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03 January 2015

Press review 03-01-2015 - Peak Oil in China?

The big energy story of 2014 was certainly the halving of petroleum prices. But on the long term the most relevant piece of news of last year was the official admission of a petroleum extraction peak in Russia. And by the very last days of the year a similar story brews up in China. Daqing, the super-giant field that accounts for one fourth of the petroleum extracted in China is entering its terminal decline phase. This information definitely sits China's peak in the not-so-distant future.

Petroleum prices are still searching for a bottom, leaving an ever grimmer picture for the industry. News of lay-offs, spending cuts, equity loss and downward revisions to reserves have now become routine. This is certainly not the best of environments to replace "easy oil" giants such as Daqing.

Want China Times
Daqing, China's largest oilfield, to reduce output

Daqing Oilfield, the largest oilfield explored by China's major oil and gas producer PetroChina, is expected to reduce its production starting in 2015.

According to the economic working conference of northeast China's Heilongjiang province on Saturday, Daqing Oilfield, which produces nearly one-fourth of China's total oil output annually, will see output reduction by 1.5 million tonnes next year.

By 2020, Daqing's annual output will be slashed to 32 million tonnes with an annual reduction of more than 1.3 million tonnes, the conference said.

As China's largest inland oilfield, Daqing has produced more than 2.1 billion tonnes of crude oil since production started in 1960.
Short term, the gravest concern remains the bond market in the US, where at least 200 G$ are threatened by the petroleum price rout. Various analysts see potential for contagion in this setting, pretty much as it happened with subprime mortgage bonds in 2007/2008.
Executive Intelligence Review
Oil Plunge Can Trigger ‘Subprime’ Debt Crash
Paul Gallagher, 19-12-2014

What began as a British-Saudi financial warfare weapon against Russia and Iran—the so-called “oil sanction”—is turning into an unpredictably bouncing hand grenade which may blow out a large debt bubble over the bankrupt U.S. economy.

Warnings are now starting to proliferate, as the price of West Texas Intermediate crude oil has fallen to the low $60s/barrel, that a wave of defaults of “high-yield,” or junk, energy debt, could trigger a broader mass default in the high-yield debt markets as a whole, which represent a couple of trillion dollars in very leveraged debt. High-yield energy debt is variously reported to constitute 20-30% of that bubble.
This huge pile of debt is mostly a consequence of the rush into source rocks, that are nowhere near profitability at present prices. A major slowdown in petroleum extraction from these low permeability reservoirs is just around the corner.
State:Texas Oil and Gas Drilling Permits Fall 50 Percent in November
Kristen Hays, 23-12-2014

Texas, the top oil-producing U.S. state, issued roughly half as many drilling permits in November as in October, as oil and gas producers scaled back with the steep decline in crude prices since summer.

The Texas Railroad Commission, the state's industry regulator, said on Tuesday that new permits for oil wells fell 57 percent to 376, while those for new oil and gas wells retreated 46 percent to 977.

Overall, the state issued 1,508 original drilling permits for all types of wells in November, compared with 3,046 in October.
According to the following analyst, this coming slow down in petroleum extraction is to continue well into the second half of 2015.
Everyone involved in oil will be squeezed: Pro
Michelle Fox, 30-12-2014

"It is a total ripple effect. Nobody's immune to this," Kilduff, founding partner of Again Capital and a CNBC contributor, said in an interview with "Closing Bell."

"I don't think we're anywhere near the bottom yet that's why I keep urging folks to hold off from rushing in to bottom fish."

Kilduff thinks there will not be any real impact on production in the U.S. until mid- to late-2015. In fact, he said there is another big pipeline reordering that will deliver another 200,000 barrels a day to the Gulf Coast which will threaten Venezuela and Mexico.

"This thing has not been sorted out in any way, shape or form yet. We've only scratched the surface of the reaction to these low prices," he said.
Ironically, the US government finally yielded to the pressures to lift the ban on petroleum exports. The country will certainly remain as a net importer, but this lift might erase the discount from the local petroleum price benchmark (WTI) to the Brent index.
U.S. opening of oil export tap widens battle for global market
Timothy Gardner and Jonathan Leff, 31-12-2014

The Obama administration has opened a new front in the global battle for oil market share, effectively clearing the way for the shipment of as much as a million barrels per day of ultra-light U.S. crude to the rest of the world.

The Department of Commerce on Tuesday ended a year-long silence on a contentious, four-decade ban on oil exports, saying it had begun approving a backlog of requests to sell processed light oil abroad. It also issued a long-awaited document outlining exactly what kinds of oil other would-be exporters can ship.

The administration's first serious effort to clarify an issue that has caused confusion and consternation in energy markets for more than a year will likely please domestic oil drillers, foreign trade partners and some Republicans who have urged Obama to loosen the export ban, which they see as an outdated holdover from the 1970s Arab oil embargo.
In Canada petroleum is mostly extracted from bituminous sands, a resource that is far more expensive to exploit than source rocks. Thus in this country a petroleum price in the fifties is completely asphyxiating the industry; with a higher relative weight, it also means a deeper direct economic impact.
The Globe And Mail
Crude prices may soon gouge Canadian oil patch
Jeffrey Jones, 31-12-2014

Oil prices ended 2014 with the biggest annual decline since the financial crisis, collapsing under the pressure of weakening demand, a glut of global supplies and OPEC’s refusal to keep playing the role of swing producer.

A 46-per-cent drop in North American oil prices since the end of 2013 has already forced deep spending cuts within the Canadian oil patch, and some analysts and investors warn that corporate budgets and staff numbers are at risk of being reduced further if the commodity-price rout continues.

The skid in crude prices has hit the shares of energy companies in Canada particularly hard, with the Toronto Stock Exchange’s energy group losing 17.6 per cent of its value in the past 12 months, despite a surge in the first half of the year.
The dissent inside OPEC over the price collapse is being left out in the open. In effect prospects are very different among members, with various struggling to meet their quotas. At this time the quotas are only effective to three members: Saudi Arabia, Kuwait and the UAE, whom right now are not willing to act. This is an interesting consequence of the surrealistic reserves figures reported by the majority of members. This deadlock might not cease without a revision to declared reserves, and consequently to quotas.
International Business Times
OPEC Oil Dispute: Iran Calls On Saudi Arabia To Address Plunging Prices, Warns Inaction Is A 'Serious Mistake'
Thomas Barrabi, 01-01-2015

A top Iranian official has called for Saudi Arabia to take steps to address plunging oil prices, which fell this week to their lowest point in nearly six years. The two nations in recent months have headlined OPEC infighting over which tactics to pursue as profits from oil exports drop.

“There are several reasons for the drop of the price of oil, but Saudi Arabia can take a step to have a productive role in this situation,” Iran Deputy Foreign Minister Hossein Amir Abdollahian told Reuters. “If Saudi does not help prevent the decrease in oil price … this is a serious mistake that will have a negative result on all countries in the region” whose economies rely heavily on oil.

Saudi Arabia leads a faction of OPEC members that have chosen to maintain oil production at current levels despite the falling prices. OPEC's biggest oil exporter and its allies fear that decreased production would allow other oil producers to seize a greater portion of the global market share. Iran has publicly resisted this decision and called for a decrease in output to counteract the price change. Abdollahian said Iran planned to discuss the situation with Saudi officials in the future, but he did not provide a time frame for when the discussion would occur.
In the gas world the outlandish estimates of reserves locked in source rocks by the US government is creating some buzz again. The gap to independent estimates is striking and leaves little shadow of doubt. This sort of deceiving publicity caught many imprudent investors that have lost (and stand to loose) vast amounts of money.
Petroleum Truth Report
David Hughes Weighs In on The Fracking Fallacy Debate
Arthur Berman, 27-12-2014

In the current debate about the Nature article "The Fracking Fallacy," the discussion has focused on estimates of cumulative production of shale gas plays by the Energy Information Administration (EIA) and The Bureau of Economic Geology at the University of Texas (UT/BEG).

David Hughes provides another estimate in his recent post "Fracking Fracas: The Trouble with Optimistic Shale Gas Projections by the U.S. Department of Energy," a summary of his comprehensive study of all U.S. shale plays Drilling Down published by The Post Carbon Institute.

The Fracking Fallacy debate is important because it casts doubt on the reliability of government estimates of our natural gas supply. If U.S. gas production is in decline by the early 2020s as described in the Nature article, or sooner as I suspect, then important policy decisions about the export of natural gas and the retirement of coal-fired electric power plants have been based on questionable information.
In Libya the war rages on, with two fronts and at least three factions clashing. Tripolitana is still ruled by an Islamic group, while Cyrenaica seems largely submerged in cahos.
The Telegraph
Libya descends into chaos as air strikes hit Misurata
Hassan Morajea, 28-12-2014

The rapidly escalating civil war in Libya saw the first air strikes on Misurata, the country’s third largest city, since the fall of Colonel Muammar Gaddafi three years ago.

Jets under the control of General Khalifa Heftar, a militia commander who was a central figure in Libya’s revolution, fired missiles on Sunday morning at the city’s international airport, just half an hour before a Turkish Airlines flight was due to leave for Istanbul. There were no reports of casualties.

The Libyan Air Force jets went on to attack the country’s largest steel plant and an air force academy near the airport, which are under the control of Islamist forces. “It was a shock. We did not see it coming,” said a spokesman for the airport, adding that the Turkish Airlines jet was preparing to taxi to the runway when the missiles struck.
Petroleum infrastructure has become a direct target of the war; the damage to exports may be more lasting than before.
Libya's losses mount as oil terminal burns
Daniel J. Graeber, 29-12-2014

Around $100 million worth of crude oil has gone up in flames as a result of a blaze burning at a tank storage facility in Libya, the government said.

Militants with a group calling itself Libya Dawn launched attacks last week on the port of Es Sider, leaving oil storage depots in flames and at least 19 soldiers dead.

The state-run National Oil Corp. confirmed as many as five of the 21 tanks storing oil at the site are in flames, which represents about $100 million worth of crude oil.
In Ukraine a slow de-escalation of the conflict seems under way, so far with any serious energy deprivation episodes avoided.
Russia says to supply coal, electricity to Ukraine

Russia has agreed on a new deal to supply coal and electricity to Ukraine, which is struggling with a lack of raw fuel for power plants due to a separatist conflict in the industrial east, Russian officials said on Saturday.

The move comes a day after Kiev said it would suspend train and bus services to Crimea, effectively creating a transportation blockade to and from the region annexed by Moscow in March this year. Kiev has briefly cut off electricity to Crimea before.

Russia will supply coal and electricity to Kiev without advance payment as a goodwill gesture from President Vladimir Putin, his spokesman Dmitry Peskov told TASS news agency.
Nothing relevant to report on Iraq, where the stalemate prevails between Shiites and Sunni.

And that is the panorama as we enter 2015. The government coalition in Greece collapsed and a snap election is to be held in a few weeks. At this moment the Syriza party is less than 10 parliament members away from absolute majority, meaning that Alexis Tsipras will most likely be the next Greek prime minister. What happens after that is anyone's guess. This will likely become the most important story in Europe in the months to come.

Happy New Year.

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