Peak oil review – Feb 16

1. Production and Prices

The trends that have developed over recent weeks continued. Prices started about $40 a barrel on hopes that the US stimulus program will be successful and then fell for 4 days to $34 a barrel due to pessimistic economic news and yet another increase in US crude stockpiles. On Friday, however, prices jumped 10 percent to close at $37.51 as traders closed out positions in preparation for the President’s Day long weekend.

Falling prices brought forth another round of warnings from OPEC officials about the dangers to future production due to insufficient funds for investment and threats to further lower production quotas if prices remain low.

The OPEC Secretariat confirmed that so far the cartel has cut production by about 66 percent or 2.7 million barrels out of the 4.2 million of agreed cuts. Production cutting appears to be continuing, however, and Algerian Oil Minister Khelil is predicting that compliance with the quotas will approach 100 percent by the next OPEC meeting on March 15th.

The three major forecasting agencies, the IEA, the EIA and the OPEC Secretariat, released new and lower estimates for 2009 oil consumption as the global economy continues to contract. OPEC is now estimating that demand for 2009 will average 85.13 million b/d while the IEA and the EIA put the number at 84.7 million b/d. Given weak oil prices, the deluge of bad economic news and the endless talk of plummeting demand, for oil, the decline of only 1.2 b/d from the EIA’s 2007 peak average of 85.9 million b/d seems underwhelming. So far this year, US consumption is down only about 250,000 b/d as compared with last year. The EIA is actually forecasting the Chinese demand for oil will increase by 250,000 b/d this year.

2. French realism

Among the CEO’s of the world’s major oil companies, Total’s Christophe de Margerie has long been the most realistic about the prospects for further growth in world oil production. Last year he had hinted that production would peak at or below 95 million b/d. Last Friday, de Margerie broke new ground by telling reporters in London that world oil production may hit a plateau below 90 million b/d – less than earlier envisioned. De Margerie went on to say that “the capacity that the oil industry has to go to 93-95 million barrels per day is already over,”

According to de Margerie, this assessment is based on delays in heavy oil projects in Canada and Venezuela, which are constrained by high costs and low oil prices, plus the unlikelihood that Iraq and Iran will be able to increase production significantly in years ahead.

Other major oil companies such as Exxon and BP continue to maintain that there will not be any restraints on production in the foreseeable future. The IEA forecast last November that world oil production will rise to 106 million b/d, 20 million b/d above current production by 2030.

3. CERAWeek

Cambridge Energy Research Associates continues to make news with its annual energy conference in Houston which it dubs CERAWeek. Star attractions such as the CEO’s of Shell and BP told the gathering that despite the recent drop in demand, the prospects for long term growth remain unchanged and that the industry must continue to invest to meet demand that is expected to double in the next 40 years.

Saudi Oil Minister al-Naimi keynoted the event by touching on a variety of topics ranging from the challenges of the current global recession to the “nightmare scenario” that would occur should the world attempt to switch prematurely to alternative sources of energy that will not meet expectations. The minister noted that with the addition of 1.2 million b/d of production capacity from the Khurais field this year, the Kingdom will have 4.5 million b/d of spare production capacity.

The willingness of the oil industry to work with the Obama administration on global warming also made headlines as did a panel of celebrity economists who not only predicted $20 oil but could offer little hope for a quick economic recovery.

From a peak oil perspective, one of the more interesting aspects of the conference was a discussion of the long running dispute between CERA and the peak oil community regarding the prospects for future oil production. As reported by Platts, CERA managing director James Burkhard made an oblique reference to the disdain that his organization has faced in its dispute with the peak oil community, by saying that “”CERA has been looked at as wildly optimistic, …. But when you look at the complete story, it’s not as nice and tidy.” He said CERA does see crude supplies “flattening out” after 2010, though the current economic slowdown may delay that until 2015 as production slows.

CERA now holds that increasing supplies of biofuels and natural gas liquids will substitute for growth in crude oil production, despite criticism that these are not sources for distillate production. Burkhard admitted that “production of enough distillates to satisfy demand will be an increasing challenge.”

4. Detroit at the Crossroads

This may turn out to be a pivotal week for the US automobile industry as GM and Chrysler are to submit restructuring plans on Tuesday in order to qualify for continued federal aid. The industry’s parts suppliers have already asked the government for $18.5 billion in loans and guarantees. So far the Obama administration has been non-committal as to whether it will respond to the request for more funds. The White House continues to say that the industry is important but that all stakeholders — the manufactures, suppliers, labor, and bankers — must be willing to make concessions.

GM is already raising the specter of filing for bankruptcy protection to rid itself of unsalable assets, contracts and debt obligations. Even in bankruptcy it will likely require an immediate infusion of $5 billion in federal money if it is to remain open beyond the end of March.

Car sales in the US show no sign of reviving. As unemployment and economic uncertainty increase, some observers are talking of sales falling as low as an annualized 5 million cars per year from the current 9 million. Should sales continue falling, the industry will need to contract to about one third its former size unless it is to receive a continuing multi-billion dollar federal subsidy.

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

• Russian crude output will drop by nearly 8 percent from last year’s level through 2013 if the government doesn’t provide further aid to producers, Energy Minister Shmatko said at a meeting that Prime Minister Putin convened to talk to oil executives. (2/13, #18)
• Most Russian oil companies still hope the oil price will magically go back up. Drilling in Russia will probably decline by 20 to 25 percent this year, according to Chirvani Abdoullaev an analyst at Alfa Bank. (2/14, #4)
• With oil around $40, OPEC countries can still turn a profit, especially as output costs have dropped. Funding national budgets is another question which in many countries assumes $50+ per barrel oil. In terms of the narrow economics of getting their oil out of the ground, it costs less than $10 a barrel to pump in the Middle East. (2/14, #4)
• OPEC nations have collectively postponed 35 oil drilling projects that had been in various stages of development, Secretary General el-Badri said Monday. The delayed
  projects, shelved for an indefinite period, are a sign that members of OPEC are starting to feel the pain of low crude prices. Oil’s record plunge reduces their revenues and the financial crisis erodes demand. (2/10, #3, #5)
• Saudi Arabia will import a third more diesel this year, due to robust power and transport demand. (2/14, #7)
• Saudi Arabia, the world’s largest oil exporter, will more than double its spare capacity by the middle of the year to 4.5 million barrels a day as it brings the massive Khurais project on stream while cutting production with OPEC. (2/11, #9)
• Crude oil prices at current levels around $40 a barrel are too low, about half the level required to attract enough investment in new supplies, the United Arab Emirate’s oil minister said Monday. He added, “we do not yet see light at the end of the tunnel.” (2/9, #5)
• The Research firm of John S. Herold expects capital spending on the part of the world’s oil companies to fall 13 percent this year from last year’s $300 billion. Many of the higher-cost fields that attracted capital in recent years may not be profitable at today’s prices. (2/14, #5)
• The stage is being set for a fuel supply crunch in the US once the economy rebounds now that refiners have pushed back more than $10 billion worth of upgrades they had on the drawing board. Gasoline price increases associated with this delay in refinery expansions and upgrades are probably two or three years away. (2/14, #14)
• Brazil’s Petrobras published its revised investment plan for the next five years. Its proposed capital spending of $174 billion over this period is bigger than the entire economy of Chile. By 2020, if all goes to plan, Petrobras and its foreign partners will be producing 5.7m barrels of oil and gas per day, more than half the output of Saudi Arabia. (2/13, #9) [Editors’ note: 5.7 mb/day in a decade? Consider us skeptical.]
• The collapse of oil prices has slowed efforts to tap crude oil and natural gas supplies that lie under the Arctic Ocean, but countries like Russia, Canada and Norway are still vying for the energy trapped there. (2/13, #17)
• To cut costs, BP is using fiber-optic lines and wireless connections to transmit data in real time from unmanned, offshore wells. By measuring the pressure, temperature, and oil flows remotely, the company tweaks the levels of chemicals, water, and gases used to flush out the hydrocarbons. BP has cut its chemical costs by 15 percent, its labor costs by 25 percent, and boosted production from old fields by 2 percent. (2/14, #5)
• Columbia cut its taxes sharply in the past three years and allowed foreign oil companies to invest without having to partner with national oil company Ecopetrol. Chevron alone has invested $500 million in Colombia. The result of such efforts is a 30 percent increase in oil production over the past two years. (2/14, #5)
• Output at Nigeria’s Bonny Terminal, operated by Shell, has fallen to around 90,000 barrels per day because of security concerns. The Bonny terminal was producing more than 500,000 bpd before the attacks started in early 2006. (2/14, #9)
• The Movement for the Emancipation of the Niger Delta (MEND), the most active militant group in Nigeria’s oil-producing Niger Delta region, has threatened to attack targets operated by Italian companies in Nigeria. (2/14, #10)
• The Ukraine-Russia gas feud is a first taste of the transnational energy disputes to come. Matthew Simmons believes Moscow’s saber rattling is political cover for a more serious problem: a shortage of gas in Gazprom’s pipeline system. (2/14, #17)
• PDVSA, Venezuela’s state oil company, will combine almost two dozen joint ventures with foreign partners into as many as six large companies, hoping to reduce costs amid financial troubles. (2/13, #11)
• Europe’s economy declined by 1.5 percent during the fourth quarter. That is even worse than the 1 percent decline in the US economy. (2/14, #15)
• Natural gas production from shale is largely responsible for an “oversupply” in the gas market. Nearly 60% of rigs that are currently drilling need to suspend operations in order for supply to decline enough to catch up with weakened demand by the end of 2009. (2/13, #16)
• KBR pleaded guilty Wednesday to federal criminal charges alleging it paid millions of dollars in bribes to Nigerian officials to win contracts to build a natural gas project in the country. (2/12, #6)
• Eni, Italy’s largest oil company, reported its first quarterly loss in seven years and will cut spending after the global recession caused a record plunge in crude prices. (2/13, #19)
• China’s net crude-oil imports declined to the lowest level in more than a year as a slowdown in the world’s third-largest economy cut demand. (2/12, #7)
• China’s exports plummeted 17.5 percent in January, the latest sign of the sharp downturn in demand that has hit Asian economies hard. (2/11, #13)
• The China Association of Automobile Manufacturers said Tuesday that 735,000 vehicles were sold in China in January. That surpasses the 656,976 vehicles sold in the U.S. the same month—a record-low figure caused by the plunging US economy. (2/10, #10)
• Confronted with a sharp change of priorities in Washington, international oil executives are expressing an eagerness to work with President Barack Obama to fashion new policies to tackle global warming. (2/12, #10)
• The world automobile fleet is growing by 23 million cars per year, and is claiming ever more cropland for roads, highways, and parking lots. At least 0.4 hectares of land has to be paved for every 20 vehicles added to the fleet. (2/12, #13)
• French oil major Total has agreed to halve its 75 percent stake in two Libyan oil blocks as part of a contract renewal with the north African country’s national oil company. (2/11, #10)
• An Iraqi oil industry official told Dow Jones last week that the country’s crude oil production from its southern oil fields had slipped by 100,000-150,000 barrels a day over the last six months as maintenance problems and a lack of investment undermine the country’s output capacity. (2/11, #11)
• The Obama administration will set aside an “oil and gas or nothing” approach to energy exploration on the outer continental shelf and consider proposals for offshore wind farms alongside plans for new drilling, Interior Secretary Ken Salazar said yesterday. (2/11, #16)
• President Barack Obama’s energy plan calls for putting one million electric plug-in hybrid cars on the road by 2015. This ambitious goal could be accomplished more quickly if we invested in converting the largest civilian fleet in the United States — the 219,000 vehicles owned by the United States Postal Service — to electricity. (2/15, #20)
• A biofuels analysis project conducted over nine months by Sandia National Laboratories and GM’s R&D Center concluded that large-scale production of advanced biofuels produced from plant and forestry waste and dedicated energy crops is achievable and sustainable by 2030. Roughly 90 billion gallons of ethanol can be produced per year in the US: 15 billion gallons per year from corn ethanol, with the balance from cellulosic ethanol. (2/11, #19)
• Chevron, BP and other oil producers are locked into drilling offshore wells that cost as much as $200 million each because of rig contracts that were signed when crude was soaring above $140 a barrel. Demand for rigs that can fetch more than $600,000 a day to rent hasn’t diminished amid the $105-a-barrel tumble in crude from a July record. Energy companies are betting that in the five to 10 years it takes to turn a deep-water discovery into a producing field, crude prices will rebound and their finds will turn a profit. (2/10, #2)
• Australian oil and gas companies face a drop in creditworthiness this year because of “significant” spending plans to develop liquefied natural gas projects and the drop in energy prices. (2/9, #14)
• Alberta’s plan to give incentives to hard-hit small and mid-size oil companies may not stem this year’s sharp drop in drilling in Canada’s biggest energy-producing province. (2/9, #18)
• A grim report from FBR Research forecasts limited growth in the production of oil from Canadian oil sands and slashed capital spending. While previous estimates thought that there would be 4 million barrels of oil being pulled from the sands by 2015, FBR only sees 2 million a day. (2/15, #15)
• US Gulf of Mexico production peaked in June 2002 at 1.73 million barrels a day and is forecast to continue declining. The 250,000 b/d Thunder Horse project started oil production in mid 2008 and BP claims that it is producing 200 kbd now, but it has not stopped the overall decline in GoM production. Blind Faith and Neptune also started in 2008, adding almost 100 kbd capacity. However, long term GoM production will probably continue its decline from the 2002 peak because sanctioned capacity additions beyond 2010 are less than 100 kbd per year which is not enough to offset production declines from existing fields. (2/10, #18)

Quote of the Week

• “During the last week, we have had fresh estimates for oil demand which now forecast the biggest decline in consumption in more than a quarter of a century. We have had yet another increase in crude oil stocks, leaving inventories at their highest levels in 15 years, and creating the biggest surplus against the previous year since 1990. These factors have worked together to press crude prices right back against their spine of support.”
  — Peter Beutel, with Cameron Hanover