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1. Prices and Production

Crude prices rose steadily last week closing above $78 a barrel, the highest close in three weeks. Rising equity markets, expectations that the US economy will improve soon, another drop in US stockpiles, and a weaker dollar all contributed to the increase. Analysts remain split on the prospects for prices, with some focusing on an economic recovery in 2010 accompanied by strong Asian demand and others looking for weak demand from the OECD countries.

Platts reported last week that China’s demand for oil increased by 18.7 percent in November year on year. This was the third straight month that Chinese oil demand marked a double-digit increase over 2008. While the debate continues as to whether China’s loose lending and $586 billion stimulus package is fostering real economic growth or a bubble, it is clear that the country is consuming increasing amounts of oil products. As China’s imports slipped in November from October, it appears that the Chinese are using reserve stocks to increase supplies.[??]

For the fourth time, OPEC held its quotas steady. As most members are now pumping above their allotments and deem prices satisfactory, nobody seems to care about quotas. If the Iraqis succeed in making significant increases in their production from the current 3 million b/d – they are talking about 12 million b/d in six years – then the Baghdad’s exemption a quota may become an issue.

Iraq repaired the sabotage damage to its northern export pipeline last week and has resumed pumping oil to the Turkish port of Ceyhan. At full capacity the pipeline can move 600,000 b/d.

Mexican oil production resumed its decline by pumping only 2.55 million b/d in November after small gains in September and October. November’s production was 5.8 percent lower in than in November 2008. Again output from Chicontepec was insufficient to offset the decline from Cantarell.

The major issue of 2010 remains as to whether increasing Chinese and Indian demand will be sufficient to use up spare OPEC capacity while demand from the US and other OECD nations remains essentially flat. Most analysts are foreseeing oil rising at least into the low $80s next year.

2. Iran 2010

Of all the issues that will impact world oil production and prices in 2010 – China’s rapid growth, a falling dollar, lack of investment – none is more fraught with danger for the global economy than the emerging Iranian situation. Tehran currently exports some 2.7 million b/d of its 4 million b/d production, earns some $60 billion annually in foreign exchange, and can potentially block some 17 million b/d of oil exports from the Gulf.

Currently there are two simmering issues which could lead to more conflict and oil embargos; continuing protests against the legitimacy of the government, which have been going on since June; and Tehran’s efforts to enrich uranium which may or may not seek to develop nuclear weapons.

Over the weekend, tens of thousands of demonstrators again took to the streets to confront security forces. Six months ago the protests were questioning the outcome of the Presidential election, but are increasingly being directed against the Ayatollahs that have ultimate power in the Iranian theocracy. Outsiders are beginning to suspect that the Grand Ayatollah Khamenei is becoming a hostage of the elite Revolutionary Guard which is becoming more influential in policy matters.

As is normal in such situations, Tehran is blaming foreign governments for its domestic political turmoil and is using foreign threats and adventures as distractions from its own unpopularity.

The major issue at the moment is the acquisition of nuclear weapons. Tehran is under a January 1st deadline to respond to the IAEA’s proposal that Iran enrich its uranium abroad so that the finished product would be difficult to turn into nuclear weapons. Thus far increasingly harsh rhetoric from Tehran suggests that the Iranians will reject the proposal and force the US, EU, and some of the UN to seek stronger measures ranging from tougher sanctions to threats of force.

The great unknown in this situation is China, which still seems more concerned about losing oil and natural gas shipments from Iran than preventing hostilities in the region. So long as Tehran can plausibly maintain that it is only interested in nuclear generation of electricity, it has the sympathy of much of the undeveloped would that seeks the same thing.

Conventional wisdom is that Beijing will make good any losses suffered by the Iranians from harsher sanctions and will continue the policy of what they call “negotiations with Tehran” until there is irrefutable evidence that Tehran is indeed building nuclear weapons.

Few think that sanctions and embargos will do any good and most commentators see the situation continuing to deteriorate.

The wild card is Israel that states loud and clear they will never allow Tehran to threaten its existence with nuclear weapons. The Israelis have a series of trip wires—some public and some obscure—that they will not allow Tehran to cross without retaliation. Many observers believe that the current path will ultimately force the US to acquiesce to Israeli air strikes on Iranian nuclear facilities, a development that could easily result in some form of curtailed oil supplies from the Gulf.

If the Iranians choose to slow exports, as they periodically threaten to do, two or three million b/d could be made up from the spare capacity of other Gulf producers. The Iranians could calculate that a spike in oil prices from reducing supply would offset the lost revenue from curtailing production. A halting of Iranian exports, either by Tehran itself or some sort of embargo, would likely send oil prices significantly higher. If the situation should develop to the point where exports through the Straits of Hormuz are reduced or eliminated, oil prices would quickly reach stratospheric levels and much of the global economy would halt.

Quote of the Week

  • “Until recently, China was a net exporter of coal. Now it is an importer. Chinese coal production will peak in five to ten years, if not sooner. Australia is by far the biggest exporter of coal in the world, yet total Australian exports of coal represent only five percent of Chinese consumption. It simply will not be possible for Australia or any other country to supply China with the quantity of coal required.” (12/26, #24)

— Dr John L. Perkins, Senior Economist, National Institute of Economic and Industry Research (Melbourne, Australia)

The Briefs

  • In November, world production of all liquid fuels increased by 200,000 barrels per day compared to October according to the latest figures of the International Energy Agency, resulting in total world liquid fuels production of 85.94 million b/d. Average global liquid fuels production in 2009 through November was 84.86, versus 86.6 and 85.32 million b/d in 2008 and 2007. (12/22, #19)
  • A global energy crisis is not expected before 2020, said expert Alexander Ageev, general director of the Institute of Economic Strategy of the Public Science Sector of the Russian Academy of Science. (12/26, #3)
  • Iraq’s oil ministry said that the recent contracts should allow Iraqi oil production to rise to 12 million bpd, from 2.5 million bpd now. But security and dilapidated infrastructure remain key obstacles to Baghdad achieving that target… Iraq does not expect it will achieve any “significant” increase in oil production before 2012, even after signing deals with international oil companies this year. (12/21, #6) [Editors’ note: wonder how the Iraqis will generate enough pressure to dramatically increase production from older fields.]
  • Iraq will more than double crude oil supplies to China next year to over 300,000 barrels per day, Iraq’s oil minister said, as Chinese refineries boost output to new highs to feed strong recovery in demand. (12/23, #9)…
  • Cairn Energy has secured a drillship and will begin drilling for oil off western Greenland’s Disko Island in the second half of 2010. (12/22, #18)
  • In Nigeria, the militant group MEND is angry with the federal government for not implementing agreements between it and the militants as one of the conditions for the freedom fighters to accept, on October 25th, the government’s amnesty offer.(12/22, #7)
  • Shell is planning to sell its oilfield assets in Nigeria valued at up to $5 billion. The oil giant is the biggest and longest standing Western oil producer in Nigeria. But production has been hampered by insecurity in the oil-rich Niger Delta, government funding shortfalls and an uncertain regulatory environment. (12/23, #11)
  • Venezuelan President Chávez, beset by lower oil export revenues and a recession that is hurting his popularity, has turned his sights on international car companies, threatening them with nationalization and pledging to ramp up government intervention in their local businesses. (12/26, #11)
  • Japan’s two oil refinery giants aim to shed 600,000 barrels a day, or about one-third of capacity, by March 2015 and save 100 billion yen ($1.1 billion) a year. Demographic changes such as an aging population and a move to energy conservation have driven down fuel demand, making one-third of the country’s refining capacity surplus. (12/26, #14)
  • Japan’s oil imports rose in November for the first time in 13 months as demand began to rebound amid the recovery from the worst postwar recession. (12/21, #28)
  • US gasoline consumption fell 3.5% last year, the steepest decline since 1965, while diesel consumption fell 6.8%, the most in 28 years. Both are set to fall again this year. (12/26, #20)
  • Only a few years ago, a cry went up that the United States needed more oil refineries. Not only did that never come to pass, but the reverse is now happening. Now the business is mired in a deep crisis, with five refineries that were producing 700,000 b/d having shut down this year, including plants in Delaware, New Jersey, California and New Mexico…Thanks to multibillion dollar projects in China, India and Saudi Arabia, the industry is expected to add two million barrels a day of refining capacity this year, even as global oil demand drops by around 1.7 million barrels a day, or about 2 percent. (12/26, #20)
  • The East Siberian Pacific Ocean Pipeline (ESPO), Russia’s multibillion-dollar attempt to supply growing energy demand in Japan, China and Korea, will load its first oil next week…When completed, the $26.2 billion project will include a 1.6 million barrel-a-day pipeline spanning 4,794 kilometers (2,979 miles). (12/26, #22)
  • The 4,350-mile gas pipeline recently opened by China’s president runs from Turkmenistan, crosses Uzbekistan and Kazakhstan and ends in north-west China. With little publicity and at the turn of a wheel, Russia’s post-Soviet dominance of gas export routes from central Asia has been undermined. Likewise, the European Union’s chances of winning Turkmen supplies for its Nabucco pipeline project now seem severely diminished.(12/26, #7)
  • New York City urged New York State on Wednesday to ban natural gas drilling in its watershed, adding unprecedented support to critics who consider the chemicals used to mine for shale gas as poisonous to drinking water. (12/23, #18)
  • The recovery of natural-gas prices may be slowed by hundreds of uncompleted wells in North America that can be brought online quickly to meet increased demand for the heating and power-plant fuel. As many as 1,500 gas wells were drilled and not completed as of an October estimate by Halliburton Co. Those wells can start pumping gas once prices climb above $6 per million British thermal units, limiting further gains. The largest concentration of uncompleted wells appears to be in the Barnett Shale of North Texas (12/24, #13)
  • Since 1990, Denmark has reduced its greenhouse gas emissions by 14 percent. Over the same time frame, Danish energy consumption has stayed constant and Denmark’s gross domestic product has grown by more than 40 percent. (12/24, #16)
  • In northern China, the heaviest snowfall in six decades forced the country to boost gas imports in November to ease a supply deficit. Net coal imports climbed 23 percent last month from October. LNG imports were also the third-largest by volume in 2009 after September and July. (12/22, #11) China’s major coal-fired power plants have only enough coal stocks for nine days of power generation as of last Wednesday, industry data showed, down from 12 days at the end of November and 15 days at the end of October. (12/22, #12)
  • Currently, the only production of cellulosic ethanol is coming from a handful of small-scale pilot plants in Montana, Wyoming, Alabama, New York, and South Dakota, which represent less than 5% of the 100-million gallon mandate proposed by Congress for 2010… The biggest hurdle is that dozens of commercial-scale and pilot facility cellulosic ethanol projects have been unable to secure enough financing to begin construction. (12/26, #25)
  • Over the past few months, EnCana has been in talks with Canadian officials about a plan to build a network of hundreds of retail compressed and liquid natural gas fuelling stations between Windsor and Quebec, Canada’s busiest highway corridor. (12/22, #17)