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1. Production and Prices

Crude prices started the week firmly as traders hoped for an improvement in the US economy, the US dollar remained weak, and Nigerian militant attacks continued to cut production. On Tuesday prices jumped to $73 a barrel when a rogue trader in London, acting without authorization, amassed huge positions in Brent crude, losing his firm $10 million in the process. By Thursday, concerns shifted back to the state of the US economy with the release of worse-than-expected job numbers. With hopes that an economic recovery would start later this year fading, the equity markets dropped sharply taking oil prices with them. Prices fell from nearly $72 a barrel on Tuesday to touch a low of $66.10 on Friday.

On Tuesday, the American Petroleum Institute released its survey showing that US crude supplies had fallen by 6.8 million barrels the previous week. The IEA stocks report issued the next day showed a more modest drop of 3.7 million barrels in crude inventories which was overshadowed by a 5 million barrel increase in gasoline and distillate stocks. US demand for oil products remains weak and stocks of gasoline and particularly distillates continue to build.
The IEA is becoming more pessimistic about a rapid economic recovery leading to an oil supply crunch anytime soon. The IEA revised its mid-term estimate of oil demand down to an annual increase of 0.6 percent each year from a previous estimate of 1.6 percent a year. In the IEA’s view, slower economic growth puts off the threat of shortages and prices spikes for a while longer.

A new report that warming patterns are shifting in the Pacific warns that this year’s Gulf of Mexico hurricane season may be worse than previously thought.

2. The Iraqi auction – success or failure?

The Iraqi oil industry is facing difficult times. With oil prices low compared to last summer and production from the southern fields slipping from decades of inadequate investment, the government is desperate to increase its oil output – the country’s only meaningful source of revenue. After years of bickering, Iraq is still unable to pass a law that would regulate oil production and the distribution of revenues. While the oil ministry needs foreign technical assistance to achieve a meaningful increase in production, there is wide-spread public abhorrence at the notion of foreigners profiting from Iraqi oil.

To solve this dilemma, the Iraqi Oil Ministry crafted a program to auction off the right to participate in the further development of Iraqi oil fields, while at the same time claiming that a politically acceptable 99 percent of the revenue would go to the Iraqi government.

Under the plan, foreign oil companies bid against one another for the right to participate by telling the government how much per barrel they would like to be paid for any new oil produced and how many barrels per day the company expects to be able to produce from the field when production reaches its peak.

Last week, participation rights at eight producing Iraqi oil fields and two new gas fields were put up for auction. At first glance the auction was a flop as it was revealed that a payment of $2 a barrel was the maximum acceptable to the Iraqis, far lower than what most of the oil companies wanted. After negotiations, a consortium of BP and China agreed to redevelop the Rumaila oil field for $2 a barrel for any new oil produced. No acceptable bids were received on the other oil and gas fields.

The Iraqi Oil Ministry hopes to sign an agreement on Rumaila within two weeks; however the parliament is saying that in the absence of an oil law, they must approve the deal first. Given the parliament’s record on oil matters, anything could happen.

While a deal was made on only one of the eight fields, Rumaila is Iraq’s largest, currently producing just under 1 million b/d. As part of the bidding process ExxonMobil estimated that it could increase the field’s output to 3.1 million b/d while BP estimated they could get to 2.85 million, far above the Iraqi estimate that the field could ultimately produce 1.7 million b/d.

If BP and the Chinese can ever get this field to produce on the order of 3 million b/d in return for $2 a barrel, then the Iraqis will have gotten themselves the bargain of the century as oil prices could easily be in three figures by the time this is accomplished.

The future of Iraqi oil production is one of the great unknowns since the political and military stability of the country and region will be very much up in the air as US forces depart.

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

  • Chevron announced that its joint venture had begun oil production from its offshore Mafumeira Norte oilfield in Angola. This is the first phase in development of the field, which is expected to reach total production of 30,000 barrels/day in 2011. (7/3, #9) [Editors’ note: the world needs more than two of these every week just to offset decline rates.]
  • Royal Dutch Shell has suspended its operations in the Western Niger Delta, giving in to increasing pressure from the MEND rebels in the region. (7/4, #7)
  • The Nigerian Government on Wednesday admitted that it had no more crude for its refineries to process for local consumption. The effects of militancy in the Niger Delta in Nigeria and the Federal Government’s clampdown on them have shaken the foundation of the oil and gas industry in that country. (7/5, #8)
  • The cost of developing Kazakhstan’s Kashagan oilfield will be cut by at least $1 billion as the global crisis drives down machinery prices, according to the Kazakh Energy Minister. The oilfield, in the north-east of the Caspian Sea, is due to come on-stream in 2012. Kazakhstan’s government had earlier estimated its total cost at $136 billion. (7/4, #6)
  • China secured access to large oil deposits last week in western Kazakhstan. The newly built Kenkiyak-Kumkol pipeline, which starts near the Kenkiyak field operated by China’s CNPC, gives China better access to Kazakhstan’s oil provinces in the west and follows Beijing’s intensified efforts to boost energy supplies from Central Asia. (7/1, #11)
  • China National Petroleum Corp. is in talks with Repsol, according to the vice chairman of China’s top planning agency. CNPC is reportedly interested in a deal to buy Repsol’s Argentine operations. (7/3, #11)
  • China’s dependency on imported oil continues to grow. A Bank of Nova Scotia commodities specialist said China relied on imports for 57 per cent of its petroleum consumption in May while the U.S. imported 55 per cent of its needs. China’s import dependency was less than 40 per cent in 2003, and averaged 50 per cent in 2008. (7/1, #10)
  • OPEC is unlikely to raise oil output when its minister meet in September as the oil market is still oversupplied, Kuwait’s oil minister said on Wednesday. (7/2, #7)
  • Russia is prepared to cooperate with Royal Dutch Shell, Europe’s largest oil producer, on oil and gas projects in the Russian Far East known as Sakhalin-3 and Sakhalin-4, Russian Prime Minister Vladimir Putin said. Now is an “ideal time” to move quickly on Sakhalin-3 and Sakhalin-4 because building costs are low, according to Shell representatives. (6/29, #15)
  • Iran’s OPEC representative said Monday both the EU and OPEC agreed that $70-80 a barrel is a fair crude oil price until the global economy picks up. (6/30, #4)
  • China raised fuel prices by as much as 11 percent today to prevent China Petroleum & Chemical Corp. from making losses as crude oil costs rise. (6/30, #14)
  • Fatih Birol, chief economist of the International Energy Agency, cited three reasons for the worse-than-feared decline in investments in the oil industry: 1) the oil price prospect is still uncertain; 2) firms did not foresee demand picking up, and 3) key producing countries still had some spare capacity to be used. (7/4, #18)
  • Baker Hughes said for the third week in a row, the number of drilling rigs running in the U.S. is up from the previous week. At 928, the count is now up 5% from its June 12 nadir, though still down 54% from its peak of 2031 last fall. (7/3, #17)
  • US consumption and export data from the US Energy Information Administration are especially vulnerable to errors. For the last three years, preliminary estimates for US petroleum consumption have been revised downward when more comprehensive data is published six weeks later. The core of the problem is the statistical system’s struggle to account for soaring exports of refined products, especially distillates to Europe. (7/3, #18)
  • US gasoline consumption last week hit an 18-month high ahead of the traditional peak in demand over the July 4 holiday weekend, according to a MasterCard Inc. report. Motorists bought an average 9.695 million barrels of gasoline a day in the week ended June 26, or 1.6 percent above a year earlier and the most since the week ended Dec. 21, 2007. (7/3, #14)
  • The boss of Steve Perkins, the broker at the heart of a rogue oil trading scandal that rocked oil markets this week, issued a bullish report suggesting prices could go higher only hours after Mr. Perkins made the unauthorized trades that caused prices to spike. The disclosure raises further questions about internal controls at PVM Oil Associates, the world’s largest oil brokerage. (7/4, #14)
  • China’s state and commercial stocks of crude oil are equivalent to 86 days of net imports, only 4 days short of the amount needed to join the International Energy Agency. (7/3, #10)
  • The EU’s Gas Coordination Group is preparing for the possibility of another gas shortage in case Russia again shuts down the flow of its gas through Ukraine.(7/3, #20)
  • European countries were urged to start stockpiling gas reserves for the winter as another gas crisis involving Russia and Ukraine is looming. (7/4, #16)
  • Nigeria, Algeria and Niger signed an agreement on a proposed Trans-Saharan pipeline that will ship natural gas from Nigeria to Europe by 2015. (7/4, #8)
  • China may face a “short-term” natural gas oversupply after 2010 because of increased domestic output and imports of the fuel, a PetroChina Co. official said. The nation is building a second pipeline to move natural gas from Central Asia and plans at least 10 terminals to import liquefied gas from suppliers including Australia, Qatar and Malaysia. (7/5, #1)
  • In southern New Brunswick, consulting engineers arrived at a best estimate of 67.3 tcf of gas in place in the overpressured Carboniferous Frederick Brook shale. (7/3, #16)
  • Iran plans to invest around $70 billion in two major offshore natural gas fields in the 2010-15 period. The managing director of the state National Iranian Oil Company said Iran would invest $40 billion to complete remaining projects in the South Pars field during the fifth five-year economic plan, which runs until 2015. He did not say how Iran, which is also the world’s fifth-largest oil exporter, would finance the investments. For years Iran has struggled to develop its reserves and now has to contend with an international lack of credit. (7/5, #6)
  • The US Senate may pass legislation to slow climate change and then fail to approve a global treaty that commits nations to do so, according to Senator John Kerry. (7/2, #15)
  • President Obama will move to seal a deal with Russia for joint action on climate change during his summit in Moscow this week. Obama arrives in Moscow on Monday at the start of a trip to Russia, Italy and Ghana that will focus heavily on energy and climate change. (7/4, #12)
  • Beijing joined a growing clamor of complaint about US plans for a carbon tax on imports from countries without their own emission caps, warning it could set off a global trade war. (7/4, #10)
  • US oil and gas associations generally condemned the climate-change bill narrowly passed by the US House of Representatives on June 26. (7/1, #14)
  • Pakistan increased domestic fuel prices after the government imposed a carbon tax to help meet the budget deficit target. The government raised gasoline prices by 10% and diesel by 14%. The South Asian country imports about 85 percent of its oil. (7/1, #8)
  • China’s power generation rose 3.59 percent year on year in June, ending eight consecutive months of decline since October last year. (7/3, #12)
  • In Europe, unemployment in the 16 countries that use the euro spiked to a ten-year high in May at 9.5 percent. (7/3, #1)
  • In the former USSR during the early 1990s, their crash in oil production preceded collapse in USSR’s Gross Domestic Product. The lag time between the two, and the severity of the collapse are clear enough to ascribe causality: to say that the oil crash caused the economic collapse. The economic collapse then caused coal and gas production to crash. (6/29, #17)
  • The prospect of peaking oil production has direct consequences for world food security, as modern agriculture depends heavily on the use of fossil fuels…Energy-intensive fertilizer accounts for 20 percent of U.S. farm energy use. As the world urbanizes, the demand for fertilizer climbs. [Other food-based energy uses include water pumping (19%), on-farm energy use (20%), processing (16%), transportation (14%) and packaging 7%).] With higher energy prices and a limited supply of fossil fuels, the modern food system that evolved when oil was cheap will not survive as it is now structured. (6/29, #16)
  • Two years before the invasion of Iraq, oil executives and foreign policy advisers told the Bush administration that the United States would remain “a prisoner of its energy dilemma” as long as Saddam Hussein was in power. The April 2001 report, “Strategic Policy Challenges for the 21st Century,” was prepared by the James A. Baker Institute for Public Policy and the US Council on Foreign Relations at the request of then-Vice President Dick Cheney. (7/4, #17)
  • Cash-strapped states in the U.S. are considering raising taxes on oil production to plug yawning budget gaps, but they face strong resistance from oil companies, which warn the moves could lead to lost jobs and higher energy prices. (6/30, #18)
  • Consulting firm Booz & Company predicts the world will have 1.5 billion cars in use in 2018, up from 672 million today, thanks to accelerated demand in China, India, Brazil and Russia… In the US, about 13 million cars a year are scrapped due to advanced age; right now, U.S. drivers are buying 10 million vehicles/year. (7/5, #19)
  • Although Americans recognize that the U.S. will need more energy in coming years, they continue to underestimate the amount of oil and gas which government experts say will be needed to meet that demand, according to a survey commissioned by the American Petroleum Institute. (6/30, #21)

Quote of the Week

  • “We expect a reduction in LNG traded this year because of the economic crisis. There will be a surplus of LNG in the global markets in the short term.”
    — Ane Arino Ochoa, Strategic Planning Director, Spanish oil company Repsol