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Peak oil review - Apr 26

NOTE: After 230+ consecutive issues, our PO Review writing team will miss at least the next Monday publication date, and probably the next two, due to “uncoordinated travels.” Our apologies.

1. Prices and Production
Prices hovered around $83-84 a barrel last week, but closed at $85.12 on Friday on a jump in US home sales and a stronger Euro. Early in the week, the markets were concerned about the volcano eruption, which at one point cut global jet fuel consumption by some 1 million b/d, and the Goldman-Sachs fraud suit which some feared could drive Goldman from oil speculation. By Wednesday, however, flying over Europe resumed after the airlines lost $1.7 billion; Goldman was reporting record earnings; and the markets started worrying about a possible fall in US oil stocks.

The Wednesday EIA report, however, showed a healthy jump of 10.7 million barrels in US commercial petroleum inventories despite a 1.6 percent increase in US oil consumption and a 2.7 percent increase in US gasoline consumption over last year. Wholesale gasoline prices in New York closed at a close-to-recent high of $2.35 a gallon after trading as low as $2.22 earlier in the week.

The explosion aboard and subsequent sinking of Transocean’s deepwater Horizon rig in the Gulf on Tuesday, with the loss of 11 oil workers, serves as a reminder that deepwater offshore drilling remains a dangerous business. Ironically, the vessel was drilling into a relatively small (100 million barrel) reservoir that was made economical because of its proximity to an existing oil pipeline.

Although the cause of the explosion is yet to be determined, speculation focused on pressure surges that can be more dangerous as drilling goes deeper. In 2006, Exxon abandoned its Blackbeard well after engineers became alarmed at the pressures and temperatures they were encountering. Over the weekend it was reported that the damaged well may be leaking as much as 1000 b/d.

BP, which had leased the rig, announced that the loss was unlikely to have much of an impact on its production for the year. Should the leaking well turn into a major and expensive environmental clean-up problem, there are certain to be questions raised over the propriety of deepwater drilling – at least in US waters.

2. Iraq
Yet another pipeline bombing, which closed Iraq’s northern export line to Ceyhan, and a coordinated series of explosions in Baghdad, serve as a reminder that the country remains politically unstable and that the potential for substantial increases in its oil production over the next few years still are problematic. The northern pipeline exported 13 million barrels of Iraqi oil in March. There is as yet no resolution of the March Parliamentary elections as officials prepare for another round of recounts.

In the meantime, life is reported to be improving for most Iraqis as life returns to city streets; stores are well-stocked and business is starting to revive. Major oilfield contractors, including Halliburton, Schlumberger and Baker Hughes, are preparing to build massive desert bases as the major oil companies attempt to fulfill contracts to increase Iraqi oil production to 12 million b/d.

The explosions in Baghdad, which killed at least 58 and wounded hundreds last week, are said by the government to be the work of al Quaeda retaliating for the recent killing of its three top leaders in Iraq. As the bombings took place in Shiite neighborhoods, some see Sunnis in general behind the blasts. The key issue remains as to whether Iraq’s politicians can form a viable government and start governing, or whether the country will slip into factional fighting.

3. Iran
The Iranian nuclear enrichment continued to make headlines all week as both sides postured and issued veiled threats. As the prospect of stiffer sanctions loom, Iran’s Revolutionary Guards held well publicized war games in the Straits of Hormouz. The Ayatollah Ali Khamenei accused Washington of trying to dominate the world through its nuclear arsenal and at one point suggested that the US and Israel should give up their nuclear weapons. The Ayatollah was particularly exercised by the deliberate exclusion of North Korea and Iran from the new US policy not to use nuclear weapons against non-nuclear states.

In Washington a consensus seems to be growing that even harsh sanctions will not change Iranian policy and that we are in for an extensive period of containment as the Iranians continue to muddle along, building a nuclear capability but never crossing the provocative threshold of testing a nuclear device. The Obama administration continues to reiterate that it has no intention of attacking Iran in the immediate future, but that the option is not completely off the table. Secretary of State Clinton warned that without harsher UN sanctions, the world runs the risk of regional conflict over Iran.

In the meantime the Iranians are attempting to head off sanctions (mollify the Chinese), by agreeing to increased UN inspections at one of their enrichments sites. According to Tehran, the Iranian position in the dispute is supported by Syria, Lebanon and Iraq who also called on Israel to give up its nuclear weapons.

4. Power shortages
A combination of droughts, inept government planning and rapidly growing demand for electricity is leading to serious power shortages and lengthy blackouts in many countries. At the minute the most serious problem appears to be in Pakistan where the government announced drastic measures to save power, including a shorter work week. With power outages lasting up to 20 hours a day in some locations, there have already been violent demonstrations and some fear for the stability of the government. In Karachi, the government announced plans to cut the city’s power quota from 650 megawatts to 350.

Zimbabwean power plants are only generating 805 megawatts, less than 50 percent of demand.
In Venezuela, rains over the past few weeks raised the water level in the main dam system which supplies 70 percent of the country’s power by a few inches. This development so encouraged the government that it ordered an increase in the dam’s power generation to ease the blackouts so the dam’s water level is dropping again. Although summer rains are expected to be sufficient to hold off a blackout this summer, many observers are already worrying about next winter.

Across all of southern Asia, from Pakistan to China, the lack of sufficient monsoon rains last summer is causing electricity problems. Most countries are turning to increased coal imports as a means of mitigating the shortages.

Finally, in Britain the national electricity regulator issued a new report that power cuts in the UK could start as early as 2016 – three years earlier than expected.

Quote of the Week
“Are policymakers, economists and peak oilists starting to speak the same language? A rash of papers, comments and interviews have made us think this recently. It’s not as simple as ‘policymakers are waking up to peak oil’, but that all those groups — and indeed, industry — are increasingly talking about the same issues looming in fossil fuel production, even if they’re using different terminology.”
-- Kate Mackenzie, energy writer, The Financial Times

The Briefs (clips from last week’s Peak Oil News dailies are indicated by date and item #)

  • Oil reserves in Kuwait’s largest oilfield, Burgan, are higher than have been published and new figures for all reservoirs will be announced soon, a minister said Thursday. A January
    2006 report by Petroleum Intelligence Weekly claimed that Kuwait’s fully proven reserves amounted to only 24.2 billion barrels—roughly one-fourth of the official figure. At the time, Kuwaiti oil officials said the report was inaccurate and that it failed to take into account undeveloped reservoirs. (4/23, #10)
  • The Kazakh government is demanding at least $2.5 billion from an oil venture led by BG Group Plc and Eni SpA after talks stalled on the state’s entry into the project…The setbacks faced by Karachaganak, and Kashagan before that, echo Russia’s moves to claw back control over resources being developed by international producers under agreements signed in the 1990s. (4/23, #12)
  • Saudi Arabia said it will increase oil exports to Indonesia to 325,000 b/d from 200,000 b/d in 2010, underling a rising trend in exports that analyst BMI sees taking place elsewhere in Asia. (4/22, #5)[Editors’ note: until a few years ago, Indonesia was an oil exporter.]
  • Officials at Pemex can do little more than watch from the sidelines as oil majors break deep-drilling records on the US side of the Gulf of Mexico. As Pemex doesn't have the technology to drill anywhere near the depth required, and under Mexican law can't share risk with them, government officials found themselves on the defensive as 100,000 barrel-a-day Perdido went on stream. (4/23, #16)
  • Auditors of Mexico’s oil and gas reserves have recommended that Pemex eliminate more than 17 percent of the 43 billion barrels of oil equivalent (boe) of proved, probable and possible reserves (3P) Pemex claimed to have at the start of the year. The recommendation was rejected by management at the oil monopoly, sources said. (4/19, #11)
  • Venezuela will send China 100,000 b/d of crude for the next 10 years to pay for a $20 billion loan agreed to over the weekend, Venezuela Oil Minister Rafael Ramirez said Thursday. (4/24, #10)
  • Venezuela and China will together invest $16.32 billion in a joint oil venture to produce 400,000 b/d in the country’s oil-rich Orinoco Belt. That’s according to Venezuela’s state-owned Petroleos de Venezuela, which will own 60% of the new venture. (4/22, #11)
  • U.S. oil firms pay about $3 billion a year in royalties to the Venezuelan government, a number that dwarfs the $200 million they'd be paying if the 1% rate from previous Venezuelan administrations remained in place, President Chavez said. His government has steadily increased that royalty rate, bumping it up to 16% in 2004, and bringing it to as high as 33%. But such high rates have caused many companies to reduce their involvement in Venezuela or forego new investments. (4/21, #12)
  • Ecuadorean President Correa said his government will submit legislation to facilitate the expropriation of private oil operations if companies refuse to sign on to new services-based contracts. When the government began moving toward new contracts three years ago, the private operators began resisting the changes, and to reduce their risks, have been investing just enough to maintain output at their existing oil fields. (4/24, #11)
  • Russian President Medvedev agreed to spend $40 billion to cement Moscow’s ties with Kiev after five years of tension by cutting gas prices to Ukraine in return for an extended Russian naval presence in the Black Sea. Russia agreed to cut the natural-gas prices it charges Ukraine by 30 percent in a deal that obliges Ukraine to import more gas from its neighbor to the east. (4/22, #17)
  • Algeria’s energy minister plans to seek commitments from 11 gas exporting nations to reduce output and end a glut that’s caused US prices to fall 28 percent since December. Russia, holder of the world’s largest reserves, said it doesn’t intend to cut supply, and Qatar, with the third- largest reserves, is opening new export facilities. (4/19, #5)
  • The LNG report – the first by TPH since 2007 – predicts shipments to the US in 2010 will fall to 1.8 billion cubic feet of gas per day. US regasification capacity is about 15 Bcfd, dispersed among nine different terminals on the US Atlantic and Gulf of Mexico coasts. “Shale gas renders US LNG imports nearly unnecessary over the next five to 10 years,” the report stated. (4/22, #16)
  • Drilling in US shale-gas formations may tumble as companies run short of cash after prices for the fuel, now at $4 per million Btus, languished below the cost of production for more than a year. The chairman of gas producer EQT said producers typically need prices of $6.50 to $7 per MBtu to make a “reasonable” return. (4/24, #15)
  • In the Delaware River watershed, natural gas drillers and environmentalists are furiously lobbying the Delaware River Basin Commission, the powerful federal-interstate compact agency that monitors water supplies for 15 million people, including half the population of New York City. The commission has jurisdiction because the drilling process will require withdrawing huge amounts of water from the watershed's streams and rivers and because of the potential for groundwater pollution. (4/20, #14)
  • Experts are warning that natural gas might not be as clean as it seems. In fact, using natural gas rather than diesel in vehicles could actually increase climate change, says Robert Howarth, professor of ecology and environmental biology at Cornell University. "You're aggravating global warming more if you switch," he says. (4/19, #14)
  • US drilling activity declined for the first time in 9 weeks, down 9 rotary rigs with 1,482 still working. Rigs drilling for natural gas declined to 956, 17 fewer than the previous week; the number drilling for oil increased by 8 to 514, with 12 rigs unclassified. (4/24, #16)
  • Using productive farmland to grow crops for food instead of fuel is 36% more energy efficient, Michigan State University scientists concluded, after analyzing 17 years' worth of data to help settle the food versus fuel debate. (4/24, #20)
  • While the term "peak oil" is well known, fewer people know that the world’s phosphate reserves could also be running out. Experts refer to this scenario as "peak phosphorus." The element phosphorus is the most important ingredient in fertilizer. Four countries – Morocco (37%), China, South Africa and Jordan -- control 80 percent of the world's reserves of usable phosphate. (4/22, #20)
  • US senators from agricultural states introduced legislation on Apr. 20 that would extend the federal ethanol tax credit through 2015. Failure to do so would cost 112,000 jobs nationwide and reduce domestic fuel ethanol production by 40%, they maintained. (4/21, #14)
  • Academics have projected algae fuel could fall to as low as $2 to $4 a liter, according to the New Energy Finance report. That compares with sugar cane ethanol, usually the cheapest biofuel, which costs between 20 cents and 45 cents. (4/20, #20)
  • South Africa’s Richards Bay Coal Terminal, Europe’s biggest source of coal burned for electricity, is boosting supplies to India and China as rebounding Asian economies build new power plants. (4/22, #9)
  • There are still two large drawbacks to current carbon sequestration efforts in Europe: the process is quite energy intensive, and thus will use up coal supplies faster; and the process is quite expensive, and can be expected to continue to be quite expensive, even as experience is gained in the process. (4/24, #18)
  • China's economy is expected to grow by 10 percent in 2010, the IMF said.(4/22, #13) March car sales rose 56% compared to a year prior, according to IHS Global Insight (4/23, #3)
  • The International Air Transport Association estimates that the crisis caused by a volcanic ash cloud above Europe cost airlines revenues of more than $1.7 billion by Tuesday. "For an
    industry that lost $9.4 billion last year and was forecast to lose a further $2.8 billion in 2010, this crisis is devastating," IATA said in a statement Wednesday. (4/21, #7)

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