Peak Oil Review – June 23

1. Production and Prices
2. Jeddah
3. Nigeria
4. The Offshore Drilling Panacea
5. China Raises Prices
6. Energy Briefs

1. Production and Prices

In another volatile week, oil prices reacted sharply to breaking news, but ended the week just about where they started. Oil rose slightly on Monday after the UN Secretary General revealed that Saudi Arabia would announce only a 200,000 b/d production increase rather than the 500,000 b/d that had been widely discussed. A fire on a North Sea platform and a weaker dollar briefly sent oil prices to a new high of $139.98 but they soon receded to below $134.

Increased imports in the Wednesday stocks report were not enough to keep US crude stocks from falling by another 1.2 million barrels. Again most of the decline is along the Gulf Coast. The EIA now says US gasoline consumption for the last month fell by 1.8 percent over last year. MasterCard says the decline is double the EIA figure and the API says it is much lower.

On Thursday prices spiked to $137 on news of a militant attack on an offshore Nigerian production platform. This was immediately followed by a Chinese announcement that they were increasing retail gasoline and diesel prices at midnight. The market interpreted this news to mean that Chinese demand for petroleum would soon be falling, so crude immediately fell by $4.75. On Friday word came that Israel may have been rehearsing attacks on Iranian nuclear facilities. This, coupled with the realization that it probably will take more than a 17-18 percent price increase to stem Chinese demand for gasoline and diesel, sent crude back up to close out the week at $135.

In the midst of all this volatility, natural gas futures rose to a high of $13.18, nearly double the price at this time last year. Concerns about weather, inventories and the falling dollar all contributed to the increase.

2. Jeddah

The meeting on Sunday was called by the Saudis in an attempt to defuse a mounting worldwide backlash against rapidly increasing oil prices. Many believe that Saudi and other OPEC members’ unwillingness to increase production is the cause of high gasoline prices, hence bills have been introduced in the US Congress to cut arms sales to the Kingdom or at least haul them into court for price fixing.

As a sweetener, the Saudis announced they would increase production by another 200,000 b/d in July to a total of 9.7 million b/d. They also talked of investing $120 billion to increase productive capacity to 13 – 15 million b/d over the next decade and talked about the  prospects for their Khursaniyah field which may add an additional 500,000 b/d of new capacity.

For Riyadh, the major objective of the conference was to redirect the world’s attention towards the role that speculators may play in forcing up oil prices and away from the balance between supply and demand. The Saudis and other OPEC members endlessly recite their mantra that “the market is well supplied” and that there is no basis to fears of an impending oil shortage.

The oil markets, however, quickly latched on to the notion that an additional 200,000 b/d of what is likely to be heavy sour oil will not do much to ease oil prices. The final communiqué touched on all the main issues raised in the conference, but provided no solid details for action.

Nigeria

Shell has told customers that it will suspend oil shipments of at least 200,000 b/d for as long as six weeks from the offshore Bonga field in the wake of attack by the MEND on its production platform. Some 20 militants in three speedboats attacked the platform at 5 AM. The objective was to destroy the control center which would likely have taken considerable time to repair. After the attack a MEND spokesman said the attackers would not have been able to destroy the control center without causing heavy casualties among the facility’s staff which is something they wished to avoid.

Although Shell has been reluctant to share details, the facility apparently suffered some physical damage and staff some psychological damage from the attack, although there were no deaths and injuries were reported to be minor.

A second attack on pipelines operated by Chevron halted an additional 120,000 b/d of production late in the week.

A successful attack on a major production facility 75 miles offshore raises the insurgency to new level. Two months ago the MEND announced they were resuming attacks on oil facilities with the goal of halting all oil production in Nigeria. The MEND has been saying that the government is forbidding the oil companies from saying any more than necessary about attacks which reduce production. From the dissembling and incorrect information coming from oil company spokespersons in recent weeks, this claim is likely true.

The Minster of Finance was quoted as saying last week that production is now down to 1.8 million b/d from the 2.4 million the country had been producing recently. Outside observers put current Nigerian production at 1.2 – 1.5 million b/d.

On Sunday the MEND announced a ceasefire, but still refuse to participate in peace talks while their leader is being tried for treason. Although pipelines through swamps and jungles are nearly impossible to defend, offshore production facilities are far more defensible by well trained and equipped naval forces. It seems likely that there will be requests for more direct assistance by US or European forces in defending Nigeria’s growing offshore oil production from attack.

The Offshore Drilling Panacea

The offshore drilling debate was revived last week when Presidential Candidate McCain called for lifting the ban on oil and gas exploration as a way to reduce the US’s “dangerous” dependence on foreign oil. McCain was joined by President Bush who urged Congress to lift the ban on offshore drilling which has been in place for nearly 30 years and throw out the ban on drilling in the Arctic National Wildlife refuge for good measure.

McCain’s and Bush’s advisors naturally are aware that it will be at least ten years before any significant quantities of oil could come from offshore drilling and even then is unlikely to have more than negligible effect on oil prices. The proximate cause of the new initiative is likely a new poll showing that 60 percent of Americans believe that offshore drilling should be allowed and that such drilling will lead to a drop in oil prices.

Some state governors, particularly Schwarzenegger of California, have vowed to fight lifting the ban. Many however feel that the threat to economy posed by $4-$5 gasoline is so serious that it is worth the environmental risks. So far there is no detectable sentiment that at least a little oil should be saved for the grandchildren. (See additional comments in the short Commentary.)

China Raises Prices

In a surprise move, the Chinese government announced on Thursday that it was raising gasoline prices by 17 percent, diesel by 18 percent, and jet fuel by 25 percent. Electric prices will increase by five percent on July 1st. Conventional wisdom had been that the move would not take place until after the Olympics, but revived shortages due to the low retail price caps and increasing worldwide complaints that subsidized fuel prices were an important factor driving oil prices higher and higher convinced Beijing to act now.

The debate now shifts to how much, if any, the price increases will stem demand. A theory has already emerged that demand for motor fuels will increase because the higher prices will eliminate lines at the fuel pumps and increase the incentive to drive more. Few, including the IEA, believe that the increases, which will still leave Chinese prices well below the world market, will have much of an impact on demand.

Thus the real issue becomes how much effect there will be on inflation in China, where prices are already rising 6-7 percent/yr. Chinese economists are saying that the recent price increases should not add more than one percent to the inflation rate during the year. Some are saying that the government’s willingness to increase oil prices at this time suggests that they believe they have inflation from other sources under control for time being.

Energy Briefs

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

• Russian crude oil exports fell by 4.2% in the first four months of 2008, year-on-year. The Federal Statistics Agency says oil production in the reporting period fell 0.3%.(6/21, #21)

• Iran is pressing on with uranium enrichment “non-stop” despite the world powers’ offer of economic incentives to coax Tehran into halting such activities. (6/21, #5)

• Western countries have upgraded the food and fuel crisis into a national security concern as they fear record high energy and agriculture commodity costs are destabilizing key developing regions of the world. (6/21, #6)

• Output at Mexico’s Cantarell slipped again in May, according to new data. Production is down 33% from the same month of 2007. Total Pemex production is down 9.3% for the first five months of 2008 vs. the same period in 2007. Exports are down. (6/21, #12)

• US Rep. Stupak introduced a bill to close regulatory loopholes that he said have allowed commodity speculators to push oil prices upward and profit from the increase. (6/21, #18)

• Across the US, surging fuel prices are forcing cities to cut back services and dip into cash reserves to keep fleets on the road, according to a survey released on Friday. (6/21, #20)

• Oil supply from non-OPEC nations, the source of roughly 60% of world oil production, is stalling and may even decline this year, keeping the heat under record oil prices. (6/20, #4)

• The International Energy Agency reiterated that the giant oil stocks it manages with energy consuming nations will only be tapped to make up for crude lost to big unexpected disruptions and will not be released to push oil prices lower. (6/20, #6)

• By the end of June, Shell, BP, Exxon Mobil and Total will sign agreements with Baghdad, Iraq’s first deal with big Western oil firms since the US-led invasion in 2003. The deals are for repair and technical support in some of the country’s largest oilfields. (6/20, #10)

• The US House plans to vote on a new energy package as early as next week that includes provisions to curtail energy market speculation and force oil companies to drill on existing leases or pay escalating penalties. (6/20, #15)

• About 60 percent of Americans would support government moves to encourage more oil drilling and refinery construction as a way to combat soaring energy prices — but the same number also profess to be in favor of conservation, according to a Reuters/Zogby poll released last week. (6/19, #15)

• Even as President Bush calls for repealing a ban on drilling off most of the coast of the United States, a shortage of ships used for deep-water offshore drilling promises to impede any rapid increase in oil supply. The world’s existing drill-ships are booked solid for the next five years. Some oil companies have been forced to postpone exploration while waiting for a drilling rig. (6/19, #14)

• Americans drove 30 billion fewer miles from November through April than during the same period in 2006-07, the biggest such drop since the Iranian revolution led to gasoline supply shortages in 1979-80. (6/20, #16)

• Major US airlines project that they could lose $10 billion in 2008 due to skyrocketing fuel costs, a staggering sum that would almost match the industry’s worst-ever year loss in 2002. (6/18, #13)

• U.S. retail gasoline demand year-to-date fell 1.96 percent from the same time last year as prices for the fuel rose above $4 per gallon, MasterCard Advisors said Tuesday. (6/18, #14)

• It may seem a bit drastic, but more and more people are taking what is perhaps the ultimate step in cutting gas prices: they’re moving closer to their jobs. (6/17, #14)

• The costs of making electricity with solar power within a decade will reach parity with power made with fossil fuels like natural gas and coal, a study announced on Tuesday by supporters of renewable and solar energy says. (6/18, #18)

• The Canadian Association of Petroleum Producers said it expects the country will produce 4.5 million barrels of oil per day (bpd) in 12 years, double current output, with U.S. refiners taking most of the increase. Last year the group called for production from the oil sands of 3.4 million bpd by 2015, but its updated study calls for 2015 output from the region to be just 2.8 million bpd. (6/19, #19) [Ed. note: this still seems like an unrealistic target.]

• A 13 percent rise in European electricity prices, which have surged by almost 50 percent in the past year, would likely force lawmakers to lower the cost of emissions trading, said an analyst at Deutsche Bank AG. (6/20, #17)

• A severe fuel crisis has hit northwestern Pakistan. Around 90 per cent of the filling stations have closed down due to an acute shortage of diesel that has lasted for several days and has forced truckers to park their vehicles. (6/19, #7)

• Saudi Aramco will sign a final agreement with Total to build a 400,000 barrel-a-day refinery in Jubail, eastern Saudi Arabia. The cost to build the new refinery has risen to $12 billion as the cost of building materials soared. The cost of a similar refinery with ConocoPhillips on the Red Sea coast has also increased to $12 billion. (6/18, #5)

• China’s gasoline production in May fell from a year ago for the first time in five years, helping to turn the world’s number-two consumer into a net gasoline importer for the first time ever. (6/16, #5)

• China increased its crude oil output in May to the highest in more than seven years as the nation’s producers strained to meet increased energy demand in the world’s fastest-growing economy. (6/16, #9)

• The industrial output of China’s major enterprises grew 16.0 percent year-on-year in May. China’s economy is forecast to grow at a slower annual rate of only 10.4 percent in 2008 because of a deteriorating external environment and domestic tightening policy, a research report said. (6/16, #12 #13)

• Recent Brazilian oil discoveries may all be connected and form one big oil field, Energy Minister Edison Lobao said during an interview Saturday. The Minister would not confirm estimates that Brazil’s new discoveries might total 33 billion barrels but said he “hopes” that reserves are more than that. (6/11, #11)

• Shell announced it will forego its 2008 Beaufort Sea drilling program due to a slow 9th Circuit Court of Appeals ruling. Shell cited a need for workers and contractors to pursue other opportunities as additional factors in the decision. Although the drilling program has been pulled, the company plans to wait until next year to begin pursuing the Beaufort program. (6/22, #13)

Quotes of the Week

“Oil is no longer cheap; indeed, it has never been more expensive. Moreover, there is growing concern that the supply of oil may soon peak as consumption continues to grow, known supplies run out and new reserves become harder to find.”
        —From this week’s The Economist

“Many people’s supply-demand models for 2010 and beyond are out of balance. The futures market is sending a message to the physical market. Either you slow demand and increase supply or prices are going to go a lot higher.
        —Adam Sieminski, chief energy economist, Deutsche Bank

“We are racing towards a future that will be very difficult, and we have to do what is necessary to not economically kill ourselves.”
        —Bob Hirsch, energy expert and peak oil commentator

“The projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.”
        —US Energy Information Administration