Peak Oil Review – April 15, 2013

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1. Oil and the Global Economy

After a three-day rebound in reaction to the selloff the week before last, oil prices fell again on Thursday and Friday on bad economic news from the US, the EU, and possibly China. This time prices fell faster in the US than in London, widening the WTI-Brent spread back to nearly $12 a barrel at the close. With demand weak in the US and EU, and few signs of improvement in the near future, oil prices may push below $90 in New York and $100 in London. At the close Friday NY futures were at $91.29, the lowest since early March, and London was at $103.11 after having touched an intraday low of $101.09. US crude prices have now fallen by more than $7.50 a barrel since April.

In addition to gloomy employment, retail sales, and consumer confidence numbers in the US and a jump in US crude inventories to a 22-year high, the IEA, EIA, and OPEC all came out with forecasts of somewhat lower increase in global demand for oil this year.

For now the realities of supply and demand seems to have taken over the oil markets as US domestic crude production continues to increase and demand in the US and EU remains quite weak. The IEA, however, still forecasts that the world is on track to increase oil consumption by some 800,000 b/d this year which would largely consume projected increases in US tight oil production.

While there is a general consensus that oil prices will weaken for the next few months, the IEA’s monthly report expresses concern about oil production from Libya and Nigeria which are having serious domestic security problems. The agency warns that the lower prices may not last long. Some analysts are also raising nagging questions as to whether the recent drop in Saudi production in recent months was completely voluntary or whether the Saudis are having trouble maintaining production.

At least one analyst noted last week that the rate of increase of oil and natural gas production from tight wells may start to slow soon as the number of new wells that need to be drilled to maintain current production increases. Sadad al-Husseini, former VP of Saudi Aramco, estimates that the US will soon need 3,000 operational rigs to drill 65,000 new wells to keep up the current pace of production increases. The US rig count is now 1,771. Oil drilling rigs increased by 63 in the last three weeks as weather conditions improved, but rigs drilling for gas reached the lowest level since 1999 the week before last. As natural gas and oil are found together in many locations, the separation between oil and gas drilling rigs is somewhat artificial. Analysts have noted that drillers prefer to designate their rigs as drilling for more profitable oil.

New York gasoline futures fell last week, closing at $2.80 a gallon, some 50 cents lower than the recent highs seen in February. US gasoline stocks rose the week before last as refineries ran at record levels for this time of year. The EIA reported that inventories on the East Coast, which have been in bad shape since last fall’s hurricane, are back above five-year averages.

US retail gasoline prices are now about $3.53 a gallon, the lowest for mid-April in three years and 33 cents a gallon lower than last year. Retailers are expecting further declines before the summer driving season. The government, however, is forecasting that US gasoline demand this summer season will fall below 8.8 million b/d, the lowest in 12 years and 555,000 b/d lower than the peak summer usage set in 2007.

US natural gas futures climbed to a 21-month high last week on persistent cold weather and an unexpectedly large drawdown of inventories. Stocks fell by 14 billion cubic feet the week before last at a time when they normally start refilling for next winter. The inventory is now 3.8 percent lower than the five-year average and 32.5 percent lower than last year.

2. Middle East & North Africa

The beginning of Israeli natural gas production from beneath the eastern Mediterranean opens a new facet to energy production in the Middle East. While the size of the recently discovered gas reserves is still subject to debate, their location in the territorial waters of energy-poor states such as Gaza, Israel, Lebanon, and Cyprus offers not only the promise of energy self-sufficiency, but the potential for export earnings if the more optimistic estimates of reserves prove out and the gas can be piped to European markets.

The recent reconciliation between Turkey and Israel offers the prospect that Israeli gas could be piped to Turkey and then to EU energy markets. The Turks, of course, are insisting that the Turkish Cypriots get a piece of the pie. While Israel and Cyprus have the resources, political stability and contacts to move quickly, other states such as Lebanon and Gaza have so many problems, it is unlikely they can move in the near future.

The issue is deeply enmeshed with Middle Eastern politics. None of the Muslim states is eager to see Israel become energy independent and economically stronger. They are likely to take a dim view of anyone helping Israel reach this goal by investing in development of its gas fields. The Russians are deeply involved in the Syrian uprising and the Cypriot financial crisis and are always looking for profitable business opportunities, but are not interested in seeing more Middle Eastern gas reach Europe.

While it seems likely that Israel will be able to move quickly to satisfy a large share of its energy requirements from offshore natural gas in the next few years, whether these discoveries can be turned into an export bonanza for the region remains to be seen.

Iran: Reflecting a consensus in Washington, the Editorial Board of the Washington Post opined last week that Tehran seems to be heeding one of Israel’s red lines by converting some of its enriched uranium into reactor plates which are not immediately suitable for making nuclear weapons. Most observers see no particular reason to move against Iran at the minute despite the ominous warnings that time is running out, and seem content to wait until the Tehran’s June elections make changes to the political landscape. In the meantime Tehran remains publically defiant by announcing expansion of uranium production and plans for more nuclear power stations, while spokesmen say World War III would ensue from any attack on Tehran’s nuclear facility.

The IEA reports that Iran’s crude exports declined in March as the sanctions take hold. Beijing seems to have decided to bypass the insurance sanctions by sending at least one state-owned supertanker to pick up crude from Iran. The price of high quality rice in India is soaring as Tehran barters rice for oil with New Delhi.

A rather strong earthquake did considerable damage in the vicinity of Iran’s one nuclear power plant last week. Although Tehran and its Russian builders reported no damage to the plant, Iran’s neighbors across the Gulf are worried about the wisdom of building reactors in seismically active southern Iran.

Egypt: Unrest continues throughout the country. Unemployment in increasing; shortages of diesel are growing; nobody is collecting the garbage; fighting between Muslims and 9 percent of the country that are Christian Copts has begun; USDA warns that Cairo is overestimating the size of the upcoming wheat crop; and the IMF negotiators are still in town taking testimony about the pros and cons of forcing the country to slash food and fuel subsidies in return for a $4.8 billion loan. Many observers are saying the IMF has it wrong in going after the Egypt’s food and fuel subsidies as the country would simply collapse if these subsidies are removed too quickly.

Egypt’s Oil Minister wants to spend $18 billion to build new refineries and improve existing plants. The government says it will start issuing fuel rationing cards in July to stem the black market and to direct the subsidies to those most in need.

In the meantime, Egypt’s neighbors are becoming increasingly concerned that the 82 million person country will collapse, spreading chaos across the region. Qatar and Libya have come up with multi-billion dollar loans in an effort to keep the country stable.

Syria: Not much change in the past week. Rebel forces continue efforts to make their way into Damascus as the government bombs, shells, and launches counter attacks as the situation permits. The Iranian airlift of supplies to the Assad government across Iraq continues with Baghdad directing that the occasional flight stop in Iraq for inspection. It is generally assumed that Baghdad and Tehran are coordinating these “inspections” so that only plans carrying food and medicine are being stopped for inspection.

Attention is turning to what a post-Assad Syria will look like with many officials predicting that fighting among the various factions will go on for years.

Iraq: The Kurds sold their first cargo of oil on the international markets last week despite warnings from Baghdad that it will take legal action. Given all the problems with the Sunnis and the ongoing Syrian revolution, Baghdad is in no position to use force against the well armed and organized Kurds. Targeted bombings of individuals and security installations continue at a low level. These incidents have become so routine that they garner little more attention than traffic deaths do in the US and other advanced countries.

Genel Energy, the largest oil producer in Iraqi Kurdistan, says it expects to have a pipeline transporting oil from Iraq to the Turkish border by the middle of the year; this will be accomplished by converting an existing gas pipeline to oil which will cover about nine-tenths of the distance and building new pipeline for the rest. Genel also announced that the first of five wells it plans to drill in Kurdistan is yielding 12,000 barrels of oil and 15 million feet of gas a day and that the field it is drilling may hold more than 300 million barrels of oil.

Turkey says it is planning additional pipelines from Iraq that will move oil and gas into Turkey’s domestic network. The Turks are proceeding on the theory that Kurdistan has a constitutional right to 17 percent of Iraq’s oil and gas resources, no matter what the government in Baghdad says about the matter. This story has a long ways to play out.

3. China

When Beijing reported stronger import numbers for March, it was immediately seen as a sign that the economy is recovering as manufacturers and consumers are buying more. After some investigation, however, many are suspicious that the newly released numbers have been manipulated by reporting companies or the government.

While official figures have exports increasing by 10 percent for the month, analysis of imports into Hong Kong suggest that the real increase in exports may be closer to 2 or 3 percent. In addition, import figures from China’s trading partners are not matching those from Beijing. A survey of manufacturing in China shows only a small gain.

Some analysts are suspicious that Chinese firms may use phony export invoices as a way of importing money from abroad in violation of government controls.

Environmental issues continue to surface in China. Although the winter heating season which contributes significantly to the hazardous air pollution in many Chinese cities is over, China continues to grow so that the problems may be still worse next winter. Last week a senior Chinese environmental official disclosed some findings of a four-year survey of China’s soils which is still officially a state secret. The full report is expected to be made public soon. Many observers believe the soil pollution which may affect as much as 70 percent of China’s agricultural land is a more serious problem than air and water pollution.

In the last 30 years China has doubled its agricultural production through heavy applications of fertilizers, some 65 percent of which may be ending up in the rivers. China’s highest policy-making body, the State Council, says it will do something about soil pollution, but not before 2020.

With every new report, it is becoming clearer that China cannot continue on its present course of 8-10 percent annual economic growth while ignoring environmental concerns to whatever extent it can get away with. The policies of openness, coupled with the internet, are leading to the realization that economic growth is coming at a cost of poisoning and cutting short the lives of millions of China’s residents. Foreign companies are finding it increasing difficult to find employees willing to live and raise children in China’s increasingly toxic air.

At some point, and that day may not be far away, Beijing is going to have to put some measure of environmental concerns ahead of economic growth as has happened in most other industrialized countries. When that happens there is likely to be a reduction in growth rates and energy consumption. The fuss in China is based only on the deleterious effects of dirty air, water, and soil and is not even taking what carbon emissions and climate change could do into consideration.

To top this all off, China’s leaders are divided as to whether to relax the country’s “one child” policy which would likely add tens if not hundreds of millions to its population before the end of the century.

4. Quotes of the week

“In 2005, we reached 73 million barrels per day. Then, to increase production beyond that, the world had to double spending on oil production. In 2012, we’re now spending $600 billion. The price of oil has tripled. And yet, for all that additional expenditure, we’ve only raised production 3 percent to 75 million barrels per day [since 2005]. – Chris Nelder

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

• Taiwan’s fourth nuclear power plant is nearly operational. Premier Jiang Yi-huah is scheduled to visit the NPP in New Taipei to review the plant’s equipment and systems that are nearly ready to come online. (4/13, #12)
• Chevron said that it expects to resume normal operations at its Richmond, Calif., refinery in April after months of reduced gasoline production following an Aug. 6 fire. The refinery’s crude distillation unit sprang a leak last year, which led to the fire. Chevron concluded that the leak in a steel component was caused by corrosion. (4/13, #16)
• Exxon Mobil said that Chief Executive Tillerson’s total compensation rose 15% last year to $40.2 million. Most of the increase was due to a change in pension value and other deferred compensation earnings, which rose to $13 million in 2012 from $9.8 million in 2011. (4/13, #18)
• Jordan wants to build an $18 billion oil pipeline from southern Iraq to beat the kingdom’s crippling energy shortage, but it’s also looking to build two nuclear reactors, a step the United States doesn’t want its Arab ally to take. Resource-poor Jordan has to import almost all of its oil and gas needs and its energy bill spiraled up to $4 billion this year. (4/12, #12)
• India’s largest power producer says it has missed coal import targets due to attempts to ensure there is no corruption in its tender process. The shortfall is likely to further hurt the country’s attempts to generate sufficient electricity. (4/12, #21)
• The largest producer of Bakken crude oil in the US will now deliver oil to an East Coast refinery by rail, refiner PBF Energy Inc. announced. The refinery announced in February that it completed its second rail facility in Delaware. (4/12, #24)
• Natural-gas use by the US power-generation sector dropped 16 percent in March from a year earlier, amid a sharp rise in prices, the EIA said. Gas prices fell to their lowest levels in a decade early in 2012 after an unusually warm winter and high output pushed inventories to record levels. (4/12, #25)
• A new concentrating solar power system developed by Pacific Northwest National Laboratory can reduce the fuel consumption of a modified natural-gas combined-cycle (NGCC) power plant by about 20%. The system converts natural gas into syngas—with higher energy content than natural gas—using a thermochemical conversion device installed in front of a concentrating solar power dish. The power plant then burns the denser syngas to produce electricity. (4/12, #27)
• Unemployment rate among young people in the Middle East and North Africa region is the highest in the world, said a latest World Bank report which warned of a ‘high levels of vulnerability’ if governments do not take urgent steps to create jobs and ensure inclusive growth. (4/12, #29)
• Iraq has raised its estimated proven crude oil reserves to 150 billion barrels from 143 billion barrels, with more oil discovered in oil fields being upgraded by international oil companies and from a new oil field in southern Iraq. (4/11, #14)
• The Libyan government understands the decision made by French pipeline company Ponticelli to pull out of the country because of insecurity. Ponticelli was working as a subcontractor for a joint venture between the country’s National Oil Co., Total and Statoil. (4/11, #16)
• Rising incidences of oil theft in Nigeria’s oil producing Niger Delta come at a significant environmental cost. In its sustainability report Shell said its Nigerian unit had experienced 137 spills as a result of sabotage and theft last year, with the volume of oil lost amounting to 3.3 thousand tons. (4/11, #18)
• China’s auto sales in March rose 13.3 percent over a year earlier Customers in the world’s biggest vehicle market bought 1.6 million cars, according to the China Association of Automobile Manufacturers. Total sales including trucks and buses were just over 2 million vehicles. (4/11, #21)
• The operator of the Fukushima Daiichi nuclear-power plant said it has to move tens of thousands of tons of radioactive water out of leaky underground reservoirs—the latest in a string of problems and missteps that has spurred a rebuke from regulators and amplified fears that the heavily damaged plant isn’t fully under control. (4/9, #18) (4/11, #23)
• An above-average number of storms will emerge from the Atlantic this hurricane season, and the odds of the U.S. being hit by a major system are about 70 percent greater than predicted last year, Colorado State University researchers said. (4/11, #28)
• ConocoPhillips suspended plans to drill for oil in the waters off of Alaska’s northern coast in 2014, blaming unclear federal regulations for Arctic Ocean drilling. The announcement is another setback for the energy industry’s plans to explore the US Arctic ocean, thought to contain huge amounts of oil. Shell called off its 2013 Alaskan drilling program after two of its Arctic Ocean rigs were damaged earlier this year. (4/11, #31)
• North Dakota broke ground on the first new US refinery since 1976. The state hopes this new refinery will help resolve North Dakota’s diesel demand problem. (4/11, #33)
• Strong demand from Iran has pushed up the price of India’s premier basmati rice to all-time highs, reinforcing the sub-continent’s recent emergence as the world’s top rice exporter. The two countries introduced a payment mechanism last June to skirt Western sanctions against Iran which involves exchanging Iranian oil for a range of Indian goods, including rice, soymeal and pharmaceuticals. (4/10, #7)
• The Energy Information Administration cut its forecast for US coal exports by 3.5 percent for the year, according to its monthly Short-Term Energy Outlook. The agency blamed falling international coal prices and continued economic problems in Europe for reducing its expectations by 4 million tons to 107 million for the year, a number it expects to grow only slightly in 2014. This would be a 15% reduction from the 126 million tons of coal exports in 2012. (4/10, #23)
• Exxon Mobil agreed to gather Bakken shale oil production into a new crude oil gathering system being built by a subsidiary of CenterPoint Energy. The agreement is the first secured for the proposed pipeline, which will have a capacity to gather 19,500 barrels per day. It underscores the rapid buildup of infrastructure taking place in the shale plays. (4/10, #25)
• An innovative oil-upgrading technology that can increase the economics of unconventional petroleum resources has been developed under a US Department of Energy-funded project. The technology, developed by Ceramatec has been licensed to Western Hydrogen of Calgary for upgrading bitumen from Canada. The process involves mixing elemental molten sodium and small quantities of hydrogen or methane to reduce the level of sulphur, metals, and asphaltenes in heavy oil feedstocks, including oil sands bitumen. (4/10, #26)
• The Iraqi oil ministry is planning to auction the giant Nassiriya oil field in southern Iraq on Dec. 19, a senior ministry official said. A total of 52 international oil companies would be able to take part in the bidding round for the integrated project–developing a $4.4 billion oil field and building a 300,000 barrel-a-day refinery nearby. (4/9, #10)
• Gazprom and Shell have signed memorandums on joint exploration and development of shale oil and Arctic offshore projects in Russia as well as an offshore area outside the country. (4/9, #23)
• Petrol stations in the UK have noticed the volume of fuel that they sell fall significantly over the past five years as high prices have forced people to buy more fuel efficient cars, and drive less. Petrol sales have fallen by more than 20 percent as oil prices have climbed to record highs. (4/8, #16)