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1. Prices and Production

Oil prices have now fallen by $10 a barrel from a recent high above $84 reached the week before last to close on Friday at $74.54. The usual factors of falling OECD demand, prospects for warmer weather in some regions, a stronger dollar, weaker equity markets, lower seasonal demand and fears that Beijing may be putting brakes on its rapid growth are thought to be behind the slump. The US weekly stocks report showed much lower refinery runs and falling demand for petroleum products in the US.

The IEA is now saying the OPEC will not need to raise production in 2010 as sluggish growth outside of Asia, improvements in non-OPEC production plus an 800,000 barrel/day increase in natural gas liquids should cover any growth in demand.

There is still much uncertainty as to the future course of the oil markets. Chinese demand remains strong as does demand from India and Korea. Goldman-Sachs is still talking of $100 oil, but says this will not come until 2011. Threats to global oil production due to dwindling electricity supplies in Venezuela and the threats posed by the Iranian nuclear standoff continue.

President Barack Obama’s proposal last Thursday to limit commercial banks’ size and their ability to participate in some types of risky markets was generally not well received by oil market players. Commercial banks are some of the largest participants in oil markets and might be required to change their trading roles.

Natural gas prices rose for a second day in New York, to $5.82. The move is likely weather-driven, as sharply colder weather forecast for the Midwest next week should boost heating demand. Yet a sharp drop in natural gas in storage could be factoring in as well.

From a record 3.837 trillion cubic feet of natural gas in storage at the November start of the heating season—15 percent above the five-year average—inventories fell to 2.607 trillion cubic feet by mid-January; that’s slightly below the five-year average. Further, the rapid drop happened despite the recession-induced 10 percent drop in demand from factories, chemical plants and steel mills. Now it appears that demand from the industrial sector may be on the rise. If so, analysts anticipate that next week’s cold snap could drive gas in storage well below the five-year average by month’s end.

2. Venezuela

Last week the news about Venezuela’s on-going electricity crisis took a turn for the worse. For weeks the power output from the drought-suffering Guri Lake hydro dam—the supplier of nearly three-fourths of the nation’s electricity—has been operating at just over 50 percent of capacity. Now output from Planta Centro, the nation’s largest fossil-fueled power plant, has declined from its rated 2,000 megawatt capacity down to just 267 megawatts and hasn’t hit 500 megawatts during the last three months. Insiders say it has not been properly maintained for years. To compensate in the short term, President Hugo Chavez has cut back on steel and aluminum operations that use up to 20 percent of the country’s power. Rolling blackouts currently impact much of the nation. If Chavez diverts power from the 940,000 b/d Paraguana refinery to more pressing uses, some analysts think that the ensuing price spike could drive oil above $100 a barrel.

A natural gas project with estimated reserves of nearly 15 trillion cubic feet of natural gas had been put out for bids that were supposed to close on Friday, January 15th. Last week the government should have announced winners of the bidding process. Despite last-minute efforts to improve conditions for potential bidders, apparently no bids were submitted.

Venezuela’s oil ministry announced that it had failed to agree on the details of a deals with Norway’s Statoil and France’s Total to develop some extra-heavy crude in the Orinoco belt. While discussions have been ongoing since 2007, the ministry’s hope for a 300,000 barrel/day production project isn’t going to happen. The government hopes for much better results from its Carabobo oil-drilling auction later this week.

None of these long-term projects will change Venezuela’s immediate oil production prospects which are steadily sinking. According to OPEC data, Venezuela’s oil exports fell during December by over 50,000 barrels per day, declining for a fifth straight month. Production during the Chavez era remains roughly 25 percent lower than the years preceding his era.

Over the weekend, Chavez’s critics staged a large protest march. In addition to the electricity rationing problem, opposition politicians hammered away at the country’s high crime rate and the recent 50 percent currency devaluation. Hard times in Venezuela may not be ending soon.

3. China continues to grow

The economic numbers reported by the Chinese government remain impressive. On Beijing announced that its economy grew by 8.7 percent during 2009, surpassing the 8 percent target set early last year. Fourth quarter growth climbed 10.7 percent from a year earlier, a reflection of recovering global trade plus stimulus investments in infrastructure. Other reports indicated that Chinese bankers still were issuing loans at a rate several times the level needed to reach economic targets. China is clearly on track to surpass Japan and become the world’s second-largest economy soon. The U.N. expects that China’s economy will grow four times faster than the US economy this year. Finally, inflation came in at 1.9 percent for December 2009 vs. 2008, up from a year-over-year 0.6 increase in December that was preceded by nine months of deflation.

In response to this suite of news, and fearing an overheating economy, Chinese regulators reined in their banks. They told banking officials to temporarily shut down lending amid growing worries about inflation and asset bubbles. Such a clamping down on growth would have broad implications, including supply and price forecasts that assume increased Chinese demand for petroleum products.

But China’s energy consumption keeps moving ahead. The nation’s electricity production capacity increased 7 percent during 2009, barely keeping ahead of a 6 percent growth in consumption. The production of refined oil products increased nearly 8 percent to reach a new high of 7.5 million barrels/day.

Throughout the past decade, China has invested a substantial portion of its net earnings in US debt instruments. But 2008 appears to have ended that trend. Chinese holdings of Treasury securities declined between July and November, the first extended decline since they became a major purchaser back in the early 2000s. In 2006, China bought nearly half the US debt; last year they bought less than 5 percent. If this trend continues, mid-term impacts on inflation and the price of oil may be quite notable if not extremely painful.

Quote of the Week

  • “We’ve gone from record [natural gas] storage to under the five-year average in two months, which is really astonishing. Before this winter season started, most traders thought it to be incomprehensible storage would evaporate so quickly.”

— Chris Jarvis, president Caprock Risk Management; Hampton Falls, New Hampshire

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

  • The Atomic Energy Organization of Iran said Wednesday his country’s first nuclear power plant in the southern city of Bushehr will come on stream by the next autumn, the semi-official Fars news agency reported. (1/21, #4)
  • Average global liquid fuels production in 2009 was 84.97 million barrels/day versus 86.6 and 85.32 million b/d in 2008 and 2007. (1/22, #16)
  • Of the 10 top offshore oil and gas discoveries during 2009, two were made in the Gulf of Mexico, two were found off Australia, and one each off Brazil, China, Israel, the UK, Venezuela, and West Africa. (1/23, #15)
  • The next ten years in Nigeria will be the years of China’s dominance in Nigeria’s multi-billion dollar oil industry according to analyst Mark Dominic. Royal Dutch Shell, the largest oil international oil company operating in Nigeria, no longer looks to its Nigerian operations to drive growth in its oil and gas output. (1/19, #11)
  • In Venezuela’s Orinoco oil belt, the volume of technically recoverable heavy oil is 513 billion bbl, making it one of the world’s largest accumulations of recoverable oil according to the USGS. This new assessment implies nothing about rates, costs, or timeframes of production. (1/23, #4)
  • RBS says the opening up of Iraq — or rather the unprecedented production commitments the majors have signed — threaten to pull long-term oil prices steadily lower. Their new analysis says the rehabilitation of Iraq may dominate oil markets and weigh on prices for much of this decade. (1/23, #5)
  • Eni SpA and partners plan to spend $1 billion a year to boost production at Iraq’s Zubair oil field by 1 million b/d after winning rights to develop the deposit. The partners agreed to raise production to 1.2 million b/d within six years and to maintain that level of output for seven years. Zubair may hold 4.2 billion barrels of crude. (1/23, #6)
  • Iraq’s Ministry of Oil has signed a 20-year contract with Shell and Malaysia’s Petronas to provide technical assistance in the development of the Majnoon oil field. The consortium targets a production plateau of 1.8 million b/d of oil, up from a current level of 45,000 b/d. Majnoon, which lies in southern Iraq, is one of the world’s largest oil fields. (1/19, #9)
  • Two major oil sands projects received funding this week. The Canadian arms of ConocoPhillips and Total said they are funding an expansion of their Surmont joint venture, and Calgary-based Husky Energy Inc. said Thursday it will spend C$2.5 billion (US $2.4 billion) on the first phase of its Sunrise project. (1/22, #15)
  • Nexen Inc’s CEO said on Friday his company won’t rush into an expansion to double the size of its $5.8 billion Alberta oil sands project, saying he needs a longer record of production and confidence in the economy following the meltdown of 2008 and 2009. (1/23, #7)
  • In an industry famous for being opaque, Total’s CEO Christophe de Margerie speaks openly about the nightmare scenario — oil shortages — that most energy firms prefer to avoid or deny. De Margerie says the possible effects on the world economy of dwindling oil supplies are so great “I am not prepared to shut my mouth.” De Margerie now says increasing world oil production to 90 million barrels a day is “optimistic.” (1/20, #18)
  • Chevron told employees this week that it will cut jobs in its refining business and consider exiting some markets, capping a series of similar actions by big oil producers and refiners amid widespread pain in the gasoline-production business. Refiners in North America and Europe are racking up losses and trying unsuccessfully to sell plants. (1/20, #13)
  • US drilling activity climbed for the fourth consecutive week, up by 34 rotary rigs to 1,282 working, compared with 1,515 occupied rigs in the same period last year, Baker Hughes Inc. reported. Of the US rigs working, 833 were drilling for natural gas and 437 were drilling for oil, with 12 rotary rigs unclassified. Half were drilling horizontally. (1/23, #9)
  • North Dakota raised its forecast for oil output in and around the Bakken Shale formation. Output may reach 300,000 to 400,000 barrels a day by mid- 2011 and stay at that level for 10 to 15 years. The state’s previous estimate was 220,000 to 280,000. The USGS estimates the formation to hold as much as 4.3 billion barrels of recoverable oil in North Dakota and Montana. North Dakota has 1,700 completed oil wells, with another 705 permitted, and room for as many as 60,000 in a productive area believed to encompass 20,000 square miles (1/23, #11)
  • The recent Davy Jones well in the shallow Gulf of Mexico has cost almost $200 million so far, and development drilling is expected to cost $1.5-2.0 billion. Production facilities will add to that cost. There are few rigs in the world that are capable of drilling to 28,000 feet and such high temperatures, so Davy Jones will have to stand in line with all of the deep-water Wilcox discoveries in the Gulf of Mexico and the pre-salt fields in Brazil’s Santos Basin for rig availability. The earliest estimates for first production are in 2013. (1/19, #22)
  • One month after world leaders fashioned a tentative, nonbinding agreement at the summit meeting in Copenhagen, the deal already appears at risk of coming undone. Major countries have yet to submit their plans for reducing emissions of climate-altering gases.(1/21, #2)
  • A bipartisan group of US senators introduced legislation Thursday to block the EPA from regulating greenhouse gases under the Clean Air Act, a move that could undercut one of the Obama administration’s top domestic priorities. (1/22, #9)
  • The Air Transport Association of America said total passenger revenue for the major U.S. carriers fell 18% in 2009 versus the year before. It was the largest drop on record, exceeding the 14% decline in 2001. The revenue decline was due to a 6% drop in passenger volume, and a 13% plunge in the average price paid to fly one mile. (1/22, #14)
  • GS Engineering & Construction Corp. will build the world’s largest tidal power plant in South Korea as the country boosts renewal energy investments for environmental concerns. (1/20, #20)
  • Europe is set to add about 1,000 megawatts of new wind power capacity in 2010 but tight credit could limit further investment in the low-carbon technology, the European Wind Energy Association (EWEA) said on Monday. (1/19, #25)
  • U.S. legislation with new incentives for natural-gas-powered vehicles will pass by late May because Democrats need to gain a bipartisan victory, T. Boone Pickens, founder and chairman of Dallas-based BP Capital LLC, said. (1/22, #12)
  • A key supplier of Toyota moved to secure a long-term source of lithium in Argentina, in one of the first global natural-resource plays of the electric-car age. Edging out Chinese buyers, Toyota Tsusho Corp., which is 21.8% owned by Toyota Motor, secured low-cost loans from the Japanese government to take a stake in a lithium project that could begin commercial production by 2012. (1/20, #21)
  • Plug-in electric vehicles will represent nearly 20% of the global market for light vehicles in 2030, according to findings in a study by automotive industry analysts at IHS Global Insight. (1/23, #14)
  • Pakistan faces a catastrophic energy crisis in the midst of a severe winter, a dire financial crunch, and a weakened government whose president is facing an insurmountable credibility conundrum. (1/19, #24)