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Peak oil review - Jan 3

Top 10 Developments of 2010

1. Unexpected Growth in Global Demand
As the global demand for oil increased during 2010 the IEA was forced to steadily increase its forecast for average annual demand. In January the agency said that the increase over 2009 would be 1.4 million b/d. By July that had increased to a 1.8 million b/d gain and in mid-December the estimate was up to a 2.5 million b/d increase in global oil consumption. The agency notes that in the 3rd quarter global demand may have been up by 3.3 million b/d over the previous year, a rate which is clearly outstripping increases in production and indicating that a drawdown in global stocks is taking place.

As could be expected, much of 2009’s increase in demand came from China, which continued to grow its economy rapidly last year and for a variety of reasons had trouble maintaining its coal and electricity output to keep pace with economic growth. Even demand in the US increased, with total consumption of petroleum products in the last month or so running about 20.3 million b/d in December 2010 vs. 19.0 million b/d in 2009.

As annual increases in demand of 2–3 million b/d are clearly unsustainable, the IEA currently is forecasting that the global increase in demand during 2011 will subside to circa 1.3 million b/d.

2. Growing Acknowledgment that Production Will Start Declining Soon
Five years with little to no increase in global conventional oil production and steadily increasing prices is starting to have an impact on thinking about the future of oil as a source of energy. The most significant recognition of the peaking of global oil production came from the IEA in its annual World Energy Outlook 2010 when the agency noted that it now believes that global production of conventional oil peaked back in 2006. The agency then went through all sorts of contortions to show how oil production could theoretically be maintained through new discoveries and increased use of unconventional fuels as production from known oil fields falls.

US and German military planners published studies last year warning that falling oil supplies and high prices will be a major concern in the next few years.

Perhaps the biggest breakthrough of the year came in the UK where the government, at the urging of influential industrialists, dropped the mantra of plentiful oil in the decades ahead and began a cabinet-level study of the problem.

3. China Grows and Grows
The story of peak oil seems to be morphing into the story of China’s economic growth. To recover from the sharp drop in exports during 2008–2009, Beijing loosened fiscal constraints, resulting in an unprecedented surge in growth and demand for oil. According to the latest estimates, Chinese oil consumption increased by 10.5 percent or 881,000 b/d during 2010 as compared to 2009. Much of this demand came in the 2nd half of the year as coal and electricity shortages forced factories to use backup diesel generators. The accompanying overheating of China’s economy resulted in an increase in inflation and a subsequent imposition of restrictions on lending. The IEA does not believe that China can maintain its rapid growth in 2011 and is forecasting an increase in demand of only 4.8 percent next year.

Some observers are not so certain that the growth of China’s oil consumption will fall so sharply in 2011. They note that Beijing recently announced that the roughly 10 percent annual increase in China’s coal production which took place over the last decade was coming to an end. Starting at 1.2 billion tons of annual production in 2000, China’s coal production is expected to reach 3.2 billion tons in 2010. Beijing has already become a net importer of coal and is expected to increase coal imports substantially in the years ahead.

The Chinese are also moving to establish large strategic oil reserves, and there is evidence that China’s commercial petroleum stocks were drawn down significantly in the second half of 2010 as refineries stepped up production. A combination of imports to fill the strategic reserve, refilling commercial stockpiles, and whatever is needed to make up for shortfalls in coal production and transport to generating stations suggests that China may have a larger increase in oil consumption in 2011 than the 4.8 percent forecast by the IEA. A number of observers, including some Chinese analysts, expect China’s annual oil production to peak sometime during the next few years; once that happens, China’s growing need for imports would likely increase even more rapidly.

4. The Deepwater Horizon Disaster and Drilling Moratorium
Repercussions from the explosion aboard the drilling rig Deepwater Horizon on April 20th will be felt for many years and are likely to have a significant impact on the costs and pace of deepwater drilling. The sinking of the rig and the failure of the blowout preventer resulted in roughly 5 million barrels of oil being released into the Gulf of Mexico over a three-month period and was loudly proclaimed as the greatest environmental disaster ever.

When it became clear that BP engineers could not promptly seal the leaking well, the incident became a wakeup call that deepwater drilling was more risky than previously believed and that a new regulatory regimen was necessary. The Obama administration then imposed a freeze on deepwater drilling until an investigation could determine the cause of the mishap and new regulations could be devised. Subsequently, a decision to permit drilling off the US east coast and in the eastern Gulf of Mexico was rescinded, and there have been extensive delays in permitting new projects off Alaska.

The moratorium halted 33 drilling projects in the Gulf throwing thousands out of work. The oil industry immediately protested saying the moratorium was unnecessary and would delay 350,000 b/d of Gulf oil production by several years. The EIA says that oil production from the Gulf is likely to be 120,000 b/d lower in 2011 due to the moratorium and delays caused by tougher regulation.

In mid-October the moratorium was lifted after the Interior Department issued new rules governing topics like well casing and cementing, blowout preventers, safety certification, emergency response and worker training.

With close to half the world’s and 25 percent of US new oil production due to come from deepwater wells by the end of the decade, the issue of delays and costs of deepwater production becomes very important to the pace of future oil production. While the new US rules and permitting standards likely will be costly to the industry and will result in delays to new projects in US waters, it is unclear how widely they will be adopted for deepwater drilling projects around the world. For now all that can be said is that there is likely to be considerably less oil coming on stream three or four years from now than there would have been without the Deepwater Horizon disaster.

5. Stockpiles, Futures Markets, and Spare Capacity
As we draw closer to the time when worldwide demand for oil consistently outruns current production, the issue of global stockpiles and spare production capacity takes on renewed importance in determining how soon and how high oil prices will spike. The summer of 2009 saw OECD stockpiles rise to recent highs, and then fall unusually rapidly in the US. In China, gas-oil (distillate) stockpiles have fallen by 45 percent since February. This happened despite a sharp drop in China’s gas-oil exports, increases in imports and refineries maximized to produce distillates. While the overall OECD stockpiles are still higher than normal, the significant drops in China’s commercial stocks during the year and the rapid contraction of US stockpiles during the last few months may have important implications for developments in 2011.

In addition to the normal commercial stockpile, "floating stockpiles" in which crude and products were stored aboard leased tankers awaiting higher prices was an important factor in the oil markets during 2010. Reaching a high in the spring, these floating stocks were gradually liquidated during the year until very little was left in December. Some of this shift was due to the oil-futures market shifting from "contango" to "backwardation". This means that futures contracts for near term delivery were trading at higher prices than more distant months. This is normally taken as a sign of tighter markets and higher prices ahead.

As the markets tightened in 2010, the issue of how much spare capacity exists in the world grew in importance. Although OPEC has been telling the IEA that spare capacity is on the order of 6 million b/d that could be turned on within a few months, most analysts had been going with 5 million b/d as a more conservative production rate of readily available oil of a quality that can be sold. In reality, the countries claiming spare capacity have only demonstrated the ability to produce another 4 million b/d of additional oil. With a theoretical "cushion" the world was thought to be safe from shortages and imminent price spikes for another two or three years, at which time large quantities of new Iraqi oil might become available.

The recent surge in demand has called this into question. If the increase in global demand does not fall from 2010’s 2.5 million b/d to the vicinity of the 1.5 million b/d increase that the IEA is forecasting for 2011, or if the spare capacity cannot or will not be turned on, then much higher prices are ahead.

6. Shale Gas: Panacea or Chimera?
The hype surrounding shale gas continued to build during 2010 with many saying that the gas will prove to be so plentiful that it will be the solution to our energy problems for many decades ahead. It has become conventional wisdom in many circles that the US has 100 years’ worth of shale gas ready for exploitation. The hysteria reached its zenith in March at the Cambridge Energy Research Associates annual conference where speaker after speaker spoke ecstatically about the prospects for the natural-gas industry. In Pennsylvania over 1000 shale gas wells have now been drilled. Even India, China, the French and Shell have started investing in the US shale gas bonanza as have the major US oil companies.

During the past year the prices for natural gas fell from $6 per million cubic feet to less than $4 as the quantity of gas in storage continued to build. Outside analysts continue to say that at these prices the industry is losing money and that it will require at least $6 or $7 gas to pay for the drilling and hydraulic fracturing of the expensive horizontal wells.

Concerns over contamination of groundwater by the fracking process continue to grow. Over strident industry objections, the state of New York has put a temporary hold on new shale-gas drilling permits until the EPA can investigate the dangers to groundwater supplies more carefully.

As was the case last year, skeptics point out that while shale-gas wells can initially be very productive they quickly fall to below economic levels. The 100 years’ worth figure comes from the most optimistic possible reading of the Potential Gas Committee report; in reality the amount of gas available at modest prices may ultimately be only a fraction of the touted amount. When one factors in the talk about moving a substantial portion of US electricity generation to natural gas or perhaps replacing the diesels in long-haul trucking with natural gas engines, exponential growth kicks in so that natural gas reserves would be drawn-down much more quickly than imagined.

While large quantities of shale gas are likely to be produced over the next few decades, behind-the-scenes evidence that the resource is not a long-term solution to our energy problems and certainly not to our liquid-fuels problem continues to mount.

7. Iraq's Elections and Oil Deals
Iraq is important to the peak-oil story simply because it is thought to be the only country left with large reserves of easy and cheap-to-produce onshore oil left in the world. If these reserves could be turned into production, then the new oil from Iraq, which Baghdad claims could go as high as 12 million b/d, could in theory delay the arrival of global oil depletion by several years.

Iraq, a country consisting of a highly unstable grouping of three separate religious and ethnic groups, has been in nearly constant political and military turmoil for fifty years – which is why it has so much easy-to-exploit oil left. In March the Iraqis held inconclusive elections, took nearly nine months to reach political accommodations and only recently formed a government.

During the past two year year Baghdad held several auctions which resulted in numerous foreign oil companies being allowed into Iraq to rework existing Iraqi oil fields and exploit new ones with the goal of achieving large increases in production. While Baghdad talks of becoming the world’s largest oil producer in the next five years with 12 million b/d of production, most foreign observers say that an increase from 3 million b/d to 5 million over the next five years is more realistic.

Foreign oil companies are already at work in Iraq and production increases have already been reported. The long term outlook, however, is more uncertain. US forces are scheduled to completely withdraw from the country by the end of the year. The centuries’ old conflict among the Kurds, Sunnis, and Shiites is a long way from resolution, and the nation’s infrastructure, water supply and agricultural prospects remain in shambles. For the time being, however, the prospect for growth in Iraqi oil exports remains one of the key factors that will determine the course of world production and the timing and pace of the falling global production.

8. The Global Economy
In the long run it will be the growth or contraction of the global economy that will determine the demand for oil. Oil prices and economic growth are presently caught in an intricate web of feedbacks whereby increases in the price of oil stifle economic growth and cut demand, which in turn lower prices. Interwoven in all this is willingness and ability to invest in expensive new oil projects such as tar sands and deepwater fields.

In 2010, the global economy became bifurcated with OECD countries largely stagnating while China, some oil producing states, and their trading partners did well. While the US is said to be officially out of a recession, fundamentals of the US economy such as the job market and housing values continue to deteriorate and some observers maintain that the US "recovery" is pure spin based on manipulated government figures. The EU debt crisis continues to move along. The daily twists and turns of the EU’s crisis and the US recovery have been moving the euro/dollar ratio and the price of oil for most of 2010.

For the immediate future, substantial economic growth appears to the limited to China and a handful of developing and oil-producing countries. How the economic growth situation will play out when the next oil price spike occurs is the major unknown for the next few years. While much higher oil prices will not harm the oil exporters, this is not true for China which will likely be depending on imports for an increasing share of its energy in the future.

9. The US Elections and Global Warming
Efforts to slow global warming through control of carbon emissions received a major setback in November when the Republican Party took the majority in the US House of Representatives. The new majority professes to be skeptical that carbon emissions are causing changes to the atmosphere and is unwilling to support any control measures. Much of the Republican argument centers around the notion that considerable economic harm would be wrought by legislation requiring emission reductions.

Although the Obama administration still has an option to control emissions through EPA regulation, it is certain that a major political fight between the Administration and the House would follow efforts to do so, with the Republicans threatening to reduce funding for the EPA.

Thus the November election, for the time being, removed the US from a leadership role in UN efforts to limit CO2 emissions. When the issue is perceived by American voters as between retention or creation of jobs and a more distant threat brought about the rising global temperatures, jobs won out easily. Although climate talks continued at Cancún in December, the goals are now far more modest.

From a peak-oil perspective, the November election probably removed any prospects that the consumption of fossil fuels will be constrained by efforts to halt the atmospheric buildup of carbon. Although it likely will be many decades before we have a better picture of the course and ultimate effects of global warming, it is possible that the Congressional elections of 2010 could turn out to have been the most important story of the year.

10. Sanctioning Iran
Iran’s nuclear program is important to the peak-oil story as it is the one festering geo-political situation that has the potential to spin out of control and disrupt some or much of the Middle East’s oil production. Should this happen, the world would never again be the same. While the situation has been quiet recently, during 2010 the West convinced Russia and China that Tehran was indeed making efforts to develop nuclear weapons and was therefore deserving of UN sanctions. After sanctions were imposed, the US and several EU countries used the economic muscle of the OECD to impose extra sanctions on Tehran beyond those that the UN was willing to impose. Those seem to be having an effect.

From the start, many believed sanctions would not succeed since China and others that valued Iran as a source of oil would come to Tehran’s aid negating any western efforts to hurt Iran’s economy. Six months into the sanctions however, evidence is mounting that Tehran is finding it more and more difficult to do business in a sanctioned environment and has been forced to turn to unpopular domestic measures such as a major price increase for gasoline to keep the economy in balance. Repressive domestic measures are also on the upswing.

The die now has been cast and how all this will turn out is far from clear. Pressures are continuing to build on Tehran: it could react in different ways ranging from acceding to Western demands, to lashing out against its enemies, to testing an atomic bomb. The sanctions of 2010 have moved the situation off center in an unknown but possibly dangerous direction not only for the Middle East but for the global economy as well.

Developments last week

1. Oil and the Global Economy
New York oil prices closed out the year at $91.31 on Friday after touching a new two-year high of $92.06. During 2010 oil gained $12.02 a barrel or 15 percent. Brent crude in London settled at $94.75, the highest close since October 2008. On Friday crude was down for a while as traders took profits on the recent price run-up. The strong rebound later in the day, however, suggests to most analysts that prices will continue to rise further in the immediate future. Gasoline futures hit a two-year high on Friday with the front-month contract increasing by 6 cents a gallon. The average national price for gasoline is now $3.07 a gallon with several states in the vicinity of $3.50 for premium blends.

Nearly all the major investment banks, brokerages, and trading houses are talking about oil prices going above $100 a barrel in the next few months. Some are starting to talk of 2008-sized price spikes reaching into the $130 range. While many continue to hang this increase on global economic recovery, they are also beginning to acknowledge that prices above $100 a barrel will wreak considerable economic damage.

Last week’s stocks report showed that US crude inventories fell by 20 million barrels in December and 12 percent along the Gulf coast, the most in 30 years. This is far greater than the normal end-of-the-year tax avoidance drawdown suggesting that recent increases in demand in the US may be getting ahead of supply.

A Bloomberg survey shows that OPEC production rose by 135,000 b/d in December with most of the increase coming from Iraq and Nigeria. Reuters however is saying the increase was only 5,000 b/d.

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

  • More than $90 billion of global oil and gas assets are on the market. In the middle of 2009 it was $20 billion; at the start of 2010 it was $46 billion. Companies like BP, Shell, Exxon and Phillips have put substantial packages of assets on the block. (12/28, #3)
  • Saudi Aramco says its planned refinery in Yanbu will start production in 2014. It will process 400,000 b/d of heavy crude to produce diesel and gasoline. (12/28, #6)
  • After cutting rare-earth export quotas by 72 percent in July-December 2010, China has reduced quotas for the first half of 2011 by 35 percent versus the same period last year. While the move risks US action at the WTO and has drawn concern from manufacturers, non-Chinese sources of the minerals stand to gain. (12/28, #14; 12/29, #11)
  • Chevron says there is no scientific basis for a $113-billion claim for damages in litigation pending in Lago Agrio, Ecuador. (12/29, #7)
  • US officials are worried Iran could deploy a new generation of centrifuges to enrich uranium in coming months. Meanwhile Israeli Deputy PM Yaalon warns the international community has just three years to stop Iran's nuclear program. (12/30, #7)
  • Houston-based Noble has confirmed the Leviathan offshore gas field offshore contains 16 trillion cu. ft., enough to supply Israel for 100 years. Israel's Ratio, with a 15-percent stake in the field, sits at the center of the Israeli gas bonanza. (12/30, #11, 12)
  • A Gallup study shows 77 percent of Pakistani car owners claim to use compressed natural gas as fuel; and 81 percent of those CNG users face supply problems. Forty-six percent blamed an increasing number of CNG stations for the fuel's shortage. (12/30, #13)
  • The US has revoked the visa of Bernardo Alvarez, since 2003 Venezuela's ambassador to Washington, as Venezuela President Chávez has refused to welcome Larry Palmer as the next US envoy to Caracas. Palmer, a former ambassador to Honduras, had told the Senate Foreign Relations Committee that the Venezuelan army has low morale and that members of the government have ties with terrorist organizations in neighboring Colombia. (12/30, #14)
  • Venezuela's inflation rate, estimated at 28 percent for 2010, is highest among the world's top 42 emerging economies. Venezuela was expected to be the only Latin American economy to contract in 2010; neighbor Brazil was to expand 7.5 percent. (12/30, #15)
  • Petrobras and its partners say they will book up to 8.3 billion barrels of recoverable oil and gas reserves — exceeding previous estimates of 5–8 billion — from the Tupi and Iracema blocks in the pre-salt area off the southeastern coast of the country. In November Brazil's production of oil rose to a record 2.089 million b/d. (12/30, #16, 17)
  • The New York Times asks, how long will Chinese authorities allow the remarkable car sales boom to go on? Will China export a flood of cars if authorities clamp down? (12/30, #19)
  • In the US, bigger vehicles have come back. Sales of midsize SUVs rose 41 percent from January to November; overall car and light-truck purchases rose 12 percent. (12/30, #20)
  • Germany is starting sales of gasoline blended with 10 percent ethanol. Germany's target for a proportion of motor fuel to come from renewable biofuels is 6¼ percent by energy content; E10 contains the corresponding volume ratio. (12/30, #21)
  • China will continue to assist Uganda in developing its infrastructure and oil. The countries have discussed the proposed Kampala-Entebbe highway project. CNOOC seeks to partner with Total and Tullow to build an oil refinery in the western part of the country. (12/31, #6)
  • Desire says its 25/5-1 well on the Dawn/Jacinta prospect around the Falkland Islands, at a depth of 4300 ft., has found no hydrocarbons. (12/31, #7)
  • Russia was to start its first oil pipeline to China on January 1. Rosneft and Transneft will sell China 110 million barrels a year for 20 years through East Siberia Pacific Ocean pipeline, to span 2,900 miles when completed in 2014; China has provided $25 billion in oil-backed loans. Russia shipped 1.06 million tons of crude to China by rail in November. (12/31, #8)
  • The worst flooding in 50 years entered its second week on Saturday in northeast Australia. It has forced 200,000 residents from their homes. Torrential rain in Queensland has halted exports from mines accounting for 40 percent of global coking coal capacity. Oil and iron ore facilities on the North West coast scrambled to shut down. (12/31, #9, 10, 11; 1/1, #12)
  • The US gas rig count has declined for a fourth week, falling by 12 to 919, the lowest level in 10 months. Oil rigs dropped by six to 765 from a record 771 the week before, and the total rig count declined 20 to 1,694. Canadian rigs declined by 65 to 246. (12/31, #13)
  • Spain's Abengoa expects to start construction in mid-2011 on a plant in Arizona to store sun-generated heat to provide six extra hours a day of electric-generating capacity. The $2 billion Solana plant, to enter service in 2013, would be the first major stored-heat plant in the US. Abengoa received a $1.45 billion US loan guarantee for the 250-MW project, which can power up to 70,000 houses. (12/31, #16)
  • Indian and Iranian central bank officials were to continue their meeting today, Monday, Jan. 3, on trade payments. The Reserve Bank of India had asked banks to stop using the Asian Clearing Union mechanism to clear Iran payments, which move effectively stops settlements in US dollars and the euro, making trade cumbersome. (1/1, #4)
  • Pakistan has increased prices of gasoline and diesel among other fuels, citing an uptrend in global crude prices. Gas rises by 30 cents to $3.52 per gallon; without this adjustment the federal government's subsidy burden would have come to $55 million per month. (1/1, #6)
  • Bolivian President Morales rescinded Saturday a decree which raised fuel prices by 70 percent. Following talks with trade unions and indigenous groups, Morales reversed the rises introduced the previous Sunday which had provoked protests and a strike. (1/1, #9, 10)
  • In South Korea, amid a cold spell, the Knowledge Economy Ministry issued an "attention" warning that oil reached $90–100 a barrel. Gasoline costs $6 a gallon. The energy conservation status of government and large buildings will be randomly checked; and the ministry will monitor the price movement of oil products. (1/1, #11)
  • Nepal will increase power blackouts from the current 56 hours a week to 74 hours beginning Wednesday, due to a rapid decrease of water levels in rivers. There will be 11 hours of "load shedding" for four days a week and 10 hours for rest of the week. (1/1, #13)

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