1. Production, prices and the Gustav factor

Despite the extensive publicity given to the forecast that hurricane Gustav was likely to cross through the Gulf oil fields and slam into Louisiana as a very powerful storm, the oil markets remained remarkably calm all week. Oil closed on Friday at $115 barrel, about where it opened on Monday after touching $120 during the week. The markets were impressed by assurances that the oil industry was in much better shape to weather a powerful storm than it was three years ago. Offshore platforms have been jacked up and strengthened, more backup power was in place for pumps, refineries had better flood walls, and the IEA pledged that emergency stockpiles of crude and gasoline would be made available. For much of the week the looming storm competed with downward pressures from a falling Euro and the reopening of the 1.2 million b/d pipeline across Turkey.

By Sunday afternoon, 96 percent of Gulf oil production had been shut down as had at least 9 coastal refineries with a combined capacity of 2.2 million b/d or 12 percent of US production. Mississippi River traffic south of New Orleans closed Saturday. Ship channels into Lake Charles as well as Houston, Beaumont and Port Arthur in Texas were shut by Sunday night, cutting off crude oil shipments to refineries.

It currently looks as if the center of the storm will pass over the Louisiana Offshore Oil Port, or LOOP and Port Fourchon, a key support base for the off-shore oil platforms and the location where oil unloaded from supertankers is brought on shore. The extent of damage to these facilities is likely to be the key to how much oil production will be shut-in and how long the LOOP import facility remains out of service.

If significant damage is done to the LOOP, Gulf refineries and distribution networks, or if damaged coastal pipelines reduce the amount of oil coming on shore, it is possible that gasoline shortages will develop east of the Rockies as gasoline stocks are unusually low. If oil prices rise as a result of hurricane damage, the likelihood that OPEC will cut production next week in an effort to get higher prices will be significantly lower.

2. US Natural Gas Supply

Last week, the EIA reported an injection of 102 bcf of additional natural gas into US underground storage during the prior week. US natural gas reserves are now 71 bcf above the 5-year average. Natural gas prices have dropped 42 percent since early July. Last week’s news was enough to send gas prices down again despite the approach of hurricane Gustav and the possibility that some Gulf natural gas, which accounts for 14 percent of US production, could be shut-in for an extended period. As of Sunday 82 percent of Gulf natural gas production had been closed down.

The increase in US gas reserves is partly due to mild weather slowing demand and partly due to a dramatic 8.8 percent increase in US natural gas production this year. New horizontal drilling and rock fracturing technology is allowing considerably more gas to be extracted from major shale formations found throughout North America (the Barnett, Haynesville, Marcellus, etc.). Though some see a new era of plentiful natural gas for the US, others are skeptical.

While the new technology is promising, and there are large shale deposits available to explore, the new technology is expensive. Production from conventional gas wells is declining. It will be some time before we know whether enough gas from shale can be produced to offset declining conventional production over a sustained number of years.

3. EU and Russia

The oil markets were briefly disturbed last week by a report in a British newspaper that Russia might restrict oil deliveries to Western Europe in response to threats of EU sanctions over Russian actions in Georgia. Although Moscow quickly denied any such intention and stressed its reliability as an energy supplier, the incident served as a reminder that relations between Russia and the West have deteriorated in recent weeks to the point that some are talking of a “second cold war”.

In recent years, Russia has “for technical reasons” cut oil supplies to the Czech Republic, Latvia, and Estonia in the midst of various disputes. While cutting oil deliveries would hurt Moscow’s earnings, many believe that oil prices would rise so rapidly in the event of supply restrictions that Moscow’s earnings would actually rise. While cutting natural gas supplies would hurt the EU, curtailment of oil shipments would have world-wide implications.

Last week Moscow recognized the breakaway Georgian provinces amidst protests from the West and continues to occupy strategic locations inside Georgia. At week’s end the US and the EU continued to ponder other possible sanctions against Moscow. At some point in this ongoing dispute, curtailment by Russia of their oil shipments and then much higher world oil prices is certainly a possibility.

4. Briefs

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

  • A tightening global demand/supply outlook during and after 2013 suggests prices are unlikely to fall significantly in the future, the head of the International Energy Agency Nobuo Tanaka said Wednesday. (8/27, #4)
  • The EIA currently forecasts oil prices will be between $120 and $130 a barrel for the rest of the year. According to the agency’s annual energy outlook, prices will fall to a low of $57 a barrel in 2016 and then reach about $70 in 2030. (8/27, #3) [Editor’s note: we’re extremely disappointed with continued publication of these unreasonably optimistic long-term energy price forecasts.]
  • Diesel sales have declined roughly 5% at US truck stops in response to higher prices. A survey of 1,100 truck stops also showed that gasoline purchases increased slightly, with a huge shift from premium and mid-grade to regular. (8/30, #14)
  • Of the eight million natural gas vehicles operating worldwide, only about 116,000 were in the United States, mostly as fleet vans, buses and cars, according to a 2006 DOE estimate. (8/30, #15)
  • The move toward more fuel-efficient cars will have an enduring impact on U.S. gasoline demand, said EIA Administrator Caruso. The EIA is forecasting for the first time that gasoline demand will go into a long term decline. The EIA sees gasoline demand falling to 9.17 million barrels per day this year, from 9.29 million barrels in 2007. (8/30, #16)
  • European cars are already far more efficient than those sold in the United States. The average new European car gets about 100 kilometers on just under six liters, or 40 miles to the gallon, which is double the average for new cars sold in America. (8/30, #19)
  • Japan’s domestic oil product demand fell to its lowest in 19 years for the month of July as surging oil prices hit gasoline and kerosene use hard. (8/29, #9)
  • US automakers deserve as much as $50 billion in government-backed loans so they can build more fuel-efficient cars, according to a top GM executive. (8/29, #13) [Editor’s note: it takes a lot of gall to fight against calls for fuel efficiency for two decades, then demand guaranteed loans to support a switch towards the very efficiency they fought.]
  • Tests performed by Ford Motor Company found that 48 motorists coached by eco-driving experts saw an average fuel economy improvement of 24%. Coaches told drivers to employ smoother breaking and accelerating, monitor their RPMs and drive at a moderate speed. (8/28, #16)
  • Southwest Airlines, which had resisted capacity cuts being made by other carriers, will eliminate 190 flights early next year as it struggles with high fuel costs and a weakening economy. (8/27, #12) Zoom Airlines, a low-cost carrier based in Ottawa, abruptly stopped operations and sought protection from creditors, stranding hundreds of passengers.(8/30, #18) Troubled Italian airline Alitalia has applied for bankruptcy protection as it tries to forge a deal to ensure its long-term survival. (8/30, #20)
  • Iraq’s Al Ahdan oil field, which was awarded to China National Petroleum Corp last week, is expected to start first crude oil production—25,000 barrels a day—in 2009. (8/29, #4) ConocoPhillips CEO James Mulva said his company expects to participate in a tender for the rights to develop Iraq’s West Qurna-2 field together with Russia’s OAO Lukoil. West Qurna has estimated reserves between 15 and 21 billion barrels of oil. (8/29, #5)
  • Many Pakistani power experts attribute the alarming rise in outages—lasting 10 to 15 hours a day—to either incompetent power authorities or their deliberate attempt to produce less electricity in view of high oil rates. (8/28, #7) Bangladesh is also suffering through severe electricity blackouts. (8/28, #15) In India, power outages seem to be having a ripple effect, with generators guzzling diesel and the resultant fuel shortage driving up vegetable prices. (8/26, #12)
  • Six more US senators have expressed support for a bipartisan energy proposal that includes opening more of the Outer Continental Shelf for leasing. (8/28, #17)
  • Crude output from Mexico’s struggling Cantarell oil field fell for the 10th month in a row in July. Cantarell is now producing half what it was yielding at its 2004 peak, pulling down overall output in the world’s No. 6 oil-producing nation and threatening Mexico’s status as a top U.S. supplier. In Mexico oil revenues constitute nearly 40% of the government’s budget. After a decade of steady progress in reducing poverty, a plunge in oil production will put public spending in jeopardy. (8/27, #8, #9)

Quotes of the Week

  • [ On the decline in oil production by supermajors:] “The reason is largely due to geopolitics and, to a lesser degree, technological limitations. It’s certainly not because the world is running out of oil. A more accurate way of defining the current situation is that the world is dealing with geopolitical peak oil, not absolute peak oil.”
  • — Deborah Yedlin, reporter for Calgary Herald

  • “It is obvious to any observer that oil production, for whatever reason, whether geologic or geopolitical in nature, is not going to keep up with demand. Fifty-four of the 65 oil-producing nations have entered irreversible production declines. This is a matter of fact, not opinion.
  • — Debbie Cook, Mayor of Huntington Beach (CA).