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Peak oil review - Nov 9

1. Production and prices

Although oil prices closed out the week just about where they started at $77 a barrel, in between prices took a trip up to $81, bounced around $80 and then fell on Friday. The oil markets seemed to take the more-than-expected increase in Friday’s unemployment numbers more seriously than the equity markets which closed higher. With “headline” unemployment breaking 10 percent for the first time in decades, more attention has been focused on other and likely more realistic unemployment numbers. The NY Times pointed out that the government’s U6, a more comprehensive assessment of un- and under-employment, is now at 17.5 percent, the highest since the 1930’s. At least one other widely followed analyst makes the case that un- and under-employment is now 22 percent.

Last week’s stocks report showed refiners cutting back on operations and decreasing imports of crude which resulted in a drop of 4 million barrels in the crude inventory. US consumption of petroleum products during the last four weeks was down by 4.5 percent to 18.8 million b/d as compared to 2008. Nearly this entire drop is in distillates and jet fuel as gasoline consumption remains the same as last year – 9 million b/d.

The Chinese say they will increase crude refining in November to record highs and according to a Bloomberg survey OPEC increased its output by 80,000 b/d in October over September. Storage of crude on tankers in the US Gulf is now down to 7 tankers from a high of 20 in May as the spread between current and future crude prices has narrowed, making floating storage less attractive.

Natural gas in NY also fell 18 percent last week on concerns that the US economy may not be recovering as fast as previously believed. Natural gas storage facilities are approaching full capacity and the outlook is for mild weather during the next few weeks.

2. Recovery or Speculation?

The breakout of oil prices from the $60-75 range they held from June to October has prompted a wave of commentary on just why this happened. Those focusing on stagnant demand in the US and Europe are saying there is no way $80 oil can be justified by fundamentals, while those taken by the prospects for increases in Chinese demand are looking for higher oil prices in the next six months.

The situation has been complicated by the tie between the weakening US dollar and rising oil prices leading many to ascribe the recent price surge to speculators hedging against the US dollar. No matter what the cause of the jump, numerous financial firms have released technical analyses in the last two weeks saying that oil prices are likely to rise into the $90s or even break $100 in the near future.

There is nothing on the horizon suggesting that demand for oil in the US is going to rebound soon. Whether the demand for oil will fall much further in America’s “motorized society”, short of a major drop in the GDP or much higher gasoline prices, is also an open question. The Chinese economic rebound in the last six months impressed many, including the forecasters at the World Bank and the IEA who are calling for an increasing Chinese GDP and increased demand for oil next year.

The key question thus becomes one of whether increasing Chinese demand will take up the slack from stagnant OECD demand and call on increased production from spare Saudi capacity to keep prices in check. This, of course, assumes that the increasing Chinese demand is sustainable and not just an artifact of their generous stimulus programs. Then again, a rapidly falling US dollar could upset everything related to normal supply and demand pricing as could the re-pricing of oil into something other than the dollar. There are still many unknowns out there.

3. Climate Change

It is beginning to look as if there will be little if any progress at the Copenhagen meeting on climate change next month. In the US, the climate bill is unlikely to pass the Senate in time for the meeting, thus undercutting Washington’s leadership in attaining any meaningful progress. While most EU nations see uncontrolled emissions as a threat and the Union is willing to undertake the substantial sacrifices necessary to bring global warming under control, few others are taking it seriously as yet.

In the US, the economic recession has set back the best efforts of the Obama administration to make progress. In Russia the government apparently sees no particular threat from increasing temperatures and is dependent on selling oil and gas for a major part of its economy.

Ironically, only Beijing is beginning to wake up to the seriousness of the threat to its national existence from drought, reduced river flows and rising sea levels.

The heart of the problem is that major cuts in emissions are seen as causing extreme hardships and reduced economic growth for many years into the future. This is something that the current generation of leaders for the most part is unwilling to contemplate.

It seems likely that high prices of fossil fuels, due to geologic limitations, costs of production, and other factors, may ultimately have more impact on reducing emissions than formal political agreements.

4. Peak Demand?

Next week the International Energy Agency will release its annual report which is reported to include a second consecutive substantial downward revision in the Agency’s forecast for global oil production. Curiously, this reduction in forecast world oil production is being cast as a reduction in the demand for oil rather than stemming from any constraints on global oil supply. As the story goes, everyone knows there are trillions of barrels oil left to find and exploit so supply can’t be the problem.

These observers hold that if oil production is to decline, it will come from the demand side – as a world we simply don’t want any more. The only reason that this would make sense – given that nearly everything runs on or is made out of oil and the world population is still growing – is if the price of oil were to climb to and stay at levels that consumers could no longer afford. Don’t ask why this extraordinary price spike occurred; it probably has something to do with speculators hedging currency holdings or foreign governments deciding to hold their wealth in the form of mineral stockpiles rather than mortgage-backed securities.

Other reasons for falling demand would be that parts of the global economy collapse are reducing the demand for oil for the next 20 years. Still another reason is a widespread switch to renewables to stem global warming. As a matter of fact, nearly any reason except geological constraints on oil production is good enough for the peak demand view.

Quote of the Week

  • “The unemployment report raises fears that there will be a double dip to the recession. This doesn’t bode well for consumption of commodities such as oil.”
    -- Michael Lynch, president of Strategic Energy & Economic Research

    Energy Stat of the Week

  • “Free Market Oil” has dropped by over 2 million b/d since December of 2003. This sub-category is the Non-OPEC countries, excluding Russia. It includes ExxonMobil, BP, Shell, Suncor, and countries like Brazil, the United States, Norway, the UK, Mexico and Australia. (11/3, #13)

    The Briefs

  • Crude output in Russia, the world’s largest oil producer, grew 1.8 percent in October from a year earlier after OAO Rosneft began production at a field in northern Siberia. Output was 10.04 million b/d, a post-Soviet high. Crude exports rose 0.5 percent from a year earlier to 5.4 million barrels a day. (11/3, #10)
  • India's crude production in the year to March 2010 is likely to rise 11 percent to 734,000 b/d, Oil Minister Murli Deora told reporters. Cairn, India's field in Rajasthan, and Reliance Industries' oilfield in the Krishna-Godavari Basin help boost output. (11/5, #10)
  • Five months after Venezuela nationalized dozens of oil service contractors in Zulia state, the once-bustling industrial dock on Lake Maracaibo is nearly abandoned, and the 16 red flags raised to celebrate the takeovers are already tattered and faded. (11/2, #8)
  • Ecuador's average oil output fell 3 percent to 491,000 barrels/day between January and August from 507,000 barrels a day in the same period of 2008, the central bank said. (11/7, #11)
  • Tenaris SA, the world’s largest maker of steel pipes for the oil and gas industry, said Pemex may drill about 600 wells at Chicontepec next year, about a third of the wells that were planned…Mexico won’t be able to start producing deepwater oil in time to stabilize output in the next few years. Pemex expects to start producing at oil fields under 500 meters (1,640 feet) of water or more in 2015. (11/7, #9)
  • The realistic scenario in the latest Canadian Energy Research Institute outlook expects Alberta oil sands production to increase to 1.7 million b/d by 2015, 2.5 million b/d by 2020, 4.5 million b/d by 2030 before reaching a peak of 5.3 million b/d in 2041. Oil sands production was 1.3 million b/d in 2008. (11/6, #15)
  • Christophe de Margerie, CEO of Total, the French energy group, warns of more upheaval in the oil patch. “We are running the risk of another oil crisis when demand outstrips supply around 2014 or 2015,” he told Le Parisien newspaper in September. (11/4, #9)
  • China's thirst for oil was expected to be a major topic at the Forum on China-Africa Co-operation, when Chinese Premier Wen Jiabao met African leaders in an Egyptian resort this past weekend. Nigeria, the world's eighth-largest producer, appears to be resisting China's approach to buy a sixth of its proven reserves. (11/7, #8)
  • Iraq awarded a contract to develop the West Qurna oilfield to Exxon Mobil and Shell, a month before the country holds its second licensing round for oilfield contracts since the 2003 U.S. invasion. (11/6, #6)
  • Saudi Arabia’s air force attacked Yemeni rebels holding territory in the kingdom’s border region, a move that threatened to draw the world’s largest oil exporter into its neighbor’s civil conflict. (11/6, #7)
  • Canada has mounted its biggest campaign yet to sell the US on the energy security benefits of the oil sands as Washington debates new environmental policy, the country's energy minister said on Friday. (11/7, #18)
  • Chevron, Exxon Mobil and five other companies searching for oil and gas on Greenland formed a group to share information about exploration in the waters around the island that may hold as much in reserves as the North Sea. (11/7, #19)
  • US services company Halliburton said today it has won an integrated turnkey drilling contract from Saudi Aramco for work in South Ghawar including work on Uthmaniyah, Haradh, Hawiyah and Shedgum oil fields. The project is expected to use three to four rigs, and will involve between 153 and 185 oil production, water injection and evaluation wells. (11/7, #5)
  • Shell said it will decide within months whether to begin drilling for oil and gas off the Alaskan coast despite strong opposition. The Anchorage Daily News said Thursday that environmentalists and Alaska North Slope officials are opposing Arctic drilling in the Beaufort and Chukchi seas. (11/6, #14)
  • Shell said its Nigerian venture is taking advantage of a declared cease-fire to quickly restore 800,000 barrels a day of production lost to earlier militant attacks. (11/5, #5)
  • Mexico's state oil company Pemex said its new oil refinery would cost $9.65 billion, approximately $700 million more than previously estimated, and would boost refining capacity by 250,000 barrels a day when completed in 2015. (11/7, #10)
  • CNOOC said it agreed to buy a minority stake in four prospects in the Gulf of Mexico from Norway's Statoil, opening crude oil reserves in the US Gulf to China for the first time. CNOOC will have a 10 to 20 percent interest in four exploration areas. (11/5, #8)
  • It offends conventional wisdom. It will also seem nasty to the doom-sayers, who for decades have predicted an oil scarcity that never came. But the 21st century is very likely to overflow with oil. (11/5, #17)
  • The US rig count rose 3.5% to 1,044 in October from 1,009 in September but remained off by 47% from 1,976 a year earlier, according to Baker Hughes. (11/6, #13)
  • Brazil’s Petrobras made a “large” (1 trillion cubic feet) natural-gas discovery in Peru’s southern Amazon jungle, Peru’s president said. (11/6, #9)
  • Talisman Energy, Calgary, said it has more than doubled its acreage position to a combined 350,000 acres in the Pennsylvania Marcellus and British Columbia Montney shales and is restructuring its North American operations into shale and conventional business units. (11/4, #14)
  • Ottawa has said nothing to sway Imperial Oil from plans for the Mackenzie Valley gas pipeline, despite a media report that appeared to cast the $15.1 billion project into more doubt, Imperial's chief executive said on Tuesday. (11/6, #17)
  • Natural gas storage sites are now at 97 percent of peak capacity, which the Energy Department estimates at about 3.9 trillion cubic feet. Inventories will probably begin declining later this month as heating-fuel demand increases. (11/7, #3)
  • The UK could run out of gas this winter, The Observer has learned. The revelation has sparked a row between the Conservatives and Labour over who is doing more to keep the heating on. (11/2, #17)
  • US utilities aren't convinced huge increases in US natural gas output mean it's time to make bigger bets on the fuel. Utilities have been stung before by the fuel's volatile prices, and they remain reluctant to make long-term commitments to gas by building or expanding plants. (11/4, #13)
  • Peabody Energy, the US coal producer, plans to double Australian coal exports over the next five years. Yet Australia’s government plans to introduce laws aimed at reducing carbon emissions, with legislation, blocked in August, due to go before lawmakers for a second vote this month. (11/7, #13)
  • China's sovereign wealth fund has agreed to buy a 15% equity stake in Virginia-based power company AES Corp. for $1.58 billion, another example of how Chinese money is flooding into infrastructure companies around the world. (11/7, #14)
  • The current investment binge in China may be sowing the seeds of bad loans that will sprout wildly in the next couple of years. China's banking system, although not shocked directly by the financial crisis, may be dangerously exposed to the balance sheet risks caused by massive and inefficient state intervention. (11/6, #11)
  • The deadline for 192 countries to complete a new global-warming accord may slip by as much as one year, as negotiators hold back on pledges to slash emissions or pay financial aid to poor nations. (11/6, #3)

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