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Peak Oil Review

1. Oil and the Global Economy

During a holiday-shortened trading week in NY, oil traded as high as $91.63 a barrel before closing Thursday at $91.51. Cold weather, Europe’s sovereign debt crisis, Chinese demand and expectations of a US economic recovery continue to be the main factors driving the oil markets. While Wall Street reporters and analysts continue to cite minor movements in economic indicators as evidence there will be greater US demand for oil ahead, the number of skeptics is on the rise. The AAA says that the average price for gasoline in the US is now $3.04 per gallon with several large states averaging in the $3.20 to $3.30 range. While it is obvious that high gasoline prices and steady demand is sucking large amounts of money from consumer’s pockets, economists continue to debate just how high gasoline prices can go before there are obvious economic repercussions.

Arab oil ministers met in Cairo on Saturday to discuss the rapidly rising prices amid hopes that the Saudis would increase production to prevent higher prices from damaging the economies of importing nations. Meeting participants, however, said that the current price increase is largely due to the cold weather; oil markets are well supplied; the global economy can handle $100 oil; and that it is unlikely there will be production increases in 2011. As the unofficial OPEC target price for oil creeps up from $70-80 a barrel to the vicinity of $100, more observers are starting to ask if the cartel, particularly the Saudis, really has the capacity to readily increase production by millions of b/d as it claims.

The oil markets could be volatile during the thinly-traded week ahead. Technical analysts note that the recent price jump has taken out a number of resistance points so that the way is clear for higher prices. What some believe is an end-of-year tax driven drawdown along the US Gulf coast is still underway so that this week’s inventory report and the one to follow could well show a further drop in US stockpiles. Some analysts are already talking about a run at $100 oil in the near future.

2. China

The awaited increase in China’s interest rates came on Saturday when the Central Bank announced a 0.25 percent increase, the second one this year. On Sunday Chinese Premier Wen Jiabao said that the move will keep inflation in check and pledged increased efforts to control housing prices. The government also raised interest rates in October, the first time in three years, and has increased banks’ reserve requirements three times in the past month. Beijing expects that it will bring its money supply back to normal levels in the coming years.

Whether these measures will have significant impact on China’s demand for imported oil, coal, and natural gas during the coming year remains to be seen. Beijing did increase fuel prices by 4 percent last week, but the underlying fuel shortages remain. With the phenomenal 60-year increase in China’s coal production drawing to a close, Beijing will have to be looking for any available source of energy – coal, LNG, crude, and oil products – to maintain its economic growth in the coming years. If China’s domestic coal production is indeed capped at 3.6-3.8 billion tons in the coming decade, the nation will need to be importing circa a billion tons of coal per year by 2020 if its growth continues at anything close to its current pace.

While the government says China’s diesel shortage is abating, this is because diesel imports and the processing of imported crude oil grew to record highs last month. Even Beijing’s controlled press is reporting that coal shortages are spreading and are likely to last for the rest of what is turning out to be an unusually cold winter.

Some US analysts who do not want to see a Chinese demand-induced oil price spike in the coming year are predicting that the growth in Beijing’s demand for oil will abate to roughly half its current rate of growth during the coming year. Given the spreading coal and electricity shortages it is hard to see much of a drop in the demand for imported fuel in the near future.

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

  • Iraq is forecasting a 17 percent rise in oil output next year – 2.75 million b/d from 2.35 million b/d now – and invited companies from South Korea and Kazakhstan to sign immediately a delayed contract for the Akkas gas field. (12/20, #12; 12/21, #3)
  • Iraq’s crude oil production increased by 100,000 b/d to 2.5 million b/d last week, new Oil Minister al-Luaibi said. BP and CNPC have achieved an increase of 10 percent in the Rumaila field and an ENI consortium has also achieved a 10 percent increase. (12/22, #15)
  • Iraqi cleric al-Sadr in a fatwa has banned his followers from accepting jobs with foreign oil companies working in southern Iraq. The ban, which could be lifted after verifying the “legitimacy” of a company’s operations, raises questions about opposition companies may face from the government Prime Minister al-Maliki is assembling. (12/20, #13)
  • Saudi Aramco’s LPG export for 2011 will slump 23.5 percent to 6-6.5 million tons as it diverts product to meet local demand. Aramco is expected to close 2010 with total exports of 8-8.5 million tons, in line with the volumes it shipped out in 2009. (12/23, #8)
  • Chevron says a pilot project to boost production by up to 600,000 b/d by injecting steam into the Wafra oilfield shared between Saudi Arabia and Kuwait showed “very promising” results. Wafra will become the world’s largest project for oil recovery with steam injection. (12/20, #9)
  • Kuwait’s government may face its strongest challenge from the opposition in parliament this week, as anger spreads over a police crackdown that saw lawmakers and their supporters beaten at a political rally. Disputes between an executive appointed by the hereditary ruler and elected lawmakers seeking wider powers may disrupt a $110 billion program aimed at luring international companies. (12/23, #9)
  • Shell and Qatar Petroleum will “jointly study” an estimated $6 billion petrochemicals project. A 1.5 million-ton monoethylene glycol plant may be built by 2016 in the industrial city of Ras Laffan. Other olefin derivatives would boost output above 2 million tons. (12/21, #4)
  • Construction has begun on the second phase of the China-Kazakhstan gas pipeline. Annual capacity is expected to hit 350 billion cu. ft., 50 percent above design capacity. (12/23, #16)
  • Chinese utility State Grid has agreed to a $1 billion deal to buy seven Brazilian power distributors, also securing a 30-year concession to operate power lines, substations and other transmission infrastructure. The deal is expected to generate $110 million in annual earnings. (12/21, 38; 12/22, #16)
  • In China, the Yichang-Wanzhou Railway that took seven years to build was to open last week. Shaving a 22-hour trip down to five hours, the 234-mile railway is the most expensive per unit distance China has built: $14.5 million per mile, compared to $7 million for the Qinghai-Tibet Railway. (12/21, #17)
  • Russia’s oil exports via Transneft will rise 3.8 percent to 410 million barrels next quarter. In January-March next year Russia will ship 29.1 million barrels to China via the new ESPO pipeline. (12/21, #24)
  • Thousands of Iranian truck drivers began a second day of strikes Tuesday after a cut in state subsidies was to increase diesel prices twenty-fold, from 6 cents a gallon to $1.32, as the Obama administration announced a further tightening of sanctions. (12/22, #9)
  • A commission of Iran’s parliament has moved to cut relations with Britain. (12/20, #7)
  • Security officials in Iran have held up fuel exports to Afghanistan, stranding 3,000 fuel trucks at the border and driving up wholesale prices for the refined products. The shipments include gasoline, diesel and heating oil from Iraq, Iran, Kazakhstan and Turkmenistan. (12/23, #10)
  • PetroVietnam, owner of Vietnam’s only refinery, will import 640,000 tons of crude in the first six months of 2011, compared to 400,000 tons total in 2010. It will buy one 80,000-ton cargo of Malaysian crude each month from BP and another two 80,000-ton spot cargoes during the period. Imported crude will be 13-22 percent of the refinery’s consumption. (12/23, #17)
  • Venezuela President Chávez must honor an $8 billion bond debt or face seizure of 14,000 Citgo stations in the US, a federal court ruled last week. (12/22, #17)
  • PDVSA’s 130,000 b/d Petroanzoategui heavy crude upgrader, which has suffered nagging mechanical problems for several years, will be down for maintenance in 2011. (12/22, #18)
  • The Venezuela National Assembly has approved penalties for spreading dissent on the Internet and laws preventing legislators from breaking with President Chávez’s political movement. A new measure curbs university autonomy; another prohibits political parties and NGOs, including human rights groups, from receiving money from abroad. (12/25, #12)
  • A Beijing vice mayor has resigned following the announcement of restrictions on new-car registrations which led to a record splurge on new cars by Beijingers. Anticipating a rule limiting registrations to 240,000 next year, a third of this year’s number, the city registered 30,000 new vehicles last week, 50 percent more than the preceding week. (12/24, #13, 14)
  • India’s power-station coal imports may turn out to be only 34-35 million tons, or 24 percent less than the 45 million forecast, after the most rainfall in three years boosted electricity generation from water. Hydropower output, 22 percent of the nation’s generating capacity, climbed 5.8 percent to 83,235 million units in the eight months ended Nov. 30. (12/21, #19)
  • The Reserve Bank of India has said it won’t facilitate payments for Iranian crude oil imports. (12/25, #8)
  • IOC sold four times its monthly average volume of fuel oil for December-loading, exporting at least 205,000 tons, its greatest month in five years. January volumes are expected to stay high, with fundamentals remaining the same. IOC has exported 660,000 tons this year, with most volumes coming in November and December. (12/21, #18)
  • Indian state consortium ICVL could fund a rival bid for Africa-focused coal miner Riversdale, 24-percent owned by India’s Tata Steel. Anglo-Australian miner Rio Tinto has offered $3.9 billion to buy Riversdale; a source familiar with the matter says that Tata may jointly bid with ICVL or support ICVL’s bid for Riversdale. (12/24, #9)
  • SK Energy, South Korea’s biggest oil refiner, rose to the highest in three years after the company agreed to sell its Brazilian unit for $2.4 billion. (12/24, #11)
  • Production from South Korea energy companies’ oil and gas fields may rise to 1.03 million boe/d by 2019 from 260,200 b/d last year. Korea Gas has agreed to acquire a 15 percent stake in the Santos-led Gladstone liquefied-natural-gas venture in Australia. (12/22, #22)
  • In Nigeria, Chevron shut down its Dibi-Abiteye pipeline after it and two others were bombed by the militant faction NDLF. NDLF justified its attacks, also targeting Eni, by the refusal of the federal government to convene a post-amnesty conference and by a continued siege on riverside communities. Meanwhile ExxonMobil said it resumed production in the Oso field, a month after its gas and condensate platform was attacked. (12/20, #14, 15; 12/21, #5, 7)
  • Nigeria’s four refineries with combined capacity of 445,000 b/d of crude oil have been shut, implying Nigeria will now import all its petroleum products. (12/23, #11)
  • Halliburton has agreed to pay $35 million to the Nigerian government to settle bribery allegations. All charges against Halliburton, KBR and associated persons, including former US Vice President Dick Cheney, are dropped. (12/22, #15)
  • Pemex exported 1.617 million b/d of crude in November versus 1.377 million in October and 1.220 million in November 2009, and the most since March 2008. The average price was $76.79 a barrel, up from $74.30 in October and $72.44 a year ago. (12/24, #10)
  • A Canadian panel concludes that the environmental effect of oil-sands production is unknown and criticizes environmental monitoring of northeastern Alberta’s oil-sands industry. It recommends that Alberta and the federal government create a single monitoring system to replace a patchwork of industry, government, and academic methods. (12/22, #25)
  • US carmakers and engine manufacturers have asked an appeals court to force the EPA to reconsider its decision allowing the sale of gasoline with 15 percent ethanol. (12/21, #20)
  • Delta, American and other large US airlines may boost fares with fuel surcharges as crude oil approaches $100 a barrel. (12/23, #19)
  • An international team of researchers has devised a solar reactor for the rapid production of fuels from carbon dioxide, water and the rare-earth compound ceria. The high-temperature, two-step reactor process yields carbon monoxide and hydrogen, which are combined to create fuels. It operates at solar-to-fuel efficiencies of 0.7-0.8 percent. (12/25, #25)