Last week, the North American oil rig count posted another significant decline, and oil prices are not budging from the low $40s per barrel. Current oil and gas reserves are now around 10 percent higher compare to 2013, showing an almost consistent increase.
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• The EIA finds that U.S. crude oil and natural gas reserves have sharply increased over the past decade. Crude oil and lease condensate proved reserves have doubled since 2004 to 40 billion barrels. Natural gas proved reserves have also doubled to nearly 400 trillion cubic feet. Texas saw the largest increase in proved reserves out of any other U.S. state.
• “Proved reserves” are defined as reserves that can be produced with reasonable certainty under existing economic and operating conditions. That means total reserves rise and fall depending on a variety of factors, but perhaps most notably, as a result of price fluctuations. A lot more oil and gas can be produced when prices rise. The same is true when the cost of drilling declines.
• Defining how much oil and gas is recoverable in a certain state or country is a bit of a moving target. Most analysts thought the U.S. oil sector was in long-term decline, but the dramatic cost reductions in horizontal drilling and hydraulic fracturing (along with a run up in prices between 2003 and 2014) changed that equation.
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• As a result, projecting how much oil and gas will be produced many years into the future is almost impossible. These charts highlight how profoundly energy markets can be upended by technology and changes in market conditions.
Market Movers
• Canadian Oil Sands Ltd. (TSX: COS) announced its 2016 budget, revealing strong cost savings at its flagship Syncrude project. Even at $50 oil, COS could realize cash flows of $633 million, or $1.31 per share. Meanwhile, COS is fending off a $4.5 billion hostile takeover from Suncor Energy (NYSE: SU). COS adopted a poison pill shareholder rights plan in order to buy time to find another offer. Regulators gave the company until January 4 to accept or reject the takeover.
• Statoil (NYSE: STO) sold off its stake in the iconic Trans-Adriatic Pipeline, a natural gas conduit that would connect gas from Turkey to Italy. Statoil sold its 20 percent stake to Italian pipeline operator Snam SpA for $220 million. Statoil is in the midst of a divestment campaign to raise cash.
• Gazprom (OTCMKTS: OGZPY) has agreed to purchase LNG from Golar LNG (NASDAQ: LNG) from its Cameroon facility. The project will startup in 2017 and Gazprom will purchase 1.2 million tonnes per year. Golar LNG reported a net loss for the third quarter of $143 million.
• The new Canadian government could shake up its National Energy Board. Prime Minister Justin Trudeau has placed a much greater emphasis on environmental protection than his predecessor. Changing the makeup of the powerful NEB could make it more difficult for companies like Kinder Morgan (NYSE: KMP) and Enbridge (NYSE: ENB) to obtain approvals for their large proposed pipeline projects.
It is a busy week for the world of energy. The Paris climate change talks could mark a more determined international effort to transition away from oil, gas, and coal. While nothing monumental is expected from the negotiations, countries will continue to pursue policies at the national level to reduce emissions. One of the things to watch is how much money the industrialized world plans on providing to poorer countries. France, for example, has pledged to spend $2 billion on renewable energy projects in Africa over the next several years. Many more pledges are likely, and while the headline figures could be impressive, the devil will be in the details – many rich countries have a track record of not actually committing the money they have pledged.
More important for energy markets in the near term is a summit taking place in Vienna at the end of the week, where OPEC convenes for its latest meeting. The summit is expected to be more contentious than the June meeting as the cartel’s strategy of pursuing market share is bearing little fruit. OPEC may be holding on to market share, but U.S. oil production is contracting much more slowly than many expected. That is leaving the more vulnerable members of OPEC reeling. Countries like Venezuela, facing an economic crisis, are pressing fellow OPEC members to overhaul its strategy and cut output. Saudi Arabia, by all accounts, is expected to stay the course. In fact, OPEC may announce a “technical” increase in its oil production quota, but that will simply reflect the inclusion of Indonesia’s output. Indonesia, once a member of OPEC, has applied to rejoin, bringing its 900,000 barrels of output per day back into the oil cartel.
Speaking of OPEC’s strategy, Saudi Arabia and Russia are increasingly fighting over the European market. Selling oil and refined products to Central and Eastern Europe has long been the domain of Russia. But Saudi Arabia is aggressively seeking to capture customers by discounting its oil, and it is encroaching on Russia’s turf in Poland and Sweden, places that Saudi Arabia has not been in years. The strategy is not only cutting into Russia’s market share, but it is also forcing Russia to discount its own oil in order to keep up. That has the Urals benchmark trading at a wider discount to Brent, further sapping revenues to Moscow. Meanwhile, Iran is planning to return 500,000 to 1 million barrels per day in lost production once sanctions are removed, which could heat up competition in Europe. Iran sold a significant portion of its exports to Europe before the 2012 sanctions were slapped on. No doubt it wants to regain its lost share.
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World powers have stepped up airstrikes on the oil-related assets of ISIS, where the militant group generates a significant portion of its revenue. Immediately following the attacks in Paris, the U.S. military said it destroyed 116 oil tanker trucks in Syria. On November 23, the U.S. announced that it had destroyed an additional 283 trucks. “We know that two-thirds of their oil comes from the oil fields we struck” Col. Steve Warren, the coalition spokesman, told The Wall Street Journal from Baghdad. “We need to take this away from them so that their operations are more difficult to conduct.”
On November 21 and 22, Russian airstrikes eliminated 500 oil trucks. French airstrikes in October damaged the Omar oilfield, one of ISIS’ most important sources of supply. The U.S. has been reluctant to bomb oil fields directly for fear of a massive environmental fallout. But the more aggressive approach is likely having an effect. Data is sketchy, but ISIS oil production is probably significantly down from its peak output of 55,000 barrels per day late last year. Still, while ISIS’ finances are taking a hit, the group is diversifying into other activities, such as more kidnapping, smuggling, looting, and taxing local communities.
The U.S. EPA published new ethanol quotas for 2016, along with retroactive quotas for 2014 and 2015. The agency was two years behind schedule in crafting the rules, and released the new figures on November 30 ahead of a court ordered deadline. The EPA is supposed to issue annual quotas for how much ethanol must be blended into the nation’s fuel supply, stemming from a 2007 law. The oil and gas industry has long opposed the quotas because of the competition from alternative fuels. The 2007 law has not succeeded in sparking the production of large volumes of advanced biofuels, but it has succeeded in creating a major fight between the corn-based ethanol producers and the oil and gas industry. The revised EPA figures acknowledge the original targets won’t be met, but the requirements are up from the draft proposal earlier this year due to rising gasoline consumption. For 2016, the EPA will require oil refiners to blend 18.11 billion gallons of ethanol into refined gasoline, which could amount to more than 10 percent of the nation’s fuel supply for the first time. Both corn boosters and the petroleum industry were disappointed with the announcement.
Oil prices continue to flounder in the low $40s per barrel, amid no sign of an easing in global supplies. The latest data from the EIA shows ongoing resilience in U.S. oil output. For the month of September, U.S. oil production average 9.326 million barrels per day, declining by just 20,000 barrels per day from the month before. The contraction is much smaller than anticipated, leaving U.S. output down only around 300,000 barrels per day from a peak in April. But, with the rig count continuing to fall and oil prices staying depressed, a deeper contraction should be coming in the months ahead.
By Evan Kelly of Oilprice.com
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