Peak Oil Review – Apr 28

April 28, 2014

1.  Oil and the Global Economy

New York oil prices fell from highs around $104 a barrel to close at $100.60 last week as the EIA reported that US crude stocks for the country as a whole and along the Gulf coast have climbed to record highs. Disappointing corporate earnings and a drop in the equity markets also contributed to weaker US prices. London’s Brent crude traded around $109.50 a barrel for most of the week as threats of sanctions related to the Ukrainian situation continued to support prices.  Last week’s trading left the Brent/WTI spread at nearly $9 a barrel.
With US crude stocks at an 83-year high, it is interesting that US refiners continue to import so much high-priced foreign crude. The only reasons that come to mind is that US refiners are expecting a leveling off in US domestic production in the coming year; they do not want to lose their current allocations of crude from exporters; they fear supply disruptions from the Ukrainian or Middle Eastern situations that will send oil prices higher; or they are expecting a large jump in domestic or export demand for oil products in coming months.
The EIA reported last week that US petroleum product exports averaged 3.5 million b/d in 2013 and reached 4.3 million in December – the first time US petroleum product exports ever exceeded 4 million b/d in a single month. The advantage that US refiners have with access to relatively cheap domestic crude and cheap natural gas to drive efficient refineries gives them a significant advantage in competing in world markets.  The US still imported an average of 2.1 million barrels of petroleum products per day last year – largely gasoline from Canada and Europe, but this number is starting to shrink as European refineries close and US refineries are able to meet East Coast demand with cheaper gasoline.
Last week’s natural gas inventory report which showed 49 billion cubic feet being added to storage, coupled with warmer weather, combined to send US natural gas futures slightly lower last week. The 3 trillion cubic foot withdrawal from storage last winter will be difficult to make up before fall unless there is a surge in natural gas production or an unusually mild summer which will lower air conditioning demand.
2.  The Middle East & North Africa
Iraq: On Wednesday 30 April, Iraq’s first parliamentary elections since the US pullout will take place. No party is expected to win an outright majority so there will have to be negotiations amongst the various parties before a government can be formed. In 2010 these negotiations took seven months, so there may be a considerable period of political instability ahead. The run-up to the elections has been marked by an upswing in Sunni-Shiite violence with a high-casualty bomb attack on a Shiite political rally last week leading to reprisals against Sunnis. Government forces have made little progress against the Sunni insurgents who continue to hold large areas of Anbar province.
With the northern export pipeline closed indefinitely by terrorists attacks, Baghdad is considering building a new export pipeline into the more politically stable Kurdistan to link up with the line the Kurds already have running into Turkey and on to the export terminal at Ceyhan. Such a pipeline which bypasses what is essentially insurgent controlled northwestern Iraq would give the Kurds a strong hand in dealings with Baghdad. This in turn could lead to agreements that would increase the flow of oil out of northern Iraq and Kurdistan.
The billions that foreign oil companies have invested in reviving Iraq’s oil fields is starting to pay off with Baghdad’s oilfields producing 3.6 million b/d in February – the highest since before the Hussein era. Iraq’s problem is getting the oil out of the country. With exports to the north becoming increasingly uncertain, further increases in exports will have to come through Basra. Although progress was made in completing new offshore loading facilities this winter, the key to further increases is the Fao storage facility at Basra which will serve as a buffer between the oilfields and ships waiting to be loaded. With this facility in operation Iraq’s exports from Basra can increase. Recent reports, however, say that this facility is way behind schedule and is unlikely to be finished before 2018, making a major jump in Iraqi exports unlikely in the near future.
Two weeks ago the pipelines feeding the Baiji refinery north of Baghdad were blown up by terrorists and oil began spilling into the Tigris River adding to Iraq’s woes. Although the oil slick on the Tigris was immediately set ablaze as a control measure by local authorities, remnants of the oil slick are threatening Baghdad’s water intakes.
The new natural gas pipeline that Tehran is building to supply fuel for Iraqi power plants is said to be nearing completion. Whether this pipeline turns out to be more than another terrorist target remains to be seen.
Libya:  The much heralded reopening of the eastern export terminals that were closed by local militias seeking a larger piece of he pie does not seem to be much of an event. So far only one small terminal with a theoretical capacity of 70,000 b/d or one large tanker-full every two weeks seems to be functioning. Last week the militias controlling the eastern ports say the two larger terminals will stay closed until a deal is reached. As the country badly needs its major source of revenue, observers expect that a deal will eventually be reached, but for now mistrust, tactical maneuvers and the general chaos in the country are keeping exports to minimal levels.
3.  China
The adoption last week of Beijing’s revised environmental protection law may mark a major turning point in China’s 40-year breakneck increases in fossil fuel consumption. China’s leaders seem to have finally come to the realization that the country is slowly committing suicide by pumping ever-increasing amounts of toxic pollution into their air, water, and soil.  Although Beijing has been paying lip service to the environment for the last 25 years, in the past economic growth always trumped the environment.
Beijing says that those days are over and that protecting (or saving) the environment is now the country’s number one concern. While cleaner sources of energy are available, replacing coal and dirty petroleum products will not be cheap and will not come quickly. It is difficult to see how the 10 percent annual GDP growth that Beijing has achieved in recent years, or even the 7.5 percent it currently has as a goal can continue while making major reductions in fossil fuel consumption.
China’s coal consumption, which is the source of most of the pollution, is scheduled for a major turnaround. There are already indications that the annual 10 percent plus increases in coal consumption have slowed markedly. Major increases in natural gas, solar, wind, hydro, and nuclear power production are underway, but together these will have trouble matching the pace at which new coal powered plants were built in recent decades.
Over the longer term, shale gas may be beneficial but early indications suggest that shale gas deposits as productive as those that have been found in the US do not exist in China. Last week there was renewed talk of a major natural gas deal between China and Russia being concluded during President Putin’s visit to Beijing next month. This deal has been under discussion for many years, but the price Moscow wants for its gas has always been a stumbling block. With the current troubles in Ukraine, however, Moscow is anxious to reduce its exposure to the European market and China is in a position to take almost unlimited quantities of Russian natural gas if the price is right.
4. Ukraine
There was little change in the Ukrainian situation last week. Russian-speaking separatists, or perhaps thinly disguised Russian Special Forces, continue to occupy government buildings in the eastern parts of the Ukraine while Moscow and the West exchange blame for the situation.  New sanctions against Moscow have been promised, but the EU which conducts considerable trade with Russia is less enthusiastic than Washington over the imposition of sanctions that could bring economic hardships to the EU.
Both sides are being extremely careful to assure the world that natural gas flows to Europe will not be cut off, but considering that much of the gas flows through the Ukraine this may be tricky to regulate. Ukraine is seeking a way to import natural gas from Europe by reversing some of the east to west flow in the Soviet-era pipelines.  Moscow is threatening Ukraine with an alleged $11 billion natural gas bill and in turn Kiev is threatening to turn off the electricity flowing to Crimea for not paying last month’s electric bill.
4.  Quote of the Week
  • “Cadmium intake through food is a chronic intoxication process by small doses. Its half life is about 17 to 38 years…. once inside, it will stay there — if not all your life, at least the better half of it. Generally speaking, one can’t take in more than two grams of cadmium in a lifetime. ”
— Chen Nengchang, a soil expert at the Guangdong Institute of Eco-environment and Soil Science

5.  The Briefs

  •  Annual reports from 42 oil and natural gas companies that have reported data on upstream expenditures since 2000 show that spending on exploration and development throughout the world increased by 5% ($18 billion) in 2013, while spending on property acquisition fell by $17 billion. Total upstream spendingby these companies was relatively flat in 2013 (+0.4%) after a period of strong growth (averaging 11 percent p/yr) from 2000 to 2012. (4/26)
  • Of all the lessons one might draw from Russia’s bullying of Ukraine, this may be the most coldblooded of all: If you want to behave badly, it helps to have a lot of oil and gas. Much will be forgiven, or at least ignored. European nations, international energy companies and China are all, in their own ways, driving home the point. The Europeans are afraid of pushing economic sanctions against Moscow too far lest they be cut off from the Russian natural gas that provides a significant share of their energy. (4/22)
  • Russian oil company Lukoil is considering joining a joint venture to develop the Nassiriya oil field in Iraq; the company is already involved in development of the West-Qurna 2 project. First oil from West Qurna-2 was produced in March. It reached a daily production reach of 120,000 barrels and has an estimated 34 billion barrels worth of recoverable reserves. (4/26)
  • The Kurdish Government published data showing gross revenue generated by the oil and gas sector of $9.7 billion from 2007-13. The KRG and central government in Baghdad remain at odds over who controls what aspects of the energy sector. (4/23)
  • said Wednesday it would revise how it governs oil and natural gas contracts, though sanctions must be lifted for full utilization. Officials said the new contract system—moving away from of a set price and towards a share of the output—are designed to bring more foreign investments into the Iranian energy sector. (4/24)
  • Nigeria’s national oil company has awarded yearly crude oil lifting contracts worth about $40 billion to mostly Nigerian companies.  In a break with tradition, no contracts were given directly to foreign traders such as Glencore, Trafigura and Vitol, with only Switzerland’s Mercuria winning a contract. (4/23)
  • A US non-governmental organization praised Ghana for managing oil revenues properly. The Revenue Watch Institute, the NGO, has released research indicating that the Ghana Petroleum Funds meet 13 of 16 good governance fundamentals. (4/26)
  • As Ghana strives harder to escape the quagmire of the oil curse which plagues oil and gas production in third world countries across the globe, there are already looming signals that Ghana is losing the battle to the foreign partners in her oil and gas industry. (4/23)
  • Thailand’s PCL, the country’s flagship petroleum explorer, will buy the Thai assets of Hess Corp. for around $1 billion, in the latest of a string of sales by U.S. energy companies as they switch focus to unconventional oil and gas projects in North America. (4/23)     
  • Shell Nigeria said its Forcados oil export terminal remains closed, seven weeks after it was shut down to repair a sabotaged undersea pipeline.  Militants had claimed responsibility for the vandalism.  Forcados has capacity to export 400,000 b/d, more than one fifth of Nigeria’s production of 2.2 million b/d. (4/26)
  • US federal rail regulators aren’t meeting their obligations when it comes to the safety of transporting crude oil by rail, North Dakota and Nebraska legislators said. (4/26)
  • The US drilling rig count jumped 30 units to reach a total of 1,861 rigs working during the week ended Apr. 25, Baker Hughes Inc. reported. The US now has 107 more rigs working compared with this week a year ago. Oil rigs were up 24 units to 1,534; gas rigs increased 7 units to 323. (4/26)
  • Export impacts: drivers in the U.S. are facing rising gasoline prices ahead of summer-vacation season, just as refiners here are shipping more gas to other countries. A new pipeline, built to release a glut of crude oil that was stuck in the middle of the country, is now feeding oil to refineries on the Gulf Coast that churn out gasoline and diesel. While these fuels still make their way to the Southeast and the East Coast, growing amounts are being sold to Mexico, the Netherlands, Brazil and other countries. (4/24)
  • Technologies that will increase the low rate of ultimate recoveries of US shale plays, currently around 5%, are the next disruptive forces in US oil and gas production. While industry is still working on incremental changes that increase efficiency — new frack fluids, green completions — revolutionary change will come with technologies that increase recoveries, according to Schlumberger fellow and physicist Robert Kleinberg. (4/23)
  • Chevron plans to run higher-sulfur Alaskan and Middle Eastern crudes when it completes upgrade work at Northern California’s largest refinery in 2016, not oil from the Bakken. (4/25)
  • a $500,000 study paid for by the U.S. government concludes that biofuels made with corn residue release 7 percent more greenhouse gases in the early years compared with conventional gasoline. While biofuels are better in the long run, they won’t meet a standard set in a 2007 energy law to qualify as renewable fuel. The conclusions deal a blow to what are known as cellulosic biofuels, which have received more than a billion dollars in federal support but have struggled to meet volume targets mandated by law. (4/22)
  • Fracking fluids: Oil services company Baker Hughes said it could disclose the ingredients of hydraulic fracturing fluids without comprising trade secrets. Their disclosure is at odds with other major companies like Schlumberger and Halliburton who argue their chemical components should be protected. (4/26)
  • Turkey agreed to increase capacity of Russian gas through the Blue Stream pipeline by more than 18 percent. Russian energy company Gazprom counts Turkey as its second-largest energy importer. Turkey will also host a rival European gas network from Azerbaijan, which the European Union sees as a way to break Russia’s grip on the regional energy sector. (4/22)
  • In the UK, energy companies are to be given the freedom to “frack” for shale gas under private land in a move that is sure to provoke a backlash from environmentalists, residents and some MPs. The legislation, expected in the Queen’s Speech on June 3, comes as David Cameron and George Osborne prepare to defend the coalition’s mixed record on transforming Britain’s ageing infrastructure. (4/22)
  • Off the coast of Israel, developments made at the Leviathan natural gas field have been “remarkable,” Noble Energy’s CEO said Thursday. Tamar, with an estimated 8.5 trillion cubic feet of gas reserves, entered into production in March 2013; Leviathan, with an estimated 18 trillion cubic feet of gas, should go on-stream in 2016. (4/25)
  • Japan has protested to Panama about planned limits on the size of ships in the Panama Canal, saying they could prevent some US natural gas from reaching customers in Asia. The issue has cast a pall over hopes for expanded trade in natural gas after the widening of the canal, scheduled for completion in early 2016. (4/24)
  • In the Marcellus shale play, rising production of natural gas in the Appalachian basin continues to outpace the growth in the region’s pipeline takeaway capacity, which has led to supply backups in the region. Because of this fact, new gas production is unable to flow to areas of high demand, placing downward pressure on regional prices. This phenomenon has contributed to more than 1,300 wells that have been drilled but not completed. (4/26)
  • Methane emissions:  New research shows drilling operations at several natural gas wells in southwestern Pennsylvania released methane into the atmosphere at rates that were 100 to 1,000 times greater than federal regulators had estimated.  (4/21)
  • Across the US, legislators are debating proposals to roll back environmental rules, prodded by industry and advocacy groups eager to curtail regulations aimed at curbing greenhouse gases. The measures, which have been introduced in about 18 states, lie at the heart of an effort to expand to the state level the battle over fossil fuels vs. renewable energy. But the campaign has run into a surprising roadblock: the growing political clout of renewable-energy interests. (4/26)
  • Renewable energy for Pacific island nations will help fight climate change and stimulate the region’s economy, according to EU development officials who started a four-day Pacific Islands tour this week. The aim of the tour is to highlight the benefits of renewable energy and energy efficiency. Such benefits include reducing the high costs of importing fossil fuels to isolated territories. (4/23)
  • Germany’s Daimler unveiled plans to build an all-electric vehicle with its Chinese partner BYD, a further sign foreign operators are under pressure to meet demands by the Chinese government for a massive increase in electric cars to fight air pollution. China wants to put 500,000 electric or plug-in hybrid cars on the road by 2015. (4/21)
  • The UK coal industry is close to fizzling out following the planned closure of two of its three remaining deep mines in northern England. In 1979, Britain produced 122 million tons of coal from 219 underground and 58 open-cast mines. Last year production was one-tenth that amount. The country now imports nearly four times as much coal as it produces domestically. (4/24)
  • Coal ash:  a Duke Energy Corp. executive told a North Carolina environmental commission that plans outlined by the utility to address coal-ash in the state are estimated to cost about $2 billion to $2.5 billion. This comes in the aftermath of the 39,000 ton leak of Duke’s ash into the Dan River in February.  (4/23)
  • a new study from Utah State University asserts a link between climate change and both the intensifying California drought and the polar vortex blamed for a harsh winter. The scientists involved say they hope what they found can help them predict the next big weird winter. Outside scientists are calling this study promising but not quite proven. (4/25)
  • The odds are increasing that an El Nino weather system will form this year, portending drought for Australia and Asia and a warmer winter in the northeast US. The Climate Prediction Center now says there’s a 65 percent chance the Pacific Ocean warming pattern will develop after August. (4/24)
  • Saudi Arabia’s doctors are having no luck stopping the deadly Middle East Respiratory Syndrome (MERS) virus from sweeping the country, but the government is doing much better at preventing news of the disease from spreading. (4/26)
  • Soil in China’s leading rice-producing region shows high levels of heavy metal contamination in a study that suggests that the proximity of mining and industry to agricultural areas is posing serious threats to the country’s food chain. (4/26)

Tom Whipple

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the long-running Energy Bulletin (formerly "Peak Oil News" and "Peak Oil Review"). Tom has degrees from Rice University and the London School of Economics.  

Tags: China, geopolitics, Iraq, Oil, Politics, Pollution, Shale gas, ukraine