Peak Oil Review - April 27

1. Production and Prices
Prices started last week above $52 a barrel, then fell sharply in sympathy with a major decline in the equity markets, at one point going below $47. Prices then climbed for the rest of the week, closing just below $52, as investor optimism about an economic recovery increased. Oil prices remained detached from the normal fundamentals such as stocks – which continued to increase last week — and demand, which continued to fall.

As worries about inflation increase, investors are turning back to oil and other commodities as a place to store wealth. This may be preventing a further decline in prices which have been holding around $50 a barrel for several months despite decreasing demand.

OPEC continues to reduce production, though slowly. Iran says it is now meeting more than 90 percent of its official cut. Senior OPEC officials are discouraging the idea that there will be another production cut at the May meeting.

2. Natural Gas
US natural gas prices fell again last week to their lowest point in more than six years, closing at $3.23 per 1000 cu. ft. US natural gas stocks are now 36 percent greater than this time last year as industrial demand in the US continues to shrink. Gas futures have fallen 74 percent from a July high of $13. Active natural gas drilling rigs have dropped to 760 from a record 1,606 last August.

Industry executives say that natural gas prices must increase to $7 – $9 before there will be enough drilling to insure that US demand for heating and industrial usage is fulfilled. If current trends continue, US natural gas output will continue to drop. Given that the wells drilled in recent years are depleting much more rapidly than in the past, it will be at least after drilling picks up before output starts to increase.

The future for the natural gas industry over the next year or so is fraught with uncertainty. US industrial production continues to slip, and more LNG cargoes are arriving on US shores as demand in Asia and Europe slackens. However, the effort to reduce emissions in the US is picking up steam so there may be increased demand if some form of a greenhouse gas bill emerges from Congress this year.

In recent weeks there have been numerous reports of encouraging results from drilling in various shale formations around the country. Although the horizontal drilling used to exploit this resource is expensive, it appears, at least initially, to be producing solid results. Last week Petrohawk Energy announced that the Eagle Ford shale formation in south Texas “is one of the highest quality shale gas formations discovered in the US.”

3. Carbon
The decision by the California Air Resources Board last week to set a new “low carbon” standard for automobile fuel has already set off a storm of protest. The air board’s standard dictates that the “carbon intensity” of fuels be reduced starting in 2011, ramping up to a 10 percent cut by 2020. At the same time, the Board decided that the carbon score of corn-based ethanol must factor in the carbon sink that is removed when trees and grasslands are replaced with corn.

The petroleum industry is saying that the new standards will cost consumers billions of dollars because of the complexity of blending the lower carbon fuels. The Board and environmentalists say the standard will phase in so slowly that there will be plenty of time to start moving to electric cars and non-corn-based biofuels and in the long run it will save consumers money.

The ruling has implications far beyond California, as 17 other states have already adopted California emissions rules; and, with a change in Administration, the federal government is no longer opposing tougher state-imposed regulations. The Canadians are already crying foul as oil-sands-derived crude has 20 to 30 percent higher carbon emissions than conventional crude. The new regulations could crimp Canadian plans to sell more sands-derived crude in the US.

In Britain, the government announced that any new coal-fired power plants must capture carbon-dioxide emissions and sequester them underground.

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

Saudi Arabia will pump about the same amount of crude in May as in April, sources report. Supply has been steady since February at just under 8 million b/d, down from 9.7 million last summer. (4/24, #3)
OPEC will trim crude oil shipments by 0.6 percent in the four weeks ending May 9, the smallest drop since February, according to tanker-tracker Oil Movements. (4/24, #2)
Iraq and Syria have agreed on a new plan to repair the bomb-damaged Kirkuk-Banias oil pipeline. The pipeline, which extends 850 km from Iraq’s northern oil fields at Kirkuk to Banias where Syria has a refinery, has been closed since the US-led invasion in March 2003, when the line’s main K3 pumping station was bombed by US warplanes. (4/25, #4)
The development of Iraq’s oil and gas reserves could be hampered by its chaotic politics and lack of interest in proposed projects, the economic newsletter Middle East Economic Survey warned last Sunday. (4/20, #6)
Mexico’s oil production fell 8.4 percent during the first quarter to 2.67 million barrels a day as the country’s largest oil field continues to shed output. Oil exports are a main source of revenue, and the combination of the price drop and drop in export volumes has strained public finances. The average price of Mexican crude exports was $38.92 a barrel. (4/22, #7)
Crude oil production from Russia is expected to boast modest gains in 2009 despite earlier forecasts of a decline in the industry, officials said. The output of crude oil from Russia for 2008 and the first two months of 2009 fell about 1 percent, but March output saw a modest increase of 0.4 percent to 9.76 million barrels per day. (4/21, #17)
Turkmenistan, Central Asia’s largest producer of natural gas, called for new pipeline routes to Europe after blaming Gazprom for causing a blast on its main export line. Russia is opposed to development of the so-called “southern energy corridor” because it would break its control of Central Asian gas exports. (4/25, #5)
A total of around 100 million barrels of oil, more than the world’s daily consumption, is stored aboard ships around the world, the head of trading and shipping at France’s Total told Reuters. (4/21, #4)
The world’s worst economic recession in six decades is hurting the Middle East, with falling commodity prices severely straining economies and wealthy oil producers digging deep into savings to sustain spending, according to the IMF’s latest World Economic Outlook released Wednesday. (4/25, #12)
Several international institutions have admitted in recent years that the increasing demand for biofuel crops has catastrophic social, economic and nutritional impacts on developing countries and their already tense food resources. Despite this, several African states have drafted policies in favor of biofuel crops. In Senegal, which was hit by food riots a year ago, up to 10 per cent of the country’s arable land might be set aside for biofuels. (4/25, #13)
China National Petroleum Corp. said the crude oil pipeline linking Russia and China will start operations by the end of 2010. After the pipeline starts operation, Russia will send 15 million tons of crude to China annually for 20 years. (4/24, #4)
China is planning to build five nuclear power stations this year to reduce the country’s reliance on coal and oil, state media reported Monday. (4/21, #10)
Demand for deepwater drilling equipment, led by Brazil and India, continues to grow at a slower pace amid the global recession and lower crude oil prices, said Transocean, the world’s largest offshore oil driller. Oil and gas explorers are postponing or scrapping deepwater projects, potentially reducing crude supplies by as much as 2.4 million barrels a day in 2011, Morgan Stanley said in an earlier report. (4/22, #4)
Brazil’s Petrobras is seeking 240 offshore oil development vessels in the next five to six years, according to its chief financial officer. These deals could bring new life to the stagnant global shipbuilding sector. (4/21, #9)
An industry source close to the Saudi’s $9 billion Manifa offshore oilfield project told Reuters that the project has been delayed for at least six months. The project will become Saudi Arabia’s largest offshore field, capable of producing 900,000 b/d. However, the heavy sour crude the field holds makes it expensive to process and not economically viable in the current financial climate. (4/22, #6
Perenco SA, a French oil company, said it will delay a planned $2 billion investment to start production at its Peruvian oil fields by two years because of slumping oil prices. (4/25, #6)
General Motors said it will shutter 13 assembly plants for up to 11 weeks this summer. That will disrupt the lives of nearly 24,000 workers. (4/25, #1)
The number of rigs actively exploring for oil and natural gas in the US fell by 20 this week to 955, down 53% from the peak last September. (4/25, #9)
Daily fuel demand in the US, the world’s largest oil consumer, averaged 18.5 million b/d in the four weeks ended April 17, down 6.5 percent from a year earlier.(4/24, #2)
BP and Husky Energy may scale back their $2.5 billion Sunrise oil-sands project in Alberta. The partners have delayed a final investment decision on the project until 2010 on expectation of falling industry costs. (4/24, #14)
Volvo, which manufactures heavy-duty trucks under the Renault, Mack, Nissan Diesel and Eicher brands, as well as its own name, said order bookings in the quarter fell 65 percent year-on-year with a fall of 71 percent in its key European market alone. (4/24, #16
The US will need an array of electric power production options to meet its needs in the years ahead. Solar and wind will have their places, as will other renewables. Realistically, however, solar and wind will probably only provide a modest percentage of future U.S. power. Some serious realism in energy planning is needed, preferably from analysts who are not backing one horse or another. (R.L. Hirsch and J. Schlesinger; 4/24, #21)
Chinese electric car-maker BYD has devised a battery that uses ferrous ion, which is cheap, plentiful and green. If it turns out to be as functional as the company claims, it could be the breakthrough needed to finally bring electric cars into the mainstream. (4/25, #14)
The US may never need to build new nuclear or coal-fired power plants because renewable energy and improved efficiency can meet future power demand, the head of the Federal Energy Regulatory Commission said. (4/23, #10)
In Florida, state lawmakers gave initial approval to a bill that could allow offshore drillers a chance to set up rigs within sight of Florida’s Gulf of Mexico beaches. (4/23, #11)
Apache, the biggest independent US oil company by market value, is reducing the size of its global workforce by 6 percent as tumbling energy prices force producers to slash costs. (4/23, #16)
The US airline industry has grounded more than 11% of its jets in “bone yards,” mostly in New Mexico, Arizona and California. More are scheduled to be grounded in the fall. (4/22, #18)
The real price of oil today is now at the same level as in 1976. This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil. (4/20, #12) [Editor’s note: this publication has never supported the view that we’re “rapidly running out of oil.” Read Kjell Aleklett’s rebuttal (4/21, #19) to this poorly-informed viewpoint in Newsweek.]
Oil is too cheap. At around $50 a barrel, it is trading far below the production costs of almost all new sources of crude and energy substitutes. A sustained price above $70 is needed to cover investments in Canada’s tar sands, the deep-water fields off Brazil, and Russia’s “High North” above the Arctic Circle. Much the same goes for biofuels from grains (sugar is cheaper). (4/20, #13)

Quote of the Week
“I don’t think new technologies will have any impact on the date of peak, which I estimate to have been passed in 2008 (“all liquids”), but they can of course ameliorate the subsequent decline. I think most of the necessary technologies are already well known, so the issue is more about applying them than inventing a magic wand.” (4/21, #18)
— Colin Campbell, ASPO, in an interview about ASPO’s 100th and final newsletter