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Download Full PDF: Peak Oil Review 12/10/12

1. Oil and the Global Economy

Oil prices fell last week on bad economic news from the EU and US, the uncertainty in Washington over the “fiscal cliff” negotiations, slumping gasoline and heating oil prices, and by a weaker euro. Brent crude which on Monday was trading above $112 a barrel closed Friday at $107.02. New York crude fell about $3 a barrel during the week to close at $85.93. The EIA has decided that West Texas Intermediate oil prices, which are being held down by a glut in the Midwest, are no longer indicative of the global price of oil and has begun using London’s Brent crude in its price forecasts.  West Texas has been running about $22 a barrel lower than Brent in recent weeks giving a misleading impression of the price US refiners are paying for imported crude.

Gasoline futures fell 13 cents a gallon last week on lower demand and increasing inventories. The EIA’s weekly stocks report showed the biggest one-week increase in gasoline inventories in the last 11 years. The US employment numbers release on Friday were messy, with unemployment rate dropping a bit, but large numbers giving up searching for work.

Natural gas futures had an up and down week reflecting changing forecasts for temperatures in the northeastern US. Prospects for large scale exports of natural gas improved last week with the release of an Energy Department study concluding that exports of LNG would not significantly increase domestic natural gas prices and would generally be of benefit to the US economy. In addition to one LNG export terminal under construction, 15 more LNG terminals costing some $5 billion each have been proposed. The issue is controversial as many fear that the domestic price of natural gas will become linked to global prices which are several times higher than current US prices. The environmental community also is concerned about increased use of fossil fuels and many in the peak oil community are not so sure that there will be that much spare natural gas around 10 or 15 years from now especially if there is more use by electric plants and chemical manufacturers.

The European economy is having yet another bad week. While the Greek debt crisis has been pushed down the road for a while, last week the Bundesbank made a substantial reduction in its forecast for German GDP growth next year and the ECB did the same for the EU as a whole. Over the weekend, Italy’s Prime Minister Monti announced that he was going to resign and former Prime Minister Berlusconi announced that he would try for a comeback.

Venezuelan President Chavez has returned to Cuba for another cancer operation, this time designating Vice President Maduro, a former bus driver, union leader, and Chavez loyalist as his successor should he not be able to continue governing. An election will have to be held within 30 days should Chavez leave office within the next four years. The US currently is importing about 1 million barrels of oil a day from Venezuela — a country with a long history of export interruptions during times of political ferment. When the Orinoco heavy oil deposits are considered, Venezuela may have the largest oil reserves in the world, but Venezuelan oil production has been drifting lower due to under-investment, expropriations, and general mismanagement by the Chavez government. There are considerable doubts as to whether Chavez’s military-leftist coalition will last after he leaves office.

The Canadian government approved more than $20 billion of investments in its oil industry by Chinese and Malaysian government-controlled oil companies.  At the same time Ottawa made it clear that it was the end of foreign government investment in its oil sands, except in very unusual circumstances. Further development of the sands, however, will require massive amount of capital – some $650 billion – over the next ten years which is beyond what the Canadians can finance themselves. Canada’s Prime Minister warned that the deal should not be seen as the beginning of a trend in which the Alberta oil sands are gradually sold to China.

2. The Middle East

Much of the news last week focused on the demonstrations in Egypt and on Syria, where the insurgent forces are slowly closing in on the capitol. The rebels have formed a unified military command to control the final push. Reports that the Assad government has begun to move chemical weapons from their storage bunkers, and might resort to using them to keep the insurgents at bay, resulted in a stern warning from Washington that such action would likely result in Western intervention in the fighting. A meeting between the US Secretary of State and Russia’s Foreign Minister produced no results.

Concern now is shifting as to what a post-Assad government might look like, who would control the chemical stockpiles, and just how much chaos would ensue after Assad falls. The people of Syria are sharply divided along numerous ethnic and tribal and religious lines so the prospects for stability are questionable. Support for the uprising was far from universal and many ethnic and religious groups, including Christians, Kurds and Shiites have concerns as to how they will be treated by a Sunni-majority takeover. The primary concern from the peak oil prospective is whether the Syrian uprising is another step in region-wide turbulence that will eventually spill over to affect oil exports.

Thousands of Kuwaitis demonstrated over the weekend demanding the dissolution of the newly elected Parliament which they claim is illegitimate. The election of the new Parliament was widely boycotted after the emir changed the election rules.  The opposition said the new rules rigged the election so they could not win. So far there has been little political trouble in the Gulf oil states, with Bahrain being the main exception, but this could easily change as political ferment and activism sweeps the region putting unelected heredity rulers in danger.  Kuwait is currently producing about 2.8 million b/d.

The confrontation between Iraq’s Kurds and the Shiite-controlled government in Baghdad continues. Baghdad has set up a new military command along the border with Kurdistan. The Kurds have their own armed forces and have moved tanks and artillery to the ill-defined border between Kurdistan and rest of the country. The issue, of course, is control of Kurdistan’s oil revenues which the Kurds would like to keep at home. The Kurds are roughly 15 percent of Iraq’s population and likely have more than 15 percent of its oil. With western oil companies moving in to exploit Kurdistan’s oil and talk of a new export pipeline to Turkey that would allow the Kurds to export their oil without any involvement from Baghdad, the situation is slowly becoming worse.

There seems to be no appetite on either side for open conflict between the two for no one can predict the outcome. For now Baghdad is withholding revenue for Kurdish oil being exported through the northern pipeline and Erbil periodically withholds oil from the pipeline. For now the situation is stalemated, but over the longer run the course of this confrontation could have a lot to do with how much oil gets exported from Iraq.

Iran appears to be having increasing trouble exporting its oil. With 95 percent of the world’s tanker fleet banned from carrying Iranian crude, Tehran is dependent on its own fleet of 42 ships which are having increasing difficulties making deliveries, ranging from insurance to the ability to enter foreign ports of the flag that they sail under. The transponders of 31 Iranian owned tankers are still signaling that they are registered in Tanzania even though the government says it has de-registered all Iranian ships.

The US has extended sanction waivers for all the major countries, including China and India, that import Iranian oil signifying that they are making good progress in cutting back imports. Tanker trackers report that Tehran is sending more cargoes to China than Beijing is willing to accept so some ships are being forced to wait weeks to unload. The sanctions are now costing Tehran about $100 million a day in lost revenue. The fall of the Assad government would be another setback for Iranian foreign policy further complicating relations in the region. There is no news of any progress on the nuclear issue.

 

3. The Doha Climate Summit

After 18 years of UN conferences on climate change, yet another one ended without meaningful progress – only a few face-saving compromises such as extending the Kyoto emission limits until a new agreement can be reached. The Kyoto agreement, of course, only covers about 15 percent of global emissions.

After an extra day of talks agreement was reached that the rich nations might compensate poor ones, such as the 43 small island and coastal nations that are close to going underwater, for their losses. This will only be decided after another conference in Poland next year. As has been the case from many years, the heart of the climate change argument is whether the rich nations, which have got that way by burning lots and lots of carbon over decades, should pay for the poorer ones to get rich without burning much carbon.  This is obviously a non-starter which is why this argument will continue until either the climate becomes obviously life-threating to nearly everybody, or new sources of energy are discovered.

Although the next official UN report on climate change in not due until the end of 2013, other groups continue to crank out dire predictions. NOAA has a new report out talking about sea-level increase of 6 feet or more by the end of the century and the World Bank has started to say that we could see a 40C hotter world by 2100. Theses temperature increases will not be distributed equally so that large parts of the world could see its agriculture output greatly reduced before then.

China, which is now the world biggest greenhouse gas emitter, is clearly conflicted about emissions and climate change. With the nation committed to rapid economic growth and little else, the idea of cutting energy consumption is beyond consideration. Beijing is concerned about the state of its air quality which it realizes is killing hundreds of thousands of its citizens, if not millions, each year. In its current five year plan it is making a small effort – 5 or 10 percent – to reduce sulfur and nitrogen dioxide and fine particulate matter but is reducing carbon burning only through increased efficiency. The new government will reverse a decision and increase dam building for electricity even if thousands have to be moved and wind and solar is getting much attention.  Overall, however, the directly observable effects of global warming will have to get much worse before Beijing gets serious.

President Obama has asked Congress for $60.4 billion to cover the costs of Hurricane Sandy. How this proposal which is less than that states asked for fares in the midst of fiscal cliffs and debt limit negotiations remains to be seen. Some are adamant that this money will have to be offset by reductions in social services elsewhere in the budget.

Quote of the week

 

“… money may be the most uncertain factor in the IEA scenario. It has the price of a barrel of oil rising to $125 in real terms by 2035. Such an increase would fund the maintenance of crude oil production, drive up production of unconventional oil, and encourage transportation’s shift toward NGLs. The catch: The Organization of the Petroleum Exporting Countries would have to restrain its production as non-OPEC production surges to allow prices to rise. The scenario is silent on the chances of that.”

 

– Richard A. Kerr, Science

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

 

  • As recovery continues from Superstorm Sandy, the U.S. government reports that flooding from future storms will likely worsen as global sea levels rise between 8 inches and 6.6 feet by the end of this century. (12/8, #4)
  • A senior Saudi official says Gulf Arab states must quash any Arab Spring-inspired unrest or risk threats to their leadership across the oil-rich region. (12/8, #7)
  • Venezuelan President Hugo Chavez arrived back home after 10 days of medical treatment in Cuba, but his failure to attend a regional meeting in Brazil raised new questions about his health. (12/8, #12)
  • Nepal Electricity Authority (NEA) has decided to increase the load-shedding hours for the second time in the past 10 days. NEA has hiked the load-shedding hours by 14 hours to make it 70 hours a week from the existing 56 hours. This means that consumers will now have to face 10 hours of daily power cuts. (12/8, #13)
  • The U.S. Army Corps of Engineers rejected lawmakers’ request to increase the flow of water from a major tributary to the Mississippi River, where declining water levels are jeopardizing about $7 billion in cargo. (12/8, #14)
  • A warm winter, a record warm spring, a record hot July and a warmer than average autumn combined to make it even more likely that 2012 will go down as the warmest year in the contiguous United States on record. (12/8, #15)
  • New York City Mayor Michael Bloomberg said he planned to have the city lead the nation in climate initiatives following Hurricane Sandy. Bloomberg said he would look to rebuild New York “sustainably” by revising building codes and pushing natural buffer zones to protect against major storm surge. (12/8, #18)
  • Investments in the Eagle Ford shale play in Texas are expected to top what’s projected for the giant Kashagan field in Kazakhstan. (12/8, #20)
  • The US drilling rig count decreased 11 units during the week ended Dec. 7, with the total number of rotary rigs reaching 1,800, Baker Hughes Inc. reported. (12/8, #21)
  • Canada approved Cnooc Ltd.’s $15.1 billion takeover bid for oil-sands operator Nexen Inc., clearing a major hurdle for the Beijing-based energy giant in completing what would be China Inc.’s biggest foreign acquisition. (12/8, #22)
  • A consortium of international and national oil companies may seek to tap into the Canadian arctic by the middle of next year. Northwest Territories Industry Minister Dave Ramsay told the Platts news service during an energy conference in New Orleans that a partnership between Canada’s Imperial Oil, BP and Exxon Mobil could seek approval from the government to start work in the Beaufort Sea by mid-2013. (12/8, #24)
  • UN climate talks are heading into the final stretch with a host of issues unresolved, including a standoff over how much money financially stressed rich countries can spare to help the developing world tackle global warming. That issue has overshadowed the talks since they started last week in Qatar, the first Middle Eastern country to host the slow-moving annual negotiations aimed at crafting a global response to climate change. (12/7, #4)
  • Even as the summer swelter has given way to frost, nearly two-thirds of the country remains in a drought, with forest fires still burning, winter crops choking in parched soil and barges nearly scraping the mucky bottoms of sunken rivers. More than 62 percent of the continental United States is experiencing moderate to exceptional drought. (12/7, #16)
  • U.S. lawmakers are divided over a government report on possible LNG exports, with backers touting economic gains and detractors worried about who benefits. NERA Economic Consulting produced a 212-page report under a commission from the Department of Energy. (12/7, #17)
  • University of Texas research that determined hydraulic fracturing for natural gas is safe was tainted by a conflict of interest involving the study’s lead investigator, an independent panel has concluded. After seeing the panel’s findings, the head of the Energy Institute, Raymond Orbach, said he would “assume full responsibility” and resigned his position though he remains on the faculty. (12/7, #18)
  • The U.S., the world’s biggest oil consumer, is among the nations feeling the least pain at the gasoline pump, while Pakistan tops the list of 60 countries ranked by Bloomberg. A gallon of premium gasoline cost Americans 3 percent of their daily income in October, 55th out of 60 nations. In Pakistan, a gallon cost 46 percent more than a worker’s daily wage. (12/6, #7)
  • China told Vietnam to stop unilateral oil exploration in disputed areas of the South China Sea and not harass Chinese fishing boats, again raising tensions in a protracted maritime territorial dispute with its neighbor. (12/6, #19)
  • The US Maritime Administration must notify Congress when it receives any requests to relax a key shipping law and then justify its reasons for granting such a waiver, according to legislation approved Wednesday. (12/6, #22)
  • Britain’s North Sea oil output, long in decline, is likely to increase in the next few years, according to research published on Wednesday, reflecting the impact of rising investment, high prices and tax breaks. Oil output will reach 1.4 million barrels per day (bpd) in 2017 based on an oil price of $90 a barrel. (12/6, #28)
  • ENI said it has discovered new gas resources amounting to an additional 170 billion square meters, or 6 trillion cubic feet, of gas in Mozambique. (12/5, #8)
  • A Chinese government think tank forecast that China’s economy would grow 7.7 percent this year before rising to 8.2 percent in 2013. (12/5, #9)
  • Chevron Corp. plans to drill three more wells in shale formations in China in addition to one it has already drilled, but the company doesn’t expect rapid progress in shale-oil and gas production there. (12/5, #11)
  • Greece has scored the worst ranking of all 27 European Union nations in a global league table of perceived official corruption, falling below ex-communist Bulgaria as public anger about graft soars during the country’s crisis. (12/5, #18)
  • More than 3 million barrels of oil per day could be flowing from the Kurdish region of Iraq given the proper export infrastructure, a regional leader said. (12/4, #7)
  • Saudi Arabia will need to invest over SAR500bn (US$133bn) over the next ten years to meet rapidly rising power demand, Saudi Water and Electricity Minister Abdullah al-Hussayen said. (12/4, #10)
  • Mexican President Enrique Pena Nieto and leaders of the nation’s three largest parties agreed to work toward allowing competition for some of Petroleos Mexicanos’s operations and revise mining royalties. (12/4, #16)
  • The nation’s largest motor club urged the US EPA and the fuel ethanol industry to delay introduction of gasoline with 15% ethanol into the marketplace until the public better understands its potential to damage engines and void warranties. (12/4, #19)
  • The Russian Energy Ministry states that crude oil and condensate production levels for November increased 0.5 percent and mark a post-Soviet record. The ministry’s reporting agency states that crude and condensate production reached 10.5 million barrels per day in November. (12/4, #21)
  • On December 1, 1942 – 70 years ago – nationwide gasoline rationing went into effect in the United States. By the end of that year, half of the vehicles in the U.S. were issued “A” stickers, which allowed owners to purchase 4 gallons of gas a week. “B” stickers were issued to vehicle owners such as industrial workers whose driving was considered essential to the war effort. They were good for 8 gallons a week. “C” stickers were given to others considered essential to the war effort including doctors, ministers and mail carriers. (12/3, #16)
  • British officials have denied a report indicating energy ministers are preparing to open 60% percent of the countryside to a shale natural gas exploration boom. (12/3, #18)