enforce stability has allowed underlying problems to go unchecked. Charlene Chu says “Everyone knows there’s a credit problem in China, but I find that people often forget about the scale. It’s important in global terms.” Chu estimates that bad debt in China’s financial system will reach as much as $7.6 trillion by the end of this year, more than five times the value of bank loans officially classified as non-performing. That estimate implies a bad-debt ratio of 34 per cent, well above the official 5.3 per cent ratio for those two categories at the end of June.

Such warnings have been increasing in recent years as Beijing continues borrowing to support high rates of industrial growth. So far, the government has been highly successful in fostering economic growth however much investment has gone to infrastructure projects such as high-speed rail networks which are of dubious economic value.

China’s demand for oil seems to be losing momentum. Last week Beijing’s oil refining slipped to 10.7 million b/d, the lowest in seven months. This may be another sign that China’s oil demand that has been supporting oil prices for years may be moderating. Some believe that China’s strategic reserve tanks are nearly full and that smaller oil imports are in the future. This side of the equation may be significant in determining where oil prices and the OPEC cap are going in the next year.

China expects that its natural gas consumption will increase by 10 percent in 2017 as the country tries to reduce its use of smog-producing coal. US natural gas exporter Cheniere Energy is setting up an office in Beijing to negotiate long-term sales to Chinese industry.

The government has approved a plan for its two state nuclear developers to promote a single integrated nuclear reactor brand that will help speed up construction and strengthen their ability to compete in markets overseas. China is in the middle of an ambitious nuclear program that could bring total capacity to as much as 200 GW by 2030. The Chinese hope to increase sales of nuclear reactors abroad, but approvals have been slow.

China’s energy demand now is forecast to peak by 2040, later than the previous forecast of 2035, as transportation fuel consumption continues to rise through the middle of this century. Energy consumption in China, the world’s second-largest economy, will peak at 4.06 billion tons of oil equivalent, up from the previous forecast of 3.75 billion tons.

4. Russia

Gazprom says that the new US sanctions on Russia will have no impact on any of its key projects. The company also reports that its gas exports are moving higher as it begins to supply consumers that will be fed by the new gas pipeline to be constructed through Turkey.

Lukoil, one of Russia’s largest energy companies, reports a slight dip in oil production in the second quarter due to lower production from its Iraqi projects.

5. Nigeria

President Muhammadu Buhari returned to Nigeria on Saturday after spending more than three months in London seeking medical treatment. The 74-year-old President has not made any public appearances during this period or addressed the country directly apart from a short voice message to wish Muslims a happy Ramadan.

Protesters continued to occupy a Shell crude oil facility in the Niger Delta last week after storming the flow station demanding jobs and infrastructure development. Echoing a common complaint in the impoverished swampland that produces most of Nigeria’s oil, the protesters said they were not benefiting from the region’s oil wealth and wanted an end to the oil pollution that has ruined much of the land. Protesters numbered around 800 people.

Petroleum Minister, Ibe Kachikwu, says the high cost of oil production at $32 per barrel makes the cost of foreign direct investment very expensive. The minister said that the Federal Government was making frantic efforts to bring down the cost to $15 per barrel to significantly bring down the cost of investment. The Nigerian National Petroleum Corporation said yesterday that the country had saved a minimum of $3 billion per year by cutting the cost of crude oil production from $78 per barrel to $23 per barrel as at August 2015, representing 70.5 percent reduction.

Illegal oil refiners in Rivers State have vowed to continue their operations until the Federal Government provides them with empowerment. The refiners, who are of Ogoni extraction, noted that they cannot leave their only source of survival until the Federal Government provides them an alternative.

6. Venezuela

The pro-government constitutional assembly seized the powers of the opposition-led Congress last week, in a move that has the oil industry nervous that Trump will make good on his economic sanctions threat. The move further intensifies the decline of democracy that led Trump last week to threaten economic sanctions that could remove Venezuelan oil from the US refining market. It also comes after Trump indicated that a ‘military option’ was not off the table. As Venezuela disintegrates politically and economically, big oil is urging Washington to refrain from resorting to economic sanctions against the country, the third-largest supplier to the US.

Venezuelans who express “hate or intolerance” will be jailed for up to 25 years under a bill pending in the country’s newly-formed constituent assembly, a measure the opposition fears will be used by the government to further crackdown on dissent. President Nicolas Maduro has faced a cacophony of international criticism – from the United Nations to Pope Francis – since he installed the 545-member assembly stacked with Socialist Party members.

Venezuela’s alliance with Russia is “perfect,” the president of state oil company PDVSA said last week. Reuters published a Special Report revealing that Venezuela’s unraveling socialist government is increasingly turning to Russia for the cash and credit it needs to survive and offering prized state-owned oil assets in return.

Venezuelan state oil company PDVSA’s revenue from oil and fuel sales in 2016 dropped 34 percent from the previous year to $48.0 billion, the company said in its annual financial results published Friday night, hurt by lower production and oil prices. Net profit crashed nearly 90 percent to $828 million from $7.3 billion the previous year.

7. The Briefs (date of article in Peak Oil News is in parentheses)

Arctic passage: The Christophe de Margerie, an LNG carrier commissioned by French Total, has become the first tanker to pass the Arctic unaided and is now en route to its destination in Asia, the South Korean port of Boryeong. (8/19)

Royal Dutch Shell’s decision to sell electricity directly to industrial customers in the UK is a creative and strategic shift. It demonstrates that oil and gas majors are capable of adapting to a new world as the transition to a lower carbon economy develops. For those already in the business of providing electricity, it represents a dangerous competitive threat. For the other oil majors, it poses a direct challenge on whether they are really thinking about the future sufficiently strategically. (8/14)

Russian scientists and local oil field services companies claim to have created a technology for thermochemical gas fracturing that could be an alternative to hydraulic fracturing and could increase oil production by between 1.7 and 6 times. (8/18)

In Russia, scientist Mikhail Yulkin, the director general at the Center for Environmental Investments, stated that nearly all of the world’s coal reserves and 30 percent of its oil should be left alone in order to keep climate change at bay. (8/17)

Japanese upstream companies are looking to tight oil to supplement dwindling domestic output and may seek to use the experience gained to become involved in similar projects abroad. Japan Petroleum Exploration intends to seek out further prospects by the end of March 2020 over three years since the drilling of Japan’s first horizontal exploration well in the Onnagawa tight formation. (8/14)

Vietnam vs. China: The drilling ship at the center of a row between Vietnam and China over oil prospecting in disputed waters in the South China Sea has arrived in waters off the Malaysian port of Labuan. Drilling by the Deep-Sea Metro I ship was suspended in Vietnam’s Block 136/3 last month after pressure from China, which says the concession operated by Spain’s Repsol overlaps the vast majority of the waterway that it claims as its own. (8/14)

Indonesia: Hit by a drop in global prices, changing regulations and competition from neighbors that are proving more attractive to international energy companies, Southeast Asia’s biggest economy is facing a decline in oil revenue and steadily rising fuel imports. (8/15)

In India, consumers could well be buying their last petrol or diesel car. Stanford University’s Tony Seba says electric vehicles could bring about a massive transportation disruption in India as early as 2020. Seba’s warning comes as passenger vehicles in India in the financial year 2016-17 grew at 9.24 percent, the fastest rate of growth in six years, most of which run on diesel. (8/19)

In Brazil, not too long-ago state oil company Petrobras was the most indebted oil & gas company in the world. But that’s all changing. Now, thanks to new management and their recently-discovered pre-salt wells, Brazil is the comeback story of the year. Discovered only 10 years ago, Brazil’s pre-salt area has rapidly become the biggest oil-producing area in the country. (8/14)

The US oil rig count decreased by five last week to 763, according to Baker Hughes Inc. Gas rigs were up by one to 183. Canada lost 6 oil rigs this week, with the number of gas rigs holding steady—for a total of 214 oil and gas rigs. (8/19)

SPR oil sale: The US Department of Energy said on Tuesday it will sell 14 million barrels of crude oil from the nation’s emergency reserve in late August. The sale from the Strategic Petroleum Reserve was expected as it was required under laws signed by former President Barack Obama in 2015 and 2016 to help fund medical research and the overall federal government. (8/16)

Anadarko swagger: With more than 10 percent of the new wells drilled in US shale basins, Oklahoma has earned a place in new monthly data reporting, the government said. The shale basin covers 24 counties in Oklahoma and five in Texas. Oklahoma is home to about 4 percent of the total petroleum reserves in the country and accounts for as much as 5 percent of the total crude oil production in the United States. The EIA said the Anadarko basin is a legacy producer that’s seen an uptick in activity from the STACK and SCOOP reservoirs within the broader shale area. (8/16)

America’s shale gas production is about to surge 12 percent. Sort of. The Energy Department issued a report Monday estimating that the nation’s prolific shale formations will yield 59.4 billion cubic feet a day in September, a massive jump from the roughly 53 billion projected for August. The difference: The agency began including the more than 6 billion cubic feet a day of gas flowing out of the Anadarko basin of Oklahoma and Texas. The addition of the Anadarko is a testament to the flood of gas flowing out of shale formations known better for their oil riches. Almost half of the country’s shale gas is now being produced in crude plays, pulled out of oil wells as a byproduct. (8/16)

Sand bagged? US shale oil companies are pulling back on the amount of sand they use to hydraulically fracture new wells, responding to rising prices of the material that are driving up costs. Investors worry a slowdown in sand use, combined with new mining capacity coming online, could lead to a glut of the material and bring down prices. (8/16)

Lobby against exports: Industrial Energy Consumers of America, an industry trade group, said Washington’s domestic focus should prioritize the retention of natural gas, rather than target it for the export market. A report from the US Energy Information Administration found the US could be the third-largest exporter of liquefied natural gas in the world by the end of the decade. (8/18)

Major oil producers pushed up high bids at a Gulf of Mexico offshore auction to $121 million on Wednesday, a nearly seven-fold increase from a year ago, as their return to deep water exploration gained momentum. This compared with $18 million in high bids at the Bureau of Ocean Energy Management’s (BOEM) Outer Continental Shelf auction last summer. The round of bids offered to come with a 12.5 percent royalty rate on leases at less than 200 meters, 18.75 percent for those at depths greater than 200 meters. These are favorable rates designed to entice new bids. (8/17)

Offshore push: After a rebound in the value of high bids for oil and gas acreage in the Gulf of Mexico, industry supporters said it was time to push for greater access. The American Petroleum Institute is pushing after the first lease in the Gulf of Mexico during the Trump Administration, which itself favors greater access. (8/19)

Offshore pushback: The Trump administration is facing increasing pressure from governors of East Coast states to keep federal Atlantic waters out of the five-year oil and natural gas leasing plan it hopes to finalize late next year. Several East Coast governors, including Republicans and supporters of President Donald Trump, have ramped up pressure on the administration to keep the Atlantic out of the 2019-2024 federal offshore lease plan. (8/19)

Shale vs. offshore: Amid strong indicators that US shale production will reach new heights by the end of 2017, efforts to promote further exploration and production in the Gulf of Mexico, long a center of US energy output, have run into some headwinds. Some even doubt that Gulf production, much of it from expensive off-shore rigs, can compete in the “lower for longer” price climate that will likely endure through the end of 2017. (8/17)

Offshore peak? The EIA has more recently estimated GOM production in 2018 to average 1.91 million bpd, a record level. While new production is spiking in 2017, the forecast looks grimmer. The off-shore active rig count has been falling since 2014, while the number of development and exploratory wells has also been in decline. With strong support from the Trump Administration, off-shore drilling in the Gulf of Mexico may continue to perform, despite low prices and stiff competition. But the current environment and “lower for longer” thinking may stymie additional off-shore development in the future. (8/17)

Mergers among offshore oil drillers are raising hopes that consolidation could bring relief to a sector struggling to emerge from an industry downturn triggered by low crude prices. Transocean Ltd, one of the world’s largest offshore drilling contractors, on Tuesday agreed to buy Norwegian rival Songa Offshore SE for $1.1 billion. The deal follows Ensco Plc’s pending purchase of Atwood Oceanics Inc. in a transaction valued at $839 million. (8/16)

Alaska, the final frontier, may be the next oil industry gold mine thanks to aggressive drilling, changing environmental policies, and a bullish administration. Not all Alaskans, however, are onboard with the transition, and the issue is now more divisive than ever. (8/18)

Record gasoline demand: Given all the media hype about peak oil demand — which is supposed to come about largely as a result of the explosive growth of electric vehicles (EVs) — you might be forgiven for missing the news that US gasoline demand just hit a new all-time high. (8/15)

Gasoline exports: Motor club AAA reports a national average retail price for a gallon of regular unleaded gasoline at $2.34 for Thursday. The price per gallon is still about 10 percent higher than this time last year. One possible reason is that the US is exporting more gasoline, which offsets some of the expected gains from growing domestic production. (8/18)

Gasoline production by US refiners and blenders has run near record levels over the first seven months of 2017, with four-week rolling average production well above its five-year average and close to the top of its five-year range. US gasoline inventories also remain relatively high despite growing domestic and foreign demand. (8/18)

Energy Secretary Rick Perry faces stepped-up pressure from environmental groups over a power grid study that he has signaled could help bolster coal and nuclear power. On Monday, the Sierra Club announced it filed suit in US District Court for the Northern District of California, alleging that the Energy Department violated laws on public access to information by not responding to its Freedom of Information Act requests for communications between the agency and outside groups, such as fossil-fuel interests. The suit asks the court to force the department to turn over those records. (8/16)

Biofuels regs: The US EPA used too strict of a test when it wrongfully denied Sinclair Oil’s request for an exemption from the country’s biofuel regulations, a US appeals court ruled on Tuesday. The ruling could potentially broaden the rules governing such exemptions, forcing the EPA to grant more in future years under the controversial Renewable Fuel Standard program. (8/16)

Floating solar power: Lakes and ponds used by water utilities have long been viewed with a single purpose: holding water. Now a handful of pioneering water utilities are looking at their aquatic real estate with a new purpose in mind: solar energy generation. Large-scale floating solar projects have been installed in Japan and China, as well as on ponds at California wineries. (8/18)

Hyperloop? CEO Dirk Ahlborn of Hyperloop Transportation Technologies says he sees a working hyperloop, which would propel passengers across vast distances in pods at speeds of up to 750 miles per hour, within the next three or four years. Introducing the magnetic transit technology is now the subject of a feasibility study in South Korea for a 200-mile loop between Seoul and Busan. (8/16)

Record heat: Earth yet again sizzled with unprecedented heat last month. The National Oceanic and Atmospheric Administration said Thursday Earth sweated to its second hottest month since recordkeeping began in 1880. (8/18)