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Peak oil review - February 21

1. Oil and the Global Economy
Last week oil prices were dominated by a balance between fears that spreading unrest in the Middle East would lead to restrictions on oil exports and concern that Beijing's efforts to control inflation would slow oil imports. The buildup of stocks at the Cushing, Okla. futures contract delivery point to near record levels continued to keep NY oil prices well below those in London. NY oil traded around $85 dollar a barrel early in the week but then closed the week at $86.20 as demonstrations increased in several Middle Eastern countries. In London, Brent crude closed out the week at $102.52 a barrel after reaching $104 earlier in the week. The spread between London and NY crude increased to a record $15.94 during the week, mostly due to the glut at Cushing and technical factors involving the delivery of NY futures contracts.

Oil specialists are becoming increasingly strident in the assertion that NY oil futures which for decades have focused on demand for gasoline in the US are no longer as relevant to establishing prices as increases in demand for oil shifts to Asia.

Beijing announced that its CPI has increased by a less-than-expected 4.9 percent year over year in January. The Chinese re-weighted their CPI to put less emphasis on food prices, which are rising rapidly due to bad weather. The number of outsiders questioning the validity of China's GDP and CPI statistics continues to grow. At any rate, Beijing tightened lending requirements and raised gasoline and diesel prices once again in an effort to stem rising consumer costs.

The Joint Data Initiative (JODI) website says that OPEC's crude exports fell 2 percent from November to December as Saudi exports fell by 387,000 b/d to 6.05 million b/d from 6.36 million b/d in November even as Saudi production rose to a two-year high of 8.37 million b/d. This implies that the Saudis either consumed or stored 2.32 million b/d during December. If these numbers are confirmed by IEA and EIA analysts, it would partially explain recent price increases in Brent crude.

Beijing announced that crude oil imports in January were 5.13 million b/d, an increase of 27 percent or 1.1 million b/d over January 2010. The IEA's forecast that there will be sufficient oil available to preclude a price spike in 2011 is based in part on a large reduction in the rate of increase in China's demand for oil from what was seen in the latter months of 2010.

China's oil reserves, which are a state secret, may play a big part in how much increasing demand subsides in the coming year. Last week Barclays issued an analysis as to how much oil has been making its way into China's reserve stocks and concluded that for 2010 it was a trivial 10 million barrels. The bank concludes that China could be adding around 100 million barrels to its reserve capacity this year thereby adding about 250,000 b/d to its rate of import which is now running around 5 million b/d.

It is starting to dawn on the US media that while NY crude has been relatively stable recently around $85 dollar a barrel, the price of gasoline in the US continues to rise rapidly, now averaging about $3.17 gallon. This, of course, is because US crude importers are paying London prices for their feedstock, which have been holding above $100 a barrel for several weeks.

Given that US gasoline prices inevitably rise from February to the summer driving season as demand increases and more expensive blends are produced, observers are starting to talk about $3.50 gasoline this summer and even $4 if there is trouble in the Middle East or if the Saudis do not come through with their widely anticipated production increase this year.

2. World in Upheaval
Hardly a day goes by now without reports of new demonstrations against the established order in some corner of the world. What started in Tunisia, spread to Egypt, has now metastasized in many Middle Eastern states. Even China seems to be to be vulnerable to popular uprisings made possible through widespread access to the Internet, social networking and cell phones.

So far Libya is the only major oil exporting country in which the upheavals appear likely to threaten oil exports in the near future. Benghazi in eastern Libya has fallen into the hands of the demonstrators and a local tribal chief is threatening to cut off oil exports unless Tripoli stops using violence against demonstrators. Libya exports about 1.5 million b/d most of which goes to Europe.

Over the weekend there were demonstrations in Yemen, Tunisia, Morocco, and Djibouti. Iranian security forces violently suppressed attempts at demonstrations in Tehran and other cities. The rebellions are moving so fast it is difficult to believe that at some point, some nation's oil exports will not be interrupted, either by internal developments or possibly by trading partners outraged by the brutality of the repressions.

Initially there was general agreement that the gulf oil kingdoms that have large oil revenues in relation to the size of their populations would not be as vulnerable to popular unrest. Developments in Bahrain last week, where the majority of Shiites rebelled against their Sunni rulers, are casting doubts on this thesis. There are already reports of small demonstrations in Saudi Arabia where a minority of 2–3 million Shiites has long been discriminated against by the kingdom's Sunni majority.

Continued suppression of mass demonstrations by police and military forces will depend on the loyalty of these forces to the government ordering the violence against its citizens. In Libya we have reports that military units in the east have joined the demonstrators and religious leaders are calling on security forces not to attack fellow Muslims. This outbreak of popular discontent with oppressive governments clearly has a long way to play out and could easily result in interruptions, perhaps even large ones, to the world's oil supplies.

3. In the Congress
Last week the Republican-controlled House of Representatives, acting on its perceived mandate to reduce federal spending by $100 billion in the current fiscal year, passed a bill that would cut spending by $60 billion over the next 7 months. Included in the bill is elimination of most of the Administration's proposals regarding energy and the reduction of greenhouse gases. The bill would slash $889 million from renewable and energy-efficiency programs, take away $3 billion from the EPA's budget, and bar the Agency from using federal funds to regulate emissions under the Clean Air Act.

While Senate Democrats will oppose the bill, a marker has been thrown down in what is likely to be a long and acrimonious struggle over US energy and climate change policy. Senate and White House opposition to the bill sets up the possibility of a partial government shutdown as early as March 4 if a compromise is not reached quickly. Given the size and ideological specificity of the House cuts, any eventual compromise still is likely to result in major reductions for federal energy and emissions control programs.

Quote of the week
"I don't think any regime is immune."
-- Mustafa Alani, security analyst at the Gulf Research Center in Dubai

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

  • An Ecuador judge has ordered Chevron to pay $8.6 billion to clean up oil pollution in the country's rainforest and an equal amount in punitive damages. The judgment stems from an 18-year-old lawsuit alleging Texaco, a 2001 Chevron acquisition, dumped chemical-laden wastewater in the Amazon River basin from 1964 to 1992. Because Chevron has no assets in Ecuador today, plaintiffs have said they may wage lawsuits in a dozen countries where Chevron does business, including elsewhere in Latin America. (2/15, #12, 13; 2/16, #12; 2/19, #15)
  • The Obama budget would slash spending for some long-standing energy programs while adding billions of dollars to support clean energy technologies and research. The president has proposed $1.1 trillion in deficit-reducing cuts over the next 10 years; but Energy, with an increase of 12 percent, is one of several Departments that stand to gain. (2/15, #21)
  • The White House budget eliminates oil/gas incentives and preferences and increases direct taxes on the industry by an estimated $3.4 billion next year and $43.6 billion over 10 years. US producers and refiners operating internationally also would pay an additional $532 million in fiscal 2012 and $10.758 billion during 2012-21. (2/15, #22)
  • The Obama budget will request $500 million over five years to help develop small modular nuclear reactors owned by utilities to supply government labs. The request is half of the estimated cost to complete two designs and secure NRC approval. An immediate goal is to help the Energy Department reduce carbon-dioxide emissions by 28 percent by 2020; a longer-term goal is to foster assembly-line production of the small reactors. (2/15, #29)
  • A federal judge on Thursday ordered the Obama administration to decide within 30 days whether to grant a set of five permits for deep-water drilling projects in the Gulf of Mexico. On the same day, a group of four large oil companies said the industry was ready to deploy an interim well containment system after engineers from the Bureau of Ocean Energy Management, Regulation, and Enforcement witnessed testing of a key component of the system. (2/18, #18, 19)
  • The Department of the Interior will reconsider two Bush-era decisions opening up 2 million acres in Utah, Wyoming, and Colorado to oil-shale development. As part of a settlement of lawsuits brought by environmental groups, Interior will reopen the public leasing process. Under review will be effects of operations on the environment as well as the royalty rate, set at 5 percent rising 1 percent each year up to 12.5 percent. (2/16, #17, 18; 2/17, #16)
  • US fuel consumption edged higher in January from a year earlier, according to API. Total deliveries of petroleum products climbed 1.7 percent to 18.8 million b/d, the 2nd-lowest January in 10 years. Gasoline consumption increased 0.9 percent to 8.6 million b/d. Heating oil consumption surged 41 percent to 882,000 b/d. (2/19, #17)
  • US reliance on coal for electricity costs $345 billion a year in health problems in mine communities and pollution around power plants, a study has found. These expenses would add 18 cents per kWh, effectively tripling the price of coal electricity. "This is not borne by the coal industry, this is borne by us, in our taxes," says the study's lead author. (2/17, #15)
  • Spot jet fuel spreads in New York and on the Gulf Coast reached their highest levels in 19 months. The differential for NY jet fuel against NY Mercantile Exchange heating-oil futures rose 1.37 cents to a premium of 11 cents a gallon, the highest level since July 15, 2009. (2/19, #19)
  • The Alberta government is backing construction of a $5.05 billion bitumen refinery. The province will supply 75 percent of the feedstock — and take in 3/4 of the returns over 30 years — and Canadian Natural will supply the remainder for the 50,000 b/d plant. Eventually the project will refine 150,000 b/d of crude derived from oil sands. (2/17, #17)
  • Chinese companies are heavily participating in North America's gas boom. Bankers expect more deals like the recent PetroChina-Encana and Cnooc-Chesapeake. (2/15, #20)
  • TransCanada has postponed its planned commercial operations on its Keystone XL pipeline to the second quarter of 2013, from the prior target of first-quarter 2013. The company had hoped to have approvals from the US Department of State by the start of 2010 but later said it anticipated a final decision in mid- to late-2011. The Keystone extension, which runs from Steele City, Neb., to Cushing, Okla., is expected to be fully operational by April. (2/16, #20)
  • Crude-oil output by Mexico's Pemex slipped Feb. 1–13 to 2.535 million b/d compared to an average of 2.584 million b/d for the month of January. Production at top oil-field complex Ku-Maloob-Zaap fell to 801,000 b/d from 849,000 b/d, a preliminary report shows. Cantarell fields held steady at 470,000 b/d. Onshore Chicontepec fields, which have received billions in investment but repeatedly missed goals, rose by 1,000 b/d, to 46,000 b/d. (2/16, #10)
  • Venezuela spends $1.5 billion a year to make domestic fuel prices the lowest in the world, Oil Minister Ramirez says. The government seeks to reduce consumption by 100,000 b/d during 2011 but isn't planning to ration, Ramirez says. Whereas subsidies equal 90 percent of production costs, market-determined prices would save $9 billion a year, a local bank estimates. (2/14, #16; 2/18, #13, 14)
  • China is in talks to build a Panama Canal alternative to link Colombia's coasts by rail, which move Bogotá also hopes will spur the US Congress's approval of a free-trade pact that has languished for four years. The 140-mile railroad would run from the Pacific to a new city near Cartagena where imported Chinese goods would be assembled for re-export throughout the Americas; Colombia-sourced raw materials would return to China. (2/14, #15)
  • China Premier Wen and his cabinet will "streamline" the rare-earth industry by consolidating production, clamping down on illegal mining, and deciding on which government agency will oversee it. (2/17, #20)
  • The Egyptian military has dispatched hundreds of additional soldiers to the northern Sinai Peninsula to guard a pipeline that carries natural gas to Israel. The troop deployment, to which Israel has agreed, is in addition to the 800 troops Israel let Egypt move to north Sinai in late January for the first time since the countries made peace in 1979. (2/19, #14)
  • Crude oil exports from Kurdistan have risen steadily to 75,000 b/d since resuming early this month, an Iraqi oil official says, adding that average exports of 40,000 b/d are expected for the month. Sources at Iraq's North Oil Co. say crude production has reached 80,000 b/d but only 50,000 b/d are being exported. Norway's DNO Int'l says it has boosted exports from Kurdistan to a test level of 50,000 b/d. (2/18, #11; 2/19, #12)
  • The Iraqi government plans to hold a new oil-gas licensing auction this year to increase oil output and capture natural gas for electricity. Oil reserves, estimated at 143 billion barrels, could plummet if Iraq doesn't get serious about exploring; and power output is currently 6,500 MW, which is less than half of its needs. (2/16, #8)
  • Saudi Arabia plans to cut up to 40 percent of its energy use, largely by enforcing investment in insulation. Power demand is rising 8 percent annually, requiring investments of $80 billion by 2018. Without reducing the rate of growth, oil available for export could drop 3 million b/d to less than 7 million in 2028, the CEO of Aramco said last year. (2/14, #9)
  • For Saudi Arabia, adding renewables to the mix is both inevitable and pragmatic, analysts say, as soaring domestic energy use will burn huge amounts of fuel oil unless alternatives, such as solar power, can be used instead. Industry officials have predicted a tripling in Saudi power consumption from last year to 120 GW by 2032, which could consume all of the 8 million b/d it produces. (2/19, #9)
  • In Iran, simultaneous blasts struck three pipelines near the holy city of Qom, cutting the flow of gas. A local official said the blasts were not caused by technical failures but did not say whether they were acts of sabotage. (2/14, #12)
  • US intelligence concludes Iran is locked in an increasingly heated debate over whether to move further toward developing nuclear weapons. The new national intelligence estimates Tehran likely has resumed weapons research and expanding uranium enrichment; but not re-launched bomb building. Iran's debate over whether to do so suggests international sanctions may be causing divisions in Tehran, US officials say. (2/17, #9)
  • Oil exploration in Nigeria has slumped to the lowest in a decade after producers including Shell and Total backed away from investment until the country's petroleum law is passed. Just one exploration well was drilled in Nigeria in the past two years, the fewest since 1999, versus a peak of 34 in 2002. Fewer wells meant the government missed its targets to boost reserves to 40 billion barrels and output to 4 million b/d by 2010. (2/18, #12)
  • Angola plans to reduce daily crude oil exports by 13 percent in April from a month earlier, shipping 1.50 million a day, down from 1.73 million. The April shipments comprise 47 crude cargoes versus a revised 56 for March. (2/17, #10)
  • In Uganda, President Museveni, a 25-year incumbent, was expected to win re-election in last Friday's poll, and would thus have to manage the national reserves of 2.5 billion barrels of oil discovered since late 2006. Analysts see the outlook as rosy despite a series of public feuds between the government and private firms preparing for production. (2/14, #14)
  • A Norwegian collaboration at the Oslo Innovation Center is working on a new carbon-capture technology: ceramic membranes that hold promise for separating carbon dioxide from other gases in hot industrial exhausts. (2/14, #26)
  • An industrial photosynthesis with efficiency five to 50 times greater than any biomass-dependent process has been developed by Joule Unlimited, the company says. The single-step, continuous process can turn solar power into hydrocarbon fuels equivalent to 15,000 gallons of diesel per acre annually. (2/18, #20)
  • Wind-turbine orders worldwide rose 75 percent in the second half of 2010, the highest level of activity in two years, according to MAKE Consulting. Orders for 2010 rose 48 percent; 75 percent of growth originated in the Americas and the Asia and Pacific regions. (2/14, #29)
  • Exxon's annual financial report shows for every 100 barrels it has pumped over the past decade, it has replaced only 95. Exxon says it has made up for the shortfall with natural gas: in 2010, of the 3.5 billion boe Exxon added — twice the amount of oil and gas it produced — 86 percent came from acquiring XTO. (2/16, #3, 4)
  • Shell says the world will run into an oil-production plateau by decade's end, adding that the global appetite for energy will likely swell far more rapidly in coming decades as emerging markets see rampant economic growth. It predicts by 2050 demand may have tripled compared with 2000, but supplies may grow by only 50 percent. Efficiency improvements could curb demand by 20 percent; but how to deal with a looming gap between supply and demand equal to the global energy industry's entire output in 2000? (2/15, #26)
  • An increase in heavy precipitation is in part a consequence of human influence on the atmosphere, climate scientists report in a new study. The climate history for the Northern Hemisphere where sufficient figures were available was compared with elaborate computer simulations. The likelihood of extreme precipitation on any given day rose by 7 percent over the last half of the 20th century, "well outside the bounds of natural variability," according to one of the researchers. The increase made sense only when factoring in the effects of greenhouse gases released by human activities like the burning of fossil fuels. (2/17, #5)
  • The world is one poor harvest away from chaos in world grain markets, according to Earth Policy Institute. Lowering prices will require a bumper grain harvest much larger than the record of 2008 that combined with the economic recession to end the 2007-08 price climb. In the longer term expanding food production rapidly is becoming more difficult due to overpumping of underground water and increasing climate volatility. (2/17, #18)

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