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Evan Kelly

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This Week In Energy: Low Oil Prices Inflict Serious Pain This Earnings Season

After another turbulent week in the Chinese stock market, we are left with no clearer picture on how sound the financial system is in the world’s second largest economy. But beyond the stock market, China’s economy is slowing down significantly. Some corporate giants are expressing concerns about the sudden slowdown, with companies like Ford (NYSE: F) projecting a full-year sales decline in China for the first time in 25 years. Factory activity dropped sharply in July, industrial equipment makers are taking hits to their profits this year, and the government is going to great lengths to stop a hard landing. “Does China stabilise? That’s probably the billion-dollar question,” Siemens (FRA: SIE) CEO Joe Kaeser, recently said, according to the FT.

If China is merely transitioning into a less industrial and export-intensive economic model that would probably be something that everyone could live with. In other words, China’s economy could be going through the growing pains of maturing into a more balanced, consumer-driven economy. However, if the economy is actually cracking, that would obviously throw up some major problems for the global economy. Only time will tell.

Royal Dutch Shell (NYSE: RDS.A) is moving forward with its Arctic drilling campaign despite protests in Portland, OR aimed at stopping it. The company started excavating a cavern at the seabed in the Chukchi Sea that could hold a blowout preventer, a piece of equipment intended to prevent oil spills. The “mud-line cellar,” Shell officials say, could be pivotal because they are not sure how long it will take to put together. It could be completed as quickly as a few days, or it could take a month, in which case, drilling the well might not be completed before the drilling season ends in late September. Related: Warren Buffett And Elon Musk To Spark A Lithium Boom

Meanwhile, Shell’s icebreaker, which sought repairs in Oregon, was the target of environmental protests this week. Greenpeace activists delayed its departure by suspending themselves in the air below a bridge that the ship would have to pass beneath. Without the icebreaker, Shell can only drill the top part of its wells, and is not allowed to enter into oil-bearing zones.

The drama came against the backdrop of the oil major’s earnings report. Shell’s profits fell by 33 percent in the second quarter from the same period a year ago. Its upstream exploration division saw revenues drop by 80 percent amid low oil prices. Shell announced that it would lay off 6,500 employees. As for the Arctic, Shell’s CEO said that the company would abandon the entire prospect if its exploratory well yields disappointing results. But if it does find oil – and the company says the potential reserves are huge – it will continue drilling. First oil may not come online until 2030, however.

The other oil majors posted their earnings this week. BP posted a quarterly loss of $6.3 billion, a wide loss due to one-time charges from the Deepwater Horizon spill. ConocoPhillips (NYSE: COP) reported a $179 million loss for the quarter. Eni (NYSE: ENI) saw its profits fall by 84 percent to $153 million. ExxonMobil’s (NYSE: XOM) profits fell by more than half, with Q2 earnings dropping to $4.2 billion from $8.8 billion a year ago. Chevron (NYSE: CVX) also took a huge hit, with profits dropping to just $571 million from $5.7 billion in the second quarter of 2014. Related: Where In The World Is The Shale Gas Revolution?

An attack on a Turkish natural gas pipeline this week added another wrinkle in the region’s ongoing violence and overlapping political conflicts. The Kurdish separatist group, PKK, attacked two pipelines that Turkey uses to import natural gas and oil. For years the PKK has fought for greater autonomy from Turkey, but the two sides had adhered to a multiyear ceasefire until this week. Turkey responded with airstrikes. But the conflict is bigger than just the two sides involved. Turkey is also launching airstrikes against ISIS, something NATO allies are pleased to see. But the Kurds are one of the most important fighters against ISIS, so the brewing violence between two U.S. allies – Turkey and the Kurds – complicated matters, to say the least.

If that isn’t enough to confuse readers, here’s one more element of the story. The attack on the oil pipeline carries oil from Iraq’s Kurdistan region through Turkey. In other words, the Kurdish PKK attacked a pipeline that carries Kurdish oil. That’s because the PKK is angry with the leadership of the Kurdish Regional Government (KRG) in Iraq for their willingness to deal with the Turkish government.

The violence threatens to destabilize – or at a minimum, adds uncertainty – to Kurdistan, where a handful of private oil companies are operating. Already oil companies in Kurdistan have struggled. Genel Energy (LON: GENL), Gulf Keystone Petroleum (LON: GKP), and Norway’s DNO all have producing assets in Kurdistan, but the Kurdish government has failed to pay them for months. Low oil prices have sapped the Iraqi government of resources, which in turn has affected disbursements to the KRG. The violence between Turkey and the Kurds makes the operating environment for the international oil companies that much more difficult. Genel Energy has seen its share price fall by 25 percent over the past month, and it’s down by about half since last December when payments from the Kurdish government dried up. The company is owed $378 million. Related: Low Oil Prices Enable India To Abolish Subsidies And Start Taxing Fuels

The U.S. EPA is set to release its final rule on limiting greenhouse gases from existing power plants on August 3. The final rule is expected to maintain its target of forcing utilities to reduce carbon pollution by 30 percent below 2005 levels by 2030. The one change from the proposed rule is that utilities may have an extra two years to meet the medium-term target of a 25 percent cut in emissions, which is expected to be pushed back to 2022 instead of the originally proposed 2020.

A new Reuters report concludes that global supplies of LNG are likely to overwhelm demand for the next five years or so. A wave of supplies is coming online in Australia, the U.S., Russia, Malaysia, and east Africa. However, LNG prices in Asia are already down 60 percent from their high of $20 per million Btu (MMBtu) in February 2014 due to swelling supplies (as well as low oil prices). To be sure, demand is expected to grow significantly, perhaps up by 40 percent in the next few years. But even with that growth, the world may not be able to absorb the supply expansion. Reuters finds that there probably won’t be enough regasification capacity to utilize all of the additional LNG supply. LNG exporters are pinning their hopes on China and India, but both could disappoint. Reuters estimates that there will be an additional 120 million tonnes of LNG per year (mtpa) coming on line by 2020, but only 78.7 mtpa of regasification capacity.

By Evan Kelly Of Oilprice.com

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