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Peak Oil Review - Sept 7

1. Production and prices
Oil prices fell 6.5 percent last week before settling at $68 a barrel. A 7 percent drop in the Chinese stock market on Monday triggered the decline which later was reinforced by reports of weak US demand for oil and increasing US unemployment. Market analysts are starting to talk about oil prices dropping further in the near future since the economic recovery is not shaping up to be as strong as anticipated, demand for oil continues weak, and stockpiles continue to build. These fundamentals will continue to be balanced against the value of the US dollar which is playing an increasing role in determining oil prices. There is also concern that possible restrictions on speculation may force oil prices lower.

The US’s EIA reported on Wednesday that US distillate stocks are at a 28-year high and that demand in recent weeks is at a 13-year low.

OPEC meets again on Wednesday and the organization is expected only to call for increased compliance with existing production restrictions. OPEC production cutbacks have slipped to 68 percent of cuts agreed on last winter. So long as oil prices remain in the vicinity of $70 a barrel, OPEC members have little incentive to comply.

A number of European refiners are shutting down their plants for extended repairs in an effort to help ease the glut of oil products. British oil production in the North Sea may drop as smaller producers are unable to get financing for projects. The Norwegians say their production will drop to 1.6 million b/d by 2013 after averaging as much as 3.1 million b/d in 2000.

In the last two weeks, three of the top world producers – Russia, Mexico, and Norway -- have warned that their production will decline faster than expected in the next few years.

Natural gas prices fell to the lowest since March 2002 after a government report showed stockpiles continuing to increase.

2. New Discoveries
Last week, the news was dominated by BP’s announcement on Wednesday that it had made a “giant” oil field discovery called Tiber, 35.000 feet beneath the surface of the Gulf of Mexico. BP did not announce the size of the find, but said it was comparable to other discoveries in the area, leading to press speculation that the Tiber find was on the order of 1-3 billion barrels. Initially the announcement that oil could be found so far below the surface was greeted with much enthusiasm with some stories suggesting that a new era of finding oil was at hand and that exploration in the Gulf would revive.

Within a day reality set in as reporters learned that it was likely to take ten years of difficult and expensive drilling before any oil could be produced and even then less than a third of the oil, and possibly as little as 5 to 15 percent, can be recovered. Given that production from existing fields in the Gulf is likely to start declining rapidly in the next few years, oil from the deep water discoveries is unlikely to be sufficient to increase production from the Gulf.

The Iranian government announced last week that 8.8 billion barrels of oil had been found in deeper layers in Iran’s Sousangerd oilfield. Given the recent deterioration in relations between Tehran and other governments, it may be difficult for Iran to find outside help to exploit this discovery.

A relatively small British oil company, Tullow Oil, has been drilling in Uganda for several years. Tullow says they have already discovered 700 million recoverable barrels, continue to make more discoveries, and remain convinced that there are large quantities of oil in the region.

Tullow is already in financial difficulties and there are reports that Shell, BP, and ENI are interested in buying or partnering with Tullow to exploit what could be relatively easy to produce oil. Uganda’s government is well aware of the troubles that have befallen other African oil producers and are determined to avoid becoming another Nigeria.

All this talk of “new finds” naturally is raising questions in the press about the imminence of peak oil production. Optimists are saying that peak oil has been pushed off indefinitely by the finds while others say that large scale production from these discoveries will be too long in coming to prevent global production from declining.

3. Nationalism
As minerals become harder to find, national governments are moving to ensure that they get as big a share of the profits from exploiting these deposits as possible. Last week Brazil introduced legislation that would scrap the present concession system and switch to a production sharing system that would give all the oil to Petrobras, the state-owned oil company, which would in turn award production sharing contracts to foreign oil companies.

In Libya the government announced that henceforth all oil companies operating in the country will have a Libyan CEO.

Iraq is preparing for another auction. The first auction was judged a failure after the government insisted on keeping so much of the profit for itself that only one of many possible contracts was awarded. The next time around Baghdad may be more realistic.

Beijing has discovered that it has a near monopoly on rare earths such as dysprosium that are needed for building advanced electro magnets that will be used in green technologies. Last week China clamped export quotas on the 17 rare earths. The draft policy would completely ban the export of dysprosium, terbium, thulium, lutetium and yttrium. The export ban plus a 42 percent export duty would force manufacturers to produce many advanced products in China. At week’s end there were indications that Beijing was modifying its stance in face of a worldwide outcry.

Briefs

  • Mexico's energy minister said she is concerned about oil company Pemex's poor financial results and the company's board is reviewing possible actions to halt the decline. (9/5, #7)
  • Saudi Arabia: The United States has no alternative to oil to meet its massive energy needs and should recognize its energy interdependence with the Middle East, Saudi Arabia's Prince Turki al-Faisal wrote in an article “wake-up call” on Friday. (9/5, #6)
  • Russia produced 9.97 million b/d in August, up 0.6 percent from July and up 1.5 percent from August 2008, recovering after last year's first drop in a decade. But going forward, official opinion conflicts with analysts' views over whether production from Russia's new oil fields can replace the fall from older fields after record August output. The oil and gas industry provides for about half of Russia's federal budget. (9/5, #16)
  • In Canada, unless oil prices rise above today's level and stay higher, it seems unlikely there will be a major increase in oil sands production. Oil sands production should approximately double by 2020, from 1.2 million b/d in 2008, to 2.4 million b/d. (9/2, #20)
  • Excess oil supply through 2010: Without "a much stronger rebound" in oil demand, or tighter supplies from OPEC, the global inventory overhang could still be in place by the end of 2010, Lawrence Eagles, analyst at JPMorgan, wrote in a report. (9/5, #3)
  • In Columbia, until recently in a free fall because of terrorist attacks that scared off wildcat drillers, oil production is staging a robust rebound, boosted in no small part by the arrival of oil industry executives and engineers banished by Venezuelan President Chavez. Colombia's oil production for all of 2009 is estimated to average 645,000 b/d, up 10% from 589,000 in 2008. (9/5, #8)
  • In India, Cairn India Ltd. started oil production at its Mangala field in Rajasthan state. Mangala’s initial output of 30,000 b/d will increase to 130,000 b/d by first-half 2010, with production rising to a peak of 175,000 b/d over the next 2 years. (9/4, #13)
  • Cairn Energy, after securing a major exploration position to the south and west of Greenland, and completing early testing, is ready to talk it up. Their feeling about Greenland is similar to the growing confidence it had in India when, after 16 dry wells, it struck it big in 2004. Each exploration well is expected to cost more than $100m. (9/1, #17)
  • Four groups sued US Secretary of State Hillary Clinton and other federal officials to protest Dept. of State approval of the proposed Alberta Clipper oil pipeline. (9/5, #15)
  • BP’s global campaign to cut costs by $3 billion this year is a reaction to oil prices falling from record levels of more than $140 per barrel a year ago to roughly $70 per barrel this summer. (9/4, #17)
  • The US EIA’s 2009 International Energy Outlook confirms a trend begun just last year, clearly revealing that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago. Until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly bleaker. (9/2, #19)
  • Regulatory delays and rising costs first contributed to the gloom over the fate of the Mackenzie Valley natural gas pipeline. Now, there are growing doubts about whether, given the large increase in natural gas reserves in the US and lower parts of Canada, the producers will commit to the northern mega-project. (9/1, #15)
  • Russia and Ukraine have resolved all of the outstanding issues related to natural gas supplies, Ukrainian Prime Minister Tymoshenko told local media. (9/2, #18)
  • Spain's hopes of becoming a world leader in solar power have collapsed since the Spanish government stopped generous subsidies. The sudden change has rippled across the global solar industry in a warning of the problems that government-supported renewable-energy programs can encounter. The industry's fundamental problem is that, without subsidies, it's still not economically viable. (9/4, #24)
  • Iran has prepared an "updated nuclear proposal" and is ready to hold negotiations with world powers, state-run television quoted the Islamic Republic's chief nuclear negotiator as saying on Tuesday. (9/2, #10)
  • Interior Secretary Ken Salazar sang the praises of a North Dakota coal plant he visited in May. The Great Plains facility is the world’s largest that captures and buries carbon dioxide emissions. It was also a financial flop, defaulting on $1.5 billion in federal loan guarantees before being sold for 4 percent of its construction cost. (9/1, #13)
  • In China, costs will total as much as $400 billion over 30 years to install systems to capture carbon dioxide from power plant smokestacks and bury it underground, said Richard Morse, a Stanford University research associate and author of a study on the technology. (9/4, #12)
  • China has authorized defaulting on commodity derivative contracts. According to a report from Reuters, six foreign banks—including Goldman Sachs, UBS and JPMorgan—received letters indicating that the Chinese State Owned Enterprises would be allowed to default on their derivatives. Beijing believes the oil markets are being manipulated. (9/5, #23)
  • With aggressive sales volumes and no major bumps in the road (unusual for new technologies), plug-in hybrids and pure electric vehicles could constitute 25% of new car sales by 2030. Because of the slow turn-over of the overall fleet, gasoline consumption would be reduced only modestly below what it would otherwise be. (8/31, #15)
  • EEStor has previously indicated it will present lab certification data and deliver production units by the end of this year, hopefully shedding light on nearly 10 years of research secrecy. They claim their batteries have several times the energy and power density of lithium ion batteries, are orders of magnitude cheaper to produce, and have a functionality unlimited lifetime. (9/3, #16)

Quote of the Week

[About BP’s recent Tiber discovery] "We really need this. After 2012, given current developments, we will see production start to decline. Without continued discoveries . . . that decline could be steep."
--- Bob MacKnight, senior consultant, Washington consulting firm PFC Energy

Energy Stat of the Week

Production in the Gulf of Mexico accounts for about a quarter of total U.S. oil production, or about 1.2 million barrels a day. Gulf production peaked in 2003 at 1.56 million b/d. Most Gulf production wells tend to hit their peak within a year or two, and then begin to drop steeply several years later. Oil production in federal waters of the U.S. Gulf fell 9.8 percent last year, to the lowest since 1997, as new finds failed to keep pace with declining output from fields discovered in the 1970s and 1980s.

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