Review May 17, 2010

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1. Production and prices

In the last two weeks oil prices have fallen from a recent high of $87.15 on May 3rd to a low of $70.83 on Friday. The precipitous fall of the Euro to its lowest point since October 2008 was the major factor behind the fall in oil prices. Contributing factors were a continuation of the buildup in US oil inventories, concerns about prospects for European economic growth, a jump in Chinese inflation, and over-production by OPEC. A record build-up of crude stocks at Cushing, Oklahoma is also contributing to unusual pressure on West Texas Intermediate prices as compared to other crudes.

The rapid fall in prices is starting to raise concerns among OPEC exporters who well remember the price plunge two years ago that took oil down to a low of $31 a barrel. Last week Libya’s Oil Minister began talking emergency production cuts if prices fall below $60. The IEA cut its forecast for 2010 global growth in the demand for oil by 50,000 b/d to 1.62 million b/d.

Last week began with optimism as European leaders agreed to a near trillion-dollar bailout of Greece’s economy. Oil prices surged briefly and there was talk of rising oil consumption and increasing prices. T. Boone Pickens was quoted as seeing $100 oil by year’s end. Twenty four hours later the Euro and oil prices were falling again on doubts that the Greek bailout was sufficient and concerns that rapid economic growth and a jump in China’s inflation rate would lead to an economic clamp-down.

In the first quarter Beijing’s GDP grew by nearly 12 percent year over year. This in turn led OPEC to forecast that China’s crude consumption in 2010 would grow by 950,000 b/d. In March, demand was already up by 800,000 b/d over 2009.

Continued growth in US petroleum inventories is due almost entirely due to large imports. Considering the state of the US economy, a growth of 2.7 % in gasoline demand during the last four weeks over 2009 and 2.8 percent growth in total use of petroleum products is considerable. Distillate demand is up by 7.5 percent and jet fuel by 1.8 percent. Although wholesale gasoline prices have been falling rapidly along with crude, so far nationwide retail prices are only down by a few pennies to $2.87 a gallon. Gasoline analysts are forecasting that in a few weeks prices could be below last summer’s peak of $2.70 a gallon.

In the coming week, attention will be focused on the course of the Euro. As more austerity packages – implying lower growth — are announced by European countries, the possibility that the Euro will continue to fall from the $1.23 close against the dollar on Friday increases. For the immediate future, European economic developments may play as big a role in the determination of oil prices as the usual factors of supply and demand.

2. The Deepwater Horizon

The tragic explosion aboard BP’s drilling rig in the Gulf of Mexico nearly a month ago is shaping up to be one of the most important events determining the course of oil production in coming years. The effects, which could be felt for decades, are likely to lead to lower oil production and higher prices as the petroleum industry is forced to delay projects and adhere to significantly harsher regulation.

Recent developments

BP announced Sunday afternoon that it had successfully tested inserting a siphon tube into the blow-out well to capture some of the leaking oil and gas. The company claims this is an important step in efforts to contain the flow. So far the oil slick appears to have had minimal impact along the coast although oil debris and tar balls are beginning to wash up in at least a dozen places in Louisiana, Alabama, and Mississippi.

The New York Times reported on Saturday that researchers have discovered huge oil plumes below the surface of the Gulf. One such plume is 10 miles long, 3 miles wide and 300 feet thick. The discovery of multiple large subsurface plumes suggests that the oil leak may be far worse than the 5000 b/d announced by BP and the government. BP seems to be stonewalling requests to utilize equipment that could establish a better estimate for the actual size of the leak.

The government is asking BP for specifics relating to the company’s offer to pay costs – which are likely to run in billions – related to the leak. Federal law currently limits oil spill claims to a maximum of $75 million, though legislation to substantially expand that liability limit may eventually pass.

The path ahead

In the coming week, BP will continue efforts to use a siphon tube to stem the oil leak and will begin dispensing dispersants directly into the leaking oil stream. If this effort does not work, there will be an attempt to install the smaller “top hat” containment dome over the leak, or alternately fire bulk particles such as gulf balls and pieces of tire rubber into the voids below the malfunctioning blow-out preventer. Flotillas of shrimp boats continue to string containment booms in front of sensitive coastal areas.

Efforts continue to drill a relief well into the seabed to stem the flow but this will take at least two more months to complete. The drilling of a second backup relief well is due to start this week. In a regulatory filing for the two new wells, BP says that a second blowout could release as much as 240,000 b/d into the ocean, again suggesting that the current 5000 b/d estimate is way too low.

Revelations

As the drama in the Gulf unfolds, information continues to surface about cozy and unequal relationship between the oil companies and federal regulators. The federal Minerals Management Service has been issuing drilling permits without first receiving the necessary environmental clearances. It has been the oil industry and not the regulators who have been setting safety and environmental standards for drilling in the Gulf.

Federal law limits industry liability from oil spills to $75 million. The API is already saying that any increase in this limit would force smaller drillers out of business. BP’s CEO admitted the obvious – that the company did not have the necessary technology to stop the leak and that the company should have done more to prepare for an emergency.

US government actions

In the wake of the disaster Washington has already taken steps to stiffen regulation. President Obama has blasted the “cozy” relationship between the government regulators and the oil industry and has ordered increased scrutiny of drilling permits. The President said that the days when Washington regulators would routinely grant drilling permits based on little more than vague assurances of safety are over. On May 6th the government temporarily suspended offshore drilling permits until the completion of a report on the causes of the BP accident.

The administration has announced plans to split the Minerals Management Service into two agencies so that safety regulation will be a separate agency from the one leasing drilling tracts and collecting royalties.

Plans by Shell to begin exploratory drilling in the Arctic Chukchi and Beaufort seas this summer are drawing increasing fire from critics who maintain the permits have been issued without adequate environmental and safety reviews.

Secretary of Energy Chu signaled his lack of confidence in BP by appointing his own panel of distinguished and innovative scientists to look for ways to stop the oil leak.

In the meantime API, the IEA, and the Times of London all warned the Obama administration that the world still needs Big Oil to continue drilling deep water and that any new regulation should not be too onerous.

In the Congress

Last week the House and Senate held hearings on the oil spill during which executives from the companies involved each claimed their organization was not responsible for the explosion. Each attempted to shift the blame onto the other companies.

Of more significance will be the oil spill’s effect on the prospects for Senate passage of a compromise climate bill that contained more offshore oil and gas drilling and revenue sharing for the states. Last week efforts were under way to rewrite portions of the climate bill to raise new hurdles for any future drilling off the Atlantic and Pacific coasts. Supporters of offshore drilling admit that the prospect for their position was bleak.

Despite the backlash against deepwater drilling, the realists point out that deepwater oil has grown from 2 to 8 million b/d in the last ten years and that further growth will be necessary to even partially offset coming declines in both onshore and shallow water production.

In the states

In Florida, Governor Crist said he is close to summoning the legislature to consider a constitutional amendment for the November ballot that would ban oil and gas drilling in state waters.

Governor Schwarzenegger withdrew his support for expanding exploration off California’s coast. The Governor is coming under increased pressure to abandon California’s commitment to the 2006 Act to reduce emissions by 25 percent by 2020.

The economic impact

Whether it takes days or months to plug the leaking well, its economic impact is likely to be felt for many years or perhaps decades in the form of higher prices for oil and gas derived from offshore wells. There are currently some 75,000 offshore jobs in the Gulf of Mexico. Many of these will be threatened by lengthy delays in obtaining drilling permits or by the manufacture of new and hopefully more effective safety equipment.

It is likely that practices regulated for drilling in US waters will be expanded to include all deepwater drilling around the globe. BP has already announced that it will postpone work on the 3 billion-barrel Tiber field in the Gulf until new equipment and procedures are ready. As BP prepares to open new fields in sensitive cod-spawning areas off the northern Norwegian coast, politicians are already raising flags. Even the Koreans are concerned that the oil spill will eventually result in higher prices damaging their prospects for economic recovery.

Ottawa has announced that it is will review safety requirements for offshore drilling projects in an effort to avoid a similar mishap. The opposition is already calling for a moratorium on offshore drilling until new rules are in place.

The industry is already claiming that the suspension of new permits in the Gulf is already stranding billions of barrels of oil and Total is saying that the European credit crisis will slow new oil projects by making borrowing more difficult.

Environmental impact

So far the known impact of the spill has been minimal as most of the leaked oil seems to be concentrated in large plumes well beneath the surface. However, the hurricane season starts in two weeks and all indications suggest that it could be an unusually active one. Should efforts to contain the spill still be underway when a hurricane enters the area, there is no telling what environmental damage could result from the roiling waters.

Environmental scientists are becoming concerned about the effects on marine life of the massive amounts of oil that has already been leaked and the dispersants that are being released deep under water. Even if the spill is contained soon, at least some if not most of the oil is likely to end up somewhere along the Gulf coast where it will have a major impact on tourist and seafood industries.

3. Venezuela

It was a busy week in Caracas with government entering an agreement with India’s Oil and Natural Gas corporation to develop a $20 billion oil project in Venezuela; the signing of a second set of agreements, worth $40 billion, with groups led by Chevron and Respol to develop heavy oil reserves in the Orinoco belt; and the sinking of an Indian-owned drilling rig off Venezuela’s coast.

Enough rain is falling in southern Venezuela to just replace the water consumed in power generation. Unless the rains increase markedly, Venezuela’s main reservoir will not have enough water to get the country through next winter’s dry season, thereby shutting down 70 percent of the country’s generating capacity. This possibility is already being discussed openly in the press.

One of the Guri dam’s generators apparently began to vibrate violently last week and was taken out of service after causing significant damage to its concrete supports. Some observers are warning that the hydro dams are being over-worked and that a catastrophic failure of a generator, thereby shutting down the dam completely, is becoming increasingly likely. In the meantime, the loss of yet another hydro-powered generator adds to the country’s electricity shortage and increases the possibility that oil exports will eventually be affected.

Quote of the Week

• “The Barnett remains important as the only shale play that has been developed to maturity. We believe that the Barnett largely dispels the belief that modern shale production is a “manufacturing process,” or that shales constitute “gas factories.” That belief is premised on the idea that shales have large cores that are uniform, that each well is similar, and that over time wells get better. Our data from the Barnett shows that all three of these premises are wrong. The core areas are small, wells vary considerably even in close proximity, and over times wells have gotten worse, not better.”

— Ben P. Dell and Noam Lockshin, for Bernstein Research

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

• Brazil’s National Petroleum Agency has revealed that a well, dubbed Franco, is estimated to hold 4.5 billion barrels of recoverable light oil. Franco is the second biggest pre-salt discovery made in the Santos basin, behind only Tupi, which Petrobras estimates to hold between 5 billion and 8 billion barrels of oil equivalent. (5/13, #9)
• A second oil well Brazil is drilling, as part of a plan to swap reserves for stock in state-run Petroleo Brasileiro SA, may hold more than the 4.5 billion-barrel estimate of the recent Franco discovery, an official said. The new prospect is named Libra. Brazil has more than 50 billion barrels of oil reserves in the pre-salt layer. (5/15, #9)
• ExxonMobil yesterday confirmed that its Nigerian subsidiary has declared force majeure on its Qua Iboe crude oil export due to damage to a key pipeline that may have impacted 150,000 b/d of exports. (5/14, #10)Pemex depends on imports to meet more than 40 percent of Mexican gasoline demand and is building a new refinery to cut its reliance on foreign supplies, but CEO Suarez said the company was open to deals with foreign suppliers due to the high cost of new refinery capacity. (5/14, #14)
• Nigeria and China agreed to seek $23 billion dollars to build three new oil refineries and a petrochemical complex in the West African country in order to meet growing domestic demand, the state-run Nigerian National Petroleum Corp. said. (5/15, #7)
• Kuwait Oil Co. is holding talks with Royal Dutch Shell, Total and Exxon Mobil to develop heavy-crude deposits to boost output by 270,000 b/d towards their target of 4 million b/d by 2020. [production by year‟s end is claimed to hit 3.3 million b/d] (5/12, #8)
• Jordan is planning to invest $5 billion in order to produce up to 100,000 barrels a day by 2020 from the country’s large oil shale-rock formation and other oil exploration blocks. (5/13, #6)
• Penn West Energy Trust will form a joint venture with a Chinese company to develop oil-sands assets in northern Alberta, marking China’s latest move into the oil-rich Canadian province. Penn West will contribute assets worth about C$1.8 billion (US$1.77 billion) for a 55% stake in the venture. The Chinese will invest C$817 million for a 45% stake in the oil-sands joint venture. (5/14, #23)
• The prospects for a nuclear-fuel swap with Iran are fading because the Iranian government refuses to heed calls to curb its uranium-enrichment program, IAEA Director General Amano said. More than six months after the United Nations-brokered offer to exchange nuclear fuel for low-enriched uranium, the deal has stalled and chances of reviving it look bleak. (5/15, #5)
• A growing number of oil companies, trading houses and other international companies have stopped doing business with Iran this year amid a US drive to isolate Tehran and international efforts to impose tougher sanctions. (5/13, #4)
• Iran, holder of the world’s second largest oil reserves, may be storing as much as 38 million barrels of crude at sea as demand declines for the heavier, sour grades the Persian Gulf country sells, according to a report from the IEA. (5/13, #5)
• Pakistan Railways shut down ten passenger trains saying it is left with only three days of oil supplies. The authorities may shut down another 110 trains. (5/14, #9)
• The number of US oil and gas rigs climbed to 1,506, up 14 rigs from the previous week, according to data from oil-field services company Baker Hughes. The number of gas rigs was 951, a decrease of two rigs from last week, while the oil rig count was 544, an increase of 16 rigs. (5/15, #19)
• Lauren Mayne, a liquid fuels analyst at the US Energy Information Administration clarifies that the EIA does not expect oil production to peak in 2011. When asked if the EIA expects to see oil production ever peak and diminish, Mayne replied that the agency does not anticipate a peak oil scenario resulting from supply shortages: “We do not see a peak, if a peak means a sharp retraction in oil production.” (5/12, #4)
• US offshore lease terms are so generous to the oil companies that according to the GAO, our revenues for oil in the Gulf of Mexico were the 93rd lowest out of 104 countries, meaning the US government may be missing out on hundreds of billions of dollars in oil royalties when prices are high. (5/15, #20)
• Anadarko Petroleum owns a 25 percent stake in BP‟s disastrous Macondo well. Given their vastly smaller corporate size, they may have to pay proportionately much more than BP for the clean-up and other costs. (5/13, #20)
• Despite the huge oil spill in the Gulf of Mexico, 57% of likely American voters agree that offshore drilling “is still a safe, reliable and cost-efficient method of producing oil,” a Zogby Interactive poll showed. (5/13, #21)
• Canada has enough natural gas to maintain its current output for a century, according to new data compiled by the Canadian Society for Unconventional Gas. Canada currently consumes 2.6 trillion cubic feet of natural gas a year, and has an estimated 700 to 1,300 tcf of exploitable reserves. (5/13, #23)
• The link between liquefied natural gas prices in Asia and oil prices is breaking down as a glut in LNG capacity boosts supplies. Crude oil futures in New York have more than doubled to $75 a barrel since the December 2008 trough of $33.87 while LNG prices stagnated at $7 per million British thermal units (5/13, #3)
• Boeing and Exxon Mobil are lobbying to fend off tightened sanctions against Iran that business groups say may cost $25 billion in U.S. exports. (5/14, #8)
• Fuel prices in Saudi Arabia remain among the lowest in the world at 15 US cents a liter. This subsidized price encourages wasteful consumption as well as smuggling to neighboring countries. (5/15, #6)
• The impact of the Greek debt crisis may not only squeeze global demand for oil but also make it harder for energy companies to finance new projects, a top executive at French oil major Total said. (5/14, #6)
• The UN yesterday issued a stark warning that the adoption of low carbon technologies such as solar panels, electric cars and energy efficient lights could stall unless the recycling rates for “specialty metals” used by the electronics industry drastically increases. The report argues that unless the reuse of rare earth metals is significantly increased they could become “essentially unavailable for use in modern technology”. (5/15, #22)
• China will need more than $146 billion to build additional nuclear power reactors by 2020, Time Weekly reported. (5/13, #11)
• Radioactive water that leaked from the nation’s oldest nuclear power plant has now reached a major underground aquifer that supplies drinking water to much of southern New Jersey, the state’s environmental chief said Friday. (5/11, #25)
• Counties in Michigan have returned some 100 miles of paved roads back to gravel because they can’t afford to maintain them. To fund repairs, the Task Force recommends two four cent increases in the gasoline tax, this year and in 2013. (5/11, #22)
• Net coal imports to China could soar by 70-100 pct to 170 million tons or more in 2010, boosting coal prices globally, if China’s power use boom continues, according to exporters and analysts. (5/15, #10)

Energy Stat of the Week

China’s coal output grew an astonishing 28.1 percent from first quarter 2009 to first quarter 2010, to over 750 million metric tons consumed in just the past three months. But this is a situation that is patently unsustainable because China simply doesn’t have enough coal to continue growing its consumption much longer. China will import 150 million tons of coal this year, twice what it imported last year. That’s not much, if we think of it as a percentage of the nation’s total coal consumption. But that 150 Mt represents over 60 percent of the total exports of Australia, the world’s top coal exporter. (from Richard Heinberg; see 5/12, #20)