Peak Oil Review – June 15

1. Production and Prices
Starting the week at $68 a barrel, oil traded as high as $73 before closing out the week at $72.04. Once again the increase was mostly based on financial developments – a falling dollar, fears of inflation, and hopes for an economic rebound. However, the IEA did reduce its estimate of how much demand will fall in 2009 by 120,000 b/d, US crude inventories fell by 4.4 million barrels, and China reported a jump in industrial production.

In its monthly oil market report, the IEA now forecasts that global demand in 2009 will be 83.3 million b/d, down 2.5 million b/d from 2008. OPEC crude production in May was up by 160,000 b/d, leaving the organization about 1.1 million b/d over its target output. OECD stockpiles rose by 10.4 million barrels in April and are now 7.5 percent above last year.

Iraq, which is not subject to OPEC restrictions, increased its exports to 2.4 million b/d, the highest since the 2003 invasion. Much of the increase is coming from the Kirkuk oil fields and is being exported through Turkey.

Increasing US gasoline prices are again raising fears of damage to an economic rebound. The nationwide price for regular is now $2.66 and just a hair below $3 in California. There is little indication that Americans are substantially curtailing their driving despite the additional $400 million per day the gas price increase since last December is costing them. While distillate (largely diesel) consumption is down by 8.4 percent this year over 2008, gasoline consumption over the last four weeks is down by only 0.4 percent. Given that some of the reduction in gasoline consumption must be related to decreased economic activity, the figures suggest that personal travel must still be close to last year’s level. Analysts are split as to how high oil prices have to go before economic consequences become starkly evident. Some say $80 a barrel, some say $100, and some say $125. At any rate tens of billions of additional dollars are going for gasoline in the US each month rather than to other purchases.

The balance between higher and lower oil prices is unusually cloudy. Most analysts are saying that $70 for oil is much too high given the economic outlook in the OECD countries right now. Others point to the unprecedented deficits that governments are financing and believe that inflation-fearful investors will continue to buy oil as one of the few safe havens; and many believe that an economic rebound, that will increase the demand for oil, is only months away.

2. China
While the OECD’s economies continue to stagnate, the situation in China is less clear. Chinese exports, which had been the mainstay of the economy, are now down by 26 percent from last year. To counter this drop, the government has launched a 1-year $700 billion stimulus package that is aimed at strengthening the country’s infrastructure and keeping people at work.

Last week the government reported that May’s industrial production expanded by 8.9 percent and insists that GDP continues to grow at a respectable 6 percent. In May China’s oil imports were up by 14 percent over April, iron ore by 33 percent, aluminum oxide by 16 percent and coal and copper by 148 percent. While increases of this size would seem to indicate a robust economy, many believe the imports are largely opportunistic buying for strategic stockpiles while world prices are low.

Skeptics point out that Chinese electric power consumption dropped by nearly 6 percent in May. They note that the declines seem to be worst in areas that have large numbers of factories heavily dependent on electricity. Many are looking to China and India to keep growing and lead the way out of the economic slowdown. The next few months should tell us more about how far China can distance itself from the troubles of the OECD countries.

3. US Imports
In recent years, the US has been importing roughly 400 million barrels of oil and products each month. The monthly totals have ranged between 450 million barrels and 340 million depending on shipping schedules, demand, and weather – particularly hurricanes. Roughly half of these 400 million barrels have come from four countries – Canada, Mexico, Venezuela, and Nigeria.

Imports from three of those countries are now in danger of becoming much smaller in the foreseeable future and even the steady growth we have been seeing in Canadian exports to us is likely to erode soon. The most immediate concern is that Mexico, which had been exporting 50-55 million barrels per month to the US, is down to 37 million and will continue to drop steadily in the foreseeable future due to imminent depletion of its giant Cantarell oil field.

Venezuelan production is more of a political problem. In recent years Caracas had been sending us roughly 50 million barrels a month. That number is now down to the low 30’s and is likely to go lower as mismanaged Venezuelan production drops and President Chavez pursues his political goal of exporting as little oil to the US as possible. In recent years Chavez has been obligating increasing amounts of oil to China, Cuba and other politically friendly countries. Exports to the US are virtually certain to continue dropping for the next few years.

The insurgency in Nigeria is continuing to take a toll on exports to the US. In recent weeks the government has gone on the offensive to destroy the insurgency. In return, the militants are methodically working to destroy all of the government’s capacity to export oil. However an increasing share of Nigerian production is coming from offshore fields which are difficult, but not impossible, to attack. Nigerian exports to the US, which had been running from 35 to 40 million barrels a month, have become erratic as various pipelines are blown up and repaired. In some recent months, exports to the US have dropped below 20 million barrels.

Prospects are not good. Remote pipelines and production facilities are impossible to defend and government attacks on rebel villages which killed civilians have only increased hatred for the government. For now the outlook is for continuing militant sabotage and slowly falling exports.

Canadian exports obviously do not have political or insurgent problems, but will be increasingly affected by the economic slowdown. As production from Canada’s conventional oil fields continues to decline, an increasing share of Canadian exports come from the expensive-to-produce Alberta tar sands. The last six months have seen widespread cancellations and delays in new tar sands projects as oil prices dropped. To justify investment in new production facilities, prices must now be in excess of $90 a barrel to make economic sense.

While someday prices will return to those levels and continued economic troubles will lower development costs, for now very little new development is underway. At a minimum, increases in production from the sands have been set back many months or possibly years. This suggests that there will be a modest decline in exports to the US in the next few years.

Unless there is a substantial drop in US oil consumption, America is certain to become increasingly reliant on Middle Eastern oil.

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

• National Iranian Oil Co. said it has signed a $5 billion contract with China National Petroleum Corp. to develop Phase 11 of the South Pars gas field. (6/10, #7)
• A survey conducted recently found a majority of Canadian CEOs polled subscribe to peak-oil theory — the idea that the planet is running out of easily accessible and economical oil — but believe it is difficult to predict when peak production will occur. More than 60% of the 117 CEOs agreed with the theory. Only 18% said new technologies and new discoveries will always allow for production increases. Another 16% not only espoused the peak-oil view but said we will be unable to satisfy demand in the near future. (6/9, #16)
• Norway’s oil and liquids production fell to 2.13 million barrels per day on average in May from 2.36 million in April. (6/13, #16) [Editor’s note: Norway’s production peaked at 3.4 million b/day during 2001, according to recent BP data. It’s down 37%.])
• Saudi Arabia has started production from its giant Khurais oil field. According to Saudi Aramco, the mega project will bring more oil on stream than the production of Indonesia and will boost the Kingdom’s production capacity from 11.3 million bpd to 12.5 million bpd this year. The Kingdom, which has outlined how it could produce 15 million bpd when demand requires, has no immediate plans to raise its output potential further. (6/12, #8))
• Venezuela’s PDVSA took control of an offshore oil platform in the Corocoro field operated by Exterran Holdings, continuing a series of takeovers of oilfield service operations…The company also reduced by close to half its outstanding bills from oil-services providers last year after reviewing and renegotiating some of the contracts with these companies. (6/11, #10, #11)
• US offshore drilling contractor Ensco International has ended its contract for a jack-up drilling rig with Petrosucre, after the unit of Venezuela’s PDVSA had failed to pay for the services. (6/9, #8)
• Peru is faced with a simmering crisis over dozens of deaths in the quelling of indigenous protests last week, and the Congress has suspended the decrees that had set off the protests over plans to open large parts of the Peruvian Amazon to investment. The movement appears to be fueled by a deep popular resistance to the government’s policies (6/12, #9)
• Shell has agreed to pay $15.5 million to settle several lawsuits related to the executions of protesters in Nigeria in the 1990s, lawyers for both sides said on Monday. (6/9, #7)
• BP’s CEO Hayward said demand for oil coming from the US gasoline market “has probably peaked” as ethanol blending gains ground and Congress works on enforcing fuel efficiency. Hayward said Wednesday that global oil production will decline, but because of dwindling demand, not because of a scarcity of supplies of crude. (6/11, #2, #7)
• Non-OECD energy consumption was greater than OECD energy consumption for the first time in 2008…OEC primary energy consumption was 5,508 million tonnes of oil equivalent in 2008, down 1.3pc from 2007. In the non-OECD, it was 5,787 million tonnes, up 4.2 pc. (6/11, #2, #6)
• The number of rigs drilling for natural gas in the US fell 15 to 685 this week, down from the high of 1600 last summer, according to Baker Hughes. (6/13, #14)
• A survey of around 100 US exploration and production companies found that the average break-even price for oil was $44.73 a barrel. With prices around $45, that suggests around half of the marginal producers surveyed would either break even or lose money. The mean break-even price for marginal gas producers surveyed was $4.66 per 1,000 cubic feet, well above current levels. This means that declines in onshore US production from shut-ins and accelerated decline rates will continue for some time (6/13, #13)
• Speaking at the Center for Strategic & International Studies in Washington DC, CERA Global Oil Group Managing Director Jim Burkhard began and ended his talk by stating that “CERA acknowledges that peak oil is here, you heard it from a CERA person.” (6/10, #13)
• US Airlines forecast more industry woes amid the recession, as slumping demand for travel and higher fuel prices are prompting carriers including Delta Air Lines Inc. and American Airlines to further reduce their flights. Delta said it would scale back its foreign capacity by 15 percent by the end of 2009. (6/12, #16)
• Global airlines are likely to lose $9 billion this year, the International Air Transport Association said on Monday, nearly double its estimate of just three months ago, as rising fuel prices and weak demand create an unprecedented crisis for the industry.(6/8, #6)
• Boeing trimmed its 20-year outlook for industry wide aircraft deliveries, conceding the bitter downturn in air-travel demand, volatile fuel prices and other challenges confronting airlines this year would also curb manufacturers’ growth. (6/12, #17)
• TransCanada and ExxonMobil, two rivals in a long-running battle over the construction of an Alaskan natural gas pipeline, have agreed to work together. (6/12, #19)
• China’s automobile sales will “definitely break the 10-million-unit barrier” in 2009, the China Passenger Car Association said, based on robust growth in vehicle sales in May, the fifth consecutive month sales have climbed this year. (6/9, #10)
• A U.S. Senate panel approved expansion of offshore oil and natural gas drilling, in a bid to open more of the eastern Gulf of Mexico to energy development. (6/10, #17)
• US lawmakers unveiled a bill that industry warns could prevent development of trillions of cubic feet of natural gas by putting regulation of a key production technique—hydraulic fracturing—under federal oversight. Hydraulic fracturing will be required for 60 to 80 percent of all the wells drilled in the US over the next decade, said a spokesman for Anadarko Petroleum. (6/10, #18-19)
• A Shell gas station in Canada became the first in the world to fill tanks with gasoline containing biofuel made from wheat straw [cellulosic ethanol], Shell said. (6/11, #25)
• As coal extraction becomes more difficult and expensive, recent studies are questioning government estimates of the US supply of coal. No one says the U.S. is facing a coal shortage. But the emerging ranks of “peak coal” theorists argue that current production levels may be unsustainable and, if anything, create a false sense of security. David Rutledge, a professor with Cal Tech who studies coal production, figures the US has about half as much recoverable reserves as the government says. (6/9, #12)
• In the US utility sector, reserve power generation margins continue to climb. Whereas Texas grid operators, for example, used to scrimp for a 12 percent reserve, they now have 25 percent. (6/11, #19)
• StatoilHydro and Siemens have made some progress on their pilot project, installing the world’s first large-scale floating offshore wind turbine off the coast of Norway. (6/13, #21)
• Mitsubishi Motors launched a compact, four-door electric car that it will market in Japan to corporate customers starting in late July. The car is powered by lithium-ion batteries and can travel 100 miles on a single charge. Mitsubishi got the jump on Nissan, which plans to sell its own electric vehicle starting in 2010. (6/8, #12)

Quote of the Week

“Global oil production peaked in 2008, and I think that as you scale back activity around the world, both because of low prices and the credit crunch, you going to see particularly the non-OPEC supply fall dramatically in 2010 and 2011…Crude supplies are going to fall, and the economy will rebound and new demand will kick in at about the same time that supplies are falling. So when I look at crude in two, three, or four years, I think prices will be meaningfully higher. In the next six months, who knows? My gut says it’s probably going to drift higher, but my confidence level in that is very low.”
Marshall Adkins, Managing Director, Energy Equity Research, Raymond James (6/13, #17)