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Peak Oil Review - December 24th, 2007

1. Production and Prices
2. The Energy Bill
3. Mexico
4. Gazprom
5. Energy Briefs 

1. Production and Prices

Oil prices had a quiet week in front of the holidays. Many traders were said to be in a low risk mode, protecting their annual bonuses, prior to the end of the year. News of the week was highlighted by a Turkish military incursion into northern Iraq, a winter storm in Northeastern US, an unexpected 7.6 million barrels drop in US commercial crude inventories, and a statement by the incoming OPEC President that a production increase in February should not be ruled out.

Public oil production figures are somewhat confused at present. All agree that OPEC increased production substantially in the fall. Most of this increase came from higher Saudi production and Iraqi exports through the usually inoperable northern Iraqi pipeline to Turkey. The UAE had a major oilfield shutdown for maintenance in November which led to expectations of additional OPEC increases when production resumed in December. Oil Movements, a British tanker-tracker firm, now expects that OPEC shipments during December will fall. Earlier reports had Oil Movements saying OPEC production was on the rise.

China’s diesel shortage appears to be continuing and diesel imports continue to climb. A warmer winter is now forecast for most of the US. Last Friday, oil prices jumped $2.25 to close at $93.31 based on a report that US consumer spending had jumped 1.1 percent in November; however bad economic news suggesting tough economic conditions in 2008 continues to accumulate.

2. The Energy Bill

President Bush signed the new energy bill last week which, in addition to raising CAFE standards to an average 35 mpg by 2020, contains provisions for the electrification of transportation; improved standards for appliances and lighting; energy savings in buildings, industry, and public institutions. The bill also contains provisions for increased energy-related R&D and a variety of other initiatives.

Missing from the final bill were provisions to increase taxes on the oil industry and to impose mandatory standards for renewable fuels. These were opposed by the White House and lost narrowly in a Senate vote. The Democrats promise to revisit these subjects next year.

In a related development, the EPA Administrator overruled the unanimous opinion of his legal and technical staff and blocked California's effort to cut greenhouse gases from cars and trucks. California’s emission regulations, which have either been adopted or are nearing adoption by 18 states, would have the effect of overriding the new CAFÉ standards by requiring car makers to produce vehicles considerably more efficient than the newly adopted 35 mpg average. California will take the matter to court.

The energy bill mandates increases in biofuels production to 36 billion gallons by 2022. Corn ethanol production is capped at 15 billion gallons per year starting in 2015; the remainder is expected provided by “advanced biofuels”, the majority of which are expected to be cellulosic biofuels which have not yet been commercially produced. [Ed. note: Congressman Roscoe Bartlett, the country’s most out-spoken elected official on the subject of peak oil, was strongly against the corn ethanol measure. ASPO-USA agrees with him.]

3. Mexico

PEMEX announced last week that Mexico’s production for the first 11 months of this year averaged 3.09 million barrels per day, down 188,000 b/d from the same period last year and from a peak of 3.38 million b/d in 2004. Production in November was 2.9 million b/d and output from the Cantarell oil field dropped to 1.3 million b/d from a high of over 2 million three years ago.

Mexico’s Energy Minister said recently that PEMEX’s average daily production will drop by 1 million barrels to 2.1 million barrels within nine years unless Mexico's Congress changes laws to give the company more independence and allow more private investment in the oil industry. A drop of this magnitude, coupled with increasing domestic consumption, would largely eliminate exports. Oil now accounts for 16 percent of Mexico’s export revenues and provides 40 percent of the Federal budget.

Mexico Oil ProductionLegislators will discuss an energy reform bill in the Congressional session that begins in February. The bill would allow private companies to invest in oil refining and pipelines to free up funds for PEMEX to spend on exploration and production. Under Mexican law PEMEX controls the oil industry from production to refining to selling gasoline to consumers. Mexico has not built a new refinery in 20 years; it has to import 40% of its gasoline from the United States. In November PEMEX’s gasoline imports increased to 382,000 b/d, up 12.8 percent from October, due to refining problems and a growing car fleet.

4. Gazprom

Russia’s natural gas monopoly has been much in the news lately as board chairman Medvedev became the favorite to become Russia’s next President. President Putin is rumored to become Russia’s next Prime Minister, chairman of Gazprom, or both. Political infighting has produced claims that Putin has $40 billion stashed away in Switzerland, a claim he vigorously denies.

Last week, Russia, Kazakhstan and Turkmenistan signed an agreement to build a natural gas pipeline along the Caspian Sea coast. The deal ended months of arguments over the price of gas supplies and reaffirms Russia's monopoly on gas supplies from Central Asia. The agreement will likely disappoint the U.S. and the European Union, which have been lobbying for a rival pipeline to be built under the Caspian Sea, bypassing Russia.

The new pipeline agreement has again raised concerns about whether Gazprom will be able to supply customers in Europe much longer. Developed fields are almost exhausted, and tapping new reserves involves technical difficulties. The 550 billion that Gazprom produces each day is just enough to satisfy its domestic market which means that it must import gas from Central Asia to resell to customers in Europe. Since only the Europeans pay full market rate, Gazprom relies on its export sales for most of its earnings.

The Central Asia countries are beginning to cut natural gas deals with China which has the potential of reducing supplies to Europe.

5. Energy Briefs

  • International Energy Agency and Energy Information Administration figures show that the plateau of global liquids production that began in 2005 recently ended due to a large production increase of 1.4 million b/d in September/October. This production increase has been sustained during October/November.
  • Oil output in Russia increased 2.4% year-on-year in January-October 2007 to 9.86 million barrels per day.
  • A surge in China's diesel imports to new records has put additional strain on global markets toward the peak of winter demand and could last through next summer unless idled "teapot" refiners start up again. Drivers waited in lines up to a half-mile long to buy gasoline in China's mountainous southwest last week.
  • China has agreed to boost crude oil imports from Saudi Arabia by over a third next year, two Beijing-based trading sources said on Monday, helping fuel new refineries in the world's second-biggest consumer.
  • Russia may delay the launch of its first oil pipeline to China for a year to September 2009, Interfax news agency quoted a source as saying on Friday. Plans had called for Transneft to commission the first 600,000-barrel-per-day section of the $11 billion pipeline by the end of next year.
  • The Norwegian Petroleum Directorate said crude oil production on the Norwegian Continental Shelf is declining more rapidly than the oil companies had previously expected.
  • Coal prices in the U.S. have surged 20% in the last three months, due largely to the voracious appetite of China and India for coal to generate electricity and make steel. Rising Asian coal consumption has caused European and South American coal consumers, which have relied heavily on coal from South Africa and Asia, to seek out U.S. coal companies for supply.
  • Saudi security forces have arrested al Qaeda militants suspected of planning attacks in the kingdom during the current Muslim haj pilgrimage.
  • Saudi Arabia plans to establish a sovereign wealth fund that is expected to dwarf Abu Dhabi’s $900bn and become the largest in the world. The new fund will be a formidable rival for other government-owned investment funds in the Middle East and Asia, which are playing an increasingly active role in channeling capital to western companies, particularly financial companies hard hit by the US mortgage meltdown.
  • Iran's largest supplier of gasoline, independent oil trader Vitol, has decided to end its long-running contract to provide the country with the fuel.
  • Ecuador's total October oil production was 15.93 million barrels, down 1% from the year-ago figure of 16.09 million barrels. In 2006 it produced 185 million barrels, a 4% decrease from 193 million barrels in 2005.
  • Argentina announced sweeping new measures to reduce power consumption to head off a crisis in the coming summer months. The key elements involve strict limits on power usage in state-owned buildings and public spaces and a nationwide incentive plan to exchange regular light bulbs for low-usage ones.
  • Pakistan’s strategic diesel stocks—93,000 tons—meant for 21 days of national security requirements, have mostly been consumed due to ‘stress situation’ in the general consumer market. The country’s total diesel stocks on Dec. 17th stood at 129,000, only a six-day supply for normal consumer consumption of 22,300 tons/day.
  • Sri Lanka faces a 400 megawatt energy shortfall in 2008 unless immediate steps are taken to address the problems, the Asian Development Band has warned. The country produced all its power needs from hydro in 1986, but that contribution has dropped to 38% in 2006 as demand soared. Today 58% comes from thermal and 4% from other renewable energy sources.
  • Ghana's president said Saturday that offshore oil reserves discovered in the West African country's waters total 3 billion barrels. British-based oil explorer Tullow Oil PLC announced over the summer that it had had success with a well off the coast of Ghana. It gave no details at the time, saying only that it had discovered "a significant light oil accumulation" and was appraising it.
  • The official start date for the offshore Kashagan field is the third quarter of 2010 from the original 2005 deadline. Kazakh officials claim the total costs of the project have jumped from $57 billion to $136 billion. ExxonMobil Corp. is not opposed to the Kazakh national oil company increasing its equity in the consortium.
  • Imports of crude oil by Japan, the world's largest consumer after the U.S. and China, rose for the second month in November, up 15.6 percent from a year earlier.
  • Stanford researchers have found a way to use silicon nanowires to improve lithium-ion batteries. The new battery could hold 10 times the amount of electricity of existing lithium-ion batteries. The greatly expanded storage capacity could make Li-ion batteries attractive to electric car manufacturers as well as for storing electricity generated by rooftop solar panels.
  • Electrodes created from atom-thick carbon sheets could make solar cells and LCDs without depleting indium resources. Researchers in Germany are testing solar cells with electrodes made from graphene – flat sheets of carbon atoms arranged in a hexagonal structure. When rolled up, this material makes carbon nanotubes.
  • After several delays, BP has started production on its Atlantis platform in the Gulf of Mexico. Plateau production should be reached by the end of 2008.
  • Airbus and Boeing have sold a record number of jetliners this year, but sales could drop significantly in 2008.
  • PG&G has entered into a long-term agreement to purchase power from a two megawatt commercial wave energy converter. This marks the first commercial wave energy power purchasing agreement in the US.
  • Global food prices increased last week. Wheat rose above $10 a bushel for the first time, bolstering prices for other grains and oilseeds and stoking inflation.
  • Venezuela’s oil company PDVSA said it is seeking partners to develop new projects to produce 2 million barrels per day from the Orinoco heavy oil region within five years. Recently nationalized projects in the Orinoco now produce a little more than 600,000 barrels a day.
  • Nigerian gunmen attacked an oil barge, a jetty and a government building on Wednesday, briefly capturing 18 Filipino crew and fighting with troops. Violence has been on the increase for the past month in the Niger Delta, where rebels say they are losing patience with peace talks launched in June by Nigeria's new government.

Quote of the Week

“There is real concern out there about the availability of oil in the world.”
       —US Energy Secretary Bodman following the signing of the comprehensive energy bill

ASPO-USA is a nonpartisan, proactive effort to encourage prudent energy management, constructive community transformation, and cooperative initiatives during an era of depleting petroleum resources.

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