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Download the full PDF: Peak Oil Review 11/26/12

1. Oil and the Global Economy

With the Gaza cease-fire announced Wednesday still holding, the markets were quieter later in the week. On Friday prices increased a bit due to some better economic news from Germany and a stronger dollar. Oil closed at $88.28 in NY, up about 1.6 percent for the week, and at $111.38 in London. With the spread between NY and London oil holding at around $23 a barrel, most analysts do not foresee much change in the immediate future.

Distillate supplies in the northeastern US are about half their normal levels partly due to the disruptions caused by hurricane Sandy. The region’s refineries are mostly back in production, but some problems remain.  Temperatures in the northeast are expected to be only slightly lower than average this year suggesting that demand for heating oil will jump about 180,000 b/d in December. For now the government is confident that additional supplies will soon become available either from local refineries or shipped in from the Gulf.  If the winter turns out to be unusually cold, however, we could see price spikes due to shortages.

US natural gas prices continued to climb last week and are now at $3.90 per million, up about 40 cents since mid-November. Withdrawals from storage were more than expected last week, due to colder temperatures, less drilling, and the switch from coal to natural gas on the part of many electric utilities. The January futures contract finished the week above $4 per million, a psychological threshold not seen since September 2011.

Gasoline futures traded quietly around $2.75 a gallon last week after climbing some 20 cents per gallon since early November.

The European debt crisis continued to bubble along. On Wednesday marathon negotiations among the Eurozone’s finance ministers, the IMF and the Central bank ended with disagreement about what to do about Greece – thereby delaying the desperately needed loan for at least another week. At week’s end, Greek officials were optimistic that a settlement was near, but other sources close to the talks were not so sure.

The EU is facing a host of problems. A major row is going on over the size of the EU’s budget; Moody’s joined S&P in downgrading France’s debt noting that Paris was falling behind in implementing structural reforms; and the region continues to slip into economic recession. Eurozone private sector activity is about to face its sharpest contraction since the 2009 crisis with business in the zone contracting for the 14th month out of 15 in November. All this suggest that Europe’s demand for oil will be lower in coming months.

2. The Middle East

With the Gaza crisis at least temporarily out of the way, attention shifted to other issues such as Egypt, where a wave of rioting broke out in the wake of President Morsi’s effort to seize more powers for the Presidency; Syria, where the rebel forces continue to make headway against the government; and the Iran confrontation. Although these issues seem to present no immediate threat to oil exports, a military takeover and yet more turmoil is one of many possible developments in Egypt.

Hardly a day goes by without news that rebel forces in Syria have captured another border crossing point, a key town, or an important military installation.  The Syrian economy continues to deteriorate with oil production, which once accounted for 23 percent of  GDP, down to 200,000 b/d, half its prewar rate; almost no tourism, which used to account for 11 percent of GDP; and little in the way of customs revenue. Damascus has asked Russia for a loan to offset revenue losses. If it is not forthcoming, the government may be forced to start printing money in order to pay its military and security forces that recently received a large pay increase.  This could result in an inflationary spiral.

With winter coming the suffering of the millions of refugees and those displaced by the fighting will increase. Despite the support of Moscow and Tehran, it is difficult to see how the Assad government can last much longer as rebel forces continue to control larger pieces of the country.

On Friday the US announced that a round of talks on creating a nuclear free zone in the Middle East will not take place “as the states in the region have not reached agreement on acceptable conditions for such a conference.” The origins of such a meeting go back to a 2010 conference of signatories to the Non-Proliferation Treaty. Obviously Israel is not interested is such discussions — nor is Tehran.

3. Tight Oil

Nearly every day there appears yet another article touting the prospects for tight (“shale”) oil coming from fracked wells in the Bakken oil fields in and around North Dakota and the Eagle Ford fields in south Texas as the salvation of America. With the help of the IEA’s forecast that the US will soon be the world’s biggest oil producer and close to achieving energy independence, writers from every corner of the mainstream media are exuberant about the prospects for tight oil.  Sometimes, down in the bottom of their stories, the writer will note that there are a few skeptics who doubt that rapid growth in fracked oil production can last much longer; however, troublesome facts are usually ignored.  Last week a Reuters’ analyst wrote a story entitled “The Bakken Revolution is Only Half-complete” that dug out some interesting numbers bearing on the issue of just how much longer fracked oil production will continue to grow.

After telling all the good things that are about to happen, the Reuters’ piece cited the conclusions from a post that ran in “The Oil Drum” last September by Rune Likvern after performing an in-depth analysis of data from fracked wells in North Dakota.  Likvern’s conclusion was that the fracked wells are depleting so fast that production from the region is unlikely to get much beyond 600,000-700,000 b/d. In contrast the Reuters’ story, citing the Director of the North Dakota Oil and Gas Division, concludes that production may reach any where from 900,000 to 1.2 million b/d in the next three years and then sustain this level of production until 2020 or even 2025 before tapering off to 650-700,000 b/d by 2050.

Even a cursory look at some of the numbers from Likvern vs. those from the North Dakota government shows such major discrepancies that it is no wonder that they reach such wildly differing conclusions. North Dakota officials told Reuters that the average Bakken well produces 329,000 barrels of oil in its first year while Likvern puts the number at 85,000. North Dakota admits that tight oil wells decline rapidly, putting the decline rate at 52 percent for the first year and then over 60 in subsequent years while Likvern puts the decline rate at around 40 percent year over year.

According to Likvern it is the accelerating rate at which oil wells have been brought into production in recent years that is the reason the average daily production per well has remained steady at circa 143 b/d. North Dakota government figures show that 590 new wells came into production between 9/09 and 9/10; 1010 new wells between 9/10 and 9/11; and 1762 between 9/11 and 9/12 – clearly an accelerating pace of well drilling.

The cost of drilling and then fracking Bakken wells, which is over $10 million each, is a major issue in how long production of fracked oil can be sustained. A recent release from Hess oil which has a substantial investment in the Bakken put the current cost per well at $13 million. North Dakota officials also told Reuters that over a 45-year lifetime, each Bakken well can be expected to produce 615,000 barrels of oil, easily covering the $9 million that the state says it costs to drill and frack a well. Now if one starts with an average production of 329,000 barrels during the first year of production, even spectacular rates of depletion allows a well to produce 600,000 barrels in 5 or 6 years. The problem of course is that if the average Bakken well is yielding around 85,000 barrels during its first year, then it would only produce something on the order of 200,000 barrels or less over its useful lifetime.

Obviously the economics of tight oil are going to be very different under an assumption that a well will only yield a third as much oil over its lifetime. Reuters, however, cites a recent study by a subsidiary of Platts that says the Bakken wells are highly profitable and that each will generate about $20 million in profits after all expenses.

After pointing out that local officials usually know better that outside analysts, Reuters’ bottom line is: “Even allowing for the massive decline rate after the first 12 months, North Dakota officials still believe daily production could rise by another 200-500,000 barrels within the next three years to reach 900,000 or even 1.2 million barrels per day and sustain that level for 5-10 years before starting to decline gradually.”

Unless the geology turns out to be significantly different, what happens in the Bakken over the next few years should turn out to be similar to what happens in the Texas shales. A recent study of 1000 wells in the Eagle Ford, Texas field shows that each well will produce about 120,000 barrels over its lifetime. This is a long ways from the 600,000 barrels that North Dakota claims each of its wells will yield.

 

Quote of the week

 

“Of course, like all long-term forecasts, the World Energy Outlook should be taken with a shaker full of salt. The IEA’s models assume that shale oil will keep producing well into the future, even though shale wells tend to dry out much more rapidly than conventional wells. That means oil companies need to keep drilling more and more wells to sustain output—and no one knows how sustainable that strategy is.”

 

– Bryan Walsh, TIME

 

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

 

  • Superstorm Sandy caused at least $29.4 billion in overall damage in New Jersey, according to a preliminary analysis released by Governor Chris Christie’s office. The estimate of the damage caused by the storm, which ravaged the Northeastern U.S. coastline late last month, includes personal property, business, infrastructure and utility damage. (11/24, #11)
  • The Alberta government has taken the first step toward finding a footing for its growing bitumen production in eastern Canada, with the establishment of a working group with the Quebec provincial government. (11/24, #15)
  • China appears to have stopped filling up its strategic petroleum reserve (SPR) – removing a big source of incremental demand from the global crude oil market. Early this year, Beijing shored up oil consumption and prices by diverting millions of barrels of crude oil into its burgeoning emergency reserve. But new data suggest that the buying spree ended in early September. (11/23, #8)
  • China’s imports of Iranian crude oil are down by about one-fifth so far this year, a drop that puts the country in good position to avoid U.S. sanctions and head off a diplomatic row with Washington. China has repeatedly defended its crude purchases from Iran, telling the U.S. it complies with existing U.N. resolutions. (11/22, #7)
  • The number of new hydropower projects in China could surge as the country’s populist premier Wen Jiabao retires and a new leadership team races to meet ambitious 2020 energy goals. Dam building slowed considerably under Wen, who personally intervened to block hydropower projects and avoid the potential for protest from local populations. (11/19, #9)
  • Turkey, its eyes on becoming the pivotal energy hub between East and West, is set to increase its presence in Iraq’s semiautonomous Kurdish enclave by taking a majority stake with a British partner in a block containing an estimated 10.5 trillion cubic feet of natural gas. (11/22, #9)
  • ExxonMobil became the fourth oil major in a month to warn customers over delays to Nigerian oil and gas exports, adding to a raft of problems for Africa’s biggest energy producer caused by oil spills, theft and flooding. (11/22, #16)
  • The U.S. government said plans by Iran to build a natural gas pipeline through Iraq to Syria may run into problems with economic sanctions. (11/21, #8)
  • Frustrated by several months of fruitless fighting for a compromise, Spanish energy major Repsol warned Argentina it will drag its government through international courts to secure fair compensation for the loss of YPF. In April, Argentine President Cristina Fernandez de Kirchner appropriated Repsol’s majority stake in Argentine subsidiary YPF, the Latin American nation’s principal oil producer and distributor. (11/21, #11)
  • China’s total natural gas imports rose 26.4% year on year to 3.9 billion cubic meters (4.44 Bcf/day) in October, the National Development and Reform Commission said on its website. It did not give a breakdown between imported LNG and pipeline gas. (11/21, #12)
  • Japan’s crude-oil imports fell sharply in October from a year earlier, reflecting rising energy conservation and utilities’ efforts to cut fuel costs at a time when nearly all of the nation’s nuclear reactors remain idle. (11/21, #13)
  • Two U.S. energy companies announced plans to build a 400-mile pipeline in Texas to deliver 300,000 barrels of oil per day to the Gulf Coast region. Magellan Midstream Partners and Occidental Petroleum Corp. announced plans to move forward with the construction of the BridgeTex oil pipeline to deliver oil from Colorado City, Texas, to the coastal area near Houston. (11/21, #15)
  • The U.S. Environmental Protection Agency announced that it found no evidence to support claims that ethanol regulations were hurting the economy. Critics of a renewable fuel standard said higher corn prices and a weak harvest due to drought meant the government should waive requirements on ethanol blends for gasoline. (11/20, #6)
  • Companies are racing to find ways to recycle the water used in hydraulic fracturing, chasing an emerging market that could be worth billions of dollars. From energy industry giants Halliburton Corp. and Schlumberger Ltd. to smaller outfits such as Ecologix Environmental Systems LLC, companies are pursing technologies to reuse the “frack water” that comes out of wells after hydraulic fracturing, or “fracking”—the process of using highly pressured water and chemicals to coax oil and gas out of shale-rock formations. (11/19, #11)
  • Bob Dudley shrank BP to save it. The onetime Mississippian and current chief executive officer has sold more than $50 billion of assets to pay the costs of the worst U.S. oil spill in history in 2010. Rescued from the brink of collapse, Europe’s second-largest oil company is now seen as vulnerable to a takeover. BP is the cheapest of the world’s five biggest non-state oil companies by market value relative to reserves, earnings and output. (11/19, #17)