Tuesday 26 April 2016

Peak oil and the oil market - 04/25/2016

The Real Reason Saudi Arabia Killed Doha

Saudi Arabia single-handedly scuttled the Doha meeting, knowing all along that Iran would not participate, with a valid reason. The Russians and others agreed to proceed without Iran, planning to include them at a later date. So if everything was known beforehand, why did the Saudi’s pour cold water on the aspirations of the remaining members, risking its alienation from Russia and the OPEC community?

Was it simply Saudi enmity toward Iran? Not exactly. Upon closer scrutiny, we can find the Saudi masterstroke behind Doha.

It is well known that Saudi Arabia is heavily dependent on oil revenues, and that those revenues are on the brink of collapse. They have sought financial aid from various international agencies to support their dwindling economy. But the trick here is to determine exactly how desperate the Saudis are. Certainly not as desperate as other countries.

Angola has recently sought support from the International Monetary Fund (IMF). Venezuela’s struggles started well before crude prices dropped to 12-year lows and is fighting to avoid a disaster. Azerbaijan has also approached the IMF and the World Bank for help.

Nigeria is also seeking the World Bank’s support. Without external support, Iraq will find it difficult to continue its war against the Islamic State (ISIS). Lower oil prices continue to make matters worse, and Iraqi Kurdistan has taken advantage of the situation and works towards independence and beefing up its unilateral export plans.Ecuador is the worst hit, and now the devastating earthquake has crippled the nation. It will need help from the IMF, the World Bank and a few other lenders to reconstruct.

After a 3.5 percent contraction in 2015, Russia’s gross domestic product will take a further 1.5 percent hit in 2016, as projected by the Central Bank. Kazakhstan is faring no better. Its growth shrunk to 1.2 percent in 2015 from an impressive 6 percent in 2013 and is expected to slow down further to 0.1 percent in 2016.
Most of the participating nations are financially ruined. They have to undertake drastic measures to reduce their dependence on oil. Disaster is imminent.

The Saudis are definitely not immune, even if on the surface disaster isn’t obvious. Saudi Arabia is burning through its reserves at a record pace, but at the same time, it can sustain low prices for the next three to four years. Not only that, it can increase its production by another 2 million barrels per day, according to the International Energy Agency (IEA), if more funds are required.
But why the drastic action on the eve of the meeting disregarding the plight of the participating member nations?

Though the real reason for the about face is known only in the secretive halls of the royal palace, consider this:

Saudi Arabia has held the mantle as the world leader in oil for decades, and has largely enjoyed veto power on all things concerning oil. However, since 2014, it has waged a losing battle against the U.S. shale oil drillers, who are phenomenally more resilient than anyone expected.

The first signs of the shale producer vulnerability are now, however, becoming visible, with oil production in the U.S. dropping below 9 million barrels a day—the lowest in 18 months. If oil prices continue to remain below $40 per barrel, a few more shale oil producers will fall by the wayside.

But if crude prices rise above $50 per barrel, the shale producers have made their intentions clear, that they will be back in business.

If Saudi Arabia had accepted the deal, oil prices would have jumped to $50/b, giving the shale oil industry a new lease on life. Shale producers would have started pumping at a frantic pace, increasing the glut and pushing oil prices back down.

This whole exercise would permanently dent Saudi Arabia’s reputation as the leading oil player. The baton would have passed to the shale oil drillers—an event that the Saudis simply cannot allow.

With Iran’s return post-sanctions, Saudi Arabia’s leadership in OPEC is under threat. By scuttling the meeting, Saudi Arabia has asserted its supremacy and reminded the OPEC nations just how much power the Saudis still wield.

The Saudis have ascertained their importance in the new cartel as well. They have not let Russia assume sole leadership, they have ensured that they remain at the centre of any decision making in the new cartel.

By voicing their objection to the meeting, Saudi Arabia has attempted to win back the leadership baton from American shale producers. It has shown the OPEC members that it still is the leader, thereby blocking Iran from challenging it, and finally, it has maintained its importance in the new bigger cartel, demanding an equal say in the scheme of things alongside Russia.

The Doha washout was the Saudi masterstroke to regain its importance. However, with many OPEC nations on the edge of collapse, the next OPEC meeting will confirm if the Saudi move was indeed a masterstroke, or if it was just a short-lived power grab.

"China Is Hoarding Crude At 

The Fastest Pace On Record"

Zero Hedge,
25 March, 2016

In the aftermath of China's gargantuan, record new loan injection in Q1, which saw a whopping $1 trillion in new bank and shadow loans created in the first three months of the year, many were wondering where much of this newly created cash was ending up.

We now know where most of it went: soaring imports of crude oil.

We know this because as the chart below shows, Chinese crude imports via Qingdao port in Shandong province surged to record 9.86 million metric tons last month based on data from General Administration of Customs.

As Energy Aspects pointed out in a report last week, "Imports through Qingdao surged to another record as teapot utilization picked up, leading to rising congestion at the Shandong ports."

And sure enough, this kind of record surge in imports should promptly lead to another tanker "parking lot" by China's most important port. This is precisely what happened when according to reports, some 21 crude oil tankers with ~33.6 million bbls of capacity signaled from around Qingdao last Monday, according to data compiled by Bloomberg. 12 of those vessels, with about 18 million bbls, were also there 10 days earlier, data show.

As Bloomberg adds, port management had met to discuss measures to ease congestion, citing an official at Qingdao port’s general office, however for now it appears to not be doing a great job. Incidentally, putting Qingdao oil traffic in context, last year the port handled 69.9 million metric tons overseas oil shipments, or ~21% of nation’s total crude imports, more than any other Chinese port.

So what caused this surge in demand? The answer is China's "teapot" refineries.
According to Oilchem.net, the operating rate at small refineries in eastern Shandong province rose to 51.84% of capacity as of the week ended Apr. 22. The utilization rates climbed as various teapot refiners completed maintenance and restarted production.

How much of a boost in oil demand did teapot refineries represent? Well, the current operating run rates is averaging 50.42% this tear compared to just 37.72% a year ago, Bloomberg calculated.

Notably, this may be just the beginning of China's. As Bloomberg adds today, China, the world’s second-biggest crude consumer, may be poised for another increase in imports after the number of supertankers bound for the Asian country’s ports rose to a 16-month high amid signs it’s stockpiling.

There were 83 headed to China, the most since December 2014, according to a ship-tracking snapshot compiled by Bloomberg on Friday. Assuming standard cargo sizes, they would be able to deliver about 166 million barrels.

Others also noticed China's ravenous demand. As JPM reported in a note last week, China crude imports rose in February and March after dip in January. The total crude imports (a number which certainly should be taken with a salt mine) was 7.7 million bpd in March, up 21.6% compared to last year. Furthermore, 2016 YTD imports are running 12.3% above the same period in 2015.

Where is China getting the most of its oil? Cue JPM:

Atlantic Basin, Russian imports strong in March at the expense of Middle East. In total, Atlantic basin–sourced crude was 28% of total imports, up from 25% the month prior, while Middle East–sourced crude was 44% of imports, down from 51% the previous month. Russian imports were the second highest on record at 4.6 million tons (up from 4.1 million tons in February), well above Saudi Arabia (4.0 million tons). Russia imports were 14% of total Chinese imports. The strength in Atlantic Basin exports primarily came from Venezuela, Colombia, and Brazil, which were all at or near record high.

It appears that at least China is delighted to take advantage of the ongoing OPEC production chaos and massively oversupplied oil market.

Furthermore, as ClipperData reported moments ago, Chinese waterborne crude oil imports are on pace for another record high this month.

, while China is importing at a near record pace, is there also an offsetting increase demand? There was early in the year as shown in the chart below, but as of March the answer appears to be no. According to JPM, apparent oil demand was down slightly. Because while crude oil processed by Chinese refineries remained high in March, roughly unchanged month-over-month, after accounting for net product exports, apparent oil demand was 10.3 mbpd in March, down 2.3% from February and down 2.5% year-over-year.

So supply is soaring, demand is declining, which means just one thing: "China is hoarding crude at the fastest pace in at least a decade", according to Bloomberg, filling up excess inventory capacity at a record pace.

The punchline:

The nation added 787,000 barrels a day to stockpiles in the first quarter, the most for the period since at least 2004 when Bloomberg started calculations based on customs data. Its imports climbed in March from countries including Iran, Venezuela and Brazil.

For now - with the record credit impulse still reverberating across its economy - China's demand is relentless, and is keeping virtually all producers busy: "we’ve seen crude buying in recent months coming from a very broad range of sources, more coming from Latin America and more from Europe,” said Richard Mallinson, an analyst at Energy Aspects Ltd. in London. Shipments are being boosted by so-called teapot refineries and may also be advancing in preparation for the end of refinery maintenance programs in China, he said.

However, the party may be ending.

China's pace of imports may drop substantially in coming weeks as the teapot operating rate starts to drop next week, as many refineries are scheduled to start repairs, just like in the US.

Meanwhile, the oil production glut persists, and if suddenly China can no longer take advantage of all those tankers overflowing with oil for the next few months as teapot maintenance takes place, the world will suddenly realize that the spike in Chinese excess demand, driven by the biggest credit impulse in history, may be over, at which point attention will once shift to an oil market that remains in a state of pernicious imbalance as a result of weak global demand, record OPEC production, and a critical storage situation as there is ever less onshore and offshore space in which to store all the excess oil.

Judging by today's oddly rational drop in the price of crude, attention may already be shifting...

Saudi Arabia approves ambitious plan to move economy beyond oil

15-year plan includes diversification, privatisation of state assets, tax increases and creating a $2tn sovereign wealth fund

26 November, 2014

Saudi Arabia has approved an ambitious strategy to restructure the kingdom’s oil-dependent economy, involving diversification, privatisation of massive state assets including the energy giant Aramco, tax increases and spending and subsidy cuts.

King Salman bin Abdulaziz announced cabinet backing for the Saudi Vision 2030 plan in a brief televised announcement on Monday in which he called on his subjects to work together to ensure success. Shares on the Riyadh stock market rose sharply.

Under Salman, who came to the throne in early 2015, economic strains have been the backdrop to rising tensions with regional rival Iran, the threat from Islamic State, the wars in Syria and Yemen, and a sense that the kingdom’s decades-long relationship with the US is fraying.

Mohammed bin Salman, the king’s son and deputy crown prince, gave details of the economic reforms in a pre-recorded TV interview – part of a proactive media strategy designed to advertise a sense of dynamism and change in response to oil prices, which have fallen from more than $100 a barrel in early 2014 to about $40 this month.

Elements of the long-heralded 15-year blueprint include the creation of a $2tn Saudi sovereign wealth fund, as well as strategic economic reforms called the National Transformation Programme.

Bin Salman confirmed that the kingdom would sell off about 5% of Aramco, which will become a holding company with subsidiaries listed via an initial public offering. Oil was a “dangerous” addiction, he told al-Arabiya TV. “The vision doesn’t need high oil prices,” he added. “We can live without oil in 2020.”

Aramco is estimated to be the world’s most valuable company, while the wealth fund would be the largest of its kind. Overall the plans aim to make the Arab world’s largest economy depend on investments rather than energy to fill government coffers in the years to come.

The vision is a road map of our development and economic goals,” the prince said. “Without a doubt Aramco is one of the main keys of this vision and the kingdom’s economic renaissance.”

The fund will include current assets of around $600bn, as well as returns from the sales of Aramco shares and state-owned real estate and industrial areas estimated to be worth $1 tn.

Bin Salman, 30, is not only young in a country long ruled by old men but famously energetic and assertive. He seems genuinely popular but is also resented for his unprecedented concentration of power – as defence minister and chairman of the Council of Economic and Development Affairs. Critics call him reckless – especially over the war in Yemen.

Economic reform has often been discussed before but the sense of urgency has grown since the government ran a record budget deficit of nearly $100bn last year. Plans to boost non-oil revenues with taxes will take years to have an impact, leaving spending cuts and foreign investment as the main way to bring state finances under control.

In recent years Saudi Arabia has relied on oil revenues for about 90% of its budget. Earlier this month it took out a $10bn five-year loan from a consortium of global banks – its first sovereign loan since 1991. The new strategy builds on the work of several prominent international consulting firms, who have been paid $1.25bn in fees this year.

Subsidy cuts, already under way, look set to be challenging, with Saudis used to cheap petrol, water and energy – while polls show they still expect them to continue. Bin Salman said the reforms are intended to eliminate housing and unemployment problems and ensure help reaches those most in need.

Last Saturday, the king sacked the water and electricity minister, who had drawn criticism for his handling of price increases, including a suggestion that citizens upset over high water bills dig their own wells.

Social factors are a key driver for the new policy. With half the Saudi population under 25, job creation is vital if the kingdom – which has no national representative institutions – wants to avoid the social unrest that has fuelled Arab spring protests across the region. But the introduction of even indirect taxes may lead to demands for change that could undermine the autocratic system.

A “green card” system is to be launched within five years to allow expatriate Arabs and Muslims to live and work long-term in the country, Bin Salman said. Tourism – apart from the annual hajj pilgrimage – and mining would be used to generate new revenues. A holding company for military industries would also be set up.

Bin Salman had suggested earlier that what Saudi Arabia was planning was similar to the Thatcher-era privatisation of state industries in Britain in the 1980s.

Experts and analysts have called this the biggest economic shakeup since the founding of Saudi Arabia. “The vision and ambition is out there and the proof now will be on the execution and the ability to continue to amass support from society in general and the business community specifically,” John Sfakianakis, director of economics at the Gulf Research Centre in Riyadh told the Guardian.

Due to Mohammed bin Salman’s age, pace and sense of accountability, society is embracing these plans. Now is the time for big economic changes that the country hasn’t embarked on since 1932. The dynamism and determination to deliver has not been seen before and Bin Salman and his team know they have to deliver. Economic necessity dictates that Saudi Arabia reforms now.”

It is unclear whether the economic shake-up will lead to the kind of social changes many believe are needed to truly modernise the country: allowing women to drive, for instance, opening up the legal system, or ending the kind of human rights abuses that attract far more attention abroad than in the kingdom itself.

"The target of 50 percent renewables by 2028 to avoid a 2C world is achievable"


Where did all the oil go? The 

peak is back

Nafeez Ahmed

24 April, 2016

Solar power has grown exponentially and the target of 50 percent renewables by 2028 to avoid a 2C world is achievable

An extensive new scientific analysis published in Wiley Interdisciplinary Reviews: Energy & Environment says that proved conventional oil reserves as detailed in industry sources are likely “overstated” by half.

According to standard sources like the Oil & Gas Journal, BP’s Annual Statistical Review of World Energy, and the US Energy Information Administration, the world contains 1.7 trillion barrels of proved conventional reserves.

However, according to the new study by Professor Michael Jefferson of the ESCP Europe Business School, a former chief economist at oil major Royal Dutch/Shell Group, this official figure which has helped justify massive investments in new exploration and development, is almost double the real size of world reserves.

Wiley Interdisciplinary Reviews (WIRES) is a series of high-quality peer-reviewed publications which runs authoritative reviews of the literature across relevant academic disciplines.

According to Professor Michael Jefferson, who spent nearly 20 years at Shell in various senior roles from head of planning in Europe to director of oil supply and trading, “the five major Middle East oil exporters altered the basis of their definition of ‘proved’ conventional oil reserves from a 90 percent probability down to a 50 percent probability from 1984. The result has been an apparent (but not real) increase in their ‘proved’ conventional oil reserves of some 435 billion barrels.”

Global reserves have been further inflated, he wrote in his study, by adding reserve figures from Venezuelan heavy oil and Canadian tar sands - despite the fact that they are “more difficult and costly to extract” and generally of “poorer quality” than conventional oil. This has brought up global reserve estimates by a further 440 billion barrels.

Jefferson’s conclusion is stark: "Put bluntly, the standard claim that the world has proved conventional oil reserves of nearly 1.7 trillion barrels is overstated by about 875 billion barrels. Thus, despite the fall in crude oil prices from a new peak in June, 2014, after that of July, 2008, the ‘peak oil’ issue remains with us.”

Currently editor of the leading Elsevier science journal, Energy Policy, Professor Jefferson was also for 10 years deputy secretary-general of the World Energy Council, a UN-accredited global energy body representing 3,000 member organisations in 90 countries, including governments and industry.

Earlier this year, Deloitte predicted that over 35 percent of independent oil companies worldwide are likely to declare bankruptcy, potentially followed by a further 30 percent next year - a total of 65 percent of oil firms around the world.

Already 50 North American oil producers have gone bankrupt since last year due to a crisis of profitability triggered by bottoming oil prices.

The industry is also under pressure due to the growing recognition that a large portion of fossil fuels are merely "stranded assets" that must be kept in the ground to avoid dangerous climate change.

The new study will place even more pressure on the oil industry with the confirmation from a former senior oil major executive that about half of global "proved" conventional reserves are not merely "stranded", but do not even exist.

Asset values 'vastly exaggerated'

The implication is that a vast quantity of investment into the oil industry will never be able to produce sufficient returns, as it has been justified by assets whose value is vastly exaggerated.

Contradicting the official position of most of the oil industry, Jefferson cites a number of recent scientific studies, according to which “the evidence suggests that the global production of conventional oil plateaued and may have begun to decline from 2005”.

Jefferson believes that a nominal economic recovery, combined with cutbacks in production as the industry reacts to its internal crises, will eventually put the current oil supply glut in reverse. This will pave the way for “further major oil price rises” in years to come.

However, by the time it takes for another oil price spike to arrive, the current spate of bankruptcies could escalate to the point that continued oil industry investment is no longer financially viable.

According to another peer-reviewed study released in March in Energy Policy by two scientists at Texas A&M University, “Non-renewable energy” - that is “fossil fuels and nuclear power” - “are projected to peak around mid-century”, with or without climate mitigation policies.

But the paper adds that to avoid a rise in global average temperatures of 2C, which would tip climate change into the danger zone, 50 percent or more of existing fossil fuel reserves must remain unused.

This will require renewable energy to supply more than 50 percent of total global energy by 2028, “a 37-fold increase in the annual rate of supplying renewable energy in only 13 years”.

The Texas A&M scientists conclude that by century’s end, the demise of fossil fuels is going to happen anyway, with or without considerations over climate risks:

“… the ‘ambitious’ end-of-century decarbonisation goals set by the G7 leaders will be achieved due to economic and geologic fossil fuel limitations within even the unconstrained scenario in which little-to-no pro-active commitment to decarbonise is required… Our model results indicate that, with or without climate considerations, RES [renewable energy sources] will comprise 87–94 percent of total energy demand by the end of the century.”

Planet solar 'by 2030'

While a 37-fold annual rate of increase in the renewable energy supply seems herculean by any standard, some analysts believe the track record of solar power shows it could happen even faster.

To date, solar power has experienced an exponential growth rate, consistently outpacingconventional linear projections. While solar power generation has doubled every year for the last 20 years, with every doubling the production costs of solar photovoltaic (PV) has dropped by 22 percent.

Tony Seba, a lecturer in business entrepreneurship, disruption and clean energy at Stanford University, says that if this trend continues, the growth of solar is already on track to go global. With just eight more doublings, by 2030 solar power would be capable of supplying 100 percent of the world’s energy needs.

This means that even if Seba’s projections are overestimated by half, the target of 50 percent renewables by 2028 to avoid a 2C world appears to be achievable.

Nevertheless, a wealth of scientific data suggests that 2C is not a realistic safe target. As former NASA chief climate scientist James Hansen among others have warned, this level of warming could result in disintegration of polar ice sheets leading to “several metres” sea level rise within this century, putting cities like London and New York underwater.

Whether or not such warnings will be enough to spur investors to pull out of the fossil fuel industries, it is the bottom line: the latest revelations on the fundamentally uneconomic nature of these investments could accelerate the inevitable transition to our post-carbon future.

- Nafeez Ahmed PhD is an investigative journalist, international security scholar and bestselling author who tracks what he calls the 'crisis of civilization.' He is a winner of the Project Censored Award for Outstanding Investigative Journalism for his Guardian reporting on the intersection of global ecological, energy and economic crises with regional geopolitics and conflicts. He has also written for The Independent, Sydney Morning Herald, The Age, The Scotsman, Foreign Policy, The Atlantic, Quartz, Prospect, New Statesman, Le Monde diplomatique, New Internationalist. His work on the root causes and covert operations linked to international terrorism officially contributed to the 9/11 Commission and the 7/7 Coroner’s Inquest.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Eye.

Photo: Petrol and diesel pumps are pictured outside a Royal Dutch Shell petrol station in Hook, United Kingdom, on 20 January, 2016 (AFP).

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