Peak Oil Review
1. Production and prices
The long awaited break-out of oil prices from the three month-long $65-75 trading range occurred last week with a 9.4 percent jump leaving oil at $78.53 a barrel. The jump was triggered by a Federal Reserve Report showing a 0.7 percent increase in industrial production in September, a weak dollar, and an unexpectedly large drop in US gasoline inventories. Oil had its highest close in more than a year and is getting close to the $80 level which is where many believe the oil price impact on any economic recovery starts to have a greater effect.
Other factors contributing to the price jump were good news out of China, where industrial and power production and exports seem to be increasing; the possibility that there will be renewed attacks on Nigerian oil facilities; and statements by Federal Reserve Board members released on Wednesday suggesting that policies contributing to a weaker US dollar will be continued.
US gasoline futures also jumped this week as a combination of lower imports and much lower refinery utilization led to a 5.2 million barrel drop in inventories. On Friday futures rose to nearly $1.98 a gallon on the NY Mercantile, the highest since Aug 31st.
Behind last week’s rise in oil prices is the assumption that an economic rebound is occurring, or is about to occur, that will increase demand for oil products. Countering this outlook is the fact that industrial production across most of the developed world is down between 10 to 19 percent. Although Beijing says its stimulus package has its economy growing at 8 percent, the question is open as to whether this growth is sustainable without increasing exports.
2. Another price spike?
The 19 percent jump in oil prices over the last three weeks has left many analysts wondering if we are seeing the seeds of another 2008-style price spike that sent oil to $147 a barrel. Goldman Sachs is already talking about $85 oil later this year and $95 oil by the end of 2010. Technical analysts are saying further increases in oil prices are in their charts and OPEC is beginning to talk about speculators driving oil prices above the cartel’s preferred $70-75 a barrel. The director of the IEA said last week that he is concerned by the rapid price jump.
Many are worried that the massive amounts of deficit financing being carried out by the US government will send the dollar to uncharted lows, thereby driving up oil prices no matter what happens with supply and demand.
The fall of 2009 is not the same as the spring of 2008 however. Demand for oil mostly from the OECD countries has fallen by 1.7 million b/d due to reduced industrial activity. China is not putting on the Olympics and no sudden jump in economic activity appears imminent despite predictions by OPEC and the IEA of a better 2010.
If demand really revives by 1 or 2 million b/d over the next year, then economic damage from higher oil prices similar to that seen in the spring of 2008 seems inevitable. Such an increase in consumption would likely come from China, the oil exporting countries, and developing Asia where subsidized prices isolate the consumer from world prices.
While 2008 showed us that $140 oil will quickly cause economic havoc, particularly in the transportation sector, nobody really knows the effect of prolonged $80, $90, or even $100 oil. A $10 per barrel price increase drains $13 billion additional dollars a month from the OECD economies.
At some point, possibly soon, it seems inevitable that the global economy will enter a lengthy period when alternating economy-damaging oil prices spikes and mitigating drops will become the norm.
3. ASPO-USA Conference
Last week ASPO-USA held its fifth annual conference in Denver with 400 attendees from 28 countries. As this conference doubled as the worldwide ASPO meeting, foreign attendance was particularly heavy. About 70 speakers, the most at any ASPO conference, including the former Governor of Colorado and the Mayor of Denver, gave presentations.
After listening to the many speakers, most of whom are deeply involved in following the peak oil story, long-time attendees were taken by how much the discussion has changed in the last four years these conferences have been taking place. While in 2005 the conversation focused on when production would peak, now there is an almost universal consensus that conventional oil production stopped growing significantly after 2005 and has remained on a plateau ever since. Many believe we passed the peak all liquids production in 2008, and even most optimists are saying that a peak below 90 million b/d is looking more likely than a peak over 100 million b/d.
Most analysis is now focused on the issue of when the plateau period will end, and just how fast declines in production will be after the decline begins. Many speakers built on the work done on decline rates by the IEA in its 2008 World Energy Outlook that significantly increased previous views of how fast existing oil fields are depleting, and are likely to decline in the future. Chris Skrebowski, editor of the Petroleum Review pointed out that a 5 percent decline rate is equivalent to 4 million b/d each year. This is equivalent to all the biofuels, tar sands and heavy oil production combined.
The steady switch to offshore production suggests that global depletion rates will increase to the vicinity of 6.5 percent by 2014.
Interest in biofuels, which was all the rage 4 years ago, has slowed dramatically as no one has yet figured out how to make either corn-based or non-corn ethanol on a commercial scale, with an acceptable return on both the energy and financial investment.
The debate on natural gas production picked up, with some believing that the newly discovered shale gas will be a salvation and others doubting it will prove to be cost-effective.
The bottom line of the conference was that, among analysts who prefer data to faith, global oil production will begin to decline between 2012 and 2015 depending on the course of the recession.
Quote of the Week
“We cannot afford to ignore the [peak oil] issue. By anticipating the expected rapid changes in both supply and demand, we can begin to frame the issue not only as a challenge but also as an economic opportunity.”
-- Mayor John Hickenlooper, Denver, Colorado, at the ASPO-USA Conference
- Russian oil output will stagnate in 2010 and begin to decline as mature fields lose production capacity and only one new project comes on line, according to oil analysts at Bernstein Research. Russia, now the world's largest oil producer, pumped 10.01 million b/d last month, up 0.4 percent from the 9.97 million b/d produced in August, both record highs. Declines next year could be as high as 1.24 percent. (10/15, #19)
- Iraq plans to drill around 150 oil wells next year which will increase the country's crude oil production by 250,000 b/d, head of the state-run Iraqi drilling company said Friday. Idris Al-
Yassiri also said the company bought 24 rigs this year, which will bring the total to around 53 rigs by the end of 2009, 60 by year-end 2010. (10/17, #8)
- CNOOC is in talks with Norway's StatoilHydro ASA over a deal for a few leases in the U.S. Gulf of Mexico, a deal which would open the US Gulf to China's oil companies for the first time. (10/17, #9)
- In its October Monthly Oil Market Report, OPEC said demand was expected to grow by a daily 700,000 barrels, just under one percent, to average 84.9 million b/d. That represents a 200,000 b/d upward revision from their September forecast. (10/14, #4)
- With a world economy intolerant of oil prices much above $80, there is a question whether Brazil’s ultra deep sub-salt fields can be developed and produce oil at a price the world can afford. (10/14, #22)
- Shell is renegotiating with Iraq about the Kirkuk oil field, one of Iraq's largest oil producing areas, after it didn't win access to the field in the country's first licensing auction, held in Baghdad in June. (10/16, #4)
- In Ghana, the government does not approve of Kosmos Energy's reported deal to sell its stake in the giant offshore Jubilee field to Exxon Mobil. State oil company Ghana National Petroleum Corp said earlier this week that the multi-billion dollar deal was "illegal" and that it is interested in acquiring the property itself. The Jubilee field may hold 1.8 billion barrels of oil and will produce 120,000 barrels of crude a day. (10/16, #6; 10/15, #9)
- Nigeria’s main rebel group, the Movement for the Emancipation of the Niger Delta, said on Friday that it was “resuming its hostilities” against the country’s oil industry and armed forces (10/16, #8).
- Brazil's state-run oil firm Petrobras may face lower debt ratings as it boosts borrowing to finance some $400 billion in development costs for the offshore subsalt fields. Petrobras is to nearly double oil production by 2020 through a business plan that will heavily rely on the deep-sea subsalt fields off Brazil's coast that are believed to hold some 50 billion barrels of oil. (10/16, #9)
- China Petrochemical Corp., Asia’s biggest oil refiner, said the race for overseas energy assets is getting tough as companies vie to acquire resources. Chinese energy companies have spent at least $13 billion on assets overseas since December, including purchases in Singapore, Syria and Kazakhstan, and have more recently bid for positions in oil fields in Nigeria, Argentina, Ghana, Uganda and Angola. (10/16, #11)
- Kurdistan halted its oil exports due to a payment dispute with the central government in Baghdad, the natural resources minister of the autonomous northern region said last Wednesday. (10/15, #6)
- Pemex can’t stop working on its Chicontepec oil development, CEO Juan Jose Suarez Coppel told Mexico’s lawmakers. Pemex’s board met Thursday to discuss whether the company should keep investing in the $11.1 billion Chicontepec development. (10/15, #11)
- Oil refiners from Valero Energy Corp. to Sunoco Inc. are cutting the most capacity since the early 1980s, anticipating the coldest US winter in a decade won’t be enough to soak up a glut of fuel.(10/13, #19)
- Refining of the first 264,000 barrels from Brazil’s Tupi field began at the Revap refinery in Sao Jose dos Campos. It apparently took 160 days to produce at an average of 2000 b/d -- far less than the 14,000 b/d that Petrobras announced in May. (10/12, #10)
- Repsol, Spain’s biggest oil company, said tests on a natural gas well offshore Venezuela drilled with Eni revealed the presence of crude oil, which the government said may help speed the field’s development. The Cardon IV field ranks as Venezuela’s largest gas discovery and one of the world’s five biggest finds in 2009. The 13 square-mile field contains the natural-gas equivalent of between 1 billion and 1.4 billion barrels of oil, Repsol said. That is between 5 to 8 trillion cubic feet of gas, more than the total reserves of neighboring Colombia, which now exports the fuel to Venezuela. (10/16, #10)
- Europe is experiencing a battle over control of the pricing mechanism for natural gas--the way in which gas is bought and sold. It is an ideological conflict between promoters of free markets and others who support the stability of a managed price. (10/16, #15)
- With an ambitious new pipeline planned to run along the bed of the Baltic Sea, the Russian natural gas giant Gazprom is driving a political wedge between Eastern and Western Europe. (10/13, #21)
- The World Gas Conference in Buenos Aires last week was one of those events that shatter assumptions. Advances in technology for extracting gas from shale and methane beds have quickened dramatically, altering the global balance of energy faster than almost anybody expected. (10/13, #6)
- The prediction three years ago that the U.S. would soon become a big buyer of ship-borne liquefied natural gas was a key theme of the last World Gas Conference in 2006. This year's event was dominated by the grim realization that many companies were completely wrong-footed by the unconventional gas revolution and that spot gas prices could remain weak for years. "The US is now a virtual liquefied natural gas exporter because all the LNG that was supposed to be going there is now going somewhere else. (10/12, #14)
- US drilling activity rebounded somewhat in the third quarter, with total well completions up 10.2 percent from the second quarter, API's third quarter 2009 drilling estimates indicate. Still, the estimated total number of oil wells, natural gas wells and dry holes completed in the quarter -- 8,856 -- was down 46 percent from 2008's third quarter and remained at levels not seen since 2003-2004. (10/13, #18)
- The number of rigs drilling for natural gas in the United States fell by five this week to 721, according to Baker Hughes. The US natural gas drilling rig count has risen in 11 of the past 13 weeks but is still 55% below the count when the number of rigs peaked above 1,600 in September 2008. The count bottomed at 665 in July. (10/17, #14)
- US Agriculture Secretary Tom Vilsack said he is pushing the Environmental Protection Agency to raise the amount of ethanol allowed in gasoline, from 10.2% today to possibly as high as 15%. (10/17, #11)
- Widespread US use of cars and trucks that use electricity stored in batteries, such as plug-in hybrid electric vehicles, is decades away, but these vehicles will cut the nation’s reliance on oil, according to oil industry analyst Tom Petrie. (10/17, #20)
- The US Nuclear Regulatory Commission said it had rejected a design by Westinghouse for a new reactor because a key component might not withstand earthquakes and tornadoes. The rejection raises the possibility of delays in building 14 planned reactors in the United States, including two twin-reactor projects in Georgia and South Carolina that are leading the pack. (10/17, #21)
- The Texas Commission on Environmental Quality is conducting air quality tests across the Barnett Shale natural gas field in response to residents' complaints about smelling odors and feeling sick. (10/16, #13)
- The Obama Interior Department is reviewing a decision made by the Bush administration in its final days that attempted to lock in lucrative royalty rates and favorable regulations for oil companies holding leases for oil-shale development on public lands. A congressional investigator said that the amendments raised eyebrows because of their "last-minute timing" and, perhaps because of the speculative nature of oil-shale development, they included "rates that are lower than any other oil and gas leasing rates on federal lands." (10/17, #13)
- A paper on climate change politics concluded that Saudi Arabia and other oil-rich states got involved in the process primarily to obstruct it. The author concluded by noting that the oil powers appear to be shifting these days to a more constructive role. ((10/16, #18)
- The Environmental Protection Agency released a copy of a long-suppressed report by officials in the George W. Bush administration concluding that, based on science, the government should begin regulating greenhouse-gas emissions because global warming poses serious risks to the country. (10/15, #13)
- According to a report from researchers at the nonprofit advocacy group Environment Northeast, all the money that government agencies, utility companies, and others are spending on efficiency programs not only saves energy, it pumps cash back into the economy - from $6 to $8.50 for every $1 spent. (10/15, #15)
- Demand for oil in developed nations peaked in 2005, and changing demographics and improved motor-vehicle efficiency guarantee that it won't hit those heights again, IHS Cambridge Energy Research Associates says in a new report. Global demand will nonetheless grow, fueled mostly by developing nations. The company forecasts world demand to increase from 83.8 million barrels/day this year to 89.1 mbd in 2014. (10/14, #5)
- Exxon Mobil’s agreement to buy the Ghana oil assets of Kosmos Energy LLC marks an effort by the world’s most valuable company to acquire what it couldn’t find after drilling dry holes in West Africa. (10/13, #10)
- Saudi Arabia is trying to enlist other oil-producing countries to support a provocative idea: if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers. (10/14, #9)
- Saudi Arabia plans to test enhanced oil recovery, a method of increasing fossil-fuel production by injecting gas in the ground, at its Ghawar Field in the country’s east. The project, planned for 2013, involves injecting about 40 million cubic feet of carbon dioxide daily into an area flooded by water in the Arab-D reservoir in the Ghawar field. (10/14, #10)
- Several oil companies that rejected tough terms in Iraq's first auction for oil-field rights this summer have dropped their demands for higher payouts, said Oil Minister Hussein al-Shahristani. The list includes Exxon-Mobil, Eni SpA of Italy, Conoco-Phillips, Kogas, Occidental and Russia’s Lukoil. (10/14, #11)
- Russia’s Prime Minister Putin used a trip to China to clinch oil, natural-gas and nuclear agreements, helping turn Russia into an even greater global energy supplier with pipelines stretching from Berlin to Beijing. (10/14, #21)
- Qatar Airways is claiming its place in history by operating the world's first commercial flight using fuel made from natural gas—“gas-to-liquids”—creating a potential new source of aircraft fuel for the future. (10/14, #23)
- Brazil’s largest union of oil workers, the FUP, claimed international oil companies are pressuring legislators to amend a bill that would extend special benefits to the country’s state-run Petrobras. (10/13, #12)
- Regional analysts say that Tehran finally may be ready to make a deal. The analysts cite a confluence of factors, from Iran’s internal political crisis to the change in leadership in Washington, and one overriding point: Iran’s leadership may have achieved much of what it set out to accomplish when it stepped up its clandestine nuclear program in 1999. In contentious, high-stakes negotiations, deals are possible when both sides have a chance to declare victory, and that point may have been reached. (10/15, #7)
- Mexico's two biggest sources of hard currency – oil exports and remittances from migrants in the US – are drying up at an alarming pace….And the Texas economy relies heavily on Mexico, which bought $62.1 billion in goods and services from Texas in 2008 – 32 percent of our total exports. (10/13, #23)
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