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1. Oil and the Global Economy

NY crude futures traded around $91 a barrel for most of last week before falling on Friday to close out the week at $89.03. In London, Brent crude continued to trade about $10 a barrel higher, closing out the week at $99.83 after touching a recent high of $103.37 on Thursday. The decline on Friday was attributed to a weaker-than-expected US jobs report, profit taking and rumors that Egyptian President Mubarak would soon be stepping down.

After two weeks of anti-government demonstrations in Egypt, commentators are split on the meaning of this upheaval for the world oil markets. There seems to be general agreement that for the immediate future there is no danger to shipments through the Suez Canal. The Egyptian army is supposed to be guarding the 220-mile Sumed Pipeline; however, the apparent sabotage of the natural-gas export line to Jordan, Lebanon, and Syria on Saturday raised questions about protecting pipelines in the middle of such political turmoil.

Many organizations have come forward with reassuring words that the closure of the Suez Canal and/or the accompanying pipeline would only delay oil shipments to Europe for two weeks. A lengthy disruption of shipments through the canal would be mitigated by adjustments to shipping routes. Some analysts believe that loss of the Sumed Pipeline would be more significant than closure of the canal, for the pipeline has considerable spare capacity and permits larger tankers to unload all or part of their cargoes in order to transit Egypt.

The larger question remains as to whether the unrest in Egypt will spread to the Middle Eastern countries with significant oil exports. Much commentary has focused on the differences between the situation in Egypt and that in the Gulf and North African oil exporting states. Most note that these oil-exporting states have smaller and less densely packed populations than does Egypt and that the high oil prices give the governments the resources to buy acquiescence in the status quo.

Other observers note that food prices are near all-time highs and seem destined to go still higher in coming months. Given this situation, and the possibility that the disturbances in Egypt could continue for many months, these observers believe that somewhere along the line continuing unrest is bound to lead to some sort of interruption in oil shipments. OPEC continues to maintain that the oil markets are adequately supplied and that it will not increase production simply to counter speculative oil-price increases.

Brent crude’s crossing of the $100-a-barrel threshold last week, however, sparked considerable commentary as to the possible impact on global economic growth. The IEA continues to express the most concern about oil prices while Wall Street economists and journalists, naturally taking the optimistic view, are saying that prices will have to rise still higher before serious economic damage will occur.

The weekly US-stocks report shows inventories continuing to grow. In NY gasoline futures took a 7- cents-a-gallon tumble after gasoline inventories increased by 6.2 million barrels the week before last and demand slipped. The unusually severe weather across much of the US is likely responsible for some of the decline.

2. The El Arish explosion

The explosion at the El Arish metering station on the pipeline that supplies Egyptian natural gas to Israel and Jordan adds a new dimension to the ongoing unrest in Egypt. The large fire following the explosion, which probably was caused by a bomb, has halted gas deliveries through the subsea pipeline to Israel and overland pipeline to Jordan for the next week or two. Egyptian gas currently supplies the fuel for about 16 percent of Israel’s electricity generation and makes up about about 40 percent of the country’s natural gas consumption. Israel’s remaining natural gas comes from its rapidly depleting southern natural gas field.

The Israeli government says electricity generation will not suffer as missing gas can be replaced from stockpiles, increased withdrawals from the southern field, and by substituting oil for the natural gas. Provided the outage is a brief one and is not followed by further attacks on the pipeline, Israel should not suffer shortages. The attack, however, will increase the urgency of developing the new gas fields that were discovered off the Israeli coast last year. Israel’s existing southern gas field is on track to be depleted by the end of 2013, or sooner if troubles with the Egyptian supply continue. Gas from the newly discovered Israeli fields will not be available until 2013-2014 at the earliest.

Jordan, which relies on the natural gas pipeline from Egypt for 80 percent of the fuel for its electricity generation, may be in worse trouble. The government says it already has switched to diesel and heavy fuel oil to generate power. However, last summer when the Egyptian natural gas supply dropped to 70 percent of normal, Jordan was afflicted with widespread brownouts and blackouts.

While the immediate effects of Saturday’s explosion may be short-lived, the incident sets a precedent for future attacks. Extremist web sites have been urging attacks on the line to Israel for some months. As we have seen in Turkey, Iraq, and Nigeria, above-ground oil and gas pipelines are difficult to secure and provide an inordinate result in return for a small quantity of explosives. The likelihood is high that we shall see more incidents of this type as unrest grows in oil producing nations.

Quote of the week

“Federal permitting has fallen off a cliff, and the resulting impact on Louisiana families, jobs, and domestic-energy production has caused a lot of pain in coastal Louisiana.”

— US Senator David Vitter, Republican of Louisiana

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

  • Oil export capacity through Iraq’s Persian Gulf ports is almost set for a second phase of expansion with a contract between Iraq South Oil and Japan Int’l. Cooperation Agency. The expansion will be 5.8 million b/d in early 2013 from a current 2.2 million. (2/2, #8)
  • Unconventional natural gas today contributes only 10 percent of major oil and gas companies’ proven and possible reserves. Yet it is rapidly boosting the majors’ production, intensifying the worldwide hunt for shale gas, tight gas, and coal-bed methane. (2/3, #5)
  • China’s CNOOC will pay $570 million for a one-third stake in Chesapeake’s Niobrara shale: 800,000 net oil and natural gas leasehold acres in the Denver-Julesburg and Powder River Basins in Colorado and Wyoming. CNOOC will also pay 67 percent of costs up to $697 million to drill and complete wells, expected by year-end 2014. (1/31, #7; 2/1, #24)
  • Trade tensions between Brazil and China are expected to increase. China accounted for $17 billion of Brazil’s foreign-direct-investment inflows totaling $48.46 billion last year, up from less than $300 million in 2009. (1/31, #5)
  • Corn prices are set to explode if the US Grain Council’s import estimates from China are correct. The council says Chinese imports may reach 9 million metric tons in 2011-12; while the USDA has estimated only 1 million. In 2010-11 Beijing imported 1.3 million tons. The most corn China has imported in modern history is 4.3 million tons in 1994-95. (2/4, #12)
  • A severe drought in Northern China has left the ground very dry for the spring planting, fueling inflation and alarming leaders. The government has initiated a relief program for eight provinces. The four-month drought has affected 35 percent of wheat crops, or 6.4 million hectares, which is 22 percent of total farmland in the provinces. The wheat-growing area in the eight provinces accounts for over 80 percent of the country’s total. (2/4, #13; 2/5, #12)
  • Global food prices are hitting record levels due to unpredictable weather and tight supplies, according to the UN. Last month was the seventh in a row of price increases. Riots and demonstrations erupting across the Middle East are not directly inspired by rising food prices alone, the UN says; but Egypt was among more than a dozen countries to experience food riots in 2008. (2/4, #7)
  • Iraq is nearly ready to resume crude oil exports from Kurdistan with an initial flow expected at 10,000 b/d from Tawke field, government and regional officials say. Eventually flows from the region should be 100,000 b/d. (2/3, #14)
  • Keeping US diplomats in Iraq without US troops may be too risky, according to a Senate committee report; but the US ambassador to Iraq urges Congress not to “gut” the post-war diplomatic presence in Iraq. The report says the US could consider negotiating with Iraq to allow a limited, temporary troop presence beyond December. (2/2, #9)
  • Iran has begun production of Euro-5 norms-compliant gasoline while attaining production self-sufficiency, according to its Oil Ministry. The country will export 264 million gallons from the start of the next Iranian year March 21 while meeting domestic demands. Some 3.2 million gallons a day of production capacity will be added at the Shazand refinery in Arak; by June the refinery is to increase that by one-third. (2/5, #11)
  • In India, the global rise in crude oil prices fans the risk of bloating the import bill and will stoke inflationary pressures further, adding to that from red-hot food prices. The government will protect the economy from high oil prices, Finance Minister Mukherjee says. (2/2, #11)
  • State Bank of India will help make payments for crude-oil purchases from Iran, India’s second-biggest crude supplier, ending a five-week gridlock threatening $9.5 billion annually. State Bank will pay euros through Europaeisch-Iranische Handelsbank AG. (2/4, #10)
  • Pakistan faces a natural-gas shortfall of 2 billion cu. ft., or 50 percent, while production declines daily, Petroleum Secretary Qazi says. The Sindh government has progressed in exploiting coal at Thar: an initial 1000-2000 MW of power generation will be scaled up to 4,000 MW. The government is allowing the private sector to import LNG. The Iran-Pakistan and Turkmenistan-Afghanistan-Pakistan pipeline projects also aid the situation. (2/1, #18)
  • Pakistan Computer Association says the country’s energy crisis is hampering economic growth and leading the industry towards a total shut down. Load management plans are hampering industrial productivity eventually hurting exports, it says, urging the government to announce a national energy strategy and initiate public-private partnership. (2/3, #17)
  • Uganda will partner with East African states and foreign investors to construct a regional, $2-billion oil refinery to process diesel, petrol, kerosene, and aviation fuel. Starting with 20,000 b/d to meet local demands, the refinery will upgrade production to 60,000 b/d; eventually a bigger facility will process 120,000 b/d, according to Uganda’s energy secretary. (2/1, #19)
  • Nigerian militant faction NDLF has threatened to resume oil-facility attacks in Niger Delta after failing to reach a peace agreement with the government. The group says it will attack the domestic distribution network – a previous target – and export pipelines. (2/4, #11)
  • Norway’s Statoil plans to challenge Exxon and Shell for a role in the UAE’s resources. Statoil will add to its Abu Dhabi office a business development executive as well as expertise in exploration and production. (1/31, #4)
  • BP expects the sale of its US refineries in Texas City and Carson, with a combined capacity of 740,000 b/d, to fetch $3.7 billion. (2/1, #25)
  • British Airways will increase its fuel surcharge for longhaul but not shorthaul flights from tomorrow, Tuesday, February 8, blaming soaring crude oil prices. BA merged with Iberia last month to create International Airlines Group, Europe’s second biggest airline. (2/5, #21)
  • TransCanada says regulators have approved its plan to build a $313-million gas pipeline from the Horn River shale in northeastern British Columbia. The country’s largest pipeline company says the project consists of a new 36-inch pipeline and the acquisition of an existing 24-inch line to carry up to 630 million cu. ft. a day. (2/5, #20)
  • Canada’s Prime Minister has urged the US to approve the Keystone XL oil pipeline from Canada to the Gulf of Mexico. President Obama, at a Washington news conference with PM Harper, did not talk about the pipeline; but his administration-commissioned report says the $7-billion project, to carry 500,000 b/d 1,900 miles from Alberta tar sands to refineries in Texas, could substantially reduce US dependency on Middle East oil. (2/3, #16; 2/4, #19)
  • President Obama has proposed to cut oil-and-gas subsidies in favor of new “green energy” incentives intended to spur construction-job growth and make commercial buildings 20 percent more efficient by 2020. The carrots include more lucrative tax breaks; easier access to loans for upgrades; and a grant program, modeled on Race to the Top, to encourage state and local governments to upgrade standards. Officials said the cost would appear in the White House budget. (2/3, #27, 28)
  • A federal judge in New Orleans has found the US Department of the Interior in contempt of his order to lift a moratorium on deepwater drilling. Regulators instituted a second ban after Judge Feldman overturned the first in June; Hornbeck and other offshore-drilling companies sued; and the judge’s latest ruling grants the companies’ request to recover “significant” legal expenses, which the DOI may be compelled to pay. (2/3, #22; 2/4, #15)
  • The Environmental Protection Agency would need congressional authorization to limit greenhouse gases under a bill introduced by US Senator Barrasso, R-Wyo. Another bill drafted by House and Senate Republicans would clarify that the Clean Air Act wasn’t intended to address climate change; halt an indirect cap-and-trade tax; and protect US manufacturers from a competitive disadvantage, the bill authors say. (2/3, #23; 2/5, #14, 15)
  • The US Chamber of Commerce has unveiled its “Facing Our Energy Realities” plan. It calls for maximizing domestic resources while not putting existing energy sources out of business; making new and clean energy technologies affordable while encouraging their free and fair trade globally; and eliminating regulatory barriers to new projects. (2/2, #12)
  • Oil shipments in rail tankers may have doubled from a year ago, and construction of dedicated terminals is happening quickly. Flexible routes could avoid a glut in Cushing, Okla., where Canadian and North Dakota supplies dead end and delivered WTI is trading at an $11 discount to Brent. North Dakota Bakken shale crude was worth $81 at the wellhead last week; similar Light Louisiana Sweet was worth $104 on the Gulf Coast. (2/5, #17, 18)
  • Shell will postpone offshore drilling plans in Alaska to 2012 from 2011 because of a lengthy US regulatory process. Legal allegations that oil exploration could hurt wildlife and habitat without adequate safeguards are holding up a key air-quality permit Shell needs to proceed after its $3.5-billion investment in exploration in the Beaufort and Chukchi Seas. (2/4, #18)
  • Wireless smart meters, which transmit real-time data on customers’ electricity use by radio waves, face opposition out of health and privacy concerns. Since 2006 Pacific Gas & Electric in California has installed seven million of the devices. In Maine, residents have waged e-mail campaigns and some towns have adopted moratoriums on installations. (2/1, #26)
  • The US Department of Energy will award $27 million in projects intended to reduce the cost of solar power by 75 percent by decade’s end to make it as cheap as fossil fuels. Secretary Chu dubs the program “SunShot,” after President Kennedy’s moon challenge. (2/5, #22)
  • World-energy demand could be fulfilled with 95-percent renewable sources by 2050, WWF International and Ecofys say. Energy-saving measures could cut total demand by 15 percent from 2005 levels. The effort would cost $4.8 trillion a year by 2035. (2/3, #33)
  • Is a 375-mile-battery range too good to be true? A Kolibri-powered Audi A2 traveled from Munich to Berlin, Germany, in seven hours without recharging in October, a record if verified. But the electric car, converted by DBM and Lekker with government funding, disintegrated in a suspicious December fire while parked in a warehouse. (2/4, #19)