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1. Prices and Production

Oil futures traded between $80 and $82 dollars a barrel last week, moving mostly on changes in the dollar/Euro relationship and the prospects for the EU bailing out Greece. On Friday, oil was weaker based on growing concerns about the pace of US economic recovery. Newly released numbers showed that the GDP grew less than expected in the 4th quarter and unemployment had increased in 27 states.

The EIA report that US crude inventories rose by 7.3 million barrels the week before last was balanced by a rather spectacular 16.6 percent year-over-year increase in Chinese oil consumption for February to an estimated 8.5 million b/d. Much of the US crude stock increase was caused by a jump in imports that had been delayed by bad weather. Oil demand across much of Europe was down by 10 percent in January from January 2009. Demand for gasoline in the US fell by 0.1 percent to 9.0 million b/d in the week ending March 19th.

With prices above $80 a barrel and robust demand from Asia, OPEC is forecast to continue ignoring quotas and to increase production in coming months.

US natural gas prices, which were pushing $6 per million BTUs in January, continued a steady drop last week and closed Friday at $3.87. Natural gas inventories climbed 11 billion cu ft last week at a time when the average decline is usually a 37 billion decrease. A combination of warmer weather, increasing drilling rig counts, higher production, and lower industrial demand is driving the inventory buildup.

2. UK Summit on Peak Oil

The first meeting between senior British government officials and organizations warning that peak oil is imminent took place in London last Monday. The meeting, attended by 20 people – 5 from the government-was not open to the public and under the rules participants were allowed to discuss what was said at the meeting, but not who said what.

As described by one of the participants, the key question of the meeting was to explore “what is the appropriate government, business and local government practical response to, at least, the risk of peak oil?”

The meeting began with a presentations based on the UK’s Energy Research Centre report, issued last October, that found a significant risk of world oil supplies peaking within the next 10 years.

A senior oil industry representative from a large company stated that 2004 was the “inflection point” when global conventional oil production plateaued and oil stopped being cheap. The speaker affirmed that the supply flow is more important that reserves and that we know that $150 oil “breaks the machine” so that the global economy cannot function above that price. “It does not matter how much oil is left if we can’t afford it.” The industry spokesman said that in order to get through the next 10 years we will need an increased flow of oil and natural gas from shale and rapid exploitation of the Iraqi oil fields. He also noted that oil and gas should become very expensive in order to provide an incentive for development of alternative energy sources.

The second presentation to the group [read the government] was a briefing on the recent industry Peak Oil Task Force report which was more alarmist than the earlier Energy Research Centre report. This report concluded that global production could conceivably climb to 90 million b/d, but not much higher before declining.

Following a presentation by the “transition movement” which is active in the UK, the meeting broke in two to discuss local and national responses to peak oil. As could be expected, much of the discussion was on transportation.

At the end a speaker summarized the main points for an individual who arrived late and may have been the UK’s energy minister: The exact date of peak oil is academic, what matters is its inevitability; there is a high risk that peak oil will occur as soon as the recession ends or in 3-4 years time; oil prices will be higher; in the near-term we can rely on unconventional gas; government intervention will be inevitable; the government must stress that change will be inevitable and that lives will be different, not necessarily worse.

Further meetings were deemed appropriate.

3. Iraq’s Elections

The surprise two seat plurality of former prime minister Allawi’s Iraqiya bloc over the bloc of incumbent Prime Minister al-Maliki seems likely to usher in a period of stalemate and maneuvering during which there is the possibility of increasing violence. As the leader of the largest bloc, Allawi will be given the first chance to form a coalition. Maliki will use his position to try to undo the results of the election as both blocs attempt to build a governing coalition. Given the multi-faceted struggle for power and influence among the Sunnis, Shiites, Kurds, Baathists, Iranians, the US, oil companies, the Saudi’s and numerous other interests, the outcome of all this unpredictable.

The US still has 95,000 troops in Iraq, but they are no longer actively engaged in maintaining security. Half are scheduled to be withdrawn this summer. A peaceful and satisfactory outcome to the current political maneuvering could pave the way for major increases in Iraqi oil production over the next five years that in theory could delay the onset of a global decline in oil production.

Alternatively, increased post-election violence could degenerate into anything from reduced Iraqi oil production to international conflict possibly prolonging the US military presence in the country. At a minimum, months of maneuvering in efforts to build a coalition seems likely to delay efforts to increase Iraq’s oil production.

Quote of the Week

  • [About the UK Peak Oil Summit] “Was it a historic moment? Yes I think it was, largely because we weren’t really debating whether Peak Oil would occur but rather how soon and in what form.”

– – From a participant [Chatham House Rules prevent name disclosure]

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

  • In February 2010, world production of all liquid fuels increased by 880,000 b/d from January according to the latest figures of the International Energy Agency resulting in total world liquid fuels production of 86.59 million b/d. (3/23, #17)
  • Saudi Arabia announced the arrest of 113 suspected militants linked to the terrorist al-Qaeda organization. The militants were organized into three cells, including two planning suicide attacks on oil and security facilities in Saudi Arabia’s oil-producing Eastern Province. A spokesman said the plans were about to be implemented. (3/27, #7; 3/25, #4)
  • Brazil’s state-run oil company Petrobras said it would move up the start of a pilot production run at its 5-8 billion barrel Tupi subsalt field to October, from December. A spokesman said the pilot plan will pump 100,000 b/d. It is currently producing 18,000 b/d in a long-term test production run.
  • A drill stem test on a Tupi Northeast appraisal well in the Santos basin presalt off Brazil showed potential production estimated at 30,000 b/d. (3/26, #9)
  • The US Gulf of Mexico is expected to increase oil production over the next several years, largely due to ultra-deepwater field development. The MMS believes oil production could reach 1.8 million b/d up from 1.3 million b/d in 2008, but gas production is expected to decline over the next four years. In 2009 operators announced 14 deepwater discoveries, 11 of which are in 3,000 ft of water or more. (3/27, #15)
  • OPEC has less room to raise production as global oil use recovers because of Russia’s increasing output, said Shokri Ghanem, head of Libya’s delegation to OPEC. (3/22, #3)
  • In Kazakhstan, an acrimonious battle between two prominent Kazakh businessmen has triggered a slew of allegations that purport to lift a lid on how Chinese companies built such a commanding position in the nation’s oil industry. (3/27, #9)
  • Pemex is ready to offer performance- based contracts to foreign contractors that produce the most at its fields as it seeks to stem declining output. Mexico’s constitution bans private companies from receiving royalties from the country’s oil. Changes to energy laws in 2008 allow Pemex to pay foreign and private companies cash incentives based on performance. The company hasn’t yet awarded any contracts under the new business model. (3/27, #14)
  • Pemex has said it needs to drill about 1,500 wells a year at Chicontepec to reach its goal of producing 600,000 barrels a day by 2017. The company will drill about 600 wells this year. Initial production of 30,000 b/d fell well short of the target (100,000 b/d). (3/25, #11)
  • The acquisition spree at ConocoPhillips is over, according to CEO Jim Mulva. Finding it increasingly difficult to win access to new sources of oil and facing stiff competition for the oil that is available, the company will pull back from its recent strategy of rapid growth and instead focus on producing the oil and gas it already controls. (3/25, #14)
  • Oxford’s Smith School of Enterprise and the Environment published a paper stating that capacity to meet projected oil demand is at a tipping point and that we need to accelerate development of alternative energy fuel resources to ensure energy security. (3/23, #19)
  • The world’s oil reserves have been exaggerated by up to a third, according to Sir David King, the UK’s former chief scientist. A peer reviewed paper soon to be published in the journal Energy Policy supports the contention held by many independent institutions that oil production may soon go into decline, followed by shortages and price spikes. (3/26, #15)
  • China’s net oil imports are expected to increase by 5.5 percent over 2009. (3/23, #13)
  • Saudi oil exports to the United States fell from 1.5 million b/day (2008) to 989,000 b/d (2009), according to the EIA. Meanwhile, Saudi sales to China surged above a million b/d last year, nearly doubling from 2008 and accounting for a quarter of their imports. (3/22, #14)
  • Saudi Arabia’s booming economy and soaring demand for electricity is increasing the kingdom’s reliance on oil to produce power. By 2012, it may be using 1.2 million barrels a day – more than twice current levels — to meet its electricity needs. (3/26, #6)
  • The number of US rigs drilling for oil and gas climbed this week to 1,444, up 17 rigs from the previous week $80 oil and a precipitous decline in gas prices. Baker Hughes said the number of gas rigs was 941 (+2) while the oil rig count was 489 (+15). (3/27, #21)
  • Russia will stop subsidizing domestic gas prices by 2014 as Gazprom seeks to profit from sales at home to help fund new fields and pipelines, Gazprom said Thursday. (3/27, #22)
  • Shell moved a step closer to shifting the balance of its production in favor of natural gas over oil following a joint $3.2 billion acquisition of Arrow Energy. By 2012, Shell expects natural gas to account for 52 percent of their production. (3/23, #16).
  • ConocoPhillips’ COO said the “biggest risk” to shale gas producers is the possibility that the federal government will get involved in environmental regulation of a natural-gas production technique called hydrofracking, a job currently in the hands of state officials. (3/26, #14)
  • One of the world’s largest oilfield services companies continued to tell the US EPA it was complying with an agreement barring the injection of diesel fuel near drinking-water aquifers, after admitting to Congress that it had violated the pact. (3/24, #21)
  • The US has backed away from pursuing a number of tough measures against Iran in order to win support from Russia and China for a new United Nations Security Council resolution on sanctions, according to people familiar with the matter. (3/25, #5)
  • Russia disclosed on Wednesday that Russian and Chinese envoys had pressed Iran to accept a UN plan on uranium enrichment during meetings in Tehran early this month but that Iran had refused, leaving “less and less room for diplomatic maneuvering.” (3/25, #6)
  • Lukoil, the Russian oil producer with the most overseas assets, abandoned work in Iran because of the threat of US sanctions. (3/25, #7)
  • The US government faces critical shortcomings in producing its influential weekly oil inventory report, casting doubt on figures that affect the production and prices of the world’s most important industrial commodity. (3/25, #13)
  • Silicon Valley startup Calera says that it has found a way to capture the carbon dioxide emissions from coal and gas power plants and lock them into cement. (3/25, #19)
  • Global warming has neither stopped nor slowed in the past decade, according to a draft analysis of temperature data by NASA’s Goddard Institute for Space Studies. The analysis, led by Goddard director Jim Hansen, debunks the belief that the planet is cooling. (3/24, #3)
  • The Russian Security Council believes climate change in the Arctic will pose a serious threat to national security in 10-15 years because of the melting permafrost. (3/24, #23)
  • “To sustain South Africa’s growth rates we need to create jobs; thus we have no choice but to build new generating capacity — relying on what, for now, remains our most abundant and affordable energy source: coal.” (3/23, #7)
  • Nearly two-dozen US coal-fired power plants are scheduled to start up by 2012, but plans for further new projects have all but dried up amid falling power demand, growing natural gas production and efforts to limit carbon dioxide emissions. The near-term challenge for all new plant construction is electricity demand, which fell 5% in the last two years. (3/27, #18)
  • US Energy Secretary Chu wrote that, with the new authority granted by the president’s 2011 budget request, the Department of Energy will be able to support between six and nine new nuclear reactors. (3/24, #18)
  • China approved the construction of 28 more nuclear power reactors under a revised target for 2020 to meet rising demand for electricity and accelerate development of the industry. These are in addition to the 40 new plants announced back in 2005. (3/23, #10)
  • Several powerful House Democrats are warning the Obama administration that its decision to withdraw funding for nuclear-waste disposal at Yucca Mountain is illegal and could cost taxpayers billions of dollars in liabilities. (3/24, #19)
  • Alcoa claims their all-aluminum parabolic trough, now undergoing testing, will cut the price of a solar field “by 20% due to lower installation costs”. Alcoa said the company planned to have its solar trough in commercial production within two to three years. (3/27, #23)
  • A new laser system for wind turbines allows them to prepare for the wind rushing toward their blades. Preliminary tests indicate the controller can increase energy generation by 5 to 10 percent as well as help reduce the wear-and-tear on machines. (3/26, #19)
  • It looks like the sweet spot for advance plug-in cars, either battery-only or range-extended and blended mode plug-in hybrids, is in the $30,000 to $45,000 price range. (3/27, #24)
  • Worldwide ethanol production this year is expected to reach 22.7 billion gallons, compared with 19.5 billion gallons in 2009, the Global Renewable Fuels Alliance said. (3/24, #20) [NOTE: 22.7 billion gallons/year = 1.5 million barrels/day.]
  • Chinese Premier Wen Jiabao has warned that meeting this year’s grain output goal of 500 billion kilograms would be “a test for sure” as severe drought in the southwest is likely to continue. Just meeting the target would mean a 6 percent decline from 2009. (3/26, #11)
  • Royal Dutch Shell and Virent Energy Systems started converting plant sugars into gasoline blend components. The 10,000 gal/year-capacity demonstration plant [less than 1 barrel/day] is the latest step in a joint research and development effort. (3/25, #16)