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1. Oil and the Global Economy

The European debt crisis continued to exert the most pressure on oil prices last week with the Euro falling as low as $1.21, a four year low, before rebounding to close at $1.25 of Friday. Three weeks ago the markets were concerned about how soon oil would reach $90 a barrel; now traders are asking how soon it will fall to $60. Prices in NY have now fallen from a high of $87.15 on May 3rd to touch $64.24 a barrel on Friday before closing at $70.04.

US petroleum inventories have climbed to their highest level in at least 20 years as US oil production climbed to a five-year high of 5.5 million b/d and imports continue to be robust.

US gasoline consumption in April increased to 9.1 million b/d. MasterCard reports that consumption the week before last was running at 9.42 million b/d, still below the peak of 9.6 million b/d reached in July 2007.

For the immediate future, prices will be determined by the market’s perception of the prospects for further economic troubles in Europe which could stifle global economic recovery versus continued growth in demand for oil from China. Although gasoline demand is up in the US, unemployment continues to increase, foreclosures grow, and many indicators suggest there are still more troubles ahead.

2. Deepwater Horizon

With the effort to plug the leaking well now scheduled for Tuesday or Wednesday, attention has shifted to the oil that is now washing up onto Louisiana’s shores and to the ongoing question of just how large is the leak. BP was saying that its siphon tube was catching some 5,000 b/d, but over the weekend lowered that number to 1,200 b/d. With 5,000 b/d still the official estimate of the leak’s magnitude now in serious doubt, a joint BP-government panel has been convened to make a new assessment. The panel is due to report shortly.

As the oil washes ashore, criticism of BP continues to grow. The realization is growing that if the leak does not stop soon the Gulf seafood industry could be damaged for years as could the Gulf tourism industry. Some are saying that the ultimate liability for the spill could run into the $10s of billions. In an ironic twist, it turns out that BP may be forced to pay the US government $1 million or more a day in royalties for the leaking oil as the drilling lease calls for a 18.7 percent royalty fee on any oil or gas lost or wasted due to the company’s negligence.

BP is already warning that this week’s effort to stop the leak may not be successful as no one has ever tried pumping drilling mud into a leaking well 5,000 feet beneath the sea. Some are warning that the “top kill” project could make matters worse by further damaging the blowout preventer. If this week’s efforts are not successful it will be another two months before two relief wells, that are currently being drilled, will penetrate the leaking well 13,000 feet below the seabed. With the hurricane season due to start next week, some are concerned that one or more of the 14-18 storms forecast to develop in the Atlantic this season could disrupt drilling of the relief wells or spread the oil across the Gulf.

3. Repercussions

Fallout from the Deepwater Horizon explosion is likely to be felt across the oil industry for many years and has the potential to slow deepwater drilling operations not only in US waters, but around the world. Deepwater oil is expected to make up some 40 percent of world production in the latter part of this decade so the regulations and delays that stem from the Deepwater Horizon accident could eventually have a significant impact on world production

The Obama administration has already put a hold on any new drilling until the causes of the current problem are known. The oil industry says that as much as $2.9 billion worth of new drilling projects are already being delayed because of the moratorium. Shallow water exploratory drilling was scheduled to start off Alaska this summer, but the administration is being bombarded with demands from Congress to local Indian tribes that the project be delayed.

With oil still gushing from the leak, the administration will be hard pressed to resume granting drilling permits until the leak is stopped and reliable technical solutions have been developed to prevent deepwater blowouts from ever happening again

The battle lines are already forming, however, between those who are anxious to push ahead with deepwater drilling and those wanting to wait until adequate safeguards are deployed. An oil industry task force has already met and is planning to recommend major changes in offshore safety procedures in hopes of forestalling harsher federal regulations. Finger pointing among the various contractors involved in the explosion is already underway as the lawsuits mount. Insurance costs for deepwater drilling could triple.

The outcome of all this is likely to depend on how much longer oil keeps leaking from the well and how much damage is ultimately done to the Gulf coasts and industries.

4. Sanctions on Iran

The Iranian sanctions saga took a bizarre twist last week when Tehran agreed to a Brazil-Turkish proposal that it ship some of its low-enriched uranium off to Turkey in exchange for 20 percent enriched reactor fuel rods. Last year the Iranians rejected a similar deal. The announcement was hailed by Brazil, Turkey, and China as a breakthrough in the impasse, while the US, Europe and Russia were skeptical that the move would have any impact on Tehran’s ability to produce nuclear weapons. Tehran made it clear that it intended to continue enriching uranium.

A day after Tehran’s announcement, the US unveiled a new package of sanctions that apparently has the support of the permanent members of the UN Security Council including China and Russia. Buried in the sanctions were proposals to pressure the Iranians by choking off financial transactions between Tehran and western banking centers. In the meantime, Tehran has no trouble selling its oil into the world market, China continues to press ahead on billions of dollars worth of joint oil projects in Iran, and Moscow says it will start up Iran’s first power reactor in August.

Quote of the Week

  • “It’s a huge mess and the liabilities are in the billions possibly the tens of billions. This is a failure of risk management of epic proportions.”

— Gregory W. Slayton, reinsurance expert at Dartmouth College’s Tuck School of Business

The Briefs

  • In April 2010 world production of all liquid fuels remained stable from March according to the latest figures of the International Energy Agency (IEA), resulting in total world liquid fuels production of 86.62 million b/d. Total oil production capacity (excl. biofuels) decreased by 85,000 b/d from March 2010, from 90.17 to 90.09 million b/d. (Oil Watch Monthly; 5/19, #25)
  • Global sales of natural gas declined by a record 3.4 percent in 2009 because of the global economic downturn, said Cedigaz, a gas industry association. It was the worst drop ever registered in the global gas business (5/22, #3)
  • Mexico’s Pemex said Friday that April crude production was 2.593 million b/d, unchanged from March but down 2% from 2.642 million in April 2009. Pemex’s new No. 1 producing complex Ku-Maloob-Zaap, saw its production rise to 848,300 b/d in April from 839,000 in March. Mexico’s crude exports averaged 1.437 million b/d in April, the highest in 17 months. (5/22, #7-8) [Editor’s note: KMZ should peak soon.]
  • Thunder Horse is the massive 60,000-ton, $1 billion production platform that BP, after years of difficulties, brought into operation in 2008. It was supposed to produce 250,000 barrels of oil a day. It hasn’t gotten close. Production from Thunder Horse’s main field reached a peak of about 172,000 barrels a day in January 2009, then began declining, falling to 61,000 barrels by December, according to data from the Minerals Management Service. (5/18, #26)
  • Shell said Tuesday that a project nearing completion in the Niger Delta-the Gbaran-Ubie Integrated Oil and Gas Project-is expected to produce more than 700,000 barrels of oil and 1 billion cubic feet of gas a day. By the end of last year, the project, which began in 2005, was more than 80% complete. (5/19, #11)
  • The number of US oil and gas rigs climbed to 1,518, up 12 rigs from the previous week, according to data from oil-field services company Baker Hughes. The number of gas rigs was 969, an increase of 18 rigs from last week, while the oil rig count was 538, a decrease of six rigs. Many shale-gas producers hold leases that require them to drill by a certain date. (5/22, #20)
  • BP is the leading operator in the deepwater GOM, producing over 400,000 b/d from fields including Thunder Horse, Atlantis, and Mad Dog, and holds interests in non-operated fields including Mars and Ursa. BP also holds the largest number of leases in the deepwater GOM with more than 650 leases in waters deeper than 1,250 ft. BP produced 4 MM boe/d in 2009, an increase of 4% on 2008, and its 17th consecutive year of increasing reserves. BP intends to start up a total of 42 new major projects between 2010 and 2015, which are expected to contribute about 1 million b/d in total production by 2015. There’s no telling what impact the April 20, 2010, blow-out in the Gulf of Mexico will have on BP’s future numbers. (5/22, #23)
  • Supermajors are known for large profits, but National Oil Companies currently contract a greater number of rigs than the supermajors. Petrobras has 51 rigs currently contracted, which includes rigs that are owned and operated by Petrobras. That’s only seven fewer rigs contracted by the top three supermajors combined. Pemex, ONGC and Saudi Aramco are also currently employing more rigs than BP with 29, 34 and 21 respectively. (5/22, #23)
  • US officials fear that targeting Iranian crude exports could wreak havoc on the economies of allies like Japan, which last year imported about 421,000 barrels of Iranian crude a day, behind China and India. (5/21, #8)
  • China National Petroleum Corp. agreed to acquire a 35% stake in Shell’s oil and gas unit in Syria in a deal an analyst said may be worth $1.5 billion. (5/19, #10)
  • China increased its daily crude imports to a record high of 5.19 million b/d (21.17 million mt) in April, up 30.9% from 3.96 million b/d recorded a year earlier. (5/19, #12)
  • CNOOC International together with Turkish Petroleum have signed a technical service contract for the development and production of the Missan Oil Fields in Iraq. The contract has a term of 20 years and the Company has undertaken to increase the daily production of the Missan Oil Fields to 450,000 barrels within six years. (5/18, #11)
  • Occidental Petroleum Corp. said it derives more than 25 percent of its California production from shales and that its California shale development program could become the company’s largest business unit within 10 years. Oxy said the California shales contain predominantly oil and liquids and may be richer in hydrocarbon resources than many of the better-known US shales. It expects to boost its California output to 212,000-300,000 boe/d in 2014 from existing assets from 51,000 boe/d in 2010. (5/21, #18) Oxy has kept the precise location of its discovery in Kern County a secret to prevent competitors from trying to purchase adjacent tracts of land. (5/19, #6)
  • Deepwater wells like the ill-fated Deepwater Horizon made up 15% of total US production in 2002 and are expected to rise to 30% of total production by 2015. New deepwater production of known reserves is supposed to provide up to 40 million b/d of global production – a staggering amount, given the large capital, engineering and expertise that must be brought to bear to bring oil from miles below the ocean floor. (5/18, #5)
  • The successful development of Canada’s tar sands has triggered a rush by Shell and other oil companies to set up similar operations in Russia, Congo and even Madagascar, (5/18, #6)
  • Brazil was fuming Wednesday that a deal with Iran over its nuclear program was being ignored by the US and other UN powers, which were pressing on with new sanctions against Tehran…Turkish officials say that together with Brazil, they believed they were coaxing Iran back to the terms of a confidence-building agreement with Iran that fell apart last year. (5/20, #4-5)
  • Iran’s recently-concluded war games concentrated on preparations to block the Persian Gulf and wreck Western economies.
  • In the North Falkland Islands, Rockhopper Exploration PLC says initial results from its 14/10-2 well on the Sea Lion prospect could be the basin’s first oil discovery. (5/20, #6)
  • Exxon Mobil said its plan to drill a deep-water oil well in the Gulf of Mexico called Hadrian has been delayed by a U.S. moratorium on offshore drilling permits. Exxon moved a rig to a site in 6,941 feet (2,116 meters) of water in anticipation of drilling the well before the moratorium was imposed earlier this month, halting any additional work. (5/19, #16)
  • The National Academy of Sciences issued an 869-page report reasserting mankind’s role in altering the climate and calling for specific policy measures to help forestall undesirable effects. The report, requested by Congress 2008, essentially supports the main findings of the Intergovernmental Panel on Climate Change. (5/21, #7)
  • US Republican lawmakers allege that federal regulators have put on hold at least twice as many Appalachian coal-mining permits as publicly disclosed, shutting off an estimated two billion tons of coal production planned for the region. (5/22, #19)
  • In China, where carbon capture and sequestration was once considered one of the ways the country was going to clean its skies, the process of removing the carbon dioxide from coal-burning emissions is proving so energy-intensive that the Chinese are now having second thoughts. (5/21, #19)
  • China Power Investment, one of the nation’s five largest electricity producers, plans to build up to 10 nuclear plants in southern, central and northeastern China as domestic energy demand surges. (5/19, #26)
  • A study says the western US can accommodate 30 percent wind and 5 percent solar penetration so long as utilities increase coordination of operations over wider geographic areas and change how they schedule generation and interchanges. (5/21, #26)
  • Tesla and Toyota will partner to make electric cars at a plant in Fremont (CA). (5/21, #25)