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1. Prices and Production

Oil prices fell steadily last week. After touching a high of nearly $84 a barrel on Monday crude closed at $78 on Friday due to warmer weather, a stronger dollar, rising US inventories, and more bad economic news in the US and EU. For now, reports of a rapidly growing Chinese economy with prospects for increasing oil consumption were largely ignored.

Natural gas prices in the US finished lower due to lower withdrawals of gas from inventory and prospects for warmer weather during the rest of January.

The IEA reported that global oil supply rose by 270,000 b/d in December to 86.2 million b/d on higher OPEC and non-OPEC production. The Agency says that oil demand for 2009 averaged 84.9 million b/d, down 1.3 million b/d from 2008, and will average 86.3 million b/d in 2010, an increase of 1.4 million b/d from 2009.

The US’s EIA, however, foresees slower growth with demand reaching 86.5 million b/d by 2011. As could be expected, growth is seen as coming from China, India, and elsewhere in Asia while OECD demand is expected to be flat.

2. Record Asian Demand

China ended 2009 with oil imports averaging some 5 million b/d in December for the first time ever. Chinese demand is expected to remain strong in 2010. Foreign exchange reserves in China grew by 23 percent in 2009 to $2.4 trillion. Evidence abounds that China now is growing at an extraordinary pace. China says its banks loaned out nearly 10 trillion yuan last year, nearly double the government’s minimum goal and roughly 30 percent of the country’s GDP. Recent reports say the lending frenzy is continuing into January 2010 despite government efforts to clamp down on lending.

China’s sales of motor vehicles totaled 13.6 million units last year thanks to loose money and government tax incentives. Exports in December were up for the first time in 13 months, but exports were relatively low in December 2008 so the year over year increase is not as impressive as it sounds. Chinese imports, however, were up 56 percent as the country imported massive amounts of ores, coal, oil and other raw materials.

Fears that we are witnessing a gigantic bubble, particularly in China’s housing market, continue to grow. Some are forecasting a major economy-wide let-down; while others believe that Beijing can confine the problem to the overheated housing industry. With foreign exchange reserves continuing to grow, it is likely that Beijing can continue to finance its internal economic growth for some time, even without a substantial increase in exports. The key issue remains whether China can develop an increased domestic demand for consumer products if the OECD and global economy in general continue to stagnate.

World oil exporters are reorienting their sales towards Asia as US demand for imports stagnates. Record amounts of crude are going to Asia from Nigeria, Angola, Congo, and Equatorial Guinea. The Saudis have lifted restrictions on oil to Asia.

While Chinese and Indian demand for oil will eventually lead to higher prices, perhaps much higher, the key question is just how soon. Some respected analysts are saying that markedly higher prices, say in excess of $100 per barrel, will not come during 2010 due to lower demand in the west plus

OPEC’s 5 million or so b/d of reserve productive capacity. Others, equally respected, are convinced that a recovery-wrecking oil price spike will occur within the next 6 months.

3. The Alberta Oil Sands

The province’s new Energy Minister, Ron Liepert, wants to examine the pace of oil sands development with a view to ensuring that future development stays within the capability of the provincial government to provide the infrastructure to support such growth. Environmental groups, which have long criticized the pace and environmental degradation that rapid development of the oils sands has caused, hailed the announcement as a major policy shift.

Long believed to be the solution to falling production of conventional oil in North America, the sands underwent a major increase in investments in the first half of 2008 when oil prices hit triple digits. New investment fell when oil prices plunged; many development projects are currently in hiatus.

Production of oil from the sands carries with it many serious problems ranging from high per barrel development costs and declining natural gas supplies to large green house gas emissions.

There are several ways the provincial government could slow future development, including restrictions on leases and delays in issuing new project permits. The government has been in a battle with oil sands developers over the issue of increased royalty payments.

As oil prices increase in future years and new drilling opportunities become scarce, their will be increased pressure to increase production from the sands. These pressures will probably come into conflict with the need for Canada to reduce emissions. While efforts are underway to develop lower-emission production from the sands, these are likely to be very expensive and will have to await much higher oil prices.

Quote of the Week

  • “We are pursuing intensive dialogue with the Chinese on the subject of energy security, in which we have raised our concerns about Chinese efforts to lock up oil reserves with long-term contracts. We will continue to engage them on this subject at very senior levels.”

— David Shear, US deputy assistant secretary of state East Asian and Pacific affairs

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

  • McMoRan Exploration Co. announced what it said could be one of the largest oil and natural gas discoveries in the shallow waters of the Gulf of Mexico in decades. The discovery was made at the Davy Jones ultra-deep prospect located on South Marsh Island Block 230 in about 20 feet of water and 10 miles off the Louisiana coast. They estimated the size of the discovery at close to 2 trillion cubic feet of natural gas. (1/12, #21)
  • Oil prices around $80 a barrel are satisfactory and OPEC is unlikely to raise its oil output targets unless prices reach $100, Libya’s top oil official said on Wednesday. The comments indicate that some in OPEC see no need to cap the rise in oil prices. (1/14, #3)
  • An upcoming research expedition to an Arctic island could help start a new wave of oil and gas exploration in Canada’s Far North. The research team, led by the Geological Survey of Canada, will travel to Ellef Ringnes Island next summer to collect data from areas where petroleum resources were first discovered nearly half a century ago. (1/12, #25)
  • Kazakh state oil and gas company said it has proposed that the consortium developing Kazakhstan’s largest oil field Kashagan cut by $3 billion the previous target of $10.4 billion in costs planned to be spent this year. (1/16,#18)
  • As of the end of last year, the Chinese National Petroleum Corp. had 81 projects in 29 countries overseas, including Canada, Kazakhstan, Nigeria, Myanmar, Peru, Venezuela, Chad, Iran, Russia and Oman. (1/15, #12)
  • Iraq’s Kurds are racing ahead of the rest of Iraq in luring oil investment and rebuilding after decades of war and sanctions. But they are in a standoff with Iraqi Prime Minister al-Maliki over how to share the country’s oil resources and where to draw internal boundaries. The dispute, which led al-Maliki to refuse payments to oil companies hired by the Kurds, may jeopardize Iraq’s stability as it approaches the March 7 elections and the pullout of U.S. troops. (1/14, #5)
  • Brazil’s Petrobras announced the huge Tupi discovery in the Santos Basin in 2007. Tupi is estimated to hold recoverable reserves of between 5 billion and 8 billion barrels of oil equivalent. Since then, Petrobras has released reserve estimates for two other Santos Basin subsalt fields, as well as an estimate for a field in the Campos Basin. The four fields hold estimated recoverable reserves of between 10.6 billion and 16 billion BOE, with none of the fields yet considered as proved reserves. The largest, Tupi, will likely be the first to move into the proved reserves category. (1/16, #10)
  • Henry Groppe, co-founder of oil industry analysts Groppe Long & Littell (Houston), predicted that by the end of 2009, the price of oil would be US$80 a barrel, or about twice its price at the start of the year. He based that forecast on a rise in oil consumption, a return of economic growth combined with static but reduced supply levels. Groppe was about as spot on as any forecast could be. He argues the price of oil will average US$80 per barrel this year. Groppe holds that view because of the continued effects of the actions of Saudi Arabia, Kuwait and Abu Dhabi in “significantly reducing their supplies.” (1/12, #4)
  • Gov. Arnold Schwarzenegger told California to give him new oil drilling off the coast so that he can give the profits to the beleaguered state park system. (1/11, #14)
  • The US has told Pakistan that it would help the country secure liquefied natural gas supplies if it abandons a planned gas deal with Iran. (1/16, #5)
  • Russia rescued British energy consumers by ensuring a steady flow of gas into the power network as supplies from Norway faltered during the cold weather. (1/14, #18)
  • The US overtook Russia as the world’s largest natural-gas producer last year as U.S. suppliers tapped unconventional resources while demand in Russia plunged amid the country’s worst economic decline on record. Minimal hurricane disruptions and significant growth in production from onshore shale basins have contributed to the increase in domestic supply. (1/13, #16)
  • The number of active US oil and gas rigs climbed to 1,248, up 28 from the previous week.(1/16, #15) The estimated 39,068 oil and gas wells and dry holes completed last year was 37% lower than 2008’s total, though drilling increased as the year went on. (1/16, #14)
  • The US’s EIA slightly raised its estimate for domestic natural gas production in 2010 but still expected output this year to be down 3 percent from 2009 levels. (1/13, #15)
  • U.S. Energy Secretary Steven Chu said he would not favor a ban on “fracking,” a now-common drilling method that XTO Energy and other natural-gas companies use to produce gas from hard shale-rock formations. (1/16, #11)
  • By the time state regulators started testing the air around Dish (TX), there were 15 shale gas wells inside the town limits and more than 12,000 spread across the massive Barnett shale. Results of those tests, released late last year, found elevated levels of the cancer-causing chemical benzene near Dish, spooking residents who now fear that what once looked like easy money could end up harming their health. (1/14, #15)
  • The Chinese Expressway system is growing in length so fast that it will likely surpass the US Interstate Highway system in two years…Between the rapid growth of private passenger transportation, and the remaining diesel powered railroads, Chinese transportation is probably almost as oil dependent as US transportation. (1/15, #17)
  • Power-station coal price forecasts for this year were raised 19 percent by Australia & New Zealand Banking Group Ltd. on rising demand from China because of government stimulus measures and cold weather. (1/12, #17)
  • China Huadian Corp., one of the nation’s five largest electricity producers, plans to build a $558 million hydropower plant in Cambodia in the company’s biggest push to expand its overseas hydropower operations. Chinese companies are offering to build or finance hydroelectric projects in poor nations in exchange for access to resources and to benefit from demand for non-fossil energy. (1/12, #20)
  • Nigeria’s Foreign Minister said the country doesn’t want to alienate its “traditional partners,” but when the U.S. recently included Nigeria among 14 countries of interest — an effective security watch list — officials in the West African nation were incensed. (1/14, #7)
  • With the price of gasoline at its highest point in over a year, federal regulators moved Thursday to prevent excessive speculation by financial traders from driving the cost of oil even higher. The effort to adopt new limits on the trading of oil and other energy commodities is a sharp reversal after years when regulators left those markets alone. (1/15, #6)
  • The global refining industry is turning into a major headache for big Western oil companies, putting a drag on earnings even as rising oil prices improve the prospects for other parts of the oil business. As oil prices rise, they are earning big bucks from their upstream operations—the business of finding and pumping crude. But they’re seeing profits plummet in downstream operations, which consist of refining and marketing. (1/15, #15)
  • U.S. electricity output and consumption decreased 3.7% last year, the steepest drop since 1938, following a nearly 1% decline in 2008. The recent downward trend is making it trickier for utilities to forecast future power consumption, a critical component of planning investments in new power plants and transmission lines. (1/14, #16)
  • Uranium producer Energy Resources of Australia said the company received an average price of $50.84 a pound for uranium oxide in 2009, a 56 percent increase from 2008. About 435 nuclear power plants are planned or proposed by 2030 and 53 plants were being built worldwide as of December 2009. (1/13, #14)
  • General Motors has freed up cash to fund a major update of its full-size pickups, a bet that consumers and businesses will resume buying bigger trucks after the lull in sales. (1/13, #19)
  • For the 13th consecutive year the US experienced a warmer-than-normal average temperature. Since the late 1980s, 21 of the last 24 years have been unusually warm in the nation. Beginning in late 1800s, when accurate weather records began, the country has been warming at a rate of about 0.1 degree per decade. (1/12, #23)
  • Venezuela’s devaluation of its currency and the imposition of a dual-rate foreign exchange system will give a short-term boost to the fiscal situation of President Chavez’s government. But doubts remain that the devaluation will meaningfully help those outside the government. (1/11, #6)
  • Venezuela is at risk of a devastating power collapse as drought pushes water levels precariously low in the country’s biggest hydroelectric dam, posing a serious political threat for President Chavez. His government is determined to keep the Guri reservoir from falling to a critical level where the turbines start to fail. (1/11, #10)
  • President Chavez indefinitely suspended rolling blackouts in Venezuela’s capital just a day after they began, and sacked his electricity minister saying he was responsible for mistakes in the way the rationing plan was applied. (1/14, #9)
  • California regulators approved a carbon fuel standard that the US ethanol industry says will bar domestic forms of the fuel—particularly ethanol from corn—from being used in the nation’s largest fuel-consuming state. The regulations will count the emissions created when corn is planted, harvested and ground into fuel as part of ethanol’s carbon output. (1/15, #16)
  • Per the National Biodiesel Board, US biodiesel production increased from 25 million gallons in 2004 to 700 gallons during 2008 to 300-350 million gallons (est.) during 2009. The Board also reports that domestic biodiesel capacity is now operating at only 15%. A federal tax credit that provided makers of biodiesel $1 for every gallon expired last week. As a result, some US producers say they will shut down without the government subsidy. (1/13, #18)