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Last Updated: April 17, 2020
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Headline crude prices for the week beginning 13 April 2020 – Brent: US$31/b; WTI: US$22/b

  • In the face of a landmark OPEC+ deal to slash production by nearly 10 million barrels a day, crude oil prices did not stage a recovery, but instead lost ground as the size of the supply deal failed to impress a market concerned about the scale of demand destruction from the Covid-19 pandemic
  • Despite a last-minute threat by Mexico to scupper the deal, the OPEC+ club agreed to cut 9.7 mmb/d of output through June 2020; an additional 5 mmb/d of cuts would come as an ‘automatic’ process of low crude prices for non-OPEC+ countries including the US, Norway, Canada and Brazil, but this still pales in comparison to a fall of 18.5 mmb/d of oil demand expected for the year
  • The unprecedented situation has led to a curious situation of many free-market economics supporting supply controls, as the G20 group of countries met virtually to support the OPEC+ deal; the US even offered to ‘pick up some of Mexico’s slack’ to save the OPEC+ deal
  • Adherence to the OPEC+ supply deal, which will last for two years until June 2022, is also up in the air; there is already evidence that both Saudi Arabia and Russia are still pumping oil at full volume in a bid to secure market share before the new deal kicks in May 1
  • However large the deal, it failed to impress the trading market; at a minimum, oil demand is expected to decline by 18.5 mmb/d in 2020, with some models predicting a loss of up to 35 mmb/d in a worst-case scenario, which would leave a huge oversupply in the market
  • While countries and companies are scrambling to fill up reserves and infrastructure – from train cars to pipelines to cargo ships – with spare crude, this will not be enough to absorb the huge amount of excess oil expected
  • Dynamics have also widened the spread between the two global oil benchmarks, with WTI sinking to a near-US$10/b discount to Brent as shale producers are caught in an existential crisis of continuing to pump or ceasing to exist
  • The depressed price environment is still wreaking havoc with the US rig count, which lost another 62 sites (58 oil, 4 gas) to sink to a 3-year low of 602 active sites according to Baker Hughes
  • After OPEC+ did all it could to enforce a new supply deal, crude oil prices are still reeling from the Covid-19 pandemic and the damage done by the Saudi-Russia oil price war; expect crude oil prices to remain soft, with Brent in the US$28-30/b range and WTI at US$24-26/b


Headlines of the week

Upstream

  • The US Department of Energy will made 77 million barrels of storage space in the federal Strategic Petroleum Reserve available to US producers in two tranches of 30 million barrels and 47 million barrels, respectively
  • Total has divested some US$400 million of non-core assets from its portfolio, with the main upstream portion being the sale of its Brunei E&P subsidiary (and 86.95% interest in Block CA1) to Shell
  • India is looking to purchase 15 million barrels of crude to fill up its three strategic reserves to take advantage of low prices, aiming at 5.5 million barrels of the UAE’s Upper Zakum grade for Mangalore, 9.2 million barrels of Saudi grades for Padur, and Iraqi Basrah Light grades for Visakhapatnam
  • Despite the global oil route and countries racing the cut production, Pemex is going to opposite route, continuing on its path to double drilling to 423 wells in 2020 and accelerate development of 15 recent upstream developments
  • Equinor has announced a new oil discovery in the US Gulf of Mexico, with the Monument well striking ‘good’ flows of crude oil
  • Wintershall DEA has made a new oil discovery at Well 6406/3-110 in the Bergknapp prospect’s Garn and Tilje formations in the Norwegian Sea
  • The Covid-19 devastation of global oil demand has forced the Middle East’s largest crude terminal in Fujairah to stop accepting storage requests by traders and refiners, having reached its capacity ceiling of 14 million barrels
  • INEOS will postpone planned summer shutdown for the UK’s Forties Pipeline system to spring 2021 in response to the ongoing Covid-19 lockdown
  • Norway has approved plans to build the Hywind Tampen floating wind farm that will power five oil and gas production platforms in the North Sea, with 11 wind turbines supporting the Snorre A and B, and Gullfaks A, B and C sites
  • Saudi Arabia has delayed the kick-off to develop its US$10 billion offshore Zuluf field until 2H 2020 amid major uncertainty in the industry

Midstream/Downstream

  • Nigeria’s NNPC will shut down its entire refining infrastructure in the country, in a bid to complete a comprehensive upgrade plan while avoid haemorrhaging money from the current low crude and refined price environment
  • As part of Total’s US$400 million non-core asset divestment, the French supermajor has sold its fuels import, distribution and marketing businesses in Liberia and Sierra Leone to Conex Oil & Gas, including 63 service stations
  • Marathon Petroleum has idled its 26,000 b/d refinery in Gallup, New Mexico – becoming the second North American refinery to shut down amid the pandemic
  • The Belarus-Russia oil supply spat seems to be ending, with Russian pipeline operator Transneft resuming supplies of Russian crude to Belarusian refineries

Natural Gas/LNG

  • Total has chartered its first LNG-powered VLCCs, while each of the two vessels owned by Malaysia’s AET aiming to enter service in 2022; the LNG for the vessels will be provided by Total’s own marine bunkering fuels arm
  • BP has declared force majeure on receiving the Gimi 2.5 million tpa FLNG facility from Golar LNG in 2022, after delaying its Greater Tortue Ahmeyim LNG project offshore Mauritania and Senegal
  • SDX has announced a new commercial gas discovery at its Sobhi well in Egypt, with some 24 bcf of recoverable gas and condensate that is expected to be tied back to the Yunus-1X pipeline tied back to the South Disouq processing facility

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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