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Peak Oil Review - Mar 2

1. Production and Prices

By recent standards, oil prices had a pretty good week. After dropping a couple of dollars to a low of $38 a barrel, prices rebounded 6 percent on Wednesday after the weekly oil stocks report showed an unexpectedly large drop in gasoline stocks. On Thursday prices rose above $45 a barrel on hopes that the drop in US demand may be stabilizing. US crude inventories, which have risen by 30 million barrels in the recent weeks, were up by a less-than-expected 700,000. On Friday, worries about the recession moved to the fore as Japan reported a large drop in exports and the US’s GDP was revised for the 4th Quarter of 2008 to show an unexpectedly large 6.2 percent decline.

The race between OPEC production cuts and a faltering global economy continued last week. A second tanker tracker reports that OPEC is making good progress on cutting production by 4.2 million b/d. Both trackers say that OPEC has already accomplished about 80 percent of their goal. With OPEC still receiving $40 or less for its oil, many analysts are predicting that OPEC will make another 1 million b/d cut at the March 15th meeting. The oft repeated sentiment is that oil prices will never rise as long as the global economy contracts.

As the Saudis are likely to bear the brunt of an additional production cut, talk continues as to how much further the Kingdom can cut production without endangering the vital natural gas supply which is needed to keep the country functioning.

The EIA reported this week that US petroleum demand in 2008 fell by 6 percent or 1.2 million b/d to 19.4 million b/d. For December consumption was down to 19.1 million b/d or a drop of 7.4 percent from 2007. Preliminary numbers from January and February 2009 suggest that demand has rebounded a little but is still well below the same months in 2006 and 2007.

The key issue remains whether global demand has fallen as much as the 3.4 million b/d that OPEC appears to have cut its production. If this is the case then global stocks should start falling soon.

2. Obama’s budget.

A combination of President Obama’s first budget, the recently passed stimulus bill and the impending climate-change bill could add up to a massive shift in US energy policy. The major energy companies are apoplectic over the proposed changes which impose heavy taxes on the old fossil fuels, largely by removing long standing tax breaks, and transfer billions to help develop renewable sources of energy.

The publication of the budget immediately polarized the debate, with Republicans and industry spokesman denouncing the proposals while Democrats and environmental groups were largely supportive.

As most of the proposed changes have to do with esoteric tax deduction and accounting rules, their impact is comprehensible primarily to accountants for the industries concerned. Some have to do with tax loopholes which allow the oil industry free or cheap access to oil on federal property.

A spokesman recently said that the oil industry pays about $152 billion in local state and federal taxes each year. Some are saying that the changes would increase this tax burden by only $3-4 billion a year which does not seem much given the size of the industry’s recent profits.

One of the emerging issues seems to be the effect of the tax changes on the myriad of small producers who do most of the on-shore oil and gas drilling in the US these days. Unlike the majors who have massive cash reserves, these companies have been hit hard by the credit crunch and industry spokesmen insist they will be driven out of business in droves by higher taxes. This of course would add to unemployment and increase America’s dependence on foreign oil.

Environmental organizations see the proposed changes as the end to the tax-payer funded feast that they assert the oil companies have enjoyed far too long.

The truth in all this is nearly impossible for an outside observer to fathom. The only thing we can be sure of is that there will be ferocious debates in the Congress and massive lobbying efforts by both sides in the days ahead.

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

  • The IEA says global oil demand will drop by 980,000 b/d this year but will rise again by about 1 million b/d in 2010. IEA’s Nabuo Tanaka worried that demand will snap back, starting a trend that will lead to higher prices and no spare production capacity by 2013. (2/28, #4)
  • The current financial crunch has already led to the postponement or cancellation of over $100 billion worth of oil projects in the past six months, which will aggravate the "supply pathology" when recovery begins. (2/27, #20)
  • The EIA predicted that world oil demand this year would fall by 1.17 million bpd from 2008 to 84.7 million. That would be down from peak demand of 85.9 million bpd in 2007. (2/27, #16)
  • A new Deutsche Bank analysis finds that with investment now falling, the downside risks of low oil prices to supply forecasts are increasing. The average oil price necessary to achieve good return on new development projects is now $68/bbl in Angola, $62/bbl in the US Gulf of Mexico, $60/bbl in deepwater Nigeria, and around $60/bbl in Brazil (2/28, #21)
  • BP’s oil and gas production business in the North Sea is unsustainable at current low oil prices and high costs. The cost of developing and running oil and gas fields in the North Sea has increased 50 percent since 2004, but the oil price is now back at 2004 levels. (2/24, #16)
  • World oil production may slide rapidly over 3-4 years past 2009 due to a short burst in decline of the resource base, then reach a gentler decline regime after 2010. Production from the super-giant and giant fields is the cornerstone of modern oil production. In the top 20, 16 of them are in decline. (2/26, #11)
  • Doubts are growing that Mexico can halt a four-year decline in crude oil production after its January oil output slumped 9.2 percent year-on-year to 2.685 million b/d, just below the 2009 target of 2.7 to 2.8 million bpd. Pemex estimates that Cantarell will end 2009 producing about 700,000 b/d, suggesting that yields will fall 14 percent from 2008. However Cantarell's decline has accelerated steadily in the past few years and exceeded 36 percent in 2008. This trend appeared intact in January as output from the Cantarell complex fell by 34 percent year-on-year. (2/28, #9)
  • Canada exports 65 percent of its oil and 59 percent of its natural gas to the US. (2/26, #10)
  • Saudi Arabia overtook Angola to become the biggest oil supplier to China in 2008, accounting for a fifth of its supplies. China is the third-largest buyer of Saudi crude after the United States and Japan. (2/26, #4)
  • The Saudis can only cut oil production so far. Beyond revenue concerns, the kingdom needs a minimum level of oil production to get the associated natural gas that runs its industries. (2/27, #2)
  • Chevron now expects a Nigerian plant that will convert gas to liquids (GTL) to be operational by 2012, which would be a year later than expected. (2/28, #6)
  • Chevron delayed the start of production at three Nigerian projects and raised cost estimates as much as 103 percent on some of its biggest new sources of output. The $60 million a day Chevron spent last year to search for untapped fields and expand plants failed to prevent a 3.4 percent drop in production. (2/27, #11)
  • Financially-troubled Nigeria will sell the nation’s four oil refineries to raise funds as falling crude prices widen the country’s budget deficit. The West African nation will also remove subsidies on gasoline and other petroleum products to cut expenditures. (2/28, #7)
  • Nigeria could triple its output of liquefied natural gas (LNG) in a few years if planned projects are not cancelled or delayed due to the global economic crisis. Nigeria is the fifth largest LNG producer, supplying 10 percent of the world's supplies. (2/26, #5) [Editors’ note: this is nearly hopeless optimism.]
  • A top official from French oil major Total said that Akpo, the Nigerian deep offshore oil and gas field discovered in 2000, will go online in April as expected and begin producing 175,000 barrels a day by the end of the year. (2/27, #5)
  • Venezuela’s Rafael Ramirez, CEO of PDVSA, said that the company is engaged in negotiations to make oil contractors lower the rates they charge for services by 40 percent. PDVSA's failure to make some previous contract payments has led to labor conflicts in different oilfields. (2/28, #8)
  • Venezuela's oil minister says oil prices should exceed $70 a barrel to be considered fair. The price for Venezuela's crude now stands at $33.93 a barrel, far below the $60-a-barrel level needed to cover this year's government budget. (2/27, #8)
  • Officials from French energy major Total SA and Russian gas giant Gazprom confirmed interest in the proposed $12-billion Trans-Sahara Gas Pipeline. (2/25, #7)
  • A deal has created a joint venture between the Iraq Drilling Co. and the British Mesopotamia Petroleum Co. This is the first such joint venture in post-Saddam Iraq, and will likely be a template for future projects to bring foreign oil companies into the world’s third largest oil reserves. (2/27, #4)
  • South Korea will provide Iraq with $3.55 billion worth of infrastructure in return for oil field stakes, Iraq’s Energy Ministry said early last week. (2/25, #5)
  • Oil production from the non-OPEC-12 peaked in 2004 at 46.8 million b/d. The US Energy Information Administration and the International Energy Agency should make official statements about declining non OPEC-12 oil production (from Russia, US, China, Mexico, Canada, Norway, Brazil, the UK, Kazakhstan, Azerbaijan, Indonesia and India) in order to renew the focus on oil conservation and alternative energy sources. (2/24, #17)
  • US rigs exploring for or producing oil or gas declined by 57, or 4.4 percent, to 1,243, the lowest level since January 2005. The rig count has fallen for 15 out of the past 16 weeks. It peaked at over 2000 rigs in September. (2/28, #12)
  • The drop in natural gas prices has come as demand from industrial users has evaporated amid the recession and as supplies have ballooned as production in the U.S. boomed over the past year. (2/23, #3)
  • At current prices, it is no longer profitable to drill most unconventional natural gas wells. If taxes are higher, this will only make the situation worse, driving more marginal producers out of business. Even without new taxes, a decline in natural gas production is likely within two years. (2/28, #18)
  • The price of diesel fuel is falling below gasoline after two almost uninterrupted years of selling at a premium as the global recession saps demand for the world’s most-consumed transport fuel and inventories rise. (2/23, #4)
  • Hard times have hit the once-robust US ethanol sector amid the economic recession, with as much as 15 percent of production capacity likely standing idle. Ethanol use will account for 33 percent of expected corn use in 2009/10, up from a forecast of 30 percent in the current marketing year. (2/27, #16)
  • Many companies across the European Union have abandoned or halted biofuel projects and more damage will occur if oil prices do not rise significantly in 2009. (2/25, #15)
  • General Motors capped a gloomy 2008 with a $9.6 billion loss in the fourth quarter, bringing its loss for the year to $30.9 billion. The results reflect a stunning downturn throughout the company's global operations and raise new concern about its viability. (2/27, #13)
  • Japan last month suffered a fall of nearly 50 percent in exports, leading to the country’s worst trade deficit ever and fuelling fears that the recession will be longer and deeper than previously anticipated. (2/25, #10)
  • The World Bank's Global Economic Prospects 2009 contains troubling data about the future availability of food. Although insisting that the planet is capable of producing enough foodstuffs to meet the needs of a growing world population, its analysts were far less confident that sufficient food would be available at prices people could afford, especially once hydrocarbon prices begin to rise again. 2/26, #12)
  • Around the North and South Poles, icecaps are melting faster and in a more widespread manner than expected, raising sea levels and fuelling climate change, a major scientific survey showed Wednesday. (3/25, #3)
  • The worst drought in Northern China in at least half a century is crippling not only the country’s best wheat farmland, but also the wells that provide clean water to industry and to millions of people. (2/25, #9)
  • In China, Chery’s first electric car, the S18, is ready for production and is to be launched on the market at the end of this year. This is China’s second domestic brand new alternative energy car after BYD’s F3DM. (2/25, #19)
  • Portugal has become a prime spot for wave energy farms, given the coastal conditions and the government’s support for renewable energy projects. Now Portuguese energy powerhouse Energias de Portugal has signed an agreement with Seattle’s Principle Power for a deep-water floating wind farm. (2/24, #20)
  • California's Pacific Gas and Electric said it would develop up to 500 megawatts of photovoltaic solar power projects over the next five years, its first direct investment in renewable generation in more than a decade. (2/25, #20)

Quote of the Week

The [economic] numbers coming out of Japan, Germany, Eastern Europe, U.K., and U.S.A. are all frightening. There's no sunshine out there."
-- Peter McGuire, managing director, Commodity Warrants Australia in Sydney

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