Energy Prospectus

Comments below from TPH weekly update: Stuff in " " comes directly from the report.

Russian Production to Decline in 2H 2016: "The Russian Finance Ministry is proposing increases to the mineral extraction tax for 2017-20 to recover 320B rubles (~$5B) to help plug its growing budget deficit. The Russian majors are reportedly projected to suffer +10% hits to CFFO, which would affect local investment while foreign capital will also be impacted and affect production. Oil output has been resilient in ’16, averaging 10.87mmbbl/d between Jan-July (+1.2% y/y) but larger companies (Rosneft, Lukoil) expect declines in H2 (-2% vs. H1’16, TPHe) and we project a 3% y/y decline rate 2017+ (~10.7mmbbl/d in ‘17) ex-tax increases."

Mexico on steady decline and will import more gas from the U.S.: "Mexican July production: liquids remain weak, natural gas even more so. We expect a further hike in gas imports – July liquids and oil production were both -1% m/m and -5% y/y at 2.48mmbbl/d and 2.16mmbbl/d respectively. The January-July oil production average of 2.20mmbbl/d was -3% y/y. We expect average liquids production to decline 5% in ’16 to 2.46mmbbl/d. Pemex’s capex cuts have not only impacted liquids but also gas output, which was down 2% m/m (-9% y/y) to 5.79Bcf/d (5.96Bcf/d YTD, -7% y/y). Worth noting that 63% of gas production is associated gas and that Pemex flares an important part of it (~15% of total production) due to lack of infrastructure. As a result, we expect to see further hikes in gas imports, which were already +3% m/m (+25% y/y) at 1.94Bcf/d in July. Average YTD imports of 1.82Bcf/d are +38% y/y."

Production in South America on steady decline: "Colombia July production: continued oil and gas declines drive total volumes to 3-year lows – Total production was under the 1mmboe/d mark for the first time in at least 3 years averaging 996kboe/d (-1.6% m/m, -11.5% y/y) in July. Oil production has fallen sequentially for every month this year averaging 843kbbl/d in July (-5% m/m, -11% y/y) driven by reduced activity and natural field declines. Gas production was down for the third month in a row to 919mmcf/d due to lower demand, the absence of the El Nino phenomenon and natural decline. YTD average oil production is 915kbbl/d (-10% y/y) and we expect FY’16 average to be down ~10% y/y (~100kbbl/d) to ~900kbbl/d. Ecopetrol produced 695kboe/d on average in Q2 and maintained its target of 715kboe/d for ’16 with increased drilling activity in its main fields planned for H2’16."

My Take: We tend to focus on what is happening in the United States, but it is important to remember that oil trades on a global market. OPEC cannot produce enough oil on its own to meet global demand for oil. Non-OPEC production is now declining by my SWAG of 200,000 BOPD month after month.

From John White at Roth Capital:

A Wall Street Journal article pointed out that Iran’s revival as a crude-oil exporter appears to have stalled; seven months after Western sanctions over its nuclear program were lifted, Iran’s ability to reach pre-sanctions levels above four million b/d are now in question. Iran has been pumping 3.85 million b/d this month, the country’s oil minister Bijan Zanganeh said Saturday, little changed from above 3.8 million b/d he cited in June. The International Energy Agency says Iran’s crude production actually fell in July, to 3.6 million b/d. A government oil official at a Persian Gulf nation said “Iran’s production seems to be stuck at a certain level and not rising like before.”

Bloomberg reported that Saudi Arabia’s state-run oil company said all of its oil, gas and refining plants are operating as normal, after Yemeni rebels said they hit facilities with a missile. A projectile fired from Yemen caused a fire at a power relay facility in southern Saudi Arabia, the state-run Saudi Press Agency reported, citing a spokesman for civil defense at the Ministry of Interior. The fire in Najran was put out without casualties, the report said, without giving further details.

Venezuela hasn’t been able to import the crude and fuel it needs this year to cover shortfalls at its own oil fields and refineries, Reuters reported, citing people familiar. Oil imports fell 21% during the January-July period to 154,465 b/d the data showed. This is due in large part to oil suppliers refusing to send cargoes to PDVSA without upfront payment and others have stopped dealing with PDVSA entirely, as it struggles to make payments.

As reported by Reuters, BP (BP-NC) and Royal Dutch Shell (RDS-NC) said on Friday they have started securing facilities and evacuating non-essential personnel from their drilling rigs and platforms in U.S. Gulf of Mexico as a precaution against a storm threat. All other producers in the area said they were still monitoring the weather and had not evacuated anyone. The National Hurricane Center said a disturbance near Cuba has a 20 percent chance of developing into a cyclone in the next 48 hours.

June 2016 Traffic Volume Trends: According to the U.S. Department of Transportation, travel on all roads and streets increased by 3.2% (8.6 billion vehicle miles) for June 2016 as compared with June 2015. Travel for the month is estimated to be 282.3 billion vehicle miles. The seasonally adjusted vehicle miles traveled for June 2016 is 268.1 billion miles, a 2.9% (7.5 billion vehicle miles) increase over June 2015. It also represents a 0.5% increase (1.3 billion vehicle miles) compared with May 2016. The Cumulative Travel for 2016 increased by 3.3% (50.5 billion vehicle miles). The cumulative estimate for the year is 1,580.2 billion vehicle miles of travel.

Unplanned supply outages will cause a spike in oil prices. It just takes one terrorist attack on an oil production facility in Saudi Arabia to cause a BIG move in oil prices.

By Christian DeHaemer
Written Monday, August 29, 2016

It is not getting much press, but there is an Iran/Saudi proxy war going on in Yemen that is not going well for the Saudis.

This is a tribal fight that pits the Shia against the Sunnis. The Iran-backed rebels are fighting an invasion force of Saudis.

The Saudis cannot afford to leave a hostile Iranian-supported enclave on their southwestern border, and it appears the Saudis feel they have to do whatever it takes to crush the rebel alliance. This includes air strikes and tanks.

The Saudis recently bought 153 new Abrams tanks from the U.S. to replace up to 40 lost. Two Saudi tanks were actually captured and had to be hunted down by airplanes. Some estimate that more than 6,000 soldiers have been killed and $14 billion in treasure spent. Three million civilians have been displaced.

Yesterday, in the northwest, Yemeni Shia rebels fired a rocket at the Saudi town of Najran and killed two civilians and wounded five.

A few days ago, reports of a Yemeni rebel missile hitting a Saudi oil facility in southwestern Saudi Arabia caused a brief panic in the oil markets, and the world oil prices briefly rose 2%. What actually happened was that a rocket fired from Yemen hit the fuel storage area for an electrical power plant near the Saudi town of Najran.

Before that, on August 22, the Saudi air defense systems shot down a ballistic missile fired from Yemen which the Yemeni army said it had aimed at oil installations in the south of the kingdom. Iran has the largest and most diverse ballistic missile arsenal in the Middle East, mostly North Korean, and has been smuggling them to Yemen.

Over 3.8 million barrels a day (b/d) pass through the 18-mile Bab-el-Mandeb Strait off Yemen, one of the world's key choke points for crude oil supply.

The Saudis know they are vulnerable to one of those rebel ballistic missiles hitting a major oil facility. This would crush Arab resolve and is a long-held fear of Iranian capabilities.

The American (Raytheon — NYSE: RTN) and Israeli firms that supply anti-missile systems have told senior Arab leaders that there is always a small chance a missile will get through. During the current campaign, Saudi patriot anti-missile systems have intercepted all rebel ballistic missiles aimed at important targets.

There is also the idea that Iran is seeking bargaining chips in negotiations with OPEC to push oil prices higher.