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Peak Oil Review

1. Oil and the Global Economy

Oil prices have been doing well lately, climbing from below $75 a barrel two weeks ago to touch $81.64 on Friday. Prices are getting close to the recent high of $84 a barrel touched in early August. In London Brent crude closed the week at $83.36, nearly $20 a barrel higher than at this time last year. Most of last week’s price increase came after the weekly US stocks report showed a drop of 5.1 million barrels in total commercial inventories. While US demand for petroleum products remains weak, increasing levels of manufacturing in China suggest that increased demand from Asia and the petroleum exporting nations will continue to drive prices up. The weekly gain of 6.7 percent was the largest since February.

Surveys of September oil production show OPEC output falling to an eight-month low. Some of the decline can be traced to insurgent attacks or seasonal maintenance programs, and most analysts expect output to resume growing soon. One or two major financial firms, however, predict that demand will outrun supply in the 4th quarter and that we will be seeing higher oil prices before the year is out.

2. Deepwater drilling

The word from Washington last week was that Interior Secretary Salazar was getting close to lifting the ban and will resume issuing deepwater drilling permits. On Thursday, the Department of the Interior announced two new rules to improve drilling safety and reduce the risks of human error that was evident in the BP explosion. The new rules are only part of a larger program to reduce the risks of offshore drilling. The drilling ban remained in place despite statements from officials close to the administration that it would be lifted prior to its expiration at the end of November.

The new regulations brought forth demands from industry spokesmen and Gulf politicians that the ban be lifted on account of the economic hardship it was causing the region. Meanwhile the legal challenges to the ban were back in court last week with Interior Department lawyers defending the ban. No decision on the second ban has yet been rendered.

The new regulations are raising questions about how quickly drilling can be resumed even after the ban is lifted. The new rules require more elaborate blowout preventers, more personnel training and outside party review of well designs. All this will require time and money to implement, suggesting that future output from deepwater wells could be delayed by months or even years. Grumbling from within the industry is already starting.

Even with the new regulations in place, environmental groups are still demanding that sensitive waters such as in the Arctic or off the coast of Florida remain off-limits. So far foreign governments have not imposed drilling bans. The question remains as to whether the rest of the world and the major offshore drilling companies adopt the new US drilling rules or whether a two-tier system evolves allowing for cheaper drilling in regions of the world where governments are more concerned about quick revenue than threats to the environment.

3. Iraq

After seven months of bargaining, a deal appears to have been made to name Iraqi Prime Minister al-Maliki to a second term. The deal includes the support of the rabid anti-US cleric Moqtada al-Sadr which will likely complicate relations with the US in the years ahead. The move comes in the wake of increasing violence and terrorist attacks across Iraq. During the last two months Iraq has suffered more casualties from bombings than during the past two years. The next year will test whether Iraqi security forces can cope without direct US help and whether the government can restore basic services such as electricity and drinking water.

In the meantime, the government is moving along with plans to expand its oil production from 2 to 12 million b/d within six years. Last week the government held an Iraqi oil conference in Istanbul, where it is much safer. At the conference Iraqi officials and oil companies updated each other on plans to expand oil production. These plans include a system to pump 15 million b/d of water into wells in southern Iraq to maintain production, construct two giant offshore terminals and three moorings each capable of loading 900,000 b/d and a “grand master plan” to build a nationwide pipeline network to bring the oil to tankers. A government spokesman announced that Iraq will soon make a “big” upward revision to the current estimate of its oil reserve which is 115 billion barrels.

Some marginal progress is being made by the foreign firms that now hold contracts to develop Iraqi oil fields. The Chinese report they have increased production at Rumaila by 100,000 b/d and Shell is starting to remove unexploded mines from the Majnoon field. Shell hopes to increase production there from 45,000 b/d to 175,000 b/d in the next two years. Exxon is talking about increasing production from the West Qurna 1 field from the current 200-250,000 b/d to 2 million. This older field has already lost pressure so that much water injection will be required to achieve this goal.

Given the current and likely security situation in Iraq, many are skeptical that these plans will come to fruition in the foreseeable future. There are already reports of investments being delayed. The northern export pipeline is being attacked regularly. The construction of massive new oil and water pipeline systems that are difficult to defend would greatly increase the opportunities for terrorism.

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

  • Shell and other oil companies in Europe have pulled out of Iran to avoid US financial penalties. US officials said they would pressure China and other countries to bar their companies from filling the vacuum and also announced sanctions on an Iranian oil subsidiary in Switzerland. Iran is making steady progress in nuclear enrichment but there is still time to find a diplomatic solution, a former top UN nuclear official said. (10/1, #6, 9, 10)
  • Iran is producing and starting to export gasoline as part of a plan to halt imports and counter international sanctions. (9/27, #7; 9/29, #6)
  • Iran suspects that a foreign organization or nation designed Stuxnet, a computer worm that has been infiltrating its industrial computer systems. (9/28, #9; 10/2, #6)
  • In 2009 Saudi Arabia’s crude production fell 11.3 percent while exports fell 14.4 percent. Proven oil reserves were steady while natural gas rose 4.6 percent. Total domestic consumption of refined products, crude oil and natural gas rose by 3.7 percent. (9/27, #4)
  • Kuwait doesn’t expect OPEC to change its production quotas at its meeting next month, although compliance among the 11 members subject to quotas is about 52 percent. (9/27, #5; 9/28, #5)
  • In Venezuela, President Chavez won a majority in parliament, but opposition parties secured at least one-third of the seats and got 52 percent of the popular vote. (9/27, #8, 9; 10/1, #12)
  • Petrobras completed a record share issue expected to bring in around $70 billion. The Brazil government’s stake increased from 39.8 percent to 49 percent. Brazil should export 1.5 million b/d of oil in 2015 and 2 million b/d in 2019. (9/28, #14, 15; 9/29, #9; 9/30, #8)
  • To develop Brazil’s massive offshore oil reserves, Sinopec will invest $7.1 billion in the Brazilian unit of Repsol, increasing its share to 40 percent. (10/1, #13; 10/2, #8)
  • A Spanish company will begin drilling next year in Cuban waters, 50 miles from Florida’s Keys. Scientists warn a well blowout could send oil onto Cuban beaches and then the Keys in three days, and, if caught in the Gulf Stream, up the coast to Miami and beyond. (9/30, #9)
  • Pemex said crude production Sept. 1-26 averaged 2.587 million b/d, compared with 2.559 million b/d for August. It plans to cut drilling of new wells at Chicontepec by 46 percent to 238 wells next year. (9/28, #13; 9/20, #7)
  • ExxonMobil started production from Odoptu field in the Sakhalin-1 project off northeastern Russia and expects it to produce up to 11 million barrels of oil in 2011. (9/30, #19; 10/1, #25)
  • The first crude pipeline between Russia and China, 300,000 b/d capacity, will open on Nov. 1, CNPC said. China might offer Gazprom a large loan as part of a long-term gas deal and Russia might build a branch pipeline for gas to northeastern China. In Beijing, the Chinese and Russian presidents signed statements on strategic coordination, energy and commerce. (9/27, #11-13; 9/28, #19; 9/30, #17)
  • Lukoil and CNPC plan to expand cooperation on exploration and production in Central Asia and may swap assets in Russia and China. China has begun to import fuel from Turkmenistan via a pipeline through Kazakhstan and Uzbekistan. (9/29, #10)
  • China will continue to limit most families to just one child in the coming decades. An official in Guangdong predicted his province would loosen the restrictions by 2015 and possibly scrap the limit by 2030. (9/28, #17)
  • Growth forecast for China’s economy is 9.6 percent in 2010, Asian Development Bank said. Forecast for 2011 remained at 9.1 percent. (9/28, #18)
  • China’s customs agency still has not allowed regular shipments of rare earths to Japan to resume, industry officials said. A separate, broader decision steps up inspections of a wide range of shipments to and from Japan. (9/29, #12)
  • Japan is to start test drilling for frozen methane along its coast next year. Surveys suggest Japan has enough methane hydrate for 100 years at the current rate of usage. (9/28, #30)
  • South Korea increased oil imports for a fifth month, rising to 74.3 million barrels from 68 million barrels a year earlier. Oil-product exports jumped 28 percent as overseas gasoline and jet fuel demand gained. (10/1, #15)
  • At BP Tony Hayward turned over the CEO reins to Robert Dudley and was to join the board of TNK-BP in Russia, which Dudley used to head. BP named its Gulf of Mexico assets that will help finance the $20 billion fund for victims of the oil spill, whose cost had risen to $11.2 billion. At a National Academies hearing, Halliburton defended its cement work on the well that blew out. (9/27, #14, 15, 16; 9/29, #24; 10/1, #23)
  • Chevron has drilled the first deepwater well in North America since the Deepwater Horizon disaster in Canada. Drillship Stena Carron did the work. After losing to Chevron in UK court, Greenpeace ended a three-day blockade of the same drillship, which was headed for the first new deepwater drilling in the North Sea since the disaster. (9/27, #18; 9/29, #16; 10/2, #22)
  • UK government statistics show a 5.3 percent year-on-year fall in oil consumption and a big increase in the take-up of renewable sources of power. (10/1, #26)
  • In France, the Fos-Lavera oil terminal was blocked by a rolling wildcat strike in protest of French harbor reform. (9/30, #18; 10/1, #27)
  • Germany’s cabinet approved energy proposals, such as extending the life of nuclear plants. Four decades from now, it wants greenhouse emissions to be 80 percent lower and for 60 percent of power to come from renewable sources – up from 16 percent today. (9/29, #25)
  • Commissioning of the 4500-km Nigal oil pipeline from Nigeria to Europe is likely to be delayed until 2015. Oil was supposed to flow by 2012. (10/1, #11)
  • Offshore Angola, an oil discovery was made in the Cabaça South East-2 well in block 15/06, operated by ENI. (9/30, #6)
  • Shell said it has made a final investment decision to build a second platform in its deepwater Mars field in the US Gulf of Mexico. Mars B Olympus is expected to start production in 2015, designed to double Shell’s Mars capacity, currently 100,000 b/d of oil equivalent. (9/30, #14)
  • The Pennsylvania House passed a bill to tax natural gas extraction for the first time. (9/30, #15)
  • Consol will close a Pennsylvania coal mine and idle another in Utah because of operating costs, resulting in 231 layoffs and furloughs. (10/2, #17)
  • US sales of cars and light trucks rose 28.5% in September compared to a year ago, when sales were damped by the end of the government’s CARS program. (10/2, #13)
  • The world will hit peak coal production next year or shortly thereafter, two researchers say in the journal Energy. (9/30, #5)