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There are some early signs that the U.S. shale industry is starting to show its age, with depletion rates on the rise.

A study from Wood Mackenzie found that some wells in the Permian Wolfcamp were suffering from decline rates at or above 15 percent after five years, much higher than the 5 to 10 percent originally anticipated. “If you were expecting a well to hit the normal 6 or 8 percent after five years, and you start seeing a 12 percent decline, this becomes more of a reserves issue than an economics issue,” said R.T. Dukes, a director at industry consultant Wood Mackenzie Ltd., according to Bloomberg. As a result, “you have to grow activity year over year, or it gets harder and harder to offset declines.”

Moreover, shale wells fizzle out much faster than major offshore oil fields, which is significant because the boom in shale drilling over the past few years means that there is more depletion in absolute terms than ever before. A slowdown in drilling will mean that depletion starts to become a serious problem.

A separate study from Goldman Sachs takes a deep look at whether or not the shale industry is starting to see the effects of age. The investment bank says the average life span for “the most transformative areas of global oil supply” is between 7 and 15 years.

Examples of these rapid growth periods include the USSR in the 1960s-1970s, Mexico and the North Sea in the late 1970s-1980s, Venezuela’s heavy oil production in the 1990s, Brazil in the early 2000s, and U.S. shale and Canada’s oil sands in the 2010s. Each had their period in the limelight, but ultimately many of them plateaued and entered an extended period of decline, though some suffering steeper declines than others. Supply Soars

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Are Natural Gas Prices Set To Spike?

October 16, 2018

Are Natural Gas Prices Set To Spike?

Natural gas storage is at record low levels but prices are falling going into winter heating season. Markets seem to be betting that wellhead supply will be sufficient to cover demand this winter. That may be but at what gas prices? This is a game of natural gas risky business.

Natural gas 6-month calendar spreads moved in backwardation in early September and climbed to +$0.57 on October 9. Henry Hub spot prices reached $3.28/mmBtu but both spreads and price have fallen since then (Figure 1).

(Click to enlarge)

Figure 1. Natural gas 6-month closing spreads & price reached maximum levels of +$0.57 and $3.28/mmBtu during week ending October 12 but have fallen since. Source: Barchart, Quandl and Labyrinth Consulting Services, Inc.

The upward movement of prices and spreads were a long time coming considering the massive storage deficit that began in October 2017 (Figure 2). Current storage is -493 bcf less than the 5-year average and we are only a few weeks away from the beginning of the 2017-2018 winter heating season. Storage is an almost unbelievable -693 bcf less than during the same week in 2017 and yet, markets are seemingly unfazed!

(Click to enlarge)

Figure 2. Natural gas comparative inventory (C.I.) deficit began in October 2017. Current storage is -493 bcf less than the 5-year average. Source: EIA and Labyrinth Consulting Services, Inc.

What, me worry?

This has led to the lowest end-of-storage (EOS) level in history. October working-gas-in-storage (WGIS) is only 3.29 tcf and a projected monthly average C.I. of -400 bcf is also the lowest in history for October (Figure 3).

(Click to enlarge)

Figure 3. October 2018 working gas in storage (WGIS) lowest ever (3.29 tcf). Comparative inventory also forecast to be lowest ever at (-440 bcf). Source: EIA STEO and Labyrinth Consulting Services, Inc.

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The Oil Markets Are At A Confusing Crossroads

October 15, 2018

The Oil Markets Are At A Confusing Crossroads

The oil market is “adequately supplied for now,” but the supply losses from Venezuela and Iran leave the market suffering from “strain,” according to a new report from the International Energy Agency (IEA).

The IEA noted that global oil production increased by 1.4 million barrels per day (mb/d) on a net basis since May, which helped lead to an inventory build at an average rate of 0.5 mb/d during the second quarter and likely the third quarter as well. As a result of a sizable stockpile of oil in storage, and these higher levels of production, the oil market is not in danger of shortages at the moment.

However, that has come at the expense of spare capacity, which is already down to only 2 percent of global demand, “with further reductions likely to come,” the IEA warned. “This strain could be with us for some time and it will likely be accompanied by higher prices, however much we regret them and their potential negative impact on the global economy.”

Iran has already lost around 800,000 bpd in exports, and the disruptions are set to continue over the next month at least with U.S. sanctions taking effect in November. Also, the “ever-present threat of supply disruptions” from Libya, combined with the ongoing losses in Venezuela, leave the oil market vulnerable.

Taking a step back, the IEA paused to note the historic nature of today’s oil market. Both supply and demand are closing in on the 100-million-barrel-per-day mark for the first time. The agency used the opportunity to take a swipe at those who warned about peak oil supply. “Fifteen years ago, forecasts of peak supply were all the rage, with production from non-OPEC countries supposed to have started declining by now,” the IEA said.

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India Yet To Figure Out Way To Pay for Iranian Oil Imports

October 15, 2018

India Yet To Figure Out Way To Pay for Iranian Oil Imports

India hasn’t worked out yet a payment system for continued purchases of crude oil from Iran, Subhash Chandra Garg, economic affairs secretary at India’s finance ministry, said on Friday.

India’s Oil Minister Dharmendra Pradhan has conveyed the message that his country would continue to buy Iranian oil to some extent, Garg told CNBC TV18 news channel, as quoted by Reuters.

Recent reports have it that India has discussed ditching the U.S. dollar in its trading of oil with Russia, Venezuela, and Iran, instead settling the trade either in Indian rupees or under a barter agreement.

India is Iran’s second-largest single oil customer after China and was expected to cut back on Iranian oil purchases, but it is unlikely to cut off completely the cheap Iranian oil that is suitable for its refineries.

India wants to keep importing oil from Iran, because Tehran offers some discounts and incentives for Indian buyers at a time when the Indian government is struggling with higher oil prices and a weakening local currency that additionally weighs on its oil import bill.

But the United States continues to insist that it expects Iranian oil buyers to bring their purchases down to zero.

Earlier this week, Indian officials said that they hoped India could secure a waiver from the United States, because it has significantly reduced purchases of Iranian oil. Late last week, the United States hinted that it was at least considering waivers.

Meanwhile, Special Representative for Iran Brian Hook is currently touring India and Europe to discuss U.S. foreign policy toward Iran, the U.S. Department of State said on Thursday.

Special Representative Hook and Assistant Secretary of State for Energy Resources Francis R. Fannon are will be meeting with Indian government counterparts for consultations.

“During this trip, Special Representative Hook will engage our allies and partners on our shared need to counter the entirety of the Iranian regime’s destructive behavior in the Middle East, and in their own neighborhoods,” the State Department said.

Oil’s $133 Billion Black Market

October 14, 2018

Oil’s $133 Billion Black Market

Oil is still the world’s leading energy source, with growing demand, a fluctuating pricing system, and much of its production in volatile regions. The oil market’s value is larger than the world’s valuable raw metal markets combined, with an annual production valued at US$1.7 trillion. A flourishing black market is no surprise, with about US$133 billion worth of fuels stolen or adulterated every year. These practices fund dangerous non-state actors such as the Islamic State, Mexican drug cartels, Italian Mafia, Eastern European criminal groups, Libyan militias, Nigerian rebels and more – and are a major global security concern.

The top five countries accused of oil trafficking – Nigeria, Mexico, Iraq, Russia, and Indonesia – are also producers. It is estimated that Nigeria alone loses US$1.5 billion a month due to pipeline tapping, illegal production and other sophisticated schemes. In Southeast Asia, about 3 percent of the fuel consumed is sourced from the black market, estimated to be worth up to US$10 billion a year. In Mexico, drug cartels launder drug revenues through the oil trade

Other countries are not immune. Turkey is not an oil producer yet serves as a major transit route for hydrocarbons flowing to Europe from OPEC countries like Iraq and Iran. As an energy hub, Turkey is strategically situated for the illegal trade and lost an estimated US$5 billion in tax revenue in 2017. An uptick in smuggling oil and other refined products began 2014, when ISIS took control of major Syrian and Iraqi oil fields.

As with most commodities, the volume of oil smuggling is primarily linked to fluctuating prices. With climbing oil prices, illicit trade is expected to increase.

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How A Carbon Tax Would Be Implemented

October 14, 2018

How A Carbon Tax Would Be Implemented

There are no solutions to complex problems – except when the problem becomes so complex it must have a simple solution.

That is the paradox thrown up by global warming and the shattering report of the U.N. Intergovernmental Panel on Climate Change. The report cries out for dramatic, simple remediation of the amount of carbon pumped into the atmosphere every day by industrial society.

The complex solution is a case-by-case, country-by-country, industry-by-industry, polluter-by-polluter remediation: power plants, automobiles, trucks, trains, ships, aircraft and manufacturers.

The simple solution to this complex problem is to tax carbon emissions: a carbon tax. Make no mistake, it would be tough. Some industries would bear the brunt and their customers would carry the burden — initially a light burden growing to a heavier one.

The obvious place to start is with electric utilities. Those burning coal would get the heaviest penalty. Those burning natural gas – the fuel favored by its low price and abundance in the nation — some penalty, but not as heavy.

Nuclear, which is having a hard time in the marketplace at present, would be the big winner of the central station technologies, and solar and wind would continue to be favored.

When it comes to transportation and farming, the pain of carbon taxation rises. The automobile user has choices like a smaller car, an electric car or simply less driving. But heavy transportation, using diesel or kerosene, is where the pain will be felt: buses, trucks, tractors, trains, aircraft and ships. The burden here is direct and would push up prices to consumers quickly.

Jets are a particularly vexing problem. Although they represent about 3.5 percent of pollution, it is the altitude at which they operate (above 30,000 feet) that makes them particularly lethal greenhouse gas emitters.

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Hurricane Michael’s Impact On Gasoline Demand

October 14, 2018

Hurricane Michael’s Impact On Gasoline Demand

Gasoline demand increased in the Florida Panhandle, southern Georgia, and South Carolina ahead of Hurricane Michael’s arrival to the areas, but repercussions to demand appeared to focus on rack cities in the direct path of the storm, according to our Supply Side daily rack volume data. The increased rack activity provided some uplift to PADD 1C demand Oct. 7 to 10. Daily rack activity on Oct. 9 jumped to the highest daily level since the approach of Hurricane Florence to the Carolinas in September.

Michael’s long-term ramifications to supply are not yet obvious. Ports along the upper Gulf Coast and southern Atlantic Coast closed either completely or to inbound traffic starting Oct. 9. Restrictions on ports in Mississippi, Alabama, Florida, North Carolina, and Virginia remained as of Oct. 12, with Savannah and Charleston reopening Oct. 11. Gasoline supply in these five states relies upon waterborne barge movements from the U.S. Gulf Coast (PADD 3) and cargo imports. To add to the constrained inflows, Colonial Pipeline reported power outages at delivery facilities in southern Georgia on Oct. 11. Colonial assessed damages and impacts to Line 17, which runs from Atlanta to Bainbridge, GA, off Colonial’s 2.6mn bpd mainline system.

Hurricane Michael made landfall as a Category 4 hurricane on Oct. 10 near Mexico Beach, FL, with maximum sustained winds of 155 mph—the strongest tropical cyclone to hit the Florida Panhandle in recorded history and the fourth strongest Atlantic tropical cyclone to hit the U.S. mainland. When Michael moved into Georgia on the evening of Oct. 10, the storm became the most intense disturbance to hit the state since 1898. The cyclone made its way through Florida, Georgia, South Carolina, North Carolina and Virginia. As of Oct. 12, Michael was a post-tropical cyclone off the coast of Delaware, heading northeast towards open water.

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The Perfect Storm Bringing China And Russia Together

October 12, 2018

The Perfect Storm Bringing China And Russia Together

During the Cold War, China and the Soviet Union regarded one another as strategic adversaries. Relations between Beijing and Moscow, however, have significantly improved over the years. Besides political alignment, the countries have complementary economies; China has an insatiable appetite for the raw materials which Russia has in abundance and Beijing has the financial strength to protect Moscow against the sanctions related to its annexation of Crimea.

Bilateral trade, as a consequence, has increased dramatically over the years. At the end of 2017, it stood at $80 billion, an increase of 30 percent year-on-year, with an aim to reach $200 billion by 2024. Much of this growth will need to come from energy trade, of which natural gas will likely make up a large part. An example of this natural gas growth is the Power of Siberia pipeline – which is currently nearing completion – and the Altay pipeline project which looks set to follow.

China’s booming demand for energy

The transformation of rural China a couple of decades ago into a global economic powerhouse has been admired across the globe. Even during the financial crisis of 2008, China served as a stabilizing force amid the turmoil. The Asian country’s expanding economy requires ever-larger volumes of energy to power homes and factories. Beijing’s adoption of more stringent rules to counter air pollution has created an energy revolution due to the coal-to-gas switch. This has had serious consequences for the global gas market.

Until recently, the LNG market was facing an oversupply. Growing demand in China due to its new rules on air pollution has absorbed much of the glut. According to analysts from Sanford C. Bernstein & Co., new supplies of LNG are “being easily mopped up by rampant market growth”. Political developments, however, have somewhat shifted Beijing’s focus from LNG to more pipeline gas from Russia. This has come at the right moment for Moscow as relations with its biggest customer, the EU, have deteriorated.

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Stock Market Chaos Sparks Oil Selloff

October 12, 2018

Stock Market Chaos Sparks Oil Selloff

The plunge in global equities on Wednesday and Thursday dragged down crude oil, with even concerns about falling Iranian supply not enough to keep crude from a steep selloff.

Brent fell more than 1.2 percent on Wednesday and was down another 1.5 percent in early trading on Thursday, falling back to the low-$80s per barrel, down from over $86 last week.

The same supply concerns are still there – Iran’s oil exports are dwindling, and it is unclear if OPEC can fill the gap. But the sudden cracks in the global economy took on a higher priority.

The conditions for an equity selloff have been building for quite some time. On October 9, the International Monetary Fund cut its forecast for global growth to 3.7 percent for 2018 and 2019, down from a previous estimate of 3.9 percent. The Fund said that “growth has proven to be less balanced than hoped,” and that the “likelihood of further negative shocks to our growth forecast has risen.” Also, the ongoing trade war between the U.S. and China, combined with the strength of the dollar and the turmoil and emerging markets could also lead to an economic slowdown.

China’s economy is already showing some signs of strain, and China’s central bank just slashed the amount of cash that banks have to hold in reserve, the so-called reserve ratio, by one percentage point. The move is seen is an attempt to keep growth aloft amid worrying signs of trouble.

In the U.S., the Federal Reserve has been going in the opposite direction, tightening interest rates in an effort to avoid inflation.

These various red flags for the global economy have been known for a while and are the background context for the sudden and painful selloff in global equities that began mid-week.

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Hurricane Michael Shuts In 40% Of Gulf Of Mexico Oil Production

October 11, 2018

Hurricane Michael Shuts In 40% Of Gulf Of Mexico Oil Production

Roughly 40 percent of the Gulf of Mexico’s oil production and 28 percent of its natural gas production was shut down as of Tuesday, as the region braced for a powerful hurricane to make landfall.

At least 75 platforms were evacuated, according to Reuters, including those operated by Anadarko Petroleum, BHP Billiton, BP, Chevron and ExxonMobil. Hurricane Michael strengthened to a Category 4 storm as it approached the Florida Panhandle, threatening catastrophic damage to Florida’s Gulf Coast. “Some additional strengthening is possible before landfall,” the National Hurricane Center said in a public advisory. The storm had maximum sustained winds of 140 miles per hour as of Wednesday morning.

An estimated 670,800 barrels per day of oil production and around 726 million cubic feet per day of natural gas production shut down. At least three drilling rigs were evacuated and eight more were moved out of the range of the storm, according to BSEE.

Also, the U.S.’ largest crude oil export terminal, the Louisiana Offshore Oil Port (LOOP), idled operations. LOOP is the only port in the United States that can handle fully laden very large crude carriers (VLCCs), which can carry 2 million barrels of oil.

The storm will be a very different one than Hurricane Florence, which inundated much of North Carolina a few weeks ago. Florence was a slow moving monster that dumped biblical volumes of rain on the region. Michael is expected to move much faster, moving out of the region and up the U.S. Southeast pretty quickly. That should reduce the extent of damage from catastrophic flooding, but the high speed winds are expected to do a lot of damage. As many as 200,000 people in Florida could be without power, according to Duke Energy.

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Prices Soar As Natural Gas Inventories Hit Decade Low

October 11, 2018

Prices Soar As Natural Gas Inventories Hit Decade Low

Natural gas prices have spiked over the last few weeks as U.S. inventories run low ahead of the peak winter heating season.

Nymex natural gas prices have jumped nearly 15 percent over the past month, rising to roughly $3.30 per million Btu (MMBtu). The market has clearly grown a little concerned about adequate supplies heading into the winter and that is reflected in natural gas prices rising to their highest point since the beginning of the year.

For the week ending on September 28, natural gas inventories stood at 2,866 billion cubic feet (Bcf), or 636 Bcf lower than at the same point a year earlier, as well as 607 Bcf below the five-year average.

Inventories dropped to extraordinarily low levels last winter as much of North America became enveloped in exceptionally cold weather. As tens of millions of people cranked up the heat, the U.S. burned through record levels of natural gas. That stood in stark contrast to the year earlier, when a much milder winter led to above-average levels of gas in storage.

Natural gas markets are cyclical, with a buildup in storage between April and November – the so-called “injection season” – and steep drawdowns during the winter. The stockpiling during injection season is necessary to provide enough supply to consumers for winter heating needs.

But the problem is that the U.S. is currently on track to finish up the injection season with the lowest level of gas sitting in storage in 13 years. Even though demand sees seasonal peaks and valleys, consumption is rising on a structural basis as more coal plants shut down and more gas is exported in the form of LNG.

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BP Chief: Saudi Arabia Is Holding Back Production

October 11, 2018

BP Chief: Saudi Arabia Is Holding Back Production

“I think Saudi Arabia does have capacity that can bring to the market,” BP’s chief executive Bob Dudley told CNBC on Wednesday on the sidelines of the Oil & Money Conference in London.

“But on the other side of it you have very unpredictable circumstances in Venezuela and of course, with the Iran sanctions,” Dudley noted, commenting on the current market forces driving the oil prices.

As the start date of the U.S. sanctions on Iran’s oil is less than four weeks away, the market is jittery and prone to emotional reactions regarding the two key uncertainties over the next couple of months—how much Iranian oil will be lost to the U.S. sanctions, and how much spare capacity Saudi Arabia can bring (or is willing to bring) to offset possible steep losses.

Analysts are estimating that the sanctions on Iran will remove at least 1 million bpd from the market, with some predicting losses could be as large as 2 million bpd.

The only really large spare capacity is in Saudi Arabia, but the issue with this is that it has never been tested, because Saudi Arabia has never pumped more than 10.72 million bpd, its all-time high record from November 2016. Last week, the Saudis hastened to inform the market that they are currently pumping 10.7 million bpd—just shy of the all-time record high—and could even tweak that 10.7 million “slightly higher” next month.

In view of those uncertainties, BP’s Dudley told CNBC that he expects in terms of oil prices that “it’s going to be 45 days of extreme volatility, it could spike up, it could also go the other way.”

“If waivers were granted to others, to big oil consuming countries, you could see it (the price) go down, there’s a lot of uncertainty right now,” Dudley said.

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UN Puts $2.4 Trillion Annual Price Tag On Mitigating Climate Change

October 10, 2018

UN Puts $2.4 Trillion Annual Price Tag On Mitigating Climate Change

Climate scientists are not known for giving good news, and the UN’s Intergovernmental Panel on Climate Change that convened in South Korea was no exception: the scientists that compiled a special report on the climate situation on the planet slapped optimists in the face: the world needs to spend US$2.4 trillion every year until 2035 to slow down the effects of climate change.

Perhaps shockingly, the panel noted that at the current warming rates, Earth’s atmosphere will in less than one hundred years be 3 degrees Celsius warmer than it was before the start of the Industrial revolution, which is twice what the Paris Agreement stipulated in one of its scenarios. No wonder that the panel is calling for following the 1.5-degree scenario instead of the 2-degree one, which was widely seen as more realistic. Realistic or not, apparently, the world needs to work towards a temperature climb reduction of 1.5 degrees, the panel says.

The 1.5-degree scenario will require cutting CO2 emissions by as much as 45 percent over the 20-year period from 2010 to 2030 and to a net zero by 2050—net zero meaning that all CO2 released will need to be captured and stored or reused. But that’s just one aspect of the seismic shift that humankind would have to affect to curb the temperature rise.

Another aspect would be the phase-out of coal and a reduction in the amount of natural gas used for power generation. To some observers unburdened by excessive planetary anxiety, this would probably sound ridiculous: natural gas has emerged as the lesser evil compared with coal and oil, the so-called bridge fuel to a future powered entirely by renewable sources.

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A New Era Of Geopolitical Risk In Global Oil Markets

October 9, 2018

A New Era Of Geopolitical Risk In Global Oil Markets

Amid never ending talk and speculation over how many more barrels of Iranian oil will be removed from global markets once sanctions slated to hit Iran’s oil production on November 6 take effect, some are claiming that geopolitical factors have driven the market just as much as supply fundamentals.

At Russia Energy Week in Moscow last week, both Saudi and Russian energy ministers saidthey see rising geopolitical risk as driving the recent oil price increase at a time when there is sufficient supply in the market. Of course, the notion of sufficient supply will be tested soon, as will both Saudi Arabia’s and OPEC’s spare production capacity will be called on to maintain this supply.

“Prices are continuing to rise and I think that proves the point that it is not the fundamentals of oil supply and demand that is behind this price increase,” Saudi energy minister Khalid al-Falih said on Thursday during the conference.

“The market has a strong influence,” he added. “Financial investors, speculators, sentiment, future expectations. The true elephant in the room is geopolitics. That has all combined to feed the market frenzy.”

Following al-Falih’s cue, Russian energy minister Alexander Novak agreed that geopolitical risks were having a disproportionate impact on global oil prices, which have recently breached new four-year highs.

On Friday, global oil benchmark London-traded Brent crude futures dipped slightly but still settled at a robust $84.33 per barrel, a price point that could arguably mark the beginning of supply disruption in developing economies where a strong U.S. dollar and rising oil prices are already creating economic woe, especially in Asia, including the Philippines, Vietnam and India.

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IEA: Renewables Set For Explosive Growth

October 8, 2018

IEA: Renewables Set For Explosive Growth

Renewable energy is growing at a blistering rate, but clean energy is also nowhere near what is needed to avoid some of the worst effects of climate change, according to a series of new monumental reports on the global energy system.

Renewable energy accounted for half of the increase in new electricity generation in 2017, a remarkable feat, according to a new report from the International Energy Agency (IEA). By 2023, renewables will account for 12.4 percent of total global energy demand (not just for electricity), a sign that the adoption of wind and solar around the world is gaining steam. In the transport sector, electric vehicles and electric buses triple over the next few years.

Solar and wind are the cheapest option in a growing number of places around the world and EV sales are skyrocketing.

Here are a few more staggering statistics. Between 2017 and 2023, renewables will cover a full 40 percent of the additional growth in energy consumption. And by 2023, renewables will account for nearly a third of total electricity generation worldwide.

Solar PV will move front and center over the next few years, the IEA argues. Solar PV is expected to grow by 600 gigawatts through 2023, having already jumped by 97 GW last year. That 600 GW is equivalent to twice the size of Japan’s entire capacity.

Within the solar sector, distributed solar “makes the difference,” the IEA says. Without the distributed solar projects, solar’s expansion would be equal that of wind. But a growing number of commercial, industrial and residential applications are putting more solar panels at the local level.

Behind this explosive growth for renewables is the dramatic cost declines that make renewables increasingly the cheapest option. “For the first time, more than half of renewable electricity capacity is expected to be commissioned through competitive auctions, which continue to slash wind and solar PV bid prices to between USD 20 per megawatt hour (MWh) and USD 50/MWh,” the IEA wrote.

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