Peak Oil Review – August 18

1. Production and Prices
2. Oil from the Caspian
3. Chinese Demand
4. Briefs

1. Production and Prices

Oil prices spent the week bouncing around the $115-a-barrel level. A strong US dollar, concerns about a slowing world economy, and the closing out of large speculative positions by hedge funds and others were enough to overshadow rather serious supply disruptions that normally would have been enough to send prices much higher. At one point oil touched $111.34 or 24 percent below the July 11th record high of $147 before closing out the week at $113.77.

The sudden fall in prices already has the OPEC price hawks, Iran and Venezuela, suggesting that world oil production is a million b/d too high so that a cut at the September 9th OPEC meeting might be in order. Many observers are saying that oil will have to drop below $100 before OPEC takes action.

OPEC production increased by 236,000 b/d in June; however, non-OPEC production has been slowing and July has seen major disruptions in the supply of Caspian oil and in Nigeria. The supply/demand situation, world stockpiles, and prices could look considerably different by the time OPEC meets three weeks from now.

2. Oil from the Caspian

It has been an eventful two weeks for exports of Azerbaijani oil. On August 5th a bomb, probably set by Kurdish separatists, closed the 800,000 b/d Baku-Tiblisi-Ceyhan (BTC) pipeline in Turkey. Last week the fire, which blazed for nearly a week, was put out allowing the Turks to determine that it was indeed started by a bomb.

A few days later fighting broke out between Georgia and Russia over a pair of Georgian provinces that are seeking independence. During the fighting the Russians bombed remote areas of Georgia along the BTC pipeline, suggesting that they were either trying to damage the pipeline or sending a message that Moscow is not happy about its existence. When bombing of Georgian military facilities continued, BP shut a second oil export pipeline that runs from Baku to Supsa on the Black Sea.

The situation got worse this Saturday when a key bridge on the main Georgian rail line was blown up, likely by the Russians, halting the shipment of Caspian oil by rail to Black Sea ports. The only remaining outlet for Azerbaijan’s oil is a 100,000 b/d pipeline that runs to Russia’s Black Sea port of Novorossiisk.

Nearly 1 million b/d of Caspian oil that had been exported via Georgia and Turkey to Europe and the US has now been shut in by the bombings. As yet there is no indication of how long the interruptions will last. The Turks speak optimistically that damage to the BTC pipe will be repaired in a week or so but others are saying it will take more than a month. The damage to the rail bridge will likely take weeks to repair.

Reopening the Baku-Supsa pipeline will depend on the course of relations between Russia and Georgia. Despite a ceasefire, Russian troops are digging in deep in Georgian territory so it may be a while before all this is sorted out.

There are at least two political disputes going on here. The Kurdish separatists who have been fighting for independence since the end of World War I may have a powerful new weapon in the vulnerable BTC pipeline. If they were indeed responsible for the explosion, which appears likely to do much harm to West by delaying oil exports, there is little reason why they will not continue the attacks for an 1100-mile pipeline is nearly impossible to defend.

A Western export corridor for Caspian oil through Georgia makes Moscow very unhappy and is likely the root cause of the current military incursion. Unless the 1 million b/d interruptions can be remedied shortly, they are likely to lead to price increases within weeks. Over the longer term, either some agreement between Russia and the West over access to Caspian oil will be worked out or the troubles will continue indefinitely.

3. Chinese Demand

In another month, the 2008 Summer Olympics will be a memory, and Beijing will be back to concentrating on economic growth as its highest priority. Traffic will return to normal and industrial enterprises that were closed to ameliorate air pollution will return to production.

In recent years Chinese imports of crude and oil products have become highly volatile. Large increases in imports during the buildup to the Olympics in the spring contributed significantly to the run up in prices just as a sharp drop in imports during July and August has contributed to recent price declines.

There are many cross currents that will be influencing Chinese imports of petroleum and products during the rest of the year. There is little doubt that China’s exports will shrink as a world-wide recession sets in. China’ GDP, however, has recently been growing at 10-11 percent a year; Beijing resolutely maintains that its economy is largely world-recession proof.

Two months ago Beijing increased retail prices for oil products by nearly 18 percent so that, while still subsidized, they are not that far behind world prices. Some believe that high oil prices are starting to reduce demand, even in China.

China is suffering a severe electricity shortage due to inadequate supplies of coal. Some foresee increased demand for diesel to make up for power shortages as we are already seeing across the subcontinent. Others say that oil is now too expensive to be used for generating electricity, and that it will not be used on any significant scale.

China has built the facilities for a large strategic petroleum reserve, but has been waiting for lower prices to begin filling it. With oil down more than 20 percent, now would be a good time to make substantial purchases. New refineries with a capacity in excess of 500,000 b/d are scheduled to be completed later this year which could substantially increase the demand for crude.

After assessing all aspects of the situation, the International Energy Agency warned last week that while oil consumption in the US is expected to fall by 3.1 percent this year and 2 percent next year, Chinese oil consumption, while only a third that of the US, is expected to grow by about 5.6-5.7 percent in the next two years, thereby offsetting much of the drop in US consumption. The IEA says that consumption in China should spring back after the Olympics, while other analysts remain skeptical.

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

• OPEC forecasts in its monthly report that world oil demand will fall by 30,000 barrels a day. While forecasting demand growing by 1million barrels a day this year, and another 900,000 barrels in 2009, the report noted that world demand growth next year will also be “the lowest since 2002,” with growth from the major industrialized countries actually declining. (8/16, #1)

• A shortage of steel pipes could disrupt the boom in US natural gas drilling for the energy companies that rely on the tubes to drill and line their wells. Seamless steel pipes, known as tubular goods in the oil patch, are in short supply after an unexpected resurgence in the North American onshore drilling market. (8/11, #17)

• US House Speaker Pelosi outlined a new energy bill that includes new offshore exploration. The policy shift follows a similar move in recent days by Democratic leaders in the Senate and by presidential candidate Barack Obama in the face of a public angered by high energy prices. (8/17, #10)

• Countries with fuel subsidies accounted for virtually the entire increase in worldwide oil consumption last year, according to one estimate. (8/17, #14)

• Liquefied natural gas prices in Asia may climb about 80 percent this year as new projects get delayed, as Japan seeks more gas to offset a shut-in nuclear power plant, and as countries from Indonesia to Egypt curb exports. Cargoes of LNG may rise to as much as $25 per million Btus during the Northern Hemisphere winter. (8/15, #9)

• The European Union has been keen on the recent plan to run a natural gas pipeline from the Caspian area through Georgia as a way to gain bargaining power against Russia and reduce the risk of supply cutoffs. But the Russia-Georgia war may have reduced the prospects for such a gas pipeline getting financing and European backing.(8/17, #16)

• Demand in the OECD countries is set to average 48.6 million barrels per day this year, a decline of 1.3 per cent or 620,000 barrels from 49.2 million in 2007, the IEA says. The US Transportation Department said this week that Americans drove 4.7 per cent, or 12.2 billion, fewer miles in June compared with a year earlier–the eighth straight monthly fall. (8/16, #4)

• Nigeria’s oil minister last week admitted security concerns in the southern oil producing region had seen production drop to 1.8 million bpd. Shell reports that it is struggling to repair recent damage to a major pipeline (8/16, #8-9)

• US consumers spent more on gasoline than vehicles and parts for the first time in 26 years in May and June, as gas prices headed for a record. During the period from 1978 to 1983, prices rose high enough to cause global demand for oil and petroleum products to drop 8.4 percent. (8/16, #14)

• In a move that could alter the economics of the global solar industry, California utility PG&E announced it will buy 800 megawatts of electricity produced from two massive photovoltaic power plants to be built on the state’s central coast. This purchase dwarfs by orders of magnitude the five-to-15 megawatt photovoltaic power stations currently in operation around the world. (8/16, #21)

• Nineteen of 30 oil analysts surveyed by Bloomberg News said prices will increase through Aug. 22. It was the most bullish response since December 2006. (8/15, #2)

• Iran and Turkey signed several cooperation agreements Thursday but failed to complete a deal for building a new natural gas pipeline — a project the United States has opposed. (8/15, #6)

• Nigeria’s government threatened to impose stiff penalties against foreign oil companies that fail to provide a certain amount of natural gas to the domestic market by the end of the year. (8/15, #7)

• China’s power generation growth eased in July to 8.1 percent, its slowest in over six years, underlining the deepening supply woes that have forced nearly half the nation to ration power. (8/15, #11)

• New information on commodities speculators show that they are a larger piece of the oil market than previously known, a development enlivening an already tense election-year debate about traders’ influence. (8/15, #13)

• A South Korean-Russian consortium has lost its license to explore and develop a huge offshore oilfield in Russia’s west Kamchatka. Unless things change, an estimated $259 million already spent on exploration and drilling by the Korean National Oil Company will go to waste. (8/15, #16)

• The global economy — which had long remained resilient despite US weakness — is now slowing significantly. On Thursday, the European Union’s statistics agency said gross domestic product in the euro zone contracted 0.2% in the second quarter, the equivalent of a 0.8% annual rate of decline. Nonetheless, China, India and other large developing countries continue a strong growth trend.(8/15, #17)

• The Iraqi Oil Ministry said it was reviving an oil contract worth 1.2 billion dollars that had been concluded with China but was cancelled after the US invasion in the spring of 2003. (8/14, #5)

• The growth in China’s CPI has dropped over the past three months to 6.3% in July, and the government is likely to reduce energy subsidies once more. (8/14, #14)

• US automakers are offering discounts of $10,000 or more on some SUVs just to get rid of them, so dealers have space to stock more of the fuel-efficient cars. On average, new sport utility vehicles sold for 20 percent below sticker price in July. That, in turn, has decimated prices for used SUV’s. (8/14, #15)

• Shell, BP and Exxon Mobil ran into difficulties in talks with Iraq to open up the country’s oil fields, and it’s not clear if negotiations are continuing. (8/13, #7)

• In Angola, Exxon Mobil started production up the Saxi and Batuque oil fields, adding to output at its largest offshore project. When combined with the Mondo field, which started up in January, production from the Kizomba C project is expected to reach 200,000 barrels a day of oil later this year. (8/13, #9)

• South Korea, Asia’s third-largest crude oil buyer, will expand the use of nuclear power and alternative energy sources to counter high oil prices and reduce greenhouse-gas emissions. (8/13, #15)

• Iran has discovered four new oil and gas fields holding about 3.7 billion barrels of oil and 1.5 million cubic meters of gas, according to the oil ministry’s Web. (8/12, #10)

• In India, the power shortage sweeping across the country is chipping away at the competitiveness, if not the survival, of India Inc. (8/12, #13)

• Vietnam, the largest supplier of energy coal to China, may cut exports of the fuel by a third after a cyclone damaged a port. (8/11, #15)

Quotes of the Week

• “Energy experts were heartened that an overdue discussion about the nation’s energy future has begun in earnest. But they worried that much of what voters hear is long on gimmickry but short on frank talk and long-term solutions.”

Bill Lambrecht, Post-Dispatch

• “Back when it began falling, I said oil was headed to $200 via $80 and I stand by that.”

Phil Roth, chief technical strategist at Miller Tabak.