Peak Oil Review – July 16, 2007

1. Crude Oil and Gasoline
2. The IEA’s Medium Term Oil Market Report
3. Mexico
4. Energy Briefs 

1. Crude and gasoline

Brent crude touched an 11-month high of $77.68 on Friday — a dollar short of last August’s $78.65 all-time record. Oil has gained more than $6 in the last two weeks on a wave of buying by funds. There are a number of factors contributing to the higher prices including: an IEA projection that supplies will be tighter in the second half of the year; partial closure of a pipeline bringing North Sea gas and oil to shore; high levels of demand for gasoline in the US this summer; maintenance shutdowns on Norwegian platforms; and the possibility that a hurricane could damage Gulf oil production next month.

Last week’s US stockpiles report contains a mixed picture of what might affect the rest of the summer. Demand for gasoline was reported as hitting 9.63 million b/d which is just short of the July 2005 all-time high when 9.72 million b/d were consumed. Thanks to an average of 1.4 million b/d of gasoline imports, US gasoline inventories rose by 1.2 million barrels during the week ending July 6th. Gasoline inventories have increased in 9 out of the last 10 weeks, thereby easing fears that gasoline shortages will develop later this summer despite the consumption levels.

In Sioux Falls, Iowa, however, gasoline prices climbed to an average of $3.27 per gallon on Friday – up about 25 cents in two weeks. The July 1 shutdown of an oil refinery in Coffeyville, Kansas – caused by flooding – and the closing this week of a key piece of oil processing equipment at the BP Whiting, Indiana refinery are to blame.

2. The IEA’s Medium Term Oil Market Report

The surprise of the week came last Monday when the International Energy Agency (IEA) in Paris released its Medium Term Oil Market Report. For the first time, this normally mundane projection began with an ominous sentence, “Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2112.”

The IEA starts with the assumption that the world’s economy will grow at an annual rate of 4.5 percent and that demand for oil will grow by 2.2 percent each year until 2012. Demand for oil will increase from the current 86.1 million b/d to 95.8 million b/d. Most of this increase in demand will be coming from Asia. This, as critics and the IEA itself have already pointed out, assumes that higher oil prices do not trigger a worldwide economic recession, or worse, thereby significantly cutting demand.

When the IEA looked around at just where this 9 million b/d increase is going to come from, and recognizing that worldwide depletion from existing fields is running at an annual rate of 3 million b/d, the agency acknowledged that the numbers simply don’t add up. First the IEA correctly noted that an insurgency in Iraq and rampant nationalism in Iran and Venezuela suggest that there will be little if any increase in production from these countries in the next five years. Increases in Nigerian production will have to come from offshore fields as the IEA sees little chance that shut-in production will be restored soon.

The IEA foresees non-OPEC supplies increasing during the forecast period to 52.56 million b/d from 49.98 million b/d today, with the growth rate diminishing after 2009. The Agency also sees natural gas liquid production, which is not subject to OPEC quotas, increasing from 4.86 million b/d to 7.08.

To close the demand/supply gap by 2012 IEA forecasts these increases by OPEC states will be needed: Saudi Arabia, 1.77 million b/d to 12.57 million b/d in 2012; the United Arab Emirates, 500,000 b/d to 3.38 million b/d; Angola, 500,000 b/d to 2.17 million b/d; Kuwait, 420,000 b/d to 3.06 million b/d; Nigeria, 370,000 b/d to 2.84 million b/d; Qatar, 210,000 b/d to 1.16 million b/d, Algeria, 190,000 b/d to 1.56 million b/d; and Libya, 170,000 b/d to 1.92 million b/d. This is a tall order.

Although getting close, the IEA is not yet ready to say that world oil production will peak soon, perhaps plateau, and then decline. For now the Agency will say that non-OPEC “conventional crude” may have reached a plateau, not a peak. They are clinging to the notion that there is still growth potential in “non-conventional” resources and perhaps in the unexplored parts of Iraq and Saudi Arabia.

The Agency, however, clearly recognizes that there are serious impediments in the way of increasing production as easily as in the past. New supplies from deepwater and arctic fields are becoming harder to develop, posing greater technological challenges and requiring higher levels of investment.

3. Mexico

Officials from Pemex said an explosion Tuesday and two more later in the week shut down different sections of a 36-inch pipeline carrying natural gas from central Mexico City to Guadalajara. The group claiming responsibility for the pipeline attacks is the “military zone command of the People’s Revolutionary Army,” or EPR, a tiny rebel group that staged several armed attacks on government and police installations in southern Mexico in the 1990s.

While some US analysts downplayed the significance of the attacks, the lack of natural gas forced some 1200 factories to shut down or reduce production and caused $10s of millions in lost revenue. Among the factories losing production were those belonging to Honda, Nissan, Kellogg and Hershey. By the end of week the pipelines were repaired and production is expected to return to normal this week. The rebels vowed to carry out further attacks on Mexico’s 14,000 km of pipelines.

4. Energy Briefs

• The 10 members of OPEC bound by the group’s crude oil output agreements boosted production by 40,000 b/d to 26.6 million b/d in June. Small increases from Angola, Iran, Nigeria and the UAE were almost completely offset by declines totaling 70,000 b/d from Iraq, Indonesia and Venezuela. Saudi Arabia told two of its Japanese crude oil buyers it will continue to ship about 10% less crude oil than called for in August, largely unchanged from July.
• Iran asked Japanese refiners to pay for all crude oil purchases in yen, after Iran’s central bank said it is reducing its dollar holdings. Russia has been examining plans to price the Urals oil export blend in rubles to curb currency risks.
• Iran and Turkey signed a preliminary agreement to pump Iranian gas to Europe via Turkey. According to the Iranian oil minister the agreement will open a new export market for Iran’s massive reserves of natural gas.
• China’s crude oil imports jumped 20 percent in June from a year earlier as production from domestic fields failed to keep pace with energy demand. Imports climbed to 3.45 million b/d. First-half imports are up 11 percent over last year.
• South Korea’s imports in May jumped 14.7% from April to 2.5 million b/d.
• A Russian company will start drilling for oil along the Namibian coastline by October next year, following intensive geological and seismic surveys.
• Gazprom and Total SA signed an agreement under which the French company will take a 25% stake in a joint venture to operate the giant Schtokman field in the Barents Sea. Lying more than 500 km off Russia’s north coast, foreign expertise has been seen as crucial in developing Shtokman as it is beset with technical problems such as the threat of icebergs.
• Last weekend the Central Bank of Nigeria said revenue from crude oil sales declined by 20.5 percent. The bank said this drop was caused by the protracted Niger-Delta crisis.
• European homes and business have continued to use more electricity in recent years, despite efforts to reduce energy consumption, according to an EU report released Friday. Household electricity use rose by 10.8 percent between 1999 and 2004.
• Iran’s oil production capacity will fall by 5 percent a year without new investment, a senior oil official was quoted as saying Sunday by the Iran’s student news agency ISNA. Iranian officials have previously put production capacity at a little more than 4 million barrels per day (bpd), with actual output – limited to a quota set by the oil cartel OPEC – running at a little below 4 million bpd.
• Iraq’s oil law, although highly controversial, could turn out to be a “benchmark for reconciliation.” When Iraq’s council of ministers last week suddenly approved the law, critics of various stripes united in opposition, denounced it, vowed to defeat it, even threatened to ensure Parliament can’t take it up. It is seen by some as giving too much to foreign companies.
• A report commissioned in the Netherlands says that wind power will quickly replace nuclear energy as the fossil fuel alternative of choice. The researchers concluded not only will technological advances in the coming years make wind financially competitive but also lack of security costs tied to nuclear energy will further add to the value of wind energy.
• Ecuador is taking measures to increase the country’s production of oil after output from state-run Petroecuador declined 14% during the first half of this year compared with the same period in 2006. Losses are largely attributable to strikes in the country’s Amazonian provinces, a lack of new project development, and clashes about policy between the energy ministry and Petroecuador.
• Nigerian manufacturers are alarmed over “imminent collapse of the textile industry,” saying 30 textile industries will be closed down and 30,000 jobs lost by this week if oil deliveries to their business are not resumed immediately.
• Libya invited international tenders for exploration of its onshore and offshore gas fields covering 28,000 square miles.
• Legendary oil man Boone Pickens of BP Capital told CNBC; “I think you’re going to see $80 a barrel before I’m 80.” Pickens’ 80th birthday is in May 2008.
• Devon Energy will spend $100 million drilling an exploration well 33,000 below the seabed near last year’s Jack 2 discovery in some of the Gulf of Mexico’s deepest waters. “We think there’s about a 65% chance of this being a dry hole, but you’re still willing to take quite a bit of risk when you’re a step away from other wells that have been successful,” said a Devon VP.
• Canada has announced plans to increase its Arctic military presence in an effort to assert sovereignty over the Northwest Passage – a potentially oil-rich region the United States claims is international territory.
• The U.K. Parliament formed a group to study peak oil as British lawmakers face up to the country’s future as an energy importer. The Parliamentary Group held its first meeting June 26, comprised of 32 members of the House of Commons and seven from the House of Lords. It aims to collate predictions for when production may peak and consider the implications for energy policy rather than push a particular view.
• A long-range weather forecasting model predicts that a ridge of high pressure will form over the US east coast by late July. This would create a hurricane steering pattern much like the ones in 2004 and 2005, with increased risk for the Gulf of Mexico and reduced risk for the US East Coast from the Carolinas northward.
• The July 13 issue of the journal Science reports that a team at UC Santa Barbara has created a new “tandem” organic solar cell with 6.5 percent efficiency. . “This is the highest level achieved for solar cells made from organic materials.”

Quote of the Week

“The latest report from the International Energy Agency makes scary reading. You don’t have to be a ‘peak oil’ doom-monger to believe the world faces an energy crunch. Investors, and everyone else for that matter, need to think through the implications of a significantly higher oil price.”
       — Tom Stevenson, The Telegraph (UK)

ASPO-USA will be issuing a special edition of the Peak Oil Review this week. The entire issue will cover our summary response to the NPC’s’s “Facing the Hard Truths about Energy” report being issued this week. Our special issue will go out between late Monday and sometime Wednesday, depending on events.

The NPC will present their report on Wednesday July 18th at 9 a.m. in Salons D&E of the Marriott Hotel at 1331 Pennsylvania Ave. N.W. in Washington D.C. To tune in by webcast, check their website (www.npc.org) for details. The NPC will also be posting their report on-line sometime this week, portions of it possibly as early as today (July 16th).

ASPO-USA is a nonpartisan, proactive effort to encourage prudent energy management, constructive community transformation, and cooperative initiatives during an era of depleting petroleum resources.