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1. Prices and Production

After two weeks of increasing prices which brought oil from $70 a barrel to the vicinity of $80, last week was rather quiet with oil gyrating between $78 and $80 in response to the latest reports. As has become normal recently, increased Chinese demand for oil was offset by generally bad news about the prospects for the US economy. Prospects for settling the Greek debt crisis were balanced by a fluctuating dollar and equity markets. US consumption of petroleum products has increased slightly in recent weeks; however stockpiles remain abnormally high. When the week was over, oil closed just below $80 a barrel, a touch below where it started.

A widespread refinery workers strike in France over the closure of a Total refinery was settled at mid-week without serious supply interruptions. The unions agreed to return to work after Total pledged not to close any more refineries for the next five years, excluding the Dunkirk facility.

OPEC increased its production in January by 125,000 b/d to an average of 29.1 million b/d, the highest since December 2008. World production of all liquid fuels decreased by 40,000 b/d in January to 85.8 million b/d. The IEA reports that average world liquid fuels production in 2009 was 84.9 million b/d; in 2008 86.6 million b/d; and in 2007 85.3 million b/d.

The Iranian nuclear enrichment situation continues to move along with Tehran defiantly announcing plans to build more enrichment plants and announcing it can handle any sanctions on its gasoline imports. The US is expressing confidence that a UN agreement on sanctions can be reached soon, while Beijing is back to saying the matter should be settled through diplomacy. In a bizarre move, UN inspectors say Tehran has moved almost its entire stock of enriched uranium to an above-ground facility where it could be bombed more easily. This comes after weeks of talk about building secret enrichment facilities under mountains.

More forecasters are coming down on the side of higher oil prices later this year. Open interest in long oil futures contracts is increasing, and Goldman Sachs is talking about $95 oil later this year due to increasing economic growth.

2. Looming Electricity Shortages

A combination of factors is coming together that is likely to lead to increasing electricity shortages and higher coal prices in coming months. The underlying problem is increasing worldwide demand for electricity as relatively cheap electrical appliances are being distributed far and wide. This is compounded by droughts which are reducing the capacity to generate hydro electricity in several key areas, receding of glaciers which is reducing runoff into hydro-electric dams in the Andes and the Himalayas, and the inability to keep ramping up coal production as the high-quality, easy-to-mine coal is consumed around the world.

The most immediate problems are in Venezuela and Pakistan which are already enduring rolling blackouts and hampered industrial production. Both are likely to face more severe problems in the next few months. Pakistan is planning additional hydro dams while Venezuela is scrambling to import more oil and gas powered generating capacity.

Cold weather and snow have reduced coal production and slowed coal shipments in northern China. This has forced industrial facilities in the south to rely on increasing amounts of imported coal, up six-fold year over year to a record 16 million tons in December. China’s annual coal consumption of 3.1 billion tons is now around 37 percent of the world’s total and is growing rapidly to support economic growth in excess of 10 percent annually. The Chinese are moving quickly to establish long-term contracts for coal from Australia, Indonesia, and Africa in order to reduce their dependence on the troubled domestic coal industry.

The final piece of this equation is India. It too is rapidly increasing demand for imported coal due to slow development of new mines, declining quality of its coal production, and problems transporting increasing quantities to support the steady growth of its economy. Indian coal imports are expected to nearly double from 28 to 48 million tons in the coming year.

As China locks in an increasing share of Australian coal production and other countries step up imports to counter persistent droughts, coal prices are likely to keep climbing for the foreseeable future. Although using oil and natural gas to generate electricity is much more expensive than hydro and coal in most places, shrinking water and coal resources will eventually force increased use of liquid fuels and gas for power generation.

Overshadowing all this is the need to reduce coal-fired electric plants to control emissions.

3. China’s Macro Control

In a rare moment of candor, China’s top economic official, the Chairman of the National Development Commission, admitted last week that China’s economy is at a testing point as the country hovers between inflation and recession. Last year China’s banks loaned out $1.4 trillion, twice as much as in 2008 and nearly half of the country’s GDP.

This year the government has started to put the brakes on lending – too little braking and an inflation spiral could occur; too much and China’s 10 percent annual economic growth and increasing demand for oil is threatened. China’s real estate bubble could pop.

An interesting footnote to China’s rapid economic growth is a severe labor shortage in the southeastern industrial areas. Eighteen months ago when China’s exports collapsed, millions of workers were fired and sent home to their rural villages. It appears that last year’s economic stimulus was so wide-spread that many rural workers now can find jobs closer to home and are reluctant to return to the industrial cities.

Quote of the Week

  • “Shale gas has a fairly short history of production. [Companies] are projecting stable production for 20 to 30 years, but we don’t have a history of that kind of long-term production to say that with any certainty.”

–Mike Dawson, president of the Canadian Society for Unconventional Gas

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

  • Colombia’s crude oil output in January rose to an average 742,000 b/d from 623,000 b/d in the same month last year. In 2009, average crude oil output totaled 671,000 b/d, the highest since 2000. (2/27, #8)
  • Iraq’s crude oil production could be increased by more than 250,000 b/d by the end of this year as some oil deals recently signed with international oil companies to develop giant Iraqi oil fields have become effective. (2/25, #5
  • Mexico’s oil production continues to fall from year-ago levels as the government struggles to implement hard-fought energy reforms designed to boost exploration. January crude production was 2.615 million barrels a day, a 2.6 percent decline from 2.685 million in the same month of 2009. The bright side is that January output was the highest level in nine months. (2/27, #7)
  • Russia remains the largest exporter of oil and gas in the world-bigger even than Saudi Arabia. But unlike the Gulf nations, Russia is fast pumping its existing wells of both oil andgas dry. To tap its reserves-and to maintain Russia’s status as an “energy superpower”-Russia needs to stop ripping off its investors (most recently BP) just because a demand falloff has hurt its bottom line. (2/25, #25)
  • Russia’s oil shipments through their new ESPO pipeline are growing as output heads toward 600,000 b/d by 2012. These shipments are a sign of success for Russia’s strategy to boost its share of sales to Asian crude-oil importers, at the expense of Middle East suppliers. (2/27, #19)
  • Oil fields discovered in Uganda’s Lake Albert basin may have the potential to produce up to 350,000 b/d after 2018, although Tullow Oil is sticking to its target of 150,000 b/d for 2013. (2/23, #9)
  • While the Argentine government has expressed outrage over drilling in the Falkands, it has made little mention of a glaring absence the British endeavor has highlighted: No oil-drilling rigs are operating in Argentina’s own expansive waters, largely because many oil companies are wary of working in Argentina these days. (2/26, #13)
  • Economic recession has been hard on many oilfield-service providers as pinched oil and gas producers have cut back on drilling, but ultra-deepwater drilling has been profitable and is likely to remain so. (2/26, #5)
  • During 2009, Exxon Mobil Corp.’s spending ($53.1 billion) exceeded its cash flow ($29.9 billion), drawing down by two-thirds one of the oil industry’s largest treasure troves in a single year of weak energy prices. (2/27, #13)
  • The main driver for ExxonMobil’s XTO acquisition was reserves, particularly in natural gas. Increasingly, ExxonMobil has had difficulty replacing reserves along with most major oil companies. The worst years ever for reserve replacement were 2007, 2008 and 2009. While 2008 additions were officially 103% of production, without the contribution of oil sands, which the SEC does not consider reserves, replacement was only 27%. Another important motive for the acquisition is the company’s belief that overseas opportunities now carry too much political risk. (2/23, #16)
  • BP and Shell may falter in their campaigns to save billions in oil and gas project costs as a resurgence in drilling and demand for engineers threaten to revive inflation in the industry. (2/22, #4)
  • BP is expected to invest more than $2 billion in Value Creation’s oil-sands project in Alberta, beating out rival bidder India’s Reliance Industries. (2/26,#20)
  • Shell has invested almost one-third of its resources in extracting oil from tar sands and produces 155,000 b/d. However, it is reported to be ‘scaling down’ some of its investment because of concerns over the high costs of extracting the oil. (2/27, #18)
  • Estimated oil reserves in Florida’s waters would provide the US with less than a week’s worth of oil and have no discernible effect on prices or US reliance on foreign oil, says a recent report which is part of a state Senate review of whether a ban on offshore drilling should be lifted. Estimated reserves off Florida in federal waters are more substantial than state waters at a bit less than 4 billion barrels but “pale in comparison” to the central and western regions of the Gulf of Mexico, the report says. (2/27, #12)
  • Oil from Bakken Shale has helped North Dakota oil production double in the past three years, surging to 80 million barrels in 2009-tiny in comparison to the more than seven billion barrels consumed by the US every year. If current projections hold, North Dakota’s oil production could double again by end of the decade. The Bakken Shale could contain up to 4.3 billion barrels of recoverable oil, according to the USGS. That would make it the biggest oil field discovered in the contiguous U.S. in more than 40 years (2/26, #18)
  • China’s imports of crude oil in the spot market have increased fivefold over the past 10 years to the equivalent of more than 55 Very Large Crude Carriers per year. (2/22, #15)
  • According to petroleum geologist Jeffrey Brown, it’s the future net oil exports, not production, we should be paying closest attention to when searching for signs of peak oil, because that’s the factor that crashes first. (2/26, #24)
  • US ethanol output rose to 787,870 b/d in December as distillers took advantage of low prices for corn and natural gas, the Energy Information Administration said. (2/27, #13)
  • The number of US oil and gas rigs climbed to 1,373, up 28 from the previous week, according to data from oil-field services company Baker Hughes. (2/27, #17)
  • When U.S. natural gas prices began to fall in late 2008, big gas producers slashed budgets and reduced drilling. But the number of rigs drilling for gas has bounced back 36% since July, as energy companies plowed into new fields in Pennsylvania, Louisiana and elsewhere that remained profitable even at low prices. Gas production in the lower-48 states has declined just 1.2% since its peak in February 2009. (2/27, #16)
  • Australian energy producer Oil Search Ltd is warning of a possible glut of liquefied natural gas (LNG) in coming years when several large projects come online. (2/25, #4)
  • The mainstream belief that shale gas plays have ensured North America an abundant supply of inexpensive natural gas is not supported by facts or results to date. The supply is real but it will come at higher cost and greater risk than is commonly assumed. (2/23, #16)
  • Environmental groups are urging New York’s environmental regulator to impose restrictions on emissions from drilling into Marcellus shale. Aside from benzene, which the U.S. government has classified as a carcinogen, emissions from natural-gas well sites can include methane, fine particles and carbon monoxide, as well as carbon dioxide. (2/26, #19)
  • A rally that has boosted coal prices 21 percent from their lows last year may have further to go as the coldest U.S. winter in nine years and China’s record imports increase demand and drain stockpiles. Prices will average $59.28 a ton this year, up 41 percent more than last year’s low in April. (2/22, #5)
  • The Indian government increased the prices of gasoline (6%) and diesel (8%), a move which will fan inflation but is unlikely to offer much relief to oil companies beyond offsetting the impact of proposed federal higher taxes. India’s headline inflation rate rose close to 9% in January from a year earlier, while wholesale food prices rose by nearly 18%. (2/27, #10)
  • Three key US senators are engaged in a radical behind-the-scenes overhaul of climate legislation, preparing to jettison the broad “cap-and-trade” approach that has defined the legislative debate for close to a decade. (2/27, #11)
  • The head of the US Environmental Protection Agency said the agency would delay subjecting large greenhouse-gas emitters such as power plants and crude-oil refiners to new regulations until 2011. (2/23, #12)
  • Motor vehicles emerged as the top contributor to atmospheric warming now and in the near term, according to a new analytical approach taken to the issue by researchers at NASA’s Goddard Institute for Space Studies. Rather than analyzing impacts by chemical species, the researchers analyzed the climate impacts by different economic sectors. (2/27, #4)
  • China’s top leaders began considering proposals from the country’s senior researchers in an attempt to help achieve the country’s ambitious goal of cutting carbon intensity by 40 to 45 percent by 2020. The move is a sign that China will roll out more economic and industrial policies to tackle climate change this year. (2/24, #10)
  • China is pushing forward the development of new energy vehicles–in particular electric cars-and aims to become the world’s largest exporter of new energy vehicles. (2/26, #25)
  • A plan to build the world’s biggest power generation complex-a 100,000 megawatt hydro project in the Democratic Republic of Congo-may never happen because the government is too indecisive. (2/26, #14)
  • The Vermont Senate blocked efforts by Entergy to win a 20-year license renewal for its Vermont Yankee nuclear power plant, an action that could encourage opponents of nuclear energy in other states. (2/25, #21)
  • Global trade contracted by about 12 percent in 2009 but has started to pick up, the head of the World Trade Organization (WTO) said on Wednesday. (2/24, #4)
  • The historic drop in US vehicle miles traveled that began in 2007 and the dramatic decline in gridlock that accompanied it have ended, according to a report today by a firm that tracks congestion in the USA. (2/24, #11)
  • General Motors’ deal to sell its Hummer brand to a Chinese automaker fell through Wednesday and the company said it now plans to shut down the brand. (2/25, #22)
  • The U.S. Department of Energy will guarantee $1.37 billion in loans for the Ivanpah Solar Complex, a 400 megawatt solar energy project in California’s. The project mounted by BrightSource Energy would be the world’s largest solar thermal power plant when built, nearly doubling the existing generation capacity of US solar thermal power. (2/24, #18) [Editors’ note: current US solar thermal power must be under 0.04 % of total US capacity.]
  • Danish biotechnology company Novozymes says it has cultivated a new enzyme that could convert maize, straw and woodchips into ethanol for as little as 32 pence/litre. (2/24, #19)
  • Bloom Energy Corp.’s claim that it has a cost-effective fuel cell technology is meeting with skepticism, because fuel cells so far have proven too expensive to serve as a viable alternative to grid-supplied power. (2/25, #27)