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Peak Oil Review - Jun 9

Published by ASPO-USA on 2014-06-09
Original article: by Tom Whipple

1.  Oil and the Global Economy
Oil prices remained flat last week as news supporting higher prices balanced off news that would tend to push prices lower:  large US crude stocks; improved US employment numbers which including the fourth straight month of job gains above 200,000; Libya falling apart; equity markets doing well; optimism about Ukraine; and the approach of the summer driving season all factored into the balance. At the end New York futures closed at $102.22 a barrel and London at $108.61.
In contrast to the oil complex, natural gas futures continued to rise last week on concerns that warmer weather will prevent adequate injections into US stockpiles this summer to avoid shortages next winter or in the years ahead. During the week natural gas futures rose 3.7 percent to close at $4.71 per million BTUs. Despite higher injections the week before last, US inventories of natural gas are still 37 percent below the five-year average for the week. The consulting firm Wood Mackenzie said last week that natural gas production from the Marcellus shale is now above 12 billion cubic feet per day and Ohio’s Utica shale gas production is now above 1 billion. Wood Mackenzie expects that these numbers will increase to 20 billion for the Marcellus and 5 billion the Utica by 2018.  No mention of what is going to happen to the rest of US natural gas production, which has been falling in recent years.
US natural gas production reached a high of 68.2 billion cubic feet per day during May with the average for the month up by 4.6 percent over May 2013. The Natural Gas Supply Association, however, expects that gas prices will move “slightly” higher this summer because of hot weather, increasing demand for gas and the need to inject a larger amount of gas than usual into storage.  
New rules that will limit the flaring of natural gas in North Dakota may slow down the growth of oil production there.  Starting on June 1st drillers in the state will have to submit plans to capture any natural gas that emerges from new wells before a drilling permit will be issued. This of course can get expensive as natural gas requires pipelines to move the gas to market. One solution is to compress the gas on site and use it to power equipment or vehicles.
The EIA released a short study last week pointing out that 96 percent of the growth in US domestic oil production in the last three years has been very light, sweet oil with an API gravity above 40.  More than 60 percent of the EIA’s projected growth in US oil production during 2014 and 2015 will be of the same grades. The study is one of a series of papers dealing with the possible relaxation of US crude export restrictions to reduce the glut of light oil.
Questions are arising as to whether the recent announcement by Total to shelve an $11 billion project to increase production at the Alberta tar sands marks a peaking of new investment in the sands. Some economists see numerous small signs that the recent wave of new investment in sands projects may be coming to an end.  Oil extracted from the sands is currently some of the most-expensive-to-produce on earth and may no longer be that profitable as production costs continue to increase.
There has been much discussion concerning last week’s IEA report, World Energy Investment Outlook, which says that the world will need to invest $48 trillion in finding and producing new oil in the next 20 years. The report also changes the Agency’s two-year old forecast on the prospects for US shale oil production. In 2012 the Agency had forecast that increasing US shale oil production would continue increasing indefinitely and make the US the world’s largest oil producer by 2020 and a net oil exporter by 2030. In its new report, the Agency says that US tight oil production will plateau by 2020, and will start to fall a few years after that.
Needless to say, peak oil analysts were ecstatic at this change by the IEA for it essentially is predicting that world oil production will start decreasing by the end of the decade as only the rapid growth in US shale oil production and very high levels of investment has sustained global production levels in recent years.  
In its discussion of the report, skeptics such the Wall Street Journal focused on the need for increased oil production from the Middle East and the need for much greater investment in the immediate future.  The IEA forecasts that if the required amounts of investment do not take place, the price of a barrel of oil could climb by $15 in the next ten years. This seems a rather modest figure considering the implications of the impending decline in world oil production.
2.  The Middle East & North Africa
Iraq: The violence continues unabated with bombings and insurgent attacks growing in number and severity. Maneuvering to form a new government continues; however key Shiite coalitions are urging that Prime Minister Maliki not be part of a new government. Given the level of violence, forming a new government will be difficult. Sunnis and Kurds seem unlikely to participate.
The opening of a new single point mooring buoy at the Basra oil export terminal increased exports by an average of 70,000 b/d in May over April. Exports in May averaged 2.58 million b/d despite the loss of the northern export pipeline to Ceyhan, Turkey to insurgent sabotage.
The saga of the Kurdish export tanker continues. The Turks apparently allowed a tanker containing a million barrels of crude to leave the Ceyhan terminal heading for the Western Hemisphere. West of Gibraltar the tanker received orders to turn around and return to Morocco. After anchoring there, the Moroccan government ordered the tanker to leave its waters as it did not want to get involved in the Erbil-Baghdad dispute. The Turks say they are helping Iraq by letting its oil get out. Baghdad is suing the Kurds in international courts to stop the shipments. The Kurds accuse Baghdad of an oil grab, but deny that its oil exports are a prelude to seeking independence.
For now Iraqi exports are rising, but so is the violence.
Libya: Another week and the situation becomes still more confused.  With rival governments and a rogue general running around, the violence is growing. Attacks on senior officials by rival organizations are increasing. The Libyan Air Force has joined the fray by attacking Islamist militia bases in Benghazi.
The Islamist dominated Congress, where few show up to vote, has appointed the third prime minister in four months, but the old one has left Tripoli for the Eastern province taking his cabinet and part of the Congress with him.
Oil exports are said to have averaged 167,000 b/d in April, largely because of offshore production which is relatively immune to the turmoil. Some are saying that exports either are, or soon will be, zero.  It looks as if we should write off Libyan oil production for the immediate future.
Iran: Nuclear negotiators are saying that an imminent deal appears to be in jeopardy and that fuel for Iran’s nuclear reactor remains a sticking point. Washington says that world crude supplies are currently adequate to sustain another cut in Iranian exports should additional sanctions be necessary. The US also announced that there are no signs of a Russia-Iranian oil swap deal that would undercut the sanctions. Such a deal was rumored a few weeks back at the height of the Crimean crisis when Moscow was looking for ways to retaliate against the West.
3.  China
A senior Russian official said that a second natural gas pipeline to China is being negotiated now that a compromise on a natural gas price formula has been achieved. The second pipeline which will be called the ‘western route” will be less expensive than the first one, but will still cost billions of dollars. Moscow seems to be making an all-out effort to compensate for the likelihood of reduced natural gas sales to Europe.
Beijing’s environmental problems continue to grow. The government has vowed to limit population growth in the largest cities, but will liberalize rules allowing rural residents to move into smaller ones. A new study shows that only 5 percent of China’s cities are meeting air quality standards. China is running out of land and has been pushing mountain tops into valleys to create more flat land to build on. A new report says that large scale mountain top removal could be an environmental folly and urges a halt to the projects until adequate environmental impact studies can be completed.
Beijing is still struggling with maintaining economic growth. Exports rose by 7 percent in May, but imports declined by 1.6 percent. In the 1st quarter, China’s GDP growth slowed to 7.4 percent from 7.5 percent in the last quarter of 2013. The government is reacting favorably to the US announcement that it intends to reduce carbon emissions significantly. Beijing has been saying for years that the US, as the world’s largest per capita emitter of carbon, must take the lead before China is willing to take the economic hit of reducing emissions. The Chinese may be living up to their word – after all they have a coastline too which is even more vulnerable to rising sea levels than that of the US.
4. Ukraine
It is hard to see where this situation is going from the viewpoint of world oil flows. So far China is clearly the big winner with Moscow agreeing to sell it large amounts of natural gas on acceptable terms.  Oil and natural gas are still flowing out of Russia as neither side wants to accept the consequences of a disruption. Even the long simmering question of Russian natural gas sales to Ukraine seems to be coming to conclusion. Ukraine has sworn in a new President who is seeking peace but is unwilling to give up territory, even the Crimea, to Moscow. Fighting continues in Eastern Ukraine where government forces are confronting ethnic Russians, many of whom have come from deep inside Russia, claiming they are confronting some sort of Nazi revival in Kyiv.
The situation is still fraught with many dangers to world oil and gas flows as Moscow and the West continue to exchange threats of sanctions. It is interesting that Russia’s oil production is down, albeit slightly, for the fifth month in a row. Many outside analysts have been expecting that Russia’s oil production which stretches back over a century will peak someday soon.  Recent developments may or may not be a sign that this is starting to happen; however Russia is a very big country --- there is the arctic to exploit and maybe even a lot of shale oil.
5.  Quote of the Week

-- Maria van der Hoeven, Executive Director, International Energy Agency 

6.  The Briefs

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