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Peak oil review - Apr 29

Tom Whipple will be in China from April 15th through May 6th. During that time, ASPO-USA Co-Founder Steve Andrews is preparing Peak Oil Review and the Mid-Week Update, while Ray Long is publishing the daily Peak Oil News.

1. Oil and the Global Economy

Futures prices of both oil and natural gas reversed the trends of the prior week. In fact, both sets of prices ended up where they started mid-month, during a period of increased volatility. Oil prices on the New York Mercantile Exchange started the month at just under $98, dropped in two steps to $87 by mid-month, then recovered sharply last week to close at $93. On the London ICE, Brent crude started the month near $109, fell 10% to below $97 before settling Friday at $103.16. The spread between the NYMEX and Brent, now at $10/barrel, is near its low for the year.

NYMEX natural gas prices closed at a yearly high on April 19th at $4.41, then pulled back roughly 5% last week to close at $4.17. The summer refill season which starts at the end of the nation’s heating season—typically in early April—is off to its slowest start in several years. Stockpiles reported last Thursday were 31.8% below the previous year and 5.1% below the five-year average.

Bullish factors cited as driving last week’s oil price recovery include an uptick in US GDP growth (from 0.4% in Q4 of last year to 2.5% in the first quarter of this year); a 3.2% uptick in consumer spending; lower-than-expected first-time jobless claims; a large 1.8% decrease in gasoline stockpiles as demand rose 4.4% to 8.75 mb/day; and the continuing geopolitical risk to Middle East supplies from Syria’s civil war.

Ironically, the list of economic forces likely depressing US demand and prices starts with the GDP growth number cited above: our 2.5% increase was less than the 3% figure which analysts expected; and as one analyst pointed out, most of the growth came as a function of business inventory builds early in the quarter. Another economic constraint included a decline in government outlays for the 10th time in 11 quarters, led by a steep 11.5% drop in military spending—the steepest annual decline in military outlays since the Korean War. Two other down-side factors include an increase in US crude oil inventories to the highest level since 1990 plus an increase in US oil production to 7.33 mb/day—the highest since April 1992. The bears’ take-away is that the economy remains in the slow and uneven growth plaguing it since the Great Recession.

On the oil business front, the head of Vitol Group, the world’s largest privately held oil trader, offered that he could see prices moving either side of $100/barrel. Oil companies reported first-quarter production and profits. Chevron profits were down 4.5%, profits flat for Exxon and Conoco Phillips, with production relatively flat for all three. Total said oil and gas production was down 2%.

2. The Middle East

The United Arab Emirates, in line with a statement last week from their oil minister that the days of easy and cheap oil are gone, is planning to produce up to 25% of its power from nuclear energy by 2021. Switching a large fraction of power generation to nuclear will reduce domestic reliance on fossil fuels and ensure the UAE has both enough oil to export as well as to supply a 400,000 b/day expansion of their oil refinery. The UAE also plans to increase its oil production capacity from 2.8 million b/day today—Bloomberg’s estimate—to 3.5 mbd by 2017.

In Syria, the lack of a normal oil sector plays a small role in generating the region’s many refugees. Syria's oil exports, which once provided a quarter of all government revenue, have almost completely ended. At present it's unclear which Syrian rebel factions control the oil fields and whether shipments can be resumed. Despite that uncertainty, the EU announced last Monday that it would authorize oil imports and related investments in Syria’s oil industry. The EU’s stated goal is to help the civilian population and support the opposition in that country.

This announcement irritated Russia. Syria hopes to clinch more financial aid from its Russian and Iranian allies soon, but still has enough foreign reserves to pursue its war on rebels trying to oust President Bashar al-Assad, the central bank governor said.

Yet two years after the start of the uprising against President Bashar al-Assad, the UN reports that over 4 million Syrians are homeless, short of food and reliant on aid within the country, while an additional 1.1 million have fled the country. Farming is reportedly collapsing, strengthening the outflow of refugees.

In Iraq, an unstable social and security situation in the northern sector once again raises the reality that the country could split apart. Two days of violence last week lead to 100 more deaths, many of them the result of clashes involving security forces. A repeat of relentless violence that defined the 2006-2007 era could emerge. With the Kurds’ 30,000 Peshmerga fighters mobilized and in a standoff on the internal border that demarks Kurdistan from the south, a potential flashpoint in disputed areas like Kirkuk is at hand. The range of deteriorating problems puts Iraq’s aggressive oil production targets and the nation’s future at risk.

3. LNG developments

In the US, Dominion announced it is proceeding with its LNG export project at its Cove Point terminal in Maryland. Construction should start in 2014 on the $3.4-3.8 billion project, with an in-service date of 2017. Cove Point has signed 20-year conditional agreements with affiliates of Japanese and Indian importers. Cheniere Energy has been converting its Sabine Pass LNG port in Louisiana into an export facility with hopes to begin shipping by 2016.

India's Petronet LNG reported last week that it has signed a preliminary agreement with United LNG for the long-term supply of LNG via its offshore Main Pass Energy Hub in the Gulf of Mexico. The $14 billion project will receive gas by pipeline, store it in underground formations and liquefy it on six floating vessels located 16 miles off the Louisiana coast. Construction of the first liquefaction ship is scheduled to begin this year with start-up by mid-2017. The Main Pass Energy Hub has already been authorized to export LNG to countries that have free trade agreements with the US.

In Russia, Rosneft claims the government can grow the economy by liberalizing LNG options for Asian markets. Two weeks ago Rosneft and Japanese company Marubeni Corp. signed an MOU on the implementation of a new LNG project in Russia's Far East. The project would allow the possibility for joint exploration and development in Rosneft’s oil and gas fields. At present, Gazprom operates Russia's only LNG plant, located on Sakhalin Island on the east coast. Gazprom officials met last week with Japanese officials to discuss an LNG project planned for Vladivostok, also on Russia’s eastern shore.

4. Pipelines

Keystone XL: In the latest round in the fight over this cross-border pipeline, the House Natural Resources Committee voted 24-17 last week in favor of a bill to make it easier for TransCanada to build the pipeline and harder for President Obama to delay it. But the issue isn’t resolved yet as counterpunches keep coming from both sides.

Polls conducted by Washington-based Woodrow Wilson International Center for Scholars found that 74% of Americans support the pipeline compared with 68 percent of Canadians. The survey also found that most Americans said they care more about North American energy independence than reducing greenhouse gases contributing to climate change.

Critics of the pipeline project state they gathered over 1 million comments against the Alberta-to-US pipeline, showing what they called grassroots opposition to the $5.3 billion project. API countered with a web-based mass mailing effort that stimulated the sending of 230,000 electronic letters to Secretary of State John Kerry urging his approval of the pipeline. In the face of the ongoing back-and-forth, TransCanada Corp. said last Friday it was delaying the in-service date for its proposed pipeline to the second half of 2015 as it awaits the final U.S. decision.

Given ongoing difficulties over US approvals plus resistance to a pipeline through British Columbia to the Pacific, provincial Energy Minister Ken Hughes said his government was in separate talks with the Northwest Territories to explore building an oil pipeline to a port on the Arctic ocean. Is this inspiration or desperation?

British Columbia: Local critics say their elected leaders need to take a stronger stand about proposed oil pipeline development plans from Alberta to the west coast. Pipeline company Kinder Morgan expects to spend about $5.5 billion to increase the capacity of its existing 750,000 bp/day Trans Mountain pipeline by roughly 20%. They also plan to twin the current 715-mile pipeline to expand access to Asian markets. Native groups and others have challenged the proposals over concerns for potential environmental effects of expanded oil activity in the region.

Pegasus spill: When roughly 5,000 barrels of oil spilled during late March in a Mayflower, Arkansas residential neighborhood from a break in Exxon Mobil’s Pegasus pipeline, it briefly stoked the national debate about pipelines. Installed during the 1940s, Pegasus was carrying diluted tar sands oil from Canada. But Exxon’s fast response and apparently adroit handling of the spill’s aftermath has muted local and national reaction. Last week, Exxon said it has removed most of the residual oil and is focusing on cleanup operations, signaling its shift from the emergency phase to longer-term remediation and restoration operations.

5. Quote of the Week

"We are moving into an environment where $90/b Brent [crude oil] will become more of a ceiling for the market. But it's hard to pick where the bottom will be." (4/23 #2) - Ed Morse, global head of commodity research for Citi Group

"There's plenty of oil in the ground, but you need the price to produce.” As a result, Preel said, "high prices remain probably in the long term" despite the marked increase in oil supplies from the US. Oil prices at "roughly" $100/barrel are required for future upstream investments in unconventional oil production as well as for the sustainability of producer governments. (4/23 #3) - Xavier Preel, vice president for Middle East E and P at France's Total

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

  • Total energy rigs drilling in the U.S. slipped by four to 1,754 last week. Oil rigs increased by 10 to 1,381. The number of gas rigs fell for the first time in three weeks, declining by 13 to 366, according to Baker Hughes Inc. (4/27 #5)
  • China: The U.S. EIA said oil production from China is expected to reach about 4.5 million barrels/day this year and 4.7 million bpd by 2035. (4/23 #7)[Editor’s note: dartboard alert?]
  • China's plan to build a second aircraft carrier and the Indian navy's recent test-firing of a submarine-launched cruise missile should be ringing alarm bells in the Persian Gulf. Beijing and New Delhi are squaring off militarily in the Indian Ocean, the key energy artery from the Middle East and Africa to the Asian giants who need the oil and gas to fuel their expanding economies. (4/27 #2)
  • In the Kurdish region of Iraq, a second test well by Anglo-Turkish company Genel Energy confirms a “significant oil discovery” in the rapid appraisal process. (4/26 #5)
  • Demand for OPEC oil will recover before the end of the decade, as a flood of crude from the US' shale oil boom will eventually stabilize and demand looks set for more growth over the next seven to eight years, David Dalton, a BP regional president said Monday. (4/22 #9)
  • India's crude imports from Iran plunged by more than 26% in the 2012-13 financial year (April-March) as US and European sanctions on Tehran combined to make it difficult for Indian refiners to ship Iranian oil. (4/25 #7)
  • Ghana, West Africa's second-biggest economy, expects oil production to more than double to 250,000 barrels a day by 2021. $20 billion will be spent to raise production at the Jubilee field and other sites. (4/26 #7)
  • Venezuelan President Nicolas Maduro put the country's electricity supplies on an emergency footing after Caracas and outlying areas plunged into darkness amid repeated blackouts. Maduro said a 90-day state of emergency in the country's power sector would allow the government to address infrastructural problems. (4/27 #3)
  • U.K. North Sea oil and gas production has dropped by more than half since its peak of around 4.6 million barrels of oil equivalent (BOE) a day in 1999. Within five years, fields enabled by new technology being employed west of the Shetland Islands are expected to help the country's production rebound back above two million barrels of oil equivalent a day by 2017, compared with 1.55 million b/day last year. (4/26, #20)
  • The second area driving the North Sea revival is in Norwegian waters, where Sweden's Lundin Petroleum found a new field in 2010 (John Sverdrup) with 1.7 to 3.3 billion barrels of oil, the largest discovery in three decades. As a result of that and more recent activity, Norway expects their total oil and gas production to bottom out at 3.7 million BOE a day this year and rebound to 3.8 million barrels by 2017. (4/26 #20)
  • Exxon Mobil began production at its Kearl oil sands project in Alberta, which is projected to produce 4.6 billion barrels of recoverable oil in the next 40 years. The C$12.9 billion project has been beset by equipment transport and weather delays plus rising costs. (4/27 #6)
  • Drilling Technology: Unlike traditional rigs on rails that only allow movement from left to right or front to back, Schramm’s T500XD has a walking subbase which lifts the entire rig six inches, allowing the rig to turn. The rig can “walk” at a pace of 30 feet per hour and move a full 360 degrees, rather than just moving forward and back or side to side. (4/27 #9)
  • The development of shale oil and gas reserves around the world will generally be much slower than in North America, Royal Dutch Shell has warned. Chevron has suggested commercial production from shale in Europe is unlikely to start this decade. (4/23 #4)
  • Tesoro Corp. plans to build a complex in Washington that would unload 120,000 barrels per day of crude from trains and put it on vessels, the latest move to get excess oil from North Dakota to refining centers on the West Coast. Shipping costs: $13/barrel. (4/23 #15)
  • In the European Union, energy generated from renewable resources in 2011 increased to 13% of the gross energy consumption from the 27 member countries. That’s now within 7% of 2020 targets. It’s also up from 7.9 percent in 2004 and 12.1 percent in 2010. (4/26 #17)
  • Japan, which has spent about $700 million on methane-hydrate R and D over the past decade, has the world’s biggest hydrate-research program. In mid-March, Japan’s Chikyu test ended a week early, after sand got in the well mechanism. But by then the researchers had already retrieved about 4 million cubic feet of natural gas from methane hydrates, at double the expected rate. Japan’s Ministry of Economy, Trade, and Industry set 2018 as a target date for commercializing methane hydrate. (4/25 #14) [Another dartboard alert?]

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