Peak Oil Review — July 21st, 2008

1. Production and Prices
2. China’s Energy Shortages
3. British Petroleum in Russia
4. Energy Briefs

1. Production and Prices

The week started out quietly with oil opening on Monday around $145 a barrel and closing about the same. The rest of the week was another story with oil falling by $16 a barrel to close out the week at $128.44. This was the biggest weekly drop in oil prices ever and led to much optimistic commentary about the end of “the oil bubble.”

The decline in prices began after Federal Reserve Chairman Bernanke outlined a bleak outlook for the US economy to a Congressional committee, leading the market to conclude that the demand for oil in the US would continue to fall. Conciliatory talk from Tehran early in the week about the course of the nuclear enrichment dispute helped the decline. When the Wednesday stocks report showed that US crude inventories, which have been dropping in recent weeks, took an unexpected jump of 3.2 million barrels due to much higher imports, oil continued to fall.

There was little news to support oil prices during the week. Nigeria got some oil production back on line despite renewed threats and minor attacks by militants. The Brazilian oil-workers strike shut-in little production before ending. US oil consumption continues to drop with American Petroleum Institute reporting that demand was down by three percent in the first half. US airlines have announced that they will ground 465 aircraft within the next 18 months and the cost of jet fuel has dropped to $3.87 from $4.85 a gallon.

Aside from the 2-3 percent drop in US oil consumption, little has happened to change the fundamentals of world supply and demand or the various production-threatening geopolitical situations around the world. Markets are tight with nearly flat production and demand from Asia, Russia, and some Middle Eastern states increasing. Chinese diesel imports jumped more than 12-fold during the first half of 2008 and gasoline imports jumped 31-fold. The Iranian and Nigerian geopolitical situations have not changed significantly in recent weeks.

OECD stockpiles are growing, but at a fraction of the rate needed to ensure adequate supplies next winter. The world inventory situation has Goldman-Sachs still talking about $150 oil by the end of the year. Although, currently, there is not an imminent threat to any oil installations, the Atlantic hurricane season already is off to an active start.

2. China’s Energy Shortages

With preparations for a successful Olympics giving the country a new sense of purpose, so far China has had to contend with severe blizzards, a major earthquake, an unusually hot summer, and now an electricity shortfall which could set records. In the midst of all this, Beijing reports that its GDP is still growing at better than 10 percent a year, implying that demand for oil and electricity continues to grow.

Until recently many thought that the growing electricity shortfall would force a repeat of 2004 when China’s oil imports jumped suddenly so that local diesel generators could make up for inadequate power from the national grid. In recent days, however, Beijing has gone to great lengths to explain that there will be no surge in China’s demand for imported oil to make up for shortfalls in electric power production. The Chinese point out that the cost of imported diesel has risen four-fold in the last four years making enterprise-generated electricity uneconomical.

Given the current state of world oil markets, China’s demand for crude and oil products over the next six months may be key to world prices. Unlike four years ago when demand got ahead of generating capacity, this time it is a coal shortage that is reducing electrical output. China’s shortfall in electricity production is currently reported to be around 30 gigawatts as compared to a 40 gigawatt shortage in 2004. China has already increased coal production by 11 percent to 1.2 billion tons in the first half, but is having trouble delivering the increased production to power plants. Coal stockpiles have dropped 8 percent in the last two weeks. Spot coal prices in China have doubled since the first of the year and price caps on electricity have complicated the situation.

In the first half of the year, China’s crude imports increased by 3.2 percent while imports of gasoline and diesel jumped many fold to make up for problems created by the earthquake and to ensure that embarrassing shortages would not develop. During the Olympics, China already has banned 300,000 heavy trucks from entering the area around Beijing, shut down polluting plants and construction sites, and banned half the region’s 3 million cars from driving each day using an odd-even license plate system. These measures alone will obviously save prodigious quantities of motor fuels and ensure there will not be shortages during the Olympics.

The key issue for the oil markets is what will happen in the fall. Beijing insists that GDP growth will continue to be in the vicinity of 10 percent no matter what happens to the world economy. The surge in coal production and transportation during the last six months is likely to be unsustainable. Chinese auto sales now are running at a rate of 10 million new cars a year. Like oil, world coal markets are extremely tight. Given the complexity of the situation, the prospects for Chinese imports over the next year are cloudy. Despite Beijing’s insistence that increased oil imports are not likely this year, they may turn out to be necessary if China is to maintain its goals for economic growth.

3. British Petroleum in Russia

When the BP-TNK partnership was set up in 2003, it was seen as an important partnership of Russian capitalism and international oil. As oil prices soared, however, Moscow came to appreciate that foreign oil companies were making large profits in comparison to their investments by producing and selling Russian oil. In the last four years the Kremlin has moved to bring Russia’s oil industry back under state control. Now it seems to be BP’s turn.

For many months BPs four Russian billionaire partners have waged a campaign to oust the BP-appointed foreign managers and replace them with Russians. The Kremlin has injected itself into the “dispute” by withholding work visas, conducting police raids, and all manner of state harassment of the British.

The 50-50 joint venture, which produces 1.4 million b/d, is very important to BP as it constitutes a fifth of its reserves and a quarter of its production. Despite Russian claims that the partnership needs new management, BP maintains that all is going well with production increasing. Many foreign observers already foresee the end of BP participation in the venture. Moscow has decided that its oil has become too valuable to left in the hands of foreign capitalists and will eventually bring it all under state control.

4. Energy Briefs

(clips from recent Peak Oil News dailies are indicated by date and item #)

• Russia’s second largest oil producer Lukoil has revised 2008 production forecasts to a decline of 3 percent. The forecast of a decline comes after a previous estimate of slight growth or at least flat output. (7/19, #15)

• A US decision to bend policy and sit down with Iran at nuclear talks fizzled Saturday, with Iran stonewalling Washington and five other world powers on their call to freeze uranium enrichment. (7/20, #1)

• Mexico’s state-owned Pemex oil company announced it will reduce gasoline supplies for Baja California soon…The Mexican government subsidizes gasoline prices to the tune of $12 billion annually. (7/19, #4)

• U.S. domestic crude production slid 2.2% during the first half to an average 5.09 million b/d. Natural gas liquids production rose 5.2% year-to-year. (7/19, #9)

• The US Energy Information Administration reports natural gas inventories rose by 104 billion cubic feet (Bcf) to more than 2.31 trillion last week. Analysts had been expecting supplies to grow by only 86 billion to 91 Bcf. (7/18, #2)

• In Iraq, there are concerns that granting no-bid contracts to Western oil companies could feed perceptions that U.S.-led forces toppled Saddam Hussein to grab the country’s natural resources. The US State Department has said it provided advisers to help draft these contracts, a subject that has generated controversy. (7/18, #5)

• Diesel shortage continues to haunt Hyderabad, India which is already reeling from an acute power crisis. Lahore, Pakistan and Ho Chi Minh City, Vietnam both report similar power outrages, often unscheduled. (7/19, #10-#12)

• The U.S. Environmental Protection Agency, under fire for apparently discounting the impact of climate change, on Thursday said global warming poses real risk to human health and the American way of life. (7/18, #15)

• Former vice president Al Gore called on Americans to convert all electricity generation to wind, solar and other renewable sources within 10 years and end their reliance on fossil fuels for the sake of the U.S. economy and the world’s climate. (7/18, #16)

• In what experts say is the biggest investment in the clean and renewable energy in U.S. history, utility officials gave preliminary approval Thursday to a $4.9 billion plan to build new transmission lines to carry wind-generated electricity from West Texas to urban areas such as Dallas. (7/18, #17)

• Hydrogen fuel-cell vehicles are still 15 years away from becoming a viable business for automakers even if they overcome remaining technical hurdles and the U.S. government provides massive subsidies. (7/18, #23)

• Australia’s oil resources may last a decade at current production rates, making supply security a “major concern,” said energy minister Martin Ferguson. The nation’s spending on exploration jumped 57% last year to a record A$2.66 billion, even as the number of wells drilled fell because equipment and labor shortages drove up costs. (7/17, #8)

• QANTAS will slash about 2000 jobs next week as the national carrier seeks to offset cost pressures caused by the crippling fuel crisis. (7/17, #12)

• The US Bureau of Land Management announced Wednesday that it will make land available for oil and gas leasing in the northeast portion of the National Petroleum Reserve in Alaska (NPR-A). Those lands could result in a much as 8.4 billion barrels of oil being developed. (7/17, #15)

• GM hopes to sell 10,000 plug-in hybrid Volts in 2010 and 60,000 in 2011, the first full year of production. (7/17, #17)

• General Motors Corp announced a plan to cut costs by $10 billion, suspend its common stock dividend and sell up to $4 billion in assets in a bid to shore up cash and survive a deep industry slump. The company lost $51 billion during the last three years. (7/16, #14)

• European car sales fell 7.9 percent in June on higher fuel prices and a slump in demand spreading north from Spain and Italy. (7/17, #20)

• EU fisheries ministers adopted late Tuesday an emergency aid package worth up to two billion euros to help fishermen cope with soaring fuel prices. (7/17, #21)

• Shortages of asphalt and its key ingredients threaten to delay up to $275 million in summer paving projects in Colorado. A shortage of liquid asphalt is occurring, in part, because oil refiners are producing more profitable finished products such as gasoline and diesel fuel. (7/16, #15)

• According to unconfirmed reports, Saudi Arabia has agreed to “defer” payment on half of Pakistan’s oil imports. The bill Riyadh has been requested to shelve is about $6 billion, which, if it happens, would cut by half Pakistan’s $12 billion bill for yearly oil imports. There is no indication how long the concession will last. (7/15, #3)

• In a largely symbolic move, President Bush lifted a White House ban on offshore drilling. Bush pushed the Democratic-controlled Congress to expand offshore oil and natural gas drilling on the Outer Continental Shelf and give oil companies access to the Arctic Wildlife National Refuge. (7/15, #15)

• Russia said it cut oil supplies to the Czech Republic last week for technical reasons, and denied it was linked to Prague’s role in a U.S. missile defense shield. (7/15, #23)

• Kazakhstan will tax oil production at 4 percent to 20 percent of output value depending on the size of the field as the government seeks greater revenue from its energy assets, a deputy finance minister said. (7/14, #6)

• Iran and Russia signed an agreement for Gazprom to help Tehran develop its oil and gas fields, days after Total dropped out of a multi-billion-dollar gas deal. (7/14, #7)

• Iran on Sunday said it has discovered a new oil field in the hydrocarbon-rich province of Khuzestan with more than one billion barrels of crude in place. (7/14, #8)

• Yuan Kou at Beijing University and his team have come up with a lignin breakdown reaction that more reliably produces the alkanes and alcohols needed for biofuels from cellulosic feedstocks like switchgrass. (7/19, #21)

Quote of the Week

• “The problem is that the reality of Saudi oil power has faded and no one, not even our so-called ‘oil’ president or the Saudis themselves, seems to have acknowledged this new fact of life…Saudi Arabia no longer has a white horse and we, like Cinderella, are thus waiting for a prince who will never come.”
       —Amy Myers Jaffe