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19 June 2016

Press review 19-06-2016 - Decomissioning

The Brent index has been trading within a band around 50 $/b as increasing consumption trends meet increasing global economic and political uncertainties. Daesh spilt more blood in OECD countries with terror attacks in the US and again in France. But in the Middle East the caliphate is clearly loosing ground, especially in Iraq, where the US seems to have definitely chosen the Shiite site of the war.

However, markets are mostly concerned these days with the referendum in the UK regarding its membership of the European Union. The shocking murder of a Labour MP days ago underlines the dramatic moments lived in the country around this decisive moment. Even though the UK is not part of the Eurozone and not part of Schengen space, most foreign analysts and pundits are taking this referendum as an omen on the future of the European Union itself.

And next Sunday there is a new parliamentary election in Spain, which is shaping up to produce a left front government, not very different from the situation in Portugal. This coming week is the most important moment for the European Union since the Lisbon treaty was signed. For bad or for worse, the EU might well enter a completely different course just a few days from now.

Whether the UK stays or leaves the European Union, the kingdom is bout to face an incredible challenge with the decline of the North Sea. Decommissioning the loads of infrastructure deployed in the region to extract petroleum and gas will soon start draining important sums of money. The North Sea will at some point change from an asset to a liability.
Financial Times
North Sea oil: The £30bn break-up
Kiran Stacey and Alan Livsey, 08-06-2016

The Pioneering Spirit, a catamaran the length of five jumbo jets, will next year sidle up to Royal Dutch Shell’s Brent Delta oil platform in the North Sea, 115 miles north-east of the Shetland Islands.

Its hulls will manoeuvre either side of the platform’s legs and it will grip on with 16 specially reinforced beams. Then in a single motion, it will lift the 24,000-tonne “topside” of the platform — accommodation block, helipad, drilling derrick and all — away from its legs, before carrying it back to shore to be dismantled.

In doing so, the ship will have undertaken the heaviest lift ever attempted in the North Sea. More significantly it will also have begun what is expected to be a wave of decommissioning across the North Sea, as oil companies struggling with low prices shut down production and pack up one of the UK’s most successful industries of the past 50 years.

The mainstream media is slowly acknowledging peak coal in China and wondering what the future may hold for this important resource. A shift in the energy market is clearly percieved at this stage.
Finantial Times
Coal use plunges as China cuts back and US turns to gas
Pilita Clark, 08-06-2016

The world’s use of coal fell by the largest amount on record last year as the fossil fuel that powered the industrial revolution was struck by tumbling US gas prices and another year of dwindling consumption in China.

BP’s latest world energy review showed 2015 had been “an annus horribilis for coal”, said the oil and gas group’s chief economist, Spencer Dale.

Global consumption and production levels for coal plunged by the biggest amount since at least 1980, while prices fell about 20 per cent.

“I would be surprised if one can think of another period when coal has fallen by a similar amount,” said Mr Dale.
Almost two in years into this depressed petroleum market the industry contraction keeps deepening. A new report references a value close to 1 T€ in deferred investments and a sizeable decline in world extraction already next year. According to this report world petroleum extraction is to decline by more than 3 Mb/d in 2017 alone.
Financial Times
Oil industry’s $1tn spending cut raises fears over future supply
Ed Crooks, 15-06-2016

Oil and gas companies will spend $1tn less on finding and developing reserves between 2015-2020 because of the crude price crash, a leading consultancy says, stoking fears about potentially tight supplies towards the end of the decade.

Wood Mackenzie, the consultancy, said it expected “upstream” oil and gas spending to be 22 per cent lower than it projected two years ago, before prices started to slide.

The US onshore industry, including shale producers, is suffering some of the deepest cuts, with Russia also expected to see sharp falls, although in some parts of the Middle East, including Saudi Arabia, spending is holding up.

The slowdown in investment is expected to cut next year’s global oil and gas production by 4 per cent. That will help to temper the oversupply that has driven crude prices down, but potentially lay the foundations for tighter markets and rising prices in subsequent years.
Not only consultancies, the industry itself is not shy of declaring "shortages" ahead as consequence of this long period of low petroleum prices.
Russia Today
Global market may face oil shortage in 3-5yrs – Rosneft CEO
15-06-2016

The oil market is reaching a balance faster than analysts predicted and a period of sustained oil price rises is not far off, according to Rosneft CEO Igor Sechin. He added that low investment may cause oil shortages in three to five years.

"According to analysts, the average oil price is expected at $40-45 per barrel in 2016. Oil demand in the world continues to grow, while production, primarily in the US, decreases,” Sechin said in an interview with Italian business newspaper Il Sole 24.

Oil prices have almost doubled since the January lows, without any agreement between world producers, said Sechin. “It indicates the fundamental stability of the oil market. Moreover, the oil market is reaching its balance quicker than analysts had predicted.”
The press is also wondering what may be happening with claimed petroleum reserves, that seem to have stopped growing. The extraction over reserves ratio remains a reference to many analysts, even through it has never provided any relevant information regarding future extraction trends.
The Barrel
Falling global oil reserves: Pricing blip or panic alarm? — Fuel for Thought
Robert Perkins, 13-06-2016

For years global oil majors have brushed off speculation that an imminent peak in global oil reserves spells the beginning of the end of the hydrocarbon age. There is a long-term trend of new oil finds and improved recovery outpacing consumption each year, they say, underpinning future output and returns.

BP’s latest benchmark energy review, however, makes this line a tougher sell.

The figures show that, since 2011, the world oil reserves have flatlined and are now dropping. Total proven reserves peaked at 1.7 trillion barrels in 2014 and, had BP not revised its 2013 figure downwards, last year’s 1.698 trillion barrel total would have marked the second consecutive fall since BP’s data began in 1980.
In previous writings I have hinted at coming structural declines in petroleum extraction in Canada. There is further information concurring with this appraisal. It does not really matter if Canada claims the second largest petroleum resource in the world in face of the present depressed market.
Business News Network
'We’re just not competitive': Why the oil patch can’t cut its way to growth
Jameson Berkow, 07-06-2016

No matter how much Canadian oil sands producers cut costs, John Stephenson argues it can never be enough.

While the CEO of Stephenson & Co. noted some players in the sector will be able to squeeze out tiny profits in a US$50 per barrel oil price environment – Husky Energy and Suncor Energy, for example, can operate with at least some margin for profitably with prices above the US$30 level – he stressed the oil sands’ economic heyday is over.

“I’m sure the last buggy-whip manufacturer had razor-thin margins and it would have done an excellent job of cutting costs,” Stephenson told BNN on Tuesday, “but it doesn’t really matter if there’s a systemic shift.”

Oil sands producers in northern Alberta have among the highest operating costs in the world. At the same time, limited market access due to ever-increasing controversies surrounding new pipeline proposals, combined with the higher cost of refining thicker oil sands bitumen, means those producers must also sell their output for some of the lowest prices in the world.
The financial and social troubles triggered in Venezuela by this petroleum market are finally starting to show in extraction in that country. This trend is likely to deepen throughout the remainder of this year.
Seeking Alpha
No Deal, Venezuela's Oil Production To Collapse
15-06-2016

[...] The Wall Street Journal reported two days ago that we are finally starting to see Venezuela's oil production declining. The 120k b/d decline was a bit more dramatic than we expected, but the 2.37 million b/d of production probably remains high. Our discussions with traders point to the situation in Venezuela as being far worse than what the media is reporting.

We note that Venezuela is still in the midst of talks with China for additional oil for loan deals. Essentially, Venezuela is mortgaging its oil reserve for cash today. The Chinese clearly realize how much leverage they have in this situation. With Venezuela possessing the largest oil reserve in the world, it would be an absolute gold mine to lock in deals at this price.

The Chinese have probably realized that Venezuela is faking its production numbers. The numbers we are hearing are somewhere closer to 2 million b/d vs. the 2.37 million b/d. The difference is massive. We also have to factor in the lack of investment in Venezuela's producing fields, which is almost non-existent. Servicing firms like Schlumberger (NYSE:SLB) has announced that it is pulling some of its activities due to Venezuela's inability to pay. BP still has cargoes of light crude sitting at Venezuela's docks as Petróleos de Venezuela (PDVSA) is unable to pay for oil imports.
Another country harshly hit by petroleum at 50 $/b is Angola. And now there are news of a potential re-wake of the rebellion in Cabinda - the enclave where petroleum extraction started in Angola.
Reuters
Rebels alive and kicking in Angolan petro-province, oil workers say
Ed Cropley, 14-06-2016

Men claiming to belong to a rebel group fighting for independence of the oil-rich Angolan province of Cabinda boarded an offshore Chevron gas platform in late May and threatened foreign petroleum workers, two industry sources said.

The incident is a rare sign of the simmering instability in Cabinda, a heavily guarded territory that accounts for half the oil output from Africa's top petroleum producer.

Chevron, Cabinda's biggest foreign oil firm, declined to comment, while provincial governor Aldina da Lomba Catembo said the group - the Front for the Liberation of the Enclave of Cabinda (FLEC) - "does not exist".
These days Iran is the only source of good news for the petroleum market. With economic sanctions out of the way, Iran has now recovered extraction to almost the pre-sanctions level. This also means Iran will no longer be offsetting the negative impact from the countries referenced above.
Bloomberg
Iran's Oil Comeback May Already Be Over
Anthony Dipaola and Grant Smith, 16-06-2016

Iran easily beat expectations with its speed in boosting oil exports after the lifting of sanctions. Without an injection of cash and the easing of remaining trade barriers, the recovery may have run its course.

When restrictions on Iran’s oil exports were relieved in January following a nuclear pact with world powers, analysts from Goldman Sachs Group Inc. to Barclays Plc doubted it could return to previous levels this year. The Persian Gulf state defied the skeptics with a 25 percent surge in production and aims to reach an eight-year high of 4 million barrels a day by year-end.

“They have surprised most market participants with the speed they’ve been able to resume production,” said Antoine Halff, a senior fellow at the Center on Global Energy Policy at Columbia University in New York. “But to exceed pre-sanctions levels would require investment and technology and that’s a much longer-term proposition.”
Throughout the past weeks the press has reported some back and forth hesitations on a lift of the economic sanctions to Russia. At this moment it seems the Council will vote to maintain the sanctions, but it is clear not everyone is happy with this situation in the EU. Interestingly, European citizens are in general not worried with Russia and do not regard the big neighbour has a threat. Perhaps an important cue to subsequent Council meetings.
EUObserver
Few Europeans see Russia as 'major' threat
Andrew Rettman, 14-06-2016

Most Europeans see Russia as a “minor” threat compared to Islamic State (IS), the refugee crisis or other issues, a survey suggests.

Roughly seven out of 10 people in the EU named IS, the jihadist group which recently carried out attacks in Paris and Brussels, as a “major” menace in a new study by US think tank Pew, out on Tuesday (14 June).

More than half of Europeans said climate change, economic instability and cyber-attacks were “dire” threats. A little less than half also named the number of refugees coming from Iraq and Syria as a “major” challenge.

But just one in three EU nationals put “tensions with Russia” in the same category.
To finish off is a long term energy outlook by Bloomberg. Full of optimism, it expects fossil fuel extraction to remain pretty much where it is today for the remainder of this century. This is quite a progress from the infinite growth forecasts issued by the IPCC, but still not a credible outlook for a finite planet.
Bloomberg
The World Nears Peak Fossil Fuels for Electricity
Tom Randall, 13-06-2016

The way we get electricity is about to change dramatically, as the era of ever-expanding demand for fossil fuels comes to an end—in less than a decade. That's according to a new forecast by Bloomberg New Energy Finance that plots out global power markets for the next 25 years.

Call it peak fossil fuels, a turnabout that's happening not because we're running out of coal and gas, but because we're finding cheaper alternatives. Demand is peaking ahead of schedule because electric cars and affordable battery storage for renewable power are arriving faster than expected, as are changes in China's energy mix.

Here are eight massive shifts coming soon to power markets.

I will be going on a short holiday the coming weekend, meaning this review will be again suspended for a couple of weeks. See you in July.