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Peak Oil Review

1. Oil and the Global Economy

After climbing from a trading range in the low to mid $70s in late September, oil prices have remained in the low $80s for the past three weeks – closing at $81.25 on Friday. Much of the daily oil price movements are tied to the dollar rather than news concerning the oil markets. Opinions are mixed as to whether a possible resumption of “quantitative easing” will or will not help the US economy recover. Some believe the $10 a barrel increase in oil’s trading range during the past month is an overreaction to the prospects for economic growth.

The fundamental question remains as to whether demand for oil from China, India, and the oil exporting nations will be so strong over the next two years that it outruns sluggish or possibly falling demand from the OECD countries and begins to drain global stockpiles. Last week there were a number of reports and developments that bear on this issue.

Beijing announced last week that it had imported a record 23.3 million tons of crude in September — rebounding from a slowdown in August. Although much of this increase is due to the continuing expansion of China’s economy, exports were up 25 percent year on year in September; analysts point out that Beijing also is making a major effort to build its strategic reserves while oil prices are still relatively low.

The EIA reported that total commercial petroleum inventories were down by 4.7 million barrels in the US the week before last mainly due to lower imports. Some of this drop was likely due to temporary import problems. The IEA, however, reported that preliminary figures show a sharp drop of 31.7 million barrels in OECD stocks during September. The two reports suggest that while global stockpiles are well above average, stronger demand from Asia, Germany, and the US may already have started drawing down stockpiles. While US gasoline consumption over the last four weeks was down 1.1 percent from last year, increased demand for distillates and jet fuel increased total US consumption over last year by 1.1 percent.

The IEA recently revised its projections for global oil demand in 2010 and 2011 upwards by 300,000 b/d to an average of 86.9 million b/d and 88.2 million b/d respectively. This is a yearly growth increase of 2.1 million b/d in 2010 and another 1.2 million b/d in 2011. The IEA estimates that global oil production fell slightly in September to 86.9 million b/d but was still 1.5 million b/d above September 2009.

Analysts watching the balance between depletion of existing oil fields and new ones coming on stream see little if any increase in total global production coming in 2011. This suggests that an additional million b/d of oil consumption will have to come from existing stockpiles or activation of reserve productive capacity in Saudi Arabia and the smaller Gulf oil producers. If this does not happen, then sharply increased prices, which will damage economic growth and reduce demand for oil, may occur within the next year or so.

While some analysts, still focusing on the unusually large US stockpiles, are forecasting a drop in oil prices in the near future, Goldman Sachs Group released a new forecast for “substantially higher oil prices” in the second half of 2011 and 2012 as the global inventory surplus is exhausted. At least some parts of Wall Street seem to be grasping the reality that six years of flat global oil production is trying to satisfy increasing global demand.

2. OPEC

As was widely forecast, OPEC left its global production targets unchanged last week while calling on its members to do a better job in adhering to its existing quotas set two years ago. As usual, the position of the Saudis, as the only member with significant spare production capacity, carried the most weight. Saudi Oil Minister al-Naimi was quoted as saying — “Current prices are “good,” and Asian demand is “good.” “The market is well supplied. It is an ideal situation we are in now. Nobody is complaining. Consumers are happy, producers are happy. Companies are investing. Demand is healthy – very healthy.”

Beneath the happy talk was an undercurrent of dissent. The 12 percent decline in the Dollar Index since June means that there has been a substantial drop in the real revenues OPEC members have been receiving for their oil despite recent price increases. Venezuela’s oil minister called for oil to rise to $100 a barrel. As Caracas is no longer in a position to increase production, the only way it has of increasing revenues is to con other OPEC members, primarily the Saudis, into cutting production and driving up prices.

The Saudis who are well aware of what happens to the global economy when prices get too high keep saying that $70-80 oil is the sweet spot that will allow economies to grow, and oil producers to achieve enough revenue to keep functioning and invest in new production. There seems to be some sort of “sweet spot creep” underway as OPEC President Pastor noted at the Vienna meeting that $75-85 oil is not a problem for the global economy.

There is of course a great contradiction between the call for adherence to quotas and keeping a lid on prices, since much of the 1.5 million b/d increase in the global oil production came from over quota production by OPEC. Should a serious effort to adhere to quotas start, prices would spike considerably higher. Indeed much of the million b/d of new production that will be needed to keep prices under control in 2011 will have to come from those OPEC members that are not already producing flat out.

Another sidelight to the conference is what to do about Iraq which in making an effort to increase production five-fold and is not bound by a production quota due to its political stress during recent decades. At some point a quota for Iraq may become a major point of contention within the organization.

3. Lifting of the deepwater ban

On Tuesday the Obama administration lifted the moratorium on deep-water drilling in the Gulf of Mexico, which had idled 33 drilling rigs, some six weeks ahead of schedule. The U.S. Interior Department said oil companies must comply with new regulations and demonstrate they can adequately respond to blowouts before new permits are issued. The announcement was met with a mixture of praise and skepticism in the Gulf pro-drilling states where any kind of federal restriction on drilling is seen as a threat to jobs. Many see the lifting of the moratorium as a token political move prior to the November elections. In general the drilling industry welcomed the move but fears that a de facto ban caused by new regulation could slow the return of deepwater drilling to pre-spill levels.

The issue of regulating offshore drilling still has a long ways to play out. The delays and costs involved in complying with the new regulations have yet to be seen and the question of drilling and accidents in thinly populated arctic regions has yet to be addressed. The question of whether the new US regulations become a world standard governing drilling by US and other oil companies in waters around the world is unresolved. Adherence to such regulations could add substantially to the costs of off shore oil fields which are expected to produce half of the world’s oil supply by 2015.

The EU decided last week not to impose a moratorium on deepwater oil drilling after the UK and European Parliament rejected calls by the EU energy commissioner for a temporary ban. The EU instead recommended legislation to enforce tough new safety standards.

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

  • OPEC won’t change production. Iraq’s re-emergence as an oil major is likely to alter the balance of power. Iran will hold the presidency in 2011. (10/13, #13; 10/14, #5, 6; 10/15, #10)
  • The EU won’t impose a moratorium on deepwater oil drilling, instead recommending legislation to enforce tough new safety standards. (10/14, #15, 16)
  • President Obama’s Deepwater commission, debating how to present its conclusions, was bogged down on what to say about the future of offshore drilling. (10/15, #21)
  • The US government will begin conducting surprise inspections on oil rigs. (10/16, #6)
  • Half of the world’s oil supplies could come from offshore production by 2015, says the head of the International Energy Agency. (10/13, #6)
  • Offshore oil development could break Cuba’s dependence on Venezuela but have a greater impact on US relations. (10/12, #20)
  • Russia plans to build Venezuela’s first nuclear power plant. (10/16, #5)
  • The economic slump; the price of competing energy sources; and the failure of Congress to pass climate legislation have stalled prospects for nuclear reactors in the US. (10/12, #27)
  • Pemex’s plans to scale back drilling by 60 percent next year at Chicontepec may hurt Mexican oil services providers. (10/11, #10)
  • Schlumberger CEO Gould says the Deepwater blowout and spill will transform the relationship between oil companies and their contractors. He also says shale gas could be much harder to recover in Europe, compared with the US. (10/13, #29; 10/14, #17)
  • CNOOC agreed to pay Chesapeake for a one-third interest in the Eagle Ford shale project in Texas. Chesapeake CEO McClendon says that most significant shale fields in the US have already been found. Such deals are helping to free up gas supply elsewhere, loosening Russia’s grip on Europe. (10/11, #14-17; 10/12, #15; 10/13, #18; 10/15, #20)
  • Developers have put Quebec’s shale gas on hold for at least six months. (10/16, #7)
  • Shale gas producers and government should prepare for problems beyond fracking, says Pennsylvania Oil and Gas Bureau director Perry. (10/12, #18)
  • Natural gas is trading in the tightest range in eight years as rising US production pushes inventory levels close to last year’s record. (10/15, #5)
  • Corn prices in the US hit a two-year high, surging more than 15 percent in two days. The EPA will allow 15 percent ethanol in motor fuels for model year 2007 or newer cars and light trucks, but E15 will not hit the market anytime soon. (10/11, #5; 10/13, #10; 10/14, #10, 11)
  • Pakistan will import two million tons of petroleum products in 45 days and maintain 20 days of oil stocks to ward off another fuel crisis during winter and Haj. The country faces increased load shedding: up to 10 hours daily in urban areas, 12 hours daily in rural. (10/12, #10, 11)
  • Iran says petrol imports have fallen to their lowest level in more than a decade owing to international sanctions but insists domestic production suffices. Japan’s Inpex has agreed with National Iranian Oil to exit from Azadegan field. (10/12, #6; 10/15, #14)
  • Oil output is still stagnant in Iraq, but it plans to add 300,000 b/d of production capacity next year; and to reach 12.5 million b/d in seven years. It aims for another 4.5 million b/d of export capacity; and repair/replacement of two terminals pumping at half capacity. Shell has raised production at Majnoon from 45,000 to 70,000 b/d; Iraq will present a draft agreement for a gas joint venture with Shell. (10/12, #7; 10/13, #11, 12; 10/14, #7; 10/15, #12)
  • As Iraq Prime Minister al-Maliki inches toward securing parliamentary support to keep his job, he is losing popular support on the streets. (10/12, #9)
  • Saudi Arabia plans to embark on an unprecedented build-up of nuclear power plants despite the forthcoming extension to the Shoaiba oil-power station. (10/11, #9)
  • In Riyadh, China and Saudi Arabia agreed to set up a joint security commission. (10/12, #8)
  • China shut down 1,355 small coal mines with a total production capacity of 125.19 million tons by the end of September, surpassing its annual target. (10/15, #18)
  • China, buoyed by a four-trillion-yuan, or $586 billion, government stimulus, will continue to develop at a rate of 8 percent in the coming 10 years, but the country faces challenges such as an aging population, experts said at a Stockholm China Alliance seminar. (10/14, #9)
  • September car sales in China grew moderately from last year; ownership may exceed 200 million in 2020. In India, over 200,000 cars were sold in August; all automakers posted their best-ever sales. New registrations in Europe fell 9.2 percent from a year earlier last month, the sixth consecutive month of declines. (10/11, #11; 10/12, #14; 10/13, #20; 10/15, #28)
  • Transocean will charge ExxonMobil the highest current rates in its fleet for the Deepwater Champion to drill in the Black Sea and later the US Gulf of Mexico or Brazil. (10/15, #31)
  • ExxonMobil surrendered its exploration license in the Great South Basin, New Zealand, denting the government’s efforts to pursue frontier basins more aggressively. (10/11, #13)
  • Geothermal energy may be viable in South Africa despite its geology, thanks to recent technological advances. (10/16, #16)
  • The US military’s heavy dependence on fossil fuels is a dangerous vulnerability: Adm. Mullen, Chairman of the Joint Chiefs of Staff, has spoken of a “strategic imperative” to become more efficient and find new sources of energy. (10/15, #19)
  • Google and others will fund a project to lay undersea cables to connect 6,000 MW of wind turbines offshore from New Jersey to Virginia which could serve 1.9 million homes. (10/12, #26)
  • Potash producers are consolidating, setting off alarms as global population growth of 75 million a year increases fertilizer needs. (10/15, #11)