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1. Prices and Production

Oil prices had a volatile week, falling below $83 a barrel on Tuesday, climbing above $86 on Wednesday and Thursday and then sinking to settle at $83.24 on Friday after the SEC charged Goldman-Sachs with securities fraud. Most analysts are interpreting the plunge as a temporary knee-jerk reaction to the fraud charges.

The markets currently are faced with many conflicting signals ranging from increasing unemployment and foreclosures in the US to increasing consumer demand for gasoline as national averages approach $3 a gallon. Throw in the Greek debt negotiations, which send the US dollar up or down every few days, and surging demand for all forms of energy from Beijing and you have the ingredients to make any kind of case for the future of oil prices that you want.

US refineries are reported to have produced more gasoline in March, 9.3 million b/d, than in any month on record and the API says that US oil product consumption in March increased by 3.5 percent, year over year, to 19.3 million b/d in March.

Technical analysts continue to talk of higher oil prices and Kuwait’s Oil Minister said OPEC will increase production if oil prices rise above $100 a barrel.

Current projections foresee very little opportunity for the world’s spare production capacity to increase significantly in the next few years – if ever. The IEA now sees global demand reaching 86.6 million b/d this year, the level achieved in March. If this number is achieved, the world will soon be in a position where there is only 5 million b/d or so of spare capacity to satisfy surging demand in Asia and Gulf States. Throw in any revival in OECD demand and the ingredients for another price spike are forming.

2. Isolating Iran

So long as 17 million barrels of the world’s crude supply is transiting the Straits of Hormouz each day, the Middle East political situation will be of paramount concern. Close this vital waterway and the global economy would be in chaos within days, if not hours. For several years now, the top geopolitical issue in the region has been Iran’s uranium enrichment program. Tehran steadfastly maintains that the enrichment is for peaceful purposes, but also refuses to give international inspectors the access needed to verify that the country is not developing nuclear weapons. Israel, which could be completely destroyed by a small number of nuclear weapons delivered by missile or terrorists, is determined that Iran shall never develop a nuclear capability and has implied repeatedly that it will go to war to prevent this. Other Middle Eastern states, particularly the Saudis, do not want to see an unstable, nuclear-armed Iran dominating the region.

So far efforts by the US and EU to impose sanctions on Iran through the UN have been thwarted by Russian and China. These nations either believed Tehran’s denials or did not perceive the threat of a nuclear armed Iran as outweighing their desire to obtain oil from Iran, sell to the Iranians, or make trouble for the West.

In recent months, however, these attitudes appear to have shifted. Moscow and Beijing seem to have come to the conclusion that a war involving Iran, which would likely slow or shut down oil shipments from the Middle East, would be far more inimical to their interests than joining in efforts to pressure Tehran on the issue.

In recent weeks, an increasing list of companies, under US and EU pressure, have announced that they will no longer supply the refined oil products which Iran needs to power roughly 50 percent of its economy. It is becoming increasing difficult to transfer money in and out of Iran and the Iranians are finding it impossible to obtain letters of credit to finance trade.

Recently Beijing has been playing both sides of the issue. The Chinese continue to say they support a diplomatic resolution of the conflict and continue to sell gasoline to Tehran, but have apparently agreed to join negotiations on a new package of sanctions on Iran. The key issue for Beijing is just how severe do sanctions on Iran have to be in order to bring about policy changes, while at the same time not do permanent harm to the Sino-Iranian oil trade.

Although the real negotiations are going on in private, judging from the increasingly shrill statements coming from Tehran, such as demands that the US give up its nuclear weapons, the Iranians are clearly beginning to feel the pressure. One of the key questions for the next few years is whether this issue can be resolved peacefully and without a reduction of oil exports from the region.

3. Defense turns pessimistic

It is ironic that the first component of the US government to warn that the US is going to face massive disruptions caused by oil shortages should be the armed services. If one reads the fine print, the most recent Joint Operating Environment document that is published annually admonishes that the Department of Defense is not actually forecasting that there will be oil shortages in the next few years; they are just saying they could happen, and it might be useful if the Department started planning for them.

Military organizations spend a lot of time planning for contingencies. When they perceive the imminent potential for global economic and political chaos caused by oil shortages, coupled with a threat to their own requirements for prodigious amounts of oil products each day, they feel impelled to point this out. Naturally the document has plenty of caveats about this not being official policy.

The headline conclusions of the analysis are that “by 2012 surplus oil production capacity could entirely disappear and as early as 2015, the shortfall could reach 10 million b/d.” The report does not see the looming problem as lack of adequate petroleum reserves, but rather a shortage of drilling platforms, engineers, and refining capacity. The authors seem to miss the problems of depletion, which is removing 4 million b/d of production capacity from the world’s oil output each year, or the nationalism which is hampering oil output around the world, or the extremely high costs of developing deepwater oil fields.

The conclusion that surplus production capacity could disappear within the next two or three years is somewhat more pessimistic than others are currently talking about – but not a lot more pessimistic. The “forecast” of a 10 million b/d shortfall within the next five years certainly gets one’s attention, but breezes over the intervening developments such as much higher oil prices resulting in sharply lower demand and economic setbacks. While a little shaky on the details, the Defense Department certainly has the general idea — that major problems surround the availability of oil.

Interestingly, the report warns that, should a deep economic depression emerge in the US, the Defense Department could lose substantial funding as it did in the 1930s and that dictatorships could emerge from the political chaos around the world.

Energy Stat of the Week

IEA data show that world oil production hit a high in 2007 at 86.51 million b/d before declining to 86.21 million b/d in 2008 and 84.93 million b/d in 2009. That was the first contraction over two successive years since the 1980s. IEA now projects oil demand this year of 86.6 million b/d, a new all-time high and up 30,000 b/d from last month’s forecast.

The Briefs (clips from last week’s Peak Oil News dailies are indicated by date and item #)

  • Venezuelan Oil Minister Ramirez said OPEC shouldn’t and wouldn’t likely increase oil output this year. Ramirez said his country is abiding by its OPEC-agreed quota levels, and is producing around 3.1 million b/d although most analysts say the figure is closer to 2.2 million b/d. Within three years, Ramirez said the country went from no crude exports to China to 463,000 b/d and expects to ultimately export 1.2 million b/d to China. (4/17, #5)
  • Japan’s government-backed Japan Oil, Gas & Metals National Corp. said it will invest up to ¥32 billion by yearend 2017 in an extra-heavy Orinoco crude oil project in Venezuela, in which two Japanese companies are involved. (4/14, #12)
  • China processed 18 percent more crude oil in March as the country’s refining capacity increased and the economic recovery spurred consumption of fuels. (4/15, #10)
  • China has taken a ‘no talk, all action’ approach to peak oil by acquiring the oil and gas assets that are available to them around the world. Michael Rodgers of PFC Energy estimates that new fields will help China maintain domestic oil production at between 3.6 million and 4 million b/d most of this decade, but rapid field depletion will see it plunge to 1 million bpd by 2020. Imports will have to increase to help meet its rising consumption. (4/16, #10)
  • China Petrochemical Corp.’s purchase of a stake in a Canada oil venture brings the nation’s spending on resources to $64 billion since 2005 and underlines its willingness to pay a premium for energy security. (4/14, #19)
  • Cnooc Ltd., China’s biggest offshore energy explorer, and Sinochem Group may separately bid as much as $3 billion for a 40 percent stake in a Brazilian oil field owned by Norway’s Statoil. (4/15, #6)
  • Sinopec agreed to buy 9.03% interest from ConocoPhillips in the Syncrude oil sands joint venture in Alberta for $4.65 billion. The transaction, subject to approvals by Canadian and Chinese governments, is anticipated to close in the third quarter. (4/13, #19)
  • Schlumberger Ltd. will invest an initial $100 million in a 300-person, 40-acre base camp at Iraq’s Rumaila oilfield and in a drilling joint venture as improving security boosts expectations of a revival in oil output. The company sees oil opportunities in Iraq on “a similar scale” to Saudi Arabia. It has been drilling in Saudi Arabia in a venture with a local company for 50 years. Work in Iraq will require about 100 drilling rigs.(4/17, #8)
  • Pemex, said the company’s goal is to keep crude oil production between 2.4 million and 3 million barrels a day in the 2010 to 2024 period. The state company still expects to produce at least 2.5 million b/d of crude oil this year. (4/17, #12)
  • Pemex‘s Labay well showed that a deepwater area in the Gulf of Mexico near their existing Lakach discovery has big potential to be a major gas source. The company believes the potential of the area could be as high as 5 trillion to 15 trillion cubic feet of natural gas. (4/17, #11)
  • In Uganda, Tullow Oil said two wells have successfully delineated the extent of oil in the Kasamene field, and it discovered oil in the Wahrindi North fault block. The company expects first oil in Uganda in 2011 (4/14, #10)
  • Colombia’s crude oil output in March rose to an average of 763,000 b/d from 647,000 b/d in the same month last year. The monthly output was the highest monthly average since December 1999, when production was at 767,000 b/d. (4/14, #13)
  • In frontier areas like the Atlantic Margin and Eastern Gulf of Mexico, big fields are commonly discovered early in the exploration cycle because industry identifies and drills the largest, most obvious features first. The fact that approximately 50 largely unsuccessful wells have been drilled in each of these areas is discouraging. (4/14, #24)
  • Saudi Arabia has emerged as the second-biggest source of growth in the demand for oil after China. Higher oil consumption in the Arab world’s biggest economy is forecast to account for 11.7 per cent of global expansion this year, the IEA said. Saudi Arabia’s increase is outstripping those in Russia, Brazil and India. Its growth is coming from higher demand for transport fuel, chemical feedstocks and industrial expansion. (4/15, #4)
  • BP’s annual meeting was the focus of a concerted investor protest over its proposals to extract oil from tar sands in Alberta. CEO Tony Hayward attempted to dampen growing investor anger over its oil sands activities by publicly pledging for the first time not to use mining techniques that devastate the landscape. (4/17, #21)
  • ExxonMobil has completed the world’s longest extended-reach well drilled from an existing offshore fixed platform drilling rig. The well extends more than six miles horizontally and more than 7,000 feet below sea level. (4/17, #19)
  • The US Interior Department said it would study other countries’ petroleum royalty policies, noting that US rates are lower than other states. Interior officials said Washington could see higher revenue if it raised rates from oil and natural gas leases. (4/13, #17)
  • There are increasing warnings about an “oil supply crunch” within the next few years, not because of geological constraints, but because of under-investment. These warnings [listed in the article] began just over two years ago, yet the mainstream media have rarely mentioned them, so the public remains largely unaware. (4/15, #17)
  • The number of US oil and gas rigs climbed to 1,491, up 15 rigs from the previous week, according to Baker Hughes. The number of gas rigs was 973, up 14 rigs from last week, while the oil rig count was 506, an increase of one rig. (4/17, #20)
  • Paris-based gas association Cedigaz, in its 2010 survey of global underground gas storage (UGS) capacity, noted that the number of UGS facilities has jumped to 642 from 610, with a working capacity of 333 billion cubic meters in January from 319 bcm in 2006, when the previous survey was published. (4/14, #6)
  • Texas officials are urging lawmakers to follow the examples of California and Pennsylvania in cracking down on oilfield practices that have left leaking pipelines, wells and storage tanks. (4/16, #13)
  • Pakistan’s energy shortage has caused the loss more than 400,000 industrial jobs. (4/17, #9) By last Tuesday, strong protests occurred for a 5th consecutive day against 14 to 16 hour blackouts by Pakistan Electric Power Company across the Punjab. (4/15, #5) Dozens of demonstrators sustained injuries during violent, nationwide protests.(4/14, #7)
  • Gulf hurricanes: the most vulnerable part of the oil & gas infrastructure in the Gulf is the pipeline system. There are more than 33,000 miles of pipelines that gather and transport crude oil and natural gas to onshore processing facilities. Katrina and Rita combined to shut-in 64 pipelines that were 20-inches or larger in diameter, and more than 450 pipelines were damaged by the two storms. (4/14, #25)
  • China’s coal output grew 28.1 percent year on year to well over 751 million tonnes in the first quarter. The increase indicates China has built up a large coal production capacity thanks to a rapid growth in fixed asset investment. (4/16, #9)
  • China chalked up unexpectedly strong annual growth of 11.9 percent in the first quarter, prompting renewed calls for tighter policies to prevent the economy from overheating. Retail sales rose 18.0 percent from a year earlier, factory output grew 18.1 percent, and urban investment in fixed assets like roads and factories rose 26.4 percent. (4/15, #8)
  • China’s auto sales continued their strong growth in March, fueled by government incentives designed to boost consumption. Auto sales in China climbed 56 percent from a year earlier to about 1.74 million units in March and were up 72 percent for the quarter.(4/12, #18)
  • Negotiators at the UN climate talks put off a decision on how to treat a U.S.-brokered agreement on global warming, reducing the chances for a new plan on limiting emissions of greenhouse gasses after 2012. (4/12, #5)
  • A compromise bill to reduce US emissions of carbon dioxide and other gases blamed for global warming will be unveiled by a group of senators on April 26. (4/17, #13)
  • China, the biggest producer of greenhouse gases, vowed to “vigorously” develop a cleaner economy by using energy more efficiently and investing in research and development projects to cut carbon emissions. China plans to voluntarily cut output of CO2 per unit of gross domestic product by 40 percent to 45 percent from 2005 levels by 2020. (4/16, #8)
  • To expand renewable energy programs funded by the 2009 stimulus law, Democratic lawmakers are likely to target tax breaks that benefit oil and gas producers. (4/17, #14)