Posts Tagged ‘oil production’

Oil price optimism would be ‘misplaced’ in early 2018, strategists say

December 26, 2017

By Sam Meredith
December 25, 2017

There’s little reason to expect oil prices to extend gains through the first quarter of 2018, energy strategists have told CNBC.

The prospect of rising U.S. shale production, subdued price movements and intensifying geopolitical risks is likely to offset a rally in prices at the start of next year, the analysts said.

Harry Colvin, director and senior economist at Longview Economics, told CNBC in a phone interview that he was “pretty bearish” over the price of oil over the next three months.

“While we could easily see an escalation of tensions in the Middle East, in the absence of that, optimism is probably misplaced for up to six months… Everybody seems to be facing the same way over oil at the minute and it’s when this happens that you need to be especially careful,” he said.

Oil prices have recovered well over a third of their value since hitting 2017 lows in June. The gains are largely due to the global supply cuts implemented by OPEC and non-OPEC producers at the start of the year.

What will happen with US shale?

Goldman Sachs said a stronger-than-anticipated OPEC-led commitment to extend production cuts would likely support oil prices through 2018. The U.S. bank lifted its Brent price forecast for next year to $62 a barrel and its West Texas Intermediate (WTI) projection to $57.50 a barrel. The revisions were up from $58 a barrel and $55 a barrel respectively.

The U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) have both indicated strong global demand growth in 2018 at 1.3 percent or above.

“A really key nub of the debate with oil is what will happen with the U.S. shale?” Colvin said.

Pump jacks and wells on the Monterey Shale formation in California

David McNew / Stringer | Getty Images News
Pump jacks and wells on the Monterey Shale formation in California

In recent months, U.S. shale producers have surprised market participants with how quickly they have ramped up production in the wake of rising prices. Almost all increases in American oil production over the last few years have stemmed from shale, which in total accounts for nearly two-thirds of the country’s existing output.

The U.S. is not part of a global effort to withhold oil production levels.

Colvin said it would be “easy” for oil to go to $50 a barrel by the end of the first quarter, before adding he would “not be surprised” to see levels as low as $45 a barrel.

‘Volatility killer’

OPEC, Russia and nine other producers agreed to extend their deal to keep 1.8 million barrels a day off the market through the end of 2018. Having extended the deal once already, the producers again reached an agreement at the end of November to try to drain a global crude glut.

OPEC’s latest deal was most likely a “volatility killer,” Chris Main, energy strategist at Citi, told CNBC in a phone interview.

Despite expecting fundamentals to continue to support the market, Main said he forecast oil prices to fall back to around $57 a barrel by the end of the first quarter.

“That price weakness could end up being supportive to the OPEC commitment next year… It would certainly reinforce the will of the Saudis,” he said.

OPEC kingpin Saudi Arabia is head of the cartel’s compliance monitoring committee and is reportedly expected to try to ensure all other member countries stick to agreed production levels over the next 12 months.

‘Bullish catalysts in short supply’

“The major price driver in the first quarter of 2018 will be geopolitical developments,” Stephen Brennock, oil analyst at PVM Oil Associates, said in an email to CNBC.

While Brennock cited Iran’s relationship with the U.S. and Saudi Arabia as geopolitical risks worthy of keeping an eye on, he argued it was likely to be only a “matter of time” before Venezuela‘s worsening debt crisis started to significantly hamper the OPEC members’ oil production.

An attendant sits at a closed Petroleos de Venezuela SA (PDVSA) gas station in Caracas, Venezuela, on Friday, Sept. 22, 2017.

Wil Riera | Bloomberg | Getty Images
An attendant sits at a closed Petroleos de Venezuela SA (PDVSA) gas station in Caracas, Venezuela, on Friday, Sept. 22, 2017.

The South American country has the largest proven oil reserves in the world but, amid intensifying economic pressure, its production levels have decreased to levels not seen in more than 30 years.

“All things considered, bullish catalysts will be in short supply and prices will therefore settle into their current trading ranges,” Brennock said.

The price of oil collapsed from almost $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. OPEC’s reluctance to cut output was also seen as a key reason behind the fall. But, the oil cartel soon moved to curb production — along with other oil producing nations — in late 2016.


Protestors occupy Shell plant in Nigeria

August 12, 2017


© AFP/File | Although Shell was forced to quit oil production in the area in 1993, the company still runs a network of pipelines criss-crossing the area

WARRI (NIGERIA) (AFP) – Hundreds of protesters have occupied a Nigerian oil facility owned by Anglo-Dutch oil giant Shell, demanding that a local company take over its operations, a community leader said Saturday.

“We want Shell to hand over the operations of the flow station to Belema Oil Company because it appreciates our challenges and needs,” community leader Godson Egbelekro told AFP.

Protesters from the Kula and Belema community in Nigeria’s restive southern Rivers state said the community has suffered through decades of poverty and neglect.

At the same time they say the owners and workers of multinational oil firms operating in the area are living a life of affluence thanks to abundant oil and gas resources.

“We will be here for as long as it takes until Shell meets our demands,” youth leader Alfred Epedi said, adding that “over 800 protesters” were occupying the flow station.

Security guards at the facility did not try to disperse the crowd as it entered the flow station on Friday.

The station, operated by Shell subsidiary the Shell Petroleum Development Corporation of Nigeria Ltd (SPDC), feeds crude oil into its Bonny Light export terminal, which has a production capacity of 225,000 barrels per day of oil.

The flow station’s output remained slow on Saturday.

Company officials “have been engaging representatives of the community (in) talks but nothing tangible has come out from the said talks,” Epedi said.

In a statement, SPDC spokesman Joseph Obari denied the protesters’ allegations of neglect and said the company was working to resolve the situation.

The company “has spent several millions of naira on social investment projects and university scholarship programmes for students of the area,” Obari said.

“SPDC has informed the authorities of the illegal occupation and is working towards resuming safe operations,” he added.

Community unrest in Ogoniland, in Nigeria’s oil rich south, is not uncommon.

Although Shell was forced to quit oil production in the area in 1993, the company still runs a network of pipelines criss-crossing the area.

In July, SPDC had to shut down its Trans Niger pipeline because of a “leak” — the preferred euphemism in Nigeria for crude oil theft.

Nigeria is Africa’s biggest oil producer and exporter, accounting for some two million barrels per day. It relies on the sector for 90 percent of foreign exchange earnings and 70 percent of government revenue.

Nigeria: Hundreds of protesters storm crude oil flow station owned by Shell

August 11, 2017

AKUKU-TORU, Nigeria — Hundreds of Nigerian protesters stormed a crude oil flow station owned by Shell in the restive Niger Delta on Friday, demanding jobs and infrastructure development, a Reuters witness said.

The protesters complained they did not benefit from oil production in their area, a common refrain in the impoverished swampland that produces most of Nigeria’s oil. They also demanded an end to oil pollution in the area.

Soldiers and security guards did not disperse the crowd as they entered the Belema Flow Station in Rivers State, which feeds oil into Shell’s Bonny export terminal.

Image may contain: sky and outdoor

The Agbada oil flow station, operated by Shell in Port Harcourt, Nigeria. Photographer George Osodi for Bloomberg

Shell had no immediate comment, and it was not immediately clear whether there was an impact on oil production.

While Bonny Light crude oil is currently under force majeure due to the closure of the Trans Niger Pipeline, exports continue via another export line.

(Reporting by Tife Owolabi; additional reporting by Libby George; Writing by Ulf Laessing; Editing by Susan Fenton)

Image result for Shell's Bonny export terminal, Nigeria, photos

Shell operated Bonny oil terminal

Image result for Shell's Bonny export terminal, Nigeria, photos


Oil Prices Return To Bear Market

June 21, 2017

Price declines more than 20% since Feb. 23 despite OPEC’s production cuts

Lower prices in the futures market are also likely to show up at gasoline pumps in the months ahead.

Lower prices in the futures market are also likely to show up at gasoline pumps in the months ahead. PHOTO: MARK HUMPHREY/ASSOCIATED PRESS

Oil prices are back in bear-market territory, frustrating OPEC members that cut production in an attempt to boost prices and renewing fears that falling prices could spill into stocks and other markets.

A persistent glut has weighed on prices for most of the past three years, a blow to investors who believed that the Organization of the Petroleum Exporting Countries’ move this year to limit production would provide relief.

Instead, U.S. producers ramped up production when the world was already swimming in oil as OPEC members, Russia and other producing nations curtailed output.

U.S. oil production is up 7.3% to 9.3 million barrels a day since OPEC announced plans in November to cut output, and the number of active rigs in the U.S. is at a two-year high.

The cartel’s output cut “has been deemed an OPEC failure and a U.S. production win,” said Tony Headrick, energy analyst at CHS Hedging.

While oil prices have enjoyed gains in short spurts over the past year, U.S. prices closed down 2.2% to $43.23 a barrel Tuesday. They have fallen in four of the past five sessions to a new low for the year.

Prices are down 20.6% since Feb. 23, marking the sixth bear market for crude in four years and the first since August. Crude prices have lost 62% since settling at $115.06 a barrel three years ago. A bear market is typically defined as a decline of 20% or more from a recent peak, while a bull market is a gain of 20% or more from a recent trough.

“We’re seeing this decline amid some major OPEC production restraints,” said Jim Ritterbusch, president of energy-advisory firm Ritterbusch & Associates. “That’s the huge difference” compared with previous bear markets.

The oil market has also been more volatile this spring. Traders have crowded into bullish positions, only to reverse suddenly when the market failed to respond to positive data or news that OPEC was extending its cuts. Tuesday’s move marked oil’s eighth loss of more than 2% in the past two months.

Investors are starting to worry that oil’s steady declines may start to drag down other markets. When the oil-price plunge gathered steam at the end of 2015, analysts blamed crude in part for sparking selloffs in other commodities, emerging markets and other risky assets.

The S&P GSCI index, which broadly tracks commodity prices, fell 1.2% Tuesday. The S&P 500’s energy sector, already the worst-performing group of stocks in the index, dropped an additional 1.2%. Seven out of the 10 worst-performing stocks in the S&P 500 this year are energy stocks, according to FactSet.

“You’ve got a buyer’s strike out there on the equities side,” said Dan Pickering, head of the asset-management arm of Tudor, Pickering, Holt & Co. “I love the values I see, but I’m scared to death to put money to work.”

There are also signs that anxiety is spreading to the debt market. Bonds of oil and gas companies with below-investment-grade credit ratings, or junk bonds, have held up for most of this year, but anxiety is starting to creep in, analysts and investors say. The Bloomberg Barclays high-yield energy index has returned negative 1.6% since the beginning of June, through Monday.

The deepening oil rout brought strong demand for long-term U.S. government bonds, sending the yield on the 30-year Treasury debt to the lowest level this year Tuesday. Lower energy prices tend to deflate inflation expectations, making long-term Treasury debt more appealing.

Falling oil prices are typically helpful to U.S. consumers and the companies that serve them. Airlines made record profits last year in part from lower oil prices and were girding for profits to fall this year if oil rose. Lower prices in the futures market are also likely to show up at gasoline pumps in the months ahead, potentially lowering costs for drivers at the end of summer driving season.

But as the U.S. energy production has grown and become a bigger part of the overall economy, many companies have recently been touting the benefits of higher oil prices. They now stand to lose out.

Neiman Marcus Group Ltd., for one, a week ago credited higher oil prices with improving traffic in its Texas stores. Railroad executives have been concerned about shrinking oil shipments on their lines after low prices forced drillers to cut back two years ago. A continuing rebound in drilling could end or slow with lower prices.

“That’s something that we monitor, just given how radical the [last] decline was and how prolonged it was,” Keith Cline, chief executive of hotel operator La Quinta Holdings Inc.,said at a recent lodging conference. “We’re keeping a close eye on the 11% of our rooms that could be impacted in some way by oil production.”

Oil returned to a bear market for the first time since August 2016, before the historic agreement between OPEC and other major oil-producing nations to limit output by about 1.8 million barrels a day at the end of last year. In May, the group decided to extend the deal into March 2018.

Morgan Stanley said Monday the oil glut wouldn’t go away and would grow again next year unless OPEC cuts deeper or extends its cuts through 2018. Along with the U.S., rising production from OPEC members that are exempt from the deal, such as Libya and Nigeria, has offset progress by the group.

Traders are bracing for crucial data released on Wednesday by the U.S. Energy Information Administration about the latest inventories.

Analysts and traders surveyed by The Wall Street Journal expect crude stockpiles to have fallen by 2 million barrels, on average, in the week ended June 16, which could provide some support to falling prices.

Yet even amid falling crude stockpiles in the U.S., oil prices have dropped as modest stock drawdowns have failed to impress investors.

The data “is probably not going to provide much in the way of support,“ said John Saucer, vice president of research and analysis at Mobius Risk Group. ”The market’s definitely been very receptive to bearish news.”

Appeared in the June 21, 2017, print edition as ‘Oil Prices Return To Bear Market.’


Bankruptcy Bust: How Zombie Companies Are Killing the Oil Rally

October 24, 2016

Energy investors have long hoped that falling prices would solve themselves by driving producers into bankruptcy and stanching the flood of excess supply, but it hasn’t worked out that way

October 24, 2016

Their owners may be bankrupt, but the sprawling mines of Wyoming’s Powder River Basin are still churning out coal. It is the same story in oil fields along the Gulf Coast and with shale-gas wells in the Rocky Mountains.

Energy investors have long hoped that falling prices would solve themselves by driving producers into bankruptcy and stanching the flood of excess supply. It turns out that while bankruptcy filings are up, they have barely impacted fossil-fuel markets.

About 70 U.S. oil and gas companies filed for bankruptcy in 2015 and 2016. They now produce the equivalent of about 1 million barrels a day, about the same as before they declared bankruptcy, according to Wood Mackenzie. That represents about 5% of U.S. oil-and-gas output.
That resilience has kept energy inventories flush and prices capped. Oil shot to $50 a barrel this summer, but has had trouble making much progress beyond that mark. On Friday, oil futures in New York rose 0.4% to $50.85 a barrel.

The theory that bankruptcies would help balance the market “was misguided to begin with,” says Roy Martin, a research analyst at energy consultancy Wood Mackenzie. “And people are starting to come around to that now.”

This is exactly the way chapter 11 was meant to work. The process is designed to save companies that can be saved, and many energy companies are using it to lighten their heavy debt loads, adapt to lean times and keep producing.

Peabody Energy Corp., Arch Coal Inc. and Alpha Natural Resources Inc.—three of the five largest U.S. coal miners—all filed for bankruptcy in the past 18 months. They accounted for about 36% of U.S. coal supply in the first half of 2015. This year, production declined only in line with the rest of the sector, and their share for the first six months was nearly unchanged at about 33%, according to IHS Global Energy. Arch Coal and Alpha Natural Resources recently emerged from bankruptcy.

“It is frustrating,” said Adam Wise, managing director at John Hancock Financial Services who helps oversee about $7 billion in energy-related debt and private-equity investments. “A lot of those companies just operate similarly to how they were prior to entering bankruptcy. It definitely doesn’t help.”

Oil hit historic lows this year and, while it has rebounded somewhat, at $50 a barrel it is just half of what it was three years ago. Oversupply continues to hamper the market and has forced analysts to retreat from earlier calls that oil would be at $60 or $70 by now.

Even accounting for recent drawdowns, oil producers and importers have added 18 million barrels to U.S. stockpiles this year, bringing the total to a near-record 469 million. There was enough coal on hand in the U.S. in July to fuel every coal-fired power plant in the country for more than 80 days, up from about 70 days’ worth in July 2015, according to the most recent data from the U.S. Energy Information Administration.

“Without a reset button, there’s no need for prices to go anywhere,” said Colin Hamilton, head of commodity research at Macquarie Group Ltd. “It is a long grind.”

Natural-gas prices have had a stronger rebound this year, but they, too, are still below the highs of 2013 and 2014. U.S. coal benchmarks have followed, with Central Appalachian coal up nearly 70% from a record low in the spring, but still down 15% from three years ago, according to S&P Global Platts.

The long-term decline in prices has led to the bankruptcies, but also to massive cost-cutting that helped producers keep mines and wells profitable.

Since 2012, Peabody Energy has laid off 1,650 employees and slashed annual capital spending to $111 million from $997 million. The upshot: three big mines in the Powder River Basin recorded a profit margin of $3.46 a ton in 2015, up from $3.45 a ton in 2011. Peabody’s operations in the region produce over 100 million tons a year, enough to power 16 million U.S. households, the miner says.

Midstates Petroleum Co. filed for bankruptcy April 30 and began drilling a new well the next day. The company stopped running some rigs ahead of bankruptcy, but kept one going after filing. Many companies kept honoring some contracts for rigs and well services, having planned drilling programs months in advance and still in need to produce revenue for paying off creditors.

Other companies that went through the bankruptcy process are now embarking on a quick return to stabilization or even growth.Halcón Resources Corp., SandRidge Energy,Inc., Goodrich Petroleum Corp. and Penn Virginia Corp. recently emerged from bankruptcy after spending two to six months restructuring. Combined, they shed about $7 billion in debt.

Goodrich plans to grow production “pretty dramatically,” President Robert Turnham told The Wall Street Journal. The recent rebound in gas prices makes drilling in Louisiana more profitable, and the company is employing new techniques to save money. They include reordering its well-site process to cut fracking time by more than half, Mr. Turnham said.

Ultra Petroleum Corp. has yet to emerge from bankruptcy—it filed in April—and it is already planning to add another rig within months and triple its fleet to 10 in about two years. The company has been renegotiating rig contracts and using bankruptcy laws to force pipeline companies to renegotiate other contracts.

“We get to run the company, and we’re trying to do what the bankruptcy rules or law suggests, which is to maximize the value of the company run as a growing concern,” Chief Executive Michael Watford said in an earnings call on Aug. 11.

Bank lenders, reluctant to actually take ownership of assets that have been used as collateral by borrowers, have been friendly to troubled companies. During bankruptcy, Halcón, SandRidge, Goodrich and Penn Virginia raised a combined $1.3 billion in debt, largely reaffirmed credit lines from their banks.

Coal magnate Robert Murray in 2014 correctly predicted that his rivals would file for bankruptcy. He pushed his Murray Energy Corp. to take advantage of the opening with a two-year buying spree fueled by $4 billion in debt. By this summer, Mr. Murray was negotiating with lenders, customers and workers on a multipoint plan he needed to avoid his own company’s bankruptcy.

His miscalculation: that his rivals’ bankruptcies would force them to cut back. If they maintain production, “that pulls everyone into what I call the bankruptcy sewer,” Mr. Murray said. “These are zombie coal companies chasing the ghosts of past markets.”

Write to Timothy Puko at and John W. Miller

Corrections & Amplifications:
In the chart showing U.S. bankruptcies, oil production is measured in thousands of barrels of oil equivalent per day. An earlier version of the chart incorrectly showed production in millions of barrels of oil equivalent per day. (Oct. 24)


Libya’s parliament votes “no confidence” in the UN-backed unity government — Now what?

August 22, 2016


© AFP/File | Libya’s internationally recognised parliament has passed a vote of no confidence in the UN-backed unity government

BENGHAZI (LIBYA) (AFP) – Libya’s internationally recognised parliament on Monday voted no confidence in a UN-backed unity government, a spokesman said, in a blow to efforts to end the country’s political chaos.

“The majority of lawmakers present at the parliament session (on Monday) voted no confidence in the government,” said Adam Boussakhra, a spokesman for the legislature based in the country’s far east.



Opponents of Libya’s U.N.-backed government voted on Monday against a motion of confidence in the Tripoli-based administration, in a rare session of the parliament based in the east of the country.

The vote is a fresh blow for the Government of National Accord (GNA), which has been seeking the parliament’s endorsement for months as it tries to extend its influence and authority beyond its base in the capital.

The vote was the first since January, when the parliament rejected an initial list of ministers put forward by the GNA’s leadership, and the first since the GNA began installing itself in Tripoli in March.

Parliamentary sessions in the city of Tobruk have been repeatedly delayed or blocked as opposition to the GNA in eastern Libya has hardened.

GNA supporters, many of whom did not attend Monday’s sitting, had previously complained that opponents used physical force and threats to prevent votes from taking place.

Spokesman Abdallah Bilhaq said 101 deputies had attended Monday’s session, with 61 voting against the GNA, 39 abstaining, and just one voting in favor.

The GNA is the result of a U.N.-mediated agreement signed in December. The deal aimed to resolve a conflict that flared up in 2014, when an armed alliance took control of institutions in Tripoli and the newly-elected parliament relocated to the east.

Western powers have been counting on the GNA to tackle Libya’s security vacuum, revive oil production, and stem the flow of migrants crossing the Mediterranean to Europe.

While forces aligned with the GNA have largely recaptured the coastal city of Sirte from Islamic State militants, the government has struggled to make an impact in other areas, losing support because of its inability to resolve a liquidity crisis, power cuts and other problems.

(Reporting by Ayman al-Warfalli; Writing by Aidan Lewis; Editing by Andrew Roche)


The Indian Ocean Challenge & China

March 11, 2016

China has resisted every effort of India to enhance its role in eastern neighbourhood

Indian navy warships on patrol in the Indian Ocean

By G Parthasarathy

IT is a truism that in any country including India, the coastal population inevitably focuses attention on maritime security, while those far from the sea remain fixated on land borders. India’s security challenges across its land borders with Pakistan and China have only accentuated this trend. Moreover, with its focus on import substitution, rather than export promotion, India’s share in world trade fell significantly in the first four decades after Independence.

With its economy collapsing in 1990, India was forced to drastically change its outlook towards domestic, regional and global economic issues. What followed has been the growing integration of India with the global economy, and its emergence as a constructive and increasingly important partner, with a growing market for trade and investment. We have since moved from an economy afflicted by what was once pejoratively described as the “Hindu rate of growth” to becoming a vibrant, emerging economy.

Foreign trade and investment have inevitably become focal points for accelerated economic growth in India. We have wisely embarked on increasingly integrating our economy, with the fastest growing economies of the world, in East and Southeast Asia. We now have Comprehensive Economic Partnerships with the 10 members of ASEAN, ranging from Myanmar to the Philippines, as also with Japan and South Korea.

We are negotiating a free trade agreement with Australia and have endeavoured to undertake similar arrangements with our SAARC partners. Moreover, ASEAN-led forums like the East Asia Summit have led to an Indian strategic role across the Bay of Bengal, which traverses the Indian Ocean and western Pacific, crossing the disputed waters of the South China Sea.

Progress on economic integration in South Asia has, however, been slow, primarily because of Pakistani recalcitrance. Significantly, tensions and disputes with China have not adversely affected a blossoming trade and investment relationship between India and China — the world’s two most populous countries.

Despite these developments, India cannot ignore the fact that China has acted as a spoiler in every effort New Delhi has made to enhance its role in its eastern neighbourhood. Beijing vigorously opposed our participation in economic and security forums linked with ASEAN, including the ASEAN Regional Forum and the East Asia Summit. China continues to maintain links across its borders with Myanmar, with some of our northeastern separatist outfits. We are now steadily moving towards a more proactive response to counter these Chinese efforts. Our aim remains to develop viable security architecture across and beyond our eastern shores. Concerns about Chinese military bases and inroads across the Bay of Bengal will continue.

But, concerted diplomatic efforts, with partners like the US and Japan have enabled us to strengthen the security of our eastern sea-lanes. China has not succeeded in its efforts to secure a predominant role in Myanmar, Bangladesh, Sri Lanka or the Maldives. This will, however, remain a continuing challenge for us.

While India has fashioned policies to safeguard the security of its eastern shores, the same cannot be said for what is transpiring in our western neighbourhood, across the Arabia Sea. It is here that we cannot now overlook the implications of China’s new thrust, at not only establishing a virtually permanent presence in the Indian Ocean, but also by its doing so in collusion with Pakistan. New Delhi should carefully note Chinese moves to outflank us on our western shores, through a network of roads and ports.

The Chinese strategic objectives are based on a Silk Road Economic Belt that links China with Central Asia, Pakistan Occupied Kashmir, the Persian Gulf States, Russia and the Baltic States. Beijing’s 21st century Maritime Silk Route, in turn, extends from China’s coast to Europe through the Indian Ocean. China is simultaneously building ports across the Indian Ocean, in Asia and Africa.

What India cannot afford to ignore is that while the silk road envelops both its eastern and western neighbours, this road links up with the Maritime Silk Road and the Indian Ocean, in the Pakistani Port of Gwadar, located at the mouth of the Persian Gulf. Gwadar is perilously close to India’s sea-lanes, linking India to the oil-rich Persian Gulf, from where we get over 70 per cent of our oil supplies. China has now secured virtual control of the port facilities in Gwadar, after pledging $46 billion to Pakistan, to promote its ambitious silk route projects.


silk road

Over a decade ago, then Pakistan President Musharraf told an audience in Islamabad, just after the visit of then Chinese Prime Minister Zhu Rongji, that in the event of a conflict with Pakistan, India would find the Chinese navy positioned in Gwadar. Given its difficulties in obtaining bases in countries like Myanmar, Sri Lanka and Bangladesh, China feels Pakistan is a crucial partner, in its quest to have base facilities, strategically positioned close to the Straits of Hormuz and astride India’s vital sea-lanes to the Persian Gulf, where around seven million Indians live.

China has simultaneously commenced an effort to strengthen Pakistan’s navy, with the supply of four  frigates and eight submarines, to reinforce these efforts.

China’s interest in having a military presence astride the Straits of Hormuz arises from the fact that this narrow 2-mile-wide corridor is the route for the transportation of 17 million barrels of oil per day (mbpd), with 15.2 mbpd traversing thereafter through the Straits of Malacca, which includes 80 per cent of Japan’s oil supplies.

The entire Indian Ocean Region, extending to the Gulf of Aden, accounts for 40 per cent of the world’s oil production and 57 per cent of the world’s oil trade. Not surprisingly, the US has positioned its powerful 5th Fleet in Bahrain to oversee the security of these vital sea-lanes.

The nature and extent of US interest in this region could well change, as the US itself is becoming a net exporter of oil and gas. Moreover, apart from the rivalries of external powers, stability in this region is being adversely affected by Iranian-Saudi rivalries, which have a sectarian dimensions.

Ideally, it would be useful if the major Asian oil importers — India, China, Japan and South Korea — cooperated on developments that threaten the security of vital sea-lanes and energy corridors. But, given existing tensions and suspicions, this may be too much to expect anytime soon.


USS Theodore Roosevelt, right, and Japanese Maritime Self-defense Force JS Fuyuzuki, center, transit alongside the Indian tanker INS Shakti during a replenishment-at-sea exercise Oct. 18, 2015, in the Indian Ocean.


China President Xi Jinping meets Iran’s Supreme Leader Ayatollah Ali Khamenei in Tehran, January 23, 2016. Photo by Reuters


Paris Climate Agreement Makes Everything Complicated for Norway

December 13, 2015


More costs for oil drilling in North Sea, slow down of investments in oil production, and need for more gas in Europe.
Paris Climate Agreement Makes Everything Complicated for Norway

Photo: Presidencia de la República Mexicana

The 2015 United Nations Climate Change Conference ended in Paris yesterday with a historical agreement.

The conference reached its objective for the first time in history to achieve a universal agreement on methods to reduce climate change in the pact (Paris Agreement), by all the nations of the world. The agreement will become legally binding if it is ratified, accepted, approved or acceded to by at least 55 countries that represent at least 55 percent of global greenhouse emissions.

The ambitious goals taken in the conference will put Norway, as a leadin oil and gas producer, in a challenging situation. The dispute over the future of the oil industry in the country has already started.

Liberal Party (Venstre) climate policy spokesperson, Ola Elvestuen said to VG that it will have major consequences for Norwegian oil and gas business and the fossil fuels will be replaced by renewable energy.

– When 195 countries gather to set such ambitious goals for how to bring down greenhouse gas emissions, Norway can not turn its back and continue as before, said  Elvestuen.

She also noted that Norwegian oil market will adapt to the new reality.

On the other hand, she noted the new situation may lead to more demand for Norwegian gas.

She notes that there is now a need and desire to replace coal with gas, and Norway can help here, says Sundtoft to VG.

Norway will continue to pomp oil and gas as before!

Petroleum and Energy Minister of Norway, Tord Lien aggrees that Norway can have a more active role with its natural gas. Moreover, he criticizes those who think Norway should stop new exploration and production of oil in North Sea. He states that the government will pump oil and gas, just like before.

But the new aggreement will bring more compications for Norway in terms of oil production. During the conference, EU introduced its binding offshore safety directive, which will dramtically increase the oil production activities in North Sea.

Directive was first adopted as a result of the Deepwater Horizon accident in the Gulf in 2010. The directive requires oil companies to take into account so-called worst-case scenarios when they put their contingency plans for development and operation of new oil fields.

So it means much higher costs than today’s current security scheme, which Norway follows today.

According to VG, the costs could be higher in northern areas, where petroleum extraction is already expensive.


Saudi Arabia risks destroying Opec — “This is not a God-driven crisis”

November 12, 2015

Saudi Arabia risks destroying Opec and feeding the Isil monster

‘Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff,’ says RBC

A worker checks a valve of an oil pipe at Nasiriya oilfield in Nasiriya province, southeast of Baghdad,Iraq

A worker checks a valve of an oil pipe in Iraq Photo: Reuters

The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.

“Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff”
Helima Croft, RBC Capital Markets

Algeria’s former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country’s Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. “Why remain in an organisation that no longer serves any purpose?” he asked.

Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states.

“Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna,” said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets.

The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. “It would fuel discontent in the Kingdom and play to the sense that they don’t know what they are doing,” she said.

“We are feeling the pain and we’re taking it like a God-driven crisis”
Mohammed Bin Hamad Al Rumhy, Oman’s oil minister

The International Energy Agency (IEA) estimates that the oil price crash has cut Opec revenues from $1 trillion a year to $550bn, setting off a fiscal crisis that has already been going on long enough to mutate into a bigger geostrategic crisis.

Mohammed Bin Hamad Al Rumhy, Oman’s (non-Opec) oil minister, said the Saudi bloc has blundered into a trap of their own making – a view shared by many within Saudi Arabia itself.

“If you have 1m barrels a day extra in the market, you just destroy the market. We are feeling the pain and we’re taking it like a D. Sorry, I don’t buy this, I think we’ve created it ourselves,” he said.

The Saudis tell us with a straight face that they are letting the market set prices, a claim that brings a wry smile to energy veterans. One might legitimately suspect that they will revert to cartel practices when they have smashed their rivals, if they succeed in doing so.

One might also suspect that part of their game is to check the advance of solar and wind power in a last-ditch effort to stop the renewable juggernaut and win another reprieve for the status quo. If so, they are too late. That error was made five or six years ago when they allowed oil prices to stay above $100 for too long. But Opec can throw sand in the wheels.

At root is a failure to grasp how quickly the ground has already shifted from under the feet of the petro-rentier regimes. Opec forecasts that oil demand will keep rising relentlessly, adding 21m barrels of oil per day (b/d) to 111m by 2040 as if nothing had changed. They have their heads in the sand.

The climate pledges made for the COP21 summit in Paris by the US, China and India – to name a few – imply a radical shift in the global energy landscape. Subsequent deals by 2025 may well bring a “two degree world” within sight.

The IEA says oil demand will be just 103m b/d in 2040 even under modest carbon curbs. It would collapse to 83.4m b/d if global leaders grasp the nettle. My own view is that it will happen by natural market forces.

The next leap foward in technology is going to be in energy storage. Teams of scientists at Harvard, MIT and the world’s elite universities are in a race to slash the cost of batteries – big and small – and overcome the curse of intermittency for wind and solar.

A team in Cambridge says it has cracked the technology for lithium-air batteries that cut costs by four-fifths and enable car journeys of hundreds of miles on a single charge. By the time we reach 2040, it is a fair bet the only petrol cars still on the road will be relics, if they can find fuel at all.

“Everything will be electrified. The internal combustion engine is a dead-end. We all know that, and the car companies ought to know that,” said one official handling the COP21 talks.

Opec might be better advised to target prices of $75 to $80 and maximize revenues while it still can, taking advantage of a last window to break reliance on energy and diversify their economies.

The current war of attrition against shale is a hard slog. US output has dropped by 500,000 b/d since April, but the fall in October slowed to 40,000 b/d. Total production of 9.1m b/d is roughly where it was a year ago when the price war began.

“The expectation that a swift tailing-off in tight oil would lead to a rapid rebalancing in the market has proved to be misplaced,” said the IEA. Costs are plummeting as rig fees drop and drilling time is slashed.

There is a time-lag effect. Shale cannot keep switching to high-yielding wells forever. Their hedging contracts are running out. The US energy department expects a further erosion of 600,000 b/d next year, but this is not a collapse.

By then Opec will have foregone another half trillion dollars. “What is winning supposed to look like for the Saudis? Can they really endure another year of this?” said Ms Croft.

Opec can certainly bankrupt high-debt frackers but this does not shut down US shale in any meaningful way. The infrastructure and technology will remain. Stronger players will move in. Output will bounce back as soon as oil nears $60.

Shale frackers will respond with lightning speed to any rebound and create a permanent headwind for Opec over years to come, or a sort of “whack-a-mole” effect, contrary to warnings by the IEA this week that Mid-East producers may regain their 1970s stranglehold once rivals are cleared out.

What is clear is that the Opec squeeze has killed off $200bn of upstream oil investment, mostly in offshore projects, Canadian oil sands and Arctic ventures. That will cut oil output in the distant future, but it is a different story.

Saudi Arabia has certainly regained market share, but the cost is causing many in Riyadh to ask whether the brash new team in power has thought through the trade-off. While the Kingdom has deep pockets, they are not limitless. Kuwait, Qatar and Abu Dhabi all have foreign reserves that are three higher per capita.

It has been downgraded to A+ by Standard & Poor’s and has a budget deficit of $100bn a year, forcing it to burn through reserves at a commensurate pace and now to tap the global bond market.

Austerity has finally arrived, a nasty shock that was not in the original plan. A confidential order from King Salman – marked “highly urgent” – has frozen new hiring by the state, stopped property contracts and purchases of cars, and halted a long list of projects. The Kingdom will have to slim down the edifice of subsidies and social patronage that keeps the lid on protest.

It is far from clear whether Saudi Arabia can continue to prop up allies in the region and bankroll Egypt, already struggling to defeat Isil forces in the Sinai. An Isil cell captured – and beheaded – a Croatian engineer on the outskirts of Cairo in August, even before the suspected bombing of a Russian airline this month.

The Isil brand has established a front in Libya and has launched attacks in Algeria, where the old regime is fraying, and oil and gas revenues fund the vitally-needed social welfare net.

Iraq is pumping oil a record pace but it is nevertheless spiraling into economic crisis, with a budget deficit of 23pc of GDP. Public sector wages are to be cut. The austerity budget for 2016 – based on $45 oil, down from $80 last year – has set off a political storm.

The government has slashed funding for the “Popular Mobilization” militia fighting Isil. “The Iraqi state faces a grave challenge. The budget crisis makes the status quo intractable,” says Patrick Martin from the Institute for the Study of War.

Helima Croft says Isil is now operating close to Iraq’s oil facilities near Basra, detonating a car bomb at a market in Zubayr last month. They clearly have the ability to attack energy targets, and have an incentive to do so since oil production within their Caliphate heartland is their main source of income.

Al Qaeda in the Islamic Maghreb showed it could launch a devastating surprise when it crossed into the Sahara two years ago and seized the Amenas gas facility in Algeria, killing 39 foreign hostages. Variants of Isil can strike anywhere they find a weak link.

“We remain concerned that they may eventually set their sights on a major oil facility. These are obvious targets of choice, and none of this geopolitical risk is priced into the market,” she said.

Saudi Arabia itself is vulnerable. There have been five Isil-linked terrorist acts on Saudi soil since May. They include an attack on a security facility near the giant oil installation at Abqaiq, where clusters of pipelines offer the most inviting sabotage target in the petroleum world and where the aggrieved Shia minority sit on the Kingdom’s oil reserves.

It would be a macabre irony if Saudi Arabia’s high-risk oil strategy so enflamed a region already in the grip of four civil wars that the Kingdom was hoisted by its own petard. That would certainly clear the global glut of crude oil.

Saudi Arabia to cut spending, issue more bonds to shore up budget

September 6, 2015


Saudi Arabian Finance Minister Ibrahim Al-Assaf attends a 2013 investor conference in Riyadh

DUBAI (AFP) – Saudi Arabia will cut spending and issue more bonds as it faces a record budget shortfall due to falling oil prices, the finance minister said on Sunday.The kingdom — the biggest Arab economy and the world’s largest oil exporter — is facing an unprecedented budget crunch after crude prices dropped by more than half in a year to below $50 a barrel.

It has so far relied on its huge fiscal reserves to bridge the gap but Finance Minister Ibrahim al-Assaf said more measures would be necessary.

“We are working… to cut unnecessary expenditure,” Assaf told Dubai-based CNBC Arabia in Washington, where he is accompanying King Salman on a visit.

He provided no details on the scale of the cuts but insisted key spending in education and health and on infrastructure would not be affected.

“There are projects that were adopted several years ago and have not started yet. These can be delayed,” Assaf said.

He said the government would issue more conventional treasury bonds and Islamic sukuk bonds to “finance the budget deficit” — which is projected by the International Monetary Fund at a record $130 billion (117 billion euros) for this year.

The kingdom has so far issued bonds worth “less than 100 billion riyals ($27 billion/24 billion euros)” to help with the shortfall, he said, without providing an exact figure.

“We intend to issue more bonds and could issue sukuk for certain projects… before the end of 2015,” Assaf said.

Saudi Arabia has projected an official budget shortfall for this year of $39 billion, but the IMF and other institutions believe the actual deficit will be much higher.

The IMF forecast in July that the deficit will be 20 percent of Gross Domestic Product (GDP), while Saudi Arabia’s Jadwa Investment firm said on Wednesday it expects the shortfall to be around $109 billion.

In 2014, Saudi Arabia posted a budget deficit of $17.5 billion — only its second since 2002.

Jadwa said that by the end of July the government had withdrawn $82 billion from its reserves, reducing the assets to $650 billion.

The reserves are expected to drop to $629 billion by the end of the year, Jadwa said.

Economic growth is expected to slow from the 3.5 percent recorded last year, with the IMF forecasting in July that the Saudi economy would expand by 2.8 percent this year.

It is forecasting 2.4 percent growth for next year.

Citing official figures, Jadwa said Wednesday that the Saudi economy grew 3.8 percent in the second quarter, up from 2.4 percent in the previous period, due to a rise in oil production.

Saudi Arabia pumped a record 10.6 million barrels per day in June but this slowed to 10.4 million bpd in July, it said.

The budget shortfall is hitting as Saudi Arabia maintains a costly military intervention against Iran-backed Huthi rebels in neighbouring Yemen.