1. Production and Prices
2. ASPO-USA Houston Conference
3. Shrinking Stockpiles
4. The Kurds and the Pipelines
5. Energy Briefs

1. Production and Prices

Last Friday, oil hit a record $90.07 a barrel before sliding back on profit taking. Oil prices have increased 15 percent since October 8th. The dollar also fell to a record low against a basket of major currencies and the Dow dropped 366 points on concerns about lower earnings, the housing slowdown, tight credit markets and higher oil prices.

Analysts continue to debate the reasons behind oil’s rapid rise. Some focus on possible shortages developing as demand outstrips available supply this winter, while others talk of speculators and hedge funds seeking protection against the declining dollar. Many, however, are forecasting that oil prices will rise well above $100 in the next few months and that US gasoline prices will increase to $3.50 or $4 in the spring.

Short of a rapidly developing world recession, the key to all this uncertainty is likely to be OPEC’s and particularly Saudi Arabia’s ability to increase oil production during the next few months. The organization is on the record as pledging an actual 500,000 b/d production increase next month. So far OPEC spokesman are saying the 500,000 additional b/d is it for awhile; however, OPEC is meeting in Saudi Arabia next month and there will be considerable world-wide pressure for yet another increase in production.

If OPEC is unwilling, or possibly unable, to produce more oil, then it appears world oil production will have reached a major turning point with much higher prices leading to economic damage. Last week, US Energy Secretary Bodman said that the record oil prices are of “great concern” and seem to be related to the amount of supply. Over at the Treasury, Secretary Paulson was warning that the downturn in the mortgage market would burden the economy “for sometime to come.”

2. ASPO-USA Houston Conference

Over 525 people attended this year’s conference, a record for what was already the world’s largest annual conference on peak oil. Some 60 speakers addressed attendees who came from 18 countries and 35 US states. Attendees included an even mix of corporate senior-level management, academic / NGO, students, and general public. Over 25 members of the accredited press attended including AP, New York Times, Bloomberg News, the Houston Chronicle, World Oil magazine, the Oil & Gas Journal, and many others.

Marshall Adkins (Raymond James Associates) helped start the event by sharing his view that world oil production would probably peak within five years. Tom Petrie (Merrill Lynch – Petrie) stressed that limited access to oil controlled by foreign governments point to the looming reality of “practical peak oil.” Aage Figenschou (Norway; oil shipping industry) noted that over the last four years, the French petroleum institute has been shifting their in-house view of the timing of peak oil from 2020 to 2015 and now “in the direction of 2010.” Matt Simmons (Simmons & Co., Intl), Stuart Staniford (The Oil Drum) and Euan Means (also TOD) expressed varying degrees of skepticism about the ability of Saudi Arabia to meet stated production goals; industry analysts Charles Maxwell and Henry Groppe were modestly more optimistic.

John Darnell (office of U.S. Congressman Roscoe Bartlett) warned that “a teachable moment [about peak oil] may be coming,” and that attendees should ask their elected representatives what contingency plans are in place for responding to it. Author Peter Tertzakian (ARC Financial) asked if peak oil “is an issue of technological engineering or social engineering.” Houston Mayor Bill White referred to oil production as “a race between technology and depletion,” but focused his remarks on public and private sector responses to the peak oil problem. Financial planner James Hansen urged attendees to “get timing out of your heads” and focus on smart responses. Oil and gas database expert Richard Nehring stressed that “rather than looking at [peak oil] as a problem of inadequate supply, we should look at this as a problem of too much consumption.”

PowerPoint presentations for most conference presenters are now posted on ASPO-USA’s website. Sets of DVDs will be available within 6 weeks.

3. Shrinking Stockpiles

Behind the rhetoric about speculators, inadequate refining capacity, and geopolitical threats there lies the fundamental fact that world oil stockpiles have begun to shrink. The IEA reports that during the 3rd quarter, OECD stockpiles fell by 33 million barrels or 360,000 b/d during a quarter when stocks normally increase by 280,000 b/d.

Outside of the US, stockpiles are near the low end of the normal range and there are fears that they will continue to drop to critical levels this winter. Beyond this there is fear that given flat production and high demand from Asia, these stocks will never be replaced.

Last week the US crude stockpile rose by a greater than expected 1.8 million barrels and gasoline stocks rose by 2.8 million barrels. Normally increases of this size would be enough to force down prices at least temporarily. But these are not normal times, so that other factors such as China’s growth, the falling dollar and European stocks are coming to overshadow the US weekly inventories as a key factor in determining oil prices.

4. The Kurds and the Pipelines

Sunday, 12 Turkish soldiers were killed when Kurdish rebels blew up a bridge carrying a military convoy in Southern Turkey. The Turks immediately announced they had killed 23 rebels in a response to the attack. Now that the Turkish Parliament has given the army permission to pursue Kurdish insurgents to their villages and bases in Iraq, further fighting seems likely.

As the US needs the supply line through Turkey to support operations in Iraq, Washington is unlikely to have much public sympathy for the Kurdish rebels it brands terrorists. Given the many cross currents involved in this situation, there are all sorts of possibilities for events to spin out of control leading to unknowable consequences. This is one reason the oil markets are so concerned.

Having few arrows in their quiver, the Kurdish insurgents are already threatening attacks on oil pipelines inside Turkey as a means of getting the West’s attention. The Kirkuk-to-Ceyhan pipeline currently seems to be operational again, but carries little oil and has been out of commission most of the time since the US incursion.

The Baku-Ceyhan pipeline is another matter. Although this pipeline is buried and is located well north of the Iraqi-Turkish border, it is over 1000 miles long, makes 1500 river crossings, and traverses mountain ranges at altitudes of 9,300 feet. There are eight pumping stations along the route. Although the Turks have increased security along the pipeline, a project of this is scope is nearly impossible to defend against a determined enemy.

Currently the line is bringing about 700,000 b/d of crude to the Ceyhan terminal — close to one percent of world production. Should this pipeline be closed for an extended period, there would be a noticeable affect on world prices.

5. Energy Briefs

  • EU nations failed to agree on whether the bloc should apply more sanctions or other measures against Iran beyond the UN sanctions. Tehran’s chief nuclear negotiator has resigned, apparently in disagreement with President Ahmadinejad’s hard line positions. New talks will take place this week.
  • Tehran will need an extra two billion dollars to import petrol after its original budget allocation ran out half way through the year, the ISNA news agency reported. The shortfall comes despite a rationing plan imposed in June that aimed to curb Iran’s massive imports of refined oil products made necessary by its frenzied consumption and lack of refineries.
  • Saboteurs have blown up the pipeline bringing crude oil from Kirkuk oilfields to the Baiji refinery 300 km north of Baghdad. The refinery is the largest in Iraq with a capacity of 350,000 barrels of oil a day. Production there has slumped since the US invasion due to sabotage, lack of maintenance and corruption.
  • A dozen districts in Harare, Zimbabwe’s capital, were without power for the sixth straight day yesterday. The massive outage, the worst in months of power shortages, was caused by a power surge blowing out a main high-voltage cable. Theft of cables and oil from transformers have left engineers – already facing chronic shortages of hard currency for spare parts, equipment and gasoline – battling with mounting breakdowns.
  • Researchers in Norway have developed a theory which can help locate oil and gas deposits. The Golden Zone is the name of an underground zone where temperatures range between 60 and 120 C. The name refers to a new discovery that 90 per cent of the world’s oil and gas reserves are to be found just there. The theory has been tested and verified against a global database containing 120,000 oil fields under production.
  • According to Mohammed al-Zaini, one of Iraq’s best known oil experts, Baghdad’s oil production is not stable and is going to fall in the absence of new investments and overhaul of present producing fields.
  • Yesterday, Nigeria’s MEND insurgents overran a Shell oil platform and abducted 7 workers including an American and a Russian. The attackers, reported as consisting of 300 men in 30 speed boats, simply overpowered the guards. Shell is withdrawing its workers from the area. In claiming responsibility for the attack, the MEND announced that they will be going after Angolan interests in Nigeria.
  • A comprehensive reform of Mexico’s energy sector is unlikely for the next few years. Instead the Congress will look at smaller legal changes that might give state oil monopoly Pemex more freedom to ally itself with foreign state-run companies. Mexico is facing a double problem of declining output and proved reserves that have shrunk to just nine years of supply at today’s rate of production.
  • Several Democrats, including Energy and Natural Resources Committee Chairman Bingaman, urged the Energy Department to suspend deliveries to the Strategic Petroleum Reserve, claiming the additions are making oil price spikes worse.
  • The stock of Schlumberger, the world’s largest oilfield-services provider, fell 11 percent after the CEO announced that projects were delayed in Nigeria and the Caspian region.
  • Renaissance Capital said last week it had cut its Russian oil output forecast for 2007 for a second time this year and saw minimal growth in 2008. Excluding ExxonMobil’s Sakhalin-1 project, daily crude output in Russia has been down year-on-year since May, it said.
  • Retail prices for diesel in the UK have struck a record high and are set to rise further, the Automobile Association said on Thursday. “Diesel prices have been growing faster than petrol due to impending seasonal demand for heating oil in the US.”
  • Iran has given Total and Shell until June 2008 to finalize their contracts for planned liquefied natural gas developments. The deadline cannot be renewed, and there are numerous replacements for Total and Shell to start drilling the South Pars field.
  • Ecuadorian President Correa, inspired by Venezuela, is aggressively attacking foreign oil companies in a gamble that likely will lead to further declines in oil output. Foreign oil companies operating in Ecuador must pay $317 million in oil royalties by Oct. 31 or face sanctions, the country’s state oil company, Petroecuador, warned last week.
  • Consumption of crude oil and petroleum products in Venezuela is rising sharply due to a growing economy, improving standards of living and some of the cheapest gasoline in the world. According to a study by a petroleum economist, consumption in Venezuela of all types of oil products including crude averaged 780,000 b/d in the third quarter of this year.
  • Venezuelan oil output dropped 26,700 b/d and the country lost five rigs last month. Average oil output in the third quarter was 2.37 million b/d, a drop of 135,000 b/d (5.4 percent) compared to the same period in 2006.
  • Increasing Alberta’s oil and gas royalties could threaten at least $15 billion in proposed oil sands pipelines, as producers delay or cancel projects. Last month, a government-appointed panel recommended increasing Alberta’s annual take from oil and gas revenues by a fifth or $2 billion, which sparked a barrage of criticism from energy executives and analysts.
  • During one of the coldest South American winters in decades, Argentina cut at least 90 percent of the natural gas it sends to Chile on 79 different occasions. This forced power plants and factories in Santiago to switch to diesel and fuel oil, which belch more air pollution and have nearly quadrupled the cost of producing electricity. Across South America, concerns about energy are roiling national politics, generating tensions and emerging as one of the biggest brakes to growth.

Quotes of the Week

  • “I think you’ll reach $100 [a barrel] before you go back to $80. It could happen in the 4th quarter, but you’ll see it within a year.”
  • When will we hit peak production? “That’s an easy one. We have already peaked; 85 million barrels is as high as we’re going to go.”
  • ”As this unfolds, you’re going to have to find alternatives that are going to do the job that oil is doing. Everyone is going to have to come to grips with this in the next two or three years. People are going to have to figure it out.”

       — T. Boone Pickens at the ASPO-USA Houston Conference