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Peak oil review - June 23

Published by ASPO-USA on 2014-06-23
Original article: by Tom Whipple

1.  Oil and the Global Economy
World oil prices continued to climb higher last week with London prices moving faster than those in New York where oil futures have remained relatively flat for the last 10 days, trading around $106-$107 a barrel.  London futures continued to move higher this week, topping $115 on Thursday before closing out the week at $114.81.
US traders seem largely unconcerned about the dangers of the worsening Iraqi situation. Dozens of stories in the last week have emphasized that the turmoil in Iraq is all taking place north of Baghdad and that the southern oil fields and export facilities which ship some 2.5 million barrels per day to world markets are unlikely to be seriously affected by the troubles – at least for now.  Even the US government, the IEA, and OPEC are holding to this position as no one wants to be seen as predicting a sharp, economically devastating, increase in oil prices. How long this optimism continues, remains to be seen. While average US retail gasoline prices are only up about 4 cents a gallon in the last month, the NY futures markets have climbed about 20 cents a gallon in the last three weeks.
Part of the optimism is due to the drumbeat of “good news” stories about US domestic oil production which has now passed 1 million b/d in North Dakota. US “crude” production in May was up 14.7 percent over May of 2013, leading many observers, including the IEA and British Petroleum, to forecast that spectacular increases in US oil production will continue for the rest of the decade and perhaps on into the future.
A closer look at US oil production reveals a different story. California has now been eliminated as a future source of large quantities of domestic shale oil production, thereby eliminating 60 percent of what was previously thought of as US shale oil reserves.  Recent data from Texas is showing an increasing discrepancy between what Washington’s EIA says is being produced in the state and what the Texas Railroad Commission, which actually collects the data, says is happening.  The EIA has been showing Texas’s oil and gas production increasing steadily for most of the last two years at a steady pace of close of 50,000 additional barrels per day every month, and now has Texas approaching 3 million b/d. The Railroad Commission’s data, which lags by some months, seems to be saying that production is leveling off at around 2.5 million b/d.  While the EIA’s protocol of estimating current production based on past growth may work well during periods of increasing and flat production, it does not do well at catching the start of trend changes.
In North Dakota, where there are now 10,317 producing wells, production has rebounded from the harsh winter weather and production in April was higher than last November. County data shows major increases in new production are now taking place in only one and possibly two counties and that the rate of production increases actually fell slightly between March and April. Despite the optimism, several outside analysts are saying that production in North Dakota will level off and start what is likely to be a rapid decline sometime within the next three years.
The IEA and BP released reports concerning the glowing prospects for US oil production in coming years. The IEA emphasized the growing US role in the oil products market. As we can’t use all the crude ourselves, the US is making money by refining the oil and exporting the products in ever-increasing volumes. A point of interest is that US crude exports to Canada, which are exempt from the export ban, rose in April to the highest level in 15 years, registering a six fold increase in the last two years.  The IMF cut the US’s growth outlook last week, saying that “full employment” won’t be reached for at least another four years.
US natural gas prices fell last week on reports of milder weather ahead and the EIA report that 113 billion cubic feet of natural gas was injected in storage the week before last. Milder weather and increasing natural gas production has allowed the US to move more than 100 billion cubic feet into storage for a record six straight weeks.
2.  The Middle East & North Africa
Iraq: Over the weekend the Sunni insurgents took over several towns in northern and western Iraq in addition to the major oil refinery at Baiji. The government now controls little in the northern and western parts of the country except the giant Haditha dam which contributes 350 MW to the national grid. There is fighting going on in towns north and west of Baghdad. The ISIS insurgents are now so deeply imbedded into the local population that airpower cannot be used without endangering civilians, so the government is counting on tens of thousands of newly armed Shiite militiamen to defend the capital and the southern part of the country.
Where Iraq’s oil production goes in all this is a key question. At the minute all reporting says that production and exports in the south remain normal, despite announcements that foreign oil companies are moving or pulling out “non-essential” personnel. At a minimum, this bodes ill for the anticipated increases in Iraqi oil exports. While the loss of the 300,000 b/d Baiji refinery is being downplayed by the government, it is clearly serious. Most of the oil products for northern Iraq, including Baghdad, came from this facility. The refinery has been closed for several days now and gasoline shortages already are appearing in Mosel, Baghdad, and Kurdistan.  If the government is unable to retake the facility in short order, they may want to bomb it to keep the product from the ISIS insurgents.
There is much optimism that the loss of the Baiji refinery can easily be mitigated by importing oil products from the Gulf Arab states which of course back the Sunni insurgents. Iran really can’t help much since it lacks the refining capacity.  The loss of this refinery is likely to have a major impact in coming weeks as Baghdad scrambles to make up for its loss.
Predicting the future of all this is impossible. For now Iran and the US are sending only a small numbers of advisors to shore up Baghdad’s armed forces. US airpower appears to be of limited value in this situation. Most observers are saying that Iran is unlikely to send in organized military units unless the situation gets worse.
For the next few weeks the issue is what happens to Baghdad and whether thousands of Shiite militia and the sheer size of Baghdad will be enough to keep the insurgents from threatening the government. The Sunni insurgents are currently trying to take predominantly Sunni towns close to Baghdad, including Abu Ghraib which is only seven miles from Baghdad’s airport. Should the airport be threatened or closed and easy access to the outside world cut off, the situation would change markedly and calls for intervention would increase. Beijing says it has already started moving some of its 10,000 citizens working in Iraq to safer places.
Should a siege develop around Baghdad, the Sunni’s have many advantages, including control of the city’s water and likely much of its electricity.  At some point attacks on southern oil and other facilities would be stepped up to deprive the Shiites of their major source of revenue.
Whether Iraqi oil exports can survive all this is now the question of the year. If Baghdad’s 2.5 million b/d of exports are closed down, it would add to the 3.5 million b/d already out of production in Libya, Iran, Sudan, Syria, and Nigeria. There is not enough oil in North Dakota to make up for all this. Beijing, alone, has been importing an extra 1.2 million b/d to add to its strategic reserves in case of shortages.
There are many other facets to the successful Sunni offensive. The Kurds have moved to take over Kirkuk and so far the ISIS is leaving them alone. There is much talk that the Kurds may declare independence. The ISIS now controls the border so it can move men and material freely between the Syrian and Iraqi fronts. It now has control of four division’s worth of US military equipment, including artillery that was abandoned by fleeing Iraqi troops and the aid of experienced Sunni officers left over from the Hussein era. Can Baghdad form a new unity government in the midst of a civil war?
Beyond all this we have the glimmerings of a threat to Gulf Arab states and their oil production. Even though they are supporting the Sunni insurgents against the Iranian-backed Shiites, monarchies have never been particularly popular in extremist circles – Al Qaeda has been after the Saudi government for years.
It is clear that none of this is going away soon and that there will be higher oil prices stemming from this turmoil.
Libya: Some oil is starting to move again. Over the weekend, two tankers holding 1.3 million barrels of oil were loaded after the port’s guards were paid their March and April salaries. They currently are holding off on allowing a third tanker to load until Tripoli pays them for May. The El Feel oilfield is also operating normally and could be producing as much as 80,000 b/d. The oil from this field is likely going for domestic consumption. The 1.3 million barrels which left over the weekend is all that has been exported recently and is a far cry from the 1.6 million b/d that the country is capable of producing.
There is no sign of any political settlement in sight. Last week’s preoccupation was denouncing the US for kidnapping the Libyan citizen allegedly responsible for the Benghazi attack. With no border guards left, the number of people trudging across Libya in hopes of making their way to the EU has doubled in the past year. The Italians say they have already detained some 50,000 who have crossed from North Africa this year.
Iran:  The nuclear talks which resumed last week have become complicated as Iran and the US have the joint goal of trying to keep the Sunnis out of Baghdad. With only a month to go before the July 20th deadline for signing a new treaty, the talks have entered what the NY Times terms the “brinkmanship” phase. Iran says the US must recognize that Iran will always enrich lots of uranium and Washington says Tehran must be willing to prove beyond a doubt that it is not secretly developing nuclear weapons. A first tentative draft of a treaty was said to have been agreed upon last week, but some diplomats are still warning that the remaining gaps are too wide to close.
3.  China
In one of the more interesting developments of the week, China and the UK have agreed to increase their cooperation to control carbon emissions through a China-Britain Working Group on Climate Change. The two countries note that climate change and air pollution, which is Beijing’s main concern, “share many of the same root causes.”
Beijing is finishing work on the world’s biggest nuclear power station some 100 miles from Hong Kong which contains two large state-of-the-art European pressurized water reactors. The plant will produce four times as much power as the average nuclear reactor worldwide. The French, who designed the reactors and are overseeing the construction of the station, are becoming increasingly concerned about the safety aspects of the project and fear that the Chinese nuclear safety authorities are being overwhelmed by the size and pace of construction. Beijing currently has 28 nuclear reactors under construction and has never reported an accident in the 22 years they have operated nuclear plants. Three years ago, China’s State Council Research Office warned that the pace of building nuclear power stations may be too fast.
The new gas pipeline from Russia to China is expected to begin construction this summer. Beijing will make a $25 billion payment to Gazprom as a down payment on the pipeline and Russia will start delivering pipe sections to China soon. The contract is to last 30 years and calls for 1.3 trillion cubic feet of gas to be delivered each year. The price that China will pay for the gas which was the major stumbling block to the deal for ten years has never been announced. This has raised suspicions that the Ukrainian crisis and the possible loss to gas sales to the EU resulted in a political rather than an economic price for the gas.
4. Ukraine
Despite the unilateral ceasefire announced by the Ukrainian government last week, reports of clashes between separatists and government forces continue. The separatists have rejected several offers from the new Ukrainian President to lay down their arms and start peace talks. Russia halted natural gas shipments to Ukraine last week for failure to pay the prices demanded by Moscow, but gas transiting the country on the way to Europe seems to be flowing.
Moscow welcomed the unilateral ceasefire, but rejected the broader peace plan as not having enough specifics about the nature of the peace talks and how much autonomy Kyiv would grant the Russian speaking east Ukrainians. NATO announced last week that it had detected a new buildup of military forces along the Russian-Ukrainian border and Moscow announced it was holding military exercises in the Urals.
As neither Russia nor the West wants to endanger the mutually beneficial oil and gas sales, the sanctions being imposed on Russia and its friends are largely meaningless. This could go on for a long time. The Ukrainians have enough gas in storage to last through the summer, but next winter is another matter.
The heart of the issue is the fear in Moscow that, given their druthers, most Ukrainians would leave Moscow’s orbit and ally with the EU or even NATO – a major blow to Russia’s self-image. For now the dispute is getting lost in the much more serious Iraqi problem.
5.  Quote of the Week

            -- Jim Hansen, KMS Financial  
6.  The Briefs


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