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Opec outflanked

By Ed Crooks of the Finacial Times: January 13, 2017

In the 1930s many newspapers carried impressively detailed diagrams showing France’s defences along the German border, described by Popular Mechanix and Inventions magazine as the “world’s greatest underground fortifications”. By the end of May 1940, Hitler had demonstrated that while the Maginot Line might indeed be an engineering marvel, it was also irrelevant, as his panzer divisions swept past it through Belgium and into France. Last year’s agreement between leading oil-producing countries to curb their output had something of the same feel about it this week.

After Opec member countries worked laboriously for months to reach a deal, and even brought Russia and several other non-Opec producers on board as well, they were this week given warning that their position was being outflanked by fast-moving US shale producers.

Although only a minority of US oil and gas producers have announced their planned capital budgets for the coming year, analysts are forecasting a surge in spending in North America if crude prices stay at around their current levels, with the larger exploration and production companies leading the way. Analysts at Raymond James suggest that if oil quickly rises further, to $65, US E&P capital spending could double this year. That flood of investment is expected to send US oil production higher; it already appears to have bottomed out in the second half of last year, according to the Energy Information Administration’s latest Short-Term Energy Outlook. The number of rigs drilling new oil wells in the US is expected to be still well down from its peak in 2014, but as Gregory Meyer explained, the production that can be delivered for each working rig is still rising rapidly. US shale producers are continuing to find ways to drill wells faster, and to get more oil out of each well with improved techniques for hydraulic fracturing.

Meanwhile, investment decisions for new large oil and gas projects worldwide, which slowed to a crawl in the past couple of years, also seem likely to pick up in 2017. The news from Khalid al-Falih, Saudi Arabia’s energy minister, that the kingdom had cut its production by more than its commitment under the Opec deal, and was now pumping less than 10m barrels per day, boosted oil prices on Thursday. He also suggested that the deal could be extended beyond its agreed six-month duration. Tanker tracking services will be watching ship movements to give a sense of whether the countries that joined the agreement are being true to their commitments.  There is no doubt that producing countries want prices to rise higher. As Suhail Al Mazrouei, the United Arab Emirates’ oil minister, put it, $50 oil “isn’t going to cut it” for most of them. The question is how much impact the Opec –led output curbs can have, if it becomes increasingly clear that higher US production will come in to fill the gap in the market that they are leaving.

The prospect of continued volatility in oil prices is one motivating factor behind Saudi Arabia’s economic reform programme, including the vastly complex IPO of Saudi Aramco.

US oil production could get a further boost after Donald Trump moves into the Oval Office next week. Rex Tillerson, who stepped down as chief executive of ExxonMobil at the end of last year and is now Mr Trump’s choice to be secretary of state, testified at his confirmation hearing in front of the Senate foreign relations committee that he saw increased oil and gas production and exports as an important instrument of US influence. He also promised to recuse himself from decisions directly concerning Exxon for a year, but said that could not keep him out of any issue related to oil and gas, as that category would be much too broad.  Without making any explicit comment on whether the US should stay in or leave the Paris climate accord, Mr Tillerson said he believed climate change was a risk, that action should be taken, and that the US needed to keep “its seat at the table” in international talks. However, he added, any climate action needed to be scrutinised to see if it put the US at a competitive disadvantage.

The potential impact of the Trump administration in US regulation was number one on the World Resources Institute’s list of six environment stories to watch in 2017. One potential flashpoint for the new president, the protest against the Dakota Access oil pipeline, may be decisively affected by the weather. Heavy snowfall in North Dakota means that when the thaw comes, the protesters’ principal campsite is likely to be flooded. The prospect is adding to tensions between the protesters and the Standing Rock Sioux tribe, which originally called people to the area to support its fight against the project.

otal investment in renewable power and other forms of “clean energy” dropped 18 per cent last year, driven by cuts in China and Japan, according to Bloomberg New Energy Finance. One “clean” technology apparently making some progress, however, is carbon capture. The world’s largest project so far to capture carbon dioxide emissions from power generation has been delivered on time and on budget, potentially pointing the way to an economically viable future for the technology. But see some interesting challenges, including over scaleability, in the comments.

As part of his final round of efforts to influence US policy after he is out of office, President Barack Obama wrote a piece for Science magazine on “the irreversible momentum of clean energy”. He writes that while Mr Trump will of course chart his own course on policy “The latest science and economics provide a helpful guide for what the future may bring, in many cases independent of near-term policy choices, when it comes to combatting climate change and transitioning to a clean-energy economy.”

Quote of the week

“Part of [Donald Trump’s] priority in campaigning was ‘America first’. And so there’s important considerations as we commit to such accords, and as those accords are executed over time, are there any elements of that that put America at a disadvantage?” – Rex Tillerson at his confirmation hearing gives a sense of how the Trump administration could try to thread the needle on climate policy, insisting on US interests while not disengaging from international agreements.

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