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Headline crude prices for the week beginning 30 March 2020 – Brent: US$33/b; WTI: US$26/b

  • Unprecedented times call for unprecedented measures, as crude oil prices got a boost from an unlikely source: President Donald Trump, and his proclamation that Saudi Arabia and Russia would agree on a new supply deal
  • The magic number touted by Trump was a massive cut of 10 mmb/d in production – which triggered the largest ever single-day jump in crude oil prices – as Saudi Arabia called for an emergency OPEC+ meeting to discuss the issue
  • The OPEC+ meeting, which took place on Thursday, yielded a historic agreement to reduce production by 10 mmb/d; the cuts will be at the maximum level of 10 mmb/d until June 2020, before tapering down to 8 mmb/d until December 2020, and then 6 mmb/d until April 2022
  • The scale of the new cuts is unprecedented, and did not include any pledges from non-OPEC+ countries – particularly the USA and Brazil – beyond a call to such countries to respond with equivalent cuts
  • Unusually, Mexico was the lone hold-out on the deal, refusing to agree to a requested cut of 400,000 b/d, but it seems that the deal will go ahead
  • Oil prices didn’t budget upon the announcement of the agreement; partially because the market had already priced in the announcement after it was telegraphed by President Trump but also because the cut will not be enough to offset the expected fall in oil demand, which some analysts are predicting could reach 35 mmb/d in 2020
  • Much will now depend on President Trump’s next meeting with American drillers – set for April 10 – and if he can cajole them into accepting a pact to reduce US output; it is a tough proposition in a free-market industry, and even if a deal is reached, adherence will be tough to achieve…. as it already is within OPEC+
  • Supporting oil prices was an announcement by China that it had begun purchasing crude to fill its strategic reserves, one of many measures by governments worldwide have been taking to capitalise on cheap crude
  • While the new OPEC+ announcement should provide a more stable environment for drilling soon, the US active rig count remains decimated, losing a net 64 sites (62 oil and 2 gas), bringing the total operational number to 664
  • The OPEC+ deal has kicked crude oil prices to new plateau, but the demand side is still too weak to push prices higher; unless something miraculous comes out of the US regarding a crude supply pact, crude oil prices will continue to trade in the range of US$30-33/b for Brent and US$22-24/b for WTI


Headlines of the week

Upstream

  • Bakken shale giant Whiting Petroleum has filed for bankruptcy, the first of many former shale darlings that are expected to go into administration as the US shale industry faces a dire reckoning from Covid-19 and the oil price war
  • In an unusual move, Pioneer Natural Resources and Parsley Energy have backed a plan for the Texas Railroad Commission – the state oil regulator – to implement a state cap on crude output to ‘set reasonable market demand’
  • Siccar Point Energy and Shell have deferred the planned sanction date for their Cambo project in the UK Continental Shelf from Q3 2020 to 2H 2021
  • Petrobras has struck new oil at its pioneer well in the pre-salt Santos Basin’s Uirapuru Block, which it shares with ExxonMobil, Equinor and Petrogal
  • The latest giant oil field to enter production, Equinor’s John Sverdrup field in the North Sea will reach peak plateau production for its first phase earlier than expected, hitting some 470,000 boe/d by early May
  • TC Energy has confirmed that it will be proceeding with the construction of the controversial Canada-US Keystone XL Pipeline Project after receiving some US$8 billion in financial support from the provincial government of Alberta
  • Total is gearing up to start drilling at its Luiperd wildcat in South Africa in June 2020, close to its recent giant Brulpadda discovery in Block 11B/12B

Midstream/Downstream

  • Chinese refineries have gone on a buying spree for US crude oil, tempted by huge discounts offered at a time when China is preparing to resume normal economic activity after emerging from the Covid-19 lockdown and after the country waved import tariffs on US crude as part of the Phase 1 trade deal
  • India’s HPCL has invoked force majeure on two cargoes of crude oil from Iraq’s SOMO, citing dramatic fuel demand destruction due to India’s lockdown
  • Shell has opted to restart refining units at its 404 kb/d Pernis refinery in the Netherlands – Europe’s largest – following a brief power outage
  • Meanwhile North Atlantic Refining’s 130 kb/d Come-by-Chance refinery in Canada’s Newfoundland and Labrador province has become the first site in North America to halt all operations due to the Covid-19 pandemic
  • Saudi Aramco is reportedly mulling the sale of a stake in its pipeline unit in order to raise cash as the Kingdom faces off with Russia over oil prices; Aramco’s move would be in line with a similar recent proposal by Adnoc
  • China will begin to grant export quotas for refined fuel products to non-state refineries in the Zhejiang province as part of a pilot free trade zone, with the aim to promoting the zone as an international hub for clean marine fuels

Natural Gas/LNG

  • US LNG giant Cheniere has made the unusual step of tendering to buy 6 shipments of LNG for delivery to Europe later in 2020, seen as a sign that it may intend to throttle back production on a global glut and seeking (cheaper) existing cargoes to fulfil its contractual commitments
  • Cryopeak LNG Solutions Corp has broken ground on its planned LNG production facility in Fort Nelson, British Columbia, which is expected to serve demand markets in northern Canada and Alaska
  • India’s ONGC has produced first gas at Block 98/2 in the offshore Krishna Godavari Basin, which will be tied back to the existing Vashishta facility and potentially reduce the country’s LNG imports by 10% alone

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Libya & OPEC’s Quota

The constant domestic fighting in Libya – a civil war, to call a spade a spade, has taken a toll on the once-prolific oil production in the North African country. After nearly a decade of turmoil, it appears now that the violent clash between the UN-recognised government in Tripoli and the upstart insurgent Libyan National Army (LNA) forces could be ameliorating into something less destructive with the announcement of a pact between the two sides that would to some normalisation of oil production and exports.

A quick recap. Since the 2011 uprising that ended the rule of dictator Muammar Gaddafi, Libya has been in a state of perpetual turmoil. Led by General Khalifa Haftar and the remnants of loyalists that fought under Gaddafi’s full-green flag, the Libyan National Army stands in direct opposition to the UN-backed Government of National Accord (GNA) that was formed in 2015. Caught between the two sides are the Libyan people and Libya’s oilfields. Access to key oilfields and key port facilities has changed hands constantly over the past few years, resulting in a start-stop rhythm that has sapped productivity and, more than once, forced Libya’s National Oil Corporation (NOC) to issue force majeure on its exports. Libya’s largest producing field, El Sharara, has had to stop production because of Haftar’s militia aggression no fewer than four times in the past four years. At one point, all seven of Libya’s oil ports – including Zawiyah (350 kb/d), Es Sider (360 kb/d) and Ras Lanuf (230 kb/d) were blockaded as pipelines ran dry. For a country that used to produce an average of 1.2 mmb/d of crude oil, currently output stands at only 80,000 b/d and exports considerably less. Gaddafi might have been an abhorrent strongman, but political stability can have its pros.

This mutually-destructive impasse, economically, at least might be lifted, at least partially, if the GNA and LNA follow through with their agreement to let Libyan oil flow again. The deal, brokered in Moscow between the warlord Haftar and Vice President of the Libyan Presidential Council Ahmed Maiteeq calls for the ‘unrestrained’ resumption of crude oil production that has been at a near standstill since January 2020. The caveat because there always is one, is that Haftar demanded that oil revenues be ‘distributed fairly’ in order to lift the blockade he has initiated across most of the country’s upstream infrastructure.

Shortly after the announcement of the deal, the NOC announced that it would kick off restarting oil production and exports, lifting an 8-month force majeure situation, but only at ‘secure terminals and facilities’. ‘Secure’ in this cases means facilities and fields where NOC has full control, but will exclude areas and assets that the LNA rebels still have control. That’s a significant limitation, since the LNA, which includes support from local tribal groups and Russian mercenaries still controls key oilfields and terminals. But it is also a softening from the NOC, which had previously stated that it would only return to operations when all rebels had left all facilities, citing safety of its staff.

If the deal moves forward, it would certainly be an improvement to the major economic crisis faced by Libya, where cash flow has dried up and basic utilities face severe cutbacks. But it is still an ‘if’. Many within the GNA sphere are critical of the deal struck by Maiteeq, claiming that it did not involve the consultation or input of his allies. The current GNA leader, Prime Minister Fayyaz al Sarraj is also stepping down at the end of October, ushering in another political sea change that could affect the deal. Haftar is a mercurial beast, so predictions are difficult, but what is certain is that depriving a country of its chief moneymaker is a recipe for disaster on all sides. Which is why the deal will probably go ahead.

Which is bad news for the OPEC+ club. Because of its precarious situation, Libya has been exempt for the current OPEC+ supply deal. Even the best case scenarios within OPEC+ had factored out Libya, given the severe uncertainty of the situation there. But if the deal goes through and holds, it could potentially add a significant amount of restored crude supply to global markets at a time when OPEC+ itself is struggling to manage the quotas within its own, from recalcitrant members like Iraq to surprising flouters like the UAE.

Mathematically at least, the ceiling for restored Libyan production is likely in the 300-400,000 b/d range, given that Haftar is still in control of the main fields and ports. That does not seem like much, but it will give cause for dissent within OPEC on the exemption of Libya from the supply deal. Libya will resist being roped into the supply deal, and it has justification to do so. But freeing those Libyan volumes into a world market that is already suffering from oversupply and weak prices will be undermining in nature. The equation has changed, and the Libyan situation can no longer be taken for granted.

Market Outlook:

  •  Crude price trading range: Brent – US$41-43/b, WTI – US$39-41/b
  • While a resurgence in Covid-19 cases globally is undermining faith that the ongoing oil demand recovery will continue unabated, crude markets have been buoyed by a show of force by Saudi Arabia and US supply disruptions from Tropical Storm Sally
  • In a week when Iraq’s OPEC+ commitments seem even more distant with signs of its crude exports rising and key Saudi ally the UAE admitting it had ‘pumped too much recently’, the Saudi Energy Minister issued a force condemnation on breaking quotas
  • On the demand side, the IEA revised its forecast for oil demand in 2020 to an annual decline of 8.4 mmb/d, up from 8.1 mmb/d in August, citing Covid resurgences
  • In a possible preview of the future, BP issued a report stating that the ‘relentless growth of oil demand is over’, offering its own vision of future energy requirements that splits the oil world into the pro-clean lobby led by Europeans and the prevailing oil/gas orthodoxy that remains in place across North America and the rest of the world

END OF ARTICLE

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September, 22 2020
Average U.S. construction costs for solar and wind generation continue to fall

According to 2018 data from the U.S. Energy Information Administration (EIA) for newly constructed utility-scale electric generators in the United States, annual capacity-weighted average construction costs for solar photovoltaic systems and onshore wind turbines have continued to decrease. Natural gas generator costs also decreased slightly in 2018.

From 2013 to 2018, costs for solar fell 50%, costs for wind fell 27%, and costs for natural gas fell 13%. Together, these three generation technologies accounted for more than 98% of total capacity added to the electricity grid in the United States in 2018. Investment in U.S. electric-generating capacity in 2018 increased by 9.3% from 2017, driven by natural gas capacity additions.

Solar
The average construction cost for solar photovoltaic generators is higher than wind and natural gas generators on a dollar-per-kilowatt basis, although the gap is narrowing as the cost of solar falls rapidly. From 2017 to 2018, the average construction cost of solar in the United States fell 21% to $1,848 per kilowatt (kW). The decrease was driven by falling costs for crystalline silicon fixed-tilt panels, which were at their lowest average construction cost of $1,767 per kW in 2018.

Crystalline silicon fixed-tilt panels—which accounted for more than one-third of the solar capacity added in the United States in 2018, at 1.7 gigawatts (GW)—had the second-highest share of solar capacity additions by technology. Crystalline silicon axis-based tracking panels had the highest share, with 2.0 GW (41% of total solar capacity additions) of added generating capacity at an average cost of $1,834 per kW.

average construction costs for solar photovoltaic electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Wind
Total U.S. wind capacity additions increased 18% from 2017 to 2018 as the average construction cost for wind turbines dropped 16% to $1,382 per kW. All wind farm size classes had lower average construction costs in 2018. The largest decreases were at wind farms with 1 megawatt (MW) to 25 MW of capacity; construction costs at these farms decreased by 22.6% to $1,790 per kW.

average construction costs for wind farms

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Natural gas
Compared with other generation technologies, natural gas technologies received the highest U.S. investment in 2018, accounting for 46% of total capacity additions for all energy sources. Growth in natural gas electric-generating capacity was led by significant additions in new capacity from combined-cycle facilities, which almost doubled the previous year’s additions for that technology. Combined-cycle technology construction costs dropped by 4% in 2018 to $858 per kW.

average construction costs for natural gas-fired electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

September, 17 2020
Fossil fuels account for the largest share of U.S. energy production and consumption

Fossil fuels, or energy sources formed in the Earth’s crust from decayed organic material, including petroleum, natural gas, and coal, continue to account for the largest share of energy production and consumption in the United States. In 2019, 80% of domestic energy production was from fossil fuels, and 80% of domestic energy consumption originated from fossil fuels.

The U.S. Energy Information Administration (EIA) publishes the U.S. total energy flow diagram to visualize U.S. energy from primary energy supply (production and imports) to disposition (consumption, exports, and net stock additions). In this diagram, losses that take place when primary energy sources are converted into electricity are allocated proportionally to the end-use sectors. The result is a visualization that associates the primary energy consumed to generate electricity with the end-use sectors of the retail electricity sales customers, even though the amount of electric energy end users directly consumed was significantly less.

U.S. primary energy production by source

Source: U.S. Energy Information Administration, Monthly Energy Review

The share of U.S. total energy production from fossil fuels peaked in 1966 at 93%. Total fossil fuel production has continued to rise, but production has also risen for non-fossil fuel sources such as nuclear power and renewables. As a result, fossil fuels have accounted for about 80% of U.S. energy production in the past decade.

Since 2008, U.S. production of crude oil, dry natural gas, and natural gas plant liquids (NGPL) has increased by 15 quadrillion British thermal units (quads), 14 quads, and 4 quads, respectively. These increases have more than offset decreasing coal production, which has fallen 10 quads since its peak in 2008.

U.S. primary energy overview and net imports share of consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

In 2019, U.S. energy production exceeded energy consumption for the first time since 1957, and U.S. energy exports exceeded energy imports for the first time since 1952. U.S. energy net imports as a share of consumption peaked in 2005 at 30%. Although energy net imports fell below zero in 2019, many regions of the United States still import significant amounts of energy.

Most U.S. energy trade is from petroleum (crude oil and petroleum products), which accounted for 69% of energy exports and 86% of energy imports in 2019. Much of the imported crude oil is processed by U.S. refineries and is then exported as petroleum products. Petroleum products accounted for 42% of total U.S. energy exports in 2019.

U.S. primary energy consumption by source

Source: U.S. Energy Information Administration, Monthly Energy Review

The share of U.S. total energy consumption that originated from fossil fuels has fallen from its peak of 94% in 1966 to 80% in 2019. The total amount of fossil fuels consumed in the United States has also fallen from its peak of 86 quads in 2007. Since then, coal consumption has decreased by 11 quads. In 2019, renewable energy consumption in the United States surpassed coal consumption for the first time. The decrease in coal consumption, along with a 3-quad decrease in petroleum consumption, more than offset an 8-quad increase in natural gas consumption.

EIA previously published articles explaining the energy flows of petroleum, natural gas, coal, and electricity. More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

Principal contributor: Bill Sanchez

September, 15 2020