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Peak Oil Review - July 9, 2007

1. Crude and Gasoline
2. Report of the National Petroleum Council
3. A World Energy Crisis
4. Venezuela — The Aftermath of Orinoco
5. Energy Briefs

1. Crude and gasoline

Brent Crude surged to an 11-month high above $76 a barrel on Friday. That’s close to the all-time record of $78.65 set last August and has led to talk of $80 or more oil before the summer is out. There does not seem to be a single major factor behind the increasing prices. US commercial crude stockpiles grew to a 9-year high last week. Refiners still are having trouble getting their utilization above 90 percent of capacity --- 5 percent below the 5-year average at this time of year. Most analysts cite more trouble in Nigeria, summer maintenance in the North Sea and a general drop in stockpiles outside of the US as reasons behind the increase. Many suggest the price surge is mainly technical, triggered by prices crossing the $70 threshold.

The immediate prospects for US gasoline supplies are unclear. Problems continue to plague the aging and overworked US refineries and last week there were additional reports of unscheduled outages. The EIA, however, tells us that so long as we can keep importing at least 1.2 million b/d of gasoline and blending components we should be able to get through the summer. Demand remains about 1.2 percent above last year despite numerous surveys in which Americans claim to be cutting back on discretionary driving. Retail gasoline prices, which have fallen by an average of more than 32 cents a gallon since late May, are likely to begin rising again in response to last week’s surge in both crude and wholesale gasoline prices.

2. Report of the National Petroleum Council

Nearly two years ago, Energy Secretary Bodman asked the National Petroleum Council, a group of senior oil company executives set up by President Truman in 1946, to study the concept of peak oil and prospects for oil and gas production through 2030. Last week the Council announced it will release the report on Wednesday July 18th.

In its press release, the Council claims “the report takes an integrated view of supply, demand, infrastructure, technology, and geopolitics, offering a comprehensive review of public and aggregated proprietary energy outlooks. Featuring in-depth analyses of technology trends and opportunities, the report offers policy options viewed through economic, security, and environmental perspectives. More than 350 expert participants from diverse backgrounds and organizations participated in its preparation.”

As is normal in these situations, a copy or summary of the report was passed to a friendly journalist, in this case Reuters, in order to add to the pre-release hype. The Reuters story gives us an idea what is coming next week.

In a draft cover letter to Bodman outlining its findings, the Council says, "The world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically." Those risks include "political hurdles, infrastructure requirements and availability of trained work force." “The group calls for "a new assessment of the global oil and natural gas endowment and resources to provide more current data for the continuing debate."

3. A world energy crisis

In recent weeks, there have been an increasing number of reports concerning serious electricity and gasoline shortages in no less than 24 countries around the world. In many cases, the leaders of these countries have announced that the situation is critical while at the same time offering assurances that they have plans to improve the situation shortly.

In about half the countries, the problem is simply not enough electricity capacity to meet growing demand sparked in part by rising world temperatures. In many cases, urban population is increasing so fast that investment in new infrastructure is not keeping up. In those countries which depend on hydro dams for a significant portion of their electricity, droughts have lowered water levels to the point where generators are being shut down. Countries that use oil for thermal or diesel power generation are finding their customers simply can’t afford electricity from $70 oil. Finally, in a few places such as Iraq and Nigeria, insurgents keep blowing up fuel lines to the generating stations. Rolling blackouts ranging from a few hours to most of the day are becoming far more common around the world than most of us realize.

Incidences of oil and gasoline shortages are becoming more common too. Nepal is completely out of retail gasoline and diesel as they can’t afford to pay India for their imports. A few weeks ago, Gambia nearly shut off all electricity production as the country could no longer afford the fuel. This list of woes goes on and on.

For most, there is little prospect that the situation will improve in the foreseeable future. Blackouts will grow longer and more widespread. Gasoline shortages will increase and supplies increasingly will be sold at black market prices.

4. Venezuela – the aftermath of Orinoco

Just before Conoco and Exxon pulled the plug on their heavy oil projects in Venezuela's Orinoco River basin, President Chavez declared "They can leave. They won't be missed."

Although four major oil firms — Chevron, BP, Total of France and Statoil of Norway — opted to stay on as junior partners, Venezuela now has an average 78 percent stake in the four Orinoco projects. Chavez has offered stakes in the projects to firms from Argentina, Belarus, Brazil, China, India, Iran, Norway, Spain, Russia, Uruguay and Vietnam, but the Chinese seem to be the only ones in sight with the capital to participate.

Chavez has announced plans to expand Venezuela’s declining production oil production to 5.8 million b/d and to double Orinoco production to 1.2 million b/d in the next five years.

Many are skeptical. Unlike Conoco and Exxon, none of the state-owned companies in the Orinoco basin have much experience producing heavy oil, which requires more technical know-how than conventional petroleum. That's a key factor because experts believe breakthroughs soon could lead to higher recovery rates for heavy oil as only about 10 to 15 percent of the oil in the Orinoco can be recovered using current technology.

The key issue at the minute seems to be whether the Chinese are willing to step in with a major effort in both investment and developing the heavy oil expertise to help Chavez arrest the decline in his oil industry.

5. Energy Briefs 

  • Followers of Shiite cleric Moqtada al-Sadr have joined a growing chorus of Sunni, Kurdish and Shiite opposition to a draft oil law approved by Iraq's cabinet and backed by Washington. Sadr's supporters said they would not support any law that would allow firms "whose governments are occupying Iraq" to sign Iraqi oil deals.
  • Iran announced that it will stop producing purely gasoline-driven cars and produce more dual-fuel vehicles, which also run on natural gas. Last year, some 1,150,000 vehicles were manufactured in Iran.
  • China's coal output rose 7.1 percent on year in the first half of 2007 to 1.1 billion metric tons. The growth is slower than the year-over-year 12.8 percent , mainly due to the government's closure of small illegal coal mines and an increase in coal imports.
  • A World Bank report, produced in co-operation with the Chinese government, found that 750,000 people die prematurely in China each year, mainly from air pollution in large cities. Beijing censored large parts of the report because of concerns that findings on premature deaths could provoke “social unrest”.
  • Iranian Oil Minister Hamaneh admitted that international sanctions imposed over its controversial nuclear program were harming its ability to invest in oil infrastructure.
  • Militant gunmen attacked an oil drilling rig and kidnapped five expatriates in the Niger Delta early on Wednesday. This came as the rebel Movement for the Emancipation of the Niger Delta (MEND), responsible for most of the attacks that have crippled the Nigerian oil industry, called off a one-month truce.
  • After days of shortages in Nepal, the state-owned petroleum importer and distributor finally reached the minimum mandatory level of fuel stocks and stopped delivering supplies to gas stations.
  • Scattered fuel shortages continued in North Dakota last week as wholesalers and retailers scrambled to find gasoline. Petroleum marketers say refinery slowdowns in the region are forcing truckers to wait longer at pipeline terminals to get fuel.
  • ConocoPhillips said last week its global production likely fell in the second quarter from the first three months of 2007, but it benefited from higher crude oil and natural gas prices for the period.
  • The decline in UK North Sea oil and gas production continued in April with output falling to 2.8 million boe/d. The underlying year-over-year decline rate was 7.8 percent.
  • Russia’s crude exports fell 6.9 percent in June as higher export duties encouraged oil companies to refine more crude domestically.
  • Saudi Arabia says it is on track to complete in December the Khursaniyah project to bring online around 500,000 barrels per day of light crude. Some western experts are skeptical that the Saudis will be able to get so much production out of an older field.
  • Russia's parliament voted to allow Gazprom and the state oil pipeline company Transneft to employ and arm private security units. Russia's interior ministry will supply Gazprom with guns from its own armory. Supporters of the plan say that Russia's oil and gas installations have to be protected from terrorist attack at all cost.
  • Russia announced that it has territorial rights to a significant chunk of Arctic seabed, and is seeking UN approval to develop it for oil, gas, and mining potential. The claim centers on the 1,220-mile long underwater Lomonosov Ridge, which joins Siberia to Canada. According to Russian media, the ridge is technically a part of Russia, and therefore open to exploitation.
  • Australia admitted for the first time that securing oil supply is a key factor behind its involvement in the Iraq war. Defense Minister Brendan Nelson said a review of Australia's defense strategy that maintaining "resource security" in the Middle East was a priority.
  • Argentina has admitted that the energy sector is in trouble. For the first time, President Kirchner used the word “crisis” to describe the severe shortages that have forced the government to ration natural gas for factories to guarantee energy for heating homes.
  • ExxonMobil pumped just 3 percent of the world’s oil last week while national oil companies produced the bulk of the world’s supply.
  • An article in the Oil & Gas Journal questions the press release from IHS energy consultants last April claiming that there may be 100 billion barrels of oil under Iraq’s western desert. The story points to a 2004 study which concluded reserves in the region may only be 500 million barrels at the 95 percent confidence level.

Quote of the Week

“If you want to buy petrol illegally from the black market you have to pay seven times the price. “ — Iranian motorist

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