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Peak Oil Review – 18 November 2013

1. Oil and the Global Economy

New York futures traded in a narrow range around $94 a barrel last week but managed to post a small loss for the week making it the sixth weekly decline in a row, the longest stretch of weekly losses in 15 years. Downward pressure came from the rising US crude inventories –up 2.64 million barrels for the country as a whole and 1.69 for the key Cushing, Okla. depot, the fifth straight weekly increase. US crude production also increased last week by 123,000 barrels b/d to 7.98 million b/d.  New reports on US industrial production showed little sign of economic growth. Only the remarks by the Federal Reserve Chair in waiting, Janet Yellen, that she plans to continue quantitative easing indefinitely kept a floor under the US oil futures market.
 
Prices in London, which are more heavily impacted by the chaos in Libya, continued to climb closing out the week at $108.50. This left the WTI/Brent spread at $14.01, the highest close since last March. The WTI/Brent spread was only $6.01 as recently as September 30th. Analysts expect to see the spread continue to increase as US production and inventories climb and European refiners have trouble.
 
There is growing optimism the Iranian nuclear talks which resume on November 20th will be productive and that there will be some easing of sanctions on Iran in the near future.
 
Despite gasoline retailing in the US at the lowest prices in 33 months, New York gasoline futures, which have been gradually falling since late August, rebounded by 20 cents a gallon last week before falling on Friday to close at $2.65, up 4 percent for the week.  This volatility reflects trader uncertainty over the ethanol ruling that came last week and recent data on the size of US gasoline exports. Gasoline inventories are normal for this time of the year, but are expected to climb as large refineries come back from fall maintenance.
 
In a move that is being billed as a win for Big Oil, the US administration proposed on Friday cutting the requirements for biofuel use in 2014. After intense lobbying from the oil and agriculture industries, the EPA decided that the renewable fuel standards could not be met without blending more than 10 percent ethanol into gasoline without harming engines not designed to run on higher blends. This phenomenon has come to be known as the “blend wall” which the industry claimed would force them to produce less or export more gasoline causing shortages and higher prices. Lower gasoline consumption due to more efficient cars and a weak economy has contributed to the problem. Under the 2007 law refiners are supposed to blend more than 14 billion gallons of ethanol into the gasoline they sell next year which would be more than 10 percent of forecast consumption.
 
In reports issued last week the IEA foresees a further decline in OPEC production which went down in October for the 3rd straight month to 29.9 million b/d. Non-OPEC production for the month reached a record high which lifted global “oil” production to 91.8 million b/d, when NGL’s, biofuels, and refinery gains are thrown in. The Agency, however, warned that disruptions in Libya and Iraq could offset growing non-OPEC production.
 
Natural gas prices have climbed some 20 cents per million to $3.66 since early November on expectations of cooler weather just ahead. The US natural gas inventory is now only about 1.5 percent above the five-year average for the week.
 
2.  Middle East and North Africa
Iran: Senior Washington officials say that a compromise could be reached in the nuclear negotiations with Tehran at the meetings due to start this week.  Iran’s Foreign Minister also expressed hopes that solutions will be found this week so long as Tehran’s “nuclear rights” are respected. Progress was also reported during a separate round of negotiations and the Iranians said they had agreed to a “road map” with the UN over its program to inspect Iran’s nuclear facilities. An agreement giving the UN broader inspection powers was signed last week. This news was underlined by a report from the UN’s nuclear inspection agency that Iran has halted expansion of its uranium-enrichment capacity since new President Hassan Rouhani took over.
 
Not all this apparent progress was well received. Israeli Prime Minister Netanyahu dismissed the report noting that Iran’s stockpile of highly enriched uranium continues to grow. Iran’s enemies in the US Congress continue to push for legislation to stiffen the sanctions further, an effort which the administration is trying to head off.
 
Meanwhile in Tehran hardliners are blocking the new President’s efforts to expand civil liberties which have been widely suppressed during the past eight years. “A complicated power struggle” is clearly going on in Tehran which may ultimately affect any nuclear compromise.
 
In the meantime, the sanctions seem to be holding with Tehran’s crude sales falling to a 21-month low in October as the biggest buyers – China, India, South Korea, and Japan – cut their purchases. The IEA says Iran’s exports in October were down by 715,000 b/d from September.
 
Iraq: The EIA reported this week that planned maintenance and terrorist attacks have cut Iraqi oil production by 715,000 b/d since September. The bombing of the Kirkuk-Ceyhan pipeline on Nov 2nd will continue to affect production, as will the construction underway at the Basra oil export terminal which has reduced exports by 400,000 b/d. The construction is scheduled to continue for the rest of 2013, but large projects in Iraq have a habit of slipping.
Production will not be helped by the evacuation of hundreds of foreign oil workers from Basra last week in response to violent demonstrations.  BP has begun scaling back its workforce in the region, and oil service firms Baker Hughes and Schlumberger have withdrawn all their workers and suspended operations. The CEO of Baker Hughes said that the safety of his employees is our top priority and that they will return when it is safe to do so.
 
Last week the Shiite holy day of Ashura, which commemorates the murder of the Prophet Muhammad’s grandson 1300 years ago, was the motivation for another round of Sunni bombings of Shiites which killed about 50 and wounded dozens.  In one particularly bloody incident, a suicide bomber blew himself up in a crowed arena where men, women, and children were reenacting the 1300 year old murder of the Prophet’s grandson. At least 35 including some actors, died in the explosion, once again showing the depth of the hatreds that exist in the country.
 
Exxon is preparing to drill its first well in Kurdistan. Baghdad is concerned about the increasing fighting between Kurds and Sunni insurgents in Syria which could easily spill over the border into Iraq.
 
Libya: Militiamen opened fire on crowds of protesters in Tripoli leaving dozens dead and hundreds wounded. Claims are mixed as to whether the protestors were armed.  Hospitals were jammed with the dead and wounded. The violence continued through Sunday when a general strike was called to protest the violence being perpetrated by militias that refuse to disarm. At one point on Sunday, protestors stormed the parliament and disrupted proceedings as they demanded an end to the militias.
 
The major development of the week, however, was the announcement by the eastern province of Cyrenaica, which holds about 60 percent of the oil reserves, that it was severing ties with the Libya’s national oil company to form its own “Libyan Oil and Gas Corporation.” A tanker sent by the National Oil Company to pick up crude from an eastern terminal was turned away by local forces.
 
How all this will go is hard to say. Tripoli keeps announcing that it is producing about 250,000 b/d from western oil fields still under some sort of government control. While Cyrenaica may have a lot of oil, it does not seem to have much in the way of naval power. Naval vessels under Tripoli’s control have once or twice blocked foreign oil tankers from picking up shipments not authorized by the National Oil Company. Obviously foreign tanker companies do not want to get involved in a civil war, so it may be some time before a serious amount of oil is exported from Libya. In meantime, Tripoli will be out of money to pay its people and import its food sometime next month.
 
Syria: The insurgency seems to carrying on at a somewhat reduced pace amid reports of fighting between various insurgent militias and even between Shiite militias loyal to the government. There seems to be slow but steady progress in neutralizing the chemical weapon stockpile. Government forces with the aid of better motivated Lebanese Hezbollah saying they are making progress in forcing the insurgents back from the Damascus suburbs and in advancing on Aleppo. The leader of Hezbollah says his forces will remain in Syria for as long as necessary. Should Syria fall to the Sunni insurgents, Hezbollah would be isolated from Iranian support.
 
At least some of the Western-backed insurgent groups now say they will participate in the Geneva peace talks being pushed by the US and Russia. The goal of the talks, removal of Assad or some sort of messy coalition is still being debated. Most observers feel that the addition of Hezbollah to the fighting is giving the Assad regime an edge in the talks. In the meantime, a lot of foreign aid, both from governments and private Sunni donors, is making its way to the insurgents while Damascus is becoming an economic client of Moscow.
 
The danger, of course, is that an endless Syrian insurgency will eventually join with other Sunni-Shiite confrontations in Iraq and other countries that would endanger oil exports. Even Moscow is becoming concerned that dissidents from its Muslim province of Dagestan, who are currently fighting with the insurgents in Syria, will learn the techniques of insurgency and return to Russia.
 
3.  China’s reforms
 Last week Beijing revealed some of the reforms instituted by the recent Central Committee plenum which it says will turn out to be the most important of the last 30 years. Most of the reforms seem to deal with freeing markets from excessive regulation. Beijing hopes that China can give up its reliance on exports and capital projects to becoming a more consumer and service oriented economy. Given that the growth in China’s economy is intertwined with its pollution and climate change problems, some of these reforms may take decades to implement. The government, however, says it expects to see “decisive” results from the changes by 2020.
 
Among the more specific changes that we have heard about so far are a freeing up of oil and electricity prices and a partial relaxation of the one child per couple rule that is leading to labor shortages and a population with a growing portion of pensioners.
 
In the meantime, China’s drive to acquire more foreign oil and gas assets to feed its economy in the years ahead continues apace. Hardly a week goes by now without the announcement of major new acquisitions which will eventually direct more of the world’s oil production towards China.   Last week we had ramped up production of natural gas from Turkmenistan for China; the right to build a new Chinese-owned LNG export terminal in British Columbia; the acquisition of a 50 percent stake in Queensland, Australia coal seam gas – LNG project; the completion of the deal for a one-third interest in Apache’s Egyptian oil fields; and a $2.6 billion deal to buy Petrobras’s oil assets in Peru. It was a good week for China’s oil-asset purchasers.
 
4. The IEA’s World Energy Outlook 2013
The annual release of the IEA’s World Energy Outlook is always of great interest to those studying the future of global energy, for the Agency alone has the resources, the independence, and the access to dig into many issues, which are not available to other researchers. While doing excellent work in many areas,  for years the Agency’s major failure has been to project current trends too far into the future without due consideration for factors which could interrupt those trends. For example, ten years ago the IEA was projecting that world oil production in 2030 would be 121 million b/d which now seems highly unrealistic. While maintaining its view that there is a 6 percent annual decline in oil production from existing wells, the Agency perennially seizes on some country or project that it believes will soon be producing prodigious quantities of oil.  Last year it was Iraq, an increasing dubious proposition, and this year it is the pre-salt fields off Brazil that are to produce the quantity of crude necessary to offset depletion from existing wells.
Closer to home we have the issue of just how long the US’s and Canada’s tight oil boom will continue. To its credit, the Agency recognizes that this boom, for geological, political, and economic reasons, is unlikely to be reproduced in other countries any time soon.
 
The marquee takeaway from this year’s IEA report is that the tight oil boom will make the US the number one world “oil” producer by 2015 by producing 11 million barrels per day of assorted liquid hydrocarbons. Growth is to continue until production peaks at 12 million and then start to decline by 2025, when increased production from the Middle East will again be of paramount importance.
 
This optimistic outlook for the next ten years conflicts with assessment of independent geologists in the peak oil community who believe that the peak oil boom will start to taper off long before 2025.
 
To its credit, however, the IEA is noting that current trends of fossil fuel consumption will lead to a 3.6o C. rise in global temperatures which many believe will have devastating consequences. The Agency is also expressing concerns that inability of oil prices to fall much below $110 a barrel is having  a major effect on hampering economic growth in the developed countries.
 
6.  The Briefs
  • Algeria announced that it has discovered the largest new oil field in the country in more than 20 years. The field, located in north central Algeria is believed to contain about 1.3 billion barrels of oil. (16 Nov)
  • PetroChina will buy the Peruvian assets of Brazil’s Petrobras for $2.5 Billion. The blocks which the Chinese firm acquired produce about 800,000 tons of oil per year. (16 Nov)
  • The DOE has conditionally authorized the export of an additional 400 million cu. ft. per day from the Freeport LNG terminal on Quintana Island in Texas. This authorization will allow the terminal to export 1.8 billion cu ft per day for the next 20 years. (16 Nov)
  • The EIA expects that crude production from North Dakota’s Bakken formation will top 1 million b/d in December. The Bakken now accounts for a little more than 10 percent of US crude production. (16 Nov)
  • The US’s Apache Corp has completed the sale of one-third of its Egyptian gas and oil business to Sinopec for $2.95 billion. Apache will remain the operator of the fields which cover 9.7 million mostly undeveloped acres in Egypt’s western deserts. (15 Nov)
  • The Tennessee Valley Authority will close eight coal-burning power plants in Alabama and Kentucky. Forty years ago TVA got 80 percent of its energy from coal. This is now down to 38 percent. A combination of EPA air quality regulations and the ever-increasing cost of extracting Appalachian coal is responsible for the decision. (15 Nov)
  • Japan has reduced its target for reducing greenhouse gas emissions by 2020 from 25 percent to 3.8 percent. The move was triggered by the virtual shutdown of the country’s nuclear power plants. (15 Nov)
  • Russia’s Gazprom says its natural gas exports to Europe will hit a five year high in 2013. Sales to Europe are up by 15.6 percent this year due to lower LNG imports by European countries (15 Nov)
  • Russia is considering building a natural gas pipeline across North Korea to South Korea which could become an important market for its gas. The idea of building an underwater pipeline that would bypass the North was abandoned in 2012 as the water is too deep. There are obviously major political problems be be overcome before such a pipeline could be built. (14 Nov)
  • US railroads are asking for a federal regulation that would require all existing tank cars that carry flammable liquids be modified to better withstand accidents or be phased out of service.  Retrofits would be required for 78,000 older tank cars and to some of the 18,000 newer cars that do not meet the standards. No estimates of the costs or timetable for the renovations have been made as yet. (14 Nov)
  • The EIA reported that oil imports into the US were at their lowest level since February 1991. The Agency expects US oil production, which averaged 7.7 million b/d last month, to increase by another 1.1 million b/d next year. (14 Nov)
  • Sudan devalued its pound by 22.6 percent against the dollar last week, the second devaluation in a year. Sudan’s economy has been in trouble since 2011 when South Sudan’s secession cost it three fourths of is oil production and had currency earnings. (13 Nov)
  • Ecuador’s Supreme Court reaffirmed the environmental damage judgment against Chevron, but lowered it from $19 to $9.5 billion. The court removed the punitive damages tacked on in 2011 after Chevron refused to apologize for the alleged damages. (13 Nov)
  • The IEA says that it expects Brazil to triple its oil production to 6 million b/d by 2035. The Agency warned that extracting oil from deep below the offshore salt will be difficult and expensive. (13 Nov)
  • The IEA said last week that the US will surpass Russia and Saudi Arabia to be the world’s top oil producer by 2015 and will be close to energy self-sufficiency in the next two decades. (13 Nov)
  • The Canadian subsidiary of Chinese oil company CNOOC has been allowed to proceed with a proposed terminal to export liquefied natural gas from Canada’s Pacific coast. (13 Nov)
  • Despite predictions that offshore drilling would be scaled back after the new regulations were imposed following the BP oil spill, deep-water drilling in the Gulf is increasing. (12 Nov)
  • At the global climate summit in Warsaw last week, the Philippine representative told the assemblage that the recent mega-typhoon is a reminder that continuing to allow extreme climatic events without taking action is madness. (12 Nov)
  • Abu Dhabi has received commitments totaling $52 billion to increase its oil production to 3.5 million b/d by 2017. (12 Nov)
  • In addition to the 2 million gallons of water that is required to frack a new well in the Bakken formation, it now appears that each well will require an additional 600 gallons of water per day to dissolve the salt deposits that build up during production. (12 Nov)
  • Israeli oil company Givot Olam announced that some 6000 b/d is flowing from a well it has drilled in central Israel near the border with Palestine. The company still believes the field contains about 7.8 million barrels which by comparison is less than half US daily consumption. (11 Nov)
  • Egypt currently is relying on massive amounts of economic aid from the Gulf Arab states while it awaits a revival of investment and the tourist business. Should these not evolve in the next year, the country will be in serious economic difficulties in 2014. (11 Nov)

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