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Peak Oil Review -- April 21st, 2008

1. Production and Prices
2. China
3. Food vs. Fuel
4. Brazil's Giant Field
5. Energy Briefs

1. Production and Prices

It was another week of steadily rising oil prices with crude moving from a low of $109.74 a barrel on Monday to new high of over $117 a barrel by Friday. By now the reasons for the continued climb are familiar – stagnant production, shrinking exports, inceasing demand, a falling dollar, the flight to safety in commodites, declining US stockpiles, and, of all things, the perception of an improving US economy.

This week several new factors contributed to the increase. Reports that Russian oil production slipped during the first quarter for the first time in a decade, coupled with assertions by senior Russian oilmen that Moscow’s production is not going higher, was troublesome. Saudi King Abdullah’s statement that he had ordered some new oil discoveries left untapped to preserve oil wealth for future generations also has serious long term implications for oil importers. During the week the Saudis said that they had trimmed output to 9 million b/d from 9.2 million.

Once again the week’s US stocks report showed low refinery utilization, unexpectedly large drops in crude and gasoline inventories, and distillate stocks up only slightly. The rapid drop in gasoline stockpiles, although still about normal, already is starting to raise concerns about sufficient supplies for the summer driving season which starts in five weeks.

Electricity shortages which are spreading to numerous countries across the underdeveloped world continue to increase demand for diesel as the only readily available way to generate electricty.

Finally, natural gas prices climbed seven percent last week and are now up 41 percent so far this year. US stockpiles, which last November were a record 3.5 trillion cubic feet, are now down to a post-heating season 1.2 trillion. To match last November’s supply, inventories will have to increase by 77 billion cubic feet a week which is well above the usual 68 billion a week addition to stocks during the summer months. US natural gas prices are still too low to compete with world prices for attracting LNG cargos. Qatar said it is now sending LNG cargoes to China rather than the US and Europe because Beijing was willing to pay more. During the last two months, US LNG imports were less than a third of what they were last year. The temporary closure of the Independence Hub in the Gulf of Mexico to repair a leak may reduce the amount of natural gas available for storage by 30 billion cubic feet.

2. China

Beijing announced last week that, despite weakening exports and bad winter weather, GDP grew by a surprisingly strong 10.6 percent in the first quarter and industrial production was up 16.4 percent. An all-out but probably unsustainable effort to increase crude and natural gas production resulted in a 2.7 percent increase in crude and a 16 percent increase in natural gas during March. Coal output rose 18 percent to 211.3 million tons last month and electricity output increased 17 percent to 289.8 million megawatt-hours. The IEA now estimates that China’s oil consumption will rise 4.7 percent to 7.9 million barrels a day during 2008.

The pace of China’s diesel imports is bound to keep pressure on the world market. In March diesel imports rebounded to 3.6 million barrels, after dropping to 2.4 million during the February snows and holiday season. In January imports were a record 6.1 million barrels. Preliminary information for May suggests that China will import at least 4.4 million barrels during the month, in part to offset production losses due to a refinery fire in Guangdong province. Reports of diesel shortages at retail stations across China continue.

Prior to last fall, China imported relatively small quantities of diesel. This rapid increase in their demand for diesel, together with efforts to mitigate power shortages around the world with diesel generators, suggest that diesel prices will continue to climb for the foreseeable future.

3. Food vs. Fuel

Rapid price increases, the suspension of food exports and the onset of food riots across the world is moving the issue of converting food grains into fuel to the world’s center stage. Food shortages that are now engulfing the world are unlike any seen in recent decades in that they are not completely weather-related. World population is increasing by 78 million people each year; some 4 billion people are now so well off they can eat more grain-intensive meat; climate change is causing droughts and reducing irrigation water; and the movement to divert food into biofuels for motor vehicles continues. More stories about “how the rich are starving the world by making biofuels—dubbed “a crime against humanity”—are appearing in the world’s press.

Currently, the U.S., the EU, India, China, and Brazil all have programs underway to substantially increase their use of biofuels. Since 2000, the amount of corn used to make ethanol has increased nearly six-fold. By next year, according to the National Corn Growers Association, some 4 billion bushels of corn--about one-third of the expected U.S. crop -- will be used to make motor fuel. The problem is being compounded by the increasing cost of oil and natural gas, which is pushing up fertilizer, irrigation, and shipping costs.

Thus far, the reaction to this situation has been minimal. In Europe and China, government leaders are beginning to question whether biofuels make sense, and have asked for studies on the issue. In the U.S., there is as yet little discernable movement. Concerned groups continue to publish tracts calling for the elimination of biofuels production while the ethanol industry continues to deny vehemently that there is link between corn-based ethanol production and global food shortages. Last week the U.S. administration, whose energy policy is largely based on increasing ethanol production, also denied there is a link.

If history is any guide, Europe is likely to change biofuels policies before it happens in the U.S., where the notion of energy independence through growing food has become deeply entrenched. As the situation worsens, and U.S. food prices continue to rise, a consensus will develop that food-based ethanol was a bad idea. After serious political struggles, ethanol mandates and subsidies should gradually be eliminated. The only question is how much irreversible damage will be done before this happens.

4. Brazil's Giant Field

Last week started on an optimistic note when the head of Brazil’s National Petroleum Agency announced that the country’s off-shore Carioca oil prospect may hold 33 billion barrels – enough to supply every refinery in the U.S. for six years. Carioca was immediately touted as the biggest discovery in 30 years and the third biggest oil field ever discovered.

The next day a statement from Brazil’s national oil company Petrobras pointed out that there was really no new information about the size of the field other than what was released last September. While fifteen wells have been drilled into the formation that is called “pre-salt”, it will be some time before any definitive estimate concerning the size of the formation, which lies beneath 10,000 meters of ocean and seabed, can be made.

In the meantime, Brazil’s stock market regulators are investigating the man who released what he said was “informal information” from sources in Petrobras. Most observers believe there is considerable oil off the coast of Brazil, but that it will be many months if not years before the full extent of the discovery is determined. At any rate, extracting the first commercial flows of oil will be very expensive, won’t arrive for five or six years at the earliest, and will span many years.

5. Energy Briefs 

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

  • A new worldwide poll shows that most people believe oil is running out and that governments need to find another fuel. Americans are alone in thinking their leaders are out of touch with reality on this issue. On average, 70 percent of respondents in 15 countries and the Palestinian territories said they thought o peaked. (4/21, #4)
  • Reports of actual or potential electricity shortages continue to pour in from around the world. In addition to the ongoing rolling blackouts in South Africa and South Asia, we now have reports of problems in New Zealand, Panama, Nicaragua, Costa Rica, Viet Nam, the Marianas, Chile, Argentina, and Poland. In Pakistan this week many were injured during riots protesting the electricity shortage. There is increasing discussion of the economic damage these blackouts are causing and of diesel generators being installed to keep facilities operating. (4/15, #6)
  • The government of Ecuador is seeking to increase state control of oil under its new constitution. The government will seek temporary, six-month contracts with foreign oil companies with which it is currently renegotiating agreements. Following that, the current participation contracts would be changed into service contracts. Last year Ecuador increased its share of windfall profits to 99% from 50% under a presidential decree. (4/15, #15)
  • UK Chancellor Darling has demanded an urgent review of international biofuels programs as part of a plan to tackle the world's mounting food crisis. The Chancellor said he had asked the World Bank to produce an analysis - for June's G7 meeting of global leaders - of the impact of green policies, including American and European biofuel programs, on global food shortages. (4/14, #20)
  • Rice prices hit the $1,000-a-ton level for the first time last week as importers scrambled to secure supplies, exacerbating the tightness provoked by export restrictions by Vietnam, India, Egypt, China and Cambodia. The jump came as the Philippines, the largest rice importer, failed for the fourth time to secure as much rice as it wanted. Kazakhstan, one of the world’s biggest wheat exporters, halted foreign sales. A big food company in Japan said high corn prices had forced it to buy cheaper genetically-modified corn for the first time, breaking a social, though not legal, taboo and signaling that opposition to GM foods could weaken. (4/18, #18; 4/16, #2)
  • Kazakhstan will have Chinese help in developing oil and gas resources on the continental shelf of the Caspian Sea, according to a joint communiqué issued last week. The two governments also agreed that they would build a natural gas pipeline to be completed by the end of 2009 to eventually pump some 30 billion cubic meters a year to China from Central Asia. (4/15, #4)
  • Turkmenistan, Central Asia's top natural gas exporter, cut its gas production in the first quarter of 2008. Russia's Gazprom, currently the only buyer of Turkmen gas, agreed last year to pay $130 per thousand cubic meters (tcm) in the first half of 2008 and $160 per tcm in the second. In 2007 Gazprom bought Turkmen gas at $100 per tcm. (4/15, #5)
  • The US, the world's biggest nuclear power producer, will start between four and eight new reactors in 2016 to 2017. The exact number will depend on manufacturers' capacity, electricity prices and capital costs. (4/15, #14)
  • US crude oil imports from Venezuela fell 18.3 percent in February from January. The steep drop corresponds with Venezuela's Feb.12 decision to cut off oil sales to ExxonMobil Corp. March crude imports from Venezuela averaged 927,000 barrels a day, down 208,000 barrels a day from February, and 16.9 percent, or 188,000 barrels a day from a year earlier, according to the EIA data. (4/16, #6)
  • Venezuelan lawmakers gave final approval to a new tax on oil companies meant to grab a bigger share of the windfall oil revenue in times of high prices. Oil Minister Rafael Ramirez said the new tax should generate roughly $760 million a month, or more than $9 billion a year. The funds will go directly into the Fonden development fund, President Chavez's favorite spending fund.(4/16, # 8) Unlike the previous oil tax boosts, this latest move to tap more money from the oil sector will increase the tax burden on its own state oil company, hitting PDVSa harder than it will the private oil producers. (4/20, #7)
  • Poland and Ukraine stepped up plans to extend an oil pipeline that bypasses Russia, a move that could help diversify supplies and reduce Moscow's energy clout in the region. Last October, Poland, Ukraine, Azerbaijan, Georgia and Lithuania set up the "Sarmatia" consortium to build a new pipeline by 2011. (4/16, #16)
  • Baghdad and the Kurdish region government have reached a deal on an oil law, including a method for weighing the validity of the oil deals the Kurds have signed with foreign firms. US imports from Iraq averaged 780,000 b/d in February up 44 percent or 237,000 b/d over January. (4/17, #5, #6)
  • Kazakhstan is attempting to fine a Chevron-led oil project $307 million for environmental violations. The government is accusing the consortium of storing sulphur extracted from the crude in big outdoor piles. (4/18, #3)
  • BP said it will start up the giant Thunder Horse platform in the Gulf of Mexico by the end of 2008. Between 2007 and 2009, BP expects to bring on-stream more than 25 projects adding 650,000 barrels a day of new production. (4/18, #11)
  • Mexico's state oil firm hopes to turn a long-ignored oil basin into a major producer as the country's traditional fields run dry. This month Pemex is collecting drilling bids for the Chicontepec basin, according to Compranet, the government's procurement Web site. Experts say it will be a difficult task for Pemex to reach its production target of 100,000 barrels a day by the end of this year at the geologically challenging area. (4/20, #8)

Quote of the Week

'It would be a profound mistake if we get into a situation where we are growing corn that is essential for feeding people and converting it into fuel. That is not sustainable.'
      —UK Chancellor Alistair Darling speaking to a G-7 meeting in Washington

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