Peak Oil Review — April 14th, 2007

1. Production and Prices
2. The Debate in Mexico
3. Russia’s Calvary Charge has Probably Ended
4. Energy Briefs

1. Production and Prices

Three reports tell the story of oil prices last week. Wednesday’s US stocks report showed not only continued low refinery utilization but also declines of 3.2 million barrels in crude stocks, 3.4 million in gasoline stocks, and 3.7 million in distillate stocks. This unexpected news sent NY crude prices briefly to a new intraday high of $112.21 a barrel. Analysts were quick to point out that the inventory drop came from considerably lower weekly imports which they attributed to delays caused by fog along the US Gulf coast.

On Friday, the International Energy Agency released its monthly report giving its estimate that world oil consumption would grow by 1.3 million b/d to 87.2 million b/d during 2008, down by 310,000 b/d from the January estimate. The agency cited the IMF forecast of slowing world economic growth, particularly in the US, as the reason for the reduction. The IEA also reported that total world oil supply fell by 100,000 b/d during March to an estimated 87.3 million b/d.

The most interesting, and perhaps most significant, news of the week was that Chinese imports surged by 25 percent to 4.1 million b/d during March 2008 as compared with March 2007. Chinese refineries are running flat out in an effort to relieve shortages across the country prior to the August Olympic games. Should this surge in demand, which may be greater than the net of increases in world production and sagging demand in OECD countries, continue much longer, still higher prices are likely.

US retail prices rose to new highs of $3.36 for gasoline and $4.06 for diesel on Friday, with no top in sight. Continued signs of weakness in the US economy last week suggest growing prospects for interest rate cuts, a weaker dollar, and consequently higher oil prices.

Despite increasing prices and a slow economy, the EIA reports that US gasoline consumption is declining by only minimal amounts. During the second half of 2007 consumption declined by .1 percent and by only .6 percent in the first quarter of 2008. The most recent stocks report shows gasoline supplied during the last four weeks has actually increased by .3 percent over last year.

2. The Debate in Mexico

Members of the Party of the Democratic Revolution (PDR) staged a protest against reform legislation introduced by President Felipe Calderon that would give Petróleos Mexicanos (PEMEX) the ability to let upstream service contracts to outside oil companies. PDR worries that Calderon is privatizing PEMEX, Mexico’s national oil company and sole operator. Mexico nationalized its oil industry in 1938, a move which remains a source of great pride to its citizens.

Mexico’s future oil production hangs in the balance. Output peaked in 2004 because Canterell, the mainstay producer, is now in irrevocable decline. PEMEX does not have the resources to carry out exploration and production in its share of the Gulf of Mexico deepwater or significantly expand production in the difficult Chicontepec field. Without reform of the upstream rules, which would allow PEMEX to contract out development in untapped areas, Mexico’s oil production and exports are expected to steadily decline over the next decade.

Calderon’s government has also proposed plans to boost Mexico’s refining capacity, a measure which would further erode exports to the United States. Mexico currently exports its heavy Maya crude for refining in the United States and then imports the finished products to meet its own increasing demand. Like the upstream reform proposal, the refinery expansion would allow private firms to build and operate Mexican oil refineries for a fee in addition to opening the oil pipeline, storage and transport businesses to private capital. The PDR also opposes opening up Mexico’s downstream industry.

It may be a case of “too little, too late” regardless of the fate of the oil reforms. Perhaps a decade would be required before Mexico would see significant new production from the deepwater Gulf.

3. Russia’s Calvary Charge has Probably Ended

Energy minister Viktor Khristenko told Bloomberg TV last week that Russia, the world’s second-largest oil producer, has hit plateau or “stagnant” production. In fact, Russia’s oil production last month, 9.76 million b/d, declined 1.3% compared to March 2007. Compared to last October’s high-water mark of 9.93 million b/d, production has declined 2.4%.

Since 1999, after their oil production had bottomed at roughly 6 million b/d, Russia added 4 million barrels a day, contributing substantially more “new incremental barrels” to world oil production than any other country. But that era appears to have ended. Last month, even Natural Resources Minister Trutnev warned that a drop in oil production was likely for 2008 compared to 2007. Earlier this month, analysts with Credit Suisse and UBS switched from forecasting growth in Russia’s production to projecting a modest decline.

Russia’s current production situation is not a “black swan event”—a major surprise—since various Russian experts during 2004-2005 anticipated and spoke about future production slowdowns. In late 2004, former energy minister Shafranik predicted Russian oil exports “would be automatically restricted two years from now.” Experts cited the fall of Yukos in 2004, the lack of sufficient pipeline capacity, high decline rates from aging fields, and tough new tax regimes. In response to the latter concern, Khristenko announced that within several months Russia will cut taxes on oil companies to encourage development of harder-to-reach deposits.

         [Graphics from Oilwatch Monthly, published by ASPO-Netherlands, www.peakoil.nl]

4. Energy Briefs

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

• The USGS estimates the Bakken Formation in North Dakota and Montana to possess 3.0 to 4.3 billion barrels of “undiscovered, technically recoverable” oil, 1.85 Tcf of natural gas, and 148 million barrels of natural gas liquids. (4/11, #14) [Ed. note: check www.aspo-usa.com on Wednesday for columnist Dave Cohen’s detailed commentary on the Bakken.]
• Fereidun Fesharaki, chairman and CEO of Facts Global Energy, told attendees at the Middle East Petroleum & Gas Conference that the world is about five years away from peak oil production. Economic recession only puts off this day of reckoning for a few years. It doesn’t change his basic formulation: if the US does not reduce its consumption by 4-5 million barrels/day, “there is not enough oil for the rest of the world to grow.” (4/9, #2)
• The International Energy Agency said demand from nations where the bulk of energy consumption growth is coming—China, India and other fast-growing emerging markets—is expected to remain strong despite U.S. and European economic troubles. (4/11, #2)
• The EIA’s newest data shows world crude and condensate production for January hit an all-time high of 74.47 million b/d, eclipsing the previous peak of May 2005 by 168,000 b/d. Total liquids production also hit a new peak of 85.8 million b/d. (4/12,#19)
• Saudi Arabia will add half of a total 500,000 barrels a day of oil expansion to its total capacity when the Khursaniyah field comes on stream this month. Aramco will add a further 250,000 barrels a day by the end of the year when the second portion of its 500,000 barrel-a-day Shaybah oil field expansion is complete. (4/10, #4)
• OPEC seaborne oil exports, excluding Angola and Ecuador, fell 100,000 barrels per day (bpd) in the four weeks to March 23, mostly on slippage from Gulf producers, data released by Lloyd’s Marine Intelligence Unit showed on Monday. (4/8, #2)
• UAE: Dubai’s decision to open its power industry to foreign investors, ending a 50-year monopoly, is a sign of the Emirate’s growing panic that the US$300 billion construction boom is outpacing growth in supplies of water and electricity. (4/7, #6)
• According to Lehman Brothers’ Edward Morse, world markets could have lost one million barrels per day of oil in the summer of 2007. This was a result of Middle East power plants being forced to burn crude and natural gas to meet summer demand for air conditioning. This power was redirected from enhanced oil recovery projects. (4/12, #3)
• Power production crises across the globe continue to strike, with multiple reports indicating shortages affecting export industries in Chile, South Africa, Argentina, the United Arab Emirates, Pakistan, Bangladesh and Ethiopia. Responses, including some steep price increases, are unlikely to resolve near-term shortages.
• The U.S. is stepping up its naval presence in the waters off West Africa to secure vital oil supplies and curb drug smuggling being used to finance terrorism, an admiral said. Many Africans saw this move as a sign of Washington’s determination to control valuable oil and mineral resources, particularly given a rising Chinese presence on the continent. (4/11, #7)
• African nations should follow Venezuela’s lead and nationalize their energy and mining sectors to secure the resources to fight poverty, Venezuela’s deputy foreign minister for Africa said on Friday. (4/12, #11)
• In China, stagnating oil production has hindered attempts to boost self reliance. Crude oil output is forecast to rise 1.1 per cent in 2008, down from a 1.6 per cent increase in 2007. (4/12, #12-13)
• China’s National Bureau of Statistics released an upward revision of 2007 gross domestic product that showed growth of 11.9 percent, or 0.5 point more than the initial estimate. (4/10, #11)
• China and Kazakhstan will start building a cross-border natural gas pipeline this year and the second phase of a crude oil link between the nations. (4/9, #12)
• China’s ever-rising coal prices and the stalled government-controlled electricity price are putting pressure on power generators, and companies are losing money. (4/7, #13)
• Indian oil and gas explorers are losing offshore rigs as rivals such as Saudi Arabia, Nigeria and Brazil step up efforts to drill wells in deep waters. (4/11, #12)
• New York’s governor rejected a proposed liquefied natural gas platform for Long Island Sound, saying it was “fundamentally wrong” to privatize open water. (4/11, #16)
• Thursday, Citigroup became the latest bank to raise its oil price forecasts, upping its estimate of the full-year average for 2008 by 20 percent, to $96 a barrel, and boosting its 2009 estimate by 17 percent, to $88 a barrel. When the U.S. economy is weak, banks generally lower their expectations for oil prices, but not at present…Total chief executive Christophe de Margerie told an energy conference in Paris that “there is a new floor linked to costs” of developing new fields; he said prices would stay above $70 a barrel. (4/11, #20)
• Prime Minister Gordon Brown said the U.K. government is concerned that biofuels are stimulating inflation and pushing up food prices around the world. (4/10, #3)
• Rising food prices could spark worldwide unrest and threaten political stability, the UN’s top humanitarian official warned yesterday after two days of rioting in Egypt over the doubling of prices of basic foods in a year and protests elsewhere in the world. (4/10, #19)
• BP and ConocoPhillips announced Apr. 8 they will join resources to propose building a 4 billion cf/d natural gas pipeline extending from Alaska’s North Slope to markets in Canada and the US. The proposed Alaskan gas line would be the “largest private-sector construction project ever built in North America,” the partners said. Estimated cost: $30 billion.(4/10, #16)
• U.S. oil demand will drop by around 85,000 b/d in 2008 due to the weak economy and record high oil prices, according to a revised government forecast issued Tuesday.(4/9, #15)
• James Hansen, head of the NASA Goddard Institute for Space Studies, calls for a sharp reduction in C02 limits. Hansen says the EU target of 550 parts per million of C02 should be slashed to 350ppm. (4/9, #19)
• British Columbia has ratcheted up its campaign to reduce carbon emissions by introducing a cap-and-trade regime for large emitters, becoming the first province in Canada to formalize such a system and leading the way in North America. (4/7, #16)
• Utility-scale concentrating solar power plants that provide electricity are beginning to dot desert landscapes in California, Nevada and Arizona and, soon, New Mexico. An array of solar projects that together can generate nearly 3,000 megawatts is now under contract. (4/9, #21)
• Panelists Matt Simmons, Peter Jackson and Dr. James Schlesinger, at a U.S. Department of Energy conference in Washington, concurred that future crude production will be constrained by physical, economic and political factors that add up to tight markets and higher oil prices. Otherwise, Simmons and Jackson disagreed early and often. (4/8, #4)

Quote of the Week

“As world oil production reaches its apex and begins its inevitable decline, it will have a radical impact on everyday American life. It will take bold political leadership and awareness on the part of individual citizens to craft a full-scale, creative response…I am convinced that the American people will tighten their belts if a president forges a national strategy to stretch the life of our oil reserves and to adjust to a long-range plan of energy conservation.”
      —Stewart (and Lee) Udall, former Secretary of the Interior, in his Letter to his Grandchildren