Peak Oil Review – February 11th, 2008

1. Production and Prices
2. Peak Oil and Food
3. South Africa’s Power Shortage
4. Nigeria
5. Energy Briefs

1. Production and Prices

Oil prices seesawed early last week as Turkish air strikes, fog in the Houston Ship Channel, and a militant raid in Nigeria competed with the overriding fear of a demand-killing recession. By mid-week oil was trading below $87 as bad economic reports sent equity markets lower. On Friday, however, crude rose by more than $3 a barrel on forecasts of colder weather in the US, prospects for reduced oil production in the North Sea and Shell’s announcement that it had halted 130,000 b/d of Nigerian production due to pipeline damage.

Although the next OPEC meeting does not take place until March 5th, rumors and off-the-record statements from insiders abound. Last week’s consensus was that OPEC will cut production only if prices fall below $80-85 per barrel before the meeting.

OPEC announced that its January production (excluding Iraq) had increased by 100,000 b/d to 32.1 million b/d. The Iraqi production situation, particularly the status of its northern export pipeline, remained unclear.

2. Peak Oil and Food

US wheat inventories have now reached a 60-year low and wheat prices have risen by 50 percent in the past month. Global wheat stocks are expected to fall to a 30-year low shortly. With global oil production relatively stagnant as the demand for more oil from Asia and the Middle East continues to grow, biofuels production has been plugging some of the gap.

Food and energy are converging so that to a considerable extent they can be used interchangeably as dictated by market forces. In the last six years, land for biofuels has increased from 12 to 80 million hectares worldwide as subsidies and national policies mandating their use are driving the biofuels substitution for oil. The US is offering subsidies of $.50 to $1 per gallon and the EU is attempting to reach a 10 percent biofuels target in the next three years.

Many knowledgeable observers are worried and are predicting that famines will break out in the underdeveloped world during the next 18 to 24 months, due to declining availability of grains for export and worsening climatic conditions. The recent snows in China are believed to have caused considerable crop damage and Beijing is becoming increasingly concerned about the prospects for feeding its 1.3 billion people.

All this suggests that policies mandating the use of biofuels and biofuel subsidies may have a very short half-life as the reality of inadequate food supplies overcomes cries of “energy independence.” The elimination of mandates and subsidies would put more pressure on petroleum products and force prices still higher.

3. South Africa’s Power Shortage

Electric power shortages which have developed in South Africa in recent weeks are threatening to cause morel problems. The shortages developed because of a failure to build enough generating capacity to keep up with economic, growth both domestically and in the surrounding countries which import power from the South African grid. This problem will not be solved quickly as additional generating capacity requires many years to build. Rolling blackouts in recent weeks have slowed gold, platinum, and coal mining which in turn has led to higher prices .

Frequent blackouts are forcing companies to install their own diesel and gasoline generators to keep their computers and other equipment running. As the number and size of these generators grows, so is concern that the already-stretched South African petroleum industry will not be able to keep up with growing demand. This in turn will require increased imports or will lead to shortages of fuel for transport.

4. Nigeria

As we have come to expect, the story of petroleum in Nigeria is a multifaceted one with new developments arising constantly. Last week the government scrapped an 8-year old oil bonus scheme that gave Shell an additional $2.50 for each barrel discovered.

At the same time, the government settled a dispute with the international oil companies regarding 2008 capital investment. As the Nigerian national oil company was unable to come up with $3.8 billion needed to complete its share of investments, it was forced to work out a funding arrangement with its partners.

Last week militants attacked a guarded pipeline manifold. Although oil flows were not disrupted, eleven people were killed in the fighting.

The big development of the week, however, came on Thursday when Shell was forced to suspend shipments from the Bonny export terminal because the security situation does not allow repairs to be made to a pipeline bringing oil to the terminal. The 130,000 b/d production cut is on top of the 500,000-600,000 b/d closed down by the militants in 2006. Some observers expect that the shut-in will eventually reach 1 million b/d. The suspension contributed to a sharp increase in oil prices on Friday.

The week concluded with a government order to 140 foreign companies that were forced out of the Niger Delta by militant attacks and kidnappings to return post haste or leave the country altogether.

5. Energy Briefs

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

• ExxonMobil obtained court orders freezing up to $12 billion in Venezuelan assets to guarantee payment should it win the arbitration over the Cerro Negro heavy oil project. Caracus says PDVSA’s cash flow and operations are unaffected by the court orders and says Exxon is violating terms of the arbitration process. President Chavez is now threatening to cut oil shipments to the US in retaliation. (2/9, #10, #11; 2/11 #2)
• OPEC Secretary-General Abdullah al-Badri said the cartel may abandon the dollar for pricing oil and adopt the euro, but noted that any such switch will “take time”. (2/10, #2)
• The managing director of the National Iranian Continental Shelf Oil Company said Iran’s oil reserve in the Persian Gulf is estimated at 90 billion barrels. “With new oil discovery in the region, the reserve may amount to 100 billion barrels.” (2/19, #3)
• The US Air Force has developed a plan to build a privately financed coal-to-diesel plant at Malmstrom air base at a cost of $1–4 billion. The plant would use a technology perfected in Nazi Germany to turn coal into synthetic fuels, including jet fuel for use by the Air Force.(2/4, #15)
• Coal prices jumped to records at Australia’s Newcastle and South Africa’s Richards Bay as snowstorms in China, power cuts in South Africa and floods in Australia reduced output. Power-plant coal prices at the New South Wales port climbed $23.09, or 25 percent, to $116.44 a metric ton ( 2/4, #2)
• Interest is increasing in the possibility of producing natural gas from the Marcellus Shale which lies underneath Pennsylvania, New York, Ohio, and West Virginia. The gas deposits, which lie 6000 feet below the surface, would be difficult to exploit but may contain 50 million cubic feet of recoverable gas. (2/4, #16)
• Saboteurs blew up a pipeline carrying oil from the Kirkuk fields to the Baiji refinery in Iraq last week. There is conflicting reporting about whether the export pipeline to Turkey is still open. (2/5, #3)
• Iraq has cancelled crude oil sales contracts with Austria’s OMV and South Korea’s top oil refiner SK Energy in response to deals signed by the companies with the Kurdistan Regional Government. The deals were made without Baghdad’s approval.
• Forty-five percent of US consumers said soaring gasoline prices have affected their spending more than rising energy and food costs, the flagging economy, or the national mortgage and lending crisis, according to a survey taken by the National Association of Convenience Stores. (2/5, #11)
• Railways and highways returned to normal across China last week. While government economists maintain that there will only be limited economic impact from the snows, the World Bank has cut its forecast for Chinese economic growth this year to 9.6 percent – which would be nearly 2 percentage points lower than last year’s because of decelerating exports and a weakening global outlook. (2/5, #8,9,10)
• Following a series of disputes involving top foreign energy companies, Kazakh Prime Minister Karim Masimov said his government could seize oil fields and mineral deposits from private investors. Western companies have flocked to Kazakhstan since independence in 1991, but the climate for foreign investors has worsened in recent months. (2/7, #3)
• The $25 billion Department of Energy FY 2009 budget includes plans to expand the Strategic Petroleum Reserve to 1.5 billion barrels by 2029. The new budget includes $171.4 million to start on the expansion. (2/5, #13)
• After years of rapid growth, Canada’s oil sands are running into trouble. Escalating costs, labor shortages, tax increases and the threat of tighter climate-change laws are clouding the prospects for additional development. (2/5, # 14)
• The political turmoil in Kenya is threatening work on a project to expand an important pipeline to western parts of the country. (2/7, #8)
• A new appraisal of the Tupi offshore oil discovery in Brazil has resulted in a tripling of its estimated hydrocarbon reserves to between 12 billion and 30 billion barrels of oil equivalent. An earlier appraisal estimated that there are only 1.7 billion to 10 billion barrels of oil equivalent. Production at Tupi could reach 500,000 -1 million barrels of oil equivalent a day between 2015 and 2020. (2/7, #10; 2/8 #10)
• Oil production from the ExxonMobil-led Sakhalin-1 project off Russia’s Pacific coast may decline 27.6% to 59.1 – 61.3 million barrels in 2008. (2/7, #17)
• New reports suggest that biofuels may actually make global warming worse by adding to the emissions of carbon dioxide they are supposed to curb. Two separate studies published in the journal Science show that a range of biofuel crops now being grown to produce “green” alternatives to oil-based fossil fuels release far more carbon dioxide into the air than can be absorbed by the growing plants. (2/8, #17)
• The Group of Seven called for an end to the oil subsidies used in China, India and Indonesia to shield domestic consumers from high energy prices. An end to energy subsidies might cut demand in some of the world’s fastest growing economies, easing pressure on prices. (2/9, #5)
• Turkish Prime Minister Erdogan vowed to continue to hit Kurdistan Workers Party (PKK) targets in Iraq and criticized EU countries for not cracking down on PKK affiliates. Turkey has been carrying out periodic raids on PKK positions in the mountainous region near Turkey’s border with northern Iraq for months in an effort to crush the group. (2/9, #6)
• Iran plans to privatize 47 energy companies worth $90 billion and set up a holding company which it will list on four international exchanges. It is hoped that the holding company which will be listed by 2014 will attract foreign investment to Iran’s oil and gas industry. (2/9, #8)
• Gazprom says that talks with Ukraine over what Gazprom says are unpaid bills totaling $1.5 billion have failed. This raises the possibility that Gazprom will again cut off natural gas to Ukraine (2/9, #15)

Quote of the Week … a letter from the Oil & Gas Journal, Feb 4th, 2008

World Decline Rate:

The January 17th 2008 press release by Cambridge Energy Research Associates…reported the world’s oil supplies were to rise to 112 million b/d by 2017. This rise is in spite of CERA’s other conclusion that the world’s oil fields are declining in capacity at the average rate of 4.5%/year. These conclusions are clearly suspect.

Although it is unlikely that global oil production is likely to drop significantly in the next few years, major sustainable increases are equally unlikely. Given the current global production of 86 million b/d and CERA’s 4.5% decline, global capacity would have to increase by 7.5 million b/d each year for the next 10 years to reach 112 million b/d. This is a total of 75 million b/d of new capacity in 10 years. Even excluding the effect of declining rates, achieving 112 million b/d within a decade represents a massive leap of 26 million b/d in global capacity. “To put this in perspective, 75 million b/d of new capacity is the equivalent of eight new Saudi Arabias or 14 new Irans in just 10 years. Considering the reality that Saudi Arabia, with 25% of the world’s best proven reserves, is already investing $50 billion to increase its production capacity by 2 million b/d, where does CERA expect the additional 24 million b/d of production capacity to come from, let alone the replacement for the 51 million b/d of declines?

    —Dr. Moujahed Al-Husseini, GeoArabia; Manama, Bahrain
    —Dr. Sadad Al-Husseini, Saudi Aramco (retired); Dharan