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1. Oil and the global economy

Oil settled at the Friday close at $76.01, only a few cents below where it started on Monday. Prices briefly climbed above $78 a barrel on Wednesday when it was learned that US crude inventories had fallen by a much-greater-than-expected 5 million barrels the week before. Prices were under pressure earlier in the week on a report that China seems to have reined in the pace of its economic growth a bit and bad news about US corporate earnings, manufacturing and consumer confidence later in the week. The latter news resulted in a substantial drop in US equities markets that have been closely tied to oil prices in recent months.

The US Federal Reserve issued a more pessimistic than usual report on the prospects for US economic growth. Oil market analysts also appear to be growing increasingly pessimistic about the demand for oil in the US.

Chinese oil imports, which have been increasing rapidly in recent months, may slow in the second half as the government’s efforts to curb inflation take hold.

More suicide bombings in Iraq serve as reminder that the political/electoral/oil law impasse continues. Iraq’s parliament has met once for 14 minutes since the elections last March. As the US withdraws further and further from managing Iraqi affairs, it appears that the prospects for major increases in Baghdad’s oil production in the near future are dimming.

2. The Deepwater Horizon

Containment: So far the closing of valves on the new containment cap appears to be going well. Oil has completely stopped pouring into the Gulf and there are no indications that oil is bubbling to the surface from openings in the well pipe.

The government, however, has ordered BP to start letting the oil flow to the surface again where it will be flared or stored. By bringing all the leaking oil to the surface the government will for the first time have a better basis for assessing just how much oil has escaped from the run-away well. This number will be important to the size of the fine the government imposes on BP and in litigation over the incident.

By letting the oil flow to the surface, there will be less back pressure inside the well and it should be easier and less risky to seal the leaking well when a relief well penetrates the casing and starts to pump in mud.

The fate of BP: British Prime Minister Cameron will visit Washington this week in an attempt to convince the administration to go easy on BP when it comes time to levy fines and initiate criminal prosecutions. Cameron will say that the UK needs a strong and stable BP during these times of economic troubles and that Britain cannot afford to let the company be torn apart in the wake of the Deepwater Horizon disaster. The Prime Minister is also worried about the bill making its way through Congress that would ban BP from obtaining any further drilling permits in the US because of its bad safety record.

Negotiations are underway for BP to sell off $20 billion worth of assets to help pay for liabilities stemming from the Gulf disaster. Apache Corp. is frequently mentioned as a possible purchaser of BP’s Alaska operations. BP is said to have sold its 7.8 million barrels of storage capacity at the Cushing, OK storage facility.

Mitsui, BP’s other partner in the Macondo well, notified BP that it does not intend to pay its 10 percent share of the accident’s liabilities as the whole affair was caused by BP’s negligence.

The moratorium: As the leaking-oil phase of the Macondo disaster draws to a close, attention is turning to the drilling moratorium that the administration has imposed while the accident is being investigated. Gulf residents are adamant that the drilling moratorium is an unnecessary precaution that is devastating the regional economy. Last week frustrations were vented at a hearing of the President’s commission on deepwater drilling.

The administration maintains that it is too risky to resume drilling while every available clean-up asset is fully committed to cleaning up the Macondo leak. Secretary Salazar says he hopes that prior to November 30th the situation will have improved and that knowledge of the causes for the Deepwater Horizon incident will be sufficient to allow a partial resumption of drilling.

Last week the administration renewed its ban on deepwater drilling as a way of getting around the federal court decisions overturning the first ban. The new ban is similar to the first, but could allow some drilling to resume. The new policy reverses the first ban and for now renders the court decisions lifting the ban moot.

3. Demand projections

Last week the IEA and OPEC issued their outlooks for oil demand during 2011 and the remainder of 2010. The IEA said global oil demand will increase 1.6 percent in 2011 to 87.8 million b/d, while OPEC forecast that demand will increase by 1.2 million b/d to an average of 86.4 million b/d next year. The IEA expects Chinese demand for oil will moderate next year as oil is used more efficiently and the economic stimulus programs that have moved the Chinese oil imports up sharply in recent months are removed.

These forecasts have been carefully crafted to foresee a benign immediate future. The world’s GDP will to continue to grow moderately, and there will be sufficient oil available to cover everyone’s needs. Prices will remain in the vicinity of $70 or so a barrel. With 5 or 6 million b/d of spare capacity available, OPEC can easily offset any supply disruptions.

For many observers, this view of the next 18 months is simply too quiescent. They note that while the economic prospects for the US and much of the EU are not good, it would take a major economic setback to reduce oil consumption much below what we have seen in recent years. While the Chinese are attempting to dampen inflation, they are still calling for GDP growth on the order of 10 percent.

Some observers believe the decline in global oil production that the IEA has been reporting since February may be more than a temporary phenomenon. Others believe the deep water producers are having serious trouble extracting oil from extreme depths below the seabed in the quantities predicted. The fallout from Deepwater Horizon is bound to have a significant impact on production. If all this turns out to be the case, and deep water wells can only produce a fraction of their hoped for production, then the future of the oil industry is going to be markedly different.

Finally, some are questioning the 5 or 6 million b/d of spare capacity numbers. This reserve is being counted on not only for emergencies, but also as a source of supply for increases in demand. As little new production capacity beyond what is need to maintain current production levels is anticipated in the next few years, either demand increases will come from this reserve or there will be a significant jump in oil prices.

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

  • Nigeria’s state-run oil company is “insolvent” and needs $6.6 billion to cover its debts and fund future domestic oil exploration. (7/14, #9)
  • At Brazil’s offshore Franco field, the first test at a new well indicates that the well may have the potential to produce about 50,000 barrels of light oil a day. Brazil says the Franco field holds an estimated 4.5 billion barrels of recoverable oil, making it the second-largest oil find in Brazil after Tupi. (7/14, #12)
  • Angola plans to export 1.42 million barrels a day during September, much lower than August’s 1.83 million barrels a day. The sharp decline in exports is mainly due to lower output of Girassol and Plutonio; Girassol had maintenance problems. (7/18, #11)
  • Venezuela hopes to catapult past Saudi Arabia as the world leader in certified crude oil reserves when it finishes registering oil deposits in its vast Orinoco Belt this year. Orinoco deposits are extra heavy tar-like sour crude that must be upgraded or mixed with a lighter grade to create an exportable blend. But there is a lot of it. (7/14, #11) [Editor’s note: all this while Venezuela continues a multi-year slide in oil production.]
  • Kazakhstan’s financial police launched a criminal probe into an oil project led by Chevron, the latest of several moves to increase pressure on energy ventures that had until recently enjoyed a special status. The announcement came two days after government officials said the Chevron consortium and another project led by Italy’s Eni SpA will have to pay a new oil export duty-a $2.73/barrel tax. (7/16, #4, #5)
  • US officials admit that Iran has worked its way around sanctions and shows no sign of abiding by international demands to stop its uranium enrichment program. Nonetheless, says one senior American official, the republic is now “constrained in its ability to conduct financial transactions, and relegated to narrow conduits in financial markets”. (7/14, #27)
  • The engineering arm of Iran’s Revolutionary Guard Corps said Friday it was pulling out of projects in a giant Iranian natural-gas field in the Persian Gulf, blaming mounting sanctions from the West. (7/18, #8)
  • Indian Oil Corp., India’s second-biggest refiner, plans to acquire oilfields in Africa as part of a $1 billion overseas investment plan, its chairman said. The state-run company’s renewed plans to expand overseas came after the government freed gasoline prices from its control last month and said it will eventually allow refiners to set diesel rates. (7/15, #9)
  • Oil and gas explorer Falkland Oil & Gas said it didn’t find oil at an exploration well off the coast of the Falkland Islands, sending its shares plunging by more than half. (7/13, #9)
  • OPEC tells us it has lots of spare capacity, but how much should we believe them? Even when prices were much higher than they are now, back in 2008, they did not make use of all of the spare capacity that they supposedly had. (7/18, #22)
  • The Lloyd’s insurance market and the Institute of Strategic Studies (ISS, known as Chatham House) says Britain needs to be ready for “peak oil” and disrupted energy supplies at a time of soaring fuel demand in China and India, constraints on production caused by the BP oil spill, and political moves to cut CO2 to halt global warming. (7/12, #20)
  • In northeastern China, oil pipeline explosions rocked the city of Dalian on Friday, sparking fires that blazed for 15 hours that were put out Saturday morning. China National Petroleum Corp pledged to do all it could to limit the impact on the important shipping port and picturesque tourist town, where the explosions reportedly impacted a 20-sq.-mile area of ocean. (7/18, #12)
  • Alberta’s Energy Resources Conservation Board, in its June 2010 update, forecasts bitumen production from the oil sands to reach 3.2 million b/d in 2019. Bitumen production from the oils sands in 2009 averaged 1.49 million b/d. (7/12, #21)
  • Billboards targeting Alberta’s oil sands and its environmental problems sprang up in Denver, Seattle, Portland and Minneapolis last week in the launch of a multi-million dollar, multi-year campaign led by NGO Corporate Ethics International. The ads ask Americans to boycott Alberta as a travel destination because of its oil sands industry. (7/16, #15)
  • Canada may be the third largest producer of gas but ranks only 21st in the amount of proved reserves. We are liquidating our gas reserves as fast as possible as dictated by the markets, not by any coherent energy policy. (7/14, #28)
  • Apache is the oil world’s yard sale specialist. Take the old Forties field. In 2002, the year before BP sold its 96% stake, Forties produced 52,000 barrels of oil a day, about a 10th of its 1970s peak; a seeming case of terminal decline. In 2009, Apache wrung more than 60,000 barrels a day from Forties. Apache uses techniques like sophisticated underground mapping and incremental drilling to find untapped reserves in fields like Forties, as well as regions ranging from the Gulf of Mexico to Egypt. Apache may buy BP Alaskan assets. (7/16, #2)
  • A Diamond Offshore Drilling subsidiary agreed to suspend a Gulf of Mexico contract and signed a multiwell international commitment that will move the Ocean Confidence semisubmersible drilling rig to Congo (Brazzaville). The Ocean Confidence is expected to arrive off Africa within about 60 days (7/14, #25)
  • The post-hurricane problems at Thunder Horse in 2005 were not an anomaly, but a warning that BP was taking too many risks and cutting corners in pursuit of growth and profits, according to analysts, competitors and former employees. Despite a catalog of crises and near misses in recent years, BP has been chronically unable or unwilling to learn from its mistakes, an examination of its record shows. (7/13, #20)
  • China now consumes and produces close to 50% of the world’s coal. Thus, changes in Chinese consumption and/or production may have a dramatic impact upon the global coal market. China’s coal consumption grew 12% in 2009. Should China ever fail to match coal consumption with indigenous production then one of three things may happen: growth stalls, imports rise, or other sources of power generation (e.g., nuclear) must grow fast. (7/12, #17)
  • Last month was the hottest June ever recorded worldwide and the fourth consecutive month that the combined global land and sea temperature records have been broken. 2010 is now on course to be the warmest year since records began in 1880. (7/18, #2)
  • China’s Ministry of Commerce recently announced it will reduce by 72% China’s exports of rare earth minerals. This matters because China controls 97% of global production of these minerals. How did it get such a dominant market position? Beijing subsidized its own mines. As a result, producers in other nations–primarily the U.S.–could not compete with the prices the Chinese were offering. That’s why China now has a lock on rare earths. (7/15, #12)
  • According to the latest numbers from the United States Geological Survey, current lithium producers are providing enough lithium to fuel the projected number of electric vehicles for the next ten years. After that, the major factor that will drive competition between players in the energy industry might not be mining lithium, but recycling it. Because lithium doesn’t chemically change while it provides energy, it can be recycled. (7/14, #29)
  • The Obama administration’s $2.4 billion investment in the development of batteries and other electric-car technology in the United States is an enormous bet on a product that has yet to gain broad commercial success. Major manufacturers have yet to sell electric cars in the United States. Hybrids, though they have been around for a decade, represent less than 1 percent of the nation’s roughly 250 million-vehicle fleet. (7/16, #20)

Quote of the Week

  • “Even before we reach peak oil, we could witness an oil supply crunch because of increased Asian demand. Major new investment in energy takes 10-15 years from the initial investment to first production, and to date we have not seen the amount of new projects that would supply the projected increase in demand.”

— Report from Lloyds of London (insurance) and Chatham House (strategic studies)