1. Production and prices

The struggle between optimists and pessimists goes on and on with neither side as yet gaining a decisive advantage. Oil prices started the week close to $75 a barrel on rising stock markets and hopes for a global recovery; fell to below $70 at mid-week on rising inventories and the outlook for bad employment numbers; and then bounced above $73 on Friday as the stock market gained. Until more definitive information as to the course of the recession arises, this pattern is likely to continue.

Natural gas prices fell to $2.69 per thousand cf last week, the lowest since August 2002, as the government announced that underground storage is filling up. Lack of industrial demand, mild weather, and good production is behind the glut.

US gasoline consumption which was holding its own a couple weeks ago is down as the summer driving season comes to a close. MasterCard reports consumption is 2.2 percent lower than last year and the EIA says that so far in 2009, gasoline consumption is down about 1 percent over last year, while jet fuel is down 13 percent and distillates down 10 percent.

Tanker tracker Petrologistics reports that OPEC shipments were up about 300,000 b/d in July as compared with June. Chatter surrounding the forthcoming OPEC meeting suggests that there will be no change in quotas at the September 9th meeting. Given the drop in world prices for goods and services, OPEC is happy with the relative price of oil for the time being and those members with excess production capacity appear to be taking advantage of the situation.

2. Droughts in Asia

New reports on the drought that is affecting the Asian sub-continent and parts of China highlight how serious the situation could become. Inadequate rain is not only damaging crop yields but is also reducing hydro-generated electricity production which in turn leads to myriad other problems.

For now the top problem is in India where drought conditions are affecting 278 districts that are home to 700 million people. The government is already taking measures to prevent hoarding and to import food.

In China, severe drought is already ravaging China’s northern areas and is beginning to extend to the south. According to the State Flood and Drought Relief Headquarters, 12.7 million hectares are currently affected – up 35 percent from past years. Some 5 million people are short of drinking water and will have to be supplied by truck from outside the region.

Changing weather patterns are affecting the amount of snow falling on the Himalayas, its glaciers and ultimately the quantity of water flowing into the rivers of China and the sub-continent. While it will take many years of drought to dry up the major Asian rivers, the situation in Nepal at the foot of Mt Everest is already serious with this year’s crops forecast to be only half of normal. Oxfam reports that millions in Nepal are already facing food shortages.

Pakistan and Bangladesh are also facing severe electricity shortages due to reduced water flows and the need to furnish more power to irrigation pumps. Pakistan’s cabinet approved a plan to rent 2,250 megawatts of generating capacity to help alleviate the critical situation. This of course will likely be oil powered and will just add to the country’s problems. Bangladesh will tender for $6 billion worth of power plants next month.

If the droughts across Asia continue and increase in severity, it will not be long before substantial resources will have to be diverted to their mitigation, thereby hampering other economic development. All countries talk of improved water management as the answer to droughts. This involves better containment and storage of rain water and efficient utilization in agriculture and other uses. All this will take decades to achieve and will likely require large amounts of energy to collect, store and distribute water.

3. Iraq

Iraq’s oil production hit a post-2003 war high of 2.03 million b/d in July but will be hard pressed to increase production further due to the poor state of its infrastructure. With one of the largest known oil reserves in the world, contracts to further develop Iraqi oil are much sought after. The first attempt to auction off drilling concessions to foreign oil companies in June was a failure due to the government’s insistence that the international oil companies only be allowed a pittance ($2 a barrel) profit for their efforts.

A second auction is scheduled for November. This auction will involve un-developed and partially-developed fields. Baghdad says it has lowered its demands to the point where foreign companies are expected to bid.

In the last few weeks, however, a surge in violence has injected a new note of uncertainty into the prospects for the badly needed foreign investment. US troops now have withdrawn from Baghdad and other urban areas, leaving government forces responsible for security. Since the withdrawal, hundreds have been killed in bombings and a new wave of sectarian violence is anticipated.

Attacks on the oil infrastructure could shut down the economy and make it far too dangerous for foreign oil workers to begin drilling. The ruling Shiite coalition is fracturing, leaving open the possibility of Iranian-backed factions coming into power after the elections next January. Some fear that Iraqi oil policy could shift to Tehran. None of this is likely to encourage the international oil companies to invest billions in developing Iraq’s oil in return for minimal profits.

Quote of the Week

  • “Demand in the developing countries peaked in October 2008 at 46.33 million barrels per day and it is down by only 0.36 million barrels per day. I don’t know about you but I am amazed that the worst global recession in decades has barely managed to shrink energy demand in the developing world. On the supply side of the equation, let me be clear. If I was asked to pick the biggest threat to a sustainable economic recovery, ‘Peak Oil’ would top that list.”
    — Puru Saxena, founder Puru Saxena Wealth Management, publisher of Money Matters 

    Energy Stat of the Week

  • Coal’s share of US power generation has fallen from 49 percent in 2007 to 45 percent this year. Declining industrial demand for electricity and an abundance of cheap natural gas will threaten coal’s status as the dominant US fuel to generate electric power, even after the economic recession ends. The loss of industrial “baseload” looks long term, analysts and executives say. Yet coal still remains cheaper ($2.24 per MMBtu) than natural gas ($3.83 per MMBtu), according to EIA data. Total electricity sales in June were 7.3 percent below the same month last year.

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

  • In Russia, Anatoly Dmitrievsky, director of the Institute of Oil and Gas Problems (Russian Academy of Sciences), said $280 billion of investment into the development of global oil reserves has been postponed due to the global financial crisis. More than a year ago, Leonid Fedun, vice president of Lukoil, said that Russia would never produce as much oil as in 2007 – almost 10million b/d– and would be able to maintain a production level of 8.5-9 million b/d for the next 20 years only given billions of investment in exploration. (8/29, #12) Russia still plans to invest up to $1.9 trillion in its energy sector by 2030 in a drive to boost stagnating oil and gas output, government sources said Wednesday. (8/26, #17)
  • A pipeline set to join China’s energy demand with Russia’s oil supply will spur production and spark refinery construction and could greatly reduce Beijing’s need for crude from elsewhere. (8/25, #6)
  • The Nigerian government says oil production has risen to 1.7 million b/d from 1.2 million following an improvement in security in the oil-producing Niger Delta region. That’s still down from a peak of about 2.5 million b/d during second half of 2005. The government credits an amnesty program for less violence and more production. (8/27, #4)
  • The MEND, the main armed group in Nigeria’s oil region, said it suspended peace talks with the government and may resume attacks on oil infrastructure on September 15th. The group is opting out of an amnesty program because the government expects disarmament without the real issues being addressed. (8/25, #10)
  • Brazil’s government is set to unveil a sweeping reform of regulations covering the oil and natural gas industries, likely sparking a political fight that will reverberate for generations. The regulatory framework will delineate how recently discovered offshore oil deposits—subsalt fields such as the multi-billion-barrel Tupi—should be developed, who will develop them and who will reap the rewards. Some proposals could leave foreign oil companies with a small share of the ultra-deepwater treasure.(8/29, #4)
  • In Libya, initial enthusiasm that accompanied its first rounds of oil licensing — held soon after international sanctions were lifted in 2004 — has worn off, a casualty of arbitrary laws, draconian contractual terms and Byzantine bureaucracy. Libya has the largest proven oil reserves of any African country, with 43.7 billion barrels (BP data). (8/28, #5)
  • In Uganda, the energy ministry said petroleum resources in the Lake Albertine Graben are about two billion barrels. Only 30% of exploration activities in the oil-potential area of western Uganda have been completed, with 32 of 34 wells hitting oil and gas. Ministry speculates that proved reserves might eventually reach 6 billion barrels. (8/28, #6)
  • The question of American “energy independence” clearly rankles officials in Saudi Arabia, the world’s biggest exporter of crude oil, who seem increasingly puzzled by the energy policy of the United States, the world’s biggest oil consumer. (8/26, #4)
  • Iran has discovered a very large in-situ oil reserve of over 8.8 billion barrels in Soussangerd oilfield, Khuzestan province, Oil Minister Gholam-Hossein Nozari announced on Monday. (8/25, #3) But Iran may struggle to put its latest oil field discovery into production due to lack of technology, tougher sanctions. (8/26, #6)
  • In Ecuador, an environmental damages suit filed against the former Texaco is expected to result in a ruling later this year or early in 2010 that will cost Chevron billion-dollar damages. (8/26, #9)
  • Clarification from the IEA about peak oil: their WEO 2008 said in chapter 11 (p. 249) that global conventional oil production will peak around 2020. A recent article incorrectly made it sound that total oil production (including unconventional oil etc.) is going to peak at that time. Taking into consideration gains from unconventional oil, oil peak will be later than 2020, more like around 2030. Also, oil peak can be delayed by improving energy efficiency, therefore consuming less oil and consequently producing less oil. (8/28, #14)
  • Calgary-based Enbridge Inc. faces new legal hurdles for its $3.3-billion Alberta Clipper oil sands pipeline as U.S. environmental groups prepare to launch a legal challenge to the State Department’s permit to proceed. (8/27, #13)
  • Australia approved Chevron’s A$50 billion liquefied natural gas venture on a remote island, adding stricter conditions to quell environmental concerns about the nation’s biggest resources project. Chevron has said the Gorgon project off the northwest shelf may produce its first LNG in 2014. (8/26, #11)
  • The total estimated volume of shale gas in British Columbia is as much as 1,000 trillion cubic feet — enough to supply all of North America for 40 years, although the volume of gas that can be economically extracted is likely to be substantially lower. (8/24, #20)
  • China is to boost its economic ties to the Burmese military government with a $5.6 billion gas project in the Bay of Bengal, to be built by a South Korean and Indian consortium. (8/26, #11)
  • Crude oil has become so expensive compared with natural gas that the record price ratio between them probably won’t last, analysts say. The ratio between them closed at a record 26.4-to-1 last week. The ratio has more than tripled this year amid a 67 percent increase in crude prices, while gas prices have fallen 48 percent. (8/26, #3)
  • In US shale gas plays, efficiency improvements of at least an order of magnitude are needed because field costs will not stay at the levels to which they have dropped since late 2008. Companies must find ways to cut the drilling time of a typical shale well to 7 days from 28. (8/28, #11)
  • A move to regulate hydraulic fracturing by the federal government is the “biggest threat our industry has ever seen in Washington,” Bruce Vincent, vice-chairman of the Independent Petroleum Association of America, said Aug. 26. (8/27, #12)
  • US drilling activity continued to climb, with 14 more rotary rigs returning to work for a total 999 this week, still well below the 2,031 units that were drilling in the same period a year ago, Baker Hughes reported. 699 are drilling for gas, 286 for oil, 14 misc. (8/29, #11)
  • Climate change legislation: 41 percent of Americans in this ABC News/Washington Post poll think proposed changes being developed by Congress and the Obama administration will raise their energy costs. Yet enough of them back those changes to give the effort 57% support among all Americans–higher than support for health care reform, 45%. Support for fossil fuel plants is down, support for nuclear power is up (though with a strong not-in-my-back-yard component) and hopes are reasonably high that a new US energy policy will create jobs and help address global warming. (8/29, #8)
  • China’s top legislature approved a resolution to actively deal with climate change, ahead of an international conference in December in Copenhagen, Denmark. (8/27, #6)
  • Cash for Clunkers program: the average fuel economy of the vehicles traded in was 15.8 mpg and the average fuel economy of vehicles purchased is 24.9 mpg: a 58% improvement. Cars purchased under the program are, on average, 19% above the average fuel economy of all new cars currently available. (8/27, #9)
  • The US Energy Department will award $300 million to a clean cities program to help communities buy alternative fuel vehicles. It will also establish about 500 fueling and recharging stations for the vehicles. (8/27, #10)
  • A 400 billion euro ($774 billion) plan to power Europe with Sahara sunlight is gaining momentum, even as critics see high risks in a large corporate project using young technology in north African countries with weak rule of law…Desertec would need 20 or more efficient, direct-current cables each costing up to $1 billion to transmit electricity to Europe beneath the Mediterranean. (8/26, #16)
  • Chevron Corp is building a solar plant to create the steam that boosts production at an aging California oilfield, a project the company aims to replicate elsewhere. (8/24, #21)