Just in case you missed the week's biggest news in the oil industry. Here is a quick round-up of events.
After over a month of posturing and rhetoric that brought crude oil prices to their lowest levels since the invasion of Iraq in 2003, the world’s largest crude oil producers managed to swallow their pride. Collectively, the OPEC+ group agreed to slash global production by nearly 10 mmb/d through June 2020, before allowing gradual increases through April 2022, when the deal expires. The scale of the new deal is vast. It is the single largest output cut in history, which is in response to the single largest demand destruction event in history, the Covid-19 pandemic, and runs on a huge timeline of 2 years.
For OPEC+, the deal serves two purposes. It immediately props up the current traded prices of crude oil, which were languishing in the US$25/b level before chatter of the deal emerged but it also is prescient enough to acknowledge that the negative impact of Covid-19 will linger for very long, hence the need for a long tail to the deal. The Great OPEC+ deal will not be enough to return oil prices to the US$50/b range. The greater Covid-19 crisis has ensured that. At least 18.5 mmb/d of oil demand has disappeared due to the pandemic; the current deal mitigates just over half of those volumes when it starts on May 1. But the goal was never to deliver a sustained recovery in crude prices. It was to ensure stability at current price levels, avoid oil prices possibly crashing further down into single digits, while managing supply to pave the way for eventual an price recovery as global economic activity slowly recovers post-Covid.
The goal was also to get the US involved. And involved it did. The emergency OPEC+ meeting, also attended by key countries not part of the OPEC+ alliance, was brokered through a series of furious meetings by US President Donald Trump. A more Machiavellian take on the Saudi Arabia-Russia oil price war was that it was a gambit to force the US to step in and get involved. Threatened with a meltdown of the US oil industry, particularly the shale patch, once an investor’s darling but now saddled with debt. Trump’s hand was forced in a crucial election year to advocate market control over free market economics. And it wasn’t just US oil facing an existential crisis; the massive LNG export infrastructure being built across the US was under threat as well. All of this was outlined to Trump in a feisty meeting with representatives of the US oil and gas industry, bitterly divided between those advocating intervention (the smaller players) and those protecting the free market (the majors and supermajors).
In the end, President Trump stepped in. He had to. Another Machiavellian take on the situation was that the oil price war was an excuse to allow Saudi Arabia and Russia to inflate their production levels in April, to cushion the blow from eventual production cuts. And, indeed, Saudi Arabia and Russia raised their output to record highs of some 12 mmb/d in April. Under the new supply deal, both countries would reduce their output to some 8.5 mmb/d, making up over half of the total expected cuts. But at the initial OPEC+ meeting on Thursday, protest came from an unusual quarter. Mexico, which has over-hedged its crude, balked at cutting its output by 400,000 b/d, promising only 100,000 b/d. The Mexican Standoff, as it was called, only ended by President Trump stepped in and promised to assist Mexico with its quota. This brought the OPEC+ supply deal down from an initial 10 mmb/d to 9.7 mmb/d.
Following the provisional OPEC+ deal, the G20 group of nations met a day after, promising to support intervention to stabilise prices. Out of that meeting, the US, Brazil and Canada aimed to reduce 3.7 mmb/d from their collective production, while the other G20 nations (including Argentina, Indonesia and the UK) would contribute another 1.3 mmb/d. However, these would not be actual quotas but ‘natural cuts’ as a by-products of the low price environment, as the free-market economies balked to establishing market controls. As President Trump put it, the free market would curb output in free market nations ‘automatically’, as private firms such as Equinor, ExxonMobil, Shell and Petrobras adjust their output accordingly.
On Sunday, OPEC+ finalised the details of its Great Deal after Mexico dropped its protest following Trump’s uncharacteristic offer to ‘pick up some of the slack’. With new countries in line (at least in spirit) with the supply deal, this has now been characterised as the Great OPEC++ Deal. But those expecting prices to rally on the news were disappointed. As Goldman Sachs called it, the deal is ‘too little, too late’. The market had already priced in a comprehensive supply deal when it rallied Brent prices from US$25/b to US$32/b; but the deal wasn’t large enough to placate a market fretting over the uncertain duration of the oncoming economic depression. Adherence to the supply cuts, as always, is always a huge question mark. But, as we have mentioned, that wasn’t the plan. Instead of a shock-and-awe cut to rally prices in the short-term, the Great OPEC++ Deal instead provides a gradual exit strategy from the current catastrophe. A catastrophe that OPEC++ itself partly contributed towards.
The OPEC++ deal in summary:
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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.
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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.
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.
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.
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.
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.
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.
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.
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