Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.

This week the oil price struck yet another all time high – $111.80 on Monday – but then underwent a major correction through the rest of the week, sinking to around $100, and settlling at just under $103 as ODAC went to print. The depth of America’s economic troubles were being offered as the main explanation and the exit of hot money.

However, the avid oil market observer will know that these explanations flip-flop almost by the day, one minute the American economy is beling wheeled into the morgue, the next it has bounced back and is ready for the next bubble.

The slump came against the backdrop of wild swings in commodity and equity markets, the collapse of Bear Stearns, another aggressive rate cut from the Fed, and as the Bank of England pumped an extra £5 billion into the London money markets. Only in days like these could the halving of profits at major investment banks Goldman Sachs and Lehman Brothers be a cause of ecstatic relief.

Shell’s delayed announcement of its 2007 reserve replacement received a generally positive press, but the underlying numbers are hardly reassuring. Shell claimed to have replaced its oil and gas production by 124%, but that number is only valid if you exclude the impact of Russia’s expropriation of the Sakhalin II project.

Otherwise Shell’s 20-F filing shows that its oil replacement was just 37% and its gas replacement a paltry 8% – despite a major upward revision in its Qatari gas reserves. On a barrels-of-oil-equivalent basis, Shell replaced just 17% of its oil and gas production overall.

We’ve said it before, but no wonder Shell and their peers are jockeying for position in Iraq, especially as Russia appears to be limbering up for another round of expropriation of oil and gas assets, and as Dick Cheney acknowledges that the world has essentially no spare oil production capacity.

If oil was the reason for invading Iraq, as many suspect, the strategy has had minimal success at an exorbitant price. On its fifth anniversary, the war is estimated to have killed hundreds of thousands of people, cost trillions of dollars, while Iraqi oil production is not much higher than before the invasion. Yet having made such a fine job of Iraq, Tony Blair now apparently thinks he can solve climate change single handed. Happy Easter!

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Crude extends slide
Shell wants to produce five times more oil from tar sands
Shell counts rising cost of squeezing oil from sand in Canada
Our reserves are healthy, insists Shell
Reserves don’t matter as much as the cost of getting the oil out the ground
Cheney says high oil price reflects market reality
Guest Commentary: Mark Griffiths BSc FRICS FAAV
Well, here it is from the horse’s mouth. What many have already realised or suspected for quite some time now, has been spelt out by US Vice President Dick Cheney.

The most fundamental problem with the high oil price is not commodity speculation, or even the falling value of the dollar, but eroded spare capacity. Dick Cheney had already seen this coming back in 1999 when he addressed an oil industry meeting in London.

Cheney (who, along with former Defense Secretary Donald Rumsfeld, was the principal architect of the Iraq war which ‘enjoys’ its fifth anniversary today) has now confirmed that OPEC has little spare capacity left to speak of (apart from difficult to process high sulphur heavy crude). This is clearly the real reason why OPEC is not offering to raise output despite the threat of recession and pleading (literally) from the US, despite whatever else OPEC may claim. In other words they won’t up production, because they can’t.

This situation is corroborated by Lawrence Eagles, head of the International Energy Agency’s Oil Industry and Markets division. He recently told TIME magazine that “Most OPEC members are working close to flat-out. There is little spare capacity outside of the United Arab Emirates and Saudi Arabia, and some of that is relatively poor quality crude.”

Cheney himself has just been out to the Middle East to negotiate an uplift in production and has essentially come back empty handed. Even the Saudis don’t seem able to help.

The only real hope has been Iraq (no other Middle East country has similar untapped geological potential to increase production), but the chaos of the failed occupation has kicked that aspiration into touch, despite an eventual cost estimated at $3 trillion or more according to a new forecast from Nobel prize winner and former chief economist at the World Bank, Joseph Stiglitz.

Increased energy use efficiency/economic recession are therefore now the most likely responses as we close in on the de facto ‘sans Iraq’ production ceiling.

Let’s hope that the first of those two response options predominates, but with growing energy demand in India and China continuing to exert heavy pressure we are clearly in uncharted territory now. Some current speculation is centred on whether the recent resignation of Admiral Fallon, the top US commander in the Middle East who has taken a more moderate stance in relation to Iran than the White House, will now result in tougher US measures against Tehran as the oil situation deteriorates. Cheney claimed last year that quite apart from its nuclear program Iran was a threat to oil supplies because of its geographic position in relation to Gulf shipping through the strait of Hormuz, and the results of last week’s Iranian parliamentary elections are unlikely to have softened his attitude.

Meanwhile one of the most notable developments in the last week or so is that CERA has suddenly dropped its forecast for the global oil production ceiling from 130 million barrels per day to 105 mb/d. Although CERA are doing this claiming investment constraints as opposed to geological ones (the distinction is of no practical relevance as far as markets are concerned, as the net result for consumers is the same – i.e. a ceiling on supply), it means even they are now nearly in line with everyone else who says production can’t go above 100 mb/d.

So it seems that in effect there is little material dissent left in opposition to the now prevalent 100 mb/d (or less) ceiling prognosis. Cheney’s return empty handed from the Gulf would seem to be just one more sign of the global oil train getting uncomfortably close to hitting the supply buffers.

Mexico grapples with oil’s direction

Bush defends Iraq war five years on
Forbidden fields: Oil groups circle the prize of Iraq’s vast reserves
The high cost of fighting a losing battle

Ukraine insists on removing intermediary from natural gas trade with Russia
Israel deplores Swiss natural gas deal with Iran

Australia plans carbon storage under ocean
Carbon capture is turning out to be just another great green scam

British Energy shares rise 20% after confirmation of tie-up talks with rivals

Green power station site opened
Australia commits $1 billion to renewable, clean energy projects
Rising costs ‘threaten green agenda’
Centrica extends deal for unique wind turbine barge

Push to bar oil sands to US military
Home is where the heat is: why old can be good as new
Glaciers suffer record shrinkage
EU’s move on emissions targets
What can Blair’s climate trip achieve?

Gold crashes as investors bail out
Ask the oil producers to rescue Wall Street
Banks meet BoE as industry jitters persist
Utility bills lift UK inflation to 9-mth high

Scottish & Southern raises prices
Rising energy costs hit middle-class families

Police raid BP’s Russian venture
Guest Commentary: James H Neale – citicom
The following Guest Commentary is taken from Citigroup’s Oil & Gas Daily, issued on 20th March

The Russian Ministry of Internal Affairs yesterday searched the offices of TNKBP and BP in Moscow. A representative of the Ministry’s economic security department said that investigators took out a number of documents relating to a criminal case against Sidanco oil company. Later, the official said that nothing was taken out and that investigators “invited two employees to our office so that they could provide us with explanations. We have no claims against TNK-BP”. Some time later it was reported that investigators also visited the offices of BP Moscow as well. No further comments were provided.

The news comes in the middle of negotiations between TNK-BP and Gazprom (GAZP.RTS – US$12.55; 1L) over the giant Kovykta gas field (2,000 bcm of C1+C2 reserves). In mid-2007 it was announced that TNK-BP would sell 62.9% of Rusia Petroleum, operating Kovykta, to Gazprom with an option right to repurchase 25% stake. As a part of that deal BP, Gazprom and TNK-BP were supposed to form a consortium for joint development of gas projects.Soon after the announcement, another TNK-BP gas producing unit Rospan International, after four years of negotiations, finally got approval from Gazprom to connect two of its fields to the Gazprom’s pipeline system, thus allowing it to increase production from 1.2 to 3.4 bcm in 2008 and to 17.4 bcm by 2017. It is believed that Rospan International may become a part of the future consortium. Completion of the deal has been postponed several times as the sides have not been able to agree on the final terms.

It would appear that the Russian authorities are making tactical moves designed on the one hand to force TNK-BP to finally complete the Kovykta transfer to Gazprom, and on the other hand to wrestle part of AAR’s interest in TNK-BP to bring it under state control.

Russia accuses brothers Alexander and Ilya Zaslavsky of being ‘oil’ spies
Delta cuts staff as it struggles with tie up
EasyJet shares plummet on profit warning