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Peak Oil Review - Sept 3, 2007

1. Production and Prices
2. Iraq
3. Kazahkstan
4. Energy Briefs 

1. Production and Prices

For another week fears of a credit-crisis induced recession competed with falling stockpiles and the threat of a hurricane getting into the Gulf oil fields to keep oil prices volatile. By the end of the week, however, Wall Street seemed satisfied that the Federal Reserve could and would save us from a recession so hurricanes and stockpiles took over to drive oil prices to $74.

The weekly US stocks report showed crude inventories slipped by 3.5 million barrels and gasoline inventories by 3.6 million. At 192.6 mmb, US gasoline inventories are well below normal and the decline was greater than analysts expected. The US gasoline delivery system requires a “minimum operating level” of gasoline (in transit fuel not available for delivery to gas stations) that is probably something on the order of 180 mmb. In some parts of the country, local gasoline inventories contain only a few days of reserves should supply disruptions occur. The EIA reports that the gasoline stockpile deficit is particularly severe in the Midwest.

Hurricane Felix seems headed for a Belize/Yucatan replay. It may slow oil and gasoline shipments from Venezuela, the Caribbean refineries, and perhaps the Mexico oil fields again. A third storm which may head in a more northerly direction currently is forming in the Atlantic. Coupled with the stockpile situation, growing US demand and refinery outages, this year’s hurricane season poses an unusually serious threat. Supply problems in the upper Midwest have already led to spot shortages in North and South Dakota, Nebraska, Iowa, and Minnesota.

Over in Europe, OPEC and the IEA continue to exchange words about the supply situation this winter. Senior OPEC officials profess deep concerns that the credit crisis will lead to a recession and less demand for oil. The IEA continues to argue that shortages will develop this winter unless OPEC increases production at their September meeting. At the minute, chances for an increase do not seem good.

2. Iraq

Last week, a Nevada Congressman returned from an August trip to Iraq where he was told by unnamed officials that a premature US troop withdrawal would result in $9 a gallon gasoline in the US. The Congressman says he was told that without US forces, there would be genocide, a resurgence of al Qaeda, and Iran would take over the region. Fighting between Kurdish guerrillas and the Iranian forces continues with the Iranians shelling villages in Kurdish Iraq.

Last week British forces completed their withdrawal from the oil port of Basra, effectively leaving key facilities in the hands of Moqtada Al Sadr’s Mahdi Army which is fighting for control of the port with other Shiite groups. Iranian President Ahmadinejad helpfully declared that US political influence in Iraq is "collapsing rapidly" and that his government is ready to help fill any power vacuum “with the help of neighbors and regional friends like Saudi Arabia, and with the help of the Iraqi nation."

With General Petraeus’ report to Congress due this month, the situation seems to be coming to a head. A recent GAO report notes that it will require $50 billion and many years of stability to get Iraq’s oil and electricity industry up to 6 million b/d. This is after the US $4 billion already has been spent on restoration. Given the proximity of the US federal elections and the growing distaste for the war, some sort of US force reduction seems likely in the next year.

So far Iraqi oil production is tottering along at about 1.5-2 million barrels per day and unless the British withdrawal from Basra results in increased fighting there, this level of production seems sustainable and agreeable to all parties concerned in the short term. As the revenue from oil sales amounts to 90 percent of Iraq’s foreign earnings, all sides seem to fear the consequences of a complete production shutoff.

The Saudis seem to be increasingly concerned about the course of events in Iraq. Last week they announced an increase in their oil infrastructure protection force from 5,000 to 35,000 men.

3. Kazakhstan

In November 1997 a group of Western oil companies signed an agreement with the Kazakh government to develop the northern Caspian Sea. By 2000, exploratory drilling had determined that the Kashagan oil field was the largest discovered in 30 years and might be capable of producing 1.5 million b/d. Exploiting Kashagan oil turned out to be major technical challenge as the oil was 12,000 feet below the shallow seabed under 500 atmospheres of pressure, contains large amounts of deadly hydrogen sulfide and is frozen solid five months a year.

These technical problems coupled with disputes among the consortium partners resulted in delays and cost overruns that eventually became unacceptable to the host government. Startup of production was pushed back from 2005 to 2010 and costs for the initial phase increased from $10 billion to $19 billion.

Last week the Kazakh government, which had been counting on revenues starting in 2008, called a halt to the project by revoking the environmental permit. Accusing the consortium of numerous environmental, and fire and safety violations, the government is also threatening criminal charges for customs violations.

During initial talks with the oil companies, the government demanded $10’s of billions in compensation for the delays and possibly the replacement of Italy’s ENI with a local company as the lead contractor.

Negotiations are likely to drag on for some time, thereby pushing off Kashagan’s 1.5 million b/d of production to some unknown year in the future. Given the unprecedented technical difficulties of the project, it is unlikely anyone other than a consortium of the major western oil companies could muster the resources and technical knowledge to increase progress much faster.

Those who were hoping that near-term production from Kashagan would offset depletion elsewhere in the world are bound to be disappointed.

4. Energy Briefs

  • Nobuo Tanaka of Japan took over as executive director of IEA from Claude Mandil of France. Tanaka meets with the head of OPEC on Wednesday, less than a week before OPEC meets to review oil output policy.
  • The US Geological Survey now says the northeastern shore of Greenland might provide significantly less oil than previously estimated -- 9 billion barrels, down from the 2000 estimate of 47 billion barrels. The USGS said there is no current technology for exploring or developing oil and gas accumulations under sea ice such as those thought to lie in reservoirs in northeastern Greenland.
  • Record global oil and gas profits of $243 billion and record spending of $401 billion have resulted in a marginal 1% increase in world oil reserves last year -- all of it coming from a 1.9-billion-barrel addition from Canada's oilsands, according to a new study by John S. Herold Inc.
  • China is building an average of two coal-fired power stations a week, and in six years has doubled its annual coal production. India will construct more than 100 coal-fired plants over the next decade.
  • Crude output dropped in July at Mexico's Cantarell offshore field. Cantarell, closely watched by the oil industry after sharp dips in output in recent months, produced an average of 1.526 million barrels per day versus 1.570 million bpd in June.
  • According to the Global Wind Energy Council, the U.S. ranks third in installed wind capacity, measured in megawatts, behind Germany and Spain. Oil-rich Texas has the most installed capacity by state.
  • OPEC Secretary General Salem el-Badri said Angola will not be given a quota for oil production this year.
  • In Argentina’s court rooms, heat is being applied by the government against Shell. Government leaders accuse Shell of withholding supply and driving up prices. Shell counters that it is exceeding government requirements to increase supply by roughly 7%. ExxonMobil is seeking to sell its Argentine unit Esso.
  • Global oil majors such as ExxonMobil, Royal Dutch Shell and Chevron Corp. are ready to pour billions of dollars into India’s energy sector, but only if the government allows private industry to sell natural gas at market prices.
  • Iraq’s Deputy Oil Minister who was kidnapped two weeks ago in Baghdad was released in "good health".
  • The President of Tajikistan warned the country “to seriously and in advance” prepare for major disruptions in energy supply during the coming winter. One of the major causes was a major decrease in water runoff to run hydroelectric plants.
  • A fuel shortage in Burundi has led to rationing and doubling of prices. The shortage follows an order by the Burundi general prosecutor to impound trucks and fuel tankers belonging to Interpetrol Company and freeze all the company’s bank accounts in Burundi.
  • The Nigerian government plans to restructure its Energy Ministry and the Nigerian National Petroleum Corporation into five agencies. The creation of the new institutional structures is aimed at creating operational autonomy and minimizing undue interference.
  • According to Nigerian elder statesman, Chief Albert Horsfall, the violence in Port Harcourt will not end soon as cults and militias permeate every level of government in Rivers State. From the most senior politician down to the local government chairmen, politicians control some cult members for their own protection or advancing their political cause.
  • South Africa’s Defense Minister said that more US soldiers are not welcome in Africa. He added that any country that allowed itself to be a base for the US strategic command in Africa (Africom) would have to live with the consequences and that this was also the "continental position" of the African Union.
  • OPEC oil exports, excluding Angola, will jump 580,000 barrels per day (bpd) in the four weeks to September 15. Oil Movements estimated OPEC 11 seaborne exports would rise to 24.21 million bpd, compared with 23.63 million bpd in the four weeks to August 18.
  • OPTI Canada and Nexen raised cost estimates for the first phase of their Long Lake, Alberta oil sands project to C$5.83 billion-C$6.1 billion, as labor shortages pushed the project's start up into 2008. This represents a 10%-15% increase over the previous C$5.3 billion estimate, itself a C$400 million hike made just four months ago.
  • Valero, the largest U.S. refiner, may sell plants in Aruba and as many as four states to tighten its focus on processing cheap grades of oil that yield the industry's widest profit margins. The most likely U.S. plants to be sold are in New Jersey, Oklahoma, Louisiana and Tennessee.
  • A recent increase in fuel prices that sparked a series of protests in Myanmar was triggered by spiraling global oil prices and was not a political move. Myanmar could no longer afford to subsidize fuel so heavily because of the steep increases in oil prices worldwide.
  • Chevron Corp.'s early termination of a contract for a drilling rig in Nigeria has depressed shares of the offshore-drillers. Shallow-water rigs have been commanding ever-higher prices in every region except the U.S. Gulf of Mexico. But with new rigs poised to flood the market, most analysts see an end to the boom times in 2008 or 2009.
  • Venezuela will import natural gas through a new pipeline from Columbia. Venezuela needs to import natural gas despite its own huge reserves because it lacks infrastructure and sufficient investment in natural gas output.
  • Plans to bring nuclear power to northern Alberta were unveiled last week, but who'll be using most of the megawatts remained a mystery. The company said that 70 per cent of the 2,200 megawatts of electricity will be going to "one large, industrial off-taker"—presumably in the oil sands sector—but declined to name names.
  • Companies are snapping up drilling rights in the Gulf of Mexico on a scale not seen since the late '90s. The new oil rush has as much to do with the lack of options elsewhere as the size of undiscovered reserves.

Quote of the Week

"Predicting peak oil is almost like predicting peak technology — an exercise, in other words, that to him seems inherently small-minded. Even absurd.”
       — Paul Siegle, Chevron vice president for deepwater exploration

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