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Peak oil review - Mar 31

Published by ASPO-USA on 2014-03-31
Original article: by Tom Whipple

1.  Oil and the Global Economy
Oil futures have climbed steadily for the past two weeks, with NY oil up about $3 a barrel to close at $101.67 on Friday and London oil climbing about $2 to close at 108.07. Unease over the effect the Ukrainian situation will have on Russian oil and gas exports provided much of the impetus for the move, but some modest improvements in the US economic situation and the continuing drain of crude from Cushing, Okla. to Gulf coast depots contributed to the increase in US oil prices. Closure of the Houston Ship Channel for three days last week due to an oil spill also contributed to the higher prices.
While the shrinkage of the great Cushing oil glut has closed the gap between New York and London oil prices, some are wondering if it makes much difference if the glut only moves from Oklahoma to Gulf Coast storage facilities which are at an all-time high. This new glut is increasing the pressures to permit exports of US crude. During hearings in Washington last week many legislators called for lifting the restrictions despite the likelihood that domestic oil product prices would increase. A few clever refiners have figured out ways to do some minimal and inexpensive processing of their crude so it can be exported as “refined” oil.
An ethanol shortage is developing just as refiners are switching to summer blends of gasoline. Congestion on the railroads stemming from a tough winter and increasing movement of oil by rail across the country is believed to the reason for the ethanol shortage and the highest prices since 2006.
The situation surrounding US shale oil production is rather murky at the minute. North Dakota reports that Bakken oil production in January was 871,000 b/d, down from the 911,000 b/d produced in November. Since then however, we have had two more months of severe weather so it is possible that there will be little or no growth in Bakken oil production for four months. During 2013, North Dakota managed to increase its production by 207,000 b/d in the 11 months between December 2012 and November 2013. Whether we will see this much of an increase in Bakken production before next winter sets in again is a good question.
At the end of January there were 660 wells that had been drilled in North Dakota, but were awaiting completion services. Two months later, that number is likely to be higher raising questions as to how fast these new wells can be fracked and brought into production.
In addition to the harsh winter that befell North Dakota, there are indications that all is not well at Texas’ Eagle Ford formation, which is the region of rapidly increasing shale oil production in the US.  Although not subject to the extreme cold and snows that hit the Dakotas this winter, recent data suggest that growth at Eagle Ford may not be as robust as many are saying. To begin with, there seems to be a growing discrepancy between the production numbers reported by the Texas Railroad Commission which manages oil in Texas and what the EIA is reporting from Washington. The EIA seems to be reporting considerably more production than Texas officials state. Another issue is that the amount of condensate coming out of Eagle Ford, which is the valuable liquid part of the gas/liquid mixture that comes from the wells, seems to be slipping as a percentage of the combined production and in total. Some analysts are starting to ask whether the field’s production has peaked.
The EIA is forecasting that US crude and liquid fuels production will increase by over 900,000 b/d in 2014. The first quarter is over and there is a lot to do in order to reach this projection before next winter.
The US natural gas situation is not doing so well at the minute either. The week before last, US natural gas stockpiles fell by 57 billion cubic feet vs. the normal 7 billion for the same week. Last week saw a lot of cold weather across the northern US so that there may be another week of inventory shrinkage before our natural gas stocks can begin growing again. The number of rigs drilling for natural gas in the US is down 22 percent from last year. This is likely due to market prices for natural gas in the US still remaining below costs of production despite the recent price jump; however there have been improvements in rig efficiency that could account for part of the decline.  Imports from Canada have fallen in recent years due to the gas glut in the US, but the Canadians may still have some slack to increase their exports to the US before next winter.
2.  The Middle East & North Africa
Iran:  The nuclear talks continued in Geneva over the weekend with no word of any progress. The presence of Secretary of State Kerry at the talks had raised hopes that progress was about to be made. Tehran’s demand that its right to enrich uranium be formally recognized by all concerned is said to be the main sticking point. The west is insisting that better inspection rights and lower levels of enrichment be part of the treaty. Israel and some members of the US Congress are insisting on a complete ban on Iranian enrichment.
The situation has been further complicated by Tehran’s appointment as its UN ambassador a member of the 1979 group that took US embassy personnel hostage. The Obama administration is taking its time on granting a visa to New York amid rumblings from Congress of further sanctions on Iran.  It is clear the negotiations are at a critical point.
The Iranian government’s plan to nearly double its heavily subsidized fuel prices will be a major test of its ability to govern. With inflation still above 30 percent there is little else the government can do but cut back on the massive subsidies that has gasoline and diesel well below world prices. The government has yet to set a date for the increases, amid concerns that there will be a repeat of the rioting that took place after the last fuel-price increase.
Iraq: The duality of the country was highlighted last week as a new oilfield came into production pushing oil output to a 35-year high and the country’s oil revenues with it. In the meantime, shootings and suicide bombings continue apace with the death toll for March now above 500. With the Russian/Iranian - backed government in Damascus making progress against the Sunni insurgents, the UN is warning that ties between Sunni insurgents in Syria and Iraq are increasing. Some believe that the Shiite-led government in Iraq may be a softer target than the one in Syria.
Last week Iraq’s electoral commission resigned en masse charging that the government was interfering with its work. This puts April elections in doubt. The dispute seems to center on a clause in Iraqi election law which bans candidates of “ill-repute” from taking part. Some are saying the government is using this clause to ban its opponents from taking part and ensuring a third term for the al-Maliki government.
The opening of the giant West Qurna-2 oilfield outside of Baghdad last week marks a major step in Iraq’s hopes to become the major world oil exporter with a goal of producing 4 million b/d by the end of this year and 9 million by the end of the decade.  The new oilfield which is 75 percent owned by Russia’s Lukoil is starting with a production of 120,000 b/d but that will be increased to 1.2 million.  This surge in Iraqi production is starting to raise questions about Iraq’s position in OPEC and its exemption from the quota system.
Ten new Chinese-built trains have been delivered to Iraq to replace the decades-old ones that provide service between Baghdad and Basra.  The diesel-powered trains have been designed to operate in Iraq’s notorious sand storms.
Libya:  Despite the best efforts of the US, EU, and the UN, little progress is being made in turning Libya into a cohesive state. Following the ouster of the prime minister in the midst of the tanker crisis, the electricity minister, who just returned from 30-years of exile in Canada, seems to be in charge when he is not busy keeping the lights on. The trouble is that there have never been any established political institutions in the country other than Gadhafi himself. The parliament in trying to draft a constitution and hold elections, but progress is slow. The west is trying to raise and train a national army to counter the endless militia groups that made off with literally millions of weapons after the revolution.
Last week Libya’s oil production fell to 150,000 b/d which is about what the country needs to keep the lights on and bake the bread. With little or no oil revenue, the government must borrow what it needs to keep functioning. There is no end in sight for this situation. For the immediate future, the world will have to do without the million b/d that Libya was exporting while awaiting further developments.
Egypt: The makings of a civil war are forming in the northern Sinai as heavy-handed government forces attempt to suppress the extremists in the region. Reports are mounting of government atrocities against innocent civilians which is turning a largely Bedouin population against the government. The region exploded into violence after the ouster of former President Morsi eight months ago and has been going downhill ever since.  
Field Marshal Sisi has resigned and will likely be elected President at the May 26-27elections. Several possible candidates have declined to run for President saying that the support of the Army and security services would be required to win. The military government’s courts have sentenced to death 529 men for riots which led to the death of a policeman last August following the ouster of Morsi.  The government crackdown on the Muslim Brotherhood is said to be worse than in the 1990’s. Since August the Brotherhood has been outlawed, more than a thousand of its demonstrators have been killed and some 20,000 arrested. More importantly the Egyptian press has been cowed into silence by the arrest of newsmen.
While most of the trouble currently is taking place near Gaza some 150 miles to the east of the sensitive Suez Canal and pipeline, closing the canal is a prime way for the insurgents to seriously harm the government and its major source of revenue.  Although developments in Egypt seem to pose no immediate threat to oil shipments, the long run prospects for the 85 million Egyptians are not good.  The country is living on canal revenues and from the Gulf Arab states. More trouble can be expected this summer when power shortages are expected to cause still more trouble.
3.  Ukraine
Although so far the crisis has had minimal effect on oil and gas flows, many are worried that the buildup of Russian troops along the Ukrainian border signals Moscow’s intention to annex still more of the country.  Moscow strongly denies that it intends to annex more of the country, but is pushing for constitutional reforms that will give more independence to Russian-speaking Ukrainians in the eastern part of the Ukraine. Over the weekend the US Secretary of State met with Russia’s Foreign Minister to discuss these reforms. Moscow wants the Russian-speaking Ukrainians to have more independence from Kiev and to insure that the country does not end up in some western bloc such NATO or the EU.
Although the oil markets were jittery last week at the prospect of still more sanctions, developments over the weekend seem to indicate that a compromise is possible.
4.  Quote of the Week


-- Patricia Romero Lankao, National Center for Atmospheric Research, referring to the first species to be listed as threatened by global warming due to melting sea ice.
5.  The Briefs


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