Peak Oil Review – Sept 29

1. The bailout

Compromise in the Congress over the $700 billion financial rescue bill brings to a close 10 days during which the oil markets have reacted to little else. For the past week oil has surged on news of progress and sunk when disagreements surfaced.

From a low of nearly $90 a barrel the week before last, oil climbed to over $110 last week, finally settling at $106.89. The surge to $110 on Monday marked the biggest 4-day increase in oil prices in the last eight years.

While some believe that the bailout of the credit markets will set off a period of economic growth thus increasing the demand for oil, others are skeptical that it will have much impact on the US economic situation in the immediate future.

Fundamental US and world economic news is not good. Slowdown is in the air everywhere. Even in China, where officials remain optimistic that they can maintain a 10-11 percent growth rate, there are signs of a slowing economy. China’s electricity production in August was up only 3 percent in comparison with July and there are reports that Beijing’s demand for oil and coal is dropping.

Numerous OPEC officials became concerned when oil slipped below $100 a barrel the week before last and talk of defending $100 oil continues. One tanker-tracker is reporting an 800,000 b/d drop in OPEC oil shipments from an unusually high rate achieved in August. An OPEC production “cut” of 520,000 b/d is still on the books.

With the omnibus bailout of the financial markets there seems to be little more the government can or will do in the short term to stabilize the US economic situation. The EIA reported last week that US gasoline consumption over the last four weeks was down by 3 percent over last year. Given the gasoline shortages across the south caused by a combination of low inventories and the hurricanes, some of this drop in consumption may be due to the unavailability of gasoline and not solely to high prices and a slowing economy.

As of last week the US refineries have processed over 45 million fewer barrels of oil due to shut downs caused by the hurricanes. While some 20 million barrels of lost gasoline production can be made up by imports, the 14 million barrels of lost distillate production will be difficult to replace prior to the winter heating season.

2. Gasoline shortages

Gasoline shortages spread across parts of the Southeast last week as electrical outages and evacuated personnel meant that oil production and refining along parts of the Gulf coast took much longer to recover from the hurricanes.

The worst shortages seem to have been around Nashville, Atlanta and western North Carolina. In some areas 75-85 percent of the gas stations were closed. In most areas the branded stations seemed to get priority while the independent convenience stores were either unable to get gasoline or were unwilling to pay the high prices that wholesalers were demanding. Many independent operators were fearful of prepaying $5 a gallon for wholesale gasoline and then taking a loss after the shortages abated.

State governments were reluctant to impose rationing; however, local governments and some independent chains capped the amount of each sale in order to spread the availability of the available gasoline and discourage topping off of tanks. Nearly every affected state invoked anti-gouging laws and sent out inspectors in response to consumer complaints. As a result gasoline prices in most affected areas rose only 40-50 cents to the vicinity of $4 a gallon.

As of last Friday, some 700,000 b/d of Gulf oil production was still shut-in and at least 700,000 b/d of refining capacity was not at full production. By the end of this week, refining is expected to be back to near normal and the federal government is making up whatever crude is needed from the Strategic Petroleum Reserve.

There is still the question of the very low US gasoline stockpiles which will need to be replenished. As of the week before last, gasoline inventories were down to 179 million barrels, the lowest since 1967 when US gasoline consumption was about half its current rate. Given another week of markedly reduced gasoline production, gasoline inventories are likely to be still lower in this week’s report unless there has been a major surge in gasoline imports from Europe; shortages across the Southeast are likely to continue for at least another week.

Refilling tank farms and pipelines to normal capacity is likely to take some time, leaving the US vulnerable to any new supply interruptions or an early onset of cold winter weather.

3. Venezuela and its friends

President Chavez had a busy week, traveling first to China and then to Russia to conclude military and economic agreements. While in China, Chavez announced a plan to build a refinery with the Chinese in the Orinoco Basin to process and refine heavy crude, build three refineries in China capable of handling heavy Venezuelan crude, and build four tankers. Chavez said he plans to increase Venezuelan oil exports to China, currently at 250,000 b/d, to 500,000 b/d in 2009 and to 1 million b/d by 2012. The US imports about 1.2 million b/d from Venezuela.

On Monday, a Russian naval squadron set off on a 15,000 nm trip to conduct joint operations with the Venezuelan Navy and has agreed to lend Caracas a billion dollars to buy arms.

While in Russia, Chavez and Prime Minister Putin announced an agreement to invest $10s of billion of dollars to develop oil fields in Latin America and beyond. The consortium will consist of Venezuela’s national oil company, PDVSA, and several of Russia’s major oil companies including Gazprom, Rosneft, TNK-BP, Lukoil and Surgutneftegaz. Russia’s Energy Minister told reporters that PDVSA will likely have control of the joint venture as “Venezuela’s national restrictions are so tough.”

These agreements mark an important step in the elimination of the international oil companies from developing the heavy oil deposits in the Oronoco Basin. During the week Chavez reiterated that the Oronoco has enough oil to last “200 years.”

While the agreement with China is just one more step in Beijing’s on-going efforts to lock up the remaining world oil reserves with bilateral agreements, the deal with Russia is in retaliation for US involvement with Georgia. Moscow has better things to do with its investment capitol than let PDVSA invest it in the Orinoco. This agreement is likely to go by the boards with changes in

Washington and the world economy. For the next few years however, the prospects for Venezuelan oil exports to the US do not look good.

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

• Chesapeake Energy, the third-largest overall producer of natural gas in the US, is cutting its drilling budget by $3.2 billion, or 17%, for the second half of 2008 through 2010. Company officials blamed a 50% drop in gas prices since June and the possibility of an emerging gas surplus. The bulk of the cut, $1.9 billion, represents a rollback in drilling activity, reducing its current count of 157 operated rigs to 140 rigs by yearend. (9/26, #17)
• Credit Suisse reports that the price needed to obtain a 10% return on investments in natural gas production has risen dramatically in recent years, from about $4.47 in 2003 to $7.05 by 2006 and $8.16 today (and should rise to $8.27 in 2009). (9/27, #17)
• Yemeni security forces arrested more than 10 tribesmen east of the capital Sanaa after an oil pipeline was blown up last Friday morning. The explosion started a fire in the pipeline, but firemen put out the blaze and the pipeline was back on stream hours later. (9/27, #4)
• Nigerian militants accused the military of launching an air assault on their camps in the oil-producing Niger Delta but said they were maintaining the unilateral ceasefire announced two days ago. The Nigerian delta witnessed the most intense series of attacks against the oil industry since early 2006 last week when militants attacked army posts and blew up pipelines in retaliation for a raid the military conducted on one of their camps on September 13. (9/24, #13, #14)
• Nigeria’s oil minister said recent militant attacks on oil facilities had not significantly slowed output and that the country was currently producing around 2 million barrels/day. (9/25, #8)
• Nigeria directed international oil and gas companies operating in the country to come up with a plan for domestic natural gas supply by the end of October, or risk a suspension of all liquefied natural gas export projects. Africa’s most populous country suffers from chronic power shortages. (9/26, #13)
• Democrats decided to allow a quarter-century ban on drilling for oil off the Atlantic and Pacific coasts to expire, conceding defeat in a months-long battle with the White House and Republicans set off by $4/gallon gasoline prices this summer. (9/24, #19)
• The U.S. House passed a tax measure that is different from a Senate-passed bill and could jeopardize enactment of solar energy tax breaks and other expiring incentives. (9/27, #14)
• Brazil’s state-run oil company Petrobras said on Friday it struck light oil south of the Santos basin in shallow waters (900 feet) above the subsalt layer of the ocean floor. The field could hold as much as 150 million barrels of recoverable oil equivalent. (9/27, #7)
• Ecuadorean President Correa said OPEC won’t let the price of crude oil fall below $100 per barrel. (9/27, #8)
• OPEC oil exports, excluding Angola and Ecuador, will jump by 540,000 barrels per day (bpd) in the four weeks to Oct. 11, on strong Asian demand and seasonal factors, an analyst who tracks future flows said on Thursday. (9/26, #3)
• Friction within OPEC has been growing because Saudi Arabia has been pumping almost 10% more than its OPEC quota of 8.9 million barrels per day. OPEC hardliners such as Iran and Venezuela have less oil in the ground and are running short on cash, so they’re more interested in maximizing revenues today. (9/26, #20)
• OPEC is expected to pump around 800,000 barrels a day of crude oil less in September after producing at higher-than-usual levels in August, tanker tracker Petrologistics said Wednesday. Saudi Arabia is seen pumping at about 9.5 million barrels a day this month, compared with 9.7 million barrels a day in August. Supplies from Iran, OPEC’s number two producer, are expected to fall 400,000 b/d to a daily rate of 4 million b/d. (9/25, #3)
• China National Offshore Oil Corporation (CNOOC) has delayed the start-up of its new 240,000 barrels/day refinery at Huizhou to 2009. Originally scheduled to open during September, the plant had previously been pushed back to November. (9/27, #10)
• For China’s oil demand, oil traders and analysts said they were looking beyond August data, because it masks weak consumption and brimming inventories that together give a far bleaker outlook for demand from the world’s number two oil consumer. (9/23, #9)
• Crude oil delivered to China from Kazakhstan via a pipeline may increase 30 percent this year as energy demand rises in the world’s fastest-growing major economy. The trans-border pipeline may transport 6.5 million metric tons of crude from the Central Asian country this year compared with 4.77 million tons in 2007. The oil link will reach its full annual capacity of 10 million tons by October 2009. (9/24, #18)
• Shell Oil, the largest oil producer in the storm-battered Gulf of Mexico, said it expects the bulk of its offshore fields back on line within two weeks. (9/26, #9)
• In the wake of Lehman Brothers bankruptcy filing last week and uncertainty over other traders’ access to credit, parties making deals in the over-the-counter oil market are increasingly turning to exchange clearing houses to ensure payment when it’s due. (9/26, #10)
• In the U.K., millions of homes could face blackouts this winter as the ageing national electric grid struggles to meet demand. Experts also warned electricity bills may soar because the amount of spare energy is too low to deal with cold snaps. Factories could be forced to shut to save electricity if just one of the grid’s 38 largest power stations went off line at peak times. (9/26, #18)
• U.K. Business Secretary John Hutton pledged to “put the brakes” on imported gas supplies by building new nuclear and coal-fired power stations. (9/22, #17)
• Iraq will sign a contract next week that will let China’s biggest oil company develop a small Iraqi oil field for 20 years. It’s expected to produce up to 25,000 barrels per day after three years and eventually reach 125,000 barrels per day. (9/25, #6)
• Israel gave serious thought earlier this year to a military strike on Iran’s nuclear sites but was told by US President Bush he would not support it, Britain’s Guardian newspaper reported on Friday. (9/26, #11)
• Mexican state oil firm Pemex has shut in 250,000 barrels a day of output because US refineries have canceled shipments as they restore operations after hurricane Ike damaged facilities. (9/25, #11)

• Average Mexican oil production for the first eight months of this year slid 9.2% on year to 2.83 million barrels/day, said Pemex. Giant field Cantarell’s production plummeted 29.2% during the period to 1.1 million barrels a day. Cantarell’s slide has been only partially offset by Mexico’s second largest field, Ku-Maloob-Zaap, where output rose 39% to reach an average of 688,800 barrels a day during the first eight months of the year. Mexican crude oil exports also fell to 1.44 million barrels a day. (9/23, #6)
• Manmade emissions of carbon dioxide grew 2.5 percent to a record last year as international efforts to fight global warming fail to curb the main gas blamed for rising temperatures. Burning fossil fuels, making cement and changing land use together produced 9.94 billion metric tons of carbon compared with 9.7 billion tons in 2006, the Canberra, Australia-based Global Carbon Project reported today. Average annual growth since 2000 is about four times the mean in the 1990s, and the last year to register a decline in emissions was 1999. (9/26, #4)
• Researchers at Temple University have developed a small electrorheological device that, when inserted into the fuel line near the fuel injector, can improve fuel economy. In tests that will appear in the 19 November issue of Energy & Fuels, the device is said to show an 18.8% increase in highway fuel mileage for a Mercedes-Benz diesel sedan. (9/25, #17)
• Ukraine’s President Yushchenko urged his country’s government to sign a contract for natural gas shipments from Russia’s OAO Gazprom for domestic use in 2009, a move that will secure stability of gas flows to Europe. The European Union gets a quarter of its gas from Russia, most of which is shipped across Ukraine. (9/23, #20)
• Italian oil company Eni said it signed a memorandum of understanding with Petroleos de Venezuela SA for the exploration and development of two offshore areas in the Latin American country. (9/22, #13)

Quotes of the Week

• “Where the United States is in regard to oil: most of the untapped reserves we have left are smaller, deeper, farther offshore, less permeable, increasingly sour, and generally more expensive to bring to market. And the more we drill, the more this will be the case…The faster we use up the little oil we have left, the quicker OPEC will be the only one at the table with any chips left. Strategically, this is a loser’s strategy.”
  — Timothy Kailing, article at Seeking Alpha site
• “There is a growing contingent of peak oil adherents within the U.S. Armed Forces that is…churning out an expanding body of work on the challenges the military may face in an energy-constrained future. Others, though, worry less about the Army or Navy keep their own fuel tanks full and more about how the military is being sucked increasingly into regions where the overriding strategic interest is oil.”
  –Neil King Jr., “A Survey of Security Concerns” (Center for a New American Security)