Peak oil review - Feb 10

1. Oil and the Global Economy

Oil traded in a narrow range around $97.50 in NY and $106.50 in London until Friday when concerns that distillate shortages may be developing sent prices up about $2 a barrel to close at $99.88 in New York and $109.57 in London. The move came after some bad economic news on Thursday which reported that US jobs had only climbed by 113,000 in January as opposed to the 189,000 the market had been expecting. Production of North Sea Brent crude is expected to slip to 890,000 b/d in March as opposed to 1.0 million in February. Libyan production is down to 500,000 b/d or less due to new problems in the western oil fields.

The polar vortex continued to push frigid air into much of the US last week pushing the demand for heating to new highs. The cold air likely curtailed economic activity and slowed oil production. Although the government reported that US domestic oil production remained the same the week before last as compared to the previous week, the railroad association reported that crude movements mostly from the Bakken Shale were down by 13 percent. The count of active drilling rigs fell, propane shortages developed in some sections of the country and heating fuel supplies in the Midwest fell to the lowest level in 20 years for this time of year.

Natural gas prices peaked at a recent high of circa $5.70 per million BTUs on Wednesday but then fell for the rest of week after the EIA reported that natural gas stockpiles had fallen less than expected last week. Traders are still uncertain as to how long the unusually cold weather which has curtailed production as well as drawn down stocks will last. At week’s end natural gas futures were trading at $4.77 per million. On Thursday a rare mid-winter conservation alert was issued for southern California asking residents to curtail their use of electricity and heating gas as supplies were running low.

2. The Middle East & North Africa

Iran: Iran held talks with the IAEA over the details of charges that in the past it has taken concrete steps towards building nuclear weapons. Tehran denies these charges but agreed to seven “practical steps” to increase transparency. The agreement however, did not including giving the IAEA access to the Parchin military site where the Iranians allegedly conducted experiments related to nuclear weapons.

Talks between Tehran and the six powers on the next stage of a comprehensive agreement will begin February 18th. The atmospherics between Washington and Tehran seem to have gotten worse in recent weeks with Tehran threatening to break off the talks unless Washington stopped its threats. At this juncture it is tough to tell if there will be an agreement this year, or whether the wrangling and sanctions will continue indefinitely.

Washington showed it is still taking the sanction seriously by penalizing nearly three dozen companies and individuals in eight countries for evading the sanctions and trading with Iran. Tehran says it will show its resolve by sending a three-ship fleet to sail up and down off the US’s Atlantic Coast.

Tehran has started handing out free food packages to citizens earning less than $170 a month. The food has come from barter arrangements in return for its oil.

Iraq: The bombings continue apace with hundreds being killed or wounded. One of the numerous bombings killed a candidate for Parliament and close friend of Shiite leader and cleric Moqtada al-Sadr. Another bombing took place close to the famous “green zone” where the government and embassies are located. This situation is getting about as close to a civil war as you can get without a formal declaration. Not much news on the situation in Anbar, given the problems the US Marines had in driving al Qaeda fanatics from the province ten years ago, it is doubtful that Iraqi security forces can do much. The current plan is to have local anti-al Qaeda tribesmen drive the insurgents out with support from the government and advice from the US Army. This plan reflects the fears that having a Shiite army attack Sunni insurgents would simply increase the troubles.

The dispute over the oil which the Kurds are exporting to Turkey continues with the US taking sides with Baghdad. Conflicting reporting has the Kurds cutting back on exports while talks are underway or continuing to export oil as fast as they can.

Talk is increasing that the Kurds will soon declare independence while the government is too distracted by bombings and Anbar to do anything about it. There is also talk of southern Iraq where all the oil is located gaining some form of independence. Hopes for major increases in Iraq’s oil production in the next few years are seen to be more problematic every day despite the presence of numerous international oil companies working to increase production.

Syria: The general situation continues to deteriorate. The peace talks are at a standstill. Efforts to provide humanitarian relief to the thousands who are surrounded and cut-off from food are not going well. The Islamic State of Iraq and Syria which controls much of Syria is turning out to be so bad that even al Qaeda has broken ties with the group as being too radical. Efforts to remove Assad’s chemical weapons are not going as planned. While all this has little to do with oil exports at the minute, the chances that the hatreds and turmoil will spread across the region increases daily.

Libya: The country is turning into a roller coaster with production flying up and down with the political winds. You will recall that a couple of weeks ago oil production resumed, albeit temporarily, in the western part of the country, while Cyrenaica in the east which has most of the oil refused to allow shipments unless they got the money. This left Libyan production at around 600,000 b/d down from 1.6 million b/d in the Gadhafi era. About 250,000 b/d go for domestic use and the rest is exported.

Last week, however, the government announced that “bandits” (shorthand for people who think you are stealing their oil) had shut valves blocking some 40 percent of the western Sharara oil fields production from reaching the coast. This should have cut the country’s production down to circa 450,000 b/d leaving little for export.

The more bizarre development of the week came when Libya’s Prime Minister announced that he had ordered the army to move on Benghazi and reopen the oil terminals. The army quickly replied that it had received no such orders and if received, “they would be studied.”

In the meantime, there seem to be no political settlements in sight and assassinations of prominent personages continue. The prospect of much oil being exported from Libya in the immediate future does not seem good.

3. Quote of the Week

“The cost of just moving food – especially over long distances – is always going to be expensive. It’s really the limiting factor. It’s not a food problem. It’s not even a farm problem. It’s an oil problem.”

— Katie Camden, owner of restaurant chains in Pacific Northwest

4. The Briefs

Uganda has signed a long awaited deal with foreign oil companies Tullow, Total and CNOOC to develop its oil sector, bringing to an end several years of protracted talks. Plans include a 60,000 barrels-a-day oil refinery, an oil export pipeline to Kenya’s northern port of Lamu and a crude-fired electricity plant in Uganda’s oil region. (2/6)
Norwegian oil company Statoil has postponed its 2020 production target of 2.5 million b/d by three to four years and is reducing its planned capital expenditure, as the company looks to larger profits instead of big production numbers. Statoil said it would lower its planned capital expenditure to an average of $20 billion a year through 2016, a reduction of 8%, to free up cash. (2/8)
Norway, which has watched its crude output fall every year since 2000, wants to attract large producers to compete with Statoil as the state-controlled company cancels and delays key projects. (2/7)
Oman, which faces Iran across the Strait of Hormuz, said it will start raising cash for a $3 billion rail line offering an alternative route for oil and freight shipments that funnel through the 21 mile-wide Strait. (2/6)
Suncor Energy‘s fourth-quarter results missed expectations, and it cut its outlook for production this year due to lower projected output overseas even as its oil-sands production hit a record high. (2/5)
BP follows Royal Dutch Shell and Exxon Mobil in reporting lower earnings as the cost of drilling rises, refining profits slump and oil prices stagnate. (2/4)
Work to expand the Panama Canal so bigger ships, including larger oil and LNG tankers, can fit through the 100-year-old waterway has virtually ground to a halt. The consortium in charge of the construction effort said the project is now on the “brink of failure” after talks broke down between the contractors and Panama’s government over who is going to pay for $1.6 billion in cost overruns. (2/6)
French Minister for Industrial Renewal Montebourg, a member of President Francois Hollande ‘s Socialist Party, is calling on the president to reconsider his opposition to hydraulic fracturing due to what he calls the emergence of environmentally safer methods to extract natural gas trapped in shale rock. (2/3)
The water demands of the “fracking” process are adding considerably to localized water depletion, especially in parts of Texas, Colorado, and California. Nearly half of the fracking wells in operation since 2011 are located in regions with high or extremely high water stress, according to a new report released last week by Ceres, a non-profit investor group that focuses on sustainability issues. (2/8)
US drilling rigs targeting oil and natural gas in the U.S. declined by 14 this week to 1,771, said Baker Hughes. Oil rigs fell by six to 1,416 while the gas count dropped by seven to 351. The rig count slid amid very cold weather and storms that swept across the U.S. this week, freezing gas wells and sending spot prices of the fuel in some regions to record-highs. (2/8)
Shale oil production from the Bakken formation will peak in 2014, according to French oil geologist Jean Laherrere from ASPO France. (2/3)
Shell said production began at its Mars B development in 3,100 feet of water in the Gulf of Mexico, which should help boost total Mars field production from 60,000 barrels a day of oil equivalent last year to 100,000 b/d by 2016. (2/5)
Shell Oil announced last week that it will not be drilling for oil off the coast of Alaska this summer. (2/6)
Hoarding US energy resources leaves the country less secure than if it moves into the global market by exporting some oil and natural gas, the Center for a New American Security finds. (2/8)
Export US crude oil? US Sens. Maria E. Cantwell (D-Wash.) and Ronald L. Wyden (D-Ore.) asked the US Energy Information Administration for more information on possible domestic gasoline price impacts from allowing US crude exports. (2/7)
Flint Hills Resources will begin to permanently halt operations in May at the North Pole refinery, Alaska’s largest by capacity, citing poor economics and “enormous” costs for cleaning up soil and groundwater. (2/5)
Federal regulators proposed civil penalties against three oil companies for allegedly failing to test North Dakota crude properly, which led to putting volatile oil into railroad tank cars too weak to handle it. (2/5)
A nationwide propane shortage is hitting an American Indian reservation that straddles the border of North and South Dakota particularly hard, causing tribal officials to warn that the thousands of low-income residents who live there are running out of ways to heat their ramshackle homes. (2/8)
Enterprise Products Partners LP must prioritize propane shipmentson a pipeline to the U.S. Midwest and Northeast, where cold weather has caused heating-fuel prices to climb, federal regulators ordered in the first use of their emergency powers. Supplies of the heating fuel in the Midwest tumbled to the lowest seasonal level since at least 1994. (2/8)
In Israel, Woodside Petroleum, Australia’s second-largest oil producer, plans to buy a quarter of Israel ’s biggest natural gas field for as much as $2.6 billion as demand rises in the Middle East. A deal would put Woodside in the middle of Israel’s nascent natural gas industry as the company’s proposed projects in Australia face delays. (2/7)
Russia’s Gazprom said top executive Alexei Miller grilled Ukraine’s vice prime minister on repayment of Kiev’s more than $3 billion natural gas debt. Gazprom in 2009 cut gas supplies to Ukraine because of contractual disputes. That left downstream consumers in Europe in the cold for several weeks as most of their Russian gas runs through the Soviet-era transit system via Ukraine. (2/5)
Poland will speed up work on setting regulations for its nascent shale gas industry, officials said Wednesday after a London-listed operator hit reserves it described last month as being potentially commercially viable. (2/6)
Chesapeake Energy expects to spend less on capital improvements in 2014, as the natural-gas company works to trim costs after years of liberal spending. The company projected $5.2 billion to $5.6 billion in 2014 capital expenditures, representing a 20% reduction from the midpoint of 2013′s outlook. (2/7)
Exxon Mobil said its subsidiary, XTO Energy, is expanding its acreage in the Permian shale basin in Texas and the Utica shale area in Ohio. (2/5)
India needs to rely on nuclear power until it can further develop renewable energy, a government official said. India, the fourth largest energy consumer in the world after the United States, China and Russia, has increased its oil imports from about 40 percent of demand in 1990 to more than 70 percent of demand by 2011. (2/7)
Seaborne radiation from Japan ’s wrecked Fukushima nuclear plant will wash up on the West Coast of the US this year. That’s raising concerns among some residents on the West Coast. At the same time, oceanographers and radiological scientists say such concerns are unwarranted given existing levels of radiation in the ocean. (2/4)
Egypt and Ethiopia remain at loggerheads over Addis Ababa’s plan to build a $4.2 billion, 6,000-megawatt dam on a major tributary of the Nile River that Cairo says will greatly reduce the flow of water that is Egypt’s lifeline. Tension between the two African states rose sharply in January. (2/8)
The developer of a controversial offshore wind farm in the English Channel announced this week it has reduced its size by 12 percent and moved it one to two miles farther from shore. Developers hope to begin construction by 2017 in hopes of generating energy by 2019. (2/7)
The EU sees itself leading the world in curbing carbon-dioxide emissions and doing more than any other region to mitigate climate change. But it is also increasing the share of electricity being generated by coal. Coal-fired electrical-generation plants are being started up in Europe—and comparatively clean gas-fired generating capacity is being shut down. (2/7)
Car sales surged in the US last year, as the automotive industry came roaring back from the dark days of the recession. But the 15.6 million vehicles sold in America last year still lags behind China, which in 2013 reportedly became the first country to sell more than 20 million. (2/3)