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Peak Oil Review -- August 27, 2007

1. Production and Prices
2. China's Economy
3. Russian Exports
4. Energy Briefs

1. Production and prices 

Last week started with concern that hurricane Dean would damage PEMEX production facilities in Campeche Sound. Prior to Dean’s arrival, PEMEX shut down 407 wells, thereby shutting in 2.7 million b/d of oil production and 2.6 billion cubic feet per day of gas production. In the end, crossing the Yucatan peninsula so weakened the hurricane that minimal damage was done to production facilities. PEMEX reported near normal production by week’s end. Closing down the platforms, however, probably resulted in a weekly production loss on the order of 10 million barrels, some of which will show up in US import statistics in the next couple of weeks.

The major surprise of the week was contained in the EIA’s weekly stockpile report. Imports were up by over 900,000 b/d which resulted in a build of US stockpiles of 1.9 million barrels. Gasoline imports, however, fell below a million barrels per day and, coupled with demand running 0.6 percent above last year, resulted in an abnormally large decline of 5.7 million barrels in US gasoline inventories. US gasoline stockpiles, particularly along the east coast, are unusually low, raising the possibility of shortages should a hurricane enter the Gulf.

Oil prices are still torn between the possibilities of inadequate world crude production this winter and/or that the credit crisis will lead to a recession that will cut oil demand. In recent days, the price of oil has been tracking the gloom or optimism of Wall Street. If the stock market goes up, so does oil. If the market goes down, so does oil.

The course of the credit crisis was mixed last week, with Wall Street still hopeful that one of these days the Federal Reserve will cut the interest rate and this coupled with occasional scraps of better economic news will bring the crisis to an end. European bankers are not so sure. Europe’s economic recovery shows signs of losing momentum and last week a senior IMF official said “the market turmoil will undoubtedly dampen economic growth.”

2. China’s economy

Last week China imported its first cargo of gasoline –ever. Although China is a major gasoline exporter – 3.6 million tons so far this year – refiners can earn higher profit margins overseas.

In July, China’s oil imports increased by 39 percent over the previous year. Oil imports have tripled in the last five years as production from domestic fields failed to keep pace with demand. 

Last year 7.2 million cars were sold in China, a rate that is rising by more than 20 percent annually. The government is building a nationwide network of highways. About 15,000 miles, the equivalent of one-third the U.S. interstate system, have been built since 2000, and 30,000 more miles are planned by 2020. In the first half of 2007, sales of cars with engine displacement smaller than 1 liter declined by 28.9 percent over the same period last year while sales of all sedans increased by 25.9 percent, and sales for SUVs rose 39 percent.

After 4 years of 10+ percent growth, China is looking like a country out of control. Inflationary pressures, especially for food, are starting to build and China’s environmental degradation is reaching unprecedented levels. Only 1 percent of China’s population breathes air that is clean by European standards. The water situation is not much better, and death rates from environmental pollution are rising sharply.

The urge to develop and grow wealthy has become so strong in China that it is doubtful that government can control it in the near term. There is simply too much momentum.

From the perspective of world oil consumption, China’s rapid economic expansion and particularly its rapidly growing fleet of cars spells imminent trouble. Nowhere in the world is there enough new oil production in sight to satisfy a demand growing like China’s. Even an economic recession that cuts into demand for Chinese products is unlikely to reduce demand for oil in the short term – the situation in China is simply moving too fast.

Something will have to give - soon.

3. Russian exports

Last week Lukoil, Russia’s second largest oil producer acknowledged that exports to Germany had been reduced by about one-third in July and August. Germany’s economics ministry said the country’s energy supplies were not in danger, as refineries could turn to other oil suppliers to make up shortfalls.

So far, there has been no official explanation for the shortfall. Speculation ranges from a pricing dispute between Lukoil and the Germans, to an orchestrated effort by the Russians to muscle their way into the European oil market.

There may be a simpler explanation. Could the Russians be running short on export capacity? In recent years, Russian oil production has been growing at a much slower pace. Domestic consumption has been growing and exports dropping a bit. In the last few years, Russia has made commitments to supply more oil to China. Taken together, these trends suggest something has got to give and exports to Germany seem an obvious choice.

4. Energy Briefs

  • The Yemeni government's share of the country’s oil output declined by 42% in the first half of this year. Total oil production fell to 20 million barrels in the six months to June 30 from 34.5 million barrels in the year-earlier period
  • Lebanon is on the verge of a blackout within three to four days due to the lack of fuel in most of the power stations. Rationing of electricity consumption began in Beirut and areas in the north and south regions of the country, with suspension periods reaching over 14 hours a day.
  • The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.
  • Cultists killed 20 people in Rivers state, Nigeria leading to imposition of a curfew. Since January, 2006, armed gangs have abducted more than 200 local and foreign oil workers in the Niger Delta. Total SA fired a geologist earlier this month after he refused a job in Nigeria.
  • Saudi Arabia's domestic oil consumption last year grew by 6.2 per cent to 2 million b/d up from 1.89 million b/d in 2005. Analysts attributed the growth to the surge in economic development, especially the decision to set up economic cities, industrial estates and IT parks in different parts of the Kingdom.
  • Chevron's largest U.S. refinery continued production at reduced levels while teams assessed damage caused by a fire last week. There are already reports that crude shipments to the refinery have been diverted elsewhere.
  • Refinery maintenance in Europe next month is expected to shut in about 630,000 barrels of oil a day, double the amount of production that was idle in August. Globally, the number of refineries undergoing scheduled maintenance is expected to increase in September, with around 1.85 million barrels a day off line.
  • Kazakhstan's environment ministry has ordered a halt to all work at the giant Kashagan oil field in the Caspian Sea, which is being developed by an Eni-led consortium, over violations of the country's environmental laws. ENI’s CEO said "friendly negotiations" with the Kazakh government over the Kashagan oil field will begin today.
  • OPEC's newest member Angola is likely to stay free of the group's output constraints so long as oil prices remain strong, giving the country scope to start up several new oilfields in coming months. Under the most optimistic estimates, Angola could reach 3 million bpd by the end of 2010.
  • Japan is forming a program that will allow countries in East Asia to share oil reserves in the event of a disaster. The Ministry of Economy, Trade and Industry believes that an emergency-oil-sharing program in East Asia, where demand for oil continues to soar, will help stabilize oil prices and the region's economies when shortages hit.
  • Venezuela exported to the US an average of 1.31 million b/d of crude oil and byproducts in June, a drop of 202,000 bpd, or 13.2 percent, compared with May.
  • Venezuela’s parliament has given initial approval to reforms proposed by President Chavez, including an end to presidential term limits. The proposals still require a final endorsement by parliament, and must then be put to a referendum.
  • GM may build as many as 60,000 of its Volt electric cars for their inaugural year on the market. Production at that level may allow GM to sell the plug-in Volt for less than $30,000.
  • Myanmar authorities moved swiftly to crush the latest in a series of weeklong protests against fuel price hikes.
  • Global warming will cut China's annual grain harvest by up to 10 percent by 2030, state press reported. China will likely need an extra 10 million hectares (247 million acres) of farmland by 2030, the year that China’s population is expected to peak at 1.5 billion people.
  • U.S. natural gas storage grew last week and is about 13 percent above the five-year average for this time of year. Forecasts for warmer-than-normal early winter temperatures may chill the prospects for a rally in U.S. heating oil and natural gas futures prices.
  • BP said it may be forced to cancel plans to increase the use of Canadian crude at its giant Whiting refinery if it can't appease environmentalists in a way that maintains the project's "viability." The company was recently granted a permit from Indiana to allow for higher wastewater discharge limits as it prepares for the $3.8 billion upgrade project.
  • Alberta's revenues from selling exploration rights have slumped more than 60% so far this year. The drop was caused by low natural gas prices, rising oil sands development costs and weak equity markets.
  • Landowners in north-central Alberta will be voting on a proposal to build Alberta’s first nuclear power plant. Energy Alberta was established in 2005 to bring nuclear technology to the province. The company says it has lined up financing and clients. Environmental groups have expressed concern about the proposed facility saying the nuclear reactors require huge amounts of fresh water and have a serious problem disposing of nuclear waste.
  • A climate-change bill from the House Energy Committee will be a hybrid of ``cap-and-trade'' and new carbon taxes, said Rep. John Dingell, the measure's main sponsor. According to Dingell, the bill, expected next month, would cut greenhouse gas emissions by 60 percent to 80 percent by 2050. The Committee is also proposing a cutoff of mortgage-interest tax deductions for all houses with more than 3,000 square feet.
  • Nicaragua’s U.S. ambassador insisted that the government immediately return a storage terminal seized from Esso, saying the takeover threatens foreign investment and is a ploy to promote Venezuelan petroleum products. A judge embargoed the assets owned by Exxon-Mobil, on Aug. 18, saying the company owed $3 million in taxes, which the company denies.
  • Militant groups have formed a coalition in preparation for another round of kidnapping of foreign workers and bombing of oil installations in the Niger-Delta beginning the first week of September. Their complaint remains that the government and oil companies have failed to meet their demands for development of their areas.
  • A nuclear cooperation pact Iran struck with the International Atomic Energy Agency has "real limitations" a senior U.S. official said on Wednesday. Washington was not impressed by the promise of Iranian transparency -- hailed as a "milestone" by the IAEA.

Quote of the Week

"The question is not for how long we will have crude oil reserves, but for how long output can grow. The significance and explosive nature of the issue is underestimated by politicians and the public. “
       —Daniele Ganser, researcher at Basel University.

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