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1. Prices and Production

Oil prices rose steadily last week closing on Friday at $81.50 after touching a high above $82. Prices have yet to regain the 2010 high of $83.95 reached on January 11th. The dollar’s reaction to the EU sovereign debt crisis, Beijing’s announcement that it expects 8 percent GDP growth this year despite fiscal tightening, and a well-spun jobs report all contributed to the price increase. Early in the week the Chilean earthquake contributed to upward pressure as the country’s refining and oil distribution network was badly damaged, threatening thermal power generation and ultimately copper production.Wholesale gasoline futures surged to their highest level since October 2008, and settled at $2.27 a gallon on hopes that an economic recovery will be coming soon. Natural gas prices, which have fallen some 18 percent this year, touched a three-month low of $4.47 /mbtu last week on a stock report showing a smaller decrease than expected for this time of the year.

With crude hovering around OPEC’s “sweet spot” of $75 a barrel, the cartel is not expected to make any output changes at its meeting on March 17th.

Attention is focusing on increased demand for oil products from the Middle Eastern oil-exporting nations. The IEA is estimating a 2010 demand growth for the region of 4.5 percent. Saudi demand is expected to be up by 3.8 percent; Iranian by 6 percent; and UAE demand by 3.4 percent.

Coupled with what could be a 4-5 percent increase in Chinese demand and increasing imports by India and Korea, Asian/Middle Eastern demand may be sufficient to generate upward pressure on prices later this year. US and OECD demand will likely remain stagnant unless there are marked price moves.

2. Iraq’s elections

Despite bomb and rocket attacks that killed at least 25, many of 19 million eligible voters went to the polls on Sunday and cast votes for the 6,200 candidates from 86 parties and factions running for the 325 parliamentary seats. With numbers like these and the likelihood that there will be no clear-cut winner, it could take weeks or even months to sort out the balance of forces in the new government.

It will take months or perhaps years before the impact of this election on Iraq’s contribution to world oil supplies will be known. Should all go well and the aspirations of Iraq producing 10 or 12 million b/d be realized, then Iraq production alone could delay the decline in global oil production by a number of years. Conversely, should the situation deteriorate with increasing violence, then even Iraq’s current production of 2.5 million b/d could be threatened.

3. The National People’s Congress

While clearly not a democratic institution in the western sense of the term, the annual meeting of the 3000 delegate, National People’s Congress serves as a focal point for China’s political calendar. In a series of “state of the nation” addresses, the country’s leaders outline the government’s accomplishments and plans for the future. Although 3000 people cannot conduct meaningful debate on anything, outside observers maintain that the atmospherics surrounding the two-week meeting can indeed feed back to and influence government decisions.

This year many of the presentations have focused on economic growth and whether the government’s massive stimulus and freewheeling lending policies are getting out of hand. Chinese┬áreal estate prices are in a speculative bubble, much industrial overcapacity is reported to be under construction, and there a serious labor shortage in the industrial southeast as workers are staying closer to home in rural areas and working on local government-financed projects.

In an address to the Congress last week, Premier Wen Jiabao admitted that there are risks involved in the government’s current stimulus policies, but that the government would “strictly control” new projects for the rest of the year. Wen said the government would expand social spending, bolster lending, curb inflation and meet its GDP growth target of 8 percent this year.

The announcement of 8 percent growth and continued stimulus was greeted by a jump in oil prices on the expectation that China’s oil imports would continue to grow by the anticipated 4-5 percent this year. A growing chorus of outside observers is skeptical that China can maintain rapid economic growth in the face of sluggish exports and an inflationary real estate bubble. The outcome of all this is likely to have a major impact on the course of China’s demand for oil and global oil prices during the next couple of years.

4. Global Warming

Several new reports on the prospects for, and impact of, global warming were released last week. The UK Meteorological office said it is becoming clearer that human activities are causing climate change and that the evidence is now stronger than when the IPCC made its assessment in 2007.

A report funded by the Pew Environment Group puts the cost of arctic ice melting over the next 40 years at anywhere from $2.4 to $24 trillion. The damage would be caused by a combination of rising sea levels, floods, and crop-killing heat waves.

A research team, led by University of Alaska scientists, reports that the East Siberian Arctic Shelf seafloor that holds vast stores of frozen methane is becoming unstable and there is widespread venting of methane. This gas is said to have 21 times the impact on global warming as carbon dioxide.

Meanwhile, back in Washington, the administration’s efforts to reduce emissions continue to run into trouble from a skeptical Congress. Last week a group of Democratic lawmakers introduced legislation to block the administration’s use of the Clean Air Act to control carbon emissions.

Quote of the Week

  • “I think it might not be a bad idea to examine the faith-based assumption that the US has a virtually unlimited supply of natural gas from shale formations that can be extracted at a low price for the indefinite future. Perhaps the few people who think shale gas will be produced at a higher cost, and more slowly, than generally believed should be heard out, rather than be executed or sentenced to work in the salt mines.”– John Dizard, the Financial Times

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

  • Russian crude production neared a post-Soviet record in February as TNK-BP raised output at new fields in both western and eastern Siberia. Crude production reached almost 10.08 million barrels a day, a gain of 3.3 percent from a year earlier. (3/3, #22)
  • Australian oil production in 2009 declined by 17% to its lowest level in four decades and is expected to continue falling as fields age after a temporary increase over the next year. Natural gas production increased by 10 percent. (3/5, #16)
  • Mexican oil production was down 5.3 percent in the final quarter of 2009 at 2.583 million barrels per day compared with the same period in 2008, although the reduction in output was offset by higher oil prices, which were 53.9 percent higher. (3/3, #15)
  • Middle East oil demand could grow by 5 percent in 2010, outpacing a modest recovery in global energy demand as the world’s top oil exporting governments continue spendingpetrodollars to boost economies. Cheap subsidized fuel has encouraged rapid energy-consumption growth that some regional governments have struggled to meet. (3/6, #8)
  • Nigeria’s oil minister warned that losses and liabilities of more than $2.5 billion threaten the existence of the state-owned Nigerian National Petroleum Corporation….Last week alone, the Port Harcourt-Aba products pipelines was vandalized at 21 different points, making it impossible to pipe products to Aba, Enugu, Makurdi and Yola depots. The NNPC boss said vandalization of pipelines is the single biggest challenge facing NNPC and the Nigerian oil industry today, (3/6, #12-13)
  • Brazil and Nigeria currently offer fairly good contract terms to international oil giants like ExxonMobil and Royal Dutch Shell that operate within their borders. But now they’re hoping to collect a much bigger chunk of the profits from the oil produced in their countries. If the two countries do successfully extract better terms from the oil companies, it could slow the development of some major new oil fields. (3/6, #5)
  • Kazakhstan is currently scrutinizing all the landmark oil deals it signed in the early 1990s, many of which are now seen as being unfairly skewed towards the international oil companies. (3/1, #6)
  • The US had remarkably strong oil production growth of 7.1 percent in 2009. The “best guess” scenario is that production will grow around 200,000 b/d for the next two years and then flatten after that. (3/2, #26)
  • Petrobras, keeping with its original timeline, is set to begin producing oil by mid-2010 from two ultradeep-water fields in the Gulf of Mexico known as Cascade and Chinook. (3/2, #18)
  • State-run Oil & Natural Gas Corp., India’s largest, expects crude oil and gas production from its onshore fields to fall in the next financial year as the fields are aging. A senior executive said Wednesday that their fields have been in production for more than 30 years and there hasn’t been any major discovery in the last few years. (3/3, #19)
  • The Haradh III development at the southern tip of the Ghawar oil field in Saudi Arabia, completed in 2006, has been portrayed by Saudi Aramco as the turning point in the battle between geological adversity and engineering prowess. But when you look at a satellite photo and count the number of producer wells they ended up drilling, it adds up to quite a few more than they have been claiming — about 60% more. (3/5, #23)
  • Saudi Arabia agreed to almost double crude shipments to India-to 770,000 b/d-and study “enhancement” of joint projects as Asia’s third-largest economy seeks to increase supply for planned refineries. (3/2, #13)
  • As energy companies rush back into the oil sands, surging demand for labor and equipment threatens to drive construction costs skyward once again. The cost to build an oil sands project roughly tripled during the last decade. (3/6, #22)
  • A Russian oil tanker will test a trial shipment of oil to Japan this summer, for what is said to be the first shipment to sail the Arctic Ocean route from northwest Russia to Asia. China also is preparing for the Arctic being navigable during summer months. (3/6, #23)
  • Royal Dutch Shell spent $19 billion, triple the original estimate, to build the world’s largest gas-to-liquids plant (Pearl) in Qatar. Now, it’s pay-off time and the company says the project may generate $6 billion a year. At full capacity, Pearl will produce 140,000 b/d of liquid fuel and 120,000 barrels equivalent of ethane gas and condensate. Operating costs at Pearl will be about $6 a barrel….The 34,000-barrel-a-day Oryx GTL, Qatar’s only operating gas-to-liquids plant, reached full power last year after hitting snags following its start in 2006. (3/4, #9)
  • A consortium led by China National Offshore Oil Corp. is the frontrunner to win the right to develop Iraq’s 2.5 billion-barrel Missan oil-field complex after agreeing to Iraqi governmentproposals. Cnooc’s rival China National Petroleum Corp. has been the predominant Chinese player in Iraq. (3/5, #8)
  • Baker Hughes said the US rig count rose by 83 to 1,350 last month, climbing 2.3% from a year earlier. The international rig count rose 2% on month to 1,068 and increased 4.7% from last February. (3//5, #21)… The gas drilling-rig count rose by 12 to 905 last week, up 36 percent from a seven-year low reached in July, according to Baker Hughes Inc. data. The number of horizontal drill rigs rose by 21 to a record 679.
  • Russian monopoly Gazprom expects liquefied natural gas shipments to compete with rising output of shale gas in the US as the Russian producer aims to expand into the world’s biggest energy market. (3/4, #17)
  • Zhang Guobao, CPPCC member and head of the National Energy Administration (NEA), made it clear that China’s natural gas price will be linked to the oil price. (3/6, #17)
  • Ben Dell of Bernstein Research in New York who has done some of the deepest drilling into the shale gas industry numbers, believes that the full cost of finding, developing, and operating shale gas wells, and paying an average return on capital to investors, requires a spot gas price of $7.50 to $8 a thousand cu ft. (3/6, #19)
  • Many environmental groups talk of how wind and relatively clean-burning natural gas can partner to displace dirtier coal, creating a path to power the US while releasing fewer greenhouse gases. A bitter fuel fight in Texas points to a different future: one in which gas and wind are foes. (3/2, #23)
  • Proposals expected to be announced next month would give the EU its first funding which would not come from national governments. Algirdas Semeta, the new European commissioner for taxation, is planning a “minimum rate of tax on carbon” across the whole EU as a “priority”. (3/5, #22)
  • China said last Sunday it will spell out greenhouse gas emissions goals and monitoring rules for regions and sectors in its next five-year plan, with monitoring to show it is serious about curbing emissions. (3/1, #11)
  • The logic of a gasoline tax is simple: when gas prices rose a couple of dollars instead of a couple of dimes, people find ways to use less — whether by taking fewer trips, carpooling or buying more fuel-efficient cars. Tax receipts could go to deficit reduction, or they could be rebated directly to households, rendering the tax far less regressive — and more politically palatable — while still sending an appropriate price signal. (3/5, #24)
  • The Obama administration, still struggling to win China’s pivotal backing for a new round of United Nations sanctions against Iran, is increasingly worried about gaining the support of some other members of the UN Security Council, particularly Brazil, Turkey and Lebanon, according to U.S. and European officials. (3/4, #8)
  • Starting this summer, the US Postal Service, which operates the world’s largest civilian vehicle fleet, will begin a year-long pilot program of electric mail trucks in the Washington area, using vehicles converted by five manufacturers. (3/4, #15)
  • Carlos Ghosn predicts that the car industry will be scrambling to build capacity to meet demand for both electric cars and the lithium ion batteries that power them in less than two years. (3/4, #20b)
  • Ford Motor plans to increase electric and hybrid vehicles to as much as a fourth of its lineup by 2020 as governments push for higher fuel efficiency. (3/5, #27)
  • Roland Berger Strategy Consultants released an analysis suggesting the world is building a battery bubble, where there is far more production capacity than demand by 2015; as aresult, sometime in the latter half of this decade, there is going to be an industry shakeout that will leave 6-8 advanced battery manufacturers in the world. (3/3, #25)
  • Venezuelan plans to cut electricity demand by 20% amid a looming energy crisis are not feasible for businesses in Caracas, the chamber of commerce said. The National Electric Corp. announced during the weekend that only 37 percent of heavy energy consumers in Caracas were meeting that goal. (3/3, #10)
  • Manila and several neighboring provinces will experience blackouts in the coming days as the country grapples with a drought that has devastated more than a dozen provinces, drying up rivers and reducing the water levels in lakes behind hydroelectric dams. (3/5, #17)
  • Frequent power blackouts are taking a toll on the confidence of India’s Silicon Valley-Bangalore. The city is reeling under frequent unscheduled power cuts-sometimes lasting 3-4 hours. (3/2, #21)
  • In Pakistan, the days of doing business by candlelight are far from over. Power cuts in many areas of the country last as long as 16 hours every day, and consumers will be paying about 45 per cent more for electricity by the end of this month compared with last year as government subsidies are withdrawn. (3/4, #10)
  • Utilities have turned to state legislators and regulators to help contain the capital costs of new nuclear power plants. In states such as Georgia, Florida and South Carolina, utilities have won permission to charge customers for some of the cost of new reactors while construction is still in progress — a financing technique that would save utilities a couple of billion dollars for each reactor. But businesses and other users are fighting back. Utilities admit that without the relief, they would not consider building the plants. (3/2, #22)