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1. Oil and the Global Economy

On Monday and Tuesday oil prices climbed from $79 to nearly $83 a barrel, then fell to close at $80.70 on Friday as multiple negative factors weighed on markets. The week’s early surge came on the usual factors of a weaker dollar and investor optimism about the prospects for economic recovery. Even China’s slowing manufacturing was interpreted as an orderly slowdown that is positive for oil.

When the mid-week US stocks report showed a 6 million barrel increase in total commercial petroleum stocks and US fuel consumption dropping by 2.5 percent, markets turned weaker. When US employment numbers for July showed unemployment growing faster than expected, equity and oil markets turned even weaker.

There were several reports of an oil glut in the Persian Gulf with an estimated 30 million barrels in floating storage. Much of this crude is said to belong to the Iranians whose production is becoming increasingly heavy, sour, and difficult to sell without larger price discounts than Tehran is willing to accept. Floating storage elsewhere in the world is selling in markets as prices no longer favor this technique as a way to speculate.

There has been much discussion of the near-term future of Chinese oil imports in the wake of Beijing’s clampdown on lending and the subsequent fall in manufacturing. After an increase of oil consumption by 22 percent year over year in the first quarter and 15 percent in the second, China National Petroleum Corp is estimating that consumption will increase by 9.5 percent in the third quarter. Given that China is now burning through about 9 million b/d, increases in consumption at the rates we are seeing in 2010 are certain to tighten oil markets and drive up oil prices eventually. For the immediate future, however, China is enduring wide scale flooding which is likely to cut the demand for oil.

2. The Macondo Well

BP finished pumping cement down the Macondo well on Thursday as a prelude to drilling into the lower reaches of the well and pumping in still more cement to seal it forever. Government scientists say that some 75 percent of the 5 million barrels of crude that leaked in the Gulf has been picked up or dispersed. The remaining 25 percent is thought to be in the form of sheen, tar balls, buried in sediment or washed ashore.

Many scientists remain skeptical of the relatively upbeat government report saying that it fails to account for the long-term effects and vast plumes of microscopic oil droplets still underwater.

With the well likely sealed, attention is turning to the litigation, fines and possible criminal indictments resulting from the spill. BP could in theory face civil penalties of as much as $17 billion in addition to the costs of sealing the well, cleaning the shorelines and paying damages to those affected. Most analysts expect the civil fines to be more on the order of $3-5 billion. BP continues to sell off assets to pay for the disaster.

Finger pointing among those involved in the spill continues. Transocean claims that its contract for drilling the well protects it from suits and claims resulting from the explosion. BP says it is too early to say whether Transocean is off the hook. In the meantime, BP has sent its partner Mitsui a bill for $480 million to pay for Mitsui’s share of the damages. Mitsui is -studying‖ the question of its liability.

3. In the Congress

For the second time, Senate Republicans and a group of Democratic Senators have succeeded in blocking another attempt at energy legislation until September. The bill bypassed the issue of carbon dioxide control and focused on matters dealing with oil spills. Vehement opposition from the petroleum and coal industries, coupled with the argument that that any restrictions, taxes, or increased liabilities on anything related to energy would only cost jobs in times of growing unemployment, continues to block the bills.

Senate Republicans are floating a bill that would permit resumption of offshore drilling and give the President the authority to set varying liability limits. The bill stays away from climate control issues and other matters that might increase costs for the industry. Both sides plan to lobby hard during the August Congressional recess and then resume efforts to pass some sort of bill in September.

4. Peak Coal?

A newly released paper by two professors at the Universities of Texas and California concludes that global coal production will reach a peak next year and then decline to 50 percent of current production by 2047. This estimate is at variance with the widely held belief that, for example, the US has 130 years of coal reserves at current rates of production. As with oil reserves, enormous deposits of coal remain, but increasing inaccessibility and decreasing seam thickness will result in declining production.

The paper by Professors Tadeusz Patzek and Gregory Croft advocates a rapid shift to new ultra supercritical steam turbines that would increase coal combustion efficiency to roughly 50 percent. Current power plants are about 35 percent efficient. This new technology would allow the existing coal reserves to last for many more years while reducing emissions from coal-fired power stations.

The Patzek-Croft study joins several other studies released in recent years that question how fast remaining coal reserves can be mined. This new analysis challenges scenarios of the Intergovernmental Panel on Climate Change (IPCC) regarding future emissions and holds that the IPCC’s findings give too much weight to extreme cases.

The rate of future coal production could be improved if new technology allows economical production of thinner seams or of coal at greater depths.

Quote of the Week

“I feel the uranium market right now could be the world’s most unbalanced commodity market. . . . the planet, by means of the nuclear power industry, consumes approximately 172 million pounds of uranium per year, as well as the planet only produces about 92 million pounds of uranium per year. The supply deficit is produced up through above-ground inventories, which are becoming worked down pretty quickly.”

— Bill Powers, Canadian energy analyst

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

  • The United Arab Emirates said Friday that a Japanese oil tanker was hit by an explosives-laden dinghy in the Persian Gulf in what would be the first attack in the strategic waterway where millions of barrels of oil are transported each day. The ship was damaged as it entered the Strait of Hormuz, a transit point for about 40 percent of oil shipped by tankers worldwide. A group known as the Abdullah Azzam Brigades said it had carried out a suicide attack against the tanker to avenge the plunder of Muslim wealth and to destabilize international markets. (8/7, #5)
  • Iran is suspending some liquefied natural gas projects, including Persian LNG, and shifting focus on pipeline exports instead, the head of the country’s state oil company was quoted as saying Saturday. Iran’s LNG schemes largely depend on key technologies owned by Western companies. (8/7, #6)
  • China’s Vice Premier told the visiting Iranian oil minister on Friday that Beijing would maintain cooperation with Tehran on existing projects, after the United States called on Beijing to observe sanctions. China has already resisted U.S. pressure on its business and oil trade with Iran in comments published earlier this week, saying Chinese trade dealings with Iran should not be criticized. Iran is China’s 3rd-largest supplier of oil. (8/7, #7)
  • China’s oil use may average about 8.9 million b/d in the third quarter of 2010, up 9.5 percent from a year earlier, CNPC’s research unit said this week. (8/5, #8) Chinese oil demand currently stands at just over 2 barrels per person per year, compared to around 20 barrels in the US, 14 in Japan, and 11 to 13 across most of Western Europe. (8/4, #13)
  • Venezuela is shipping 200,000 b/d of oil to China to repay a $20 billion debt owed to the Asian nation to finance power, agriculture and technology projects. (8/5, #8)
  • Ecuador has agreed to refrain from drilling for oil in a pristine Amazon rainforest reserve in return for up to $3.6 billion in payments from rich countries. Under a pioneering agreement signed with the UN, the oilfields under the Yasuni reserve will remain untapped for at least a decade. The money is about half of what Ecuador would make by selling the oil. (8/4, #10)
  • Ecuador is preparing a plan to take over the operations of private oil producers if efforts to replace their production-sharing deals with service contracts fail. (8/3, #8)
  • Mexico’s Pemex plans to increase the number of leased offshore drilling rigs to 60 from 52 as the state-owned company requests a bigger budget in an attempt to halt output declines. (8/7, #10)
  • Mexico’s formation of deepwater policies in response to the Macondo well blowout, Deepwater Horizon rig explosion, and crude oil spill will push drilling of Mexico’s first deepwater well into 2011. (8/7, #11)
  • BP’s oil spill crisis in the US Gulf of Mexico has prompted offshore safety regulators in Europe to examine the adequacy of their own response procedures to ensure a similar disaster does not happen there. The upstream sector’s reputation has been damaged, and regaining society’s trust in delivering safe and reliable supplies of fossil fuels is going to be incredibly difficult. (8/2, #19)
  • Eni SpA, Italy’s largest oil company, may delay exploration of an offshore field in India by at least a year. Eni is reconsidering the risks of deepwater exploration following BP’s accident in the Gulf of Mexico (8/6, #8)
  • The new head of the US Interior Department’s offshore-drilling oversight agency vowed to make “aggressive investigations of oil and gas companies” a “hallmark” of the agency going forward. (8/4, #14)
  • In the wake of the Gulf of Mexico disaster, the prospect of drilling for oil in the Beaufort Sea has gone back into the deep freeze, and critics say it should stay there until further research is done on the risks of an Arctic spill. Very few, if any, drillships in the world are capable of withstanding the deepwater ice in the Beaufort. (8/2, #17)
  • Two interviews with energy market investors–Rick Rule, founder of Global Resource Investments, and Charles Maxwell, senior energy analyst for Weeden & Co.-both point to a coming demand-driven spike in oil prices, despite professing differing views on peak oil. (8/7, #17)
  • Western Refining will idle its Yorktown, Virginia, 71,000-barrel-a-day refinery because of a poor outlook for East Coast refining margins. The idling process will take six weeks and will result in 230 of the refinery’s 260 employees being laid off. (8/6, #12)
  • The EU is seeking an agreement on a natural-gas pipeline between Turkmenistan and Azerbaijan as the 27-nation bloc aims to import Caspian fuel and reduce its dependence on Russia. The EU regulator’s energy unit drafted a document that the parties could use as the basis for a deal on building at least one pipeline across the Caspian Sea. (8/4, #21)
  • Wood Mackenzie reported that unconventional gas, particularly shale, will increase significantly to help meet China’s strong gas demand growth. However, unconventional gas resources will take a significant time to develop and therefore meeting its gas demand will require China to import significant additional volumes of liquefied natural gas and piped gas, particularly up to 2020. (8/4, #12)
  • Reliance Industries, India’s biggest company by market value, agreed to buy its third shale-gas asset in the U.S. this year, acquiring a 60 percent stake in acreages held by Carrizo Oil & Gas Inc. and its partner. The purchase of Carrizo assets is as much as 56 percent cheaper than other acquisitions in the Marcellus area this year. (8/5, #15)
  • EOG Resources is looking to sell 180,000 acres of natural gas shale leases in the Haynesville, Marcellus and Eagle Ford shales, as well as some Canadian natural gas production, CEO Pappa said Friday. EOG says it still has more acreage than it can develop. But it will help fund the shift from being mainly a natural gas producer to being primarily an oil producer, and bring its debt-to-capitalization ratio below 25%. (8/7, #15)
  • Chesapeake Energy Corp raised its production outlook for the year and said it would shift $400 million in spending originally targeted for natural gas to more profitable oil exploration. Because of the current disparity between oil and natural gas prices, a number of US exploration companies, including Chesapeake, have accelerated oil exploration in a bid to fatten profits. (8/3, #19) [Editor’s note: we wonder if an unexpectedly high cost of producing shale gas is having any impact here…]
  • Companies led by Chesapeake Energy would be banned temporarily from drilling for shale gas in New York under state legislation proposed because of disputes over environmental risks. The measure would suspend drilling until May 15 in New York’s portion of the Marcellus Shale formation to allow for further study. (8/4, #20)
  • Southwestern Energy, the largest natural-gas producer in the Fayetteville Shale of Arkansas, said development of the Marcellus Shale in Pennsylvania may be slowed if dry weather continues the next few months. The dry weather means less water is available from the nearby streams for use in the process of hydraulic fracturing. (8/7, #16)
  • Iran rigorously denied reports on Wednesday that President Mahmoud Ahmadinejad had been the target of a grenade attack. A state-run satellite broadcaster quoted an unidentified “informed source” in the presidential office as saying the reports were false. (8/4, #5) Yet on Monday, in a speech in Tehran, Mr. Ahmadinejad said he believed Israel had “hired mercenaries to assassinate me.” (8/4, #5)
  • In the year 2000, the price of Uranium 308 (a standard mix of uranium oxides) fell to just $10 per pound. Seven years on, however, uranium was at the pinnacle of a stunning bull run, riding a wave of increased demand for nuclear power plants around the globe. By 2007, U308 had hit an incredible $136 per pound – more than a 1,200% price increase from the bear market lows. But then the bottom fell out for uranium prices – again – as hard assets got abandoned in the great financial meltdown. So now, in the mid-$40s, the uranium spot price is well off its year-2000 lows, but merely a third of bull market highs. (8/3, #26)
  • The Obama administration awarded $1 billion to an Illinois project that aims to sharply reduce greenhouse-gas emissions from coal-fired power plants, the latest in a long-running saga aimed at proving coal’s viability amid widespread pressure to combat climate change. (8/6, #17)
  • Prime Minister Putin on Thursday banned all grain exports after millions of acres of Russian wheat withered in a severe drought, driving up prices worldwide and pushing them to their highest level since 2008 in the US. Russia is suffering from the worst heat wave since record-keeping began here more than 130 years ago. This year’s grain harvest is projected at 70 million metric tons, well down from last year’s 96 million. (8/6, #13)
  • A giant sheet of ice measuring 100 sq. miles has broken off a glacier in Greenland–the largest such -calving‖ of an Arctic glacier since 1962–according to researchers at the University of Delaware. (8/7, #4)
  • Argentina is importing record amounts of energy as the coldest winter in 40 years drives up demand and causes natural-gas shortages. (8/4, #11)
  • A new process that simultaneously combines the light and heat of solar radiation to generate electricity could offer more than double the efficiency of existing solar cell technology, say Stanford engineers who discovered it and proved that it works. (8/4, #26)