1. Production and Prices
2. Iraq
3. Rumblings from Canada
4. Energy Briefs

1. Production and Prices

The prospects for production and prices of world oil are unusually murky just now. At the fundamental supply and demand level, we have the ongoing dispute between the International Energy Agency, which foresees a substantial increase in demand for oil during the 18 months, and OPEC which says the market is adequately supplied. OPEC either A) does not anticipate a price-increasing rise in demand; B) does foresee an increase in demand but does not believe the resulting price increases will seriously damage the world economy and may even benefit oil exporters who would get more for less; or C) is geologically incapable of making major substantial production increases at this time.

Last week the EIA reported that US crude stockpiles dropped 5.2 million barrels and gasoline inventories dropped by 1.2 million barrels. Currently US imports and production are not keeping up with increasing demand. Even though the end of the driving season is only two weeks away, stockpile declines of this size cannot continue much longer without serious consequences.

At the next level we have the mortgage credit crisis which is looking like a long overdue “re-pricing of assets,” the beginning of a major demand-killing recession, or something in between. Government intervention in the US and Europe may have momentarily arrested stock market declines, but many believe the scope of the crisis will be larger than government intervention can mitigate. It is interesting to note that OPEC has begun to cite the credit crisis as a reason oil production does not have to be increased next month.

Finally we have the beginning of what appears will be an active Atlantic hurricane season. At press time, it looks as if the first major storm will miss the US Gulf oil fields, but may damage Mexican off-shore production and is certain to slow US imports for awhile. If the forecasters are right, the Gulf is likely to be subjected to additional storms during the next two months. Surface temperatures in the Gulf are very high, thus ensuring that any hurricane that happens by is likely to become a large one..

The only thing that can be said about the combination of a tightening supply/demand situation, a potential recession, and large hurricanes is that it is not good.

2. Iraq

The well-planned abduction of Iraq’s Deputy Oil Minister and his top aides last week serves as a reminder how precarious the roughly 2 million barrels a day of Iraqi oil production really is. At the political level no real progress towards a solution for Iraq has been made for months. The Sunnis and Shiites are not cooperating. The Kurds are going their own way. The US Congress is due to receive a report that may well determine the size and duration of the US presence in the country.

Iraqi oil is still flowing because so many are getting a cut of the revenue, but there are indications that relative stability surrounding oil production may be coming to a close. It seems likely that as British forces pull out of Iraq’s oil city of Basra, fighting over control of the exports will explode. While there is talk of US troops being sent south to contain the situation there, many feel that a US presence in the area will only lead to more trouble.

In early September, a summit to consider the future of Iraq’s energy resources will be held in Dubai despite the fact that the basic Iraqi oil law has not yet been passed. All the big players will be there, including BP, Shell, Exxon and Chevron, in hopes of gaining access to Iraqi oil.

Such a meeting, however, seems premature. Any realistic appraisal of the Iraqi situation must conclude that it continues to deteriorate and that many of years of hard fighting and political upheaval are ahead before a political entity strong enough to grant foreign oil companies secure access to Iraq’s oil resources could possibly evolve. A better bet may be that it will never happen.

3. Rumblings from Canada

As the US’s number one source of oil and product imports by a wide margin (2.4 million b/d in May), Washington has a keen interest in the future of Canada’s oil production and her willingness to export it. Most US interest focuses on the Alberta oil sands, because of the benign political environment and billions of barrels of potential reserves albeit in the form of expensive and difficult-to-process tar. While the Alberta sands currently account for about half of Canada’s production, conventional oil production should be slipping into decline again shortly so that the Alberta sands will play an increasing role in Canadian energy production. Some are hoping that production from the sands will increase to 5 million b/d over the next 25 years.

In recent months however, a rising tide of Canadian voices has been expressing concern about the future of the Alberta sands and the policy of exporting so much oil and gas to the US while at the same time importing a million b/d to cover the needs of Eastern Canada.

A constitutional crisis over the environmental mess caused by growing oil sands production may bring the matter to a head in the next few years. In Canada, provinces have considerable control over non-renewable energy resources, while the federal government mandates environmental standards. A bill that gives Alberta a three-year exemption from tougher standards on emissions from oil sands production will likely die in the Parliament to be replaced by one with a stronger stand against emissions. A growing number of factors indicate that the time of uncontrolled growth in oil production from the tar sands may be drawing to a close.

4. Energy Briefs

  • In Nigeria last week, dozens were killed and over 45,000 people displaced during fighting between government forces and armed gangs in the country’s oil capital of Port Harcourt. Troops are patrolling the streets and the senior oil workers union is threatening to pull its members out of the area.
  • Shell has lost $10.6 billion since it shut down some production in February 2006 due to the Niger Delta insurgency.
  • China’s auto sales in the Jan.-July period increased 23.3 percent from a year ago (to 5.11 million units), while output rose 24.7 percent to 5.01 million. The country is on track to raise both its output and sales to a record 8.5 million for the full year.
  • The replacement of Iran’s Oil Minister will likely kill the $7.5 billion Iran-India-Pakistan natural gas pipeline project. The outgoing minister warned that Iran is facing an energy “catastrophe” because of increasing domestic consumption. A senior official hinted the country may start selling gasoline at a higher price in addition to the subsidized amount allocated to drivers under a rationing scheme launched in June.
  • David Walker, Comptroller General of the US, issued the unusually downbeat report which says that the country is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments which threaten a crisis if action is not taken soon.
  • Argentina’s economy probably slowed in June as cold weather and a lack of investment in the energy industry led to rolling blackouts and electricity cuts for companies.
  • The United Arab Emirates will shut around a quarter of its oil output for two to three weeks of planned maintenance at its largest fields from the end of October. The shutdown will cut output from the world’s sixth-largest oil exporter by around 630,000 b/d.
  • India’s dependency on oil imports is likely to increase to about 85 per cent by 2012 from the current level of 70 per cent.
  • Oil production from the Norwegian Shelf in June was the lowest for the month in 15 years. The average daily production reached only 1,866,000 barrels, against 2,604,000 a day in June last year. The twin factors are continued depletion of mature fields plus an unusually high level of maintenance this season.
  • China admitted that the Nanpu oil discovery has only half the reserves announced last May. One of the engineers working at Nanpu said the oil-bearing structures were characterized by a lot of geological faults indicating that the oil is in small, individual pools rather than in a complete field like China’s flagship field, Daqing.
  • India’s largest gas-fired power plant at Dabhol has shut down because of a failure to secure gas supplies.
  • The Abu Dhabi National Energy Company, is preparing to move into Canada in a major way with a $3-4 billion investment in oil and gas producing assets and other energy related activities during the next 12 months.
  • Dutch Crown Prince Willem-Alexander warned against diverting water resources from food production to biofuels, saying Wednesday that feeding people is more important than fueling cars.
  • Venezuela is creating its own oil-field services company to reduce dependence on foreign contractors.
  • Mexican legislators agreed to reduce taxes on Pemex by $5.45 billion a year to free up funds for increasing crude production. Pemex, the third-largest oil supplier to the U.S., has set a goal of maintaining crude-oil production at 3.1 million barrels per day and add proven reserves equivalent to 100 percent of production over the next six years. [Ed. note: consider us skeptical.]
  • Damage to a nuclear power station run by Tokyo Electric Power from the July 16 earthquake “appears less than expected,” the International Atomic Energy Agency said after a three-day examination.
  • Researchers at Rensselaer Polytechnic Institute have developed a new nanocomposite paper energy storage technology that can serve as building blocks for a variety of thin, mechanically flexible energy storage devices. The nanoengineered battery is lightweight, ultra-thin and completely flexible, and can function in temperatures up to 300 degrees Fahrenheit and down to 100 below zero.
  • In China, power consumption nationwide reached 1.5 trillion kilowatt hours during the first half, up 15.56 percent year on year. The growth, 2.67 percentage points higher than the same period last year, was largely attributed to the power consumption of secondary industry.
  • Texas Department of Transportation faces its most severe funding crisis ever. Unless new sources of roadway funding are developed, the state soon will be in a maintenance program rather than a road building program.

Quote of the Week

“As an OPEC member, my most important issue [would be] price, the decline of the U.S. dollar and growing expenses in my country. So I would tend to be very conservative and not have an output increase” [at the September OPEC meeting].
         — Paul Tossetti, director of market analysis, PFC Energy.