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Peak Oil Review

1. Oil and the Global Economy

After climbing from $89 to $91 a barrel on Monday, NY oil prices traded in the vicinity of $91 a barrel for the remainder of the week closing at $91.54 on Friday. In London, however, Brent crude continued to move ahead, expiring at $98.68 a barrel on Friday after touching a high of $99.20.

Gasoline prices in NY continued to climb, closing on Friday at $2.49 a gallon. The average national retail price for regular gasoline now is just shy of $3.10 a gallon. The spread between NY and London crude has widened to over $7 a barrel, the largest difference in nearly two years. A supply glut at Cushing, Oklahoma, fuel depot is believed to be the cause of the weaker prices in New York.

The week’s trading was affected by a stronger euro, an unexpected drop in US crude inventories, the temporary closing of the 600,000 b/d trans-Alaska pipeline, fiscal tightening in China, increasing US unemployment, cold weather in Europe and the US, and what some believe is an improving outlook for US economic growth. The net balance of these forces was to move oil prices 4 percent higher for the week.

Despite the strident “no meeting” rhetoric coming from various OPEC ministers – the Saudis say $90, the Libyans and Kuwaitis say $100 and the Iranians are saying even $120 a barrel won’t trigger a special OPEC meeting – the Saudis continue to slowly bump up production. Overall OPEC production in December was up by 170,000 b/d over November. The work that the foreign oil companies are doing to revitalize the Iraqi fields will help push up production for a while, but large new infrastructure investments will soon be needed to achieve further gains in production.

Attention continues to focus on China, where the IEA forecasts that the increase in production during 2011 will be only 4.8 percent vs. the 11 percent increase last year. Bad weather continues in China as do reports of power shortages. Beijing continues to tighten the economic screws in an effort to dampen inflation but various authorities continue to forecast an 8.5 percent GDP growth in China this year. Should Chinese coal production continue to grow steadily this year, Beijing might be able to achieve its growth goals without higher than the EIA-projected oil imports. If, however, coal production and imports, particularly from Australia, should falter as now seems likely, then importing more oil than forecast seems a feasible course of action.

As oil prices, at least in London, approach $100 a barrel, the number of organizations talking of much higher prices in the year ahead continues to grow. The technical analysts are now talking of “double tops” and “Fibonacci retracement” which could lead to testing the $110 and $120 per barrel price levels in the months ahead. Such talk is starting to bother Wall Street which is still counting on an economic rebound.

2. China’s coal production

Last week Reuters published a lengthy analysis of China’s coal industry. The report arrived at the surprising conclusion that unlike some of the “peak Chinese coal” talk that has been emanating from Beijing in recent months, China may be able to increase its coal production in the next decade to 4 billion tons per year or perhaps to over 5 billion tons per year from the current estimate of 3.2 billion tons. The impetus for this goal is that in order for China to keep growing its GDP at circa 10 percent a year, Beijing simply cannot afford to let coal production stagnate.

According to the analysts consulted by Reuters, Beijing currently has a widespread mine consolidation effort underway that will convert small, inefficient, accident-prone mines into major mining firms that will have the capital to install the latest mining equipment that can continue to increase production rapidly. One observer noted that “an expansion phase will naturally come after consolidation. With massive economies of scale and sophisticated technology, it would be no sweat for them to ramp up output by at least 10 percent a year.”

Some coal analysts consulted doubt that a cap on production in the 3.6-3.8 billion-ton range will be enforced if the alternative to more coal is shutting factories and turning off lights, which they do not see happening. Some analysts foresee more efficient use of coal as a way to keep the GDP growing without actually increasing coal production. Thousands of small coal burning facilities have already been shut down and this trend is expected to continue.

Much of the Reuters discussion sounds like the Cornucopians of oil production a few years back. China is already producing nearly half of the world’s coal from a resource base that is only 14 percent of the world’s total and will run out completely in 30-40 years if exploitation continues at anything approaching current rates. In these circumstances an increase to 5 billion tons a year seems unlikely.

The problem of moving 3 billion tons of coal each year from increasingly remote western mines is already overwhelming China’s rail and road network. The notion that the Chinese can increase coal transport by 50 or 60 percent in the next decade seems rather far-fetched. Moreover, China has already been increasing its coal imports. This allows the imported coal to be brought by ship directly to where it will be consumed, thus keeping the burden off the transportation system.

This issue bears close watching over the next few years, for either China’s domestic coal industry is starting to stagnate as the minable coal seams become thinner, deeper and farther away; or the new mine consolidation program will breathe fresh life into the industry. Either way the course of China’s coal industry is likely to have a significant impact on the country’s demand for imported coal and oil over the next few years.

3. The Australian floods

It will be some time before the implications of the Queensland flood are clear. Last week conditions grew worse as the flooding extended into Queensland’s capital of Brisbane and southward into the state of Victoria. As Queensland ships out about 60 percent of global metallurgical coal exports the prospects of badly constricted supplies for the next few months raises the issue of the damage that could be done to China’s, Japan’s, Korea’s, and India’s steel industries. Coking coal prices could easily surge to a new record and double the cost of producing a ton of steel.

As steam coal supplies, already tight because of flooding in Indonesia last year, grow tighter, there is the possibility that demand for oil could increase as an alternative source for generating electricity. Another scenario has industrial production sliding across much of Asia as steel production lags thereby temporarily reducing the demand for oil.

4. BP and Rosneft

In a bold move, BP and the state-controlled Russian oil company Rosneft announced a $16 billion share swap agreement that will give BP a 9.5 percent interest and Rosneft a 5 percent stake in BP. As part of the agreement the two companies will jointly develop three blocks in the Kara Sea off Russia’s north coast. Russian Prime Minister Putin suggested that the area may hold 36 billion barrels of oil. BP said that the area contained in the agreement was the size of the North Sea which contained some 60 billion barrels of oil and gas. Rosneft will own two-thirds of the new exploitation company and BP one third. BP of course brings considerable experience in deep-sea drilling to the joint venture which Russia lacks.

The deal is the first cross-shareholding agreement between a state-owned oil company and a western oil major. Washington is already voicing concern that the Russian government is now the largest shareholder in BP with one congressman saying that BP should be renamed “Bolshoi Petroleum.” The company is the largest supplier of petroleum products to the US Defense department.

The agreement comes as BP struggles to cover the estimated $40 billion cost of the Gulf oil spill. Last year BP announced that it was selling $30 billion worth of assets to cover the costs of the spill.

Quote of the week

“The recent discoveries of possible findings of oil have increased the debate on the issue of independence. It is a goal and every day we are coming closer to that.”

— Greenland’s Prime Minister Kleist, after a meeting with the Norwegian Foreign Minister

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

  • Shipping lines carrying raw materials are set for the lowest freight rates since 2002. Leasing costs for capesizes hauling iron ore and coal will drop 34 percent to average $22,000 a day this year. In 2002, China’s economy was 75 percent smaller, the S&P GSCI commodity index 67 percent lower. Shipbroker Clarkson expects seaborne trade to exceed 2 billion metric tons for the first time this year, a 7 percent increase. About 200 capesizes, spanning 35 miles, will leave shipyards this year, expanding the fleet by 18 percent. (1/11, #4)
  • Explorers intensified drilling in Asia last year using 11 percent more rigs. The Asia-Pacific region used an average 269 rigs on land and sea last year, accounting for 25 percent of last year’s global rigs. Rig usage in December was 282, last equaled in 1990. (1/11, #14)
  • Developing countries will contribute half of global growth this year and next year, according to the World Bank. It contends that East Asia and the Pacific, with GDP growth estimated at 9.3 percent for 2010, led the global recovery. It estimated that Chinese GDP increased 10 percent, imports 35 percent. The region’s growth is projected at 8 percent in 2011 and 7.8 percent in 2012. (1/13, #18)
  • US coal companies are rushing to fill the vacuum left by flooding in Queensland, Australia, which has taken an estimated 13 million metric tons of metallurgical coal out of the seaborne market in recent weeks. Companies particularly in Central Appalachia are fielding inquiries from overseas buyers. Analysts say US coal exports may climb 10 percent this year, adding 6 million short tons of seaborne exports to last year’s 60 million. (1/11, #23)
  • Growing domestic consumption of natural gas in the Middle East and a muted, delayed supply response is increasing concern that critical shortages will occur in the Middle East and North Africa. (1/13, #31)
  • In parts of Afghanistan the price of fuel has risen sharply. An Iranian-imposed slowdown on tanker traffic at key border crossings, in its second month, has increased the price of refined fuel by 50 percent; forced gas stations on major highways to close; and driven up the costs of other basic commodities, including food and heating oil. (1/11, #9)
  • India expected an amicable solution to the Iran oil payments issue during a scheduled visit of officials to Tehran last week. (1/11, #8)
  • Iran said it had hit record natural gas consumption of 19 billion cu. ft. a day due to cold weather. Earlier this month Iran said its gas consumption had dropped by 700 million cu. ft. a day since the government cut price subsidies. Officials have said Iran consumes a peak of 18 billion cu. ft. a day. (1/15, #5)
  • US Secretary of State Clinton has said an international campaign aimed at slowing down Iran’s suspected nuclear-weapons program is succeeding, the first time a senior Obama administration official has publicly made such a claim. (1/10, #9)
  • Iran’s proposal for a tour of its nuclear sites floundered after China effectively rejected the invite and Russia cautioned such a trip couldn’t replace UN inspections or talks. (1/13, #13)
  • Nuclear talks this Friday-Saturday, January 21-22, between Iran and major powers could be the “last chance” for the West because Tehran’s atomic capability is improving, a senior Iranian official says. Once Iran can make its own fuel for a research reactor, which it says will happen this year, it may not return to negotiations if these talks, in Istanbul, fail. (1/12, #8)
  • Iraq has raised crude-oil output by 300,000 b/d, to 2.7 million b/d, since a handful of foreign companies began redeveloping some of the biggest fields. (1/10, #11)
  • China increased net imports of crude oil by 1.4 percent in December, buying 20.6 million metric tons, or 4.9 million b/d, more than it exported in November. Overseas purchases for 2010 rose 18 percent from a year earlier to a record 239.3 million tons. (1/10, #14)
  • The Chinese trade surplus shrank in 2010 as a share of GDP for the third year in a row, declining 7 percent to $183.1 billion. Economists cautioned that a 41-percent jump in import values reflected higher commodity prices, not greater domestic consumption. (1/10, #15)
  • China’s foreign exchange reserves jumped by a record $199 billion in the last quarter of 2010, taking the total to $2.85 trillion. Already the largest in the world, China’s reserves increased by 18.7 percent over the course of 2010. Total new Rmb-denominated bank lending in 2010 hit Rmb 7.95 trillion overshooting an Rmb 7.50 trillion target. (1/11, #12)
  • PetroChina has gained a foothold in Europe. It and the UK’s Ineos will refine and trade oil products at the Grangemouth refinery in Scotland and the Lavera plant in southern France. Both have daily oil-processing capacities of 210,000 barrels. (1/11, #15)
  • Guangdong province, China’s largest export hub, may face up to 4 GW of power shortages in the first quarter. With 70 GW of generating capacity of its own, Guangdong also receives up to 23 GW from three provinces to its west, where some powerlines have been disrupted by unusual weather. Central Chinese provinces expect an energy deficit of 10 billion kWh in the first two months of this year. (1/13, #19)
  • More cars were sold in China last year than in any other country at any time in history. The 30 percent sales growth in China in 2010, to 18 million vehicles, is probably unsustainable, especially as government officials are moving to put the brakes on car purchases. Experts expect sales growth in China to slow to 10-15 percent this year. Many automakers are making investments based on the assumption of continued strong sales gains. (1/13, #21)
  • Russia’s Lukoil says its 2010 oil output was 96 million metric tons, versus 97 million tons a year earlier. It refined 66 million tons of oil in 2010 at its refineries in Russia and abroad, up from 63 million tons in 2009. Natural gas production stood at 700 billion cu. ft., up from 600 billion in 2009. (1/13, #29)
  • Transneft expects Russian oil companies to fully resume crude oil supplies to Belarus starting January 17-18, RBC reports. Russian oil companies suspended supplies to Belarus on January 1 without an agreement for 2011 with Belarus’s Belneftekhim. (1/13, #30)
  • In Nigeria, 18 consortia have expressed interest in Shell oil fields for sale. (1/10, #13)
  • Ghana has sold its first oil exports to Exxon, which has bought cargoes of Jubilee crude from Vitol and Trafigura. Initial production of 120,000 b/d will rank Ghana as sub-Saharan Africa’s seventh largest producer. (1/13, #15)
  • Europe may face a shortfall of Norwegian natural gas as soon as 2015. Europe’s second-largest supplier has cut its estimate for gas yet to be discovered by 31 percent, or 20 trillion cu. ft. – five years of current production, worth $186 billion. The troubles may help Russia, Europe’s biggest supplier, cement its grip on the market and provide an opening to liquefied-natural-gas exporters from the Middle East like Qatar. (1/15, #18)
  • Norway’s oil output is seen falling in 2011 and throughout the coming decade if no new big finds are made soon. More modest finds are making the Nordic country attractive for small firms rather than majors. Output forecasts were expected to show that oil production would fall for the tenth year in a row, while gas output would continue to rise. (1/11, #26)
  • Greenland’s goal of gaining full independence from Denmark is getting closer as rising oil prices and melting ice spark renewed interest in its fossil fuels from companies such as Shell and Statoil. The island is receiving “enormous interest” from the oil industry for licensing rounds in 2012 and 2013. (1/11, #24)
  • A UK industry watchdog warns an oil spill like last year’s Deepwater Horizon disaster is possible in British waters, unless government and industry policies change. (1/11, #25)
  • President Chávez says Venezuela has “reached 253 billion” barrels of oil reserves, and that it is now the world leader. Some experts say the figures are inflated and that Venezuela’s oil industry is suffering serious problems. Last May, Venezuela said proven reserves were 172 billion. Saudi Arabia has said that it has 260 billion barrels proven. (1/13, #16)
  • Colombia’s crude oil output in December rose 12.2 percent from the year before to 825,000 b/d. (1/13, #17)
  • Petrobras added to its oil reserves last year. At year end reserves had risen 4.9 percent to 12.138 billion boe, up from 11.563 billion at the end of 2009, according to US SEC criteria. The figures included oil and natural gas from the Lula and Cernambi presalt fields. Petrobras booked new reserves of 1.472 billion boe in 2010 while producing 867 million boe last year, for a net addition to reserves of 605 million boe. (1/15, #7)
  • Mexico’s upstream regulator, the National Hydrocarbons Commission, has announced rules to govern deepwater drilling within the nation’s territorial waters. The new regulations, intended to prevent Macondo-like accidents and spills, have come out just when Pemex is launching its most ambitious effort to drill. (1/15, #9)
  • Canadian Natural has declared force majeure on January shipments of the 10 percent of Canada’s synthetic crude that comes from a 110,000 b/d Horizon oil sands plant. (1/13, #28)
  • The US presidential oil-spill commission will recommend tougher regulation, stiffer fines and a new industry-run safety organization in its final report. (1/11, #20)
  • Chevron will spend $4 billion to develop Big Foot oil and gas field in the deepwater Gulf of Mexico. The plan is to use an extended tension-leg platform with an onboard drilling rig and production capacity of 75,000 b/d of oil and 25 million cu. ft. a day of gas. (1/11, #21)
  • The Alaska oil pipeline shutdown is not just an unpredictable mechanical problem, says Financial Post. Rather it has been foreseen for years as production dwindles. As pipeline pressure falls below what was anticipated when it was built, there is more opportunity for structural breaks. (1/13, #27)
  • The overhaul of US oil-drilling regulations won’t slow the review of applications from producers seeking to resume exploration in the Gulf of Mexico. Also, unless continuing investigations of the Macondo well accident and spill uncover significant new information, Director Bromwich of the Bureau of Ocean Energy Management, Resources, and Enforcement does not expect to issue additional emergency rules. (1/14, #9, 10)
  • The US Agriculture Dep’t. cut its estimates for global harvests of key crops, predicting corn stocks would fall to their lowest level since 1996, and raised some demand forecasts. Prices of corn and soybeans leapt 4 percent and wheat gained 1 percent on Wednesday. Corn futures rose 3 percent Wednesday and are up 94 percent from June lows; soybeans are up 51 percent and wheat is up 80 percent. (1/13, #8, 9)
  • Last year was the wettest in the historical record and tied 2005 as the hottest year since at least 1880, two US government agencies report. (1/13, #12)
  • Thirteen Japanese automakers and energy companies plan to expand the introduction of hydrogen fuel cell vehicles in 2015 and develop the hydrogen supply network throughout Japan. The two groups are looking to the government to support their joint efforts. (1/14, #12)
  • Toyota says the thousands of laptop computer lithium-ion batteries used in the electric RAV4 crossover, co-developed with Tesla, may cost only one-third as much as conventional electric-car batteries. (1/14, #13)