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Peak Oil Review

1. Oil and the global economy

Oil prices fell 8 percent last week from a high of $79 on Monday to close on Friday at $72.14. After it became apparent that hurricane Alex would stay well to the west of Gulf oil production, concerns over future economic growth took over and drove prices steadily lower as the week progressed. Even predictions of higher gasoline consumption over the holiday weekend and a decline in gasoline inventories were not enough to stem worries that another economic downturn is in the offing. From housing to unemployment, consumer confidence and equity markets, bad economic news built all week. Even Beijing released numbers showing that its phenomenal growth may be slowing.

US gasoline prices are expected to fall further as it becomes apparent that driving season demand may be weaker than usual. Although they started from a very low base, last year gasoline prices on the West coast grew by 58 percent in the first half of the year as compared to 5 percent this year.

Iran was back in the news last week as UN and the US Congress stepped up efforts to penalize Iran’s economy. France’s Total announced that it will no longer sell finished petroleum products to Tehran. The move came in the wake of a new US law that imposes consequences on firms selling petroleum to Iran and adds to the expanding list of firms that will no longer do business with Iran.

Although Tehran remains defiant, saying that China and independent oil traders will supply all the product they need, the government has also announced emergency plans to increase gasoline production to the point that imports would not be necessary.

Iran’s news agency reported that Tehran’s oil sales dropped by 24 percent in the 11-month period ending in February. Some analysts are noting that slowing oil sales may be more of a problem for Tehran than sanctions since 80 percent of its export revenue comes from oil sales.

A Bloomberg survey shows OPEC production in June slipped by 157,000 b/d from a 17-month high. OPEC is now producing about 26.8 million b/d which is 2 million b/d higher than their last official quotas set in the midst of the price slump in January 2009.

2. The Deepwater Horizon

Developments last week: Waves spawned by hurricane Alex slowed cleanup and containment efforts last week as an attempt to bring a third containment vessel into operation was delayed. Southwesterly winds drove more oil into the Louisiana marshes and the beaches of Mississippi and Florida. Skimming of oil, controlled burns and the use of dispersants were all suspended.

A converted supertanker arrived in the Gulf and began tests on Saturday. The ship’s owners claim the tanker can scoop up some 500,000 barrels of oil water from the sea each day, separate it into oil and water and store the oil on board while returning relatively clean water to the sea. The ship works by allowing polluted water to enter 12 horizontal slits near its port and starboard bow. The liquid then enters a series of tanks where the oil is decanted and then stored for later transfer to a separate vessel. If the concept proves effective, the ship’s owners hope for a contract that would call for the ship to remain in the vicinity of the spill skimming oil as it surfaces.

The near term: Numerous experts expressed hope last week that the first relief well may be completed by mid-July and start pumping mud into the runaway Macondo well. Officially BP is sticking to its early August completion date as the there is no assurance that BP will be successful on its first attempt to penetrate the leaking well casing. A similar relief well that was drilled off Australia last year missed the target four times before it was successful.

The economic impact: As the Macondo well leak may come to an end during the next few weeks, attention is turning to the drilling moratorium which has thrown thousands of Gulf workers out of jobs and has sparked a wave of lawsuits and recriminations as to whether the benefits are worth the cost. Washington is preparing a revised offshore drilling moratorium which could be issued this week. Meanwhile the Federal judge’s ruling against the ban has gone to the Court of Appeals where the government’s moratorium is being opposed by the oil companies, Chambers of Commerce, and US Senator Landrieu. All say the losses caused by the moratorium are staggering

At a meeting with Interior Secretary Salazar last week, executives of the major oil and drilling companies told the Secretary that they are about to move their rigs to Africa and the Middle East. Apparently the Secretary was not moved by those threats. Later the executives expressed disappointment with Salazar’s lack of concern for the economy of the Gulf.

Environmental impact: With containment efforts slowed or halted, and with stronger southwesterly winds, more oil made it on to the Gulf coasts last week. Concerns are being raised about the fate of the Gulf’s whale sharks which are the biggest fish in the sea. Many of these creatures, which are surface feeders, have been spotted swimming through oil slicks in search of food.

The future of BP: With possible liabilities and fines now thought to be on the order of $60 billion and its stock value way down, concern that BP may be taken over by stronger rivals abounds. Last week the company was reported to be seeking a strategic investor from among the world’s sovereign wealth funds that could afford a £6 billion investment in the company. Rumors abound that BP’s chairman and CEO will be replaced once the leaking well is capped.

3. China

Two new reports on Chinese manufacturing show that the Country’s rapid growth may be slowing as Beijing cuts back on bank lending and stimulus money. Chinese manufacturing in June expanded at the slowest pace in 16 months. While China is still growing, Goldman Sachs has cut its projection for 2010 back to 10.1 percent from 11.4 percent. Other observers are suggesting that growth for the year may be on the order of 9 percent in the wake of an upward revaluation of China’s GDP growth in 2009 from 8.7 percent to 9.1 percent. This provides a higher base for the 2010 numbers.

On Sunday Premier Wen Jiabao said China is facing increasing dilemmas as the impact of the global economic crisis is more serious than expected. With economic conditions in the EU and US deteriorating, the outlook for China’s exports is not good. China is going through a series of major changes in its economy, ranging from worker demands for more pay, to paying for decades of environmental neglect, to a revalued currency and increasing reliance on foreign sources of energy and raw materials. Much of the country’s wealth is tied up on massive foreign exchange reserves, much of which is facing the possibility of devaluation.

This suggests that the Chinese demand for oil in coming months will moderate.

Quote of the Week

  • “We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost – to the world economy and, above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense.”

–Thomas Friedman, author and New York Times columnist

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

  • Russia boosted its oil output to a new record high in June and kept it above 10 million b/d for the 10th month in a row, allowing it to remain the world’s top oil producer. Analysts see problems ahead and express doubts that Russia can continue to ramp up oil production due to depletion of mature fields and a low number of new deposits being put on stream as well as the tough business environment in Russia. (7/3, #27)
  • Persian Gulf states seeking to prolong the lives of aging oilfields face a shortage of the natural gas needed to pump into wells to maintain crude output. And the problem is rapidly worsening. The need for gas to use this way could rise by as much as 8 per cent a year for the next decade, said Fereidun Fesharaki, chairman of FACTS Global Energy. (6/30, #7)
  • Mexico’s declining oil output is a major challenge for the country and its neighbors because of its inevitable fallout in all sectors of the economy. The government relies upon earnings from the oil industry for about 40 percent of total government revenues. Any decline in Pemex production directly affects the country’s overall fiscal balance. (7/3, #4)
  • In the UK, total energy production in Q1 2010 was 6.5% lower than in the first quarter of 2009. Oil production fell by 6% compared to the first quarter of 2009 and natural gas production was 9% lower. (6/30, #17)
  • The head of French oil major Total expects the industry to face tougher safety rules, following the BP oil spill, that could lead to higher oil prices. (7/3, #15)
  • In Venezuela, progress in arbitration cases and new filings are putting more pressure on the nation’s cash-strapped state oil company PDVSA which faces having to compensate various firms for assets that were nationalized. (7/3, #5)
  • In the Ecuadorean Amazon, from 1964 until it pulled out in 1992, Texaco — which merged with Chevron a decade ago — dumped some 17 million gallons of crude oil and 20 billion gallons of drilling waste water into waterways and pits. (7/3, #16)
  • Royal Dutch Shell’s CEO, responding to criticisms raised at the Global Forum that Shell and other oil majors were not doing enough to clean up oil spills in Nigeria, said the complex situation in the country makes it difficult for the company to properly deal with it. (6/29, #8)
  • Swings in oil prices may widen over the next five years as OPEC’s shrinking spare production capacity increases traders’ concern about supply shortages. (6/28, #5)
  • At current rates, China’s and India’s net oil imports will exceed U.S. net oil imports sometime around 2013. (7/3, #28)
  • Indian energy major Reliance Industries and Mexican state-run oil giant Pemex may soon join hands to develop a greenfield refinery in Mexico, the Economic Times reported last Monday. The refinery, which will have a capacity of 300,000 barrels a day, will largely meet the energy requirements of Mexico. (6/29, #9)
  • TransCanada Corp’s $5 billion Keystone pipeline began operating on Wednesday, delivering 435,000 barrels per day of Canadian oil sands crude to Illinois refiners. (7/1, #12)
  • The debate is heating up over whether the Obama administration should approve a huge new pipeline called Keystone XL that would bring oil extracted from the oil sands in Alberta, Canada, all the way to Texas for refining. (7/3, #24)
  • A U.S. Senate committee voted Wednesday to remove all limits on damage claims that oil companies could pay for offshore spills, the leading edge in a wave of new industry regulations anticipated following the disaster in the Gulf. But the measure to discard the current $75 million cap on spill liability, along with other proposals to tighten government regulation of offshore oil drilling practices, faces an uncertain future. (7/1, #8)
  • The White House’s top energy adviser acknowledged that smaller oil firms might no longer be able to drill in the Gulf of Mexico as a result of legislation moving through Congress that would eliminate the cap on their liability for oil spills. Small companies have warned that discarding limits would shut out all but the biggest companies from offshore drilling, partly because obtaining insurance would become impossible without liability limits. (7/3, #17)
  • The US oil and gas industry’s approach of developing standards and practices apparently isn’t capable of handling complex deepwater exploration and production problems by itself, an independent consultant told a House subcommittee, which is considering legislation to increase regulation of offshore equipment and systems. (7/1, #11)
  • Of the US drilling rigs working-1557, up 5 over the previous week-960 were drilling for natural gas, 587 for oil, with 10 unclassified, according to Baker Hughes Inc. (7/3, #23)
  • North Dakota’s oil production hit a record 218,000 barrels daily in 2009, up from the previous year’s production record of 172,000 b/day. North Dakota’s oil patch averaged 52 rigs daily in 2009; at present nearly 130 rigs are drilling in North Dakota. About 5,200 wells were capable of producing oil and gas in 2009, producing an average of about 47 b/d apiece. (6/29, #18) [Editor’s note: average Saudi Arabian wells produce roughly 100 times this rate.]
  • Thirty years ago, Exxon vowed that oil shale would be Colorado’s economic salvation and the future of national energy independence. The company projected 8 million barrels a day from the state by 2010. It’s 2010, for the record. Not a barrel has been squeezed from the state for commercial use. The industry remains far from “scaling up.” Said Randy Udall, “Oil shale is the petroleum equivalent of fool’s gold. Oil shale a mental illness more than an energy source. It has been almost a statewide [Colorado] delusion for a century.” (7/3, #22)
  • A natural gas joint venture between Iraq and Royal Dutch Shell, first announced in the fall of 2008, was given the preliminary OK from the Council of Ministers on Tuesday. The controversial deal would help Iraq capture and use massive amounts of natural gas that is currently being flared off as a waste byproduct of crude oil production. (6/30, #6)
  • China National Petroleum Corp., China’s biggest state oil company, signed an initial agreement Thursday with Encana Corp. of Canada that could lead to the companies jointly investing in the development of shale-gas reserves in British Columbia. (6/28, #11)
  • Against the backdrop of the Gulf of Mexico oil spill, onshore shale-gas production in Pennsylvania is facing sharper scrutiny as concerns about the environmental impact of oil and gas drilling build. (7/3, #21)
  • A bipartisan group of U.S. senators emerged Tuesday from a meeting with President Obama still divided over how to craft a climate and energy bill, with lawmakers predicting scaled-back legislation that would cap emissions from electric utilities rather than impose an economy-wide limit on greenhouse gases. (6/30, #14)
  • Recent weeks have brought nothing but bad news for the Persian Gulf’s gas and power sector: not just isolated incidents but a sign something is badly wrong. (6/30, #8)
  • China’s carbon dioxide emissions per person reached the same level as those in France last year. A Dutch agency said that per capita emissions were 6.1 tons in China in 2009, up from only 2.2 tons in 1990. (7/3, #8)
  • After a six-month inspection of the Texas City refinery last year, OSHA hit BP with an $87 million fine, the biggest in the agency’s history. About $57 million of that OSHA describes as fines for “failures to abate” hazards similar to those that caused the 2005 explosion which killed 15 people. (6/30, #22)
  • Every million electric vehicles running entirely on electricity would save just 31,000 barrels per day of gasoline, or about 0.3% of our current usage, and that’s assuming they would replace cars getting today’s average mpg, rather than Prius-type non-plug-in hybrids. To see the energy transition really take off, we must reach the point at which the alternatives are unambiguously better/faster/cheaper than oil, or can at least match its cost and convenience. (6/30, #25)
  • Nearly two-thirds of the 55 nuclear power plants being built globally at the end of 2009 could be found in Asia, according to the International Energy Agency. China alone accounts for 20 of these and India a further five. The list keeps growing. Last week, Vietnam unveiled plans to build thirteen nuclear reactors by 2030. (6/29, #21)
  • In a bold if lonely environmental stand, Britain’s coalition government has set out to curb the growth of what has been called “binge flying” by refusing to build new runways around London to accommodate more planes. The British government said that the economic effects of scrapping a planned third runway are “unclear” while the environmental costs of adding one are unacceptably high. (7/3, #26)