1. Prices and Production

After eight straight days of decline, oil settled on Friday at $69.87, the lowest close since early October. The 11 percent drop since December 1st was attributed to a strengthening dollar and rising US fuel inventories. Global oil production increased by 200,000 b/d last month with the increase apparently going to China which continues to report spectacular increases in industrial production and oil refining.

Beijing announced that it will continue its stimulus and lending polices for another year, but with somewhat tighter controls. Outside observers continue to say that China’s economic policies cannot last long without an improbable increase in exports.

Opposition protests against the Iranian government resumed last week. U.S. Defense Secretary Gates and EU leaders both expect the international community to impose “significant additional sanctions” on Tehran for failure to negotiate over nuclear enrichment. In the past, the Iranians have threatened to reduce oil exports as retaliation for increased sanctions.

The IEA continues optimistic about economic recovery and now expects the demand for oil to increase by 1.5 million b/d next year, 130,000 b/d more than their previous estimate.

2. Baghdad’s Second Auction

The two-day auction which concluded on Saturday awarded international oil companies development rights to seven more oil fields. As these are among the few remaining easy-to-produce fields in the world, if all goes well, development of these fields could double Iraqi production within a few years. When combined with the awards made during the last auction, the Iraqis are talking about producing 12 million b/d by 2016 which would make them the world’s largest producer. A former Iraqi oil minster told an industry conference that he believed 6 million b/d was more realistic.

Many are skeptical that such production levels will ever be achieved, considering the propensity towards violence in the country and the many serious ongoing political disagreements. Last week a series of coordinated bombings in Baghdad, which killed 120 and wounded over 500, were attributed to renewed al Qaida activity. National Elections are coming up in March and there is no end in sight to the disputes with the Kurds. A national oil law has yet to be passed so there is no legal basis for the award of contracts or distribution of revenue.

To keep the awards politically palatable in Iraq, the Oil Ministry was unusually stingy in the terms of the contracts – initially allowing the winners a fee of some $2 a barrel for any new oil that they produced. In the second auction this seems to have been modified to around $5-6 a barrel, still way below the return normally expected by international oil companies for their time and efforts. Shell, however, was reported to have accepted a fee of a $1.39 a barrel for developing a field that is expected to produce 1.8 million b/d. Giving the shrinking prospects for access to new oil and the fierce competition, negotiating leverage has clearly shifted to the owners of new oil fields.

Perhaps the most interesting result of the auction was the national diversity of the companies that received awards and that little oil was awarded to US oil companies. These included Russia, China, Norway, Malaysia, Angola, France and the UK. Chinese oil companies, which have lower labor costs and a willingness to accept more risks than other countries, have secured three contracts with the Iraqi’s. Some fields remain too risky for anybody. The field right next to and possibly under Baghdad’s religious hot bed of Sadr City received no bids.

3. Climate Change

There is as yet little solid news from the climate summit at Copenhagen. A 100,000 person demonstration outside the meeting on Saturday resulted in 1000 arrests. The conventional wisdom remains that so long as the US Senate considers the threat of possible job losses from emissions controls higher than the dangers of global warming, there will be no meaningful worldwide agreement.

On the second day of the Copenhagen meeting, the World Meteorological Organization released a new analysis showing that the sustained global warming trend shows no signs of ending despite local and temporary fluctuations. This assessment is in general agreement with independent estimates made by the National Climate Data Center and NASA in the US.

Perhaps the most significant development of the week will turn out to be the finding by the EPA in the US that carbon dioxide emissions are a dangerous pollutant. This move, which has already been confirmed by the Supreme Court and is unlikely to be overturned by the Congress, gives the administration considerable leeway to set carbon emission standards without the need for legislation. How far the administration will press this authority likely hinges on the outcome of the legislation currently being debated in the Senate.

4. The IEA’s Peak

Fatih Birol, the chief economist for the International Energy Agency (IEA), has now said if no big new discoveries are made and that if oil demand continues to grow, “the output of conventional oil will peak in 2020.” For those who have been following the discussions within the peak oil community and who suspect that world oil production has likely peaked already or will peak soon, this is not a revelation. Coming from a senior official of the IEA, however, the statement underscores a major shift of sentiment regarding peak oil among policy makers.

Until the release of their annual world energy assessment in November 2008, the IEA was adamant that world oil production could continue to grow for the foreseeable future. After the IEA finished analyzing historical production trends in 800 oilfields and realized that fields in decline were losing production at the rate of up to 8.6 percent a year, there was a major shift in thinking. By November 2009, the Agency was saying that conventional oil production would start dropping before 2030, but assumed that continued growth would come from non-conventional sources such as tar sands.

We now have a specific and indeed much closer date from the IEA – 2020. While this is 10 or more years later than most in the peak oil community believe that the actual peak will, in hindsight, turn out to occur, it represents some kind of a turning point in official thinking. It also modestly increases the possibility that governments will soon acknowledge the fact of peak oil and will start actions to mitigate the consequences.

Quote of the Week

  • “The current schism between the old and new energy industries—wherein the green evangelists mock the traditional fuels and the oil and gas crowd reciprocate—should end. This transformation also could be led by policymakers who admit there is no silver bullet in our common effort to build a low-carbon future.”

— Joe Stanislaw, CEO of JA Stanislaw Group LLC

The Briefs

  • As world leaders gather in Copenhagen to pursue a reasonable set of targets to cap greenhouse gases, there is a growing realization that the US Senate’s cap-and-trade bill designed to address climate change is doomed… Against this backdrop, another idea is gaining momentum, one that seems even more improbable: a carbon tax. A Hart Research poll found that voters prefer a carbon tax to cap-and-trade by a 2-to-1 margin (12/12, #17)
  • According to the IEA, non-OPEC producers, accounting for about 60 percent of the global total, will provide 51.6 million b/d in 2010, or 265,000 b/d less than previously anticipated. Projections for non-OPEC supply through to 2014 were boosted as higher investment restores delayed projects. (12/11, #3)
  • Colombia’s crude oil output in November rose to an average 725,000 b/d vs. 624,000 b/d 12 months ago, Mines and Energy Minister Martinez said Thursday. He expects the country’s output may rise to 1.2 million barrels a day in the “medium term.” (12/11, #12)
  • The Libyan government, hit by budget constraints and by current market conditions, has announced a delay, from 2012 to 2017, in its previously released plans to raise its oil output capacity to 3 million b/d. (12/9, #15)
  • Saudi Aramco, the world’s biggest oil company, plans to drill 45 to 50 oil exploration wells next year, the company’s vice president for exploration said. (12/7, #9)
  • Nigeria’s amnesty program has increased the country’s oil production as daily output recently averaged between 2.4 and 2.45 million barrels. (12/8, #10)
  • Chinese companies have proposed investing $50 billion to buy 6 billion barrels of Nigerian oil reserves, the African nation’s presidential adviser on energy said Tuesday. (12/9, #16)
  • Mexico has taken out a $1bn insurance policy against oil prices falling next year, a clear signal that commodities producers remain wary about the threat of a double-dip recession. The world’s sixth largest oil producer said on Tuesday that it had hedged all its oil exports for 2010, by buying protection against oil prices falling below $57 a barrel. (12/9, #17)
  • Over the past 20 years, oil functioned as a type of life jacket for Mexico’s economy. It hid economic distortions, allowing governments to postpone needed structural reform as it financed the status quo. Mexico was able to float along, buoyed by billions of dollars of oil revenue, without having to swim more quickly than its competitors in the sea of emerging markets. But now that oil production at Pemex, the state-owned oil monopoly, is plummeting, the country faces some hard truths that the oil bonanza obscured. (12/9, #18)
  • The US Interior Department approved, with conditions, Shell Oil’s plan to drill three exploratory wells in Alaska’s Chukchi Sea. Shell paid $2.1 billion in 2008 for leases in the Chukchi Sea when the Bush administration opened up 30 million acres (12 million hectares) in the unexplored area for drilling. (12/8, #15)
  • A spill of 1,095 barrels of crude oil mixed with water from a BP pipeline in Alaska was due to a rupture caused by a buildup of ice within the line, BP and the local environmental authorities said Thursday. (12/10, #11)
  • In the Gulf of Mexico, so far this year there have been 12 discoveries in at least 1,000 feet of water, representing some 1.35 billion barrels of oil equivalent, the most found there in a single year since 2002, according to Wood Mackenzie, an industry consulting firm.(12/8, #14).
  • Chevron said Thursday its 2010 capital budget will be $21.6 billion, 5% lower than its 2009 budget. (12/11, #20)
  • Transocean and Diamond Offshore Drilling, the world’s biggest deepwater oil drillers, may face a drop in rig-rental revenue because of a glut of vessels that can operate in oceans two miles (3.2 kilometers) deep. (12/8, #6)
  • IHS-Cambridge Energy Research Associates’ third-quarter capital-cost index showed a 6-month decline of 4%. IHS CERA said the decline resulted from lower levels of upstream oil and gas activity, which pulled down costs of drilling rigs and yards and fabrication. (12/9, #5)
  • US drilling activity increased by 20 rotary rigs to 1,161 units working this week, compared with 1,790 during the comparable week in 2008 and to the peak figure of 2032 rigs in September 2008. (12/12, #14)
  • An organization of natural gas exporting countries informally known as the Gas OPEC has elected a Russian as its first secretary general, underscoring the oversize role the country is likely to have in the group that it helped found a year ago. (12/10, #3)…The group, which controls nearly 70% of the world’s proven gas reserves, is facing the first global drop in gas demand, with the International Energy Agency (IEA) expecting supply capacity to exceed demand for most of the next decade. (12/9, #7)
  • Saudi Arabia’s raw gas production is seen exceeding 13 billion standard cubic feet a day by 2020, from about 8.8 billion cubic feet a day now and 1.65 billion in 1981. (12/9, #14)
  • El Paso Corp. plans to push ahead with $4.1 billion in spending next year on natural-gas pipelines and exploration, even though its earnings have plunged with natural-gas prices. The Houston company told sometimes-skeptical analysts Thursday that its spending will pay off by 2012. (12/11, #18)
  • The head of the American Petroleum Institute on Friday said the industry group was shedding 40 employees, or 15%, from its work force as part of a modernization of its advocacy efforts. (12/12, #13)
  • As the US Congress and Commodity Futures Trading Commission consider tighter regulation of derivatives trading, a new study suggests excessive speculation wasn’t to blame for a record-breaking surge in oil prices in first-half 2008. (12/9, #11)
  • Pakistan’s government is offering economic aid and political changes for Baluchistan, the province in the southwest where insurgents have attacked oil and gas installations, pipelines and security forces in recent years. The Baluch group of Nawab Akbar Khan Bugti, a tribal leader killed by security forces in 2006, says it is fighting for the rights of local people, including royalties from the minerals and fuels discovered in the region. (12/10, #8)
  • China’s crude-oil processing volume reached a record in November, driven by economic recovery. Refining volume climbed 21 percent from a year earlier. A $586 billion stimulus package, record bank lending and incentives for purchases of cars and home appliances are supporting industrial production and boosting fuel consumption. (12/11, #14)
  • The rebound in the Chinese economy accelerated again in November with industrial production rising by a larger-than-expected 19.1 per cent compared with the year before. The increase in factory output came after a 16.1 per cent rise in October and represented the fastest pace of growth in industrial production since June 2007. (12/11, #15)
  • China has unveiled new energy intensity targets and aims to have 15 percent of its energy from renewable sources by 2020. Beijing is presently building the world’s biggest wind power project. Paradoxically, new coal-fired power plants, with 13.6 million kilowatts of capacity, will be added by 2020 in Jiuquan to back up the new wind project. (12/11, #17)
  • China is driving ahead with an ambitious program to expand its atomic energy capacity over the next decade, raising questions about its ability to find the uranium it will need, at home or abroad. (12/11, #22)
  • China aims to deepen energy ties with Central Asian states seeking new markets for their oil, gas and uranium, an official said on Thursday, ahead of a visit to Kazakhstan and Turkmenistan by Chinese President Hu Jintao. (12/10, #9)
  • Chinese car manufacturers expect car sales and output to top 13 million for the full year, the Xinhua News Agency reported. China has never produced more than 10 million cars in one year before. Sales in China are set to storm ahead next year too – though the growth rate is set to slip back to a more measured 10-15% from 40-50% growth in 2009. (12/7, #16)
  • A $60 million project to extract geothermal energy from the hot bedrock deep beneath Basel, Switzerland, was shut down permanently after a government study determined that earthquakes generated by the project were likely to do millions of dollars in damage each year. The findings are a serious blow to the hopes of environmentalists, entrepreneurs and investors who believe that advanced geothermal energy could substantially cut the world’s use of emissions-causing fossil fuels. (12/12, #18)
  • Uranium miners rushing to meet future nuclear fuel demand face a tough slog against government red tape, project-specific problems, and the hangover of years of underinvestment. The limited growth in mined supply is a legacy of the 1990s, when plunging prices froze most exploration and development. (12/12, #19)
  • The head of American Electric Power Co., the biggest emitter of carbon dioxide in the US, said advances in technology would allow the company to eliminate the emissions from its coal-fired power plants by 2025. (12/9, #25)
  • Several recent studies of US coal supplies suggest that much that we think we know about coal is wrong. If these studies are correct, the argument for investing in “clean coal” becomes tenuous on economic grounds alone. These studies call into question the one “fact” that both pro-coal and anti-coal lobbies have taken for granted: that the US has a virtually limitless supply of cheap coal. (12/11, #21)
  • Scientists at Stanford University reported on Monday they have successfully turned paper coated with ink made of silver and carbon nanomaterials into a “paper battery” that holds promise for new types of lightweight, high-performance energy storage. (12/11, #24)
  • General Electric Co. won a $1.4 billion contract to supply turbines and services for an Oregon wind farm that would be bigger than any completed so far and supply a tenth of Southern California Edison’s renewable energy. (12/10, #13)