The world's largest exporter of crude oil, the Kingdom of Saudi Arabia, recently announced a plan for its post-oil future. If a country almost synonymous with the oil economy can see the need for such a plan, how can the rest of the world, particularly the United States, the world's largest consumer of petroleum, not see the necessity of such foresight?
The kingdom's plan includes sale of part of Saudi Aramco, the world largest oil company and currently wholly-owned by the Saudi government. The company controls all oil development in Saudi Arabia. That the Saudis want to sell part of the most valuable company in the world means they have a different view about the future of oil than those who will be buying. Commentators often report that markets rise because investors are optimistic or fall because they are pessimistic. But this is complete nonsense because for every buyer there is always a seller. Each side of a trade believes in a different future for the investment being traded.
Certainly, there are many reasons for selling a minority stake in Saudi Aramco. But one of them can't be that the rulers of the kingdom have an unalloyed bullishness about Saudi capabilities and oil resources.
As recently as 2007 the U.S. Energy Information Administration (EIA) believed Saudi Arabia would be supplying the world with 16.4 million barrels per day (mbpd) of oil by 2030. (And, that was down from 23.8 mbpd projected for 2025 in a 2003 report.) In 2008 the Saudi king appeared to embrace a policy of 12.5 mbpd and no more.
Since then long-term projections for Saudi production have come down with a range of 10.2 mbpd to 15.5 mbpd for 2040 (in a 2013 EIA report) depending on which of three scenarios you choose. No explicit range has been included in subsequent EIA reports.
With the release of a new independent report on world oil reserves by a former BP insider, a report that suggests that conventional reserves are half what is being claimed, the issue of limits on oil production has resurfaced. (The report implies that Saudi reserves have been inflated as well.)
By including Canadian tar sands and Venezuelan heavy oil, world oil reserves increase back to about 75 percent of what is typically reported. But that number makes no adjustment for the much greater difficulty and expense of getting these unconventional resources out of the ground and then turning them into something we call oil. The financial debacle taking place in the tar sands under the current low-price regime is clear evidence that those resources cannot be sustained without high prices.
The temporary glut we are experiencing now, however, does not disprove limits. It only shows that we can still have market cycles in oil just as we did in 2008 when oil fell from $147 per barrel to around $35 in six months. By 2011 oil was back above $100, where it stayed with only brief forays under that price, until the end of 2014. This period has so far given us the highest inflated-adjusted average daily prices for oil ever.
For those who believe the United States does seem to have energy policies relevant to a post-oil world, I would answer that this is not the result of some grand design, but rather due to a hodge-podge of programs, many of which are conflicting. Even as the U.S. tax code continues to provide substantial subsidies for oil and natural gas production, it also provides substantial subsidies for renewable energy such as solar and wind. But these renewables subsidies are really about producing electricity.
Subsidies for liquid fuels, the kind that replace fuels from oil, have been reduced. The federal subsidy for ethanol ended in 2012. Subsidies for biodiesel and other biofuels continue.
While ethanol was always really an energy carrier and not an energy source - it takes about as much energy to produce corn ethanol as it yields--biodiesel is believed to have a positive energy balance. Even so, converting the U.S. vehicle fleet to biodiesel isn't in the cards, and doing so would require so much farmland to grow the necessary oil crops that we might be able to drive, but probably not eat--an absurdity of the first order.
Now granted, a post-oil society doesn't necessarily mean a no-oil society. Oil supplies may decline gradually after a future peak in production. We won't, as the critics say, "run out." That's just a canard meant to prevent people from understanding the serious implications, not of running out, but of having less each year.
There is the option of moving to electrified transportation which I support. But most people think of this as a move toward electric cars. The entire car fleet in the United States currently takes about 14 years to turn over. But, of course, we'd only get replacement of all vehicles with electrics over this period if we started selling 100 percent electric-only vehicles now. Moreover, certain types of transport--emergency services, farm equipment and rural transport--will likely require liquid fuels for a long time to come.
Because we are only very gradually increasing the number of electric-only cars available for purchase, it would likely take two to three decades for a complete transition away from oil-fueled vehicles. It would be much wiser to electrify and vastly expand public transportation, something that isn't on the policy radar in the United States.
There are certainly local efforts to expand bicycle lanes and pedestrian areas to reduce dependency on motorized transportation. But those efforts can hardly be called coordinated and rapid.
If we had absolute clarity on future oil supplies, we'd know how quickly we must make the transition away from oil. But we don't have anything approaching that. Instead, we have competing estimates and timelines, and--here's the important part--we Americans have chosen to embrace the optimistic forecasts without understanding the risks because doing so takes the pressure off of us to make the necessary changes. (And, we do this in spite of the fact that supposedly ample U.S. production is now once again in decline.)
The Saudi move toward a post-oil economy ought to be one of the strongest messages ever that the world is moving closer to a peak and decline in world oil production. The kingdom's actions are telling us that the world's largest crude oil exporter feels it must start today to plan and implement a post-oil economy.
Will we Americans (and others who haven't yet) take the hint seriously?
By KURT COBB (SUNDAY, MAY 22, 201)
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At first, it seemed like a done deal. Chevron made a US$33 billion offer to take over US-based upstream independent Anadarko Petroleum. It was a 39% premium to Anadarko’s last traded price at the time and would have been the largest industry deal since Shell’s US$61 billion takeover of the BG Group in 2015. The deal would have given Chevron significant and synergistic acreage in the Permian Basin along with new potential in US midstream, as well as Anadarko’s high potential projects in Africa. Then Occidental Petroleum swooped in at the eleventh hour, making the delicious new bid and pulling the carpet out from under Chevron.
We can thank Warren Buffet for this. Occidental Petroleum, or Oxy, had previously made several quiet approaches to purchase Anadarko. These were rebuffed in favour of Chevron’s. Then Oxy’s CEO Vicki Hollub took the company jet to meet with Buffet. Playing to his reported desire to buy into shale, Hollub returned with a US$10 billion cash infusion from Buffet’s Berkshire Hathaway – which was contingent on Oxy’s successful purchase of Anadarko. Hollub also secured a US$8.8 billion commitment from France’s Total to sell off Anadarko’s African assets. With these aces, she then re-approached Anadarko with a new deal – for US$38 billion.
This could have sparked off a price war. After all, the Chevron-Anadarko deal made a lot of sense – securing premium spots in the prolific Permian, creating a 120 sq.km corridor in the sweet spot of the shale basin, the Delaware. But the risk-adverse appetite of Chevron’s CEO Michael Wirth returned, and Chevron declined to increase its offer. By bowing out of the bid, Wirth said ‘Cost and capital discipline always matters…. winning in any environment doesn’t mean winning at any cost… for the sake for doing a deal.” Chevron walks away with a termination fee of US$1 billion and the scuppered dreams of matching ExxonMobil in size.
And so Oxy was victorious, capping off a two-year pursuit by Hollub for Anadarko – which only went public after the Chevron bid. This new ‘global energy leader’ has a combined 1.3 mmb/d boe production, but instead of leveraging Anadarko’s more international spread of operations, Oxy is looking for a future that is significantly more domestic.
The Oxy-Anadarko marriage will make Occidental the undisputed top producer in the Permian Basin, the hottest of all current oil and gas hotspots. Oxy was once a more international player, under former CEO Armand Hammer, who took Occidental to Libya, Peru, Venezuela, Bolivia, the Congo and other developing markets. A downturn in the 1990s led to a refocusing of operations on the US, with Oxy being one of the first companies to research extracting shale oil. And so, as the deal was done, Anadarko’s promising projects in Africa – Area 1 and the Mozambique LNG project, as well as interest in Ghana, Algeria and South Africa – go to Total, which has plenty of synergies to exploit. The retreat back to the US makes sense; Anadarko’s 600,000 acres in the Permian are reportedly the most ‘potentially profitable’ and it also has a major presence in Gulf of Mexico deepwater. Occidental has already identified 10,000 drilling locations in Anadarko areas that are near existing Oxy operations.
While Chevron licks its wounds, it can comfort itself with the fact that it is still the largest current supermajor presence in the Permian, with output there surging 70% in 2018 y-o-y. There could be other targets for acquisitions – Pioneer Natural Resources, Concho Resources or Diamondback Energy – but Chevron’s hunger for takeover seems to have diminished. And with it, the promises of an M&A bonanza in the Permian over 2019.
The Occidental-Anadarko deal:
Source: U.S. Energy Information Administration, Short-Term Energy Outlook
In April 2019, Venezuela's crude oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of the year, according to EIA’s May 2019 Short-Term Energy Outlook. This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought the operations of Venezuela's state oil company, Petróleos de Venezuela, S.A. (PdVSA), to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines.
Source: U.S. Energy Information Administration, based on Baker Hughes
Venezuela’s oil production has decreased significantly over the last three years. Production declines accelerated in 2018, decreasing by an average of 33,000 b/d each month in 2018, and the rate of decline increased to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan crude oil production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years. EIA estimates that U.S. crude oil imports from Venezuela in 2018 averaged 505,000 b/d and were the lowest since 1989.
EIA expects Venezuela's crude oil production to continue decreasing in 2019, and declines may accelerate as sanctions-related deadlines pass. These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies, among other factors, will contribute to a further decrease in production.
Additionally, U.S. sanctions, as outlined in the January 25, 2019 Executive Order 13857, immediately banned U.S. exports of petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—to Venezuela. The Executive Order also required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States.
India, China, and some European countries continued to receive Venezuela's crude oil, according to data published by ClipperData Inc. Venezuela is likely keeping some crude oil cargoes intended for exports in floating storageuntil it finds buyers for the cargoes.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, and Clipper Data Inc.
A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.
If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.
EIA forecasts that Venezuela's crude oil production will continue to fall through at least the end of 2020, reflecting further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what EIA currently assumes would change this forecast.
Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b
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