1. Production and prices

Oil prices rose 1.9 percent last week, hitting $82 a barrel at mid-week. Much of the price jump is attributed to the weakness of the US dollar which at one point fell to $1.50 vs. the Euro. Later in the week the dollar recovered a bit and equities fell, leaving oil to settle on Friday at $80.50.

Oil fundamentals remain weak with US crude stockpiles rising by 1.3 million barrels in last week’s stocks report. US demand for fuel dropped 1.4 percent to 18.7 million b/d and consumption of distillates dropped 2 percent to 3.4 million b/d.

The jump in prices set off a flurry of commentary – most of it bullish for oil. Technical price analysts are talking about the potential for oil moving into the $90s. Deutsche Bank foresees the dollar sliding to $1.60 vs. the Euro and suggests that this implies $100 oil shortly. Jeff Rubin, former chief economist with CIBC World Markets sees $100 oil and $4 gasoline by next spring.

OPEC too is starting to raise concerns now that prices are above the Saudis’ $70-75 “proper level.” The organization’s Secretary General is already claiming that production is adequate and is blaming the increase on speculators. The cartel is talking about increasing production at their December meeting in Luanda.

The twin developments that could drive oil prices higher in the next few months are weakness of the dollar and the course of China’s economic recovery. As US deficits continue to rise and the government is forced to raise increasing amounts of cash through the sale of treasury securities, some analysts see a breaking point in the offing that could lead to a falling dollar and higher oil prices.

Last week Beijing announced that the Chinese economy grew 8.9 percent year-over-year in the third quarter despite exports that are roughly 25 percent below normal. The issue remains as to whether China can grow if exports continue to lag after the stimulus ends and whether the economy is growing too fast to be sustainable within the global environment. China’s oil consumption in August was reported as 9.3 million b/d which is substantially above the previous highs of 7.7 and 8.0 million b/d recorded during the summers of 2007 and 2008 respectively.

So far the financial media has largely ignored the potential impact of $100 oil on the global economy and equity markets despite much evidence from the 2008 price spike. Deutsche Banks analysts have decided that $80 oil will not have much effect on any global rebound but are studying what the impact of $100 oil might be.

USA Today notes that oil prices had increased by 76 percent so far this year before the latest jump and wonders whether this might not spoil the stock market rally.

2. Copenhagen

As climate change legislation creeps ahead in the US Congress, activity prior to the formal negotiations on emissions that will take place in December is picking up. Last Monday a meeting of officials from the major greenhouse gas emitting countries ended with hints that progress is being made in discussion between the rich countries that currently emit most of the greenhouse gases and the developing countries that fear their economic development will be choked off by carbon ceilings.

In the meantime, China and India, which account for one quarter of global emissions, announced a plan for an alternative to the climate treaty that is to be signed in Copenhagen. China remains opposed to specific emissions caps and prefers more general plans to cut emissions in proportion to economic growth. The China-India plan may either be incorporated in any agreement reached at Copenhagen or may become an alternative should negotiations break down.

Beijing is starting to realize that it is among the most vulnerable to climate change as its rivers and crops start to dry up, water tables drop, and sea levels rise. The government is making major efforts to switch to green technologies, but policy is still overshadowed by the perceived need for rapid economic growth and the generally linked need to consume more and more coal and oil.

Ironically, recent polls show public sentiment in the US swinging away from the need to do anything about greenhouse emissions. Part of this comes from the barrage of industry advertising aimed at derailing climate change legislation in the Congress by focusing on increased costs to consumers during difficult economic times.

There are so many forces now at work applying pressure to climate change policy, financial systems, currencies, economic growth, and fossil fuel consumption that a clear outcome to all this is impossible to foresee. It seems likely that major changes will be forced on the global economy within the next few years despite widespread denial of the real problems.

3. Oil and Money Conference

Several oil industry CEOs and other high-profile speakers at the 30th Oil & Money conference in London last week pitched a few key points during the October 20-21 event. First, the industry needs a stable framework with respect to any new rules stemming from possible agreements on climate change, in order to be able to proceed with long-term investments in new production capacity. Second, while there was agreement that the oil resource base is large, several CEOs asserted that for a host of reasons we appear headed towards a supply-constrained situation in which world oil production will fall well short of 100 million barrels a day. Third, while it would be nice to return to a period of greater price stability, in reality we are unlikely to have market regulatory mechanisms put in place that will bring about such a change.

Lunchtime presentations by CEOs John Hess and Christophe de Margerie were notable. An abridged version of Hess’ remarks are included as this week’s Commentary (p.4); further notes from de Margerie, Matt Simmons and other CEOs will be included in next week’s Peak Oil Review.

Quote of the Week

  • “What’s going to happen in a world of triple digit oil prices is that air travel is going to go back to what it was in the ’60s or early ’70s, which was essentially a luxury item, not an everyday commodity.”
    — Jeff Rubin, former chief economist, CIBC World Markets

Briefs

  • Brazil’s state-run oil company Petrobras said production in Brazil hit a new record just above 2.00 million barrels per day (bpd) from 1.98 million bpd in August. (10/20, #15)
  • BP has held talks with Ghana National Petroleum Corp. concerning a joint bid for Kosmos’ interest in Jubilee, although plans have not been confirmed at this time. That puts them in competition with reports about similar interest from Exxon-Mobil. (10/23, #7)
  • China’s state-owned oil giants are likely to lose out to global rivals in a race for top energy assets, as they lack experience and hit a protectionist wall, forcing them to settle for smaller, but riskier buys. Kosmos Energy’s recent decision to award its prized Jubilee oil field stake in Ghana to Exxon Mobil over CNOOC is the latest sign that Chinese energy companies are not ready for oil prime time, bankers say. (10/23, #12)
  • While OPEC members limped through a period of painful production cuts this year, Russian oil companies enjoyed an extraordinary run. The year that has gone by since Russian officials floated — and then retracted — a proposal to coordinate production limits with the OPEC illustrates why the Kremlin is unlikely ever to actually do so. (10/20, #22)
  • A dramatic slide in Mexico’s oil production has come to an end and it can maintain output at 2.5 million barrels per day for the coming years, Energy Minister Georgina Kessel said last week. (10/22, #8) [Editors’ note: more material for David Shields’ dartboard.]
  • Mexico produced 2.599 million barrels per day of crude in September, 4.5 percent less than a year ago but up from 2.542 million bpd in August, Pemex said on Friday. (10/24, #6)
  • Mexico is currently facing one of the biggest economic recessions in the country’s two hundred-year history of independence. Some Mexican policy makers blame the decrease in tourism, while others attribute it to the continued dependence of the Mexican economy on the United States. But Mexico’s plummet in oil production and the decline in the price of oil and oil revenues are two main contributors to its present economic downfall. (10/24, #17)
  • A Chinese company’s gambit to drill for oil in US territory demonstrates China’s determination to lock up the raw materials it needs to sustain its rapid growth, wherever those resources lie. The sour US economy and the need for Washington and Beijing to cooperate on potentially larger issues could mute any outcry. (10/23, #11)
  • The US Interior Department said Monday it has approved a plan by Royal Dutch Shell to drill for oil and natural gas off Alaska’s coast in the Beaufort Sea. (10/20, #19)
  • Nigeria plans to transfer 10 per cent of its oil and gas ventures to the inhabitants of the oil-producing Niger Delta, in an attempt to end a rebellion that has hampered production in sub-Saharan Africa’s leading energy supplier. (10/19, #10)
  • In the UK’s North Sea, oil men say high taxation is a reason investment has fallen to 4.8 billion pounds in 2008 from 6 billion in 2006: older fields are taxed at up to 75 percent while most others pay 50 percent. (10/21, #19)
  • South Korea ended a frustrating losing streak in overseas resource deals with the agreed $1.7 billion takeover of Canada’s Harvest Energy Trust, securing oil and gas reserves but also taking on an aging refinery in need of significant investment. (10/22, #17)
  • A half dozen major international oil companies are close to deals with Iraq, on the heels of BP and the Chinese National Petroleum Corp. which are one step away from receiving the first new oil contract issued by Baghdad – for the largest oil field in the country. (10/21, #9)
  • The IEA this month raised its forecast for world oil demand next year for a fourth consecutive month. One of the main reasons cited was stronger economic growth in Asia. (10/20, #16)
  • Japan’s oil and natural-gas imports fell by the most in at least a decade—down 13% and 9%, respectively—in the fiscal first half because of falling exports and lower energy demand from factories. (10/22, #12)
  • Suncor Energy says it has a promising new technology (Tailing Reduction Operations) that will turn tailing ponds near its oil sands operations in Northern Alberta into a solid landscape in a matter of weeks, thereby speeding the reclamation process significantly. (10/24, #14)
  • Chevron’s CEO, David O’Reilly, said there is enough output capacity either on line or coming on line to prevent a supply imbalance in the near term. But the world could face a supply challenge beyond the next three-to-five years if companies don’t invest enough in production as the global population rises and living standards improve, he said. (10/20, #10)
  • So what about all those new oil finds – some 200 announced on five continents this year – including BP’s giant discovery in the Gulf of Mexico last month? Development of such new fields, many deep under the ocean, takes years and will only help offset the decline in oil production elsewhere, analysts say. (10/20, #8)
  • A report from the non-governmental organization Global Witness – famous for its exposé of so-called “blood diamonds” – pointed to an impending oil supply shock that could be so severe that many of the world’s poor countries would simply be shut off from the world of energy by sky-high prices. (10/20, #25)
  • At the recent ASPO-USA conference, a media panel asked whether the press has been “on the watch or asleep at the wheel” when it comes to peak oil media coverage. (10/24, #16)
  • Royal Dutch Shell may order at least three floating liquefied natural-gas plants for about $5 billion each as Europe’s biggest energy producer seeks to be first in the race to tap so-called stranded deposits using the untested technology. (10/20, #9)
  • Purchases by Gazprom’s largest European customers has fallen short of the minimum specified in their “take-or-pay” contracts by about 10 billion cubic meters, or about 7 percent. The undelivered gas is valued at roughly $2.5 billion, and Gazprom says it will insist its European customers pay for it. The financial crisis and ensuing recession have depressed demand for natural gas in Europe. At the same time, supply has surged thanks to new shale gas fields in North America and a slew of new liquefied natural-gas projects. (10/24, #15)
  • Gazprom, the world’s biggest natural-gas producer, plans to ship 80 to 90 percent of the fuel from its Shtokman project in the Arctic to North America, assuming that economic recovery will spur energy use. The Moscow-based company plans to sign 20-year contracts in 2010’s first half to use gas-import terminals on the U.S. Gulf and East coasts. (10/21, #18)
  • Gas companies, environmentalists, and cash-strapped farmers have been squaring off over the Marcellus shale play, whose fate could be decided soon. New York’s Dept. of Energy Conservation recently released a regulatory proposal for public comment. (10/23, #14)
  • We read Arthur Berman’s commentary “Lessons from the Barnett Shale suggest caution in other shale plays” in World Oil’s August 2009 edition. From examining production data, Mr. Berman makes a variety of declaratory statements about the Barnett Shale, and thus Gas Shales in general, which are superficially real, yet disintegrate as predictive factors upon further examination. (10/19, #20)
  • Developing countries around the world are increasingly turning to natural gas as their alternative transportation fuel of choice. But early official embrace of the technology in industrialized nations has mostly cooled, because risks inherent in mass deployment outweigh the benefits, especially in regard to climate change. Growth in most OECD countries is likely to focus on commercial fleets and heavy-duty transportation. (10/21, #4)
  • Demand for coal to generate electricity and make steel in China and India is expected to grow by 7 percent to 8 percent annually in the next five years, leaving the world “chronically” short of the fuel, the head of US coal miner Peabody Energy said on Tuesday. (10/22, #6)
  • US electric utilities, at “The Business of Plugging In” conference, collectively pledged to move forward aggressively to create the infrastructure to support the full-scale commercialization and deployment of plug-in electric vehicles. (10/22, #19; 10/24, #18)
  • The US should create a high-level independent council to analyze and communicate critical issues to energy policymakers and the public, a group of 27 leaders in academia, government, and the private sector recommended in a new report, the result of a workshop convened by Sandia National Laboratories and the University of California in March. The report also recommends that policymakers focus their attention on outcomes and values rather than on mandating specific technical solutions. (10/24, #4)