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Peak Oil Review - September 22

1. Oil and the financial crisis

Two hurricanes, one financial and one meteorological, took control of the oil markets last week. The week started quietly with oil prices, which had been coming down steadily for two months, falling below $99 a barrel on the news that Hurricane Ike inflicted what was at first thought to be minimal damage on oil installations along the Texas coast.

By Tuesday, a rapid fire series of financial shocks drove oil prices down to nearly $90 a barrel on the theory that the world’s financial system was disintegrating so quickly that the demand for oil would surely fall. The financial developments far outweighed normally bullish developments such as the possibility of a major OPEC production cut, heavy fighting in Nigeria, and developing gasoline shortages in parts of the US.

By Wednesday, however, prices rebounded to $97 on the theory that a $10 price drop in two days may have been too much and the government bail-out of the AIG insurance company might have saved the world’s economy.

On Thursday morning, oil fell again on indications that the continuing series of bail-outs, bankruptcies, and mergers was not going to be enough to stem rapidly deteriorating financial indexes. By Thursday afternoon, the US government had decided that drastic action was needed and began to brief a plan for the federal government to take over 100’s of billions worth of bad loans from financial institutions.

This was the news the markets had been waiting for. Stock indexes and oil prices surged and surged some more. By the Friday close oil prices had risen 14.7 percent to close at $104 a barrel, the biggest three-day jump since December 1998.

For the next few weeks, oil prices are likely to be determined by the course of the $700 billion bail-out bill the administration has submitted to Congress. At the minute, there seems to be broad agreement that it will pass by the end of this week, but as the bill constitutes biggest makeover of the US financial system in 80 years and is loaded with the potential for unintentional, ill-considered consequences it could have trouble in the Congress.

In the meantime, other developments bearing on oil prices and production such as dropping Chinese demand, OPEC’s production cut quandary, and Nigeria’s budding civil war will play second fiddle to the course of the financial bailout.

2. Gasoline shortages

Despite the limited damage Hurricane Ike did to oil facilities along the Gulf Coast, the storm left nearly 100 percent of gulf oil production shut-in and 20 percent of refining capacity closed due to a combination of insufficient electricity, evacuated personnel and limited feedstock. Coming in the wake of Hurricane Gustav 10 days earlier, which also shutdown Gulf crude production and a numerous of refineries, US production of refined petroleum products took a significant hit that is not over yet.

By Monday, oil companies were already warning that they would not be able to produce adequate supplies of gasoline in the immediate future because so many refineries were not operating. Gasoline prices, which had been dropping since mid-July began to climb. Spot shortages and some very high prices began to appear across the Southeast.

As there was little federal and state authorities could do to restore gasoline flows, they concentrated instead on guarding against price-gouging. The major oil companies still appear have adequate supplies of gas and most of the shortages that developed last week seem to be among the independent stores that much buy on the spot markets where prices soared. Shortages occurred across the South over this past weekend.

Many observers believe the worst is yet to come. US gasoline inventories had already fallen to 184 million barrels, the lowest in 40 years, just before Hurricane Ike forced another round of refinery and production platform closures. A knowledgeable official of the EIA said that this week’s stocks report could show a drop of 6-8 million barrels in US gasoline inventories.

The government has already decided not to ask the IEA for emergency shipments of gasoline from Europe on the grounds that production will be back to normal soon. The US is already importing considerable quantities of gasoline from Europe so there may not be that much left to send. The government has already released crude from the Strategic Petroleum Reserve to Midwestern those refineries untouched by the hurricanes but still not getting enough crude from the Gulf.

There now has been a reduction in refinery utilization of 2-3 million b/d along the Gulf Coast for nearly 3 weeks. Although there has been some reduction in demand due to power shortages around Houston, most of the region is still consuming gasoline at pre-hurricane rates.

As it takes two weeks or more to move gasoline through pipelines to customers along some sections of the East Coast, the full impact of the shortages may still come. As of Friday the government was reporting that 90 percent of Gulf crude production was still shut-in.

3. War in Nigeria

On September 14th, the major militant group in the Niger Delta (the MEND) declared an “oil war” in the aftermath of what they claim was a government air and naval attack on one of their village strongholds. Every day last week, the MEND announced that they had blown up another pipeline or attacked a pumping station.

So far the oil companies, acting under government instructions, have refused to confirm these attacks, but the MEND has good record of not exaggerating the effectiveness of its actions. Oil company spokesmen normally confine themselves to saying that they are investigating the militant’s claims.

During the week the MEND also announced that they were going to expand their attacks to other areas of Nigeria and offshore platforms away from their bases in Rivers State.

Without confirmation of the damage from the oil companies involved, it is difficult to determine how much additional oil production has been shut in by last week’s attacks. Government spokesmen say production has fallen by 150,000 b/d to 1.95 million b/d. Others put the damage much higher and are concerned that if the attacks keep up all Nigerian production could be shutdown.

On Sunday September 21st, however, the MEND announced a unilateral ceasefire until further notice. The militants said the action was at the request of tribal elders, but warned that they would resume attacks if government forces took advantage of the situation. In a week or so a better idea of how much damage was done by the week of attacks should emerge.

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

  • The British government has responded to a petition asking it to evaluate the risk of an imminent peak or plateau in global oil production. The Government replied that ‘the world’s oil resources are sufficient to prevent global total oil production peaking in the foreseeable future.’ (9/18, #16)
  • A leading Chinese newspaper said the world must consider building a financial order no longer dependent on the United States currency. (9/19, #10)
  • New oil sands projects need crude prices to remain over $100 a barrel to turn a decent profit, according to analysts at UBS Securities. Petro-Canada's announced that costs for its planned Fort Hills project had soared by more than half. (9/20,#17)
  • Total officials said that oil prices had slipped to within sight of the threshold below which some of its most expensive projects will no longer be commercially viable. Total’s extra heavy oil sands project in Canada requires an oil price of just below $90 a barrel to achieve a 12.5 percent internal rate of return, while Total’s developments in the deep waters off Angola need about $70 a barrel. (9/20, #18)
  • Persistent power outages continue in Karachi with people taking to the streets to block traffic, shout slogans, and stone power company offices. (9/15, #15)
  • Angola, which will be Africa's biggest oil producer this year, will cut daily crude exports in November by 10 percent to the lowest level in nine months. (9/16, #16)
  • China cut diesel and gasoline imports in August from record highs as increased domestic prices spurred oil refiners to boost fuel supplies. Diesel imports fell to 880,000 metric tons from 970,000 tons in July and gasoline imports declined to 382,151 tons from 606,000 tons. (9/16, #17)
  • Lower crude prices and shaky credit markets could force some companies to delay multibillion-dollar Canadian oil sands projects, cutting the forecast for Canada’s overall output. Most at risk are developments that are in the design phase but have yet to start construction. Some have already been delayed due to surging costs, a tight labor market, and stricter regulatory scrutiny. (9/16, #19)
  • OPEC needs to study the effects of its production cuts before considering an emergency meeting, oil officials from Iran and Libya said as prices fell to a seven-month low near $90 a barrel. (9/17,#8)
  • Saudi Arabia probably will reduce oil production before the next OPEC meeting in December after the group pledged to respect output quotas. OPEC told its members on Sept. 10 to ``strictly'' comply with production quotas after oil prices fell 30 percent. OPEC next meets in Oran, Algeria, on Dec. 17. (9/16,#17)
  • Iraq exported oil at less than half the typical rate early last week as bad weather slowed exports from the main southern terminal and sabotage cut the northern pipeline to Turkey. Oil exports flowed at around 860,000 b/d, down from average rates of close to 2 million b/d, shipping agents said. (9/17, #13)
  • Brazilian energy officials say they have declined an invitation from Saudi Arabia to join OPEC, explaining that Brazil plans to refine, not export, crude oil from recently discovered deep water reserves. (9/17, #16)
  • Exploitation of Brazil's deep-sea, sub-salt oil and gas reserves will be easier than at a similar sub-salt well operated by Chevron in the Gulf of Mexico, oil industry executives said last week. (9/17 # 17)
  • The US House of Representatives approved a package of energy initiatives last week, including measures that would allow oil drilling as close as 50 miles off the Atlantic and Pacific coasts and finance the long-term development of alternative energy sources. The vote was largely along party lines, 236 to 189, with most Republicans rejecting the Democratic-sponsored legislation because it would prohibit exploration of oil reserves closer to the coasts and in the Gulf of Mexico. (9/17, #18)
  • The US would press the Iraqi government to adopt an oil trust fund for distributing revenue or risk economic assistance under a bill proposed by Senators Clinton and Ensign. The State Department said the proposal is a threat to already divisive oil and revenue sharing laws. (9/20, #8)
  • Iran’s Energy Minister warned that that there will be more power cuts this winter. The minister said cheap electricity and the resulting high levels of consumption were to blame for the inability to meet demand. A severe drought in many parts of the country has also hit hydroelectric power generation. (9/18, #9)
  • T. Boone Pickens said he has convinced the head of Wal-Mart to study the possibility of switching the fuel used for the retailer's huge fleet of delivery trucks from diesel to compressed natural gas. (9/18, #19)
  • Brazil’s President warned that the resurrection of a US fleet in Latin America waters 58 years after it was decommissioned may signal that Washington covets huge new oil reserves off Brazil's coast. (9/19, #6)
  • Brazil’s Petrobras announced that an offshore field, in the same block as the Tupi field, is expected to yield some 3-4 billion bbl of recoverable light crude and natural gas.(9/19,#7)
  • Sinopec, Asia's biggest oil refiner, will cut planned crude oil imports by about 8 percent for the rest of the year because of ``ample'' domestic supplies. The company will import at least 1 million metric tons less crude a month than planned and also reduce refinery run rates until the end of 2008, (9/19, #8)
  • China increased electricity consumption by 10.2 percent in the first eight months of this year. Power demand rose to 2.33 billion megawatt-hours between January and August, (9/19, #9)
  • Congress seems ready to give loan guarantees to Detroit automakers. Both presidential candidates, McCain and Obama, support the loan guarantees. (9/19, #14)
  • OPEC's surprise decision last week to reduce production lays the foundation for more decisive action to prop up weakened oil markets and could involve the collaboration of leading non-OPEC producer Russia. (9/20, #7)
  • Oil production in Venezuela's Orinoco belt has risen to 850,000 barrels per day, an official at Venezuelan state oil company PDVSA said last week. "Between our own production, plus the production of upgraders, we are producing around 850,000 barrels to 900,000 barrels a day." (9/20, #12)
  • Russia will propose more tax cuts for the oil industry this year and implement them in 2010. President Medvedev met top officials to discuss tax reform after a debate between a pro-growth camp, which wanted a major cut in value-added tax, and fiscal hawks. The two sides agreed to a compromise that postponed a decision on VAT until 2009 and tasked the government with looking instead at cutting taxes in the oil sector. (9/20, #14)

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