Oilvoice Magazine - August 2015

Edition Forty One - August 2015

The Iraqi-Kurd Oil agreement means dangerous political disagreement Nine Reasons Why Low Oil Prices May 'Morph' Into Something Much Worse Oil Price Crash of 2014 / 15 Update

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Issue 41 – August 2015

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Table of Contents Nine Reasons Why Low Oil Prices May 'Morph' Into Something Much Worse

by Gail Tverberg

6

Oil Price Crash of 2014 / 15 Update

by Euan Mearns

22

Rig Count Increases by 19 As Oil Prices Plunge - What Are They Thinking?

by Art Berman

29

Cause for Hope in the Levant

by Chris Friedemann

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The Iraqi-Kurd Oil agreement means dangerous political disagreement

by Anthony Franks OBE

37

Has U.S. oil production started to turn down?

by Kurt Cobb

40

Something Solid: World Oil Demand Increases

by Art Berman

42

North Sea could get caught in fallout from Iran nuclear deal

by Alex Russell and Peter Strachan

48

Obama: Iranian oil, good. Canadian oil, bad. American oil, bad.

by Marita Noon

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Nine Reasons Why Low Oil Prices May 'Morph' Into Something Much Worse Written by Gail Tverberg from Our Finite World Why are commodity prices, including oil prices, lagging? Ultimately, it comes back to the question, 'Why isn't the world economy making very many of the end products that use these commodities?' If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing.

It looks to me as though we are heading into a deflationary depression, because prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn't happening. Instead, Janet Yellen is talking about raising interest rates later this year, and we are seeing commodity prices fall further and further. Let me explain some pieces of what is happening.

1. We have been forcing economic growth upward since 1981 through the use of falling interest rates. Interest rates are now so low that it is hard to force rates down further, to encourage further economic growth.

Falling interest rates are hugely beneficial for the economy. If interest rates stop dropping, or worse yet, begin to rise, we will lose this very beneficial factor affecting the economy. The economy will tend to grow even less quickly, bringing down commodity prices further. The world economy may even start contracting, as it heads into a deflationary depression.

If we look at 10-year US treasury interest rates, there has been a steep fall in rates since 1981.

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In fact, almost any kind of interest rates, including interest rates of shorter terms, mortgage interest rates, bank prime loan rates, and Moody's Seasoned AAA Bonds, show a fairly similar pattern. There is more variability in very short-term interest rates, but the general direction has been down, to the point where interest rates can drop no further.

Declining interest rates stimulate the economy for many reasons: 

   

Would-be homeowners find monthly payments are lower, so more people can afford to purchase homes. People already owning homes can afford to 'move up' to more expensive homes.

Would-be auto owners find monthly payments lower, so more people can afford cars.

Employment in the home and auto industries is stimulated, as is employment in home furnishing industries.

Employment at colleges and universities grows, as lower interest rates encourage more students to borrow money to attend college.

With lower interest rates, businesses can afford to build factories and stores, even when the anticipated rate of return is not very high. The higher demand for autos, homes, home furnishing, and colleges adds to the success of businesses.

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 



The low interest rates tend to raise asset prices, including prices of stocks, bonds, homes and farmland, making people feel richer.

If housing prices rise sufficiently, homeowners can refinance their mortgages, often at a lower interest rate. With the funds from refinancing, they can remodel, or buy a car, or take a vacation.

With low interest rates, the total amount that can be borrowed without interest payments becoming a huge burden rises greatly. This is especially important for governments, since they tend to borrow endlessly, without collateral for their loans.

While this very favorable trend in interest rates has been occurring for years, we don't know precisely how much impact this stimulus is having on the economy.

Instead, the situation is the 'new normal.' In some ways, the benefit is like traveling down a hill on a skateboard, and not realizing how much the slope of the hill is affecting the speed of the skateboard. The situation goes on for so long that no one notices the benefit it confers.

If the economy is now moving too slowly, what do we expect to happen when interest rates start rising? Even level interest rates become a problem, if we have become accustomed to the economic boost we get from falling interest rates.

2. The cost of oil extraction tends to rise over time because the cheapest to extract oil is removed first. In fact, this is true for nearly all commodities, including metals.

If costs always remained the same, we could represent the production of a barrel of oil, or a pound of metal, using the following diagram.

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If production is getting increasingly efficient, then we might represent the situation as follows, where the larger size 'box' represents the larger output, using the same inputs.

For oil and for many other commodities, we are experiencing the opposite situation.

Instead of becoming increasingly efficient, we are becoming increasingly inefficient (Figure 4). This happens because deeper wells need to be dug, or because we need to use fracking equipment and fracking sand, or because we need to build special refineries to handle the pollution problems of a particular kind of oil. Thus we need more resources to produce the same amount of oil.

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Some people might call the situation 'diminishing returns,' because the cheap oil has already been extracted, and we need to move on to the more difficult to extract oil.

This adds extra steps, and thus extra costs. I have chosen to use the slightly broader term of 'increasing inefficiency' because I am not restricting the nature of these additional costs.

Very often, new steps need to be added to the process of extraction because wells are deeper, or because refining requires the removal of more pollutants. At times, the higher costs involve changing to a new process that is believed to be more environmentally sound.

The cost of extraction keeps rising, as the cheapest to extract resources become depleted, and as environmental pollution becomes more of a problem.

3. Using more inputs to create the same or smaller output pushes the world economy toward contraction.

Essentially, the problem is that the same quantity of inputs is yielding less and less of the desired final product. For a given quantity of inputs, we are getting more and more intermediate products (such as fracking sand, 'scrubbers' for coal-fired power plants, desalination plants for fresh water, and administrators for colleges), but we are not getting as much output in the traditional sense, such as barrels of oil, kilowatts of electricity, gallons of fresh water, or educated young people, ready to join the work force.

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We don't have unlimited inputs. As more and more of our inputs are assigned to creating intermediate products to work around limits we are reaching (including pollution limits), less of our resources can go toward producing desired end products.

The result is less economic growth, and because of this declining economic growth, less demand for commodities. Prices for commodities tend to drop.

This outcome is to be expected, if increased efficiency is part of what creates economic growth, and what we are experiencing now is the opposite: increased inefficiency.

4. The way workers afford higher commodity costs is primarily through higher wages. At times, higher debt can also be a workaround. If neither of these is available, commodity prices can fall below the cost of production.

If there is a big increase in costs of products like houses and cars, this presents a huge challenge to workers. Usually, workers pay for these products using a combination of wages and debt. If costs rise, they either need higher wages, or a debt package that makes the product more affordable-perhaps lower rates, or a longer period for payment.

Commodity costs have been rising very rapidly in the last fifteen years or so.

According to a chart prepared by Steven Kopits, some of the major costs of extracting oil began increasing by 10.9% per year, about 1999.

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In fact, the inflation-adjusted prices of almost all energy and metal products tended to rise rapidly during the period between 1999 and 2008 (Figure 7). This was a time period when the amount of mortgage debt was increasing rapidly as lenders began offering home loans with low initial interest rates to almost anyone, including those with low credit scores and irregular income. When buyers began defaulting and debt levels began falling in mid-2008, commodity prices of all types dropped.

Prices then began to rise once Quantitative Easing (QE) was initiated (compare Figures 6 and 7). The use of QE brought down medium-term and long-term interest rates, making it easier for customers to afford homes and cars.

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More recently, prices have fallen again. Thus, we have had two recent times when prices have fallen below the cost of production for many major commodities. Both of these drops occurred after prices had been high, when debt availability was contracting or failing to rise as much as in the past.

5. Part of the problem that we are experiencing is a slow-down in wage growth.

Figure 8 shows that in the United States, growth in per capita wages tends to disappear when oil prices rise above $40 barrel. (Of course, as noted in Point 1, interest rates have been falling since 1981. If it weren't for this, the cut off for wage growth might even be lower-perhaps even $20 barrel!)

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There is also a logical reason why we would expect that wages would tend to fall as energy costs rise. How does a manufacturer respond to the much higher cost of one or more of its major inputs? If the manufacturer simply passes the higher cost along, many customers will no longer be able to afford the manufacturer's or serviceprovider's products. If businesses can simply reduce some other costs to offset the rise in the cost in energy products and metals, they might be able to keep most of their customers.

A major area where a manufacturer or service provider can cut costs is in wage expense. (Note the different types of expenses shown in Figure 5. Wages are a major type of expense for most businesses.)

There are several ways employment costs can be cut: 1. Shift jobs to lower wage countries overseas.

2. Use automation to shift some human labor to labor provided by electricity.

3. Pay workers less. Use 'contract workers' or 'adjunct faculty' or 'interns' who will settle for lower wages.

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If a manufacturer decides to shift jobs to China or India, this has the additional advantage of cutting energy costs, since these countries use a lot of coal in their energy mix, and coal is an inexpensive fuel.

In fact, we see a drop in the US civilian labor force participation rate (Figure 9) starting at approximately the same time when energy costs and metal costs started to rise. Median inflation-adjusted wages have tended to fall as well in this period.

Low wages can be a reason for dropping out of the labor force; it can become too expensive to commute to work and pay day care expenses out of meager wages.

Of course, if wages of workers are not growing and in many cases are actually shrinking, it becomes difficult to sell as many homes, cars, boats, and vacation cruises. These big-ticket items create a significant share of commodity 'demand.' If workers are unable to purchase as many of these big-ticket items, demand tends to fall below the (now-inflated) cost of producing these big-ticket items, leading to the lower commodity prices we have seen recently.

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6. We are headed in slow motion toward major defaults among commodity producers, including oil producers.

Quite a few people imagine that if oil prices drop, or if other commodity prices drop, there will be an immediate impact on the output of goods and services.

Instead, what happens is more of a time-lagged effect (Figure 11).

Part of the difference lies in the futures markets; companies hold contracts that hold sale prices up for a time, but eventually (often, end of 2015) run out. Part of the

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difference lies in wells that have already been drilled that keep on producing. Part of the difference lies in the need for businesses to maintain cash flow at all costs, if the price problem is only for a short period. Thus, they will keep parts of the business operating if those parts produce positive cash flow on a going-forward basis, even if they are not profitable considering all costs.

With debt, the big concern is that the oil reserves being used as collateral for loans will drop in value, because of the lower price of oil in the world market. The collateral value of reserves works out to be something like (barrels of oil in reserves x some expected price).

As long as oil is being valued at $100 barrel, the value of the collateral stays close to what was assumed when the loan was taken out. The problem comes when low oil prices gradually work their way through the system and bring down the value of the collateral. This may take a year or more from the initial price drop, because prices are averaged over as much as 12 months, to provide stability to the calculation.

Once the value of the collateral drops below the value of the outstanding loan, the borrowers are in big trouble. They may need to sell other assets they have, to help pay down the loan. Or they may end up in bankruptcy. The borrowers certainly can't borrow the additional money they need to keep increasing their production.

When bankruptcy occurs, many follow-on effects can be expected. The banks that made the loans may find themselves in financial difficulty. The oil company may lay off large numbers of workers. The former workers' lack of wages may affect other businesses in the area, such as car dealerships. The value of homes in the area may drop, causing home mortgages to become 'underwater.' All of these effects contribute to still lower demand for commodities of all kinds, including oil.

Because of the time lag problem, the bankruptcy problem is hard to reverse. Oil prices need to stay high for an extended period before lenders will be willing to lend to oil companies again. If it takes, say, five years for oil prices to get up to a level high enough to encourage drilling again, it may take seven years before lenders are willing to lend again.

7. Because many 'baby boomers' are retiring now, we are at the beginning of a demographic crunch that has the tendency to push demand down further.

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Many workers born in the late 1940s and in the 1950s are retiring now. These workers tend to reduce their own spending, and depend on government programs to pay most of their income. Thus, the retirement of these workers tends to drive up government costs at the same time it reduces demand for commodities of all kinds.

Someone needs to pay for the goods and services used by the retirees. Government retirement plans are rarely pre-funded, except with the government's own debt.

Because of this, higher pension payments by governments tend to lead to higher taxes. With higher taxes, workers have less money left to buy homes and cars. Even with pensions, the elderly are never a big market for homes and cars. The overall result is that demand for homes and cars tends to stagnate or decline, holding down the demand for commodities.

8. We are running short of options for fixing our low commodity price problem.

The ideal solution to our low commodity price problem would be to find substitutes that are cheap enough, and could increase in quantity rapidly enough, to power the economy to economic growth. 'Cheap enough' would probably mean approximately $20 barrel for a liquid oil substitute. The price would need to be correspondingly inexpensive for other energy products. Cheap and abundant energy products are needed because oil consumption and energy consumption are highly correlated. If prices are not low, consumers cannot afford them. The economy would react as it does to inefficiency.

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These substitutes would also need to be non-polluting, so that pollution workarounds do not add to costs. These substitutes would need to work in existing vehicles and machinery, so that we do not have to deal with the high cost of transition to new equipment.

Clearly, none of the potential substitutes we are looking at today come anywhere close to meeting cost and scalability requirements. Wind and solar PV can only built on top of our existing fossil fuel system. All evidence is that they raise total costs, adding to our 'Increased Inefficiency' problem, rather than fixing it.

Other solutions to our current problems seem to be debt based. If we look at recent past history, the story seems to be something such as the following: Besides adopting QE starting in 2008, governments also ramped up their spending (and debt) during the 2008-2011 period. This spending included road building, which increased the demand for commodities directly, and unemployment insurance payments, which indirectly increased the demand for commodities by giving jobless people money, which they used for food and transportation. China also ramped up its use of debt in the 2008-2009 period, building more factories and homes. The combination of QE, China's debt, and government debt brought oil prices back up by 2011, although not to as high a level as in 2008 (Figure 7).

More recently, governments have slowed their growth in spending (and debt), realizing that they are reaching maximum prudent debt levels. China has slowed its debt growth, as pollution from coal has become an increasing problem, and as the need for new homes and new factories has become saturated. Its debt ratios are also becoming very high.

QE continues to be used by some countries, but its benefit seems to be waning, as interest rates are already as low as they can go, and as central banks buy up an increasing share of debt that might be used for loan collateral. The credit generated

by QE has allowed questionable investments since the required rate of return on investments funded by low interest rate debt is so low. Some of this debt simply recirculates within the financial system, propping up stock prices and land prices.

Some of it has gone toward stock buy-backs. Virtually none of it has added to commodity demand.

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What we really need is more high wage jobs. Unfortunately, these jobs need to be supported by the availability of large amounts of very inexpensive energy. It is the lack of inexpensive energy, to match the $20 oil and very cheap coal upon which the economy has been built, that is causing our problems. We don't really have a way to fix this.

9. It is doubtful that the prices of energy products and metals can be raised again without causing recession.

We are not talking about simply raising oil prices. If the economy is to grow again, demand for all commodities needs to rise to the point where it makes sense to extract more of them. We use both energy products and metals in making all kinds of goods and services. If the price of these products rises, the cost of making virtually any kind of goods or services rises.

Raising the cost of energy products and metals leads to the problem represented by Growing Inefficiency (Figure 4). As we saw in Point 5, wages tend to go down, rather than up, when other costs of production rise because manufacturers try to find ways to hold total costs down.

Lower wages and higher prices are a huge problem. This is why we are headed back into recession if prices rise enough to enable rising long-term production of commodities, including oil.

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Oil Price Crash of 2014 / 15 Update Written by Euan Mearns from Energy Matters Towards the end of last year I had a couple of posts, the first explaining the oil price crash of 2014 in terms of a simple supply - demand model and the second using this model to anticipate where the oil price may head in 2015 and 2016. In light of the supply, demand and price action of the last six months both of these posts now need to be updated and revised.  

The 2014 Oil Price Crash Explained Oil Price Scenarios for 2015 and 2016

In my Price Scenarios post I forecast a Brent price of $56.50 for December 2015 and with Brent spot currently around $60 this is looking quite good. So far this is panning out in the right direction but for the wrong reasons which does not count as being correct in my book.

Figure 1 The raw oil price and production monthly data that lies behind the model can be

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divided into 7 legs. 1) Jan 2002 to April 2004 oil supply was elastic allowing demand to grow with little impact on price...

Figure 2 The supply and demand curves are based on a model first proposed by Phil Hart in an Oil Drum post from 2009 (link no longer working). Supply, fitted to the data, changes from elastic (low gradient) to inelastic (steep positive gradient).

Demand (conceptual) is inelastic with steep negative gradient, i.e. high price will suppress demand but not by a lot. The price is struck where the supply and demand curves intercept. The movement of the inelastic parts of the supply and demand curves relative to each other can result in large movements in price for relatively small movements in supply or demand. The grey line shows how demand increased from 2004 to 2008 against inelastic supply sending the price sharply upwards (the intersection of the two curves, supply and demand, should always be balanced by price.)

2) May 2004 to July 2008, OPEC spare capacity shrank and demand continued to rise against inelastic supply sending the monthly average price up from $34 to $133 / bbl (Figure 2)

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Figure 3 Between August 2008 and February 2009 demand collapsed, in part due to the unwinding of speculative positions, sending the oil price back to from whence it came.

3) Aug 2008 to February 2009, the financial crash, in part caused by high energy prices, saw demand collapse and the price retraced its ascent falling from $133 to $43 / bbl (Figure 3).

4) Mar 2009 to May 2011, QE, debt inflation, OPEC supply reduction and overall management of our not so free markets saw the oil price recover to $123 / bbl (Figure 1).

5) Jun 2011 to Jun 2014, the impact of shale drilling in the USA began to feed through to rapid supply growth which once again became elastic allowing demand to increase with little impact upon price (Figure 1).

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So far so good, these are the sequence of events described in my earlier posts. It is what happened next that is seriously at odds with my forecast. My 2015 / 16 price forecast was largely based on assumption that we were witnessing history repeat and that price collapse was to a large extent driven by weak demand combined with OPEC's decision to abandon the policy of restraint. What has happened can in fact be explained by over-supply alone.

Figure 4 Since 2008 oil supply grew significantly, hence the supply curves have moved to the right. A significant increase in supply between August 2014 and January 2015 (grey curve) not met by an increase in demand, sent the oil price into a tail spin.

6) August 2014 to present saw supply increase from 93.1 to 96.1 Mbpd. A 3 million bpd supply increase against weak / static demand sent the price crashing down.

Where did this oil come from? In the past OPEC have cut supply by at least 3 Mbpd to support price and their failure to do so this time is sufficient explanation. If one

25

needs further convincing of the over-supply argument, US production has risen by over 1 Mbpd from August 2014 to May 2015. There remains a weak demand component to the story in that in past cycles OPEC has managed weak demand by cutting supply. This time they have not resulting in over-supply.

Figure 5 7) The final part of the story is that demand has risen, stimulated by low price, to mop up that extra supply and providing the recent support to the oil price, driving Brent back over $60 / bbl (Figure 5).

What Was Wrong With Earlier Scenarios There were two main problems with my Oil Price Scenarios for 2015 and 2016 post.

The first is that I anticipated weak demand but went further and assumed that demand would fall as in 2008 and this would be the principle mechanism for price collapse. While demand then probably was weak, it did not fall. The second is that while I anticipated that supply may not fall for over a year, I did not anticipate the momentum for supply growth. Hence, the price movement thus far is largely as anticipated, but it has come about by supply growth and not a fall in demand.

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What next?

It has always been a fickle black art to try and forecast the oil price. One of the first points to recognise is that the demand curve shown in all my charts, derived empirically from the 2002 to 2008 data may no longer apply. The Global economy is littered with mine fields, the main one staring Europe in the face is GREXIT. The second is unsustainable debt levels in many major economies starting with Japan, followed by Italy, France, the UK, the USA and China. And there are geopolitical scars from the early skirmishes of WWIII all around the borders of Europe. These negative factors need to be weighed against the warm glow of cheap oil flowing through the global economy. I find it impossible to judge the balance between these forces.

On the supply front, it was widely anticipated that the collapse in US drilling would bring about a fall in LTO production by this summer that has so far failed to materialise. The US oil rig count is stabilising at the 600+ level and I am beginning to wonder if this might not be sufficient to sustain production levels. A significant drop might not occur. And thus far, significant falls in production have failed to materialise anywhere.

My Oil Price Scenarios for 2015 and 2016 anticipated a significant drop in production in 2016 that would send the price back up towards $100. Now I'm not so sure. The momentum built in recent years on the back of high price may take more than 12 to 18 months to dissipate. The industry is doing all it can to cut costs in order to adjust to the lower price environment. Those companies locked into high cost developments will pour gasoline on the bonfire and may have to chew losses for a number of years.

Recent history has not repeated and that makes it nigh impossible to predict the future with so many unconstrained variables.

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Rig Count Increases by 19 As Oil Prices Plunge What Are They Thinking?

Written by Art Berman from The Petroleum Truth Report The U.S. rig count increased by 19 this week as oil prices dropped below $48 per barrel-the latest sign that the E&P industry is out of touch with reality.

The last time the rig count increased this much was the week ending August 8, 2014 when WTI was $98 and Brent was $103 per barrel.

What are they thinking?

Figure 1. Daily WTI crude oil prices, January 2-July 24, 2015. Source: EIA and NYMEX futures prices (July 21-24).

In fairness, the contracts to add more rigs were probably signed in May and June when WTI prices were around $60 per barrel (Figure 1) and some felt that a bottom had been found, left behind in January through March, and that prices would continue to increase.

Even then, however, the fundamentals of supply, demand and inventories pointed

29

toward lower prices-and still, companies decided to add rigs.

In mid-May, I wrote in a post called 'Oil Prices Will Fall: A Lesson in Gravity', 'The data so far says that the problem that moved prices to almost $40 per barrel in January has only gotten worse. That means that recent gains may vanish and old lows might be replaced by lower lows.'

In mid-June, I wrote in a post called 'For Oil Price, Bad Is The New Good', 'Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.'

Oil prices began falling in early July and fell another 6% last week. Some of that was because of the Iran nuclear deal, the Greek debt crisis and the drop in Chinese stock markets. But everyone knew that the first two were coming, and there were plenty of warnings about the the Chinese stock exchanges long before July.

The likelihood of lower oil prices should not have been a surprise to anyone.

Of the 19 rigs added this week, 12 were for horizontal wells (Figure 2) and 7 of those were in the Bakken, Eagle Ford and Permian plays that account for most of the tight oil production in the U.S.

Figure 2. Rig count change table for horizontal wells.

Source: BakerHughes and Labyrinth Consulting Services, Inc.

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Horizontal shale gas plays added 8 rigs. That is as out-of-touch as the tight oil rig additions since gas prices averaged only $2.75 in the second quarter of 2015 (Figure 3) and are almost half of what they were in the first quarter of 2014.

Figure 3. Henry Hub natural gas daily prices and quarterly average prices.

Source: EIA and Labyrinth Consulting Services, Inc. The U.S. E&P industry is really good at spending other people's money to increase production. It doesn't matter if there is a market for the oil and gas. As long as the capital keeps flowing, they will do what they do best.

Don't be distracted by the noisy chatter about savings through efficiency or refracking. Just look at the income statements and balance sheets from first quarter and it's pretty clear that most companies are hemorrhaging cash at these prices.

Second quarter is likely to be worse and it gets uglier when credit is re-determined in Q3, hedges expire, and reserves are written down after Q4.

This is an industry in crisis despite the talk about showing OPEC a thing or two about American ingenuity. Increasing drilling when you're losing money and prices are falling doesn't sound very ingenious to anyone.

Watch for the markets to agree as oil prices fall lower in coming weeks.

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Cause for Hope in the Levant Written by Chris Friedemann from NEOS The Eastern Mediterranean region has drawn a great deal of interest in recent years, and not just because of the dynamic geo-political situation in the region. The petroleum industry has been watching the region with a keen eye, as exploration successes in the offshore waters of the EastMed have many intrigued by the potential riches to be unlocked in this newly emerging hydrocarbon province. Noble Energy's 2010 discovery of the Leviathan field and the reported 16 trillion cubic feet (TCF) of natural gas it contains captured the attention of explorationists worldwide.

Other discoveries in the EastMed, including that of the 5-10 TCF Aphrodite field in Cyprus' territorial waters, have only added to the fervor.

While these recent offshore discoveries make it appear that the EastMed is one of the newest regions on the global hydrocarbon stage it is, in fact, one of the oldest.

Syria has a hydrocarbon history that dates back to the days of Antiquity when bitumen on the surface was used to lubricate stone tools and to waterproof crop baskets. Just a few years ago, Syria was producing 400,000 barrels of oil per day. At 2.5 billion barrels, Syria possessed the largest hydrocarbon reserves of any producer in the greater Levant region, excepting Iraq.

Sitting squarely in the center of all this activity is Lebanon, a country known for its rich cultural history and vibrant tourist sector. What Lebanon has not been known for, however, is the production of oil and gas. Only seven wells have ever been drilled in the country, all of them onshore and none of them having ever produced in commercial quantities.

Interest began to build in Lebanon's hydrocarbon potential several years ago, with the initial focus on the country's offshore prospects in the EastMed just northeast of the Leviathan and Aphrodite discoveries. Spectrum Geophysical and PGS collectively acquired 14,000 line-km of 2-D and 14,000 km2 of 3-D seismic data. To date, not a single well has been drilled nor has a single lease block even been awarded as political wrangling has drawn the entire offshore block bidding process to a virtual standstill.

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Having enriched the country's offshore geophysical database, the Lebanese Petroleum Administration (LPA) turned its attention to gathering geophysical measurements and assessing the hydrocarbon potential of the country's onshore basins. Initially, the plan was to acquire several hundred line-km of 2-D seismic.

However, those plans were scaled back and ultimately never implemented because of the challenges to terrestrial geophysical acquisition posed by Lebanon's topography. The country's natural beauty - shaped by rocky hillsides, deep ravines and even snow-capped, 2,500 meter mountains - are not well suited to seismic vibrator trucks or dozens of juggies hauling tons of seismic acquisition gear.

6,000 km2 survey area covering the northern onshore region and near-shore waters of the Eastern Mediterranean.

To sidestep these challenges, the LPA turned to NEOS GeoSolutions and its local Lebanese partner, Petroserv, to propose an alternative path. The Plan B option that was identified involved acquiring a suite of airborne geophysical measurements including gravity, magnetic, radiometric and hyperspectral - complemented by subsurface regional resistivity data acquired using ground-based magnetotelluric (MT) receivers. The two-month acquisition operation over a 6,000 km2 area of investigation in the northern onshore portion of the country and its near-shore coastal waters concluded earlier this year. Once processed, the acquired measurements were integrated and simultaneously interpreted with other legacy G&G datasets, including logs from two of the wells in the study area along with some of the offshore seismic data.

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Airborne hyperspectral imaging revealed direct and indirect hydrocarbon indicators, including oil seeps, over a large portion of the survey area.

The results, which were shared with the LPA and several cabinet ministers in June, appear very promising. Perhaps the biggest surprise came from the hyperspectral measurements, which are used to search for indirect and direct hydrocarbon indicators on the surface. The hyperspectral data identified mineral alteration zones often associated with hydrocarbon micro-seepage in large parts of the survey area.

Even more telling, the hyperspectral data indicated a large expanse of oil seeps throughout much of the area of investigation. The sheer number of these seeps and their locations along newly mapped fault networks and along the boundaries of key stratigraphic intervals suggest we are dealing with an active (and potentially liquidsprone) hydrocarbon-generating system beneath Lebanon.

Peering down into the subsurface, the interpretation of the multi-physics measurements revealed some other intriguing attributes often associated with prospective frontier exploration areas. These include: 

Evidence of multiple source rock intervals, including those believed to be hydrocarbon-generating in Syria and in the Southern Levant immediately south of Lebanon;



Evidence of sedimentary depo-centers, reservoir rocks, and typical structural trapping mechanisms such as anticlinal closures and prospective reservoir intervals abutting faults;

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

Evidence of resistivity anomalies within several of the structural traps, potentially indicative of hydrocarbon charge within the prospective reservoir intervals.

Multi-physics modeling work revealed several promising structural features, including anticlinal highs (adjacent to faults) in the thick Triassic and Paleozoic intervals.

The features noted above were observed at different intervals within the geologic column and in different parts of the area of investigation - including along the nearshore coastal waters of Lebanon - suggesting a variety of potential exploration play types (including both gas and oil plays) might exist in the country. The multitude of plays and the stacked nature of a couple of them - all of them now highgraded following this project - serve to de-risk the overall exploration opportunity.

Although Lebanon is in the earliest stages of the exploration cycle, the initial promising results of the multi-physics project appear to support additional investments in data gathering - including targeted seismic acquisition - and G&G analysis to further highgrade the opportunity areas and to identify potential prospects for an initial wave of exploratory drilling. More remains to be done to de-risk the plays in Lebanon, but we may finally have a cause for hope in this part of the Levant and be able to celebrate the birth of this great country's oil and gas industry.

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The Iraqi-Kurd Oil agreement means dangerous political disagreement Written by Anthony Franks OBE from Mars Omega LLP

The oil agreement between Baghdad and Irbil is under dangerous pressure, and constitutes a clear risk to the economic and political stability of both Iraq and Kurdistan.

It is for this reason that US Ambassador Stuart Johns hurried to Irbil earlier this week for a meeting with President Barzani. Ostensibly the discussions were to encourage closer operational coordination between the Peshmerga and the Iraqi armed forces, but a priority was to try to defuse the ticking time-bomb of independent Kurdish oil sales.

An MP for the Kurdish Alliance, Salim Shawqi, believes that dialogue will remove misunderstanding between both governments. He said 'The collapse of the oil agreement will affect both Baghdad and Irbil, because the central government needs the oil revenges and Kurdish unilateral oil exports will lead to nowhere, because the oil exports are illegitimate and secretly done.'

Shawqi explained that the oil agreement between the two capitals stipulated the export of 550K bpd as being 'sharp' whereas Irbil says the figure should only be an average, as Kurdistan has experienced technical problems in production.

Baghdad is insisting that the daily exports from Kurdistan should be exactly 550K bpd as a result of the decline in global oil prices - they are looking to raise revenue through high volume - low margin sales. And the recent US decision on the probable lifting of sanctions on Iran is only going to make that situation more complex as Tehran opens the spigots.

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The Kurds say that Baghdad has not honoured the agreement to transfer the appropriate cash for oil produced to fund the KRG and the Peshmerga's fight against ISIS, they decided on 1 July 2015 to export their oil directly.

There is a clear economic and political risk. The Chairman of the Iraqi Parliamentary Oil and Gas Committee, Ariz Abdullah, says that the move by the KRG directly to export the oil is 'the start to divide Iraq' - a comment which will have caused alarm bells to ring in boardrooms across the world, as executives try to work through what the implications of such a division might mean.

However, it would be premature to believe that there is unity in the KRG towards this issue - there is not. The Politbureau of the Kurdish National Union Party (KNU) has called upon the KRG to continue to export oil through the Iraqi State Oil Marketing Company (SOMO), even though Baghdad is in arrears of payments for oil already produced.

MP Tariq Kurdi who sits on the Oil and Gas Commission is critical of the KNU stance, as he believes that the KRG has been forced down the road of independent production by Baghdad.

The KRG has big bills to pay: not only its day to day running costs, but it is footing the bill of hundreds of thousands of displaced persons, many of whom are Iraqi.

According to information provided by the Kurdish Ministry of Natural Resources, Irbil has handed over 54M barrels of crude since January 2015 as well as 24M barrels from Kirkuk.

The KRG expects Baghdad to pay them 1.2T Iraqi dinars per month, but says Baghdad is not doing so, and this is exponentially increasing the financial pain it is feeling.

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And this pain is leading the KRG to examine a different future: a future that does not involve political interference from Baghdad in Irbil's economic policy or political decisions.

The Kurdish Minister of Finance, Fadhil Nabi, has suggested that the Kurds would be able to sell their oil independently but at the same time retain a share of the federal Iraqi budget whilst paying an element of the Kirkuk budget.

This is likely to be seen as a highly contentious proposal by Baghdad, which is desperate to retain control of the super-giant oil field of Kirkuk.

Despite political misgivings by some of the Kurdish parties, Irbil is slowly but surely cruising towards independence. An understandably reticent political source argues that the KRG can 'benefit from the security, political and sectarian chaos in the Arab part of Iraq' in order to expand Kurdistan's geographical boundaries, as well as its economic boundaries by annexing Kirkuk and other disputed areas.

Such a move would allow Irbil to follow its dream of a separate sovereign state; but such a move is likely to be viewed with alarm and deep concern by Kurdistan's neighbours, all of whom fear the creation of a much broader and deeper Kurdish state that would undermine the territorial integrity of Iran, Syria and Turkey.

We understand that the Iraqi Minister of Oil, Adil Abdul Mahdi will shortly appear in front of the Iraqi Parliament to explain why the oil agreement with the KRG is in fact more of a highly dangerous political disagreement and one which might see Iraq fracture down ethnic as well as hydrocarbon faultlines.

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Has U.S. oil production started to turn down?

Written by Kurt Cobb from Resource Insights The plunge in oil prices last year led many to say that a decline in U.S. oil production wouldn't be far behind. This was because almost all the growth in U.S. production in recent years had come from high-cost tight oil deposits which could not be profitable at these new lower oil prices. These wells were also known to have production declines that averaged 40 percent per year. Overall U.S. production, however, confounded the conventional logic and continued to rise--until early June when it stalled and then dropped slightly.

Anyone who understood that U.S. drillers in shale plays had large inventories of drilled, but not yet completed wells, knew that production would probably rise for some time into 2015--even as the number of rigs operating plummeted. Shale drillers who are in debt--and most of the independents are heavily in debt--simply must get some revenue out of wells already drilled to maintain interest payments. Some oil production even at these low prices is better than none. Only large international oil companies--who don't have huge debt loads related to their tight oil wells--have the luxury of waiting for higher prices before completing those wells.

The drop in overall U.S. oil production (defined as crude including lease condensate) is based on estimates made by the U.S. Energy Information Administration (EIA).

Still months away are revised numbers based on more complete data. But, the EIA had already said that it expects U.S. production to decline in the second half of this year.

What this first sighting of a decline suggests is that glowing analyses of how much costs have come down for tight oil drillers and how much more efficient the drillers have become with their rigs are off the mark. It was inevitable that oil service companies would be forced to discount their services to tight oil drillers in the wake of the price and drilling bust or simply go without work. And, it makes sense that the most inefficient uses of drilling rigs would be halted.

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But the idea that these changes would somehow allow tight oil drillers to continue without missing a beat were always bunkham promoted by an industry sinking into a mire of overindebedness in the face of lower prices. In order to maintain the flow of capital to the industry--which has consistently spent more cash than it generates--the illusion of profitability had desperately to be maintained. A recent renewed slump in the oil price may finally pierce that illusion among investors.

As Iranian oil exports start to ramp up in the wake of an agreement on nuclear weapons--the Iranians aren't allowed to have any--and the resulting end of economic sanctions, the oil price is likely to fall further, putting even more pressure on U.S. domestic drillers.

OPEC, which has refused to reduce output in the face of slackening world oil demand growth, continues to say that others--such as U.S. tight oil drillers--will have to 'balance the market,' a euphemism for cutting production in order to push up prices.

It looks as if U.S. drillers may finally be doing just that. Who knew that 45 years after abandoning the role of the world's swing producers*--that is, producers who adjust production up or down to maintain stable world oil prices--U.S. oil companies would be forced into that role again entirely against their will?

*The state of Texas was the world's swing producer up until 1970 through a mechanism called proration. The state regulated the percentage of maximum flow from oil wells in order to adjust production and thus keep prices within a band that made drilling profitable without jeopardizing demand for oil. In fact, the proration program administered by the Railroad Commission of Texas became a model for OPEC.

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Something Solid: World Oil Demand Increases Written by Art Berman from The Petroleum Truth Report Traders were busy throwing in the towel on oil futures this week just as the first solid data and hope appeared that oil prices may be starting on the long road to recovery.

As oil prices approached $52 per barrel on Tuesday, July 7, the EIA released the July Short-term Energy Outlook (STEO) that showed an increase in global demand.

Figure 1. New York Mercantile Exchange crude oil futures, Continuous Contract #1 (CL1) (Front Month).

Source: Quandl Global liquids demand increased 1.26 mmbpd (million barrels per day) compared to May (Figure 2).

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Figure 2. World Liquids Supply and Demand, July 2013-June, 2015.

Source: EIA and Labyrinth Consulting Services, Inc. This is the first data to support a potential recovery in oil prices. For months, great attention was focused on soft measures like rig count, crude oil inventories and vehicle miles traveled, all in the United States. These are potential indicators of future demand but hardly the kind of data that should have moved international oil prices from $47 in January to $64 in May. The relative production surplus (production minus consumption) moved down to 1.9 mmbpd (Figure 3).

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Figure 3. World liquids production surplus or deficit (total production minus consumption) and Brent crude oil price in 2015 dollars.

Source: EIA and Labyrinth Consulting Services, Inc. That is certainly good news but an over-supply of almost 2 mmbpd is hardly cause for celebration. The new demand data from EIA brings over-production of liquids back into the October 2014 to January 2015 range that resulted in Brent oil prices falling from $87 to $48 per barrel.

Oil prices dropped sharply this week as news of the Greek financial crisis and the free fall of Chinese stock exchanges suggested weaker demand for oil as the global economy falters. The EIA demand data does nothing to change this troubling economic outlook but it does confirm the seemingly obvious notion that low oil prices result in greater consumption.

In recent posts, I have emphasized that falling global demand for oil is key to OPEC's strategy to keep prices low for some time. The July STEO underscores this problem for two key markets-the Asia-Pacific region-29% of world consumption-that includes China, Japan and India, and the United States-21% of world consumption.

Growth in Asia has slowed from 7% annually in 2012 to only 2% today (Figure 4).

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Figure 4. Asia-Pacific liquids consumption and year-over-year change.

Source: EIA and Labyrinth Consulting Services, Inc. While somewhat less alarming than Asia, U.S. growth has slowed from 6.5% annually in 2013 to about 4% today (Figure 5).

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Figure 5. U.S. liquids consumption and year-over-year change.

Source: EIA and Labyrinth Consulting Services, Inc. U.S. crude oil production declined a mere 40,000 barrels per day in June (Figure 6).

U.S. production fell 120,000 bpd in January. That was an good sign that the global over-supply would be alleviated sooner than later so prices could recover.

Figure 6. U.S. crude oil production.

Source: EIA and Labyrinth Consulting Services, Inc. Then, an increase in prices in February and exceptional capital flow to U.S. tight oil companies resulted in increased U.S. production in February, March and April.

Company executives boast about the resilience of U.S. tight oil production as if overproduction and low prices are something they are proud of and that their shareholders value.

ConocoPhillips CEO Ryan Lance made macho proclamations at the OPEC meeting in June that tight oil 'is here to stay,' single-handedly undermining the remote possibility that a production cut might result from the cartel's meeting.

U.S. E&P companies should get realistic about the situation they are in. Price will win this game. OPEC holds those cards for now.

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North Sea could get caught in fallout from Iran nuclear deal Written by Alex Russell and Peter Strachan from Robert Gordon University - Energy Centre As intense negotiations continue in Vienna with the world's superpowers (Britain, China, France, Germany, Russia and the US) Iran has still to conclude a deal that ensures absolute transparency on its nuclear plant activities that should prevent it acquiring nuclear weapons.

That result would be good news and the world a safer place as a consequence. In return, sanctions against the free development of Iran's oil and gas reserves will be removed. How would this impact on the world's political and economic scene?

With low oil prices now seemingly a fixture for the foreseeable future the prospect a huge increase in oil output from Iran must send a shiver down the spine of countries whose oil industries are already teetering on the brink of collapse.

For example, can the North Sea oil industry withstand any further fall in the price of oil?

It is possible that once output from Iran reaches, or more likely surpasses, its 2011 output of 3.6million barrels of oil per day the price of oil could fall as low as $20 a barrel.

It may take up to a year for that to happen as Iran will need the help of the oil majors to maximise its output.

But at $20 a barrel the North Sea game would appear to be over and decommissioning would be order of the day. Low oil prices would have a positive effect on the economy of the UK as a whole that would help compensate for the decline in the upstream oil sector.

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In Aberdeen, the dynamics of the industry would change. There would be huge potential for the supply chain to become involved in decommissioning, the total cost of which is likely to be in the region of ÂŁ80billion. The Oil and Gas Authority has already positioned itself to help the industry through that phase.

Would the Organisation of Petroleum Exporting Countries (OPEC), of which Iran is a member, allow oil to fall to $20 a barrel?

Everything else being equal the answer is a resounding 'no'.

But recent actions of Saudi Arabia, the most influential member of OPEC, in its apparent conflict with its US ally over primacy in oil production casts doubt on its desire to keep oil prices at a higher level. Why is that the case? Alas, the other great game being played is the US economic war against Russia.

The country to suffer most from a very low oil price is Russia; its economy could not survive oil at $20 a barrel. If Russia is brought to heel and its ambitions in the Ukraine tempered then normality could return to the oil price setting mechanism.

The big question is will that happen in time to save the North Sea oil industry and the oil industries of a host of other countries such as Nigeria?

Part of any deal between Iran and the superpowers will include an understanding that Iran will not be an onlooker in degrading and removing the firepower of the so called Islamic State (Isis) in Iraq and in Syria.

Indeed Iran itself will be a target in the sights of the Sunni-based Isis with its hatred of Shi'is-based Iran. The US and Saudi Arabia will welcome help from any quarter in its war with Isis. Such collaboration amongst otherwise implacable enemies has been a characteristic of the history of the Middle East.

If there had been no internal and external squabbling amongst Iraq, Iran, Saudi Arabia, Syria and Kuwait then those countries arguably could now be rulers of the world in economic terms. But that is something for historians to ponder over.

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Obama: Iranian oil, good.

Canadian oil, bad.

American oil, bad.

Written by Marita Noon from Energy Makes America Great

President Obama's confusing approach to energy encourages our enemies who shout 'death to America,' while penalizing our closest allies and even our own job creators.

Iran's participation in the nuclear negotiations that have slogged on for months, have now, ultimately, netted a deal that will allow Iran to export its oil-which is the only reason they came to the table (they surely are not interested in burnishing Obama's legacy). International sanctions have, since 2011, cut Iran's oil exports in half and severely damaged its economy. Iran, it is estimated, currently has more than 50 million barrels of oil in storage on 28 tankers at sea-part of a months' long build up.

It is widely reported that, due to aging infrastructure and saturated storage, it will take Iran months to bring its production back up to pre-sanction levels. The millions of barrels of oil parked offshore are indicative of their eagerness to increase exports.

Once the sanctions are lifted-if Congress approves the terms of the deal, Iran wants to be ready to move its oil. In fact, even before the sanctions have been lifted, Iran is already moving some of its 'floating storage.' On July 17, the Financial Times (FT) reported: 'The departure of a giant Iranian supertanker from the flotilla of vessels storing oil off the country's coast has triggered speculation Tehran is moving to ramp up its crude exports.' The Starla, 'a 2 million barrel vessel,' set sail-moving the oil closer to customers in Asia. In April, another tanker, Happiness, sailed from Iran to China, where, since June, it has parked off the port City of Dalian.

Starla is the first vessel storing crude offshore to sail after the nuclear deal was reached-which is, according to the FT: 'signaling its looming return to the oil market.'

Reuters calls its departure: 'a milestone following a months-long build-up of idling crude tankers.' Analysts at Macquarie Capital, apparently think the oil on Starla will not be parked, waiting for sanctions to be lifted. A research note, states: Iran is 'likely

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assuming that either a small increase in exports will not undermine the historic accord reached or that no one will notice.' We noticed.

Already, before sanctions are lifted, global oil prices are feeling the pressure of Iran's increased exports. Since the deal's been announced, crude prices have lost almost all of the recent gains. While the Obama Administration's actions are allowing Iran, which hates America, to boost its economy by increasing its oil exports, they are hurting our closest ally but putting delay after delay in front of the Keystone pipelinewhich would help Canada export its oil.

After six-and-a-half years of kicking the can down the road, and despite widespread support and positive reports, the Keystone pipeline is no closer to construction than it was on the day the application was submitted. It is obvious President Obama doesn't like the project, which will create tens of thousands of jobs, according to his own State Department. Back in February, he vetoed the bill Congress sent him that would have authorized construction, saying that it circumvented 'longstanding and proven processes for determining whether or not building and operating a cross-border pipeline serves the national interest.' At the time, Senate Majority Leader Mitch McConnell (R-KY) said: 'Congress won't stop pursuing good ideas, including this one.' But he was not able to gather enough votes to override the veto and, since then, we've heard nothing about the Keystone pipeline. In Washington, DC, silence on an important issue like Keystone isn't always golden.

There is no pending legislation on Keystone, but the permit application has still not been approved or rejected. I had hoped that the unions, who want the jobs Keystone would provide, would be able to pressure enough Democrats to support the project, to push a bill over the veto-proof line. But that didn't happen. For months, Keystone has been silently dangling. But that may be about to change.

Reliable sources tell me that Obama is prepared to, finally, announce his decision on Keystone. According to the well-sourced, and verified, rumor, he is going to say: 'No'-probably just before or after the Labor Day holiday. He'll conclude that it is not in the 'national interest.' So helping our ally grow its economy and export its oil is not in our national interest but helping our sworn enemy do the same, is? It's like the

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'Channeling Jeff Foxworthy' parody states: we just 'might live in a country founded by geniuses and run by idiots.'

Speaking of economic growth and oil exports, what about here at home, in the good old U.S. of A.? Senator Lisa Murkowski (R-AK) questions the deal that allows Iran to export its oil, while we cannot: 'As Congress begins its 60-day review of President Obama's nuclear deal with Iran, there are plenty of reasons to be skeptical about whether it is in our nation's-and the world's-best interests. Not least among them are the underexplored, but potentially significant consequences the deal will hold for American energy producers.'

Most people don't realize that the U.S. is, as Murkowski says in her op-ed, 'the only advanced nation that generally prohibits oil exports.' Due to decades-old policy, born in a different energy era, American oil producers are prohibited from exporting crude oil because it was perceived to be in 'short supply.' (Note: refined petroleum product, such as gasoline and diesel, can be exported and is our number one export. We are also about ready to ship our major first tanker full of natural gas headed for Europe.)

Today, when it comes to crude oil, our cup runneth over. The U.S. is now the world's largest producer or oil and gas. Rather than short supply, we have an over-supply-so much so that American crude oil (WTI) is sold at a discount over the global market (Brent). This disadvantages U.S. producers but doesn't benefit consumers because gasoline is sold based on the higher-priced Brent.

Murkowski argues that it is time to lift the 40-year-old oil export ban. She's introduced bipartisan legislation that would do just that, but, if he was so inclined, President Obama could reverse the policy himself-if he found it to be in the national interest. And how could it not be?

Allowing U.S. crude oil into the world market enhances global energy security, as it would be less impacted by tensions in the Middle East. Our allies in Europe and Asia would have access to supply from a friendly and reliable source-remember the Arab Oil Embargocrippled Japan's economy because it had no domestic supply and was overly reliant on Arab sources. Lifting the oil export ban would allow U.S. crude to be sold at the true market price, not the discounted rate, which would help stem the job

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losses currently being felt throughout the oil patch due to the low price of oil and exacerbated by the drop in the price of crude triggered by the Iran deal.

So, the Obama Administration is lobbying Congress to lift the sanctions on Iran, a country that views America as The Great Satan. Lifting sanctions would allow Iran to resume full oil export capabilities and boost its economy-while refusing to give our allies and our own country the same benefit. Iranian oil will enter the world market, while Canadian and American oil is constrained. How is that in the 'national interest?'

It appears we might just be living in a country founded by geniuses and run by idiots.

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