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Peak Oil Review --April 28th, 2008

1. Production and Prices
2. Nigeria
3. Grangemouth
4. Natural Gas Prices
5. Energy Briefs

1. Production and Prices

It was yet another week of historic peaks for oil prices. On Monday crude reached a new high of $117.40 a barrel based on the weak dollar and OPEC’s refusal to increase production. On Tuesday, a second new high of nearly $120 was reached as insurgent attacks in Nigeria were added into the mix.

By Wednesday crude was falling again with a stronger dollar and a US stocks report that showed more US refining capacity coming back online, imports growing by 1.2 million b/d over the previous week, and crude stockpiles increasing by 2.4 million barrels.

However, the report also said that petroleum consumption in the US was up by 0.8 percent over the same four-week period last year and gasoline consumption increased by 0.9 percent. US gasoline inventories declined by 3.2 million barrels and distillate inventories declined by 1.4 million barrels. Gasoline inventories are still satisfactory, but have been dropping rapidly from abnormal highs for the last 6 weeks. Distillate stocks, which have been dropping during the winter heating season, are now scraping the bottom of the normal range for this time of year.

The week ended with another surge putting crude above $119 again on a report of shooting in the Persian Gulf and yet another pipeline attack in Nigeria. US retail gasoline prices continued to rise during the week nearing $3.60 on Friday.

We are now at the time of year when gasoline and distillate inventories usually rise in preparation for the summer driving season and heating oil stocks build for next winter. These inventory numbers will bear close watching over the next few weeks for if they do not start rising there will be higher prices and possibly even shortages ahead. The strikes that currently are going on in the UK and Nigeria, coupled with increased insurgent activity in Nigeria and the surge in Chinese imports, suggest that it may be difficult for the US to import sufficient products in the next couple of months to keep up with demand.

2. Nigeria

Nigerian oil production took a double hit last week when a combination of five insurgent attacks on pipelines and a rare oil-workers strike against Exxon reduced crude production from the 1.9 million b/d averaged in March to about 1 million b/d. The estimated loss in production may be even worse as they do not include any oil shut-in by the latest pipeline attacks.

The oil companies have been slow to acknowledge the damage being done by the insurgent attacks and Exxon will not reveal the damage being done by the strike. For several days Shell maintained that the first attack was a minor, easily contained incident, before declaring force majeure on 169,000 b/d of production.

While the strike is likely to be settled shortly, the persistent insurgent attacks, if continued, have the potential to make a significant dent in Nigeria’s oil production. In a letter to President Bush the insurgents said they will not be intimidated by US warships in the Gulf of Guinea and will continue the attacks “to cripple the economy of Nigeria.”

In an effort to relieve the persistent domestic gasoline shortages and dependence on imported fuels, the Nigerian government is considering a mandate on the international oil companies operating in the country to refine and sell a portion of their production locally.

There was no progress in the strike negotiations over the weekend. On Sunday insurgents attacked the police station on Bonny Island, the site of Nigeria’s largest oil export terminal, killing five policemen and taking their weapons.

3. Grangemouth

A two-day strike by oil workers at Scotland’s 210,000 b/d Grangemouth refinery may have worldwide repercussions lasting several weeks and cost hundreds of millions in lost revenue. The problem is that Grangemouth provides the power and steam for the facility that processes 700,000 b/d of crude oil that is brought ashore from 70 North Sea oil fields, about 40 percent of the UK’s daily production. This is the first time in more than 70 years that a British refinery has been closed by a strike.

Although the strike is scheduled to end Tuesday morning, it may take several weeks to return the refinery and North Sea crude production back to normal. The outages will cost Britain’s economy about $100 million per day and the government $50 million per day in lost tax revenue. Scotland is importing 500,000 barrels of diesel from the continent to insure there are adequate supplies in the next few weeks.

The British government assured motorists that there is adequate fuel in stockpiles, but this did not stop long lines, limits on fuel purchases, and price gouging from developing in parts of Scotland and Northern England.

It will be several days before the full effects of the strike are clear and its impact on world oil prices is known. In theory, the refinery and production platforms should be able to resume functioning in short order, but the refinery is 40 years old and many of the aging North Sea production platforms may be difficult to restart. Whitehall announced that it will institute emergency rationing if shortages develop and the emergency importation of 500,000 barrels of diesel is going to put further pressure on world diesel prices. The strike did not settle the underlying labor dispute and the unions are already threatening to call another.

4. Natural Gas Prices

Natural gas rose to $11.27 per million BTUs last week, the highest level since December 2005 after the disruptions caused by hurricanes. Natural gas prices have not risen as much as oil products in recent months, so that in terms of BTUs natural gas at $11.27 is still cheap in comparison with fuel oil at $14.66 per million BTUs and heating oil at $23.88. Natural gas inventories are now at 1.28 trillion cubic feet after reaching a high of 3.54 trillion in November and are 18 percent lower than at the end of the heating season last year and 1.9 percent below the five-year average.

The Independence Hub in the Gulf of Mexico that was supplying about 900 million cubic feet a day was shut down to repair a leak on April 9th and may be out of service for a month. Preliminary data show that US LNG imports in the first 3 months of 2008 are only half of the volumes received in the first quarter of 2007, lowering average daily supplies by more than 1 billion cubic feet per day. Europe, China, and other LNG importers are willing to pay higher
prices to attract LNG cargoes. All of this suggests that rebuilding stocks to prepare for next winter is likely to take still higher prices.

5. Energy Briefs

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

  • Oil output in Russia has peaked and may decline in the coming years, said billionaire Viktor Vekselberg, an owner of BP Plc's venture TNK-BP. Russia's oil output dropped one percent in the first quarter of this year. The Russian Energy Ministry has said it expects production of crude and gas condensate to increase 1.8 percent increase this year to 10 million barrels a day. (4/24, #21; 4/26, #16)
  • In the first three months of 2008, IEA figures show that an all-time high average of 87.34 million b/d of total energy liquids was produced worldwide. Crude oil production, including lease condensates, increased by 194,000 b/d from December 2007 to January 2008. Total crude-and-condensates production in January hit a new all time high production record at 74.47 million b/d. (4/22, #22)
  • The average price of a liter of gasoline will top $1.40 this summer and $2.25 by 2012, according to a forecast from CIBC World Markets which says tightening supplies will drive crude oil over US$150 a barrel by 2010 and to US$225 a barrel in four years. (4/25, #12)
  • Opinion poll: most people believe oil is running out and governments need to find another fuel, but Americans are alone in thinking their leaders are out of touch with reality on this issue, an international poll said on Sunday. On average, 70 percent of respondents in 15 countries and the Palestinian territories said they thought oil supplies had peaked. (4/21, #4)
  • With the opening of the 1.2 million barrel/day Khurais project, Saudi Aramco is dipping into one of its last big basins of oil. After Khurais, Saudi Arabia will have only one known mega-field left to fully develop, the even more challenging offshore Manifa field. Much of the kingdom's reserves beyond these lie either in aging fields or smaller pockets. (4/23, #5)
  • Amid signs of a growing backlash against biofuels in the wake of the worst food price spike since the 1970s, the IEA said that the crop-based fuel was vital to meeting current and future demand. Texas Gov. Perry asked the US government to cut "skyrocketing" food prices by waiving half of the renewable fuel standard for ethanol made from grain. The FAO estimates biofuels account for only 10 per cent of the food price spike. (4/26, #4; 4/27, #14)
  • Iraq's Oil Ministry is in negotiations with BP, Shell, Chevron, Total and ExxonMobil for technical support contracts aimed at increasing production by 100,000 bpd in each of five key oil fields over the next two years. In the meantime, a bomb attack on a fuel pipeline south of Baghdad on Friday caused a large fire and wounded eight guards, police said. (4/26, #5, #6)
  • Kuwait wants to increase crude oil exports to China to 100,000 barrels a day this year, a company official said. (4/25, #2)
  • Saudi Aramco aims to double its crude oil supply to China by 2010 from about 500,000 barrels a day last year (4/24, #3)
  • Sudan is targeting an increase of 100,000 barrels/day of oil mid-2009 as new investments, particularly Chinese, come on stream, the Sudan oil minister has said. (4/25, #5)
  • Studies debunking the environmental benefits of ethanol have made little impression in China, which is betting on biofuels to help clear its increasingly smog-filled skies. But economic realities of surging food prices are beginning to disturb the ethanol program. Prices for cassava and other non-grain feedstock promoted in China as a safe alternative to the conversion of precious corn into ethanol fuel are quickly rising. (4/26, #17)
  • China's Ministry of Commerce has ordered already strained oil producers to increase output of diesel to meet heightened farm demand during spring planting. Reports of diesel shortages across southern China continue. (4/24, #12; 4/24, #11)
  • Mexico's gasoline imports rose 6.5% to 360,700 b/d in March. This coincided with a 7.8% decline in the country's oil production in this year's first quarter to 2.91 million b/d, largely due to declining output from traditional oil fields. Oil exports fell by 12.5% to 1.5 million b/d in the quarter, compared with the year-ago period. (4/24, #9)
  • With the economy soft and U.S. gasoline prices having recently passed the inflation-adjusted record of $3.40 a gallon set back in 1981, vehicles sales fell 8% overall during the first quarter of 2008, and those of large SUVs and pickup trucks were down 27% and 14%, respectively. (4/24. #15)
  • Delta Air Lines, the U.S.'s third-largest carrier, said Wednesday its loss widened in the first quarter to a whopping $6.39 billion because of soaring fuel prices and the steep decline in the company's market value. (4/24, #17)
  • Alberta has appointed a panel of experts to study the pros and cons of nuclear power to melt oil from the tar sands as one developer considers a $9.8 billion plant amid opposition by environmentalists. (4/24, #18)
  • Argentina is on the brink of a major energy crisis. Oil production has peaked, natural gas reserves are not being replaced, natural gas is not attractive to foreign investors, and major electricity shortages are looming, with some blackouts already being reported. (4/23, #8)
  • From Iraq to Ecuador, ,b>international oil companies have swallowed their pride and agreed to contract terms they would have walked away from a few years ago. (4/21, #22)
  • China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency. (4/21, #9)
  • US Energy Secretary Bodman said he does not favor releasing the nation's strategic oil reserves to help bring down record high crude prices. "You could affect things for a week or a month but you're then in a very sticky wicket.” (4/22,#4) 

Quote of the Week

"Our candid advice to the oil majors is that they should not waste their time repairing any lines as we will continue to sabotage them. We have time on our side and there is so much to be destroyed."
     —Nigerian militant spokesman Jomo Gbomo

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