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Download Full PDF: Peak Oil Review 02/04/13

1. Oil and the Global Economy

Oil prices continued to rise last week with Brent crude closing at $116.76 on Friday, only a few dollars below the highs set in the spring of 2011 and 2012. New York crude, which is still held down by the glut of tight oil and Canadian crude in the Midwest along with seasonal refinery maintenance,  closed at $97.89 on Friday, up $1.89 for the week as compared to the $3.84 increase in the price of Brent.

Optimism over growth in the US, Chinese, and Germany economies, coupled with concerns about the deteriorating situation in several Middle Eastern countries, is behind the move.  Prices were helped by a stronger Euro and the Federal Reserve’s announcement that it will continue purchasing $85 billion a month worth of securities in an effort to stimulate the economy. Unlike all the concern over higher taxes that would ensue if the US went over the “fiscal cliff” last month, the prospect of large automatic cuts in federal spending on March 1st seems to be generating little concern in the Congress.

After falling precipitously from the short-lived 2008 price spike of over $140 a barrel, Brent fell to nearly $60 a barrel in the winter of 2009. It then climbed slowly over the next two years to a high of about $117 in the spring of 2011 and has traded in a range of $95-$118 since then. As prices once again approach the high end of the recent trading range, commentators are opining about where we go from here. Most are talking about a pull-back in prices, citing various technical resistance points. These people, of course, realize that as oil prices move higher, economic damage is likely to hurt the prospects for growth in the near future. Most major financial institutions remain hopeful that oil will not rise much further and this is reflected in forecasts talking of little change in average oil prices during the coming year. Pessimists, looking at the growing chaos across much of the Middle East, are expecting oil to eventually move to new highs, with the possibility of it hitting $150 a barrel in the next six months.

Gasoline and distillate prices continue to rise along the US coasts while remaining relatively low in much of the midsection of the country. Most of this is due to refinery outages and other disruptions. NY gasoline futures closed at $3.05 on Friday, well above the highs seen in the spring of 2011 and 2012.  Nationwide gasoline prices are up 20 cents a gallon in the last month to an average of $3.50 for regular and once again pushing $4 a gallon in high-cost states.

US natural gas prices halted a six-session decline on Wednesday on new forecasts of colder weather ahead.

2. Middle East – North Africa

Week by week turmoil across the Middle East is increasing, bringing us ever closer to the time when there could be significant reductions in oil exports from the region. Iraq seems on the brink of civil war; the situation in Syria continues to deteriorate; in the Maghreb, al-Qaeda is threatening more attacks on oil and gas facilities; and Libya seems to be on the verge of breaking apart.

Iraq: Last week the situations surrounding the multiple confrontations going on in Iraq continued to deteriorate. Prime Minister al-Maliki is simultaneously confronting the Kurds who want the right to exploit what they consider their own oil without interference from Baghdad and the Sunnis – about 35 percent of Iraq’s population — who believe they are being discriminated against by the al-Maliki Shiite government and have been conducting demonstrations for the past three weeks. Add to this Iraq’s branch of al-Qaeda who continues to blow up government buildings and security forces at a steady pace – they claim 82 attacks in the last few months; the Iranian government who is seeking to dominate the Shiite-run country; international oil companies eager to make money; the waning remnants of US influence; and a dysfunctional parliament. The whole place would be a joke, except the place has large untapped oil reserves, aspirations to become the next Saudi Arabia of OPEC, and is seen as the backbone of OPEC oil exports well into the next decade.

Last week the Sunni-Baghdad confrontation took a serious turn when government troops fired on Sunni demonstrators blocking highways through Sunni provinces killing five demonstrators. This action increased the number of Sunni demonstrators from thousands to tens of thousands and led to an al-Qaeda call for the Sunnis to take up arms against the government. On Sunday suicide bombers blew up police headquarters in Kirkuk, killing dozens and wounding more than 80, mostly police officers.

For now the government has pulled back its forces from the Sunni demonstrators to avoid further confrontations, but in the longer run al-Maliki has few good options to satisfy Sunni demands and many are saying the country could be drifting towards civil war with serious consequences for oil production.

In the confrontation with the Kurds, Baghdad is continuing to work on a deal to have BP rehabilitate the declining oil fields in the disputed area around Kirkuk. The Kurds, who have significant military forces, have warned BP not to drill for Baghdad in the Kirkuk oil fields until a settlement is reached. In the meantime, Baghdad has warned Exxon that it can’t have it both ways and must either stop working for the Kurds or stop working in Iraq’s southern oil fields.

The Kurds say they are producing some 400,000 barrels of oil per day and after local refining needs are met, have some 250,000 b/d available for export. They were exporting 200,000 b/d via the Baghdad-controlled northern pipeline, but this was halted over a dispute about payments late last year. Some oil currently is being trucked out of Kurdistan to Turkey and Erbil is talking about resuming exports of about 35,000 b/d through the northern pipeline. Baghdad is expected to start legal efforts soon to halt the Kurds direct oil exports to Turkey.

Iran: There was little movement in the nuclear confrontation last week. Both sides continue in accuse the other of intransigence. US Vice-President Biden has raised the possibility of direct Washington-Tehran talks to settle a range of issues between Iran and the West.  On Sunday Iran’s foreign minister said Tehran was ready for direct talks provided the West had serious proposals. Some see such direct talks as the only path to progress on the nuclear issues and believe that for now Iran is only stalling for time in the current negotiations overseen by the EU.

Tehran told the UN nuclear inspectors last week that it plans to install more sophisticated equipment at its principal uranium enrichment plant enabling it to speed up production of enriched uranium several fold — a move that will cause much consternation in Israel and the West.

Iranian oil exports had a good month in December as the Chinese increased their imports of Iranian oil. However, most observers believe this was a one-time jump and that Iranian exports will continue to drop in the months ahead. Some note that the increasing price of crude is helping Tehran weather the sanctions.

At the minute, Tehran has a lot on its plate. Not only is it trying to cope with the deteriorating position of its allies in Syria and Lebanon, last week Iran was caught trying to smuggle portable surface to air missiles to Yemeni insurgents – a major escalation in the Middle Eastern situation as these missiles can easily be used to shoot down civilian airliners.

Egypt: Although Egypt no longer exports oil or natural gas, its control of the Suez Canal and the parallel Su-Med oil pipeline means that it could have a major impact on world oil supplies and prices should these vital arteries be closed due to civil unrest. As the largest country in the Arab world, the fate of Egypt will have a major impact on the whole region. Last week Egypt’s President declared a state of emergency in three cities along the canal in the wake of rioting over deaths in a soccer riot last year. By mid-week large demonstrations had spread across the country and the Army’s Chief of Staff was saying that the political strife was pushing the country towards the brink of collapse.

The demonstrations in which at least 50 protestors died continued for most of last week amid calls for President Morsi to step down. Behind the continued protests, however, is a deteriorating economic situation which means the confrontations could continue indefinitely.

Despite the turmoil, traffic through the 120 mile Suez Canal, which handles some 18,000 ships a year, about 8 percent of world trade, and earns Egypt $5 billion in tolls annually, seems to be moving normally as the canal is under the supervision of the Egyptian Army. Strikes at the canal’s piers which provision transiting ships are causing some disruptions however. There is no end in sight to Egypt’s troubles which seem likely to increase as the political and economic situation deteriorates.

Syria: Another step towards a wider Middle East war took place last week when Syria attempted to send a convoy of weapons, possibly surface to air missiles, to Hezbollah in Lebanon. This action crossed an Israeli “red line” and Tel Aviv promptly bombed the convoy inside Syria. As nobody really wants to take on the Israelis right now, Damascus, Tehran, Moscow, and Hezbollah retaliated with a storm of denunciations and threats of retaliation at a later date. Tel Aviv deployed at least one “iron dome” missile defense system in northern Israel as protection against rockets fired from Lebanon.

Washington warned last week that Tehran is stepping up its support for Assad by sending “more personnel” to train and advise Syria’s army and security forces. Tehran has made it clear for some time that keeping Assad in power is one of its highest priorities.

In the meantime, the civil war continues to go badly for the Assad government with slow but steady rebel gains in several regions. The food situation is getting worse, millions have been forced from their homes and at least 700,000 refugees are huddled in tents just beyond Syria’s borders. To their credit a number of the richer Arab states are coming up with enough money to feed many of the refugees. Although Moscow continues to send money and probably arms to Syria, even Prime Minister Medvedev is beginning to sound pessimistic about Assad’s prospects.

Concern over the shape of a post-Assad government continues to grow. With dozens of groups of all political stripes involved in the uprising, the prospects for formation a stable government for Syria do not appear good. Summary executions of captured opponents by both sides seem to be on the rise, indicating that the animosities growing out of this war are likely to last for decades and spill into other countries.

Algeria: In the aftermath of the insurgent attack on the natural gas plant two weeks ago, it now seems that the insurgent goal was to blow up the facility in a giant fireball with all the foreign employees inside as a warning. As the plant had been shut down as soon as the first warnings were given and the insurgents did not have the technical expertise to blow up such a large facility, little damage was done. It now seems as if one or more former employees of the facility took part in the attack.

Last week a new attack against another pipeline, this time in northern Algeria, resulted in the killing and wounding of several guards, but did little damage to the pipeline.

The attacks are already having repercussions across the oil industry with foreign oil companies becoming increasingly concerned about sending their employees to poorly guarded desert oil and gas facilities. Norway’s Statoil lost five of the 17 employees it had at the facility. The attack in southern Algeria took place only 30 miles from the Libyan border where there has been little law and order since the overthrow of the government. In the long run exploiting oil from remote sites in the Sahara is likely to be slower and more costly as foreign experts will be more difficult to attract and the costs of their security will be much higher.

Libya: In the wake of the assassination of the US ambassador in Benghazi last September the security situation there has deteriorated markedly. Amid a rising tide of assassinations, kidnappings, and bombings of security officials, several western countries have warned their nationals to stay away from the city. Many former anti-Gaddafi rebels have joined the numerous militias that now have more manpower and firepower than the government’s police forces.

As the city becomes more estranged from the central government in Tripoli, talk of another revolution is increasing. The people of Benghazi would like to see some benefit from the oil money which they believe is largely staying in Tripoli. They would also like the headquarters of Libya’s national oil company returned to the city where it was before Gaddafi moved it 600 to Tripoli.

Libya’s oil minister recently put the country’s oil production at 1.1 million b/d, down from 1.6 before the revolution. Although the minister has plans for higher production in the future, the current security situation and the political mood in the country suggest that further gains may be difficult to obtain.

Quote of the week

“The United States spent roughly $430 billion dollars on foreign oil in 2012. This is a direct wealth transfer out of our country. Many billions more are spent to keep oil shipping lanes open and oil geo-politics add considerable additional burdens. Although our oil imports are projected to fall to a 25 year low next year, we still pay a heavy economic, national security and human cost for our oil addiction.”

– U.S. Energy Secretary Steven Chu

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

  • U.S. exports of gasoline to Venezuela climbed to a record high of 85,000 barrels a day in November. The volume of gasoline shipped to the South American member of OPEC was more than double the October level of 39,000 barrels a day and topped the previous record of 68,000 barrels a day set in September. (2/2, #13)
  • U.S. crude oil imports fell 6.8% in November from a year earlier, to 8.13 million barrels a day. Imports were modestly higher than the October average of 8.091 million barrels a day. (2/2, #16)
  • Carbon dioxide emissions fell by 13% in the past five years, because of new energy-saving technologies and a doubling in the take-up of renewable energy. The reduction in climate pollution – even as Congress failed to act on climate change – brings America more than halfway towards Barack Obama’s target of cutting emissions by 17% from 2005 levels over the next decade. (2/2, #17)
  • Oil production from Alaska’s North Slope dropped 7.9 percent in January from a year earlier as output from wells declined and new ones weren’t added. Production averaged 576,959 barrels a day last month, down from 626,155 in January 2012. December output was 582,150 barrels a day. Alaska’s North Slope has been yielding less oil every year since 2002 as output from wells naturally declines. (2/2, #20)
  • Oil rigs in the U.S. advanced to the highest level since December as energy producers, responding to a $10-a-barrel rise in crude prices over the last three months, picked up drilling activity in shale plays. The oil rig count rose by 17 to 1,332, the biggest weekly gain since June. (2/2, #21)
  • Brent crude, which gained the most in five months in January, may slow its advance in London as prices reach technical resistance starting at $118 a barrel, according to Societe Generale SA. (2/1, #4)
  • Iran is still plugging away at building a natural gas pipeline to energy-hungry Pakistan, a project that’s been plagued by difficulties. The problems include determined U.S. efforts to halt the project as part of Washington’s drive to isolate the Islamic Republic, successfully forcing India out of the project in 2009, and Pakistan’s perennial lack of funds. (2/1, #7)
  • Saudi Prince Muqrin bin Abdulaziz, a special adviser to King Abdullah and Saudi Arabia’s former intelligence chief, was appointed second deputy prime minister, potentially placing him second in line to the throne. (2/2, #6)
  • Six years after the Panama Canal began a $5.25 billion expansion to capture shipments of Asian- made goods to the U.S. East Coast, the flow of liquefied natural gas in the opposite direction promises to be a better bet. Shipments of the fuel, along with rising commodity and energy cargoes between the U.S., Latin America and Asia, are likely to provide the largest sources of demand growth when the project is complete in June 2015. (2/1, #19)
  • China uses almost as much coal in a year as the rest of the world combined, says the U.S. Energy Information Administration. China’s consumption of the carbon-intensive fuel increased 9 percent in 2011, to 3.8 billion tons. (1/30, #14) (2/1, #22)
  • Canada’s oil reserves helped buoy the country’s currency during four years of financial-market turmoil. Now, those oil supplies, Canada’s biggest export, are becoming a liability for the Canadian dollar, even as crude prices globally have stayed high. (2/1, #30)
  • The extent of the oil-production outage that contributed to tipping the U.K. economy into a fourth-quarter contraction was laid bare as official statistics showed production of crude fell nearly 30% in the three months to November. Production of petroleum fell a record 27.9% compared with the same period the previous year. (2/1, #32)
  • The world’s biggest oil companies are failing to convert the highest Brent crude prices ever into record profits as production costs climb and U.S. natural gas prices languish. The London-traded benchmark for two-thirds of the world averaged $111.68 a barrel in 2012, up 0.7 percent from a then- record in 2011 and more than double the price in 2006. At the same time, oil and gas producers have lagged behind other industries in stock markets as profit growth failed to keep up. (1/31, #6)
  • A Dutch court has rejected four out of five allegations against Anglo-Dutch oil giant Shell over oil pollution in Nigeria’s Niger Delta region. But it found a subsidiary of the firm, Shell Nigeria, responsible for one case of pollution, ordering it to pay compensation to one Nigerian farmer. (1/30, #11) (1/31, #15)
  • China’s oil demand in 2013 is expected to rise to 514 million metric tonnes, up 4.8 percent, a research institute affiliated with China National Petroleum Corp., the country’s biggest energy producer, said. (1/31, #16)
  • China has lifted a ban on controversial hydropower development on the Salween River. The decision was included in a recently released notice from China’s state council that more than 60 new hydroelectric projects on three major rivers would move forward under the government’s 12th 5-year plan, which covers the years 2011-15. (1/31, #20)
  • Hess Corp’s decision to close its U.S. East Coast refinery, the latest plant to fall victim to weak profits in the Atlantic Basin, could threaten painful gasoline price spikes for regional drivers as local fuel supplies dwindle further. Hess will shut the 70,000-barrels-per-day Port Reading, New Jersey plant in late February, as part of a larger restructuring, the company said. (1/31, #24)
  • The City of Light is about to get dimmer. As of July, all shops and offices in France will have to shut off their lights at night, under a government decree issued. The decree, from the Environment Ministry, is intended to save energy and “reduce the print of artificial lighting on the nocturnal environment.” (1/31, #29)
  • U.S. companies installed a record amount of wind power in 2012, according to an industry study, but new construction has nearly halted because Congress waited until the last minute to extend a wind-power tax credit. (1/31, #32)
  • Chinese Premier Wen Jiabao called for action to alleviate pollution, representing the highest-level acknowledgment to date of hazardous air-quality levels across much of China in recent weeks. (1/30, #12)
  • Chesapeake Energy Corp.’s departing chief executive officer will leave to his successor a shrunken, cash-starved version of what was once the preeminent natural gas producer in the world’s biggest market for the fuel. Aubrey McClendon’s agreement to resign effective April 1 culminated a shareholder revolt by Carl Icahn and Southeastern Asset Management Inc.’s O. Mason Hawkins that earlier had cost the CEO the chairmanship he’d held for more than two decades. Chesapeake lost as much as 43 percent of its market value in 2012 as scrutiny of McClendon’s financial transactions destroyed investor confidence in management and cratering gas prices drained the company of cash. (1/30, #18)
  • Almost 800 barges are backed up in the southern portion of the Mississippi River while an oil spill is cleaned up, the U.S. Coast Guard said. Traffic has been halted at Vicksburg, Mississippi, since Jan. 27 when a towboat with two barges ran into a railroad bridge, spilling oil from a tank containing 80,000 gallons of light crude. (1/30, #19)
  • Valero Energy Corp. is considering using barges and rail to move Canadian oil to the Gulf Coast as the government weighs approval of the Keystone XL pipeline. (1/30, #23)
  • Ethanol-blended gasoline approved for use in most U.S. vehicles may damage car engines by harming fuel pumps, according to a study funded by oil refiners and automakers. (1/30, #21)
  • A federal appeals court threw out a federal rule on renewable fuels, saying that a quota set by the Environmental Protection Agency for incorporating liquids made from woody crops and wastes into car and truck fuels was based on wishful thinking rather than realistic estimates of what could be achieved. The ruling by the United States Court of Appeals for the District of Columbia involved a case brought by the American Petroleum Institute, whose members were bound by the 2012 cellulosic biofuels quota being challenged. (1/28, #16)
  • OPEC’s deepest output cut since the global recession in 2008 is creating the biggest surplus of oil tankers in the Persian Gulf in at least three years and lowering earnings for Frontline Ltd. and other ship owners. (1/29, #5)
  • Days of riots over the construction of a 310-mile Chinese-funded natural-gas pipeline in Tanzania have left seven people dead, but the development will continue. The riots mark an escalation of local tensions as the East African nation attempts to start exploiting recently discovered offshore natural-gas reserves. (1/29, #19)
  • Venezuela’s government announced plans to have the state oil company turn over more of its earnings in dollars to the Central Bank, seeking to confront shortages of some foods and other products that have worsened due to a lack of dollars provided to importers at official rates. (1/29, #20)
  • Russia has hit Ukraine with a $7 billion bill for gas deliveries just as Kiev took a step toward greater energy independence by signing a deal with Royal Dutch Shell PLC to explore for shale gas. The bill is for gas that Ukraine didn’t take in 2012 but that Russia says it is obliged to pay for under a “take-or-pay” clause in the contract. (1/28, #20)