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Peak Oil Review - September 8

1. Production and Prices

As last week began, Hurricane Gustav was threatening to tear up a substantial portion of the US’s oil production and refining capacity in the Gulf as well as devastating New Orleans. However, Cuba, cooler water and the hurricane steering currents intervened so that within hours it became apparent that Gustav was going to be a more benign hurricane than those of three years ago. At the last minute, Gustav turned west, thus sparing New Orleans from substantial damage, but instead managing to tear up most of Louisiana’s power grid. With this news, the oil markets focused on the demand destruction that was likely to ensue from sagging world economic activity.

By Tuesday, oil prices had fallen as low as $105 a barrel as the markets ignored the facts that close to 100 percent of US Gulf oil production had been shut-in by the evacuation of the Gulf oil platforms and that 1 million b/d gasoline production were lost due to refinery closures. The announcement that the US would release crude from its strategic reserves if necessary supported the market’s perception that the hurricane was inconsequential. Even the weekly stocks report showing declines in inventories of crude, gasoline, and distillates the previous week did not stop the erosion of oil prices which closed out the week at $106 a barrel.

The oil markets did not reflect the serious damage that was done to the Louisiana power grid which caused lengthy delays in restoring production. By Saturday over a million b/d of crude production was still shut-in as was nearly a million barrels of refining capacity.

During the week, a new threat to Gulf production and refining capacity emerged in the form of Hurricane Ike which is currently forecast to hit the Gulf coast next weekend. As Ike will pass over Cuba before reaching the Gulf, it is too early to foresee how much damage it might cause.

Should Ike continue on its current path, another round of platform evacuations, refinery shutdowns, and port closings seems likely. While the lost crude production can be made up from the strategic reserve, gasoline supplies are likely to be very low after two or three weeks of reduced refining.

2. The OPEC Meeting

As oil falls towards $100 a barrel the question of OPEC, and more particularly Saudi, production is back on the table. In the fall of 2006, with oil having fallen from $75 to $60 a barrel, OPEC cut back production and soon oil was on its way to a high of $147 last July. The major OPEC producers, Saudi, Arabia, Venezuela, and Iran are now supporting such large social welfare programs by their oil exports that any further reduction in the price of oil could lead to social unrest. The marginal cost of new non-OPEC production, especially from deep water, has risen so high that some believe it now takes $80-90 a barrel oil to support continued deep water drilling.

Many reasons have been given for the 30 percent drop in oil prices over the last seven weeks – unprecedented gasoline prices, a slowing world economy, reduction in Chinese imports during the Olympics, unwinding of hedge funds, and curbs on speculators to name a few.

As usual, there is a split between OPEC’s “price hawks”, Iran and Venezuela, that cannot increase production and want to see prices as high as possible, and the more moderate members led by the Saudis who realize that they must balance the damage they could do to their major customers against their own need for revenue.

The Saudis are currently producing about 600,000 b/d above quota which gives them plenty of room to maneuver without formally lowering quotas; the latter step would set off howls of protests from importers around the world, especially if it is done prior to the US election. The best guess at the minute seems to be that formal quotas will remain unchanged at Tuesday’s meeting. Any informal supply reductions will go unannounced and may take a while to detect.

In the next few weeks, there are a number of other factors that could drive oil prices higher, ranging from hurricanes to revived US consumption to increased Chinese and Indian imports.

3. Iraq

A few weeks back the press was filled with stories about how Iraq, even without an oil law, was about to sign major contracts with US and European oil companies to increase Iraqi production. Suddenly the wind changed and stories emerged about how the Iraqis were going to sign contracts with China and Russia instead. The Iraqi press is reporting that this change came about as a result of pressure from Iran which wants to exclude the US from Iraq. As the key Iraqi ministries, particularly the Oil portfolio, is dominated by Shiites with ties to Iran, such a development is to be expected as US influence wanes.

Last week it was revealed that Iraq is negotiating a 20-year, $3 billion contract with China to develop a new oil field that will eventually produce 125,000 b/d. Negotiations with Russia to revive contracts to develop Iraqi oil that were signed many years ago are also said to be underway and last week Baghdad invited Japanese firms to participate in rebuilding oil facilities.

4. Russia and the West

Relations between Russia and the West, reflecting the recent incursion into Georgia, continued to deteriorate last week. A meeting of EU leaders to discuss sanctions against Moscow resulted in a condemnation of Russia’s actions, but was unable to reach an agreement on sanctions. Just prior to the meeting, Prime Minister Putin announced that Russia was speeding work on the $12 billion, 600,000 b/d oil pipeline to the Pacific Coast that would allow Moscow to sell its oil in the Asian market. Russia welcomed the “responsible” outcome of the EU meeting.

In the meantime, Russia’s oil production declined 0.9 percent in August over last year. Last week Russia’s Energy Minister proposed cutting the mineral resources tax in order to spur flagging oil production. Russian exports of gas oil and gasoline fell in August due to higher customs duties and increased domestic demand.

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

  • OPEC’s oil production dropped 0.6 percent in August, led by declines in Iraq and Saudi Arabia, a Bloomberg News survey showed. (9/4, #4)
  • OPEC’s oil supply rose for a fourth consecutive month in August, mainly due to higher output from Iran and smaller increases in Nigeria and Angola, a Reuters survey showed on Monday. (9/2, #2) [Editor’s note: conflicting reported data don’t make life easier.]
  • Russian exports of gas oil and gasoline fell in August due to higher customs duties and increased demand for the fuels on the domestic market. Crude exports dropped 5.7 percent while gasoline exports fell by 14.7 percent (9/2, #7).
  • Russia's Energy Ministry suggested a further cut in the mineral resource tax, saying the reduction already approved by the government was not sufficient to mitigate falling oil output. (9/6, #16)
  • Brazil has between 30 billion and 70 billion barrels of oil in its “pre-salt” fields near the Tupi discovery, said Julio Bueno, the state's economic affairs secretary. About $600 billion will be needed to develop the pre-salt resources. (9/6, #6)
  • Brazilian President da Silva boarded an oil platform last week to celebrate the first output from offshore deposits he's counting on to speed development and end poverty. The oil is the first trickle from the so-called pre-salt region containing as much as 50 billion barrels of oil worth $6 trillion at current prices. (9/3, #11) [Editor’s note: it will be interesting to follow the billion barrel numbers here to see where they settle.]
  • Brazil’s Tupi field is expected to start flowing oil in 2012 at about 100 kb/d but will not reach peak production until nearly 2020 at over 1 mb/d. (9/3, #20)
  • Commercial production at Kazakhstan's Kashagan oil field could start later than the agreed 2013 deadline, an oil industry official said on Thursday. (9/4, #10)
  • India has huge reserves of coal and is the world’s third largest producer, but the country is grappling with coal shortages and will continue to do so. Coal India, the state-owned monopoly, may import coal this year for the first time to tide over a shortage faced by power producers (9/6, #7, #8)
  • Global demand for coal is slowing, leaving investors to wonder what's next for US producers who've seen prices at times triple over the past year. While steam coal has slipped a bit - Central Appalachian coal for electric power plants closed at $105, down from $143 in July - the price remains historically high. (9/7, #14)
  • The Louisiana Offshore Oil Port, the only US deepwater oil port supplying crude to about half of the nation's refining capacity, said on Friday it restarted offloading tankers in the wake of Gustav. The LOOP infrastructure was not damaged by Hurricane Gustav which passed directly over the LOOP platform. (9/6, #12)
  • An unprecedented decline in driving in the USA, accompanied by a decline in gasoline tax collections, will deplete the federal Highway Trust Fund by the end of September and prompted the Bush administration on Friday to ask Congress for an $8 billion emergency infusion. (9/6, #13)
  • Prime Minister Brown vowed to end the “dictatorship of oil” with a billion-pound plan to boost renewable energy supplies and make Britain more energy-efficient. (9/6, #17)
  • Daimler AG and RWE AG are launching the world's largest joint project for environmentally friendly electric cars. The initiative covers all components required for the efficient use of battery-powered electric vehicles - from innovative drive technology through to customer-friendly infrastructure. (9/6, #19)
  • US Energy Secretary Bodman defended the reliability of market data supplied to the Energy Information Administration and said he was unaware of a probe of participants in industry surveys allegedly providing false information. The Wall Street Journal had reported that the Commodity Futures Trading Commission is examining whether certain players provided false data to the EIA to benefit their trading positions. (9/5, #5)
  • Comments from the Chinese auto and real estate markets indicate that high oil prices and stock market slump have reduced demand for cars and real estate. The steel industry, closely connected to both the automobile and real estate industries, is the first to be affected. Domestic steel prices have dropped steadily for seven straight weeks. (9/5, #9)
  • The long-delayed natural gas pipeline championed by Gov. Palin that would carry supplies from Alaska to Canada and then to the lower 48 states exists in concept only and is years away from fruition. Up to now, high costs and poor economics have thwarted the pipeline and kept the gas stranded. Estimates for the opening of the line are now as far away as the end of the next decade. (9/5, #12)
  • Nissan introduced the Eco Pedal last month as a way to actively optimize driving behavior. When the system detects that the driver is pressing too hard on the gas, the pedal pushes back on the foot to inform the driver that they are over-accelerating. The Eco Pedal can improve fuel efficiency by 5 to 10 percent, according to Nissan research. Commercialization of the product will begin in 2009. (9/5, #19)
  • The supply of natural gas from Egypt to Israel was halted on Friday and has yet to be resumed. Concern is mounting in Jerusalem: Sources there believe Egypt is struggling to supply all its clients, and has chosen to cut back its supply for its neighbors, including Israel, some of which pay especially low prices for the fuel. (9/4, #11)
  • Russia’s Gazprom said it has signed a co-operation deal on oil and gas exploration in Nigeria. The accord with the Nigeria National Petroleum Corporation covers exploration and production of oil and gas plus associated operations in several projects. (9/4, #12)
  • According to Toyota, approximately 800 to 900 million passenger vehicles exist worldwide, increasing by around 100 million vehicles every five years for the past two decades. Toyota projects that this increase is expected to continue in the future, particularly in developing countries, meaning that ownership will likely exceed 1 billion vehicles in 2010 and reach 1.5 billion vehicles in 2020. (9/4, #19)
  • US home heating bills are expected to rise dramatically this winter and there is growing concern that the government program aimed at helping poor families cope with energy costs may not be able to meet the needs of cash-strapped households. (9/3, #16)
  • The fall in the price of oil from record highs proves that prices were being driven up by speculators and not because of a shortage of supply, Angola's Finance Minister was quoted as saying. (9/2, #14)
  • Shipments of liquefied natural gas to the US declined by 63 percent in August on increased domestic production and higher Asian demand. (9/2, #19)
  • With a looming energy crisis on the horizon with Russia, Turkey has started looking for alternative suppliers for its energy needs, especially for natural gas. Turkey's balanced approach to the Russian-Georgian conflict has increased the problem as Russia is beginning to utilize economic tools to pressure Turkey. (9/2, #21)
  • Shell stopped returning workers to offshore platforms in the Gulf of Mexico on Saturday due to Hurricane Ike's threat to pass through oil and natural gas production areas next week. Shell evacuated 1400 workers prior to Gustav; 615 had returned by Saturday, but they will not be sending more offshore. (9/7, #2)
  • North Sea nations could link their offshore wind farms via a giant electricity grid on the sea bed and bring huge benefits for Europe, according to a Greenpeace report. The environment group said the grid would build on existing infrastructure to link tens of thousands of turbines located offshore, helping to smooth out power fluctuations caused by turbulent weather around the North Sea. (9/7, #18)

Quote of the Week

  • "It would be unseemly of OPEC right now to officially cut production. But a quiet understanding to trim back production might be the order of the day."
    -- Adam Sieminski, chief energy economist at Deutsche Bank

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