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Aramco’s Mythical Ghawar Field Could Be Its Weak Spot
Aramco’s Mythical Ghawar Field Could Be Its Weak Spot
Some of the most secretive, highly-anticipated details about the Saudi oil industry have just been released.
Saudi Aramco is preparing to launch a major bond issuance to purchase the Saudi petrochemical company Sabic, a process that required a detailed prospectus on the company. As part of that review, Aramco released on Monday some closely-guarded state secrets that have been kept under wraps for decades and have been the subject of endless and wild speculation.
With little fanfare, Aramco released some details …and they are somewhat damning. For instance, the Ghawar oil field, which has at times held an almost mythical status both because of its massive size and also because of the complete opaqueness on its inner workings, can’t produce as much as previously thought. Ghawar is the core of Aramco’s oil production, and is of vital national security importance to the Saudi state.
The prospectus says that the Ghawar field can only produce 3.8 million barrels per day (mb/d), not the widely thought 5 mb/d that has floated around for years as a rough estimate. “As Saudi’s largest field, a surprisingly low production capacity figure from Ghawar is the stand-out of the report,” said Virendra Chauhan, head of upstream at consultant Energy Aspects Ltd., according to Bloomberg.
There was little other detail offered on that figure, why it declined, or whether it would continue to decline. But it is a very significant downward revision.
Nevertheless, the Aramco prospectus confirmed some more impressive figures that have also been the subject of speculation. The document says the company can produce 12 mb/d, a rate of output that has been criticized and questioned. With current production at about 10 mb/d, that implies a current 2 mb/d of spare capacity, which is a comfortable buffer that could plug some hypothetical supply gaps. In addition, there is about 500,000 bpd lying dormant in the Neutral Zone on the border with Kuwait.
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Oil Prices Spike On Shale Slowdown
Oil Prices Spike On Shale Slowdown
The collapse of oil prices late last year, along with pressure from shareholders, has led to a slowdown in the U.S. shale industry.
The EIA released new monthly data on March 29, which revealed a decline in output of about 90,000 bpd between December and January, evidence that shale drillers slammed on the breaks after oil prices fell off a cliff in the fourth quarter. The 90,000-bpd decline came after a rather meager 35,000-bpd increase the month before, which was the weakest increase in months.
But the U.S. shale industry is facing more headwinds than just a temporary dip in oil prices. Shareholders have run out of patience with unprofitable drilling, and are demanding returns, which is tightening the screws on less competitive companies and forcing spending cutbacks across the board. More worrying for the industry is a growing recognition of the “parent-child” well problem – the unexpected poor performance of subsequent wells drilled in close proximity to the original “parent” well.
These obstacles are beginning to pile up. Schlumberger and Halliburton, the two top oilfield services companies, have predicted that shale drillers will be forced to collectively cut spending by more than 10 percent this year.
The slowdown could put some bullish pressure on the oil market, already suffering from outages in Venezuela, Iran and coordinated cuts from OPEC+. While U.S. inventories rose unexpectedly last week, much of the increase can be chalked up to turmoil in the Houston Ship Channel following a major fire at a petrochemical facility.
Indeed, some analysts see significant stock declines in the next few weeks. “The most visible inventory levels in the world…will fall victim to a potent mix of Venezuelan supply disruptions, a Houston Ship Channel chemical spill, and an uptick in refining runs,” Barclays wrote in a note on March 29. The investment bank sees WTI rising to an average of $65 per barrel this year.
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Reuters: OPEC’s Oil Production Drops To Lowest Since 2015
Reuters: OPEC’s Oil Production Drops To Lowest Since 2015
OPEC’s oil production in March 2019 fell to its lowest level since February 2015, as Saudi Arabia cut more than it had pledged under the output cut deal and Venezuela continued to struggle amid U.S. sanctions and a major blackout, the monthly Reuters survey showed on Monday.
The combined production of all 14 OPEC members stood at 30.4 million bpd last month, down by 280,000 bpd compared to February and the lowest level of OPEC production since February four years ago, according to the survey.
Production in March beat the previous four-year-low record of the cartel’s oil production from February 2019. As per Reuters survey last month, OPEC’s oil production fell by 300,000 bpd in February compared to January to stand at 30.68 million bpd.
The figures in the survey for March suggest that Saudi Arabia continues to over-deliver in its share of the cuts, as it has promised multiple times since the new OPEC+ deal began in January 2019.
Under the OPEC/non-OPEC agreement for a total of 1.2 million bpd cuts between January and June, Saudi Arabia’s share is a cut of 322,000 bpd from the October level of 10.633 million, to reduce output to 10.311 million bpd.
The rate of compliance from the eleven OPEC members bound by the pact—with Iran, Venezuela, and Libya exempted—also suggests that the Saudis and their Arab Gulf partners are deepening the cuts.
The eleven OPEC members with quotas had a combined compliance of 135 percent in March, surging from 101 percent in February, according to the Reuters survey tracking supply to the market and based on shipping data and information provided by sources at oil companies, consulting firms, and OPEC.
The survey did not provide figures for the Saudi production, but estimated that exempt Venezuela—under U.S. sanctions and suffering from a major power blackout in March—saw its oil production plummet by 150,000 bpd in March compared to February.
The Oil Industry Faces A ‘Crisis Of Confidence’
The Oil Industry Faces A ‘Crisis Of Confidence’
The oil industry is starting to feel the pressure of climate change.
Oil executives, by and large, have not been swayed to change their business practices despite years of warnings about the climate crisis. However, they are beginning to listen to shareholders who are demanding change, while also seeing policy risks looming just over the horizon.
The annual IHS CERAWeek Conference in Houston is usually a gathering of oil titans who meet to celebrate their business. A backslapping affair, the event doesn’t spend too much time worrying about climate change.
This year is a bit different. There has been palpable anxiety about the future. Shareholders are putting pressure on companies to report their risks and exposures to climate change. At the same time, oil executives are worried that shifting technologies, pushed along by government policy, will threaten future oil sales.
Norway’s Equinor sounded the alarm. Eldar Saetre, CEO of the Norwegian oil company, said that the industry faced a “crisis of confidence,” and that companies were not doing enough to plan for the epochal change that is beginning to unfold. “We need to drive this as an industry, to be part of the solution and not be dragged into a low-carbon future,” Saetre told the Wall Street Journal. Some companies are taking action, but “there is definitely denial within companies and in boardrooms, as well as ignorance and an unwillingness to act.”
Last week, Norway’s $1 trillion sovereign wealth fund proposed a divestment from oil exploration companies, an event that may turn out to be a significant moment in history, marking the beginning of a difficult chapter for the oil industry.
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The Easy Money In European Natural Gas Is Gone
The Easy Money In European Natural Gas Is Gone
At the end of last winter’s heating season, it was an unusually cold spell that upended European natural gas markets, with storage levels falling below average and prices firming up as demand shot up.
At the end of this winter’s heating season, it is the unusually mild weather in most of Western Europe for most of the winter that has driven natural gas prices down and left supplies higher than the seasonal average.
The summer gas futures at the Dutch TTF hub have declined by 16 percent so far this year and have been trading lately around the lowest in 10 months. The winter gas futures contract, however, has dropped by just one third of the decline in the summer contract, according to data from ICE Endex compiled by Bloomberg.
So the discount of the Dutch summer natural gas futures to the winter contract widened to the biggest since 2011 as of early March. Typically, such a wide spread would mean that one of the most common European gas trades—buying cheaper gas futures in the summer to sell in the winter—would be the most profitable in eight years.
However, traders are unable to take full advantage of the wide winter-summer spread because several factors have combined this winter season to create a perfect storm in the European natural gas markets. These factors are higher stockpiles than usual, limited available storage capacity as most of it is booked out amid declining overall capacity, and increased liquefied natural gas (LNG) shipments to Europe as Asian LNG spot prices continue to tumble.
First, unlike last year’s winter, this winter has been unusually mild in many parts in Western Europe. This has led to lower natural gas demand and lower withdrawal from storage—a stark contrast compared to the 2018 winter.
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Is This A Precursor For Peak Oil Demand?
Is This A Precursor For Peak Oil Demand?
The $1 trillion sovereign wealth fund of Norway may sell off all of its shares in oil producers.
The move is a shot across the bow for the oil industry. A $1 trillion fund, built on oil itself, now sees the future of oil as too risky.
Norway’s sovereign wealth fund is not getting out of the oil business entirely. The government has only recommended exiting oil and gas exploration and production companies (i.e., upstream producers). The reason why the fund wants to pursue divestment is that it views the long-term oil market as volatile, unpredictable, and at this point, vulnerable to permanently low prices. “The goal is to make our collective wealth less vulnerable to a lasting fall in oil prices,” Norway’s finance minister, Siv Jensen, said. The fund currently holds about $37 billion in oil and gas stocks.
Based on that logic, the government wants to avoid the exposure to producers, since they will be the companies most impacted by changes in oil prices.
But the divestment is also one of the most powerful symbols yet regarding the potential for peak oil demand. The notion of permanently low oil prices is predicated on a peak and decline in consumption. And if a $1 trillion sovereign wealth fund views oil as inherently risky going forward, other investors could begin to fret. It’s worth noting that oil and gas stocks fellimmediately after the announcement.
On the other hand, the selloff could also be viewed in the narrow interests of Norway itself. The sovereign wealth fund was built by oil revenues, so the divestment is a bit ironic. Critics might point out that it is a bit rich for a country that has been, and still is, funded by oil revenues to be taking such a stand on the future of the oil business.
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Vietnam’s Energy Dilemma Is About To Become A Crisis
Vietnam’s Energy Dilemma Is About To Become A Crisis
Vietnam can’t seem to get a break. The country lies just beneath China, its giant neighbor to the north, and shares many of the same socialist ideals that Beijing promulgates. However, Sino-Vietnamese relations have been a source of tension for years dating back to the colonization of Vietnam by China centuries ago – a historical fact that the average Vietnamese citizen has never forgotten. Even after the protracted and costly war between North Vietnam and the U.S.-backed South Vietnamese government, that ended more than 40 years ago, China (which had proven a valuable ally for Hanoi during the war) turned on its smaller communist ally and invaded the country in 1979. It was a brief but bloody border war which showed Beijing that Vietnam could still hold its own.
Fast forward several decades and Hanoi is still trying to placate Beijing while at the same time rapidly improving relations with one-time adversary Washington. In fact, U.S.- Vietnamese relations, both trade and bilateral, have improved so much recently that the two sides could now arguably be called allies in the Asia-Pacific region. Of course, much of that alliance, similar in some respects to the decades-old U.S. alliance with Saudi Arabia, is born of necessity. The U.S.-Saudi alliance was berthed in the aftermath of World War 2, held together amid shared concerns during the cold war, and remains amid worries over Iranian hegemony ambitions in the Middle East. The U.S.-Vietnamese alliance is largely held together over the mutual aim of both Washington and Hanoi to keep China’s economic and military ambitions in check in the Asia-Pacific region, particularly in the volatile South China Sea, where Beijing claims as much as 90 percent of the troubled body of water.
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Be Wary Of Unrealistic Shale Growth Expectations
Be Wary Of Unrealistic Shale Growth Expectations
U.S. shale drillers are facing a serious problem: Their wells are not producing as much oil and gas as they had anticipated.
When facing shareholder scrutiny, shale drillers have countlessly hyped the litany of technological breakthroughs, efficiency gains and innovative drilling techniques. Indeed, production from U.S. E&Ps has skyrocketed over the past decade, save for interruption during the 2014-2016 bust. But even then, shale executives argued that the downturn made them lean and mean, and that they would use their newfound frugality to ramp up production and profits.
But the hype has slammed into reality on a few fronts. First, after years of bankrolling the shale industry in hopes of juicy profits, Wall Street is starting to lose patience. Some companies turn a profit, but the industry on the whole has been losing money since its inception in the mid-2000s. Executives are once again promising that enormous profits are just around the corner, but you could forgive the skeptics for questioning whether that will turn out to be the case.
A second – and no less damning – development is starting to occur on the operational side of things. Shale companies are finding that the returns on pushing their drilling practices to evermore intense frontiers are beginning to fizzle. For years, drillers increased the length of their laterals, injected more and more sand and water underground, and packed wells closer and closer together. These techniques of intensification promised to produce more oil and gas for less money. Related: The Winners And Losers Of The Latest Commodity Rally
Suddenly, there is evidence that the industry is running into a wall. The Wall Street Journal reported that shale wells placed too close together are starting to report unexpectedly disappointing results. The thinking is that the wells are interfering with each other.
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Shale Growth Is Nearing An Inflection Point
Shale Growth Is Nearing An Inflection Point
Drilling activity has plateaued in much of the U.S., with the rig count zig-zagging well below the peak from last November.
The rig count often rises and falls in response to oil prices, but on a several-month lag. It takes some time before oil companies make drilling decisions in response to major price movements. As such, the price meltdown in the fourth quarter of 2018 is still working its way through the system.
But the U.S. shale industry has already begun to tap the brakes. Total U.S. oil rigs are stood at 853 for the week ending on February 22, down from a peak of 888 in November. In particular, the Permian – often held up as the most profitable and prolific shale basin – has seen the rig count decline to a nine-month low.
Production continues to rise, to be sure, but the growth rate could soon flatten out. “We estimate that the y/y change in US oil drilling will, for the first time since 2016, turn negative by late May, should the current trend of gentle declines continue,” Standard Chartered analysts led by Paul Horsnell wrote in a note.
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At the same time, oil prices are rising again, and are up roughly 25 percent since the start of the year. If WTI tops $60, many shale drillers could find themselves feeling confident all over again, and could pour money and rigs back into the field.
That said, multiple drillers have laid out more conservative and restrained drilling programs, facing pressure from shareholders not to overspend. According to Bloomberg and RS Energy Group, U.S. E&Ps have trimmed their spending plans by 4 percent on average, while at the same time they still expect production to grow by 7 percent.
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Wall Street Loses Faith In Shale
Wall Street Loses Faith In Shale
To Wall Street, the shale industry has lost a lot of its allure. A decade’s worth of promises have failed to materialize, and Big Finance is cutting some of its ties with smaller shale drillers who have not delivered.
The Wall Street Journal reports that the shale industry only saw $22 billion in new bond and equity deals, down by more than half from 2016 levels, which was a much worse time for the market.
The steep decline in new debt and equity issuance is a sign that major investors are no longer rushing to finance unprofitable shale drilling. It’s worth noting that this is a new development. For years Wall Street financed unprofitable drilling, holding out on the promise that rapid production growth would eventually pay off.
Shale wells suffer from precipitous decline rates, with as much as three quarters of a well’s total lifetime production coming out in the first year or two. After an initial burst of output, shale wells enter a steep decline.
Of course, this has been known since the beginning and Wall Street has long been fully aware. But major investors hoped that shale companies would scale up, achieve efficiencies and lower breakeven prices to the point that they could turn a profit.
However, that has not been the case. While there are some drillers that are profitable, taken as a whole the industry has been cash flow negative essentially since its beginning in the mid-2000s. For instance, the IEA estimates that the shale industry posted cumulative negative free cash flow of over $200 billion between 2010 and 2014.
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U.S. Warns The World Against Buying Venezuelan Oil
U.S. Warns The World Against Buying Venezuelan Oil
U.S. National Security Advisor John Bolton has warned countries and companies against buying crude oil from Venezuela, after the Latin American country’s Oil Minister Manuel Quevedo said during a surprise visit to India that Venezuela wants to sell more oil to the fast-growing Indian market.
In a tweet with a Bloomberg article on Venezuelan-Indian oil relations attached, Bolton wrote: “Nations and firms that support Maduro’s theft of Venezuelan resources will not be forgotten. The United States will continue to use all of its powers to preserve the Venezuelan people’s azsets and we encourage all nations to work together to do the same.”
“We have a good relationship with India and we want to continue this relationship. The relationships with India will continue, the trade will continue and we will simply expand all the trade and relationship,” Indian outlet Business Today quoted the Venezuelan minister as saying on the sidelines of the Petrotech conference in India this week.
At the start of the Venezuelan political crisis last month, Indian media reported that the Asian country continues to be one of the main buyers of Venezuelan crude oil. Indian refiners keep buying more than 400,000 bpd of oil from the troubled Latin American country, which is sitting on the world’s largest crude oil resources.
In separate Venezuela-and-sanctions-related news, Bulgarian security officials said on Wednesday that they had blocked several bank accounts in a local bank that have received millions of euros from Venezuela’s state oil firm PDVSA, on which the U.S. slapped sweeping sanctions at the end of January.
Bulgaria’s security services and prosecutor’s office were tipped off by the U.S. about those money transfers and have blocked transfers out of the bank accounts.
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The Renewable Revolution Has A Lithium Problem
The Renewable Revolution Has A Lithium Problem
As the global middle class rapidly expands, so too does the worldwide demand for energy and its subsequent carbon footprint. Global climate change will be one of the greatest, if not the single greatest, challenges of this next century, and one of the few feasible solutions that is generally agreed upon by scientists and politicians alike is a wide-scale transition from the use of traditional fossil fuels to renewable energy resources.
Around the world, there is a race among researchers to more efficiently and cost-effectively implement renewable energy as a long-term solution to global climate change, and there is even a concerted effort to switch Europe’s energy consumption to 100 percent renewable energy as soon as the year 2050. However, even if Europe achieves this target and takes the lead as the rest of the world follows down a path toward 100 percent renewable energy, we still would not be living in a completely sustainable, green energy utopia–there is a considerable downside to this seemingly perfect plan.
Even renewable energy relies on certain decidedly non-renewable resources. Even the eco-friendliest solutions such as solar panels can’t be made without the use of finite rare earth elements. Batteries, too, are completely dependent on finite earth-sourced materials for their fabrication. What’s more, China currently has an overwhelming monopoly on a great number of these rare earth elements (although not all are as rare as this label implies). This means that in a renewable energy-based world, energy security could become a major issue. In addition to rare earth elements, there are myriad other non-renewable materials used in the production of renewable energy. Currently, the one that has everyone talking is lithium.
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This Is Just The Beginning Of Europe’s Gas War
This Is Just The Beginning Of Europe’s Gas War
In a move that should not surprise energy pundits nor even those that follow geopolitical news in Europe, on Thursday Russian gas giant Gazprom said it’s looking to gain an even larger gas market share in Europe following record-high 2018 exports, as it expects a decline in Europe’s gas output combined with rising demand. Last year Gazprom sold more than 200 billion cubic meters (bcm) of natural gas to Europe, including Turkey, while its gas market share in the region rose to more than a third, Reuters said in a report on the matter.
Elena Burmistrova, in charge of the Gazprom’s exports, said the company would be able to offset a production decline in the EU, mainly at the Netherlands’ Groningen, once Europe’s largest natural gas field. “North Sea production is also gradually declining … So, the space for Russian gas is being freed up,” she said on the sidelines of the European Gas conference in Vienna.
Future gas wars
Gazprom’s statement comes as EU gas production is projected to spiral downward over the next 12 years. Regardless of possible development of non-traditional gas resources, production will decline by 43% against the 2013 level, Russia’s National Energy Security Fund (NESF) said recently. Moreover, the Paris-based International Energy Agency (IEA) forecasts that EU gas production will halve by 2040.
This dwindling production also comes as a number of EU states are poised to break away from over-reliance on both nuclear and coal needed for power generation, leaving opportunities for renewables, particularly solar and wind power, as well as liquefied natural gas (LNG) imports. However, all of these sources will take more time and funding to develop before they can add a more significant percentage of the bloc’s energy mix going forward.
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Controversial Nord Stream 2 Pipeline Could Be Operational By November
Controversial Nord Stream 2 Pipeline Could Be Operational By November
In what would be an early geopolitical win for Moscow, German news agency DW reported yesterday, citing one of the project’s engineers, that the Nord Stream 2 natural gas pipeline should be operational by November.
Klaus Haussmann, an engineer at Nord Stream 2’s future landfall site at Lubmin on Germany’s Baltic Sea coast, told German public radio station Deutschlandfunk that the “raw” laying of the pipeline would be finished by the middle of 2019, according to the DW report. “Then comes the entire installation of the electrical equipment, security chains. And, then it’s planned on the large scale that we get the first conduit filled with gas in November, from Russia,” Haussmann said.
Haussmann said his concern was more the impact of the Baltic’s winter weather and waves on construction at sea and less so the international pros and cons. “For two years or more, Nord Stream 2 has been pretty much under fire. But at the moment we have more worries with the weather outside,” he said.
Geopolitically charged pipeline
Nord Stream 2 is a 759 mile (1,222 km) natural gas pipeline running on the bed of the Baltic Sea from Russian gas fields to Germany, bypassing existing land routes over Ukraine, Poland and Belarus. It would double the existing Nord Stream pipeline’s current annual capacity of 55 bcm.
However, it is arguably one of the most geopolitically charged energy projects ever proposed. Germany maintains that the pipeline is needed to increase natural gas supply as some EU members move away from nuclear for power generation, but not everyone agrees. The U.S., under the past three presidents including Donald Trump, has long countered that the pipeline puts European national security in jeopardy – a concern that seems grounded given Russia’s history of using gas a geopolitical weapon in the middle of winter.
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Shale Pioneer Hamm: Output Growth Could Fall By 50%
Shale Pioneer Hamm: Output Growth Could Fall By 50%
U.S. shale production growth could slow by as much as half this year, according to one industry titan.
Continental Resources’ Harold Hamm said that shale growth could decline by as much as 50 percent this year compared to 2018, although he added that it was just a “wild guess.” Hamm said that a lot of shale E&Ps are trying to keep spending within cash flow. This newfound mantra of capital discipline has been imposed on the shale industry after a decade or so of a debt-fueled drilling frenzy.
“Producers have become more disciplined in their approach to capex,” Hamm said at the Argus Americas Crude Summit in Houston this week. “Several years back growth was a huge consideration. That consideration has been much less. The peak consideration now has been — are you overspending cash flow. Are you living within cash flow?”
The signs of a shale slowdown have been mounting. The rig count fell sharply in recent weeks. Production growth has already begun to slow. Schlumberger, the world’s largest oilfield services company, has warned that it is already seeing shale companies pulling back on drilling activity.
In the latest Drilling Productivity Report, the EIA forecasts that U.S. shale production will grow by 62,000 bpd in February compared to a month earlier. That is the slowest rate of growth in nearly a year, and down from the prior monthly production increases that have consistently exceeded 100,000 bpd.
Argus, using Barclays data, points out that North American onshore might only tick up by about 9 percent this year, down from the 18 percent jump in 2018. That could quickly translate into slower output growth. “Production is a direct response of capex today with this industry,” Hamm said at the Argus summit.
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