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Oil prices are likely to stay below $80 per barrel for another five years, according to a closely watched energy report.

The International Energy Agency released its 2015 World Energy Outlook (WEO), with predictions for energy markets out to 2040. Although there are no shortage of caveats, the IEA projects that oil prices will only rebound slowly and intermittently, and the supply overhang will slowly ease through the rest of the decade. In its “central” scenario, it sees oil prices rebalancing in 2020 at $80 per barrel, with increases in the years following.

At issue, as always, is supply and demand dynamics. The IEA estimates that the oil industry will slash upstream investment by 20 percent in 2015, which will cut into long-term supply figures. Non-OPEC supply will peak before 2020 as a result of much lower investment, topping off at 55 million barrels per day.

U.S. shale will recover as prices rebound, but the IEA still sees it as a passing fad. As the sweet spots get played out in the U.S., and costs remain elevated compared to other sources of production from around the world, shale will not be around for the long haul. The IEA sees U.S. shale output plateauing in the early 2020s at 5 million barrels per day. Thereafter, it declines.

The IEA weighs a scenario in which oil prices don’t actually rebound in the medium to long-term, however. In this scenario, OPEC continues to pursue market share, U.S. shale remains resilient, and the global economy doesn’t perform as well as expected. All of that adds up to oil prices remaining at $50 per barrel through the remainder of the decade and only rising to $85 per barrel by 2040.

Of course, there is a flip side to that coin. Persistently low prices gut investment in new sources of supply, which sow the seeds for a supply shortage in the years ahead. As a result, prices could spike.

…click on the above link to read the rest of the article…

Venezuela Liquidating Assets As Economic Crisis Worsens

November 10, 2015

Venezuela Liquidating Assets As Economic Crisis Worsens

Venezuela is at a political crossroads, with an all-important parliamentary election set to take place in December. Meanwhile, the Venezuelan economy continues to deteriorate as the state seeks to stave off default and a brewing financial crisis.

The state-owned oil company PDVSA is looking to push off debt repayments that are due in 2016 and 2017, hoping to buy two more years of breathing room. Eulogio del Pino, the president of PDVSA, confirmed that the oil company completed debt payments of $4.2 billion that matured last month, and will pay another $1 billion due in the near future. But PDVSA is also seeking to work with bond holders to extend the deadlines for short-term debt until 2018 and 2019.

The comments from del Pino highlight the growing difficulty Venezuela is having in dealing with the collapse of crude prices. For a country that depends on oil exports for 95 percent of its export revenue, the bust in oil prices is hurting the South American OPEC member worse than most.

Bond prices for the government and PDVSA have collapsed, a development that del Pino blames on speculators seeking to drive down their value. Based on market sentiment, there is a strong consensus that Venezuela is facing the likelihood of default within the next year. Still, Venezuela thus far has been careful to meet debt payments, something that del Pino argued should give PDVSA credibility as it seeks to renegotiate maturity terms with bondholders.

But cash is running low. Gold reserves are falling sharply as Venezuela liquidates them to raise funds to meet debt payments. Also, the Wall Street Journal reported that Venezuela withdrew $467 million in cash reserves that it keeps with the International Monetary Fund, a sign that Venezuela is scrambling to raise as much money as it can.

…click on the above link to read the rest of the article…

What The Oil And Gas Industry Is Not Telling Investors

November 2, 2015

What The Oil And Gas Industry Is Not Telling Investors

Oil prices crashed because of too much supply, but will rebound as production shrinks and demand rises. But what if long-term demand for oil ends up being sharply lower than what the oil industry believes?

That is the subject of a new report from The Carbon Tracker Initiative, which looks at a range of scenarios that could blow up oil industry projections for long-term oil demand.

Historically, Carbon Tracker says, energy demand has been driven by population, economic growth, and the efficiency (or inefficiency) of energy-using technologies. Carbon Tracker looks at a couple possible future scenarios in which those parameters are altered, resulting in dramatically lower rates of oil consumption.

Carbon Tracker has been a pioneer in the concept of “stranded assets,” the notion that fossil fuel assets will lose their value as the world moves to restrict carbon emissions. If an oil field cannot be produced profitably in a carbon-constrained world – or cannot legally be produced because of certain regulations – then it ceases to have value. That puts investors’ dollars at risk, a risk that financial markets have not fully grappled with.

However, in a new report, Carbon Tracker expands upon the possible scenarios in which oil demand may not live up to industry predictions.

For example, if the world population hits only 8.3 billion by 2050 instead of the 9.7 billion figure typically cited by the UN, fossil fuel consumption could end up being 17 percent lower in 2050 than the oil industry thinks. Coal would be affected the most, with 25 percent reduction in demand compared to the business-as-usual case.

…click on the above link to read the rest of the article…

SPR To Be Used To Raise Cash For US Gov

October 29, 2015

SPR To Be Used To Raise Cash For US Gov

The U.S. Congress is moving on a budget deal to avert a standoff over raising the debt ceiling, at least until 2017. The emerging budget deal calls for some modest increases in government spending, including on defense, along with some tweaks to Social Security and Medicare.

But the budget deal contains a novel way to raise the funds needed to pay for the increase in spending: selling off oil from America’s strategic petroleum reserve (SPR).

The proposal calls for the sale of 58 million barrels of oil from the SPR, spread out over six years between 2018 and 2024. The Congressional Budget Office predicts the move will raise over $5 billion.

The SPR was created in the aftermath of the Arab Oil Embargo in the 1970s, which led to price spikes, fuel rationing and long lines at gasoline stations. The SPR was to be used as a tool to ensure against supply disruptions. Tucked away in salt caverns along the Gulf Coast in Louisiana and Texas, the SPR holds an estimated 695 million barrels of crude.

Congress has traditionally been very reluctant to touch the SPR, and there has been a general consensus in Washington DC that it should only be used in very special circumstances. For example, the SPR was tapped following the Persian Gulf War in 1990-1991 and following damage inflicted upon Gulf of Mexico energy infrastructure from Hurricane Katrina in 2005.

Any effort on behalf of the government to sell outside of these unique situations tended to spark criticism. For instance, President Barack Obama was highly criticized for selling oil in 2011 during the Arab Spring when Libyan oil supplies were knocked offline, with detractors citing no urgent supply need.

…click on the above link to read the rest of the article…

Next Few Weeks Will Reveal Full Extent Of Oil Industry Suffering

October 27, 2015

Next Few Weeks Will Reveal Full Extent Of Oil Industry Suffering

Get ready for some bad news and red ink.

With the bulk of quarterly earnings reports in the energy industry yet to be announced, there are already $6.5 billion worth of asset write-downs, according to Bloomberg. And that could be just the tip of the iceberg. A Barclays’ assessment last week predicted $20 billion in impairment charges from just six companies.

Write-downs occur when the expected future cash flow from an asset falls sufficiently that a company has to report that the asset has lost some of its value. With oil prices half of what they were from mid-2014, oil and gas fields around the world are no longer worth what they used to be. Some oil fields that were previously expected to produce in the future may no longer even make sense to develop given current oil prices. As a result, investors should expect billions of dollars in further write-downs in the coming weeks.

Persistently low oil prices are putting a lot of pressure on the dividend policies of oil and gas producers. The Wall Street Journal reported that four oil majors – BP, Royal Dutch Shell, ExxonMobil, and Chevron – have a combined cash flow deficit of $20 billion for the first half of 2015. In other words, these big players are not earning enough revenues to cover expenditures, share buybacks, and dividends. With such a large cash flow deficit, something has to give. All four are focusing on slashing spending in order to preserve their promises to shareholders, with dividends especially seen as untouchable.

However, it could take several years to bring spending into alignment so that cash flows breakeven. The problem for these companies is that they were also cash flow negative even when oil prices were above $100 per barrel in the years preceding the bust in 2014.

…click on the above link to read the rest of the article…

Stop Blaming OPEC For Low Prices

October 26, 2015

Stop Blaming OPEC For Low Prices

We are a little more than a month away from OPEC’s next meeting, which will be held in Vienna on December 4, 2015.

OPEC altered the course of the oil markets last year when it decided to cast aside its traditional role of maintaining balance through production cuts. Instead it pursued a strategy of fighting for market share, contributing to an immediate rout in oil prices. WTI and Brent then went on to dive below $50 in the weeks following OPEC’s decision.

OPEC is widely expected to continue its current strategy at its next meeting, and as such, no rebound in oil prices is expected, at least not because of the results of the group’s meeting in Vienna.

But that raises a question about what the world of oil expects from OPEC: Why is it that the responsibility for balancing the market falls on OPEC? Why should OPEC be the one to fix the imbalances in the global crude oil trade?

On the one hand, it makes a certain degree of sense that market watchers anticipated adjustment from OPEC. After all, the group has historically coordinated its production levels in an effort to control prices, or at least influence them. They could cut their collective production target to boost prices, and vice versa.

However, there is an element of imperialism and superiority in the expectation that the burden should fall on OPEC, which is largely made up of producers from the Middle East. It is a bizarre mentality to think that private companies deserve to seize as much market share as they can manage, after which OPEC producers can take what is left. Steven Kopits, President of Princeton Energy Advisors, laid out the concept very nicely in a Platts article earlier this year, in which he says the expression “call on OPEC” should be scrapped.

…click on the above link to read the rest of the article…

Obama Slams The Door On Future U.S. Arctic Drilling

October 20, 2015

Obama Slams The Door On Future U.S. Arctic Drilling

The Obama administration officially shut the door on Arctic drilling, a move that could prevent any new drilling for years to come.

The U.S. Department of Interior announced on October 16 that it would cancel two lease sales for offshore acreage, which had been scheduled to take place in 2016 and 2017. Environmental groups have been doggedly criticizing the Obama administration for allowing Royal Dutch Shell to drill in the Arctic to begin with, citing the potential catastrophe if an oil spilled occurred. They had called upon the President to deny any permits to Shell.

But it wasn’t environmental protest that killed off Shell’s drilling campaign. What really forced the Anglo-Dutch company to retreat was low oil prices and disappointing drilling results.

Similarly, the Obama administration is now shutting the door on future lease sales not because of concerns over the environment, but “In light of current market conditions and low industry interest,” as Interior put it in a statement.

On its face, the move is a logical one. Few other companies were interested in drilling in the Chukchi or Beaufort Seas, despite several having purchased leases years ago. Statoil and ConocoPhillips, two other large oil companies interested in the Arctic, had previously put their Arctic ambitions on ice because of the difficulty and high costs associated with drilling in the region. With Shell announcing that it would suspend U.S. Arctic exploration for the “foreseeable future” there are now zero companies that are viably interested in drilling anytime soon.

Remarkably, however, the interest in new leases had dried up even before the downturn in oil prices. Interior said that it put a “Call for Information and Nominations” in September 2013, which is essentially a way for the government to solicit interest from the industry on which areas to auction off based on their interest.

…click on the above link to read the rest of the article…

Macroeconomic Instability For Emerging Markets Thanks To Commodity Bust

October 12, 2015

Macroeconomic Instability For Emerging Markets Thanks To Commodity Bust

The bust in commodity prices is sending ripples through the world of emerging markets.

Countries depending on resource extraction and exports of commodities have run into a brick wall this year the prices collapsed for all sorts of materials – oil, gas, coal, gold, copper, and more. The bust presents macroeconomic risks to these countries, and the risks are greater for economies that are less diversified and more dependent on commodities.

Already, we have seen the sharp loss in value for currencies in emerging markets. China devalued its currency over the summer, sending a wave of panicthrough emerging markets. The currencies of commodity exporters (Russia, Brazil, Mexico, Nigeria, and Iraq, just to name a few) were already under pressure before China’s devaluation, but China’s decision threw the weaknesses of emerging markets into sharp relief.

Related: Has Oil Finally Bottomed?

Commodities tend to go through booms and busts. The seeds of the latest “supercycle” for commodities were planted around a decade ago. Capitalizing off of the scorching growth in China, capital-intensive resource extraction projects were planned around the world. Between 2005 and 2014, a staggering $745 billion worth of investment flowed into new oil, gas, and mining projects. The sum peaked in 2008 and 2009, when petroleum and mining projects accounted for 10 to 12 percent of total foreign direct investment around the world.

Of course, an oil project, or a new coal mine takes several years to build and to bring online. That explains the massive volume of new capacity for all types of commodities that came online in the last two years or so. In other words, the run up in commodity prices between 2005 and 2010 sparked a wave of investment, but all that new capacity came online in 2013-2014, popping the bubble in commodity prices.

…click on the above link to read the rest of the article…

With Shell’s Failure, U.S. Arctic Drilling Is Dead

September 30, 2015

With Shell’s Failure, U.S. Arctic Drilling Is Dead

Arctic Drilling in the U.S. is dead.

After more than eight years of planning and drilling, costing more than $7 billion, Royal Dutch Shell announced that it is shutting down its plans to drill for oil in the Arctic. The bombshell announcement dooms any chance of offshore oil development in the U.S. Arctic for years.

Shell said that it had completed its exploration well that it was drilling this summer, a well drilled at 6,800 feet of depth called the Burger J. Shell was focusing on the Burger prospect, located off the northwest coast of Alaska in the Chukchi Sea, which it thought could hold a massive volume of oil.

On September 28, the company announced that it had “found indications of oil and gas in the Burger J well, but these are not sufficient to warrant further exploration in the Burger prospect. The well will be sealed and abandoned in accordance with U.S. regulations.”

After the disappointing results, Shell will not try again. “Shell will now cease further exploration activity in offshore Alaska for the foreseeable future.” The company cited both the poor results from its highly touted Burger J well, but also the extraordinarily high costs of Arctic drilling, as well as the “unpredictable federal regulatory environment in offshore Alaska.”

Shell will have to take a big write-down, with charges of at least $3 billion, plus another $1.1 billion in contracts it had with rigs and supplies.

Shell’s Arctic campaign was an utter failure. It spent $7 billion over the better part of a decade, including an initial $2.1 billion just to purchase the leases from the U.S. government back in 2008. The campaign was riddled with mishaps, equipment failures, permit violations, and stiff opposition from environmental groups, including the blockading of their icebreaker in a port in Portland, OR this past summer. The FT reports that Shell executives privately admit that the environmental protests damaged the company’s reputation and had a larger impact than they had anticipated.

…click on the above link to read the rest of the article…

Oil Majors Sacrifice Production To Protect Dividends

September 26, 2015

Oil Majors Sacrifice Production To Protect Dividends

The French oil company Total released a downward revision to its production forecast, lowering its target from 2.8 million barrels per day (mb/d) in 2017, to 2.6 mb/d, a sign that low oil prices continue to cut into long-term oil production for even the largest companies.

Total’s CEO said part of the reason for the more modest target was spending cuts, amid falling oil prices. Lower investment will lead to lower output in the future. The other part of the problem is delays to projects that the company already has in the works.

It is no secret that low oil prices are eating into the resources that major oil companies have to use at their disposal. Less revenue from lower oil prices leaves less capital to invest. But, the oil majors do have choices, and for now they are choosing to find savings in their capital spending budgets in order to protect their dividend policies. Dividends are seen as sacred, something that cannot be touched for fear of losing their sterling reputation with major investors. That means that even profitable oil projects get the axe in order to protect payouts to shareholders.

There are few exceptions to this approach, save for Italian oil giant Eni, which became the first oil major to slash its dividend in March of this year. “We are building a much more robust Eni capable of facing a period of lower oil prices,” CEO Claudio Descalzi said at the time, explaining the company’s decision to trim its dividend. Eni’s share price plummeted in the days following the news, but has not performed noticeably worse than its peers in the intervening months.

…click on the above link to read the rest of the article…

Canadian Oil Trapped Without More Pipeline Capacity

September 24, 2015

Canadian Oil Trapped Without More Pipeline Capacity

Adding insult to injury for Canada’s oil industry, Democratic Presidential candidate Hillary Clinton came out against the Keystone XL Pipeline on September 22, ending several years of silence and waffling on the controversial issue.

That comes as a blow to TransCanada, the project’s backer, who wanted to connect Canada’s oil sands to refineries on the U.S. Gulf Coast. The 1,179-milepipeline would allow 830,000 barrels of oil per day to be exported from Canada. Clinton’s opposition will add some pressure on the U.S. President to reject the pipeline, which looks increasingly likely.

But if the pipeline is rejected, it won’t just be bad news for TransCanada, but also for Canada’s larger oil industry. Canadian crude trades at a discount to WTI, in part because of a lack of pipeline capacity. That discount has fluctuated over the years – ranging from $40 at a high point to around $15 today – but the bigger the discount, the more revenue is lost by Canada’s oil producers.

Now with oil prices less than half of what they were from a year ago, the discount that Canada’s oil sector must sell their oil for is even more painful. “At $100 a barrel it was a big concern. At $45 a barrel, that is a far larger percentage (of revenue) and is likely the difference between profitable and unprofitable on many of the assets,” Tim McMillan, president of the Canadian Association of Petroleum Producers (CAPP), told Reuters in an interview in early September.

…click on the above link to read the rest of the article…

There Are 800 Fossil Fuel Subsidies Around The World

September 23, 2015

There Are 800 Fossil Fuel Subsidies Around The World

There are 800 different programs around the world that subsidize fossil fuels, according to a new report from the OECD. The OECD released the report ahead of the international climate change negotiations set to take place in Paris in December, where the world has a “moral imperative to reach an ambitious and actionable agreement.”

Tackling climate change will be a monumental task, but key to the effort will be scrapping “lose-lose” fossil fuel subsidies, as the OECD calls them. Subsidizing oil, natural gas, and coal leads to distortions in prices, contributes to overconsumption of energy, and saps developing countries of revenues that could be used for much better investments in education and infrastructure.

They also lead to environmental fallout, with capital flowing to pollution-heavy industry and energy extraction. These investments, once made, can last for decades, essentially “locking-in” pollution for a long time to come. That is one of the glaring downsides to subsidizing fossil fuels. “Because they change the stream of income investors expect to receive for holding a particular asset, those subsidies influence investment choices and change the allocation of capital across sectors. In the case of certain fossil-fuel subsidies, there is therefore the risk that investors end up favouring sectors that produce fossil fuels or use them intensively, at the expense of cleaner forms of energy and other economic activities more generally,” the OECD wrote.

The report only surveyed the OECD member countries (consisting of Western Europe, Japan, Korea, North America, and a few other rich countries), plus Brazil, China, India, Indonesia, Russia, and South Africa. All told, the OECD concludedthat the world subsidized fossil fuels to the tune of $160 to $200 billion per year between 2010 and 2014, across 800 subsidy programs. That is much more than the $121 billion that renewable energy receives each year.

…click on the above link to read the rest of the article…

Oil Companies Running Out Of Options

September 21, 2015

Oil Companies Running Out Of Options

The financial pressure on indebted oil and gas companies continues to mount, putting them in a bind as they try to mend their deteriorating balance sheets.

As their debt rises, drillers have had to divert more of their operating cash flow to servicing that debt. Or, put another way, as cash flow declines, a greater share of those resources are swallowed up by debt payments.

According to an analysis by the EIA, a group of 44 onshore oil and gas operators, responsible for 2.7 million barrels of oil production, are increasingly struggling to deal with falling oil prices. Between July 2014 and June 2015, an estimated 83 percent of the operating cash flow from these companies is dedicated for debt payments.

As the oil bust got underway late last year and in early 2015, oil companies had options. They could cut spending, take on new debt, issue new shares, or sell assets, to name a few.

In the first half of this year, the U.S. shale industry raised an estimated $44 billion in fresh debt and equity. Companies could roll over or refinance debt, taking on new loans in order to retire old ones. In a low-interest rate environment, lenders were very willing to do this. More importantly, in the first and second quarter of 2015, many lenders expected oil prices to rebound.

That optimism about oil prices has all but vanished at this point. As a result, it is becoming increasingly difficult for indebted companies to secure fresh loans – interest rates for high-risk companies are becoming prohibitively expensive. According to the EIA, the bond yields for energy companies with a credit rating in junk territory have shot above 11 percent, as the bond markets start to steer clear of high-yield energy debt. Debt and equity markets are all but shut off for distressed companies.

…click on the above link to read the rest of the article…

Decline In U.S. Oil Production Accelerates

September 11, 2015

Decline In U.S. Oil Production Accelerates

New EIA data once again points to a deeper contraction than previously expected.

The revelation was initially revealed in late August, when the EIA reported that the United States produced much less oil than expected in the first half of 2015. On the whole, the country produced 40,000 to 100,000 fewer barrels than previously reported between January and May. The August report also showed that U.S. oil production peaked in April at 9.6 million barrels per day (mb/d), before falling to just 9.3 mb/d in June.

The declines suggested that the contraction in the U.S. shale industry was deeper than the world had initially thought. And one can only assume that the decline either kept up at a similar rate, or even accelerated in the intervening months since June.

The latest data from EIA confirms this trend. In its Short-Term Energy Outlookreleased on September 9, the EIA estimates that the U.S. oil industry lost another 140,000 barrels per day between July and August. That is a faster rate than the 100,000 barrels lost in June. Moreover, the agency predicts that output will continue to decline for another year until August 2016, before picking up again.

The U.S. is expected to produce 9.2 mb/d on average in 2015, which will drop to just 8.8 mb/c in 2016. Both of those figures are 0.1 mb/d lower than last month’s projection.

(Click to enlarge)

This contraction is one of the biggest determining factors to oil prices finding their footing. At its expected low point one year from now in August 2016, U.S. oil production will bottom out around 8.6 mb/d, about 1 mb/d below the peakreached this past April. That could go a long way to cutting into excess global oil supplies.

…click on the above link to read the rest of the article…

Lack Of Alternatives Sees EU Sign New Russian Gas Deals

September 8, 2015

Lack Of Alternatives Sees EU Sign New Russian Gas Deals

Several recent gas deals will tie Russia and Germany closer together.

Russia’s Gazprom announced an agreement on asset swaps with European partners including OMV, BASF, E.ON, and Royal Dutch Shell. The deals will kick start the Nord Stream gas pipeline expansion and also give Gazprom a greater presence in Europe, while giving several European companies assets inside Russia.

For example, Austrian-based OMV will receive a 24.98 percent in two fields in Russia in exchange for the “participating interest in OMV.”

“This Agreement is another step closer to the cooperation with Gazprom along the entire value chain. We purchase Russian gas for our European customers. Together we contribute to the security of supply by implementing the Nord Stream II project. In addition, right now we are broadening our trust-based partnership for producing natural gas in Siberia,” said Rainer Seele, the Chairman of the OMV Executive Board.

Gazprom also announced asset swaps with BASF, a deal that had first been announced in 2013 but was put on ice after the deterioration in relations following the crisis in Ukraine. But the two sides now plan on completing the swap. Gazprom will gain control of Wingas GmbH, a gas storage and trading entity based in Germany. Wingas services the Czech Republic, Austria, and Germany, supplying wholesale and retail natural gas.

In exchange for Gazprom getting a stronger foothold in Europe, Wintershall, a subsidiary of BASF, will take a position in natural gas fields in Siberia. Gazprom will also take a 50 percent stake in a North Sea oil and gas project owned by Wintershall.

The most newsworthy item was the announcement of the Nord Stream pipeline expansion. The Nord Stream Pipeline allows for Russian natural gas to reach Western Europe, bypassing Ukraine. A third and fourth line of the pipeline system will be added by 2019, doubling Nord Stream’s capacity to 110 billion cubic meters per year (bcm/y).

…click on the above link to read the rest of the article…

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