Tag Archives: oil

Electric Cars: Impact – 2/17/17

Improved battery technology is about to bring electric vehicles (EVs) to the masses faster and with a greater impact than almost anyone expected.

The proportion of EVs out of all cars on the world’s roads is still well below 1% with most forecasts estimating an increase in that number to around 4% by 2025. Now those estimates are looking quaint as car makers announce huge expansions in their EV production. Banks Morgan Stanley and Exane BNP Paribas now predict numbers closer to 7% and 11% of vehicles by 2025, respectively.

Ford has promised 13 new electrified cars in the next five years. Volkswagen, 30 new battery-powered models by 2025, also saying that EVs will account for as much as 25% of its sales.

The falling cost of batteries will make the cost of owning and running an EV the same as that of a conventional car by the early 2020s, even without subsidies. Vehicles once bought only for the sake of the environment will become the cheaper option as well.

Better, cheaper batteries should also conquer “range anxiety” as pure EVs go from driving 100 miles on a single charge to more than 200. If battery technology continues to improve at the current rate, the price of a car with a range of 300 miles could hit $30,000 by the early 2020s, according to Exane BNP Paribas. In addition, better, more numerous charging points will also mean recharging in minutes, not hours, and alleviate fears of being stranded. In the U.S., the number of points grew over 25% to about 40,000 last year.

But EVs are not yet a profitable business for carmakers precisely because of their batteries. Each sale of Chevrolet’s Bolt will reportedly set GM back $9,000 and even Renault-Nissan, the biggest EV manufacturer, continues to lose money on its electric models. Research and development, as well as restructuring are also extremely expensive processes that could force many manufacturers to take multiple years of losses as they make the switch.

EVs may eventually make more money than internal combustion cars as battery costs fall further and their simpler design lets companies cut labor costs, but the only thing more costly than the initial transition would be missing it altogether.

If the effect of EVs on car makers will be large, their effect on oil companies will be absolutely massive.

About 2 million barrels a day of oil demand could be displaced by EVs by 2025, equivalent to the mismatch of supply and demand that triggered a 50% drop in the price of oil over the past three years, according to research published by Imperial College London and the Carbon Tracker Initiative. A similar 10% loss of market share caused the collapse of the U.S. coal mining industry, the report said, illustrated below in a graph from Bloomberg.com.

BP says EVs could erase as much as 5 million barrels a day of global oil demand in the next 20 years, while analysts at Wood Mackenzie estimate the loss of as much as 10% of global demand over the same period. Royal Dutch Shell Plc CFO Simon Henry recently said that oil demand could peak in as little as five years.

The cost of EVs is already falling faster than previously forecast; they could reach parity with conventional internal combustion vehicles by 2020, eventually saturating the passenger vehicle market by 2050, according to the report. EVs may take 19% to 21% of the road transport market by 2035, according to the researchers, or three times BP’s projection of 6% market share in 2035. By 2050, EVs would comprise 69% of the road-transport market, with conventional oil-powered cars accounting for about 13%.

Considering that almost three-fourths of all oil consumed in the U.S. is used for transportation, the loss of oil-demand from cars would have a devastating impact on unprepared companies in the oil industry.

Oil Update: Mixed Results for the OPEC Deal – 2/13/17

OPEC and Russia are leading a push by global producers to end a three-year oil surplus that sent prices crashing and devastated their finances. And while prices initially rallied 20% on news of the OPEC agreement, concerns about rebounding U.S. drillers will fill the gap left by OPEC’s cuts are keeping a lid on prices. Regardless of how increasing U.S. output would make ineffectual any cuts, so far OPEC member compliance with the agreement has been better than expected while compliance from non-members has been weak.

Largest exporter of the group, Saudi Arabia, told OPEC that it cut oil production beyond its obligations under the deal to balance world markets, but independent review suggests otherwise. The kingdom reported that it reduced output by 717,600 barrels a day (b/d) last month, according to a monthly report from the OPEC compared to the group’s own estimates which put Saudi Arabia’s cut closer to a less impressive 496,000 b/d cut.

Saudi Arabia has also violated the spirit of the deal in a more subtle way: reducing domestic use of oil so it has more to sell abroad.

Saudis have always been huge consumers of oil and are only now starting to cut back. That change would allow them to export more while producing less. Oil consumption jumped 77% for Saudi Arabia between 2005 and 2015, topping even China, which grew 72%, according to data from BP.

Now Saudi Arabia’s actual domestic consumption of unrefined crude oil and its increase in production left a combined 3.5 million additional barrels available for refining or export compared with 2015, according to data from the Joint Organisations Data Initiative.

In regards to the group as a whole, in monthly report covering the deal, Iraq, Venezuela and Iran told OPEC they pumped more than allowed by the accord.

OPEC’s “secondary sources” numbers formed the baseline for the accord. Tellingly, Iraq had initially insisted that only statistics supplied by member governments should be used. Iraq’s own data currently shows that it had made 180,000 b/d in cuts of its 210,000 b/d target. Meanwhile, OPEC said Iraq cut 166,000 barrels and the independent International Energy Agency reported that Iraq cut output by only 110,000 barrels a day. 

Among OPEC members, Iraq was always expected to be one of the hardest to reign in. Both the Iraqi and Venezuelan governments are currently unstable (and in need of funds) explaining their reluctance to comply with the cuts that would mean bringing in less oil revenue. Only recently seeing the end of U.S. sanctions, Iran has also made it clear from the start that righting its atrophied energy sector takes precedent over any obligations to the group.

Still, estimates indicate a relatively high degree of compliance among OPEC members compared to deals in the past such as the one in 2009. According to the IEA, OPEC compliance peaked at 80% during the 2009 agreement period.

OPEC, which agreed to the cuts with 11 other oil-producing nations in December, is 92% compliant with its pledge to reduce output by 1.2 million b/d, Oil Minister Essam Al-Marzooq told reporters Monday in Kuwait City. Non-OPEC producers are complying at a lower rate, he said. The IEA reported similar numbers showing a historically high 90% compliance rate.

The same cannot be said for the 11 non-OPEC producers that agreed to join in with output cuts.

Compliance from OPEC members alone was never going to be enough to balance the market. If it were, then the group wouldn’t have had to ask other producers to join the agreement and cut their output by 558,000 b/d. So far, Russia and the other non-OPEC participants have cut just 269,000 b/d, according to IEA data, or compliance of about 48%.

Kuwaiti Oil Minister Essam Al-Marzooq, whose country chairs the committee that oversees compliance, is urging those countries to fulfill their commitments; however, those urgings are probably in vain since OPEC has no means of compelling compliance in any meaningful way.

In addition, the output deal expires in June and though OPEC members have said they will consider extending the cuts if necessary, non-OPEC members have not even suggested they might go along with an extension. With all the trouble, the oil market is still far from being back in balance. If the organization keeps output at January levels, supply would still outmatch demand by about 800,000 a day adding to already bulging global stockpiles.

OPEC Deal: Good Compliance, Pessimistic Reactions – 2/6/17

OPEC members seem committed to showing commitment to their deal for whatever that’s worth.

In OPEC’s initial agreement, production data compiled by analysts in the group’s secretariat will be the principal tool for judging whether members are complying with the deal. Notably, the data won’t cover non-members such as Russia. The committee also has no plans to use external agencies to verify implementation of the pledged supply curbs.

Still, non-official channels are happy to keep track for them. Tanker-tracker Petro-Logistics SA estimates that oil supplies from OPEC plunged in January in one of the first outside assessments of compliance. OPEC will reduce supply by 900,000 barrels a day in January, about 75% of the cut that the producer group agreed, according the Geneva-based consultant group.

The data suggests “a high level of compliance thus far into the production curtailment agreement,” said Daniel Gerber, CEO of Petro-Logistics.

An implementation rate of 75% is high relative to past deals such as the 2008 deal where it only reached 70%, according to Hasan Qabazard, OPEC’s former head of research.

For now, there’s no indication that the cuts will need to be extended beyond the initial six-month term, Algeria’s representative Boutarfa said at a recent meeting, echoing previous comments by the Saudi oil minister.

Unfortunately for OPEC, six months of cuts may do little to move prices. The U.S. rig count has been rising and, with a looming resurgence in U.S. output, analysts have their doubts about the efficacy of the OPEC agreement and any future deals the group could make. As the capacity for oil production in the U.S. rises and global demand for oil falls, the group’s power over the market is a fraction of what it once was during the 1973 Oil Embargo and resulting crisis.

The latest energy outlook by supermajor BP illustrates the market-share/price problem facing OPEC.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”. BP expects oil demand growth to slow down in the years to come and pegs the cumulative oil demand until 2035 at around 700 billion barrels, “significantly less than recoverable oil in the Middle East alone”.

In this view, low-cost producers — primarily OPEC nations and Russia — would try to seize more market share. BP predicts that the abundance of oil resources would prompt the lowest-cost producers to pump the low-cost barrels as quickly as possible before demand falls off.

However, OPEC has the recent experience of oil prices crashing weighing on it. After attempting to force high-cost shale drillers out of the market and seeing the resulting drop in oil revenue OPEC appears reluctant to return to a market-share strategy. But OPEC’s decision to cut supply is currently benefiting U.S. shale putting the cartel in a lose-lose situation.

Commenting on OPEC’s current and future relevance and influence on the oil markets, Wood Mackenzie said in an analysis last week:

“The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel. If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.”

Energy Security: Oil Independence A Long Ways Off – 2/3/17

U.S. Presidents pledging to make America independent from OPEC oil isn’t new. Energy security has always been a concern for nations, and reliance on imported oil from unstable regions has caused serious problems in recent times. Problems which lead to George W. Bush’s attempts to reduce imports from the Middle East saying the nation was “addicted to oil”, but vowing and doing are very different things. In the end, oil shipments from OPEC to the U.S. rose more than 10% during Bush’s time in office.

Independence from the Middle East would equate to replacing about 2.7 million barrels a day (b/d) in net imports, a 30% increase in current domestic output — currently ~9 million b/d after the already massive increase following the shale drilling and fracking boom.

Still, the new goal is more obtainable than it once was. U.S. oil production has risen significantly in the last decade, so the nation was nearing energy independence even without prompting from the White House.

And shale explorers in the United States are expected to increase spending four times faster than the global average this year. According to Bloomberg, the number of rigs drilling for oil and gas in the U.S. and Canada has more than doubled since May.

As to when the U.S. reach some degree of energy independence, the EIA’s January Short-Term Energy Outlook could hold some clues.

The EIA forecasts an increase in U.S. crude oil production from an average of 8.9 million barrels per day (b/d) in 2016 to an average of 9.3 million b/d in 2018, primarily thanks to U.S. tight oil production in Texas from the Permian and Eagle Ford regions.

Although overall U.S. oil production has been declining since mid-2015, the EIA has observed increasing production in the Permian region. In 2016, Permian production averaged 2.0 million b/d, a 5% increase from 2015. Permian production is projected to average 2.3 million b/d in 2017 and 2.5 million b/d in 2018.

Compared with the Permian region, other regions have fared poorly. The next most successful region, Eagle Ford, saw declines with average annual production at 1.6 million b/d in 2015 and 1.3 million b/d in 2016. The EIA expects production in that region will only begin increasing again in the third quarter of 2017 amid higher oil prices.

Clearly a 0.4 million b/d increase in domestic production isn’t enough to make up for the 2.7 million b/d in imports from OPEC nations, but it is decent progress for two years.

Still, U.S. tight oil is relatively costly to pull out of the ground with even the best U.S. shale plays producing at break-even costs near $35.

The problem with just pumping more oil to reach energy independence is that increasing supplies by a couple million barrels per day would drive down prices. And compared to OPEC nations that can break-even selling at prices below $25 a barrel, no shale driller could operate profitably under the prices declines that large a difference in supply and demand would cause.

U.S. shale drillers may be extremely important as marginal producers, but unless OPEC imports are banned entirely, U.S. tight oil output will inevitably decline like it did over the last two years. Even in that unlikely even, a shift away from OPEC would probably do more to benefit Canada and Mexico than the U.S. The two countries supply 40% and 8% of all U.S. imports of petroleum, respectively.

Iran and the OPEC Deal – 10/14/16

In oil news, few events stir up more volatility than OPEC deal talks so the next few articles will be taking a look at the effects of such talks on some major stakeholders in the oil industry. This series will start with Iran.

Iran has essentially won an exemption from the production controls most other countries agreed to at the recent OPEC meeting. The nation will continue to increase its oil output after successfully arguing that it should be allowed to return production to levels achieved before US-led sanctions devastated its energy industry.

Although OPEC agreed on a new overall range for production and will set up a committee to decide on output quotas for individual members, the probability of a cap on Iran’s production is insignificant for a reason. Iranian officials have repeatedly said they will up production to regain the nation’s pre-sanctions share of the market. Relative to other OPEC members, Iran has little to lose by boosting production and undermining the price support. If anything, Iran welcomes the opportunity to win back some market share.

Iranian officials are seeking to increase output to about 4 million barrels of crude a day. Iran produced 3.62 million barrels a day in August, according to data compiled by Bloomberg.


Yet, the country’s withered energy infrastructure and investment base will make the official goal difficult to reach. Without a larger influx of foreign capital and technology, something that could take years to happen in earnest, Iran is not recover this year.

Iran has begun the process of attracting foreign investors. National Iranian Oil Co. agreed to the framework of a $2.2 billion deal with Persia Oil & Gas Industry Development Co. aimed at increasing crude oil exports. Moderate forces in Iran, which need to show that easing tensions with the West is paying off, will continue pushing such agreements as they seek higher oil revenues. The oilfield development accord combined with rising crude exports suggests a positive trend for Iran’s oil industry.

Of course, a positive for Iran is often a negative for its regional rival, Saudi Arabia. Because Saudi Arabia is the largest producer in OPEC it is expected to make up for make cuts where others cannot or will not to keep overall production within the range the group agreed upon. Meeting that expectation means conceding market share.

Adding to the deal’s troubles are few other issues: Nigeria has also claimed exemption from any cap on its output as it recovers from militant attacks on its oil assets, Iraq has said it doesn’t accept OPEC’s estimates of its production levels, Libyan output is rising substantially, and Russia, with its history of not following through on similar deals, boosted output last month to a post-Soviet record. None of those issues will help the deal but, like Iran, those countries may be expecting Saudi Arabia to pick up the slack anyway.