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Download Full PDF: Peak Oil Review 09/24/12

1. Oil and the Global Economy

After falling by nearly $8 a barrel during trading on Monday, Tuesday, and Wednesday, prices recovered a bit on Thursday and Friday to close at $111.42 in London and $92.89 in N.Y.  The drop came after nearly 3 months of steady gains and was likely related to talk of an SPR release, assurances from the Saudis that they will keep up production, and an unexpected drop in US crude inventories on Wednesday. Production in the Gulf has recovered from Hurricane Isaac and is moving upward under the new safety regulations established after the BP well disaster in 2010.

Over the longer run, the open-ended quantitative easing announced last week should push the dollar lower and consequentially oil prices higher. Efforts to ease the European financial situation are still underway with a new bailout program for Spain to be announced on September 27th. The American Petroleum Institute says that US fuel demand in August dropped to the lowest level in 15 years at 18.6 million b/d, down 4.3 percent from last year, adding another factor to the price mix as did bad economic news out of China.

With economic growth faltering in the US, EU, and China, the outlook for increased demand does not appear to be good despite IEA and OPEC forecasts that the world will consume an additional 800,000 b/d next year. Most analysts seem to believe that the balance of oversupply vs. the new stimulus packages in the US, EU, and Japan will keep oil in a fairly narrow trading range for the next few months.

While the weekly US stocks report showed the crude inventory was up by 8.5 million barrels, gasoline inventories were down by 1.4 million barrels and distillates down by 300,000, both well below the average for this time of year. This is the 8th straight decline for gasoline inventories. East Coast stockpiles were down 4.6 percent to their lowest level since October 2008. The increase in gasoline prices, however, was tempered at the end of the week by the jobs report which showed little progress in US employment.

US natural gas prices rebounded late last week ending a selloff as new EIA figures showed that additions to US natural gas stocks were only 67 billion cubic feet last week – about as analysts had forecast. This is well below the same week last year when stocks increased by 89 billion. Increased use by power companies, outages in Gulf production, and a significant reduction in drilling new gas wells in the past year is likely behind the lower increase.

 

2. The Middle East

Increasing instability in Libya following the assassination of the US ambassador is raising fears for the future of Libyan oil production. Although production there has risen markedly from lows during the uprising last year, there are concerns that foreign oil workers whose presence will be required to maintain or increase Libyan production will be reluctant to return without adequate security.

The Syrian situation continues largely unchanged with casualties mounting and charges of increased Iranian logistic support for the Assad government on the rise. One report has Iran using civilian aircraft to fly military personnel and large quantities of munitions across Iraqi airspace to Syria. This, of course, has raised tension between Washington, which is insisting the flights be halted, and Baghdad.

An agreement has been reached for Baghdad to pay the Kurds for the oil it exports. Under the agreement, the Kurds will increase exports to 200,000 b/d this year and 250,000 in 2013.

The confidence of the Free Syrian Army seems to be increasing as they announced Saturday that they had moved their headquarters into Syria from Turkey. As it now seems to be increasingly dangerous for government forces to move around the country, most of the fighting seems confined to cities as the government cedes much of the countryside to the insurgents.

The anti-American violence in the wake of the YouTube video spread to most corners of the Muslim world last week, but so far there is little indication of just what effect all this animosity will have on oil exports.

The Iranian nuclear confrontation is evolving into a war of words between Tel Aviv and Washington with Prime Minister Netanyahu still insisting that President Obama set a “red line” on Iranian nuclear activities. Feelings between the Prime Minister and the President are getting so bad that charges that Netanyahu is interfering in the US Presidential election are starting to appear in the Israeli press.

In the meantime, Iran is charging that there have been sabotage attempts against the power supplies running to its nuclear enrichment facilities. A senior Iranian lawmaker accused the UN’s IAEA which oversees the Non-proliferation Treaty of passing confidential information about Iran’s nuclear program to Israel. The lawmaker also said that if Iran were to break off relations with the IAEA it will be the fault of the Agency’s Director General. Another parliamentarian accused the German engineering company, Siemens of planting explosives in nuclear equipment sold to Iran. Siemens which was building Iran’s nuclear power station prior to the 1979 revolution denied the accusation, pointing out that it has not sold any nuclear related equipment to Tehran for decades.

Iranian parliamentarians have a history of loose talk about matters over which they have no direct policy responsibility; however, the growing tensions over the possibility of an Israeli strike has all sides on edge.

3. The EU

It was a rather quiet week in Europe as government officials continue to meet over the various financial bailout and reorganization plans that are under consideration. Der Spiegel is reporting that the EU has decided to increase the size of its bailout fund to €2 trillion in order to allow it to bailout larger countries such as Spain and Italy. If so they have more time to seek a permanent solution to the continent’s financial problems that would probably involve the surrender of some fiscal sovereignty to a central authority.

The European Commission, which is becoming increasing concerned about looming food shortages, announced that it will limit the use of food-based biofuels to 5 percent of the continent’s transport requirements. This is a radical change in policy.

 

Quote of the week

  • “…there’s a limit to how many wells you can drill in a year and they’re going after the sweet spots first. So as time goes on, the quality of the resource declines and also the energy return on the energy invested declines. It takes energy to explore for, drill, and pump oil. And if you compare the amount of energy that we get back at the end of the day with these unconventional resources compared to the amount that has to be invested, it’s pretty paltry, especially if you compare it to the glory days of conventional oil back in the 20th century.”

– Richard Heinberg, interviewed on Australian television

 

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

  • The dismal economy and skyrocketing gas prices may have accomplished what years of advocacy failed to: getting more people to stop driving solo. The share of workers driving to work alone dropped slightly from 2010 to 2011 while commutes on public transportation rose nationally and in some of the largest metropolitan areas. (9/22, #9)
  • Canadian energy company Nexen announced its shareholders approved a proposed takeover bid from China National Offshore Oil. CNOOC offered $15 billion for Nexen Inc. in July. The Canadian government has looked to Asian markets as a potential export venue for the country’s oil and natural gas assets. Nexen announced that roughly 90 percent of the shareholders voted in favor of the deal. (9/21, #15) (9/22, #13)
  • The British Parliament said it was advocating a halt to oil drilling in arctic regions until comprehensive safety regulations are in place and environmental reviews are conducted and sanctuaries established. (9/22, #16)
  • Uncertainty over the US wind tax credit, set to expire at the end of this year, is taking its toll on the country’s wind power industry. In existence since 1992, the credit allows project developers or investors to trim tax payments 2.2 cents for every kilowatt-hour of power generated over the first 10 years of a project’s life. “It’s hard to make those new investments in bringing down costs when you don’t know what the world will look like a hundred days from now,” Liz Salerno, chief economist for the American Wind Energy Association told The Washington Post. (9/22, #17)
  • A total of 436,800 foreign-funded enterprises had set up shop in China by the end of June, an increase of 68.55 percent from 2002. (9/21, #10)
  • The Bureau of Safety and Environmental Enforcement (BSEE) gave Shell approval to move forward with certain preparatory activities in the Beaufort Sea off Alaska ahead of exploration drilling. Shell will be allowed to create a mudline cellar, which ensures that the blowout preventer is adequately protected below the seafloor level. The company can also drill and set the first two casing strings into shallow non-oil bearing zones. (9/21, #11)
  • After a steep drop in oil production in the wake of the Deepwater Horizon disaster, the Gulf of Mexico is set for an energy boom. Gulf oil flows will increase by nearly 28% by 2022 to 1.8 million barrels per day, according to consulting firm Bentek Energy. (9/21, #12)
  • North Dakota officials said daily natural gas production is increasing at a rate greater than oil production in the state. The North Dakota Industrial Commission reported that daily natural gas production for July, the latest date for which data was available, was 718 million cubic feet per day, a state record. (9/21, #14)
  • Royal Dutch Shell said its Majnoon oil field in Iraq is still likely to meet a key production target by the end of this year, despite a series of setbacks that have hampered its development. (9/20, #12)
  • Saudi Arabia burned record monthly volumes of oil in June and July to generate electricity, official government figures show, contrary to the top crude producer’s plan to temper its summer oil burning spree this year with more gas. (9/20, #14)
  • Falkland Oil & Gas’s discovery of natural gas off the Falkland Islands shows investors are betting that demand for the fuel will increase enough to develop finds in the remotest corners of the planet. (9/20, #16)
  • EU members need strong rules to regulate the emergence of shale oil and natural gas deposits, European committees ruled. Separate non-binding resolutions from the European Energy Committee and the Environment Committee called for “robust regulatory regimes” on shale developments in the European Union. (9/20, #20)
  • Italian energy group Eni said it has made a significant gas discovery in Pakistan 350 kilometers north of Karachi. The size of the discovery is currently estimated at between 300 and 400 billion cubic feet of gas in place and its delineation will require further appraisal wells. (9/19, #12)
  • General Electric Co. and Brazilian energy company Petrobras have signed the world’s largest subsea wellhead production contract, worth nearly $1.1 billion, as GE looks to boost development of the oil and gas sector in Brazil. (9/19, #14)
  • Japan’s Cabinet stopped short of committing to phase out nuclear power by 2040, backtracking from an advisory panel’s recommendations in the face of opposition from pro-nuclear businesses and groups. (9/19, #17)
  • It’s not unrealistic to expect abundant oil and gas resources to help make North America energy independent within a decade, a witness told a US House Energy and Commerce Committee subcommittee on Sept. 13. “The United States has become the world’s second-largest oil producer,” said Harold Hamm, chief executive of Continental Resources in Enid, Okla. “We just passed Russia and are behind only Saudi Arabia. I don’t think a lot of people realize this.” (9/19, #19)
  • A long-awaited analysis of US natural-gas exports won’t be ready until the end of the year, the Energy Department said, potentially delaying a decision on whether several companies can ship US natural-gas overseas. (9/19, #20)
  • The Petroleum Safety Authority in Norway said it was investigating a “substantial” leak at the Ula field in the North Sea. (9/19, #23)
  • In energy circles, the town of Cushing is well known as the hub used by New York oil traders to set the benchmark price for all US crude. Less well known is the fact that Cushing sits in the Sac and Fox Nation, part of a patchwork of land belonging to Oklahoma’s 38 tribes, each with sovereignty over its own affairs and land. TransCanada’s plan to dig a trench and bury part of its $7 billion, 1,700-mile Keystone XL pipeline through this land has unearthed a host of Native American opposition. (9/18, #12)
  • Five LNG projects to be developed on Canada’s West Coast could be in service between late 2014 and 2019, the country’s federal energy minister Joe Oliver said at a Canadian Natural Resources Regulatory Seminar held in Tokyo. (9/18, #15)
  • The creation of Russia’s first Liquefied Natural Gas (LNG) plant has meant overcoming a number of obstacles similar to those faced within the Arctic region – an increasingly attractive prospect as proven oil and gas reserves decline. (9/18, #17)
  • Power Grid Corp. of India, the nation’s largest electricity transmission company, may exceed a 1 trillion rupee ($18 billion) spending plan to upgrade its network and avoid a repeat of the world’s biggest blackout. (9/18, #18)
  • Iraq’s semi-autonomous Kurdistan region has agreed to increase its 2013 exports to 250,000 b/d — part of a tentative deal intended to help resolve a long-standing conflict with Baghdad over oil rights. (9/17, #4)
  • Ecuador’s crude-oil export revenue totaled $7.64 billion for the first seven months of the year, up 9% from $6.99 billion registered in the same period of 2011, thanks to higher oil prices. (9/22, #6)
  • China imported 20.44 million tons of coal in August, inching down 0.7% year on year, and falling 15.8% from July. (9/19, #16)
  • The US drilling rig count fell 5 units during the week ended Sept. 21, with the total number of rotary rigs in the US reaching 1,859, reported Baker Hughes Inc. This compares with 1,991 rigs working in the comparable week last year. (9/22, #11)