Resilience

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Peak Oil Review - Mar 17

Published by ASPO-USA on 2014-03-17
Original article: http://peak-oil.org/ by Tom Whipple

1.  Oil and the Global Economy
 
Oil prices continued to fall for most of last week on concerns about growing inventories and weaker demand -- particularly from China. On Friday, however, prices rebounded on concerns about the worsening Ukrainian situation and a new estimate from the IEA that global oil demand will increase this year as the economic situation improves.  As the Ukrainian crisis is more likely to impact European rather than US energy supplies, London prices were up more on Friday with Brent closing at $108.57 and WTI at $98.89, leaving the spread at $9.19.
 
The impact of unusually harsh winter weather in North America, which seems to be continuing into the second half of March, is beginning to turn up in energy statistics. The EIA reported last week that the working stockpile of US natural gas was down to 1 trillion cubic feet as of March 7 after a weekly drop of 195 billion cubic feet. If drawdowns continue for the next three of four reporting periods at anything near recent rates, US natural gas stocks will be very low, especially in the hard hit northeast where weekly natural gas production was down 30 percent from the same period last year due to the weather.
 
The EIA is forecasting a robust comeback for the natural gas industry as soon as spring arrives. Even though US gas stocks will be well below 1 trillion cubic feet by the time rebuilding begins in April, the Administration is expecting a build of some 2.5 trillion cubic feet this summer. The EIA also is expecting a 2 percent increase in US natural gas production this year and little growth in demand.
 
North Dakota’s oil production has also been affected by the severe weather this winter. In December oil production was down by 50,000 b/d due to cold and snow. In January production rebounded by only 7,000 b/d to 933,000, still 43,000 b/d below November’s output. Twelve days of high winds in January severely limited the fracking of new wells in the state so that only 60 new wells were completed in the month. There now is a backlog of 660 new wells that have been drilled but are waiting to be completed. February and March also saw some severe weather in North Dakota so it will be June before we have a good picture of how much production was slowed by the winter weather. The EIA remains optimistic that these losses will be made up in the spring so that the US will see large increases in shale oil production in the next two years with total US production going from 7.5 million b/d in 2013 to 8.4 million in 2014, and to 9.2 million in 2015.
 
In its monthly Oil Market Report, the IEA reported that global oil production grew by 600,000 b/d in February largely thanks to a 500,000 b/d increase in Iraqi production. The Agency also increased its forecast of demand for oil in 2014 by 1.4 million b/d to 92.7 million b/d. The faster growth in demand is based on improving economies in non-OECD countries, particularly in Asia.
 
2.  The Middle East & North Africa
 
Iran:  Iran’s oil exports have been climbing since the interim 6- month agreement came into effect on January 20th. The agreement calls for a cap of one million b/d on average during the period of the agreement. The IEA is reporting that Tehran’s exports reached 1.16 million b/d in January and likely were the same in February. Unless these are brought down in the next few months, the interim agreement and the prospects for a permanent nuclear agreement are threatened.
 
Rhetoric and posturing about Iran’s nuclear rights continue to come out of Tehran, but much of this is directed towards mollifying hardliners who see a deal with the West as a betrayal of the basic principles of the country’s governance. Included in last week’s rhetoric were claims that Iran’s security services are having great success in thwarting a continuing series of plots aimed at sabotaging the country’s nuclear industry.
 
Last week Iran signed a deal with Oman to send 10 billion cubic meters of Iranian gas through a new 150 mile pipeline which Muscat is to build build across the Gulf of Oman. Once in Oman, much of the gas will be converted to LNG for sale on the world markets. The agreement is a way for Iran to get its gas to market bypassing any sanctions restrictions and not having to invest any capital in very expensive liquefaction facilities.
 
Iran’s involvement in the Syrian uprising appears to be increasing. Tehran is recruiting Iraqi Shiites to fight for the Assad government in forces in Syria, bringing them to Iran for training, and returning the bodies of those killed in the fighting to Shiite cemeteries for burial. All this activity on behalf of Assad may eventually become involved in the nuclear and sanctions talks.
 
Iraq: Iraq is becoming two separate countries: the Sunni and Kurdish north where a full scale insurgency has driven some 400,000 refugees from Anbar province and the Shiite-dominated south which remains relatively peaceful and continues to set records for oil production. From Baghdad north we see some 30-40 suicide bombings and hundreds of casualties each month and radical Sunni forces occupying portions of major cities. The northern export pipeline is blown up frequently and the Kurds are going their own way in hopes that someday they will be able to break ties with Baghdad. Kurdistan’s new problem is the torrent of refugees from Sunni Anbar that are flooding into Kurdistan which is away from the Sunni-Shiite conflict and security remains relatively good.
 
The key question is how long these two Iraq’s can remain on their present course without the turmoil in the north spilling south so that it begins to damage oil production. This is an important question for during the next few years the only major increases in oil production on the horizon are to come from US shale oil and Iraq. Parliamentary elections are scheduled for late April, but with much of north in turmoil, these are unlikely to change the political balance in the country.
 
Libya: The partition of the country seems to be moving closer in the wake of the El Sider incident two weeks ago when a North Korean flagged tanker slipped into an eastern Libyan port, loaded a cargo of crude and got away in the face of some rather anemic gunfire from a hastily armed government tug boat. The Prime Minister, who never had much power anyway, was voted out of office by the congress and fled the country in the face of corruption charges.  
 
The congress in Tripoli then sent militia from Misrata that are still loyal to the Tripoli government to seize the eastern ports from the Cyrenaica rebels, but they were stopped by a combination of rebels, militia, and army units. The Libyan air force seems to be on strike due to an unpopular change in leadership. To make matter worse, the Zintan militia from the western mountains which controls the flow of oil to the western terminals is unhappy over the ouster of the Prime Minister and has mobilized. On top of this, leaders of a southern province met to consider breaking away from Tripoli.
 
In short it appears we have near anarchy in Libya. There are no recent announcements as to how much oil is making its way out of the country – legally; however another ship is reported to on its way to El Sider to buy a cargo from the rebels that control the terminal.
 
Another major concern is the natural gas coming by pipeline from Libya to Italy. With Moscow making threats on Europe’s gas supplies as part of the posturing surrounding the Ukrainian situation, this source of gas becomes even more important.
 
Egypt: The security situation in the country continues to deteriorate with anti-government insurgents moving from eastern Sinai towards the Nile valley where they are in a better position to attack government targets. Over the weekend six government soldiers were killed in one attack adding to the 200 Egyptian security personnel have been killed since the overthrow of the Morsi government.  
 
The Egyptian economy continues to slide with massive unemployment and a burgeoning energy crisis which is already causing rare winter blackouts and the shuttering of some businesses. Fears are rising about the lack of electricity during the hot summer months.
 
The election of Field Marshal Sisi to the Presidency in a one-sided election in which many opposition groups have been banned, looks like a sure thing. A Sisi government will face a host of problems ranging from the growing insurgency to Ethiopian plans to dam the Nile. Compared to the troubles in Libya, Syria, Iraq, and Yemen the Egyptian situation does not pose any immediate threat to oil shipments from the Middle East. While Egypt is no longer an exporter of oil or natural gas, the Suez Canal and its accompanying pipeline remain important to the movement of oil from the Gulf to the West.
 
3.  Ukraine
 
With the landslide vote by ethnic Russians living in the Crimea to join the province to Russia once again, the possibility of a new crisis affecting global energy supplies has arisen.  The result of the vote, which will only be recognized by Moscow, virtually insures that the Crimea will become part of Russia. Moscow already has enough troops in the province to forestall any military opposition by the Ukrainian government.
 
The situation could become even more serious, however, if Moscow repeats its Crimean takeover in other Ukrainian provinces that have a majority of ethnic Russians.  While Moscow has been emphatic in saying that it has no designs on the eastern Ukraine, Crimea is dependent on other Ukrainian provinces for some of its water, gas and electricity and with no direct land access to Russia proper, maintaining vital services for the Crimea will be difficult without the cooperation of the Ukrainian government.  The US is already accusing Moscow of fomenting unrest in Russian cities in eastern Ukraine.
 
The US, the EU, and possibly other countries have strongly condemned Moscow’s intervention and are planning sanctions against Russia. For its part, Moscow as announced that it will retaliate “asymmetrically” for any sanctions, which means it will attempt to hurt any sanctioning country with still harsher economic sanctions of its own. As Russia exports some 4 million barrels of crude and oil products a day to Europe and supplies about 30 percent of its natural gas consumption, Moscow in theory has considerable leverage over Europe.  However, Russia’s economy has been weak for the last three years, and it is heavily dependent on its earnings from oil and gas exports to keep it afloat.  So far, talk of sanctions by both sides have made not mention of restricting oil and gas supplies as both sides could be seriously hurt.
 
The exact nature of the sanctions imposed on Moscow will depend on developments in the next few days, but will likely start with travel bans on senior Russian officials and seizure of any assets they have in the West. Just as Ukraine can stop natural gas flowing into Crimea, provided Russia does not invade eastern Ukraine, Moscow can stop gas flowing into Ukraine. How all this plays out in the next few weeks will likely determine whether this crisis escalates into a major confrontation between Moscow and the outside world.
 
4.  Quote of the Week

 

--   Larry Wickstrom, former chief geologist for Ohio’s Dept. of Natural Resources
 
 
5.  The Briefs
 


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