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Peak oil review - Jan 21

Published by ASPO-USA on 2013-01-21
Original article: http://aspousa.org/wp-content/files/por130121.pdf by Tom Whipple

1. Oil and the Global Economy

In the January issue of its monthly Oil Market Report, the IEA forecasts that the world oil market will become much tighter than expected in the year ahead due to recent reductions in Saudi and Iraqi exports and increases in Chinese demand. The Agency now expects that global demand for oil will increase by about 900,000 barrels in 2013. This forecast coupled with better economic news from China and at least a temporary settlement of the US’s debt cap crisis sent oil prices up about $2 a barrel on Thursday to a new 17-week high. On Friday, however, concerns about falling demand for oil in the US, a stronger dollar, and a report that US consumer confidence in slipping balanced off the enthusiasm for higher prices. NY oil gained only 7 cents a barrel to close at $95.56, while London oil climbed 79 cents to close at $111.89.

The weekly US stocks report came as a surprise with crude inventories dropping by nearly 1 million barrels, contrary to the 2.3 million barrel increase that analysts were expecting. Gasoline and distillate inventories however were up by 3.6 million barrels. The API says US oil demand is now at its lowest level in 16 years.

The Saudis assured the world last week that their drop in production during December was not an effort to increase oil prices, which are now $10 a barrel higher than Riyadh’s “fair” price of $100, but were due to lower domestic demand brought about by the end of the Saudi air conditioning season and lower export demand. Analysts note that the Saudis are building three new 400,000 b/d refineries that when completed in 2017 could divert about 1.2 million b/d of crude exports to its domestic market.

A senior Goldman Sachs analyst says that he would not be surprised if oil went to $150 a barrel this summer.

A blast of Arctic weather into the northern US sent heating oil and natural gas prices higher last week. In the last two weeks, natural gas prices have risen about 45 cents per million BTUs in anticipation of the colder weather. Forecasts are mixed as to what temperatures February will bring.

2. Iraq

The situation deteriorated further last week with the assassination of a senior Sunni tribal chief, possibly by al Qaeda, who served as the key moderate link between the Sunnis and the al-Maliki government. In the meantime, Sunni demonstrations and sit-ins in Anbar and other predominately Sunni provinces continue. In response to the blockade of the highways to the north of Baghdad by Sunni demonstrators, the government has closed the border crossing station with Jordan. This has had a side effect of blocking some 10,000 b/d of oil that was being trucked into Jordan from Iraq. The loss of 10 percent of Jordan’s fuel supply is causing unrest which is compounded by the size of the Syrian refugee problem.

Suicide and car bombs continue to go off across Iraq, some of which are aimed at Shiite pilgrims traveling to shrines. A bomb detonated next to a convoy carrying Iraq’s Sunni Finance Minister who was not hurt in the bombing. It was the arrest by the al-Maliki government of some of the Finance Minister’s bodyguards on charges of treason that started the latest round of Sunni-Shiite contretemps.

Three car bombs went off in Kirkuk, which is in the disputed area between the Iraqi Kurdistan and the rest of Iraq. Some 20 people were killed and hundreds were wounded in the attacks which apparently were aimed at Kurdish political and security offices in the city. Adding to the anarchy, al Qaeda has begun kidnapping oil workers in the northern part of the country.

The problems with the Kurds further increased last week when Baghdad announced a new plan to have BP double the output of the Kirkuk oil fields which are in the disputed zone. Production from the Kirkuk field, which was discovered in 1927, has fallen to 260,000 b/d from a high of 900,000 b/d 15 years ago and is badly in need of rehabilitation.

The Kurds have denounced Baghdad’s plan to have BP work in the disputed oil fields without their consent as illegal and unconstitutional. "Citizens of Iraq know all too well the dangers of allowing the country's abundant oil and gas resources, and its revenues, to fall under the control of a handful of misguided people in Baghdad," the KRG statement read.

The Russian oil company Lukoil has signed a new contract with Baghdad to continue developing the West Qurna 2 oil field. The Russians were left with the project after Norway’s Statoil pulled out. Under the new contract, the project’s goal is to raise production to 1.2 million b/d as opposed to the unrealistic 1.8 million b/d in the old contract. The Russians are said to be seeking to partner with the Chinese on the project.

Taken together, all these problems facing the Iraqi government suggest that the prospects for major increases in oil production in the immediate future are not that good. The major unknown is just how the “end game” to the Syrian uprising will affect Iraq. Some are suggesting that the recent increase in al Qaeda - Iraq’s activities can be attributed to the situation in Syria where al Qaeda affiliated groups seem to be playing a role in the uprising. Iraqi oil exports are already slipping partially due to the dispute with the Kurds. The withdrawal of the major western oil companies from southern Iraq also does not help the prospects for higher production. The chances for increased unrest and even civil war seem to be improving every week.

3. Drilling Rigs and Tight Oil

A key issue facing the US oil industry during the next few years is just how long the impressive increases in production of oil from the hydraulically fractured tight oil fields in North Dakota and Texas can continue. The ever-optimistic EIA says that production from the Williston Basin (North Dakota) will increase by 400,000 b/d from 800,000 b/d December 2012 to 1.2 million by the end of 2014. During the same time, production from Texas’ Western Gulf basin which includes Eagle Ford is to increase from 1.1 million b/d to 1.7 million and the West Texas Permian Basin production is to increase by 200,000 b/d. All together, America is supposed to be looking forward to a 1.2 million b/d jump in its oil production in the next two years which some foresee as increasing further and lasting well into the next decade. Recent stories proclaim that never in the history of the United States has oil production grown so rapidly for in 2012 US oil production grew by 779,000 b/d, setting a 15 year high.

On the other side of all this euphoria are a handful of independent geologists who have looked into the admittedly short history of fracked oil wells and are telling a different story. They note that these tight oil wells are much more expensive to drill and fracture than conventional ones and deplete much faster so that at some point all the drilling and fracking that can be accomplished in a year can only sustain and not increase production. Another key factor in this source of oil is that the most productive locations are drilled first so that subsequent wells can expect to be continuously less productive until production collapses.

The key question, of course, is just when output will level off and then decline. The optimists are talking of several more years of increases followed by a lengthy plateau. The pessimists are saying increases in production should start to slow within the next couple of years.

Last week there was a pair of news stories bearing on the issue. Bloomberg pointed out that North Dakota’s Bakken oil production in November had declined by 2.2 percent from October. Digging around as to the reason for the decline, Bloomberg’s writer came up with a report from the oil services company Smith Bits that active drilling rigs in the Bakken had declined from 210 on October 19th to 181 on November 30th. Recognizing the need for continuous drilling to maintain increasing production, Bloomberg concluded that the drop in production was due to the number of active rigs.

This story was immediately countered by North Dakota officials who told of a 7 inch snowfall in November that led to a “very large decline” in hydraulic fracturing. The drop in active rigs was attributed to either their replacement by newer and more efficient rigs that can drill multiple wells from the same pad, or drillers being forced to suspend drilling as their capital budgets for the year were depleted.

A second story, citing Baker Hughes data, points out that nationwide the number of active drilling rigs has been dropping steadily and is now at a 22-month low. Rigs drilling for dry gas are generally recognized as being a losing proposition due to low gas prices in recent years so that rigs drilling for dry gas are down close to 25 percent from their peak back in 2008. In the past year for example, rigs drilling for gas in Pennsylvania have fallen from 116 to 71 and in Louisiana from 146 to 106.

The more interesting question is what is happening to drilling-for-oil rigs. Baker Hughes says that in the year ending last December, the rig count in North Dakota fell by seven and by 110 in Texas. Other recent analysis indicates that the initial productivity of fracked oil wells declined in 2012 compared to previous years. This is in line with the best drilling locations or “sweet spots” having already been drilled. Most analysts do not see a major reduction in the rate of increase of US tight oil production during the coming year, however. What they do see may be the first signs that unprecedented increases in production will not last as long as some are forecasting and that the tight oil situation may look quite different by the end of the decade.

4. China

The severity of the smog that settled on Beijing last week may be leading to a reassessment of where China and its breakneck increases in energy consumption are heading. With air pollution levels reaching way above dangerous levels, the government reversed course and permitted an unusual public discussion of the problem in its media and on the Internet. For the last 30 years, Chinese society has had one chief goal – economic growth – to the detriment of nearly all other concerns. In an age with increasing demands for democracy, the Chinese people, particularly the elite, were willing to let all power remain within a secretive political party, provided they could keep the country growing at breathtaking rates. The problem was that measures needed to insure that the country remained environmentally habitable were never taken as they would have restricted the pace of growth.

China’s environmental problems likely will not be sustainable much longer. While some problems might be ameliorated by quick fixes such as the proposal to restrict driving on dangerously polluted days which are not that frequent. But longer term problems such as floods, droughts, extreme temperatures and sea level rise require solutions over decades and unless there are major changes in energy technology, most believe would require major reductions in the burning of fossil fuels particularly coal.

The new Chinese government is well aware of the problem and for now is making an effort to build more hydro dams--even if many are flooded out of their homes -- and to increase wind and solar power generation.

Last year was a bad one for China’s economy with economic growth the slowest in 13 years due to lower exports and efforts to deflate property values. While China’s GDP grew by “only” 7.8 per in 2012, the 4th quarter was up to 7.9 percent, leading some to believe a recovery to the accustomed growth rates is possible. China’s crude oil processing in December rose to a record as new refining capacity and increased industrial production added to demand. Last year China’s electricity consumption, which is fair measure of economic activity, increased by 7.4 percent over 2011. The State Electricity Commission expects that consumption will be up by 9 percent this year.

Somewhere in the future, China’s environmental situation will become so bad that major policy changes will have to be undertaken. Whether we are starting to see the first signs of those changes remains to be seen.

Quote of the week

"The outlook shows the degree to which once-accepted wisdom has been turned on its head. Fears over oil running out – to which BP has never subscribed – appear increasingly groundless. The US will not be increasingly dependent on energy imports, with energy set to reinvigorate its economy. And China and India are expected to need a lot more imports to keep growing." - Bob Dudley, BP CEO

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