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Peak Oil Review - June 8

1. Production and Prices
Oil prices opened and closed the week around $68 a barrel. At one point they fell below $65 on news of a build in US crude stocks and later touched a high of over $70 on hopes that US unemployment was bottoming out. Oil’s connection to the dollar, equity markets, and hopes for an economic recovery remains strong.

Demand for oil remains weak, with US consumption of petroleum products falling to 17.7 million b/d, the lowest since May 1999. While gasoline demand this year has been relatively strong, distillate consumption, which is largely used for industrial purposes in the summer months, is down by nearly nine percent. Distillate stocks continue to grow and are now 34 percent higher than last year. In the meantime, OPEC production continues to creep back up as exporters take advantage of higher prices to ease their recent financial problems.

An oversupply of distillates in the US can be reduced through exports, provided world demand holds up, or they can be stored provided there is enough space. In the last two months, oil stored on tankers has jumped by 71 percent. Some distillate is now being held aboard newly built tankers that have not yet been used for crude.

Disagreement over the course of prices remains high. Oil price bulls see the economic picture improving with prices moving higher by the end of the year and much higher over the next year or two. Last week Goldman Sachs sent prices surging with a forecast that oil would reach $85 by the end of the year. Most analysts, however, looking at falling demand and increasing stockpiles, expect prices to drop.

Many of the signs that the markets are choosing to interpret as a bottoming of the recession simply indicate a reduction in rates of decline and do not suggest that the demand for oil will increase in the foreseeable future. The Chinese say they are through filling their recently-built strategic reserve tanks and will not be in the market for oil to stockpile in the near future. Although Beijing is pumping large amounts of money into improving domestic infrastructure, it is difficult to see their exports increasing. US gasoline demand fell precipitously over the Memorial Day weekend, Japanese demand is down, and it is hard to imagine much growth in demand anywhere else.

2. Airlines under pressure
Last summer with oil prices approaching $150 a barrel, the world’s airlines were approaching collapse. The drop in oil prices in the second half of 2008 gave them a temporary reprieve, but now a combination of rising prices and falling traffic is again increasing the financial pressure.

Last week the International Air Transport Association reported that 2009 airline losses are expected to be very bad; IATA will release a new loss forecast this week. Fifty major airlines reported losses totaling $3.3 billion during the first quarter. Many airlines used the futures market to hedge part of their fuel requirement and ended up paying well above spot prices. Although the airlines have cut costs and introduced baggage surcharges, steep declines in international and premium class travel have cut into profits. Rising unemployment will not help discretionary travel.

The outlook for the industry is not good and the IATA is forecasting increased mergers and calling for a lifting of route restrictions as the carriers struggle to remain in business.

Strange as it may seem in this environment, last week United Airlines asked Boeing and Airbus for bids on 150 new, more fuel efficient airliners valued at $10 billion. The airlines must be expecting a federal bailout, for given the prospects for passenger traffic and fuel prices over the next five years, replacing the fleet is unlikely to be an economical proposition.

3. Update on China
Prior to last summer’s Olympics, China was moving the oil markets by importing unprecedented quantities of oil and products to insure the games would be successful. After the Olympics, China’s demand for oil fell as its exports, GDP, and industrial activity declined. Their GDP, which had been running at a 10-11 percent annual increase in recent years, contracted to a claimed six percent.

To counter the economic slowdown, China embarked on a massive domestic stimulus program, spending at a rate approaching double that of the US. Although the government continues to report gains in industrial production, outside observers remain skeptical noting that electricity consumption, a good indicator of economic activity, has been falling.

While Chinese oil imports have been growing moderately this year, the amount that can be attributed to filling strategic storage tanks is unknown. These purchases are now on hold for a number of years until new storage facilities can be built. So the future on imports is uncertain.

While the US Congress debates cap and trade, the Chinese are moving ahead rapidly to create an economy that will survive on less fossil fuels. China is investing heavily in solar, wind, electric vehicle, and electric grid technologies. Approximately nine percent of China’s current $586 stimulus package is being devoted to renewable energy technologies. Another package on the order of $500 billion is being prepared that is said to be devoted to renewable and energy efficiency technologies. If these plans come to fruition China will be well on the way to establishing a post-carbon economy.

In absolute terms, Beijing’s carbon emissions and consumption of fossil fuels are likely to continue increasing for many years. The programs currently underway clearly indicate that the Chinese appreciate the threat to their national well-being posed by global warming and possibly peak oil.

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

  • Over the next 11 years, Canada's oil industry is likely to produce 500,000 b/d less than was forecast a year ago, according to the Canadian Association of Petroleum Producers. The forecast for the oil sands has dropped even further, the industry group said in an annual report. Oil sands production is expected to reach only 2.9 million b/d by 2020 — down from 3.5 million b/d in the 2008 forecast. (6/6, #16)
  • New projects in Canada's oil sands could be viable with crude prices of just $60 a barrel, as much as 40 percent below estimates made before oil prices slumped late last year. Labor and material prices in the oil sands region of northern Alberta have fallen far enough that producers may look to revisit projects that were mothballed by the recession. (6/2, #15)
  • A Kuwaiti lawmaker demanded the oil minister provide the exact size of the OPEC member's crude reserves following doubts over the official figure of 100 billion barrels. Kuwait, whose officially stated oil reserves constitute about 10% of global crude reserves, is pumping around 2.2 million barrels a day and oil income contributes more than 95% of public revenues. (6/2, #8)
  • Declining investment will naturally lead to production declines, making a Saudi prediction of oil at $150 barrel “realistic” within three years, Russian Deputy Prime Minister Igor Sechin said at the St. Petersburg International Economic Forum. Should companies fail to invest, a demand crunch could drive up the price to $160 or even $200 a barrel, BP CEO Tony Hayward said, answering a question about surpassing last year’s price. (6/6, #17)
  • Seven of the 33 supertankers being used to store oil are scheduled to deliver their cargoes. The amount of oil stored at sea climbed to the highest in at least two decades last month (53 tankers) because traders could buy the commodity, sit on it and take advantage of higher prices in the future. A supertanker is capable of storing about 2 million barrels of crude. (6/6, #4, #5)
  • The number of drilling rigs operating globally fell 3.5 percent in May compared with April, according to Baker Hughes Inc. The U.S. rig count for May was 918, down 54% from the high point at the end of last summer. (6/6, #7)
  • Venezuela says it is seizing 14 natural gas compression plants as it moves forward with the takeover of private companies in Venezuela's oil industry… PDVSA will hire all 8000 workers from the more than 70 oil service contractors that the government nationalized last month… The company’s refusal to pay its bills has led several of the private companies to stop work in Venezuela. (6/6, #8, #9)
  • Venezuela's congress has approved an energy cooperation deal with Russia that includes the creation of a joint venture company to develop the Carabobo 1 north and Carabobo 1 center oil fields, two of the seven areas that were offered to foreign oil companies. (6/4, #12)
  • BG Group said it discovered oil at another well in the pre-salt Santos Basin off Brazil’s coast. The Iracema well is under 2,210 meters (6,850 feet) of water and located 33 kilometers northwest of the Tupi well. A test confirmed the presence of light oil located at depths of around 5,000 meters, reinforcing expectations for the Tupi discovery. BG plans to invest as much as $5 billion through 2012, and expects its share of output from three fields will reach 400,000 barrels of oil equivalent a day by 2020. (6/6, #10)
  • Energy analyst Daniel Yergin said current oil prices are not justified in the face of weak global demand and a glut of spare supply, but oil supplies could tighten in the next three to five years. Global oil demand is down nearly 3 million barrels a day, erasing four year's worth of demand growth, and the market is struggling to digest the biggest spare capacity overhangs in 21 years at 6.5 million barrels per day. (6/2, #7)
  • Ukraine will settle its Russian gas bills and expects an apology from Moscow for comments that cast doubt over its ability to pay. (6/6, #18)
  • A $5 billion deal on the development of South Pars gas field phase II was signed by Iran and China last week. (6/4, #6)
  • One spot LNG buyer said the startup of a second LNG train at the Sakhalin 2 project in Russia’s Far East would only add to the excess available in the market. He said there were lots of cargoes being offered to buyers already, so further production could flood the market. (6/6, #19)
  • Arjun Murti, the Goldman Sachs analyst who predicted a surge in crude oil prices, raised his fourth-quarter estimate to $70 a barrel from $60 as output from non-OPEC members declines. (6/5, #6)
  • The American Petroleum Institute says increased federal regulation of a method to crack underground shale rock to release natural gas could increase costs and chill production. (6/5, #15)
  • Independent oil and gas producers that rely heavily on cash flow face bigger financing challenges than major or national oil companies as the global recession depresses oil and gas demand and prices drop. The possible consequences range from a new wave of acquisitions to slower development of natural gas from domestic shale formations. (6/5, #16)
  • Chevron will spend more than $20 billion on exploration and production activities this year despite the economic downturn. Chevron has maintained annual capital spending in excess of $20 billion this year, the same level as it was in 2008. (6/3, #13)
  • As California teeters on the verge of insolvency, the governor has proposed expanding offshore oil drilling under a plan approved by environmental groups as a way to tap new revenue. If approved, the state would collect $100 million from the project on July 1 and as much as $2.3 billion in royalties over the next13 years. (6/6, #13)
  • In northern Nigeria, the town of Kano was once a hub of commercial activity. Today, it's a different story: over 70% of its factories are shut. Those that are open are working at 40% capacity or less. The reason: sporadic electricity supply. (6/2, #11)
  • Japan may be forced to shut more than a fifth of its refining capacity, at least 1 million b/d, in the next five years as oil demand falls faster than expected. Total oil sales in the year ended March 31 slumped 8 percent, the sixth straight year of decline, as the global economic crisis has slowed industrial activity, adding to already waning demand caused by an aging population, a shift toward smaller, fuel-efficient cars and a drive to embrace greener energy sources. (6/4, #14)
  • Russia’s swing from 8 percent growth in 2008 to a 6.5 percent contraction this year is the most extreme of any major economy in the global slowdown. (6/4, #18)
  • The Amsterdam Court of Appeals has ordered Shell to pay $450 million to a foundation representing institutional investors after it suffered securities fraud related to the company's proven oil and gas reserves, which were found to be inflated from 1997-2003. (6/2, #17)
  • U.S. car sales fell 34% in May to 925,824 vehicles, but showed some signs of firming up as General Motors, Ford and Toyota all reported their highest monthly totals so far this year. For May, the annualized selling rate for the entire market, a closely-watched indicator of the industry's health, was 9.91 million vehicles. That's up significantly from April's annualized pace of 9.32 million vehicles, and is the highest rate so far this year. But it still is well below the year-ago level of 14.26 million. (6/3, #11)
  • US climate legislation approved by a House committee would raise more revenue than it would cost in federal spending through 2019, the Congressional Budget Office said in a report today. (6/6, #12)
  • As much as 100 billion euros ($143 billion) in planned investments in German offshore wind farms are at risk as developers struggle to get funding. A large municipal utility expects its first wind park to be delayed by up to two years (6/3, #14)
  • Using nonfood crops to make cellulosic ethanol to fuel vehicles has been the most common path laid out by Congress, but it may be more efficient to use those crops to make electricity. An acre of crops can generate enough electricity for a battery-powered SUV to travel 15,000 miles, nearly twice the distance that would be covered if the crops were turned into cellulosic ethanol. (6/3, #17) [Editor’s note: why analyze an SUV?]
  • Massive investment in renewable energy could ultimately create 4 million manufacturing jobs. But for the workers in the bottom rung of this movement, the shift to green jobs could very well mean a pay cut of nearly 60 percent, a trend spreading across the entire manufacturing sector. (6/5, #18)
  • Currently, wind generated electricity, in the absence of subsidies, is much more expensive than the fossil fuels it is replacing. (6/1, #14)

Quote of the Week

“The reality is that the economy will come back and when it does there are serious doubts as to whether the supply of oil will be adequate to sustain the economic engine. So all those doubters who criticized Matt Simmons’ view about peak oil may soon have to come to grips with the reality that oil scarcity may become a fact of life in the near future.”
-- Don Stowers, Editor, Oil & Gas Financial Journal

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