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Peak Oil Review - February 25th, 2008

1. Crude
2. Gasoline and Diesel Prices
3. Geopolitics
4. Prudhoe Bay
5. Energy Briefs

1. Crude

Oil prices continued their inexorable march upwards last week hitting a record high of $101.32 a barrel on Wednesday. Prices have now climbed from below $60 at the beginning of last year and below $20 in early 2002.

No particular development appears responsible for the new high. The International Energy Agency attributed the increase to a “confluence of fundamentals” such as tight markets and low stocks coupled with the usual geopolitical turmoil in Kurdistan, Nigeria, and Venezuela.

There was nothing unusual in the US stockpiles report this week. Low refinery utilization led to a build in crude stocks. Good imports led to unusually high gasoline stockpiles and cold weather drew down the distillate inventory.

The pre-meeting posturing prior to the March 5th OPEC meeting was in full swing last week. Importing countries made the ritual calls for an increase in OPEC production. Iran and Venezuela, which can no longer increase production and need the money, made the ritual call for lower quotas knowing that prices will go higher. Other OPEC members, knowing the cartel really can’t significantly increase production, opine that the nominal ceiling will not be changed.

The oil market’s perception of just how much a US recession will slow demand for oil appears to be changing. For months now, bad economic news has led to a drop in oil prices on the theory that a recession in the US would lead to a significant drop in demand. The realization that liquidity troubles in the US and Europe are unlikely to slow demand for increasing quantities of oil by Asian economies and from within the major exporting countries seems to be sinking in. Although a few observers cling to the notion that large supplies from new oil fields will drive prices lower, a consensus seems to be developing that these new flows will not offset both depletion and increased demand so that still higher prices are in the offing.

2. Gasoline and Diesel Prices

Last week gas prices jumped to a nationwide high of $3.11 per gallon, their highest level since June, and diesel rose to a record nationwide high of $3.50 a gallon. These increases led to a spate of commentary as to just what was in store for the rest of the year. Last year at this time gasoline was about $2.30 a gallon and increased to $3.20 by the end of May, an average nationwide increase of over 90 cents a gallon. There were, however, some special circumstances in the spring of 2007 – refineries broke down at an unusual pace; low prices in the US led to shrinking imports; and the changeover to summer gasoline blends, using large amounts of ethanol for the first time, was difficult. For a time gasoline stockpiles fell so far below normal that there were fears of shortages.

This year several factors in the equation have improved. Due to increased imports, gasoline stockpiles are now way above normal and the EIA says our refining capacity is in much better shape than during the last two years. The downside is that the current nationwide price of gasoline is now 83 cents a gallon higher and diesel 90 cents a gallon higher than it was at this time last year.

Based on what happened last year, some analysts are saying that US gasoline prices could easily surge to $3.75 - $4.00 a gallon in the next three months. Others, looking at the high inventories in the US and an impending recession, are arguing we have already reached a high for the year and that crude and gasoline prices will soon recede. The EIA currently is in the middle by forecasting that gasoline prices will increase to $3.40 - $3.50 per gallon by June.

The only thing that is certain is that fuel prices are much higher than last year and are starting to take an economic toll. Truckers with fixed contracts are hurting the most and some may soon be out of business. Prices of nearly everything are bound to rise as diesel prices are passed on to consumers. Although total US demand for petroleum products is down about one percent over last year, according to the EIA, US demand for gasoline is up by half percent over 2007. High prices seem to be suppressing demand for heating oil, jet fuel, and other products in the US, but the use of our automobiles is still increasing as it has for many years.

3. Geopolitics

None of last week’s geopolitical developments appears to have particularly rattled the oil markets, but the potential for situations to deteriorate and result in much higher oil prices is clearly there.

Turkey’s ground attack on Kurdish rebel bases in northern Iraq is the most dangerous of the new developments. Kurdish separatists have already called for an uprising by Turkish Kurds. A few months ago the separatists were threatening to blow up the major oil pipeline that runs across Turkey from Baku to Ceyhan in retaliation for Turkish attacks on their camps. Iraq’s northern export pipeline to Ceyhan is working again making it a good target for somebody.

Kurdish separatism has been festering for centuries and given that it currently involves Turkey, Kurds, Iran, Iraq, the Iraqi Kurdish authority, oil, the US, the EU, and NATO, the situation could deteriorate in numerous directions, some of which would clearly be bad for oil production.

Angola has handed over Henry Okah, an important leader of the Niger Delta insurgency, to the Nigerian government. The insurgents are already claiming their leader has been executed, an act that the government vehemently denies. Should something happen to Okah, however, the chances of new attacks on Nigerian oil facilities are good.

Although the amount of Nigerian oil production is shut in by insurgent attacks is always murky, some outside observes are saying it could be as much as 1 million b/d.

In Venezuela, the fight between the government and Exxon over compensation for nationalized facilities continues without much damage to oil flows. Venezuela is claiming that Exxon is asking for $5 billion for property that is worth less than $1 billion and is threatening to sue Exxon for back taxes.

Finally, back in Washington, yet another effort is underway to impose more sanctions on Iran for its nuclear ambitions. The Iranians have responded with more threats to harm the Western powers.

4. Prudhoe Bay

At one time the Prudhoe Bay oil field on Alaska’s North Slope was producing 1.5 million b/d, but starting in 1988 a decline in production has been taking place so that production is now about 400,000 b/d and even that is dropping by about six percent each year. Thus far about 11.5 billion barrels of oil have been produced from Prudhoe.

To maintain production, BP is drilling 60 to 70 new wells each year and using the latest technology and techniques with the hope of extracting another 1.5 billion barrels.

For the last two years, BP has been investing in rebuilding the collector pipelines that suffered serious corrosion problems leading to oil spills. The company is now examining the possibility of extracting extra-heavy oil that lies in layers closer to the surface. BP is already producing about 50,000 b/d of this heavy oil and was planning to spend $1 billion to increase heavy oil production until Alaska raised taxes leading to cancellation of the project.

BP believes that an oil bearing layer called the Ungu formation may contain as much as 20 billion barrels of extra-heavy oil. Exploratory drilling into this formation is already underway and BP hopes that 1-2 billion barrels may ultimately be recoverable.

5. Energy Briefs

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

  • Automobile production in the EU grew by 5 percent last year to 19.7 million vehicles. Diesel-powered cars accounted for 53.3% of total new car registrations in the EU, up from 13.8% in 1990. Luxembourg (77.2%), Belgium (77%), France (73.9%) and Spain (70.9%) had the highest diesel share of new car registrations. (2/21, #16)
  • Lukoil says a disagreement with German company Sunimex resulted in its suspension of Russian oil going to German refineries via the Druzhba pipeline in February. Lukoil says it plans to transport oil to Germany by sea if a pricing dispute continues. (2/21, #14)
  • US regulators are on the verge of modernizing oil and gas reserve accounting rules. The proposed rule revisions were based on recommendations made by the petroleum industry and would create standards for unconventional resources such as tar sands and hard-to-produce natural gas and allow the industry to officially book billions of barrels in tar sands or billions of cubic feet of natural gas reserves as assets.(2/21, #13)
  • Penn State researchers have a proof-of-concept device that can split water and produce recoverable hydrogen. While the proof-of-concept system is very inefficient, ultimately catalytic systems with 10 to 15 percent solar conversion efficiency might be achievable and could provide a clean source of hydrogen fuel from water and sunlight. (2/19, #17)
  • Nippon Oil signed a long-term contract to buy Russian oil from Sakhalin Island, the first such agreement by Japan’s refiners to diversify supply from the Middle East. Nippon Oil will purchase one vessel of oil, or 720,000 barrels, every quarter from the $13-billion Sakhalin-1 project starting this year, (2/19, #14)
  • Chinese consumer inflation surged in January to an 11-year high of 7.1 percent and looks set to rise further, cementing expectations that Beijing will stick to a tight monetary policy despite softening economic growth. (2/19, #12)
  • China's diesel imports hit a record high of 840,000 metric tons in January, up 640% over January 2007 and well above market expectations, as traders sought to rebuild stocks in the wake of fuel shortages late last year. (2/22, #8)
  • “Much of the anxiety over a looming supply crunch is based on projections for rising demand in China, but the country itself seems too preoccupied with the more immediate problems of short-term energy security, high oil prices and supply diversification to worry about the nuances of peak oil theory.” (2/23, #7)
  • The presidents of Argentina, Brazil and Bolivia failed to resolve a natural gas dispute Saturday, but agreed to study how to divide limited Bolivian supplies to avoid an energy crunch. (2/24, #7)
  • Indonesia's state-run oil company said it will reduce its monthly crude oil imports by 1.5 million barrels starting in April because of surging prices. Indonesia’s crude oil import ranges from 6 million to 9 million barrels per month, depending on demands. (2/24, #8)
  • Russia’s Economic Development Ministry has suggested varying export duties for petroleum products according to the degree of refining. Traders interpret the proposal as saying the more a company spends on oil refining the lower the export duty it will pay on the product. (2/24, #12)
  • More than 70 companies have registered to compete for oil extraction and service contracts to help develop Iraq's oil reserves. The oil ministry will announce which companies it has accepted as qualified to bid for future contracts in March. Baghdad is moving forward with agreement on a new oil law over the objections of many Iraqis. (2/18, #5)
  • Europe risks power shortages if it does not press ahead with new power station projects to replace and add to aging capacity. Coal-to-power projects were being cancelled because operators feared tougher emissions rules or because citizens did not want polluting plants in their neighborhood, while rising prices of materials and labor added to delays. (2/20, #17)
  • A $12 billion contract gives South Korea the right to develop new oil fields in the Kurdish portion of Iraq. Baghdad, of course is dead set against this. (2/22, #4)
  • Turkey is paying record prices--$17 - $18 per million BTUs—for liquefied natural gas cargoes after Iran cut pipeline exports to Turkey due to record low temperatures. Turkey is paying more than double the current US price for natural gas. (2/22,#5)
  • Pemex reported that January production of crude was virtually unchanged from December. Steep declines from Cantarell oilfield were nearly offset by production increases from the Ku-Maloob-Zaap field. Production, however, was down 5.9% from a year ago and exports were down 9.4%, in part due to bad weather. (2/22, #7)
  • In Kathmandu, Nepal’s worst fuel crisis in nearly two decades has led to long lines of motorbikes, taxis and buses stretching, at times, up to two kilometers from petrol stations in the city’s main thoroughfares. (2/22, #11)
  • Gazprom, Total and StatoilHydro signed a Shareholder Agreement for the first phase development of Russia’s Shtokman natural gas field. Phase one is to produce a yield of 23.7 billion cubic meters of natural gas per annum; the start of pipeline deliveries is to begin in 2013 and LNG in 2014. (2/22, #17)
  • Canada, Mexico and the U.S. account for about 25% of the world's natural gas consumption, yet they only hold about 4.3% of the world's proved reserves. (2/22, #18)
  • Bill Reinert, Toyota’s national manager of advanced technology, says US automakers are at risk by basing sales and profits on the big, fast cars that their customers currently want. In five years, as oil shortages intensify, car companies may be out of step with drivers' demands for fuel-efficient vehicles. Degrading stretches of the planet like Alberta will only delay--not prevent--the time when the world must function in a post-peak-petroleum economy, he says. (2/22, #19)
  • In Alberta, at Fort McMurray's open mines, it takes 2 tons of tar sand, 250 gallons of water and 1,400 cubic feet of natural gas to produce one barrel of synthetic crude, says Peter Wells, director of English research firm Neftex Petroleum Consultants Ltd. (2/22, #19)
  • Quantity targets to introduce biofuels into the European Union's energy mix should be scrapped in favor of a low-carbon policy approach, according to a senior environmentalist. (2/22, #19)
  • Brazil, expecting to become an exporter of crude oil in the future, is serious about joining OPEC which - in the long term - could push up prices. (2/23, #5)
  • Enbridge has lined up enough support from Asian refiners and Canadian oil producers to revive its $4-billion plan to build a pipeline from the oil sands to the West Coast, just months after China pulled out of the project. (2/23, #12)
  • Australian snapshot: The country currently produces 500,000 barrels a day, a bit over 50% of the 1 million b/day of oil it consumes. Production peaked in 2000, when production met nearly all Austrailian demand, but production is now in decline, with occasional jumps as new production is added. While import requirements will continue to grow, exports from three of Australia’s four suppliers—Vietnam, Papua New Guinea, and Malaysia—are in decline. (2/23, #15)
  • Kazakhstan is planning to abandon production sharing agreements for future natural resource contracts but will respect existing PSA's, according to official sources. (2/21, #6)
  • Gazprom is optimistic that talks with the Nigerian authorities will result in the company gaining a stake in Nigeria’s vast gas deposits.. Gazprom is ready to invest in energy infrastructure to get access, oil industry officials have said. (2/21, #8)
  • Saddled with more social spending and higher production costs, Venezuela's state oil company said Wednesday its profit fell dramatically in the first half of 2007. (2/21, #9)

Quote of the Week

“Feeling a bit peaked: Peak oil, that is — a dismal theory that keeps getting more plausible.”
     —Paul Krugman, economist and New York Times columnist

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