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Saudi Officials Worried About Oil’s Future

Saudi Officials Worried About Oil’s Future

Saudi delegation

Saudi government officials like talking to the media about oil. They invariably come across as upbeat, confident that the OPEC deal will achieve its goal of shrinking the global oversupply, and equally confident that U.S. shale will not seriously eat away at their oil revenues, however fast it grows.

The general message seems to be: We can handle everything. Behind the scenes, however, things look differently, Time reports, citing former and current U.S. government officials with experience in the Kingdom.

Following an interview with Crown Prince Mohammed, in which he anticipated a bright future for crude oil thanks to new strong demand, Time talked to several U.S. officials who shared their concern about how realistic this view of the industry actually is.

In fact, these officials believe Saudi Arabia is still overdependent on crude oil, and this could spell trouble for the barely contained powder keg that is the Middle East—a ripple in crude oil would likely set the region all ablaze. What’s more, they say, Saudi Arabia is still unable to make ends meet, even at the current higher oil prices. If prices fall and its deficit deepens further, the Kingdom would be hard pressed for an urgent change in its heavily subsidized economic model. There is even a danger of the economy crashing, one U.S. official said, and should this happen, chaos will ensue.

It is possible that Saudi officials are downplaying some very real threats to all the ambitious economic reform plans initiated by Mohammed bin Salman. However, it seems difficult to gauge the importance of these threats when Saudi sources are often at opposing ends of the opinion spectrum. Some, U.S. officials say, are adamant that everything around the reforms is proceeding smoothly. Others are equally adamant that the Kingdom is running on fumes that will soon evaporate.

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Oil Prices Fall As EIA Confirms Inventory Build

Oil Prices Fall As EIA Confirms Inventory Build

Rig

After a surprise 5.32-million-barrel inventory build reported by the American Petroleum Institute (API) weighed on oil prices yesterday, the Energy Information Administration (EIA) is reportinga build of 1.6 million barrels for the week ending March 23.

The markets, which have not had a chance to react to the EIA report as of the time of writing, could ease their downward trend given the nearly 4-million difference in build in the official figures.

However, they could also take this as confirmation of a reversal of expectations. Heading into Tuesday’s API data, expectations were for a draw of around 430 million barrels.

The authority said refineries processed 16.8 million bpd of crude in the reporting period, unchanged from a week earlier. Gasoline production averaged 10.3 million bpd, compared with 9.9 million bpd a week earlier, and distillate output averaged 4.8 million bpd last week, versus 4.5 million bpd a week earlier.

Gasoline inventories, the EIA said, fell by 3.5 million barrels in the week to March 23. In the week before that, gasoline inventories marked a decline of 1.7 million barrels. Distillate inventories last week shed 2.1 million barrels, compared with a decline of 2 million barrels in the prior week.

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2018: A Breakout Year For Clean Energy

2018: A Breakout Year For Clean Energy

solar Australia

The bullish momentum for global clean energy investment, which rose 3 percent to $333.5 billion in 2017, will continue this year.

There was significant progress in the transition to cleaner energy in 2017, and 2018 should see more of the same. New solar installations will top 100 GW this year, with China likely to make up about half of that total, according to a new report from Bloomberg New Energy Finance (BNEF), which lays out some key predictions for 2018.

However, beginning this year, BNEF says that new countries will become relevant in the race for clean energy, including sizable solar installations slated for Latin America, Southeast Asia, the Middle East and Africa.

Falling costs and proliferating installations of wind and solar are underpinning the sector’s growth. At the same time, cheaper inputs mean that developers can get more gigawatts of clean energy per dollar invested, which explains why the headline investment figure appears to not be growing by all that much.

There were some eye-popping figures and notable progress for new renewable energy projects in 2017. For instance, the tariffs for some onshore wind projects in Mexico dropped to a whopping $18.60 per MWh, a price that “would have been unthinkable only two or three years ago,” Angus McCrone, Chief Editor at Bloomberg New Energy Finance, wrote in the report.

Meanwhile, the cost of lithium-ion batteries plunged by an additional 24 percent last year, which raises the odds that by the mid-to-late 2020s, EVs could beat out conventional gasoline and diesel-powered vehicles not just on the life time cost, but even on upfront cost.

Battery costs will continue to decline this year, but at a slower rate than in the past. Soaring prices for cobalt and lithium carbonate will offset some of the declines in cost, to be sure, but BNEF still sees the average cost of battery packs falling by an additional 10 to 15 percent.

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Worst Hurricane Season In A Decade Threatens Gulf Coast Production

Worst Hurricane Season In A Decade Threatens Gulf Coast Production

GoM rig

2017 could be an “above-normal” year for large hurricanes, according to the National Oceanic and Atmospheric Administration (NOAA), a potential problem for Gulf Coast oil drillers and refiners.

NOAA puts the odds of an “above-normal” season for hurricanes at 45 percent, while the chances of a normal and below-normal season are at 35 and 20 percent, respectively. In fact, they said that there is a 70 percent likelihood of 11 to 17 named storms, which are storms that have 39 mile-per-hour winds or higher. About 5 to 9 of those could become hurricanes (winds of 74 mph or higher); 2 to 4 of which could become major hurricanes (winds of 111 mph or higher). The average season (which runs from June through November) tends to have just 12 named storms, so the potential for 17 named storms puts the 2017 hurricane season in more treacherous territory.

“We’re expecting a lot of storms this season,” Gerry Bell, lead seasonal hurricane forecaster with NOAA’s Climate Prediction Center, told reporters. “Whether it’s above normal or near normal, that’s a lot of hurricanes.”

Part of the reason for the expected uptick in hurricane activity is because the El Nino phenomenon is not expected to show up. El Ninos tend to suppress hurricanes. Also, sea-surface temperatures are above-average, which contributes to stronger storms.

There has been a decade-long lull in major hurricanes that have struck the U.S., but there is a growing probability that that changes this year.

That should be cause for concern for the oil and gas industry, much of which is located along the Gulf Coast. They have been spared the worst that Mother Nature has to offer for quite some time. Related: Oil Prices Fall As U.S. Rig Count Rises For 20th Straight Week

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Today’s Stunted Oil Prices Could Cause Oil Price Shock In 2020

Today’s Stunted Oil Prices Could Cause Oil Price Shock In 2020

Refinery

As oil prices remain unsteady and OPEC continues to make headlines every hour, the world is focused on oil’s immediate future. As Saudi Arabia announces plans to slash production and move their economy away from oil dependency, many industry insiders are predicting that the now over-saturated market will reach an equilibrium with higher commodity prices by 2018 and U.S. shale production will continue to grow along with global demand.

Robert Johnston, the CEO of one of the world’s biggest political risk consultancies, is unconvinced. In a speech made at the Association of International Petroleum Negotiators’ 2017 International Petroleum Summit, Johnston laid out his concerns for the future of oil.

What I don’t hear people asking is, ‘then what?’ Are the Saudis going to maintain these production cuts forever, or at some point do they have to start reversing that? I think in 2018 they will be reversing those production cuts,” he said. These important questions aren’t getting enough attention according to Johnston, whose firm Eurasia Group foresees a fast-approaching supply gap that Saudi Arabia and U.S. oil may not be able to fill.

Eurasia Group forecasts about 7 million barrels per day (MMbbl/d) of new crude supply by 2022. This includes about 5 MMbbl/d of U.S. shale growth and about 2 MMbbl/d from oil sands and deepwater extraction. But by the year 2022, another 15 MMbbl/d of new supply may be needed, as demand trends predict an annual growth rate of about 1 MMbbl/d. With this kind of impending discrepancy between supply and demand, the industry needs to start looking for new sources of oil, and quickly.

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Shale Hotspot Draws In Another Big Oil Player

Shale Hotspot Draws In Another Big Oil Player

Oil rig

The oil price crash that destroyed a lot of smaller oil producers has not spared the finances of even the oldest and largest oil companies. Trying to keep the precious dividends intact and growing, Big Oil is focusing on cost control and cash preservation, and has effectively deferred investments in new ultra-expensive drilling ventures.

One of the biggest companies, U.S. Chevron, is now planning to capitalize on its vast acreage holdings in the Permian. Investments in new mega projects, at least over the next few years, are not currently on the table, chief executive John Watson told Reutersin an interview published this week.

Chevron is now betting big on the Permian; the star shale play straddling West Texas and New Mexico that has seen most of the resurgence since oil prices started steadily recovering in the fourth quarter last year.

Unlike some other (and smaller) producers who have just recently rushed to secure holdings in the shale play, Chevron is not a newcomer to the Permian – the group and its legacy companies have held acreage in the area since the early 1920s.

Now the new oil order is causing the company to shift strategies away from mega drilling projects to secure steady returns in more conservative projects in order to protect dividends and keep them growing.

Chevron reported earnings of $0.22 per share for the fourth quarter of 2016, compared with a loss of $0.31 per share for the fourth quarter of 2015, in line with analyst expectations that it would return to profit, but still missing the EPS estimates by a wide margin. Full-year 2016 results showed a loss of $497 million compared with earnings of $4.6 billion in 2015, which was the first annual loss Chevron has booked since 1980.

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Venezuela In Dire Straits As Oil Production Falls Further

Venezuela In Dire Straits As Oil Production Falls Further

Oil Pipe

Venezuela’s economic crisis continues to deepen. The South American OPEC member is thought to be sitting on nearly 300 billion barrels of oil, far more than any other country in the world, including Saudi Arabia (estimated at 268 billion barrels). But the economy has been in freefall for several years, with conditions continuing to deteriorate.

The economic crisis has morphed into a full-blown humanitarian disaster. Just this week the Wall Street Journal reported on Venezuelan women traveling to neighboring Colombia to give birth because the state of Venezuela’s hospitals are horrific, with shortages of medical supplies and trained staff. Infant mortality is worse than in war-ravaged Syria.

Food and other essential items are also painfully scarce, leading to long lines at shops. Tensions run high because there is not enough to go around.

Now even gasoline is running low in Caracas, Reuters reports, an unusual development for the capital city.

Gas shortages suggests problems for Venezuela’s state-owned oil company PDVSA are deepening. The government depends on oil production for more than 90 percent of its export revenues, and the collapse of oil prices back in 2014, coupled with a long-term slide in output, have ruined the company’s finances.

That, in turn, puts even more pressure on PDVSA. A shortage of cash is straining the company’s ability to import refined products as it falls short on bills to suppliers. PDVSA needs to import refined products to dilute its heavy crude oil, but without enough cash, tankers are sitting at ports unable to unload their cargoes. Reuters also says that “many tankers are idle because PDVSA cannot pay for hull cleaning, inspections, and other port services.”

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Venezuela Is Down To Its Last $10B As Debt Payments Loom

Venezuela Is Down To Its Last $10B As Debt Payments Loom

Maduro PDVSA

Venezuela’s central bank is down to its last $10.5 billion in foreign reserves, according to the institution’s most recent report on the country’s financials.

Over the remainder of 2017, Caracas needs to fund $7.2 billion in debt payments – an amount that it can only meet if oil prices spike far higher than the ongoing boosts caused by OPEC’s output reduction agreement.

Current reserves stand 66 percent lower than levels in 2011, when the government held $30 billion in foreign currencies to spend on loan repayments and other official business.

“The question is: Where is the floor?” Siobhan Morden, head of Latin America fixed income strategy at Nomura Holdings, told CNN Money. “If oil prices stagnate and foreign reserves reach zero, then the clock is going to start on a default.”

Venezuela’s financial report for 2016 stated that roughly $7.7 billion of the remaining $10.5 billion in foreign reserves had been preserved in gold. Last year, in order to fulfill debt obligations, Caracas began shipping gold to Switzerland.

The drastic fall in oil prices in 2014 and widespread corruption have both caused an economic meltdown in the South American country, where citizens had become accustomed to imported goods paid for by fossil fuel revenues.

President Nicolas Maduro has resorted to opening the country’s border with Colombia to allow Venezuelans to purchase necessary medical and day-to-day supplies.

Venezuelan state-run oil company PDVSA’s default is probable, according to the ratings agency Fitch, which cited the oil giant’s weak liquidity position and high amortization scheduled for 2017 as the causes of the default problem last month.

“Should oil prices remain around current levels, average recovery may lead to additional future defaults to further reduce obligations and allow for necessary transfers to the government,” said Fitch’s senior director Lucas Aristizabal.

The company has projected that its oil production will maintain its 23-year-low in 2017.

Norway Doubles Down On Arctic Oil

Norway Doubles Down On Arctic Oil

Statoil oil operation

While Canada and the U.S. ban Arctic drilling for oil and gas motivated by environmental concerns, and majors such as Shell pull out of their Arctic projects due to financial pressures, Norwegian energy companies are planning to increase drilling in the country’s Arctic shelf in the Barents Sea.

It seems that the limited oil price increase that followed OPEC’s production cut deal has been enough for Statoil and Lundin to decide to allocate more funds to Arctic drilling, especially since the price rise has been accompanied by a major discovery for Lundin and a likely future major discovery for Statoil.

Lundin announced earlier this month that it had struck a deposit holding between 35 and 100 million barrels of oil equivalent in its Filicudi prospect in the southern Barents Sea. According to the company, which is exploring the prospect in partnership with Aker BP and Dea, Filicudi may contain as much as 700 million barrels of oil equivalent.

Statoil, for its part, is gearing up for a major drilling campaign focusing on what could turn out to be the largest field in Norway’s Arctic shelf: the Korpfjell field. Dubbed an elephant, Korpfjell may hold up to 10 billion barrels of crude, not least because of its immediate proximity to another promising deposit, the Perseevsky oil prospect in the Russian section of the Arctic. Perseevsky is being explored by Rosneft in partnership with Statoil.

Naturally, there is major environmental opposition to this Arctic foray: Greenpeace, Bloomberg recalls, last year launched a lawsuit against the Norwegian government for awarding exploration licenses in the Barents Sea. The case will be heard this fall.

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OPEC Production Cut May Need to Be Extended: Oil Ministers

OPEC Production Cut May Need to Be Extended: Oil Ministers

Production

The oil ministers of Iran and Qatar have suggested that OPEC’s production cut agreement may have to be extended beyond the June deadline, despite an almost 100-percent compliance rate.

The comments come a day after the American Petroleum Institute reported the second-largest crude oil inventory increase in history, at 14.227 million barrels, which added fuel to worries that production cut efforts are not enough to rebalance the market.

Iran’s Oil Minister, Bijan Zanganeh, told Iranian media after a meeting with his Venezuelan counterpart that the option of extending the cut needs further study, but, he said, “in principle” the group must do it. Zanganeh also said that most OPEC producers would be happy with oil at US$60 – a level that has proved difficult to reach.

Qatar’s Oil Minister Mohammed Al Sada, for his part, spoke at a news conference in Doha, saying that the oil market may rebalance in the third quarter, adding that “it’s too early to make a judgment.”

At the same time, however, Qatar’s Finance Minister said that the country is comfortable with the current level of oil prices, with expectations that it will be able to plug its budget hole this year, at oil price levels of US$45, as stipulated in the budget.

The latest update from OPEC on how the production cut was progressing pegged daily production for January at 32.89 million barrels, versus a target of 32.5 million barrels. This represented a compliance rate of 91 percent and suggested that nearly everyone is on board with the market rebalancing effort.

Iraq is still producing 130,000 bpd more than agreed, but as a whole, the cartel is exceeding expectations of compliance. This, however, seems to be insufficiently lifting benchmark prices. After API’s report yesterday, WTI slipped below US$52 and Brent dropped below US$55.

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The Oil War Is Only Just Getting Started

The Oil War Is Only Just Getting Started

Oil infrastructure

It’s been a month now that investors and analysts have been closely watching two main drivers for oil prices: how OPEC is doing with the supply-cut deal, and how U.S. shale is responding to fifty-plus-dollar oil with rebounding drilling activity. Those two main factors are largely neutralizing each other, and are putting a floor and a cap to a price range of between $50 and $60.

The U.S. rig count has been rising, while OPEC seems unfazed by the resurgence in North American shale activity and is trying to convince the market (and itself) and prove that it would be mostly adhering to the promise to curtail supply in an effort to boost prices and bring markets back to balance. In the next couple of months, official production figures will point to who’s winning this round of the oil wars.

This would be the short-term game between low-cost producers and higher-cost producers.

In the longer run, the latest energy outlook by supermajor BP points to another looming battle for market share, where low-cost producers may try to boost market shares before oil demand peaks.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”.

“In a world where there’s an abundance of potential oil reserves and supply, what we may see is low-cost producers producing ever-increasing amounts of that oil and higher-cost producers getting gradually crowded out,” Spencer Dale, BP group chief economist said.

In BP’s definition of low-cost producers, the majority of the lowest-cost resources sit in large, conventional onshore oilfields, particularly in the Middle East and Russia.

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Can U.S. Shale Add 1 Million Bpd In 2017?

Can U.S. Shale Add 1 Million Bpd In 2017?

Rigs

Oil prices are up on expectations that OPEC will contribute to a faster balancing in 2017, with up to 1.8 million barrels per day in cuts along with some non-OPEC countries. That has put a floor beneath prices, with fears of another downturn largely dissolved after OPEC’s announcement.

But what if U.S. shale comes roaring back and ruins the price rally? Estimates run the gamut on how quickly U.S. shale production can rebound and by what magnitude. Citigroup sees output rebounding by 500,000 barrels per day if oil prices average $60 per barrel. A December 12 report from Macquarie said that oil prices above $60 could spark a 1 million barrel-per-day revival.

U.S. shale is already up about 300,000 barrels per day from a low point in the summer of 2016, at least according to preliminary data. The gains are expected to continue. The industry is producing about as much oil as it was two years ago, with only one-third of the more than 1,700 rigs in 2014. Drillers are producing just as much oil with a lot less effort.

If U.S. shale surges back by 1 mb/d as Macquarie suggests, it would offset most of the cuts from OPEC and non-OPEC countries. Additionally, one would have to assume some degree of non-compliance and/or “cheating” on the cuts from participating countries, plus an expected increase in supply from Libya and Nigeria. Altogether, a rise in oil prices could be self-defeating, leading to prices falling once again later in the year. Related: Oil Price Roulette: Investors Bet On $100 Oil

Then there are also the implications on oil demand to consider. Higher prices might cut into demand growth, leading to an expansion in consumption at a much slower rate. The IEA already thinks oil demand will grow by 1.3 million barrels per day in 2017, one of the weakest in years.

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Trump’s Oil Price Dilemma

Trump’s Oil Price Dilemma

Trump Victory speech

President-elect Donald Trump has started naming his picks for key administration offices, and it looks like he is beginning to assemble a team to deliver on at least part of his campaign promises of An America First Energy Plan.

Trump’s agenda includes lifting restrictions and opening onshore and offshore leasing on federal lands, eliminating the moratorium on coal leasing, and opening shale energy deposits. The President-elect’s key arguments for these policies are creating high-paying jobs, lessening and even eliminating America’s energy dependence, increasing tax revenues, and adding billions of dollars in economic activity.

Even if Trump were to deliver on all his pledges – as far as federal law and federal regulations are concerned – the U.S. oil production would be driven by the market—the economics of the supply and demand that determine the prices of oil.

At the time of Trump’s inauguration on January 20, OPEC and a dozen non-OPEC nations are set to begin to reduce crude oil supply with the purpose of killing the global glut and lifting oil prices. Ideally, OPEC/NOPEC taking 1.8 million bpd off the market would speed up the drawdown in global stockpiles and prop up prices.

In reality, few expect OPEC to stick to its commitments and cut as much as promised.

Still, oil prices are now north of US$50, and OPEC (even if some members cheat) may be able to talk prices up a month or so more. American production has been suffering the consequences of the two-year oil price rout, but if oil stays over US$50 for longer, it would entice more U.S. producers to return to work. Oil prices at US$60 or more would lead to even more confidence among U.S. producers—producers who are now ‘leaner and meaner’ and carefully choosing how to invest.

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Huge Decline In U.S. Proved Oil And Gas Reserves

Huge Decline In U.S. Proved Oil And Gas Reserves

Shale Gas well

Proved oil and gas reserves down 11.8 percent and 16.6 percent, respectively, from year-end 2014

EIA has downgraded its estimates of proved oil and gas reserves in the U.S., according to its Crude Oil and Natural Gas Proved Reserves, Year-end 2015 report, released today.

Proved reserves of crude oil in the U.S. declined by 4.7 billion barrels or 11.8 percent from their year-end 2014 level to 35.2 BBbls at year-end 2015. Natural gas proved reserves decreased 64.5 Tcf to 324.3 Tcf, a 16.6 percent decline.

Average oil and gas prices in 2015 dropped 47 percent and 42 percent, respectively, from 2014, resulting in more challenging economic and operating conditions. This caused operators to postpone or cancel development plans and revise their proved reserves downward.

Discoveries and revisions

Proved reserves are volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.

The charts below break down the different additions and revisions contributed to the changes.

(Click to enlarge)

Total discoveries of crude oil kept pace with reserve decreases from production, with 150 million more barrels of crude and lease condensate produced than were found.

Discoveries are defined as new fields or reservoirs in previously discovered fields. Extensions are additions to reserves that resulted from additional drilling and exploration in previously discovered reservoirs. In a given year, extensions are typically the largest percentage of total additions while discoveries are usually a small percentage of annual reserve additions.

Revisions primarily occur when operators change their estimates of what they will be able to produce from the properties they operate in response to changing prices or improvements in technology.

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Why Are Bankrupt Oil Companies Still Pumping?

Why Are Bankrupt Oil Companies Still Pumping?

As oil prices have declined, the number of bankruptcies and distressed oil majors has quickly risen into the dozens. In fact, a recent Reuters analysis suggests little effect on production from when companies enter bankruptcy. Reuters cited Magnum Hunter as a primary example of this reality.

While Magnum Hunter filed for bankruptcy in December 2014, the firm has scrambled even in Chapter 11 to keep its oil flowing, resulting in O&G production rising by roughly one-third between mid-2014 and late 2015. The firm has used the protection bankruptcy courts to help stave off creditors while keeping the pumps flowing full tilt. Nearly all of Magnum Hunter’s 3000 wells are still producing crude, and that makes sense for several reasons.

First, daily costs for operating wells remain well below current spot prices. While drilling new wells is not economical, it is perfectly logical to keep exploiting existing wells. Fracked wells usually start to see a significant decline in production after about two years of operations. So eventually Magnum Hunter and other companies will see their production fall, but two years can be a very long time to pump.

Second, creditors want to extract maximum value from the company and the best way to do that in the current environment is to keep the oil flowing.

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