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1. Oil and the Global Economy

Oil prices rose for 4 days last week, touching a high above $76 on unexpectedly large Chinese export numbers and remarks from Fed Chairman Bernanke that economic recovery was on track. On Friday, however, weak US retail numbers sent prices back down to close at $73.78. The European debt crisis sent the Euro down to four-year lows last week. Although most OECD economic numbers have not been good in recent weeks, few seem willing to admit that a deeper recession is ahead.

The IEA now forecasts that global oil consumption will rise by 1.7 million b/d in 2010 due to Asian and increased North American demand. The US’s EIA now forecasts that demand will increase by 1.5 million b/d to 85.51 million b/d this year – only slightly above current production. When increasing demand is coupled with likely reductions in offshore oil production this year, many analysts are saying higher prices are likely soon.

During May, Beijing’s exports increased by nearly 50 percent and industrial production registered a 16.5 percent increase, year over year. China’s inflation rate, however, exceeded 3 percent during the month. A series of strikes suggest that higher wages and more inflation are ahead.

The UN Security Council, with support from Russia and China, voted to impose stronger sanctions on Tehran last week. Important portions of the new sanctions are aimed at controlling Iranian use of its ships to circumvent restrictions on arms imports. So far Tehran’s response to the sanctions has been mostly bluster and threats to decrease cooperation with the IEA.

2. Deepwater Horizon

As oil continues to gush into the Gulf, criticism and demands for reparations from BP ratcheted up last week. Concerns were expressed in the UK that US politicians, including the President, were over-reaching in their demands that BP stockholders pay for not only damages resulting from the spill, but also for industry-related wages lost during the deepwater drilling moratorium. This led to demands from British politicians and media that Prime Minister Cameron do something to stem the US assault. Cameron issued a statement of support for BP and over the weekend phoned President Obama to discuss the situation. BP’s Chairman will meet with President Obama on June 16th while other BP executives will testify before Congress on Tuesday.

The Coast Guard is expecting a detailed plan from BP shortly on how the company plans to deal with the spill until the well is sealed. BP will continue efforts to collect more of the leaking oil this week by siphoning oil from the blowout preventer and up a second riser system to a second ship. The second collection system could increase the oil collected to some 20-25,000 b/d out of the up-to-40,000 b/d currently estimated to be the size of the leak. A more permanent cap is being planned that could capture nearly all the oil and have the capability to temporarily disconnect from its riser pipe in the event of a hurricane. There is no word on when such a system might be deployed.

The first relief well has reached a depth of more than 14,000 feet and could be completed as early as mid-August. Many experienced observers, however, are saying that it may be many months before the runaway well will finally be sealed. President Obama will address the nation at 8 PM Tuesday night after visiting the Gulf for the fourth time since the explosion.

The environmental impact

Last week the government team studying the size of the oil leak doubled its estimate of the spill’s rate, prior to the cutting off of the bent riser pipe, to between 20,000 and 40,000 b/d. This prompted at least one team member to say that the current leak may be on the order of 50,000 b/d and that BP is unlikely to be capturing much more than half the of spewing oil for several weeks to come. Pressure sensors are being installed around the leak in an effort to get a better handle on its size.

The leaked oil, which has been washing up along the Louisiana coast for the last two weeks, is starting to appear in quantity along the coasts of Mississippi and Alabama. So far the beaches in Florida’s Pensacola region remain relatively clear.

Concern continues about the effects on marine life caused by the large but diluted plumes of oil being found below the Gulf’s surface. As oil has never been leaked at this depth and in this quantity before, it is likely to be many months before the environmental damage caused by the oil plumes will be known.

New modeling shows that some of the leaking oil will eventually make its way around the Keys and into the Atlantic, but once in the ocean, the concentration should be very small and is unlikely to do much coastal damage.

The economic impact

Florida and Louisiana are asking that BP place a total of $7.5 billion in escrow to pay for damages to the states’ shorelines and economies. President Obama is also asking for a BP escrow account that a third party would use to pay promptly verified claims against the company.

BP currently believes that the cost of the spill will be from $3 to $6 billion, but many analysts put the figure much higher. As the area affected by the spill continues to grow, more and more organizations and people are asking for compensation from BP.

Some are saying that the ultimate cost of the spill may be on the order of $40 billion or more, which could wipe out BP’s earnings and dividends for years to come.

Across the Gulf region, the petroleum industry is bracing for bad times as the moratorium on deepwater drilling and new restrictions on shallow water drilling take hold. Three large oil rigs are already in the process of leaving the Gulf, impacting the jobs of contractors supporting the rigs.

The political Impact

With the polls showing that 70 percent of the public are dissatisfied with the government’s handling of the spill crisis, the Obama administration unleashed a combination of harsher rhetoric, demands that BP come up with a workable plan to stop the spill, a visit to the Gulf, meetings with senior BP executives, and an upcoming nationwide address outlining his future plans.

While the British government is inextricably tied to Washington on such issues as the Afghan War, the government decided last week that it could no longer stand by while the Americans talked a big crown jewel of Britain’s economy into bankruptcy. Many British feel that the anti-BP tirades emanating from the US are simply part of the mid-term election campaign and that the US government that issued all the permits and rules for the Gulf drilling shares some of the blame. This debate is likely to continue for many years.

Reactions to the administration’s moratorium on deepwater drilling continue to grow. Louisiana, which stands to lose the most from the moratorium, is already asking that it be replaced with a regimen of better safety inspections in order to save jobs. This debate too will continue until the moratorium is lifted.

The future of BP

Fears are growing that demands for reparations from BP are growing so large that the company will ultimately be bankrupted and its assets sold to some other oil company (read the Chinese) at rock¬†bottom prices. The BP Board of Directors will meet today in an effort to find some way to avoid a dividend cut. BP’s dividends are the bedrock of many British pension plans.

Faced with numerous demands, lawsuits, large fines, criminal prosecutions, and governmental control of the liability payments, it is hard to say if any private corporation has ever faced such a sea of troubles. Fines under the Clean Water Act alone could well be in on the order of $10 or $15 billion. BP posted a net income of $16.8 billion last year and had $8.3 billion in cash and liquid assets available to pay for the spill damage.

Already a veteran of 28 Congressional hearings into the spill, much of BP’s fate will depend on how much longer substantial quantities of oil continue to spew into the Gulf. The only certainty is that oil companies engaging in deepwater drilling will be more cautious and attentive to possible dangers than ever before.

Quote of the Week

  • “Oil will be slower onstream, more expensive to produce, it will be more politicized and there will be less of it. All of those are factors that make us look at the current back of the oil curve and see it as undervalued at current levels of a shade below $100. We see the consequences as being more severe than the postponement of Gulf Coast volumes. It looks likely to become an iconic event, a touchstone and rallying flag for opposition to the oil industry across a wide series of fronts and issues for years to come.”

— Paul Horsnell, Barclays lead oil industry analyst, in a recent report

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

  • The throughput capacity of the Baku-Tbilisi-Ceyhan oil pipeline will increase during 2011 to 1.4 million b/d from the current 1.2 million b/d. (6/8, #10)
  • Iraq’s proven reserves of 115 billion barrels of oil, about 10 per cent of the world’s total, is a conservative estimate, Iraqi oil minister Hussein al-Shahristani said Monday. (6/8, #5)
  • China imported 29 percent more crude oil in the first five months of the year as faster economic growth boosted demand for motor fuel and electricity. (6/10, #10)
  • PetroChina Co., vying with Exxon Mobil Corp. as the world’s biggest company by value, would have “persuasive” reasons to seek a takeover of BP, according to Standard Chartered Bank. (6/10, #11)
  • China, over the last 18 months, signed loan-for-oil agreements worth more than $60 billion with Russia, Kazakhstan, Turkmenistan, Brazil and Venezuela, among others. The latest addition to that list is a Chinese deal with Uzbekistan to purchase natural gas. (6/11, #7)
  • Venezuela on Friday praised the latest decision by an arbitration panel in a case over the 2007 expropriation of Exxon Mobil assets by the Venezuelan government. Venezuela’s energy minister said a decision should force Exxon Mobil to “drastically reduce” the $10 billion it has been seeking, and should reduce how much other companies such as ConocoPhillips can seek over nationalizations. (6/12, #4)
  • In Mexico, at least a handful of workers at several oil and gas installations belonging to state-run oil giant Petroleos Mexicanos have been abducted by presumed drug cartel members in the past few weeks. The action raises worries that cartels are increasingly infiltrating parts of the oil company in order to smuggle oil products. (6/12, #5)
  • Sir David King, the UK’s former government chief scientist, last week issued a stark warning, arguing that oil supplies could peak far sooner than anticipated by politicians and businesses. King said that he expected oil demand to outstrip supply by 2015. (6/12, #25)
  • Production from Canada’s oil sands region grew 14% to 1.49 million barrels a day last year despite the drop in oil prices. The report also forecasts production will more than double during this decade, to 3.2 million b/d in 2019. (6/9, #31)
  • Total, Europe’s third-biggest oil company, has put all its deepwater exploration and production projects under review following BP’s oil spill in the Gulf of Mexico. (6/12, #22)
  • The world’s thirst for oil abated last year, with global consumption dropping by 1.2 million b/d in the biggest decline since 1982, according to a study released Wednesday by BP. (10/9, #2) [for some details, see this week’s Commentary]
  • Iran started to build a long-planned pipeline to export natural gas to Europe with an investment of at least $1.55 billion, state television reported today. (6/8, #9)
  • Qatar, the world’s largest producer of liquefied natural gas, will idle 66 percent of its export plants this year, reversing earlier plans and joining Russia in curtailing supply amid a global glut. Qatar’s decision to shut units even as it increases overall capacity-by 43 percent this year-underscores the challenge LNG producers face in balancing abundant supplies with long-term expectations of demand growth. (6/10, #8)
  • The US an LNG exporter? Cheniere Energy Inc. let a contract to Bechtel Oil, Gas & Chemicals for the design and construction of liquefaction facilities at Cheniere’s 4 bcfd Sabine Pass LNG receiving terminal in Cameron Parish, La. Cheniere is in the process of pursuing contractual arrangements with natural gas buyers overseas and US producers interested in supplying the project. (6/12, #19)
  • The number of active US oil and gas rigs climbed to 1,527 rigs, up 21 rigs from the previous week, according to data from oil-field services company Baker Hughes. The number of gas rigs was 954, an increase of seven rigs from last week, while the oil rig count was 561, an increase of 16 rigs. (6/12, #20)
  • A Pennsylvania natural gas well “blowout” last week helped drive prices to a 14-week high on concern that tighter restrictions on offshore drilling following BP’s Gulf of Mexico spill will spread onshore. (6/7, #15)
  • Conventional natural gas drilling used in the past needed about 80,000 gallons of water per well, according to the New York State Department of Environmental Conservation. Hydraulic fracturing and horizontal drilling for unconventional gas drilling uses millions of gallons laced with a cocktail of chemicals drawn from more than 260 possible elements, many toxic. (6/12, #24)
  • General Electric Co.’s Jeffrey Immelt and Microsoft Corp.’s Bill Gates called today for the U.S. government to more than triple its spending on clean energy research and development to $16 billion a year. (6/11, #17)
  • Three out of four Americans believe that the Earth has been gradually warming as the result of human activity and want the government to institute regulations to stop it, according to a new survey by researchers at the Woods Institute for the Environment at Stanford University. Other results from the survey: 78 percent opposed taxes on electricity to reduce consumption, and 72 percent opposed taxes on gasoline (6/10, #6)
  • The US Senate narrowly defeated a resolution by Lisa Murkowski (R-Alas.) aimed at halting the US Environmental Protection Agency’s effort to regulate greenhouse gases under the Clean Air Act. (6/12, #9)
  • Use of Illinois coal, once considered too dirty to be burned by utilities, is on the rise after the worst US coal disaster in 40 years. Schwab’s town of 6,000 in southern Illinois stands to benefit as Central Appalachia’s deposits get more perilous and costly to mine. (6/9, #30)
  • International Energy Agency Chief Economist Fatih Birol called on leaders of the Group of 20 Nations to fulfill their pledge to end fossil-fuel subsidies, a move he said will cut oil demand and greenhouse-gas emissions. (6/8, #4)