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Peak Oil Review - February 18, 2008

1. Production and Prices
2. CERAWeek — The Hess Heresy
3. CERAWeek — Much to Think About
4. Citibank Contemplates Oil Depletion
5. Changing Views of the Recession Forecast
6. Exxon Versus Venezuela 
7. Energy Briefs

1. Production and Prices

Prices moved up rapidly last week. In seven trading sessions, oil moved from a low of $86 a barrel to touch a high of $96.67 last Friday. The surge appears to have numerous causes ranging from concerns about disruptions in supplies from Nigeria and Venezuela to increasing demand from Asia and lower OPEC shipments.

The IEA’s monthly Oil Market Report notes that world oil supplies in January rose by 745,000 b/d to 87.2 million b/d on new output from Brazil and increased output from other non-OPEC producers. The IEA says OPEC production in January remained at about 32 million b/d with increases in Angolan, UAE, Saudi, and Kuwaiti production being offset by declines in Iraq, Nigeria and Qatar.

OECD crude stockpiles fell by 39.5 million barrels during December. The IEA notes that during the 4th quarter of 2007, OECD stockpiles dropped at a rate of 1.15 million b/d which is significantly higher than the 740 thousand b/d ten year average. Preliminary indications, however, suggest that OECD crude stocks grew in January.

Evidence that a recession is taking hold in the US and may spread to other countries led the IEA to reduce its 2008 demand growth forecast from 1.98 million b/d to 1.7 million. The US’s EIA now is forecasting a 1.4 million b/d increase. In its monthly Short Term Energy Outlook, the Administration says oil markets will be tight for the first half of the year and then ease in the second half as new production comes on stream. The EIA, however, is still talking about average US gasoline prices rising to $3.40 in the spring.

OPEC continues to talk about production cuts at its March meeting based on rising US crude inventories and bad economic news which would lead to reduced demand.

2. CERAWeek – The Hess Heresy

From a peak oil perspective, the most interesting news from Cambridge Energy Research’s 27th annual conference in Houston last week was the talk given by John Hess, CEO of Hess oil. It is doubtful that the conference planners knew what he was going to say for in essence he told the peak oil story to the over-flow crowd of 2000 or so conference attendees. In words of the reporter from Platts, he “gave one of the best speeches ever heard from one of the opening speakers”.

Hess told the group that "Given the long lead times of at least 5-10 years from discovery to production, an oil crisis is coming and sooner than most people think. Unfortunately, we are behaving in ways that suggest we do not know there is a serious problem." "Some say that there is a large endowment of resources and that there is nothing to worry about. Some say that we have already hit peak oil, and there's little we can do. Others say that the rapid development of renewables will fill the gap between demand and supply and reduce our carbon footprint in the process," Hess noted. However, he said, "It is imperative that we change our mindset, our sense of urgency, or the consequences will be severe."

Hess’s talk left little out. On demand he talked of the rapidly growing world population and growing fleets of cars. He said gas and oil are still relatively cheap, that oil consumption will continue to grow at 1-1.5 million b/d for the next decade. New discoveries of oil are inadequate; deepwater fields are difficult to exploit; there is inadequate investment; unconventional oil and renewables will not be adequate; there is a need for conservation; there is a lack of trained manpower. His bottom line is "the International Energy Agency predicts global demand to average 98.5 million b/d in 2015, based upon current behavior; I do not see how we will meet this projection….An oil crisis is coming in the next ten years.”

3. CERAWeek – Much to Think About

As usual, the CERA conference featured an impressive array of luminaries from the oil industry, government, and academia. The CEOs of Saudi ARAMCO, StatoilHydro, and ConocoPhillips spoke as did the new Executive Director of the IEA and the chair of the UN’s Intergovernmental Panel on Climate Change.

As is normal for a CERA conference, several speakers took pains to explain that “peak oil theory” is wrong and there is still plenty of oil. A senior vice-president of Exxon said Geologic Survey statistics show that there are still 3 trillion barrels of oil waiting to be found. The CEO of ARAMCO, Abdallah Jum'ah, went one better by stating that when you consider unconventional sources of oil the world has between 13 and 16 trillion barrels of oil left, but that only three to six trillion can be converted into supplies.

During the conference, CERA Chairman Daniel Yergin himself went out of his way to ask Jum’ah about the reports that the Saudi’s largest oilfield, Ghawar, was on the decline. Jum’ah denied this vigorously saying the water cut is declining, that Ghawar has 70 billion barrels of oil left, and that his company will soon be capable of producing 12 million b/d.

The CEO of IHS Inc. which owns CERA, went a little over the top when he told a Bloomberg reporter that those who espouse the theory that the world's oil production has already peaked lack evidence to support their claims.´” The only thing that's relevant is our data….Believers in the so-called Peak Oil theory don't have our data."

Among the many themes to come from the conference was the notion some sort of carbon tax or cap and trade is inevitable in the near future. The cost of oil production is rising and oil is unlikely to ever sink below $60 a barrel again.

Another interesting insight is that the demand for middle distillates is increasing faster than for other oil products. Recent gains in production have come for NGLs, biofuels and condensates which are not used to make distillates. Although refineries can be retooled, this is a slow and expensive process which will not occur overnight. A Harvard economist opined that the write-downs from the subprime and other financial crises could eventually reach $1 trillion.

In reading through the dozens of news stories that were generated by the conference, there is a note of developing skepticism. The industry theme that the world is not running short of oil, and that it is just misguided governments that are keeping us from supplying all the oil that you want, is getting a little thin. Many reporters played off the pessimism of the Hess talk against the optimistic can-do, all-is-well attitude of many other speakers.

4. Citibank Contemplates Oil Depletion

A research paper issued by Citigroup Global Markets delves into what is known about oil depletion to a greater extent than is common for Wall Street analyses. Even more unusual is that the authors spent some time with the editor of the Petroleum Review in London, Chris Skrebowski, discussing the growing fears that oil production is depleting at such a rate that new projects will not be sufficient to stave off a decline in overall oil production in the near future.

The study starts out by noting that all liquids production has been essentially flat for the last four years at a time when economic theory says significantly higher prices should have called forth greater production. The authors correctly note that part of the problem was a deliberate production cutback by OPEC during much of 2007 which led to a rapid decline in OECD stockpiles. They also note the widespread belief that the emerging US recession will “chase” worldwide demand growth back to zero.

After looking at the Petroleum Review’s “Megaprojects” analysis, the study notes that 175 new projects are due to come on stream during 2007 and beyond. One hundred forty of these projects are due to have stated production by 2010 and all are to have started by 2012. They also note that very little new production is currently visible for startup in 2013 and beyond.

For 2008 the study concludes that there should be about 1.5 million b/d of new OPEC production and 1.2 million b/d of non-OPEC new production coming on-stream. The authors then move to the more difficult problem of production rates. Skrebowski told the Citigroup authors that some observers believe depletion across all liquids is currently running at 4 percent or 3.4 million b/d a year. If depletion is indeed at this rate then the current visible new projects would only be able to keep production at current levels until 2013. When the Citigroup authors expressed skepticism about decline rates in excess of 3 million b/d per year, they were told that some knowledgeable experts believe that decline rates upwards of 6 percent (5+ million b/d) are more realistic.

Citigroup then discusses the recent Cambridge Energy (CERA) study of depletion. Citigroup says that after assessing 811 producing oil fields and extrapolating the results across all liquids production, CERA concluded that annual decline is only about 1.6 million b/d or about half the rate that Skrebowski’s moderate observers believe is valid. [Editor’s Note: The CERA study concluded that the worldwide rate of decline for crude and condensate is 4.5 percent. When this rate is applied to the current world crude and condensate production of 73-74 million b/d the total an annual decline is about 3.3 million b/d.]

The conclusion as to whether CERA’s depletion rate of 1.6 million b/d or the higher rate of 3.4 million is interesting. Citing the evidence that world oil production has been essentially flat for the last four years, Citigroup says that the burden of proof that the higher rates of depletion are in fact not true has shifted to CERA and the optimists.

5. Changing Views of the Recession Forecast

In recent months daily oil prices frequently have moved in reaction to news about the outlook for a US recession. The oil market’s collective wisdom has been assuming that a recession in the US would quickly spread around the world and significantly reduce the demand for oil and that prices should be going down. Now the sentiment seems to be changing, at least is some quarters.

Although the IEA, the EIA, and OPEC have all cut their estimates for oil demand, all still see a substantial growth in the demand for oil. In looking around the world, Asia, Russia, the Middle East, and parts of Latin America are booming. While there is considerable European exposure to the US credit problems, the EU’s demand for oil has been, and is likely to, remain flat. Even the most pessimistic analysts are still expecting world-wide demand for oil to grow by over 1 million b/d.

The coal shortages that have sprung up in the last few weeks are likely to impact the demand for oil as affluent coal importers turn to oil as the only ready means of keeping up electricity production. The reports of hydro power shortages around the world in the wake of local droughts will only add to the base demand for oil.

The heart of the issue is how deep a US recession will turn out to be and how far around the world its effects will be felt. Although the US is still the world’s largest economy, this is changing and it is not at all clear to many that a reduction in US imports will result in serious economic damage to the emerging economies.

Last week, the CEO of the French oil company Total said oil prices won't be “too affected" by a slowing U.S. economy as demand is increasing in emerging economies. “The impact on Total's results of a slowing U.S. economy will be minor.” This view of oil demand over the next few years seems to be appearing more frequently.

6. Exxon Versus Venezuela

Venezuela’s announcement that it was stopping oil sales to Exxon in retaliation for the court orders freezing Venezuelan assets in the US and Europe brought forth a flood of commentary. The Venezuelan announcement is, of course, meaningless as it does not cover shipments to the Louisiana refinery jointly owned by Exxon and Venezuela. Some reports say that besides the jointly owned refinery, Exxon only imports directly about 86,000 b/d of the 1.4 million b/d that the US currently receives from Venezuela.

Although Exxon claims that $12 billion in Venezuelan assets held abroad have been frozen, Caracas says the amount is far less and that the freeze will have no effect on its current operations. Venezuela’s oil minister said that Exxon was demanding $5 billion in compensation for the nationalization of its heavy oil projects and claimed that Exxon’s share was not even ten percent of that amount.

During the past week Total and ENI announced that they had reached a settlement with Venezuela for the nationalized properties. Total will receive oil worth $834 million dollars while ENI did not reveal the amount of its settlement.

As numerous observers have pointed out, Venezuela has more to lose from cutting oil sales than the US does. Heavy, sulfurous Venezuelan crude can be most efficiently processed in special US refineries. Although China is reported to be building refineries for Caracas’s oil, it will still be some time before they are done. Until then, President Chavez is likely to continue selling most of his oil to US customers.

7. Energy Briefs

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

  • The IEA has been forecasting that China's oil demand would increase by 5.8 percent year-on-year in 2008 to 7.9 million barrels a day. Recent heavy snowfalls, however, prompted the Chinese to utilize diesel and fuel oil-fired power generators for households and businesses that lost grid power, suggesting that consumption will increase. Lehman Brothers, however, is forecasting that the increase in consumption will drop to 4.5 percent because of the disruptions caused by the snows. (2/16, #12: 2/24, #12))
  • BP has warned its staff against creating electronic documents on unpublicized problems with a key component of the much-delayed Thunder Horse project. This warning suggests there may be additional delays in starting up the world’s largest floating oil production platform which is already three years behind schedule. (2/11, #16)
  • The electric power situation in Nigeria continues to deteriorate. Nine of the country’s ten power plants are operating at 30 percent of capacity. (2/11, #11)
  • Platt’s, which tracks oil production around the world, estimates that approximately 1 million b/d of Nigerian oil production has been shut-in by civil strife. (2/13, #10)
  • China, once a major coal exporter, has switched to being a net importer and because of the recent snowstorms has suspended coal exports for at least two months. This coupled with flooded coal mines in Australia and power shortages in South Africa has driven coal destined for Europe to record prices. (2/16, #20)
  • China produced 2.4 trillion cubic feet of natural gas in 2007, an increase of 23 percent over 2006. (2/12, #12)
  • The bombing of a gas pipeline in Iraq last week has caused widespread power outages. A second bomb which severed power lines caused additional blackouts across northeastern Iraq. The attacks were blamed on Sunni insurgents that were driven out of Baghdad. (2/12, #3, #4)
  • The earthquake which shut down Japan’s largest nuclear power station last year has forced Tokyo Electric Power to burn more oil and natural gas to make up for the losses.. In January 2008, fuel oil consumption doubled, crude consumption tripled and natural gas consumption increased by 18 percent over 2007. (2/13, #12)
  • ENI, which is still leading the Kashagan consortium, says it will update the project’s production schedule and costs estimates by the end of March. ENI agreed to give up its status as consortium leader when production starts, now expected to be in 2011. (2/16, #5)
  • Environmental Defense called the Alberta tar sands ”the most destructive project on earth” and demanded that the federal government either clean it up or shut it down. The group says that excavation of the sands is producing vast amounts of greenhouse gases and poisoning local water supplies. (2/16, #14)
  • Exxon, Shell, and BP posted falling 2007 output, even though they upped capital spending to over $60 billion and expect to spend more this year. The drop reflects reduction in the amount of oil companies are getting under production-sharing agreements, and declining supply from aging fields. (2/15, #8)
  • Mexico's energy minister said she hopes an upcoming reform will allow the state oil company to form alliances to develop reserves in deep waters of the Gulf of Mexico. US oil firms are already drilling a few miles from the US-Mexico maritime border in 9,000 feet of water, and Mexico risks watching oil seep into wells on the U.S. side. (2/16, #11)
  • Vietnam, China's largest coal supplier, plans to reduce exports by 32 percent this year and eliminate all foreign sales by 2015 to meet rising domestic demand. Coal exports may drop to 22 million metric tons this year from 32.2 million in 2007. (2/16, #13)
  • A shortage of fuel in Nepal forced the shutdown of much of the capital's public transportation system. More than 80 percent of Katmandu's buses, vans and trucks were out of service because their owners were unable to buy diesel and gasoline. The problem has been compounded by ethnic minorities who have blocked fuel shipments into the country demanding more autonomy. (2/14, #13)

Quotes of the Week: A 10-year Retrospective

Per earlier Commentaries (Jan. 21, Feb 11) in this Review, CERA forecast that the world’s oil “productive capacity” will increase by 23%, from 91 to 112 million b/d, over the next decade. Below, we check back 10 years ago this week, when actual production was roughly 76 million b/d (vs. 87 million b/d today), to see if our searches in the 1998 Oil & Gas Journal and World Oil magazine issues turn up any sense at the time for where we would be a decade later.

1. “[The US] DOE proposed that the government halt the decline in domestic oil production by 2002 and then reverse it. ‘Increased federal support for R&D in improved oil supply technology can expand domestic oil production while reducing the environmental impacts,’ said DOE.” (O&GG, 2/23/98, p. 34)

Reality: daily US crude oil production declined 21% from 6.45 to 5.11 million b/d over the last decade.

2. “Brent crude for prompt delivery closed at $13.58/barrel in London on Feb 17, its lowest level in about four years.” (Ibid, p. 2)

Reality: no anticipation that prices would be running in the $90/barrel range a decade later.

3. “U.S. companies are beginning to report their estimated production replacement ratios for 1997. Of these reporting, 60% have exceeded 200%. The following is a sample of 1997 production replacement ratios, expressed as a percentage: ARCO 164%; Exxon 121%; Anadarko 341%; Apache 228%; Enron 220%; Texaco 167%.” (Ibid, p. 4)

Reality: no sense that a decade later, replacement ratios would average less than 100% when mergers and acquisitions are excluded.

4. From “Perceptions of future, often flawed, shape plans and policies” (Part 1 of a 6-part series, p. 60). “Within the time frame considered in this study—25 years ahead and even far beyond—there is no reason to believe that limitations in the resource base will require prices to rise to balance supply and demand even at a much higher level of consumption than today…[It is a fallacy of the past that] Physical resources of petroleum are finite and the impending shortage is of primary importance to policy makers and markets.”

Reality: oops. Peak oil is about the size of flows, first and foremost. Flows can stall for a combination of reasons,. And flows of liquid fuel supplies,, compared to demand, started leading to substantially higher prices within the first few years of this 25 year outlook.

5. From “Facts don’t support weakening market,” by Matt Simmons (World Oil, Feb 1998, p. 37): “One of the strange ‘disconnects’ in most long-term supply forecasts of recent years has been a widespread tendency to essentially ignore depletion or to presume that new oilfield technology has minimized its impact…There is considerable evidence which suggests that the ‘blended rate’ of worldwide depletion for existing oil production averages is at least 4% per annum. If so, it now takes 3 million b/d of new supply coming onstream each year simply to maintain a flat production base.

Reality: Simmons was a little ahead of his time as well as a decade ahead of CERA’s recently released study identifying the world’s decline rate at around 4.5%.
Bottom line here: back in 1998, there was little sense in the trade press that by 2008 the world would find itself in a major and sustained petroleum price, supply and demand pickle.

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