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1. Prices and Production

Oil prices which have been stuck in a range between $70 and $85 for months traded as high as $85.22 on Thursday, a 23 percent increase since February and close to the highest prices seen since the great 2008 oil price spike. Wholesale gasoline prices in NY also closed at the highest level seen since October 2008. Continued high Asian demand and new figures showing increasing industrial production were behind the increases.

Oil price analysts are in a quandary over what is likely to happen next. Some note that US demand remains flat, that US inventories are rising, and believe that the Saudis, who continue to proclaim their allegiance to $70-80 oil and claim to have another 4 million b/d of spare productive capacity, will boost production if prices get much higher. Others, recognizing an obvious trend, are talking of oil rising into the $90s either soon or before the year is out. Most, however, fearful of projecting a steeper economic downturn, remain confident that oil will not climb back above $100 a barrel, threatening the prospects for economic growth and reducing demand for oil products. Goldman-Sachs’ forecast for oil at $96.50 within 12 months is an example of such reasoning.

US gasoline prices are even more of a problem for prognosticators. For this last five years, US gasoline prices have risen 24 percent between March and May, suggesting that average prices could be well above $3 a gallon by Labor Day. Some analysts, fearful that very high gasoline prices would cause economic damage, are trying to make the case that high inventories and high unemployment will combine to keep the traditional summer prices increase from occurring this year. Gasoline prices are already costing US motorists $300 million more a day than at this time last year.

OPEC production in March apparently fell for the first time in a year on a 200,000 b/d slump in Iraqi output. Tanker rates for moving crude from the Middle East to Asia continue to climb as the volume of shipments on that route continues to climb.

2. China shifts on Iran

The most interesting geopolitical news last week may be the apparent shift in Beijing’s policy on sanctions against Tehran for its nuclear programs. The announcement that Chinese President Hu will attend a multi-nation summit on nuclear security in Washington sent Iranian officials scurrying off to Beijing to plead their case. The Chinese, who buy large amounts of oil from Tehran, have been reluctant to support meaningful sanctions. It has long been thought that without Chinese support, tough sanctions, such as an embargo on gasoline sales to Tehran, would fail.

The reasons for China’s change of heart are as yet unknown, but have been hinted at in official pronouncements for several weeks. One possibility is a report that an Iranian scientist with detailed knowledge of nuclear programs defected to the US and provided information on Tehran’s intentions regarding nuclear weapons. As part of the deal the US apparently is going to back off on outspoken support for Tibet and Taiwan as well as efforts to brand China as a currency manipulator.

With China joining Russia, the US, the EU and probably many others in enforcing tough sanctions, Tehran will be faced with a serious problem. In the past they have threatened to cut back oil exports sufficiently to drive up prices and harm the global economy. Reduction of exports could in theory be countered by the Saudis and other OPEC members pulling out all production stops.

Other Iranian retaliatory moves could be to provoke more trouble in Iraq or for the Israelis, or to threaten shipping in the Straits of Hormouz. It seems likely that, no matter what happens, simply

moving the Iranian nuclear issue off center where it has rested for many months threatens higher oil prices one way or another.

3. A busy week in Washington

The announcement by the Obama administration that it will support and move quickly to permit drilling for oil and gas off portions of the east coast, in the Gulf of Mexico and parts of Alaska is widely seen as an effort to gain support for climate change legislation. Environmental groups worried about oil spills denounced the decision; pro-drilling advocates offered muted support.

While many doubt that there are significant commercial quantities of oil off the East Coast, prospects in the Eastern Gulf of Mexico and the northern shore of Alaska are more favorable. Some 35 wells were drilled in the Baltimore canyon 100 miles southeast of Atlantic City in the 1970s and 80’s without finding significant quantities of oil. In any case it will be decade or more before oil found could be produced in quantity from the newly opened areas. By then, global oil production is likely to be in decline and some form of emission controls could be in place changing the paradigm and business model for oil production. [For more, see the attached Commentary]

In a companion move, the administration announced new rules that would require new cars to average 35.5 mpg by 2016.

4. World Energy Conference

Last week the International Energy Forum, which is the world’s largest gathering of Energy Ministers, met at Cancun, Mexico. The meeting took place amid a major change in world oil flows, with demand stagnant in the traditional heavy consumers of oil in the OECD countries and demand growing rapidly in Asia and the oil producing nations.

Among the issues considered at the meeting was the peaking of global oil production. A paper presented the current IEA and OPEC projections that global oil production will reach 111 million or 113 million b/d in 20 years. Another possibility, that oil production will be constrained to below 100 million b/d, was also considered. The peak oil community’s assessment that the all-time peak for oil production is likely to be in the vicinity of 90 million b/d is apparently still too radical for the ministers.

The upshot of the meeting seems to be an effort to understand and control the volatile oil prices we have seen in recent years and a declaration of an “enhanced global producer-consumer energy dialogue.” This apparently is a call for greater transparency both in the supply situation in many countries plus in Beijing’s consumption and stockpile situation.

Quote of the Week

  • “How much longer can the world pretend that it won’t soon be facing another energy shock, one every bit as challenging as the one it faced two years ago? Whether we are talking about supply or demand, there is nothing on the horizon to prevent the imminent return of the very same oil prices that put us into the deepest postwar recession yet in the first place.”

— Jeffrey Rubin, consulting economist, author and commentator

Energy Stat of the Week

U.S. oil consumption declined 9% since 2007, from 20.7 million b/d to 18.8. By contrast, China’s oil consumption rose from 7.6 to 8.5 mb/d. Chinese demand for oil should continue climbing through 2011, even as American consumption remains nearly flat. China obtains some of its oil domestically, but must import a growing share. In 2007, the country produced 3.9 mb/d and imported 3.7 mb/d, but that proportion is changing rapidly. By 2020, it is projected to produce only 3.3 mb/d, while importing 9.1 mb/d. (from Michael Klare, EIA data)

The Briefs (clips from last week’s Peak Oil News dailies are indicated by date and item #)

  • Glen Sweetnam, an official with the US Energy Information Administration, admitted that “a chance exists that we may experience a decline” of world liquid fuels production between 2011 and 2015 “if the investment is not there.” (3/29, #16) [Editors’ note: a source at the EIA told us that Sweetnam was quoted out of context for this article, and that neither he nor the EIA sees peak oil as likely during the next two decades. A comforting fantasy view…]
  • OPEC chief Abdalla Salem El Badri last Monday said the cartel’s members have restarted $165 billion worth of drilling investments that went dormant during the recession. The IEA estimates that oil drilling investment globally is expected to come in at about $330 billion this year, a rise of about 7% from 2009 when investment collapsed almost 20%. (3/31, #6) El Badri also said Monday that the cartel continues to support price levels between $70 and $80 per barrel, despite a recent spike above that range. (3/31, #8)
  • Russia, supplier of about 12 percent of the world’s oil, increased crude production in March to a post-Soviet record as TNK-BP tapped deposits and OAO Bashneft’s new owners squeezed more crude from older fields. Crude output reached 10.12 million barrels a day, a gain of 3.3 percent from the same month last year and 0.4 percent from February. Exports rose 3 percent on the month to 5.38 million barrels a day. (4/3, #1)
  • BP awarded about $500 million in contracts to drill wells in Iraq’s giant Rumaila oil field, kicking off a huge push by foreign oil companies to revive the country’s troubled energy industry. The program’s success–or failure–could be the difference between a tight oil market struggling to meet rising Asian demand amid triple-digit prices and a well-supplied market with oil steadily trading below today’s roughly $80 price. (3/31, #13)
  • Iraq is only likely to achieve around half its target of growing oil production to 12 million barrels a day in the next six or seven years due to political, security, operational and infrastructure challenges, CERA said Wednesday. (4/1, #4)
  • Former Iraqi Prime Minister Allawi said on Wednesday he would honor deals signed with global oil majors in recent months and would move quickly to pass a new hydrocarbons law if his bloc forms the government. (4/1, #5)
  • Gunmen wearing Iraqi military uniforms raided homes in a Sunni village south of Baghdad, killing at least 24 people, including five women, execution-style. Many fear long negotiations to form a government could spill over into violence and complicate American efforts to speed up coming U.S. troop withdrawals. (4/3, #3)
  • Russia’s PM Putin visited Venezuela on Friday to sign a series of military and oil agreements with President Hugo Chávez, who is seeking to expand ties with Russia as a way of countering the influence of the United States in Latin America. (4/3, #5)
  • The UK reported its December 2009 production by field. Total oil production was down quite a bit from Dec ‘08, by about 200,000 b/d. (4/3, #17)
  • Mexican Energy Minister Kessel said that state oil monopoly Petroleos Mexicanos needs the help of international oil companies, like the ones attending the International Energy Forum here, in order to reverse the decline in its crude output. (4/3, #7)
  • Desire Petroleum Plc slumped in London after reporting disappointing drilling results from a well near the Falkland Islands, where exploration has provoked a diplomatic row between the U.K. and Argentina. (3/29, #8)
  • The US EPA has given Shell approval to explore in Alaska’s Chukchi Sea. Shell paid $2.1 billion in 2008 to explore there for oil and natural gas. The Minerals Management Service estimates the sea could hold recoverable reserves of 15 billion barrels of oil and 77 trillion cubic feet of natural gas. (4/3, #11) [See this week’s Commentary]
  • Cnooc Ltd. Chairman Fu Chengyu plans to buy more oil and gas assets to supply China’s surging economy after the March purchase of a $3.1 billion stake in Argentina’s Bridas Corp., the company’s largest overseas acquisition. (4/1, #17)
  • PetroChina plans to spend at least $60 billion in the next decade on overseas acquisitions, challenging Exxon Mobil Corp. and BP Plc in the race to control oil and gas fields. (3/29, #9)
  • With China adding at least half a million b/d of crude processing units every year until 2015, it is producing diesel faster than the country’s double-digit growth can absorb it. (4/2, #12)
  • Some of the misinformation being peddled by the media today can be dispelled by breaking down three common myths: #1–natural gas will solve our energy problems; #2–new oil discoveries are solving the oil crisis; and #3–peak oil has been disproved. (4/3, #20).
  • A sudden deluge of reports and summit meetings suggest that the oil industry and energy officials are now taking peak oil very seriously indeed. (4/3, #21)
  • The offshore US Atlantic Continental Shelf could contain 3.8 billion barrels of oil and 137 trillion cubic feet of natural gas. First production could be as early as seven years in the area that the Obama Administration announced will be open to exploration, but any current estimates are still very preliminary, according to Cambridge Energy Research Associates (CERA). (4/2, #16) [Editors’ note: see this week’s Commentary.]
  • The north slope of Alaska is a mature field that has been in decline, at a rate of 4.9% per year, since production peaked in 1988. Because it is a significant contributor to US production, its decline rate is of special interest. (3/31, #25)
  • Chevron said crude-oil and natural-gas production has started at Perdido, located in the deepwater Gulf of Mexico. Production using the Perdido hub, which is 60 miles beyond any existing developments in the Gulf, is expected to reach full capacity of 130,000 barrels of oil-equivalent a day after the drilling of additional wells. (4/1, #22)
  • Contracting for new floating production systems has reversed. Jim McCaul, head of International Maritime Associates said the market touched bottom in fourth-quarter 2009. Since then the industry has placed orders for nine production floaters and four floating storage units, well above the long-term average order pace. (3/31, #11)
  • The number of US oil and gas rigs climbed to 1,465, up 21 rigs from the previous week, according to Baker Hughes Inc. The number of gas rigs was 949, an increase of eight rigs from last week, while the oil rig count was 502, an increase of 13 rigs. (4/2, #18)
  • Ukraine’s new leadership said on Friday it was inviting Russia to join the European Union in a plan to revamp Ukraine’s gas pipeline network, which carries crucial supplies of Russian gas to Europe. The move appeared to be a concession to Moscow. (4/3, #18)
  • Combining the effects of combustion, production, distribution, and leaked methane from hydraulically fractured natural gas gives the fuel about the same greenhouse gas emissions as coal and about 30 percent more than diesel or gasoline, Cornell University researcher Robert Howarth says in the draft paper published in mid-March. (4/1, #20)
  • What’s going on in the natural gas industry, where companies are openly violating a basic principle of supply-side economics? In many gas-rich areas of North America the number of rigs drilling is still rising while the price of natural gas continues falling. (3/31, #21)
  • Chesapeake Energy Corp.’s plans to pull back on drilling while natural-gas prices are lower serve as a warning shot for drilling contractors still reeling from the economic downturn. The company announced it will idle 20 of its 118 drilling rigs if prices stay below $5. The number of rigs drilling for gas peaked in September 2008 at 1,606 rigs, fell to a low of 665 by mid-July 2009 but had recovered to 941 rigs last week. (4/1, #21)
  • Halliburton and Schlumberger, trying to forestall a regulatory crackdown that would cut natural-gas drilling, are developing ways to eliminate the need for chemicals that may taint water supplies near wells. (3/30, #14)
  • In the Barnett shale, most reserve predictions based on hyperbolic production decline methods were too optimistic when compared with production performance. Average well life is much shorter than predicted, and the volume of the commercially recoverable resource has been greatly over-estimated. There are many lessons we can learn from the Barnett Shale, and they all suggest a cautious approach to developing new shale plays. (3/31, #22)
  • US natural gas producers are finding they have more gas than they can move through existing pipelines because of booming production in the nation’s new shale-gas regions, such as the Barnett and Haynesville formations. If bottlenecks multiply, that will help drive industry growth. (3/31, #24)
  • Persian Gulf states face crippling shortages of energy, water and food unless resource management is overhauled now, says a study by New Economist Intelligence Unit. Blackouts and brownouts are already common during peak times, and energy subsidies represent an increasing cost for gulf national governments. (4/2, #10)
  • In Uganda, a shortage in petrol supplies has left the entire country paralyzed. The shortfall, which started two weeks ago, has spread countrywide leaving several filling stations closed and causing agony for transporters and passengers in most towns. (4/2, #11)
  • Venezuela’s government may face a cash crunch as early as this year as oil production slumps amid stable prices, Morgan Stanley said in a report. The country, which depends on crude for revenues, has seen output plunge to 2.2 million barrels a day from 3.7 million in 1997. Venezuela now faces the risk that oil prices won’t rise enough in coming years to offset declines in production, forcing it to use savings to fund spending. (3/31, #17)
  • The worsening drought in southwest China could force the Longtan hydropower station, the country’s second largest, to halt power generation in another month. The plant generated 30 percent less electricity in 2009 than in normal years and 59 percent less in the first quarter of 2010 than in the same period last year. It generated 13 billion kWh of electricity last year for Guangxi and neighboring Guangdong province. (3/31, #19)
  • Britain faces the worst energy crisis in Europe, according to the boss of one of the biggest power companies. To keep the lights on, it will have to build at least two large power plants per year, something it has never done in its history. (3/29, #10)
  • The 2011 Nissan LEAF electric vehicle, which becomes available for purchase or lease at Nissan dealers in select markets in December and nationwide in 2011, will sell for $32,780, before the $7,500 federal tax credit. The consumer’s after-tax net value of the vehicle will be $25,280, less in some states. Nissan will begin taking consumer reservations for the LEAF April 20. (3/31, #28)