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Peak Oil Review - October 29th, 2007

1. Production and Prices
2. Tanker Trackers
3. Alberta
4. The Energy Watch Group
5. Energy Briefs

1. Production and Prices

Early last week oil prices fell below $85 a barrel on concerns about the US economy, a bounce in the dollar, and indications that OPEC had already substantially increased production. All that changed on Wednesday when the US stocks report showed that, contrary to analysts’ expectations of an increase in the US crude stockpile, it actually fell by a rather substantial 5.3 million barrels and gasoline stocks fell by 2 million barrels.

By Friday morning oil had shot up to an all-time high of $92.22 based on fears of shortages this winter and geopolitical concerns after the US accused Iran’s military of supporting terrorism and more oil workers were taken hostage in Nigeria. New lows for the dollar and the expectation that the Federal Reserve will cut interest rates again this week helped with the run-up.

For the next few weeks, the path looks clear to higher oil prices. Many analysts are now saying they see little to stop oil from reaching $100 in the near future. As usual, some are saying we are on a speculative binge and that fundamentals do not support prices this high. A lot seems to hinge on OPEC significantly increasing production in the next few months and whether the credit squeeze morphs into a recession. Goldman Sachs continues to note that during the 3rd quarter, supply was 400,000 b/d less than last year and that demand is expected to increase.

2. Tanker Trackers

Several firms attempt to monitor oil tanker movements in order to get around the secrecy of major oil exporters such as Kuwait and Saudi Arabia that do not routinely make public their production and export data. The issue is of particular importance right now as the world awaits an insight into how much and how quickly OPEC will increase its production in response to a tightening supply/demand situation.

This month the issue is complicated by Abu Dhabi which is planning to shut down some 600,000 b/d of production for maintenance during November, but plans to resume full production the following month. Some believe they increased exports in October in order to fulfill contractual obligations during the maintenance period.

Last week, tanker tracker Petrologistics announced that OPEC minus Iraq and Angola increased production and will ship about 300,000 b/d more during October than they did in September. Saudi production for the month of October was estimated to be 8.95 million b/d, up 150,000 b/d over September. Lloyd’s Marine Intelligence Unit said OPEC exports excluding Angola jumped by 1 million b/d in the first two weeks of October over the last two weeks in September.

A third tanker tracker, the UK’s Oil Movements, also reports that October OPEC shipments are about 300,000 b/d higher than those in September, but sees a dramatic drop in the number of tankers booked for November shipments to “well below the October equivalents.”

Given that tanker trackers sell the information they collect for hefty sums, and only release generalized export information each month, they are still useful for an insight into general trends. If the Oil Movements report reflects the expected drop in the UAE’s November exports, then the key question is whether the 150,000 b/d increase is the Saudi share of OPEC’s 500,000 b/d increase or whether we will see a further increase in November Saudi production.

3. Alberta

Starting in January 2009, the government of Alberta will increase oil and natural gas royalties. The royalty for extraction from the oil sands will increase to as much as nine percent from the current one percent, before companies recover their investment costs. After costs are recovered, royalties will rise to as much as 40 percent from the current 25 percent. Alberta expects to raise an additional $1.4 billion in 2010. Energy companies can deduct royalties from federal taxes, meaning higher rates in Alberta cut off several $100 million in the money paid to Ottawa.

Even though the increases are less than those recommended by a government-commissioned panel last month, the province’s oil industry professed to be furious at the $1.4 billion increase in their costs. Industry spokesmen warned of slowdowns in further developments and threatened that billions of dollars of capital spending cuts costing thousands of jobs were at stake. There were even threats of leaving Alberta altogether. Given the difficulty of finding oil fields open to foreign investment these days, these threats sound hollow.

Outside observers say the increases are fair and reasonable. Compared to other countries where difficult-to-extract oil carries royalties above 60 percent, Alberta was taking a less than 50 percent cut of the revenues.

4. The Energy Watch Group

Last week the German-based Energy Watch Group released a dramatic report saying that world oil production peaked in 2006 and that production will decline at several percent a year. By 2020 they forecast that world production, which the group put at 81 million b/d in 2006, could slide to 58 million b/d by 2020 and to 39 million b/d by 2030.

The report warns that coal, uranium, and other key fossil fuels are also in declining supply. The group predicts the fall in fossil fuel production will bring with it the threat of war, humanitarian disaster, and general social unrest. In contrast to industry estimates that the world has 1.2 trillion barrels left to produce, the group believes the number to be in the vicinity of 850 million barrels.

The Energy Watch study is one of the more pessimistic reports that have been issued to date and is certainly close to a worst-case scenario. Current thinking by many presenters at the recent ASPO conference in Houston foresee two or more years in which production holds relatively steady followed by a more gradual decline.

5. Energy Briefs

  • Concerns are growing that Qatar, the world¹s largest exporter of liquefied natural gas (LNG), may not be able to increase its exports beyond 2011. The government placed a moratorium on further expansion of LNG in 2005 when it became clear that the North Field, Qatar¹s giant offshore gas field, was not as geologically sound as initially assumed.
  • Mexican President Calderón said "Our oil reserves have been consistently falling," and the decline is "severely threatening" government finances. Production of crude has fallen 8 percent since 2004. Pemex said that the company produced 3.06 million barrels a day of crude oil during the third quarter, down 5.9% from a year-ago. Production from Cantarell in September was 1.46 Million b/d, down 130,000 barrels a day from January.
  • Oil production at Canada's Hibernia platform off the coast of Newfoundland has fallen by nearly a fourth since July as the aging field's water production rises, regulatory filings showed on Monday.
  • Russia's oil output will increase 2.6% year-on-year to 3.6 billion bbl in 2007, according to the Russian Industry and Energy Minister.
  • Kazakhstan said it may take as long as 11 years more than planned for the country to see returns from the Kashagan oil field, prompting demands for a greater share of profit from the Eni SpA-led group developing the find.
  • China's apparent oil demand grew at the slowest rate in 20 months in September, up just 0.3 percent from a year earlier. Gas stations in southern China have started rationing diesel as high crude prices coupled with controlled retail prices are causing refiners to limit production.
  • Saudi Aramco will invest as much as $90 billion between 2007 and 2012 to boost crude oil production by almost a third and domestic refining capacity by about 86%, according to a company official.
  • In Senegal, the energy shock is filtering down to the most isolated rural areas, where illiterate parents are worrying about how to put fuel in oil lamps so their children can do their homework.
  • The White House has refused to use the U.S. Strategic Petroleum Reserve to lower oil prices, out of concerns about meddling with the free market. The role of the emergency stockpile is "to deal with an interruption of supply" like hurricane Katrina and not "to try to manage prices," according to Vice President Cheney. The stockpile now holds 694 million barrels, equal to about 57 days of US petroleum imports.
  • Chevron’s Tahiti oil field in the Gulf of Mexico will begin production by the third quarter of 2009, a 12-month delay from its original start date. Tahiti, which will produce 125,000 barrels a day at its peak, was originally scheduled for a mid-2008 startup. BP is expecting the long-delayed 250,000-barrel-per-day Thunder Horse project in the Gulf to come on stream at the end of 2008.
  • Currently 131 ethanol distilleries are operating in the U.S. with capacity of about 456,000 b/d. New planned construction and expansion could double output in the next three years, according to the U.S. Renewable Fuels Association. A United Nations expert has condemned the growing use of crops to produce biofuels as a replacement for petrol as a crime against humanity.
  • Darfur rebels launched an attack on Sudan's oil fields, kidnapping two foreign workers and giving Chinese and other oil companies a week to leave the country.
  • Case Western Reserve University has just published its May-Aug survey results that attracted over 300 oil experts from around the world. Its conclusion: global agreement on peak oil occurring by 2010.
  • The US policy of using corn ethanol to increase energy self-sufficiency will do little but drive food prices skywards, according to a new report from CIBC World Markets.
  • Russia’s Lukoil announced that the joint development of the Anaran oil block in western Iran has been suspended because of US sanctions against foreign investment in the Iranian energy sector.
  • Gunmen in speedboats kidnapped six people from an oil vessel off Nigeria's coast at dawn Friday, the second attack on petroleum workers this week. There are reports that 50,000 b/d of production has been shut down as a result of the attack.
  • Nigeria wants to review its contracts with international oil companies as part of a major shake-up in the energy sector, probably imposing tougher conditions to obtain a larger share of soaring global crude prices.
  • The cutoff of Russian oil supplies to Kremenchuk Oil Refinery in the Ukraine's could lead to an artificial shortage of oil, according to the Ukrainian Economics Minister. The refinery produces 40% to 45% of refined products on the Ukrainian domestic market.
  • US Senator John Cornyn, a Texas Republican, said he is blocking the Senate from moving into a formal conference with the House on a broad energy bill, saying he is worried the measure could hurt oil and gas producers.
  • Fierce street clashes between security forces and fighters of the Mahdi army have been reported from Basra, Iraq's oil export port. But the city's chief police official insisted Basra was calm and the security forces were firmly in control.

Quote of the Week

"The question is will there be peak oil? Yes. But will it be the disaster [some people] expect? I don't think it has to be. We have other ways of making fuel."
      — Don Paul, VP Technology, Chevron

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