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US oil leadership questioned

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By Ed Crooks: 8 July 2016

The most eye-catching story of the week was the estimate from Rystad Energy that the US holds the world’s largest oil reserves. As the table in Rystad’s press release shows, that calculation relies heavily on “undiscovered fields” in the US that have yet be found. In terms of proved reserves in existing fields, Saudi Arabia still has more than twice as much oil as the US, according to Rystad’s estimates. John Kemp of Reuters discussed the meaning of the varying figures for Saudi Arabia’s reserves, concluding: “No-one really knows how much more oil can be recovered from beneath the Saudi desert and adjoining areas in the Gulf.”

While Saudi Arabia may have been pushed into third place in terms of estimated oil resources in the ground, the world’s reliance on supplies from the Middle East has been growing. Fatih Birol, executive director of the International Energy Agency, said Middle Eastern producers’ share of world oil production was at its highest since the 1970s, and rising.

The US undoubtedly has a lot of oil, however you look at it. But there are questions over how much can be produced at today’s prices. Bond financing for US exploration and production companies slowed to a trickle in the second quarter, and although they have been selling shares at record rates, the constraints on their financing could hold back the industry’s recovery.

One of the reasons why oil production in the Middle East has been rising has been the strong growth in Iraq, where investments by foreign oil companies have made a big difference in the past few years. The official British inquiry into the US-led invasion of 2003 showed how UK oil groups were worried they would lose out in contracts for postwar reconstruction of Iraq’s oil industry. There was some interesting criticism of Chilcot’s failure to dig deeply enough into the significance of oil to the invasion, looking back at memos released under freedom of information legislation that detailed discussions between oil companies and the UK government over Iraq.

Remember how the oil price shrugged off Brexit last week? This week the turbulence returned, and the market has also had other worries. Brent crude opened on Monday at about $50 per barrel, and ended Thursday evening at about $46.40, driven down by US data showing a smaller than expected drop in inventories.

The slump in oil industry investment triggered by the price crash has raised questions about where supply will come from in the 2020s. Chevron gave one small piece of the answer this week: the TCO consortium that it leads in Kazakhstan committed to a $37bn expansion of the Tengiz oilfield. Tengiz is a particularly lucrative field, though, and the decision does not look like a sign that the days of the oil and gas mega-project are back.

One company that does have some decisions on commitments to large investments coming up is Eni of Italy. James Politi, the FT’s Rome correspondent, wrote a fascinating piece on the group, which is making a big bet on its upstream operations after some spectacular exploration successes. The transcript of James’ interview with Claudio Descalzi, Eni’s chief executive, is also worth a look, for his views on oil prices and plans to bring in new partners for the big gas discoveries in Mozambique and Egypt.

Adam Brown of Dentons, the law firm, wrote an excellent guide to some of the implications for the energy industry of different models for the UK’s exit from the EU. One to bookmark for the long negotiations in the years to come. 

US regulators published new regulations for oil companies wanting to drill in the Arctic seas in future, essentially formalising the requirements imposed on Royal Dutch Shell during its unsuccessful exploration campaign that ended last year. The rules were praised as “a significant step in the right direction” by Oceana, the environmental group, but condemned as “exhaustive and burdensome” by oil producers.

Dong Energy of Denmark has done what experts say is the world’s cheapest offshore wind farm deal.

The New York Times carried an eye-opening investigation into the problems at Kemper, a pioneering coal-fired power plant in Mississippi that will capture and store its carbon dioxide emissions.

There were just four hurricanes making direct hits on the US during 2009-15, compared to 18 in the previous seven years 2002-08.

Henry Sanderson wrote a great piece on Chile’s huge reserves but troubled production of lithium, sometimes known as “white petroleum”.

The best read of the week was Gregory Meyer’s colourful look back at the Nymex commodities trading floor, which will be closed down by the end of the year. It is packed with great lines, including the description of the trading floor as “middle school with money.”

Quote of the week

“A friend used to say, ‘If I weren’t trading gasoline, I’d be pumping it’. Well, some of them are.” –  Raymond Carbone of Paramount Options, discussing the fate of former Nymex floor traders.”

Chart of the week

The surge in Iraqi oil production that was predicted before the US-led 2003 invasion has indeed come to pass, but its growth was a lot slower than US and UK officials suggested was possible.

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