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Peak Oil Review - Apr 13

1. Production and Prices
The oil markets continue to move with the equity markets. When there is bad economic news, oil and stocks go down. When there is even a flicker of good news, both go up. Last week oil climbed above $53 a barrel, fell to $47 on general pessimism about the global economy, and then rebounded to close Thursday evening at $52.24. News relating to the supply and demand for oil seems to have minimal impact on prices these days.

US crude inventories continue to creep up, this time by 1.7 million barrels. Refinery utilization is low as US demand for distillates and gasoline continues to drop. Gasoline imports from Europe remain high. As long as the oil markets remain in contango with long-dated future contracts commanding a premium to current prices, more oil is likely to go into storage on the theory that prices will rise dramatically with economic recovery. There are reports of at least 10 large tankers waiting off the UK coast for higher prices.

Last week two OPEC oil ministers suggested that a consensus is emerging within the cartel that the best strategy is to keep oil prices at current levels, around $50 a barrel, thereby helping with an economic recovery. This is in sharp contrast to the talk about $70 being the proper price that was prevalent a few weeks ago.

Beijing is claiming that China’s economy has turned a corner and is responding to its own $585 billion stimulus package. Chinese crude imports in March 2009 were up by 33 percent over February and were only 5.5 percent less than the record imports in March 2008. While visiting Beijing last week, Venezuelan President Chavez announced that he had signed an agreement to increase oil shipments to China to 1 million b/d next year. Venezuela currently is exporting about 1.5 million b/d to the US and 380,000 b/d to China. To rousing applause, Chavez told a group of Chinese Communist Party leaders that "God put the oil that China needs for the next 200 years in Venezuela. Before, the United States took our oil like a 'vampire.'"

2. IEA’s Forecast for 2009
Following the lead of the IMF, which recently forecast a significant drop in global economic activity this year, the International Energy Agency reduced its forecast for world oil demand by 1 million b/d. Global demand for 2009 is now forecast to be 83.4 million b/d, 2.4 million b/d below 2008.

The IEA says that OPEC production fell by 235,000 b/d in March, but is still about 720,000 b/d above the target that was reaffirmed at the March 15th OPEC meeting. Non-OPEC production slipped by 170,000 b/d last month, and is now forecast to average 50.3 million b/d in 2009, 300,000 b/d lower than in 2008. The drop in non-OPEC production is seen as being mainly in the biofuels sector, as low oil prices are hurting their competitiveness.

The new forecast changes the IEA’s previous assumption that economic recovery and increased demand for oil would start in the second half of 2009. The Agency now believes that global economic recovery will be delayed to 2010. Most of the drop in demand will be in the OECD countries, although the Agency now sees Chinese demand dropping by one percent this year instead of the small increase it had been forecasting.

The IEA is still talking about serious shortages in the years ahead due to lack of investment in new production projects which it sees as falling by 20 percent this year.

3. Investment during the recession
Investment in oil and gas production continues to slip everywhere, unless ExxonMobil or China is involved. The CEO of ConocoPhillips discussed nearly $2 billion in investment cuts that his company plans to make. Drilling in the US slipped further, with Baker-Hughes reporting that the US rig count was down by another 38 to 1,005 last week, down just over 50% from mid-September. Low natural gas prices and the unavailability of credit have cut drillers capital budgets by 17 percent this year.

Total SA may delay a 230,000 b/d oil sands project. In Qatar, natural gas, refinery and petro-chemical plant projects have been put on hold. The market for new floating production systems has dried up with no new orders being placed during the last quarter, the first such occurrence since 1996. In Russia the CEO of Rosneft said that shortfalls in investment and high taxes may lead to a major reduction in oil production over the next five years.

The CEO of Exxon remains optimistic and reiterated that his company will continue with plans to invest $129 billion for exploration and production during the next five years. He insisted that the “temporary economic downturn will not affect Exxon’s business plans.”

China lent Brazil’s Petrobras $10 billion to fund the company’s offshore exploration in the pre-salt oil fields. In return, China locked up long term oil deliveries from Petrobras amounting to 160,000 b/d. China and Kazakhstan are said to be close to signing a $10 billion agreement for a Chinese stake in the Kazakh national oil company. While in Beijing, Venezuelan President Chavez discussed plans for a new refinery to process Oronoco heavy oil in China. While in Tokyo, Chavez signed an agreement for a $1.5 billion loan to finance a refinery project and spoke of Japan investing $33 billion in Venezuela to insure an alternative source of energy.

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

  • Russia and Iraq have agreed to work on restoring oil contracts that they signed before the U.S.-led invasion of Iraq in 2003. Previously, Baghdad had renegotiated and signed another Saddam-era deal, with the Chinese National Petroleum Company. (4/11, #4)
  • Alaska’s North Slope oil output is expected to drop 5 percent in the coming fiscal year as its oilfields age, and average prices of its crude oil are expected to fall, causing a drop in state income. Oil royalties, taxes and fees make up about 80 percent of Alaska's general government revenues. (4/11, #9)
  • Chevron said its production is headed for a quarterly gain for the first time since 2006 as new platforms in the Gulf of Mexico and offshore Africa began operation. Last year, Chevron’s output fell 3.4 percent, the biggest decline in half a decade, as higher energy prices reduced the company’s share of crude under production-sharing agreements with oil-rich nations. Production this year is projected to increase by 4 percent. (4/10, #17)
  • Last year's record run-up of oil prices came about because of factors outside supply and demand, such as currency fluctuations, money fleeing the troubled financial sector, and developing economies in China and India starting to signal a greater need for energy. Such a perfect storm may not happen again anytime soon. (4/11, #1)
  • If all "at risk" supply fails to materialize, Cambridge Energy Research Associates projects that the world's oil production capacity five years from now could reach 101.4 million b/d, down from the pre-collapse projection of 109 million. (4/11, #1) [Note from editors: we’re not holding our breath on this one.]
  • Iran is reporting huge new discoveries of oil that contain "billions" of barrels of reserves, state radio quoted the managing director of the country's National Oil Co. as saying Tuesday. (4/8, #7) [Editor’s note: any impact of upcoming elections on this report?]
  • The Russian state oil pipeline Transneft will finish the laying of the East Siberia-Pacific Ocean oil pipeline to the Chinese border within weeks, according to Russian Prime Minister Vladimir Putin. (4/7, #9)
  • BP, Total and Royal Dutch Shell are asking oilfield service companies to cut project costs by up to 40 percent as the industry battles its worst slump since the mid-1970s. (4/6, #4)
  • Pemex, Mexico’s state oil company, may recover an extra 3 billion barrels from its Cantarell field, or 20 percent more than planned, by using a liquid foam injection technology that extracts hard-to-reach crude. (4/8, #8)
  • Louisiana representatives encouraged US Interior Secretary Salazar to authorize more offshore drilling for oil and gas at a regional meeting held in New Orleans Wednesday. The Louisiana event contrasted with the first meeting held in Atlantic City, N.J., where opponents of the offshore drilling program dominated the conversation. (4/9, #13)
  • Leaders of California's Santa Barbara County, site of a 1969 oil spill that galvanized the modern environmental movement, voted 3-2 on Tuesday to reverse a decision backing new offshore energy development. (4/11, #10)
  • Canadian environmental groups asked regulators on Wednesday to rescind approvals for part of a $13.7 billion expansion of Shell’ oil sands project, alleging the company backed off promises to cut greenhouse gas emissions. (4/9, #15)
  • Ethanol prices have sunk to $1.58 a gallon from last summer's peak of about $2.80 a gallon. Lower prices could drive additional mills into bankruptcy. (4/11, #12)
  • The Congressional Budget Office said the increased use of ethanol last year accounted for 10-15 percent of the rise in food prices in the year ending in April 2008, or 0.5-0.8 points of the 5.1 percent increase in food prices that was registered. (4/9, #10)
  • Composite Technology Development of Lafayette, CO, reports development of an innovative heating cable material, to be used in heating oil shale formations, that solves durability problems present in other materials used for heating elements. (4/8, #22)
  • China plans to turn their country into the world’s largest producer of electric cars, including a focus on consumer choice rather than corporate subsidies. (4/10, #12)
  • Nissan is expected to help set up an electric-car program in a major Chinese city, in an unusual partnership between the Chinese government and a foreign company, in an effort to further Beijing's efforts to develop environmentally friendly automobile technology. (4/9, #19)
  • While the Obama Administration is leading the charge in America with $25 billion for carmakers to build greener vehicles and $2.4 billion for better batteries, in China they are offering consumer subsidies of nearly $9,000 on hybrid and electric cars. (4/8, #19)
  • One of New England's largest utility systems has applied for a federal grant to help build 575 stations to charge electric vehicles in Massachusetts and Connecticut. (4/8, #20)
  • Forecasts for a relatively quiet US hurricane season have given the country's storm-weary oil sector hope for a reprieve from winds and waves that sank platforms and flooded refineries in recent summers. (4/11, #11)
  • President Ahmadinejad inaugurated Iran’s first nuclear fuel plant a day after he insisted that the Persian Gulf country doesn’t aim to develop atomic weapons. (4/10, #7)
  • Energy Secretary Chu said the US should invest in technology to reduce the carbon produced by burning coal, but he said it will take at least eight years to be sure such systems work. Chu said a proposal by oil and wind magnate T. Boone Pickens to use natural gas as a transportation fuel was "a possibility," then declared himself "agnostic" about it, before finally emphasizing the virtues of making more fuel-efficient cars and turning to biomass-based transportation fuels. (4/9, #14)
  • In the Obama administration’s starkest rebuke yet to industry over global warming, Todd Stern, special envoy for climate change at the state department, said “high-carbon goods and services will become untenable” as the world negotiates a new agreement to cut carbon emissions. (4/8, #12)
  • Empty seats on planes flown by US airlines are rising this year despite aggressive fare sales and capacity cuts, darkening the outlook for industry earnings. A year-to-year drop in the price of jet fuel will offset some of the damage done by falling demand. However, carriers wrote down millions of dollars in losses in the second half of 2008 as oil plummeted 75 percent, diminishing the value of their fuel hedges. (4/8, #15)
  • China’s exports, which make up about one-third of the country’s economy, were 17.1 percent lower in March than they were in the same month a year earlier. (4/10, #11)
  • Falling oil income and sagging crude output could soon mean a pinch at the pump in oil producing countries like Venezuela, where hefty government subsidies have for decades guaranteed cheap fuel. Iran is already cutting back. (4/5, #3)
  • Britain’s wind industry increased its call for state aid yesterday after new figures showed that investment in the sector has collapsed by nearly 80 per cent. (4/11, #17)
  • The US recession was caused by the oil shock of 2007-08, according to Professor James Hamilton (UC San Diego). Hamilton says it is "a conclusion that I don't fully believe myself". His work raises the question of whether the role of oil in the US and global downturn has been underestimated. (4/7, #18) [Editor’s note: look for a column from Dave Cohen on this soon.]

Quote of the Week

"The evidence to me is persuasive that, had there been no oil shock, we would have described the US economy in fourth-quarter 2007 to third-quarter 2008 as growing slowly, but not in a recession."
-- James Hamilton, professor of economics, UC San Diego

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