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1. Oil and the Global Economy

Oil prices moved up slowly last week from $76 a barrel to a close of just below $79 on Friday. A combination of a weaker dollar, stronger equity markets and a Gulf storm was behind the move. After the Gulf storm weakened on Friday, prices fell from last week’s high of $79.60. Evacuation of production platforms prior to the storm briefly shut down about 1.6 million b/d of Gulf production.

Total US commercial petroleum inventories increased by 5 million barrels last week on larger imports. The API reported that US gasoline demand last month was the lowest for any June since 2004. US gasoline consumption during the first half of the year was reported to average 8.9 million b/d, down 0.6 percent from 2009. US crude production for the first half averaged 5.4 million b/d, up 3.5 percent over 2009.

Open interest in the US oil futures market fell by 13.2 percent to the lowest level since last November. The decline is attributed to growing concerns that the slow pace of economic recovery will not increase the demand for oil in the near future. Most oil traders show little concern about the possibility of supply shortages ahead and see rising prices as a function of the increased demand that would come with an economic recovery.

The IEA reports that world production of all liquids fell by 250,000 b/d from May to June resulting in total world production of 86.1 million b/d during the month. The IEA says that global all liquids production averaged 85.3 million b/d in 2007; 86.6 million b/d in 2008; and 84.9 million b/d in 2009.

2. The Deepwater Horizon Saga

With the dissipation of tropical storm Bonnie on Friday, oil workers returned to the Mocando site and resumed work on relief wells. The brief evacuation set the effort back from 7 to 10 days. Prior to the evacuation, government officials said it was satisfied that the new cap was containing the flow and gave BP permission to keep the cap in place until the well is finally plugged. If the leaking oil flow is never brought to the surface before the well is plugged, there will never be an actual measurement of the size of the leak. This of course is fine with BP as it leaves the company more wriggle room in negotiations with the government over the size of its fine.

Energy Secretary Salazar said on Thursday that the oil industry’s announcement of the formation of a task force of major oil companies to deal with oil blowouts was a step towards talks about the resumption of drilling in the Gulf. Meanwhile the chorus of industry and southern state voices demanding a resumption of drilling continues to grow. The industry maintains that only deepwater drilling can save the US from dependence on OPEC for its energy supply.

A Washington Post analysis of the testimony emerging from the hearings into the cause of the Deepwater Horizon explosion shows that a variety of shortcuts and procedural lapses, mostly rooted in the desire to save money, culminated in a series of failures that let the unchecked blowout occur. Finger pointing among the various companies involved in the tragedy continues, with the whole matter likely to end up in extended litigation.

The Wall Street Journal reported on Sunday that BP’s board of directors has decided to replace CEO Hayward with Managing Director Bob Dudley. The company is trying to decide whether to make the announcement immediately or wait until the well is finally sealed. The departure of Hayward is seen as a major step in efforts to restore the company’s image – especially in the US.

3. Energy Bill on Hold

Last Thursday US Senate Democrats conceded that they could not find the votes necessary to pass a comprehensive energy bill and withdrew the measure. The bill was opposed by most Republicans and some Democrats who believe the dangers of higher energy costs implicit in the bill outweigh the potential dangers of climate change. Most opponents say they are more concerned by the large number of unemployed while the threat posed by climate change, should it turn out to be caused by emissions, is decades away. The threat of oil shortages caused by depletion of easy-to-exploit oil reserves is so poorly understood that it does not enter into most politicians’ calculus.

The comprehensive bill is likely to be replaced by a bill dealing with issues raised by the Gulf oil spill, $5 billion in home efficiency money, and $4 billion for natural gas vehicle incentives. There are efforts underway to include national energy efficiency and possible renewable energy standards in the new bill. What will be missing, until there are major changes in national understanding and sentiment, will be efforts to control emissions in the US through national legislation.

Withdrawal of the bill bodes poorly for efforts to achieve global agreement on emissions controls.

Quote of the Week

“Recognizing there is a high degree of uncertainty here, overall I would expect global oil production to continue to grow over the next decade, supply permitting, but more slowly and interrupted by periods of contraction as the global economy falls into recession repeatedly due to the ongoing deleveraging process. Under the circumstances, the general course of oil prices seems almost completely unknowable.”

— Stuart Staniford, energy commentator, Early Warning (blog)

Energy Stat of the Week

“About 10 years ago, OPEC sources indicated Saudi Arabia needed to sell a barrel of oil at $18 to break even. Two years ago, data from ratings agency Fitch (which cares because it evaluates sovereign debt) estimated Saudi Arabia’s breakeven had risen to $26. In January, Fitch pegged breakeven for the country at $68 a barrel. Saudi Arabia is the primary low-cost oil producer on the planet.”

— Brendan Coffey, Cabot Wealth Advisory, former oil writer for Dow Jones

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

  • A giant oil slick continued spreading off China’s northeastern coast. The slick near the oil port of Dalian was caused when two pipelines exploded the week before last as crude was being unloaded from a Libyan tanker. Government officials said the accident released about 1,500 tons — or 400,000 gallons — of oil into the Yellow Sea, where the slick now covers up to 170 square miles, making it China’s largest recorded spill. (7/23, #7)
  • Oman plans to invest $3.5 billion in the next 5 years to boost the country’s oil production by 18 percent to 1 million b/d, according to the finance ministry. (7/22, #6)
  • The Iraqi oil ministry is talking to several international oil companies about investment in four new refineries throughout Iraq to meet increasing domestic demand. The cost of the refineries, designed to produce 740,000 b/d of refined products, will be more than $20 billion. (7/24, #3)
  • BP, along with its partner China National Petroleum, plans to increase production from Iraq’s Rumaila oil field by more than 100,000 b/d at the beginning of next year. (7/19, #6) Both companies, and Iraq’s state-run South Oil Co., expect to issue tenders to drill between 80 and 100 wells in the Rumaila field this year and next year. (7/21, #9)
  • Iran and a little-known Turkish firm said they signed a €1 billion ($1.3 billion) deal to build a new 410-mile gas pipeline from Iran to Turkey that would supply gas to Europe. (7/24, #6)
  • Increasing any country’s production capacity from 2.5 million b/d to 12.5 million is a monumental task – and international oil companies are concerned that Iraq’s bureaucracy isn’t up to the challenge. (7/21, #8)
  • Iran warned on Saturday it would stop trading with countries that impose restrictions on its assets abroad in the face of tightening international sanctions over the Islamic state’s disputed nuclear activities. (7/24, #7)
  • Threatened by tougher international and US penalties, Western firms such as Shell, Total, and Halliburton have pulled out of the development of Iran’s South Pars gas field. South Pars is the Iranian portion of a natural gas reservoir estimated to be the world’s largest gas field, covering 3,745 square miles and containing an estimated 1,800 trillion cubic feet of gas. About 38 percent of it lies below Iran’s territorial waters. Qatar, the Arab emirate that shares the gas field, exported $62 billion of mainly gas products in 2008, while Iran’s gas exports brought in about $6 billion. (7/23, #4)
  • BP will start deep-water drilling off the coast of Libya within weeks, at 1,700 meters below sea-level in their Gulf of Sirte, in spite of public concerns about the firm’s environmental and safety record after the Gulf of Mexico disaster. (7/24, #5)
  • Petroleos Mexicanos said Friday that crude output averaged 2.592 million barrels a day in the first half of the year, 1.4% less than in the year-ago period. (7/24, #9)
  • Kazakhstan’s oil reserves may be too valuable for an export-tax increase to deter companies from drilling in the former Soviet republic. The country, the world’s fourth-fastest growing supplier, will tax oil leaving its territory at $20 a metric ton, or $2.73 a barrel, starting next month. (7/21, #11)
  • The environmental impact of crude production from Canada’s oil sands should be studied more closely before the US approves a new pipeline from its northern neighbor, the EPA said Wednesday. (7/22, #22)
  • US drilling activity increased this week with 1,585 rotary rigs working, 14 more than the previous week and up from 943 in the comparable period a year ago, Baker Hughes Inc. reported. (7/24, #23)
  • The oil and gas industry’s offshore safety and environmental record in the Gulf of Mexico has become a key point of debate over future drilling, but that record has been far worse than is commonly portrayed by industry leaders and lawmakers. Federal records show a string of oil spills dumping 517,847 barrels of petroleum – about twice the size of the Exxon Valdez spill-into the Gulf of Mexico between 1964 and 2009. (7/24, #16)
  • Nearly eight weeks after Interior Secretary Ken Salazar announced a six-month moratorium on deepwater drilling, 31 of the 33 rigs that were operating in the Gulf when the Deepwater Horizon exploded remain there. (7/21, #28)
  • Two of the world’s top five oil rig contractors, Diamond and Ensco, are gearing up to buy more rigs as many seem even more likely to be sold due to the regulatory backlash over the Gulf of Mexico oil disaster. (7/23, #11)
  • Global unconventional gas has the potential to reshape global gas dynamics, according to a report by analyst Wood Mackenzie. Indeed, according to the report’s authors, companies that position themselves early will be best placed to benefit from the “unconventional gas revolution.” (7/24, #20)
  • Development of the Marcellus shale natural gas could create 280,000 jobs and add $6 billion of federal, state, and local tax revenues over the next decade, a new study commissioned by the American Petroleum Institute concluded. (7/23, #22)
  • Gas companies claim that the environmental horror stories described in Pennsylvania and at other EPA meetings held recently in Texas and Colorado are either fictions or not the companies’ fault. More regulation, the industry warned, would kill jobs and stifle production of gas, which the companies consider a clean-burning fuel the nation desperately needs. (7/24, #21) [Editor’s note: are all the anecdotes about problem with water wells wrong?]
  • There have been between 15-20 major natural gas shale deals since the peak of natural gas prices two years ago. Every acquisition in this category from July 2008 to present was a foreign company investing in a piece of a domestic company’s shale acreage with some upfront money and a carry of future drilling costs which the industry has dubbed a ‘Joint Venture’. The domestic players were nowhere to be found after Plains Explorations’s deal in late June of 2008. (7/24, #22)
  • Owners of natural gas vehicles in Colorado Springs will see one of the city’s two natural gas fueling stations shut down on August 1. The city’s municipal utility will no longer be using natural gas vehicles. Clean Energy Fuels, the station’s co-owner, says it can’t operate the station for just 15-20 private users. (7/22, #25)
  • There is no doubt we can produce some transportation biofuels, and little stands against burning wood or waste to generate heat and electricity, as many countries already do. However, these solutions will replace only a fraction of today’s fossil fuels. If we plan to grow significant amounts of biomass, this will ultimately deteriorate the soil and affect future fertility of the land, unless we can replenish it. There are multiple ways of replenishment, but all incur energy for replenishment or slow the rates of biomass production. Even if we can double current extraction of biomass, this only represents 6 percent of total U.S. primary energy consumption. (7/23, #29)
  • In a new book, “Empires of Food,” journalist Andrew Rimas and Leeds University agricultural researcher Evan Fraser examine civilizations from Mesopotamia to Rome to Great Britain. They argue that every empire was made possible by agriculture, and that when those agricultural systems failed, the empires they supported failed with them. Fraser and Rimas worry that the food system in place today is built around nitrogen-based fertilizers that require petroleum to create, as well as good weather that’s graced the world since the dust bowl. If fuel prices go up again, or if the weather gets worse, they say, we could see our food empire unravel as well. (7/22, #5)
  • According to the World Nuclear Association, China’s demand for uranium may rise to 20,000 tons a year by 2020. That translates into more than a third of the 50,500 tons mined globally last year. All of the world’s current uranium output currently has a market, supplying the existing global demand for uranium. Don’t be surprised to see uranium in shortage by the second half of this decade. Looking ahead, there’s just not enough new production in the planning stages. The world needs new mines, but startup costs are much higher than 10 or 20 years ago. (7/20, #30)