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1. UK Summit to Discuss Peak Oil

According to a report in The Guardian newspaper yesterday, Lord Hunt, the UK’s energy minister, will meet with industrialists in London today in an effort “to calm mounting fears about the disruption that could follow a sudden shortage of oil supplies.”

The Guardian wrote that the decision to hold the talks came after the UK Industry Taskforce on Peak Oil and Energy Security issued its second report, The Oil Crunch: a Wake-up Call for the UK Economy, in which it warned of the dangers of complacency in the face of world oil peaking.

Compared to the UK government’s somewhat predictable “it’s not an issue” response to the task force’s first report, the agreement to meet today represents a significant policy shift. Apparently the Energy Ministry has agreed to conduct a serious study to determine whether the UK needs to take concerted action to avoid the worst dislocations that could result from the peaking of world oil production.

Jeremy Leggett, a catalyst for the task force as well as executive chairman of the renewable energy company Solar Century, told The Guardian that the meeting, to be held at the Energy Institute in London, showed a welcome new sense of urgency.

2. Prices and Production

Oil prices remained above $80 a barrel for most of last week, moving in response to fluctuations in the dollar which in return responded to news about Greece’s debt problems and expectations for an economic recovery. After reaching a recent high of nearly $83 on Wednesday and Thursday, oil fell to close at $80.86 as the dollar strengthened against the Euro. The recent intra-day high of $83.95 was set back on January 11th.

Gasoline prices in the US increased, with the national average now at $2.82 a gallon, some 20 cents a gallon higher than a month ago and 87 cents higher than this time last year. With the US currently consuming some 810 million gallons a day of various oil products, this increase is placing an additional burden of $700 million a day on consumers as compared with last March.

For the fifth time in 12 months, OPEC agreed to keep its current production quotas; with nearly all members saying they are happy with the current situation. Although the cartel is currently producing about 2.2 million b/d below the high reached in the summer of 2008, it is selling an additional 1.9 million b/d as compared to March 2009 at nearly double last year’s price.

OPEC has expanded its drilling for oil at the fastest rate in two and half years. In the first two months of 2010 the number of rigs in operation increased by 8.4 percent.

3. China – Droughts and Bubbles

Friday night, a major sandstorm struck Beijing with 60 mph winds, leaving the city covered with tons of sand. Air quality fell to a rare level 5, indicating hazardous pollution conditions. Before hitting the capitol, the storm wreaked havoc across much of northern China and then went on to batter provinces south and east of the city. In the southwest a major drought is affecting 50 million Chinese and 4.3 million hectares of farmland in southwestern China. Nearly 1 million hectares are not expected to produce a harvest this year. Since last autumn, southwestern China has received only half its average rainfall, water reservoirs are depleted, and adequate rains are not forecast for the immediate future. Last winter, China’s chief meteorologist warned that if the droughts continue into a second year, the country will be forced to turn to imports to feed its population.

Beijing is sending an envoy to the US in an effort to cool the dispute over the valuation of the yuan. For over a decade, China has made an artificially cheap yuan the center of its economic policy of rapid economic growth through exports. If China had let the yuan float in a free market, given the massive trade imbalances, it would have risen against the dollar and ultimately reduced exports. Now the reaction is setting in and Washington and other nations are once again demanding that Beijing give up its unfair competitive advantage and let the yuan climb. Behind the acrimonious public exchanges on the matter, a debate is clearly going on in China between factions which foresee plummeting exports and those which believe the current situation is not sustainable. A resolution of all this is expected shortly.

In the meantime, the issue of China’s growth bubble continues. Unlike western democracies, China’s government controls the banks, the third of the economy that consists of state-owned corporations, and the granting of building permits. When the government orders growth to take place, it happens immediately. However, such a system can also result in massive misallocation of resources – empty new malls, housing and unneeded industrial facilities –as an increasing chorus of observers is pointing out.

While the timing of what must someday be an end or slowdown in China’s unprecedented economic boom is unknown, when it comes there will be major economic consequences around the world. Commodity prices and purchases of US government securities are likely to fall, and interest rates will rise. There would seem to be little on the horizon, short of an outbreak of hostilities in the Middle East, that has more potential to affect the availability and pricing of global oil supplies than the course of China’s economy over the next few years.

Quote of the Week

  • “By any standard, the Iraqi auction represents a major event in the history of the world oil market: It is the largest single transfer of reserves into the production stream since the beginning of the petroleum era,” the report maintained, saying the supply effect might lower oil prices enough to strain alternative fuels. “Credible estimates . . . suggest Iraq contains over 200 billion bbl of recoverable reserves and potential reserves of over 400 billion bbl.”

— New report from Energy Policy Research Foundation Inc.

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

  • For years, IEA reports have been reiterating the conclusion that peak oil was not a problem. Behind the scenes however, it is now clear that senior staff thought otherwise. It was only through the work of 22-year-old Lionel Badal, a politics student at Exeter University that the truth about this cover-up finally emerged. (3/16, #5)
  • There’s little chance that Iraq will ever attain the government’s target of 12 million barrels per day and any jump in production is likely to take much longer than six years. (3/17,#8)
  • Venezuela said its proved oil reserves rose by 23% to 211.17 billion barrels due to the addition of 39.24 billion barrels mainly from the Orinoco Heavy Oil Belt. (3/20, #5)
  • Nigeria’s state-owned National Petroleum Corporation has initiated talks with investment banks including Standard Chartered, JP Morgan, and Deutsche Bank to explore financing options as it changes into a fully privatized commercial company. (3/15, #6)
  • Pemex, Mexico’s state-owned oil company, said Thursday-the 72nd anniversary of the expropriation of the oil industry-that it has found deposits of up to 2 billion barrels of super-light and super-heavy oil in shallow Gulf of Mexico waters. (3/19, #12) But the company only replaced 74.9 percent of its output with new proven reserves last year. (3/15, #11)
  • While Iran’s oil exports to the West have shrunk, it strengthened crude flow to China by a third between 2007 and last year, to 544,000 bpd from 411,000 bpd. China is Tehran’s second-biggest customer after Japan. Iran is Beijing’s second-biggest crude supplier, behind Saudi Arabia. It supplied15 percent of Chinese 2009 oil imports. (3/19, #15)
  • Cnooc’s plan to buy 50 percent of Argentine oil producer Bridas Corp. in its biggest overseas acquisition–$3.1 billion-may herald more purchases to achieve its goal of boosting production 28 percent this year and meet Chinese demand. (3/15, #12)
  • Cnooc Ltd.’s failure to buy Unocal Corp. for $18.5 billion in 2005 taught Chairman Fu Chengyu a lesson: use overseas joint ventures rather than takeovers to gain the global oil resources China needs. Chinese companies spent a record $32 billion last year to buy oil fields, coal and metal mines in Africa, Asia and Australia, raising concerns they are beginning to dominate the world’s resources. (3/16, #13)
  • Indonesia’s upstream regulator BPMigas said the country’s oil production could drop to half of its 965,000 b/d target in the 2-3 years it will take the industry to adjust to a new environmental law. (3/18, #18)
  • Steam-driven projects to extract crude from Canada’s oil sands, often held up as more environmentally friendly than mining, have major drawbacks of their own. These require more stringent regulations to fix, an environmental think tank said on Wednesday. (3/18, #21)
  • Chevron reported that 35 percent of the wells it drilled in 2009 came up dry. In 2008, the rate was just 10 percent. More dry holes mean spending more money to find less oil. (3/17, #22)
  • The US government faces shortcomings in producing its oil-inventory data, casting doubt on figures that affect the production and prices of the world’s most important industrial commodity. One error by the Energy Information Administration in September was large enough to cause a jump in oil prices. There is a litany of problems with EIA’s data collection, including the use of ancient technology and out-of-date methodology. (3/20, #11)
  • Shell and Nexen found “significant oil” in the Mississippi Canyon at the Appomattox prospect at a depth of 2,200 meters (7,218 feet), the company said in a statement published Friday. Additional appraisal activities are planned later in the year, it said. (3/20, #14)
  • Calgary-based pipeline giant Enbridge has more than doubled the capacity of a US regional North Dakota oil pipeline to handle up to 161,000 b/d as crude production in the region increases. (3/20, #15)
  • The number of US oil and gas rigs climbed to 1,427, up 20 rigs from the previous week, according to oilfield-services company Baker Hughes. The number of gas rigs was 939, up 12 rigs from last week though still well down from the September 2008 peak. (3/20, #16)
  • Shell earned 67 percent more from oil-sands operations in Alberta than from projects elsewhere between 2005 and 2009. The company earned $20 a barrel from oil-sand mining on average, more than the $12 a barrel it gained from other projects. (3/20, #17)
  • Shell’s CEO Peter Voser outlined plans to raise oil and gas production 11 percent by 2012 to 3.5 million barrels a day. The company’s capital expenditure, set at $28 billion this year, will be between $25 billion and $27 billion from 2011 to 2014. (3/17, #5, #19) [Editors’ note: Shell’s production was higher still, 3.8 million b/d, back in 2003]
  • China’s natural gas consumption, after a tripling in the past decade, is set for a similar jump by 2020 to make up nearly 10% of total energy use, from the present 4%. (3/17, #13)
  • Extracting shale gas requires drilling hundreds of wells and blasting the rock with water and chemicals, raising environmental objections in densely populated Europe. Those obstacles suggest Russia’s OAO Gazprom, supplier of 25 percent of Europe’s gas, will have plenty of customers for its new gas pipelines across the Baltic and Black Seas. (3/18, #23)
  • U.S. automakers’ muted response during CERAWeek stood out in an event that was dominated by talk of natural gas. Automakers at the conference see natural gas-powered cars and trucks more as a niche market. They certainly don’t view natural gas as a game-changer. And no amount of natural gas seems to be able to change their minds. (3/17, #25)
  • The US Environmental Protection Agency announced Thursday that it will launch a $1.9 million study into how drinking-water supplies are affected by hydraulic fracturing, a method used to turn shale rock into natural gas wells. (3/19, #16-#17)
  • The most likely effects of a supply-limited peak in oil production? 1) a sharp increase in price; 2) inflation expected across many goods and services; 3) volumes of internationally traded oil will decline more rapidly than the decline in global oil production; 4) this will lead to instability in global geopolitics as countries struggle to insure future oil supplies. (3/20, #18)
  • While many commentators believe the jury is still out on Peak Oil, the list of petroleum analysts who say world oil production has already peaked, or will do so in the next five years, lengthens almost daily, and includes CEOs and other well-placed leaders within the oil industry. (3/20, #20)
  • China fully knows what it should do as a global power in the effort to halt Iran’s nuclear push, Saudi Foreign Minister Saud al-Faisal said in an interview run last Monday. (3/16, #8)
  • Energy Resources, which sells uranium to power utilities worldwide, produces about a 10th of the world’s mined uranium. The company is looking toward strong growth in demand from China, to which it began shipments in 2008. China leads the world with more than 20 nuclear units under construction, and several more in the planning stage. In all, around 55 units were currently being constructed around the world (3/19, #4)
  • India‘s coal, steel and power producers are scouting for coal assets overseas as local output is unable to keep pace with the fast growth in demand, fuelled by rapid capacity additions in the country’s power sector. (3/20, #9)
  • Congress must set a national renewable-power standard and revamp the electric grid to help the burgeoning US wind-energy industry reach its potential and compete globally, governors from 29 states said. A jumble of state laws should be replaced by a federal edict, according to a report from the Governors’ Wind Energy Coalition. (3/16, #15)
  • Desertec – the ambitious $550 billion dollar project to generate electricity for Europe and North Africa through giant solar collectors arrayed in the Sahara desert – took a step closer to reality this week with the announcement that the Arizona-based solar manufacturer First Solar had joined the project. (3/18, #27)