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Peak Oil Review - January 28th, 2008

1. Production and Prices
2. Trouble in China
3. Shell
4. Prospects for Iraqi Production
5. Energy Briefs

1. Production and Prices

For yet another week oil prices rose and fell with the perturbations of the world stock markets. Starting the week in the low $90s, oil prices fell to nearly $86 as traders assessed and reassessed the prospects for a demand-killing recession. By week’s end, hopes that the US “stimulus package” would forestall a recession drove oil prices up to close at $90.71.

The weekly stocks report showed that US refineries are starting to shut down for maintenance in preparation for the summer driving season. As refinery activity fell, crude stocks jumped as did gasoline stocks, aided by an increase in gasoline imports. Distillate stocks fell by 1.3 million barrels, however, due to cold weather in the northern US and reduced imports. The US currently imports about 5-8 percent of its requirements for distillates. Last winter the US was importing 350-400,000 barrels of distillates per day. Last week we imported 242,000 and so far this winter imports appear to be running 100-150,000 b/d lower than last year. US stockpiles are close to the bottom of the normal range and unless this situation stabilizes soon, there will be higher prices and shortages ahead.

OPEC is expected to keep its crude oil production unchanged when the group's 13 members meet in Vienna on Feb. 1.

2. Troubles in China

Calamity after calamity struck China last week as the coldest, snowiest winter in decades left millions without heat and running water. On Sunday 100,000 passengers were stranded on trains and in stations when power cuts halted 136 electric passenger trains. The storms and cold weather have cut deliveries of coal which powers 78 percent of China’s electric production. On Friday, the government halted coal exports and ordered that all available coal be delivered to domestic power plants. Storms felled transmission towers along a major power line from the Three Gorges Dam, disrupting supplies to central China.

As happened with diesel supplies last fall, Beijing’s imposition of coal price controls, coupled with the closing of thousands of mines not in compliance with safety regulations, has exacerbated the problem. The power generation shortfall has reached 70 gigawatts, equal to the production of all of Great Britain. The five biggest electricity producers have shut 90 power stations in northern and central China. Rationing of electricity is reported in one-third of China’s provinces. Shortages are expected to continue, with forecasts of continued cold weather and more snowfall for many regions of central and southern China.

The recalcitrance by power plant managers unwilling to generate at a loss is similar to the nationwide diesel supply crisis last autumn, when refiners under pressure quietly curbed output and forced the government to make an unplanned and unwanted increase in fuel prices. Beijing is battling high inflation and has promised not to raise energy prices in the short-term. The government has a major problem: domestic prices of coal and crude oil rose 14.2 percent and 35 percent on year respectively in December while priced-capped electricity rose by only 2.1 percent. Overall Chinese inflation in 2007 was 7.6 percent.

In the midst of all this turmoil, Beijing announced that economic growth reached a 13 year high of 11.4 percent last year. Oil consumption in December grew to 7.2 million b/d, the highest growth rate for seven months and is expected to remain high in 2008. The current power shortages could easily lead to a sudden increase in fuel imports as managers attempt to compensate for the problems with the national electric grid. If the weather problems persist, China is likely to lose considerable production this winter. Over the remainder of the year oil imports are likely to be determined by how closely China is tied to global economic problems.

3. Shell

Shell’s CEO, Jeroen van der Veer, made headlines last week when in an email to company staff he stated that “Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.”

In face of the declining availability of oil, Shell envisions one of two scenarios. The first is a “Scramble” in which the world’s oil importers engage in a mad dash to secure oil supplies and an increasing use of coal and biofuels. The alternative scenario, “Blue-prints”, envisages a world of political cooperation between governments on efficiency standards and taxes, a convergence of policies on emissions trading, and local initiatives to improve environmental performance of buildings.

Van der Veer joins an increasing list of organizations, newspapers, government officials who are willing to publicly acknowledge the reality of imminent peak oil…without using that wording. With a few notable exceptions, such as ExxonMobil and BP, most major oil companies and the International Energy Agency have at least hinted that serious problems are just ahead.

4. Prospects for Iraqi Production

While visiting the Davos World Economic Forum last week, Iraqi Oil Minister al-Shahristani proudly announced that Baghdad had increased oil production by 400,000 b/d over the last three months, going from 1.9 million b/d to 3.3 million b/d. The minister said all of the increase had been exported and that Iraq would increase production and exports by another 400,000 b/d during 2008. This increase, most of which can be attributed to the opening of the northern export pipeline to Ceyhan, Turkey, has contributed significantly to the recent increase in OPEC production.

This euphoria, however, contrasts with fragmentary press reports on serious troubles in Iraq’s electric and refining industries. The troubles started two weeks ago with reports of fires at two Iraqi refineries. Although the government reported that the damage would be repaired quickly, it appears that supplies of fuel for the Iraqi power plants are way less than necessary and that electricity generation is much worse than normal. Some reports say that power is on for only two hours a day in much of the country.

The power shortages in turn are hurting the oil industry which needs the electricity to run pumps. Much finger pointing between the ministries is taking place. Although the Iraqi government is understandably reticent to announce the true state of affairs, it appears that the northern export pipeline to Turkey has been out of service for much of the last two weeks due either to power shortages or another insurgent attack. Given the history of Iraqi exports over this last five years, the reopening of exports to Turkey will be an anomaly and the prospects for an additional 800,000 b/d of exports during the coming year are not that good.

5. Energy Briefs

(clips from recent Peak Oil News dailies are indicated by date and item #)

  • Crude oil output from Mexico's aging Cantarell offshore field fell to 1.260 million barrels per day in December. It was the field's lowest monthly output last year and a 16 percent drop from December 2006's 1.493 million b/d. Mexico's average 2007 oil production fell 5.3% to 3.08 million barrels a day due to bad weather and declining output. Average export volume slipped to 1.69 million barrels a day, the lowest since 2000. (1/27, #4; 1/22 #14)
  • Mexico's key opposition Institutional Revolutionary Party (PRI) is open to ideas for energy reform, including a constitutional change. The PRI, whose position is crucial in congressional votes, remains firmly opposed to privatizing state oil monopoly Pemex, but would back private-sector alliances if that would bolster flagging reserves. (1/24, #10)
  • U.S. Energy Secretary Bodman repeated his plea last Monday for more oil from top exporter Saudi Arabia, undeterred by OPEC's cautious response to Washington's request so far. (1/22, #4)
  • South Africa will ration electricity and increase prices as a result of the worst-ever power outages that have caused chaos and threaten to choke economic growth. Entire regions of South Africa are dark for up to five hours a day. Neighbors like Botswana and Namibia, which rely heavily on South African energy exports, have also been badly hit. The government is considering emergency measures to compel South African mines to supply the state utility Eskom with more and better coal rather than exporting it. Zambia has said it will no longer share power with Zimbabwe, as electricity problems spread across southern Africa. (1/26, #10; 1/24, #9)
  • Thanks to higher oil prices, OPEC member nations are expected to earn a record $850 billion US this year from their crude exports, about $175 billion more than in 2007. (1/25, #5)
  • ENI’s CEO said that the lengthy negotiations with Kazakhstan over the Kashagan oil field have delayed initial production until 2011. A new managerial consortium consisting of Eni, Shell, Total, and ExxonMobil has been formed to perform operational management of Kashagan. Eni will continue to manage the test phase. (1/26, #7)
  • According to PFC Energy, only 7 percent of the world's oil and gas reserves are in countries that allow international oil companies free rein. Two-thirds are directly in the hands of state companies such as Saudi Aramco and Venezuela's PDVSA. Even if oil prices tumble, interest in West Africa is likely to be sustained by its strategic location between the U.S. and Asian markets, and the low sulfur content of its oil. (1/26, #7)
  • Nigerian crude shipments are expected to drop in March because of maintenance work at the Bonga field and a force majeure at the Forcados terminal. The March loading schedule is for 1.72 million b/d, down 420,000 b/d from the previous month. (1/26, #9)
  • Consumers of petroleum products in western Kenya are paying nearly three times the market price in the wake of extended political turmoil. (1/21 #5)
  • US oil and gas exploration remained active during 2007 as producers drilled a record number of natural gas wells. Domestic drilling held steady near 1,800 working rigs [during 2007], but the Texas rig count jumped sharply, once again led by work in the Barnett shale near Fort Worth. Expectations are for drilling to decline in Canada in 2008 and remain steady or pick up in the US. (1/26, #15)
  • Europe is facing a looming threat of gas shortages as supplies plateau or even drop over the next few years. Some say Russia's gas fields are rapidly being exhausted. There is a real question whether Russia will be able to meet its customers' demands starting around 2010, several experts warn. (1/26, #17)
  • Russia and other major natural gas exporters could announce a cartel similar to OPEC in Moscow in June, a Russian business daily said on Thursday. The founding fathers of the ‘gas OPEC’ would be Russia, Iran, Qatar, Venezuela and Algeria. (1/25, #6)
  • Nuclear reactors across the Southeast US could be forced to throttle back or temporarily shut down later this year because drought is drying up the rivers and lakes that supply power plants with the large amounts of cooling water they need to operate. Of the nation's 104 nuclear reactors, 24 are in areas experiencing the most severe levels of drought. (1/24, #19)
  • Saudi Arabia, the world's biggest oil producer, won't consider abandoning the riyal's peg to the dollar unless the U.S. currency loses almost a third of its value. (1/24, #7)
  • BP’s oil production in Russia, which accounts for a quarter of the UK group’s global output, will not grow for a second consecutive year in 2008. (1/24, #16)
  • A "significant" slowing in the pace of 2008 global economic growth appears inevitable, the International Monetary Fund said last week, also warning that restoring world financial markets was going to be a complex and protracted task. (1/23, #2)
  • Total says it is facing budget problems on a major liquefied natural gas project in Iran and that it is reviewing plans. The Pars LNG, which is to be Iran’s first LNG export terminal, was due to be operational by the start of 2009 but has been pushed back to at least 2011. Iran says it plans to give half of the 40% stake held by Total to potential buyers of the liquefied natural gas, (1/23, #6 1/25 #8)
  • BHP, the world’s biggest mining company, said their coal-mining operations in northeastern Australia may be disrupted for months because of “torrential rains” caused by a monsoonal trough early last week. (1/22, #15)
  • Nigeria has warned oil companies that it wants to complete renegotiation of contracts covering offshore oilfields during the next three months, the first time it has specified a deadline. Nigeria’s goal is to secure a greater share of the profits. Last week, StatoilHydro paid Nigerian tax officials some $800,000 of alleged back taxes at gunpoint. (1/22, #11)
  • A “huge” natural gas field has been found a short distance off Rio de Janeiro’s coastline, according to Petrobras, Brazil’s state-controlled oil company. The company believes the new fields, Jupiter, could match the recently discovered Tupi oil field, though further work is required to establish exact dimensions. (1/22, #13)
  • Defense contractor Raytheon is selling microwave technology to Schlumberger that might someday be a key tool in unlocking oil from the West’s extensive Green River formation shale deposits. (1/22, #18)
  • European coal prices increased as mining companies shut production in South Africa because of power cuts. More than a quarter of Europe's energy coal is shipped from Richards Bay, South Africa. Anglo American, the second-biggest coal producer in the country, stopped five of its nine mines after state utility Eskom Holdings Ltd. said it couldn't guarantee electricity supply. (1/26, #14)

Quote of the Week

“When you’re schlepping around two tons of sand for a barrel of crude, it shows that conventional oil is already well into depletion. Price will ultimately ration demand. People won’t be able to afford to drive.”
      — Jeffrey Rubin, chief economist CIBC World Markets

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