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1. Prices and Production

Crude oil prices dropped 8.2 percent, nearly $10 a barrel, in January to close on Friday at $72.89 a barrel. Continuing weakness in US demand, financial troubles in Greece, Spain, and Portugal resulting in a stronger US dollar, and reduced expectations that China will soon be leading a global economic recovery were behind the decline. There are also concerns that the US and others will soon be taking steps to control speculation in oil by large financial organizations.

The EIA reports that US demand for petroleum products declined every week in January.

The situation in China is far from clear. Although Beijing’s demand for oil surged along with its economy in 2009, a near frenzy in bank loans during the first weeks of 2010 led the government to order some sort of clamp down on lending. Whether this will slow or even reduce oil imports during the coming year is an open question.

Analysts remain split on the future of oil prices with some seeing oil in the $90s or even topping $100 a barrel before the end of the year, while others see a stagnating demand for oil which will push prices down into the $60s.

2. Is the US Economy Recovering?

The announcement that the US GDP grew by 5.7 percent in the 4th quarter of 2009, the fastest growth since 2003, was met by much skepticism in the markets. Oil prices and the equity markets both fell in the wake of the announcement. Despite incessant repetition of the mantra by federal officials that an economic recovery is underway, outside observers remain skeptical that there will be any real growth in the near future.

They point out that the 5.7 percent figure released last week is an advanced or preliminary number that is put out before all the numbers are in and is almost certain to be revised downwards as most other indicators of economic growth – employment, sales, housing, industrial production — are not showing anything like the advanced GDP estimate for the 4th quarter.

The federal deficit continues to grow rapidly with current federal tax receipts running as much as 10 percent lower than last year. This will result in still larger sales of US debt obligations into a market that is increasingly skeptical of US debt. With Chinese and other foreign purchasers of US securities reducing their holdings, it is likely that the Federal Reserve will have to increase its purchases (monetize) a larger share of the US debt. All this suggests that there may be serious trouble ahead with the advanced 4th quarter GDP report marking some sort of interim high.

State and local government revenues continue to decline, suggesting that substantial layoffs of government employees may be in the offing this year, since only the federal government can cover deficits by printing money.

The effect of all this on oil prices is problematic. Commercial and OECD demand for oil products will probably continue to decline for the foreseeable future. Whether Asian demand for more oil will grow fast enough to offset this decline and lead to higher prices will be the question of the year.

3. Venezuela’s Auction

Last week Caracas held its first major auction of drilling rights in more than a decade. After the bidding, President Chavez announced that that there were two bids for the three blocks that had been made available. Although the results of the auction will not be revealed until February 10th, industry sources say that one bid was submitted by Chevron in a consortium with Japanese companies including Mitsubishi. The other bid was said to have been submitted by Spain’s Repsol in a consortium with Indian and Malaysian firms.

The situation in Venezuela has one major upside – there now are estimated to be 573 billion barrels of heavy oil available for recovery – and one major downside – dealing with the Chavez government. As the location of the oil is already well established, there are no exploration risks or costs.

In addition to dealing with the Chavez government, currently faced with a sea of troubles including the loss of much of its electric power, the winners of the bid must make investments of $10 or $20 billion on roads, pipelines, ports and upgraders which turn the heavy oil into a marketable synthetic crude. Although China and Russia have made deals to exploit the heavy oil deposits, neither participated in the current bidding.

The blocks let for bid are well to the east of the current Orinoco exploitation projects, so that they will require much investment in infrastructure. The foreign oil companies must make all the investment even though PDVSA will hold 60 percent interest in the project.

The companies bidding on the project may be hoping that in the many years it will require to get into production, the Chavez government will go away and that more favorable terms can be negotiated.

Quote of the Week

  • “The problem of peak oil remains. In our opinion, it will be very difficult to raise oil production worldwide above 95 million barrels a day, which is 10 percent more than today.” The problem is not one of insufficient reserves, but that “a lot of it is difficult to be produced.” World oil production could peak in “about 10 years. We are not there yet today.”

— Thierry Desmarest, chairman of French giant Total

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

  • So why is senior GM executive Bob Lutz such a strong proponent of the Volt and the electrification of the automobile? And why is Toyota Motor USA’s COO James Lentz so supportive of efficient vehicle technologies? Peak oil is the answer. (1/27, #19)
  • Oil use in rich industrialized countries will never return to 2006 and 2007 levels because of more fuel efficiency and the use of alternatives, Fatih Birol, the chief economist of the International Energy Agency, said last week. (1/29, #2)
  • Saudi Aramco, the world’s biggest crude producer, is exporting about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said. (1/29, #4)
  • Iran’s oil ministry said that legislation, passed by the US Senate, to impose gasoline sanctions on Iran over its disputed nuclear program won’t succeed in halting fuel supplies. Some say that the only way for sanctions to have success is for them to be backed by the United Nations. (1/30, #5)
  • A consortium made up of Exxon Mobil and Shell finalized a deal in Baghdad Monday to develop the West Qurna phase 1 oil field in southern Iraq. (1/25, #9)…In an analysis of Iraq’s West Qurna 1 license awarded to ExxonMobil and Royal Dutch Shell, Peter Wells puts the government’s take at $444 billion, or 99% of total revenue. Wells was hired by Toyota to build a world oil supply model, so he knows the business. The promise of getting better terms on future deals has got to be the prime motivator here. (1/27, #8)
  • BP’s CEO Tony Hayward told an audience at the World Economic Forum in Davos that within a decade Iraqi oil production could quadruple to 10 million barrels a day from 2.5 million barrels at present. (1/29, #7)
  • TengizChevroil, the Kazakh oil venture led by Chevron Corp., plans to invest $15.2 billion to boost oil output at the country’s largest producing field by 2016. (1/26, #5).
  • Angola’s pace of development since peace returned eight years ago has been staggering. The country feels like a gigantic building site, as roads, ports, railways, hotels, shopping centers, hospitals, universities—even whole new towns—rise up out of the bush. None of this would be possible without Angola’s 13 billion barrels of oil reserves. (1/29, #10)
  • India plans to expand its investment in Nigeria by $350 million. India is presently Nigeria’s second-largest crude oil buyer. (1/29, #9)
  • Nigeria’s main militant group has ended a cease-fire with the government and pledged to renew attacks on the nation’s oil industry according to the Associated Press. After years of attacks by militants, Nigeria’s output has risen in the past five months during the cease-fire, putting it back ahead of rival Angola and prompting analysts to forecast further production gains. The end of the cease-fire could swing the pendulum back again. (1/30, #7)
  • Around the Faukland Islands, analysts say that as much as 60 billion barrels of high-grade oil could be found in the 200-square-mile economic zone. If those estimates prove correct, this could make the Falklands one of the world’s largest oil reserves, comparable with the North Sea, which so far has produced about 40 billion barrels. Desire Petroleum and Rockhopper Exploration will begin exploring later this month. But an ongoing political dispute with Argentina could slow development if commercial oil is ever found. (1/25, #18)
  • Hundreds of millions of pounds in tax breaks for companies opening up the West of Shetlands area, Britain’s last offshore oil and gas frontier, are being offered by the UK government. The move is evidence of the government’s concern about dwindling supplies of fossil fuels, and especially gas. Reserves west of Shetland remain largely undeveloped because conditions are so challenging. (1/28, #15)
  • Chevron said fourth-quarter net income dropped 37 percent as slumping demand for diesel and gasoline outweighed gains from higher oil production and prices. CEO John Watson is slashing refinery payrolls, selling unprofitable plants and gasoline stations to focus on oil and natural-gas wells that deliver higher returns. (1/30, #14)
  • Struggling to survive the worst fuel market since the 1980s, Valero Energy is reversing an acquisition binge that had made it North America’s largest oil refiner. (1/27, #15)
  • Shell’s expansion in Canada’s controversial tar sands will be “very much slower” than in recent years, the company’s new chief executive has said, as the group makes a strategic shift away from high-cost “unconventional” oil production. Shell now plans to rely more on conventional oil and gas reserves for its future growth. (1/25, #26)
  • Within Russia, the political climate seems to be warming to private and foreign oil industry investors after years of Kremlin preference for big state companies had squeezed rivals’ access to major new projects. BP says their relations have thawed dramatically. (1.25, #28)
  • Crude oil rigs operating in the U.S. increased by seven this week to 444, the highest level in 16 years, as drilling rose in Texas and the Dakotas. The count has more than doubled since June, when it bottomed out at 179. North Dakota [the Bakken], which ranks fourth in rigs behind Texas, Louisiana and Oklahoma, added three this week to 75. Its rigs have more than doubled from 33 last May. The total rig count for gas and oil rose by 35, or 2.7 percent, to 1,317, an 11-month high. (1/30, #18)
  • Exxon Mobil and TransCanada said a proposed Alaskan natural gas pipeline to carry gas to US markets will cost, $32 to $41 billion—a substantial increase from the $26 billion cost projected as recently as June 2009. (1/30, #19)
  • Two million vehicles with engines running on gasoline in Nigeria have been slated for conversion into the ones powered by compressed natural gas. (1/26, #7)
  • The capital cost of Shell’s Pearl gas-to-liquids plant in Qatar is $18 billion or more — 10% of its market capitalization. (1/26, #3)
  • For US natural gas, the average daily spot price for 2009 was $3.95/MMbtu. The average wellhead price for 2009 was $3.61/MMBtu. Average wellhead gas prices increased in December 2009 to $4.31/MMbtu from a September low of $2.84. Natural gas futures contracts suggest that gas prices will remain in the $5.50-6.00/MMBtu range through Q3 2010, and then increase toward $7.00 in Q4 2010. (1/28, #16)
  • New York City’s water supply should be protected from natural gas drilling in the upstate Marcellus Shale formation, Mayor Michael Bloomberg said on Monday, making his toughest comments on the proposal so far. (1/26, #14)
  • Saudi Arabia uses 1.5 million b/d of oil at its water desalination plants, according to Arab News. Roughly 60% of their fresh water consumption is from expensive desalinated water. But planned solar-powered plants will help keep costs down. (1/28, #20)
  • In Yemen, Al-Qaeda militants could strengthen their foothold and form part of a belt of Islamist instability linking Asia to Africa if the government in Sanaa fails to crack down decisively against them, analysts say. The most direct threat from a stronger Al-Qaeda foothold in Yemen is to Saudi Arabia, which shares a 1,500 km porous land border with its southern neighbor. (1/28, #6)
  • The International Air Transport Association said 2009 saw the worst demand decline in history, despite December traffic improving 4.5% from a year earlier. Passenger demand for the full year was down 3.5% compared with 2008, with the load factor hitting 75.6% on average. Freight showed a full year decline of 10.1% and a load factor of 49.1%. (1/27, #4)
  • The US auto and truck fleet has apparently peaked and started to decline. Cars scrapped exceeded new car sales in 2009 for the first time since World War II, shrinking the US fleet from the all-time high of 250 million to 246 million…Parents can no longer afford to buy cars for their kids. And with teenage unemployment at the highest rate in history, kids cannot afford to buy their own cars. (1/26, #16)
  • Saudi Arabia does not expect any global climate change pact soon because current proposals lack fair burden-sharing and would hit oil exporters unfairly, the country’s top climate negotiator said on Sunday. (1/25, #7)
  • Climate change may be an “accelerant of instability” in future conflicts, and the U.S. military needs to plan for possible environmental catastrophes and resource wars, according to the Pentagon’s soon-to-be-released master strategy document. (1/28, #19)
  • President Obama, acting on a pledge to support nuclear power, will propose tripling U.S. loan guarantees for new reactors to more than $54 billion. Industry groups have said the loan guarantees are critical to reviving the industry because most companies can’t afford the $9 billion capital investment in a facility that can take a decade to build.(1/30, #15)
  • Secretary of State Clinton said the Chinese government is coming under pressure to recognize how Iran, on which it relies for oil, may destabilize the region with its nuclear program. (1/30, #6)
  • In Vermont, levels of radioactive tritium have risen rapidly in recent weeks in the groundwater surrounding its sole nuclear power plant, leading both longtime supporters and foes of the reactor to question whether it will be allowed to keep operating. (1/29, #21)
  • International mergers and acquisitions to gain access to uranium mines are set to rise as countries seek to strengthen fuel security to power new nuclear reactors, Nomura International said in a report. (1/26, #17)
  • General Motors said on Tuesday that its Chevrolet Volt, an electric car with extended range via an onboard gas generator, would be launched later this year in three markets, including Washington. Nissan, meanwhile, is highlighting its Leaf, an electric car that the company says is expected to go on sale in December. Ford’s first fully electric vehicle, a work van known as the Transit Connect, will be available later this year. (1/27, #21)
  • Nissan, Japan’s third-largest carmaker, closed on a $1.4 billion loan from the U.S. Energy Department that will be used to retrofit facilities in Smyrna, Tennessee, for making electric cars. (1/29, #23)
  • Think, the Norwegian electric automaker, announced a deal this week with a California company, AeroVironment, a maker of electric vehicle charging stations, to introduce fast-charging stations that can charge its battery-powered City car to 80 percent capacity in as little as 15 minutes. But utilities — concerned that fast-chargers (at 440 volts vs. 110 volts for household current) could overload the electricity grid — are cautious. (1/30, #25)
  • Maine has been heavily involved in generating power from wind, and now Gov. John Baldacci is drawing attention to a plan to create ammonia as a green energy source from wind power. (1/25, #33)