1. Production and prices

The week started with oil trading at around $69 a barrel on periodic concern that the global recovery was running out of steam. This was helped by a forecast that the demand for gasoline would drop in the US and Europe over the next 10 years as more efficient autos become the norm and emissions controls are implemented. On Wednesday, however, the market’s mood shifted when the US stockpile data showed US crude inventories dropped by 4.7 million barrels vs. a 2.5 million barrel analyst forecast and an American Petroleum Institute report the night before showing that inventories had actually risen by 600,000 barrels the previous week. Much of the drop was caused by reduced crude imports as refiners cut back on production amid weak gasoline sales.

Little in the underlying fundamentals of the oil markets has changed since early summer, leaving oil trading in the vicinity of $70 a barrel. “Green shoots” and government bailouts in America, coupled with reports that China is leading a world recovery, continue to balance weak employment and real estate numbers in the US.

Natural gas prices moved higher last week closing on Friday at $3.76 per million BTUs despite record storage levels and several weeks to go before winter heating gets going. After reaching a 7-year low of $2.41 on September 4th, natural gas has now risen 56 percent in only nine trading sessions.

2. The crack spread

With the price of crude hovering around $70, a price which many say is not supported by fundamentals, refiners are having trouble making money by refining crude. The industry is faced with slipping demand for its various refined products – gasoline, diesel, heating oil, jet fuel, and bunker fuel. MasterCard reports that the average 4-week demand for gasoline in the US slipped by 3.2 percent over last year – the ninth straight weekly decline.

Cracking spreads vary with products, refinery efficiency and type of crude being processed. In January refiners could earn as much as $27.80 per barrel refining crude into diesel and heating oil. With crude oil prices doubling and product prices moving little, that number recently fell to $4.98 — near a two-year low. The gasoline crack, which was earning about $15 all summer, recently fell to $5.22 a barrel.

Refiners have little choice other than to cut back on processing, closing refineries for lengthy maintenance, selling off excess capacity, and delaying new projects. Valero recently announced a delay in a $250 million refinery upgrade in Louisiana due to poor refining margins.

European refiners which sell some 1 million b/d of gasoline to the US market are experiencing the same problems and reducing refining capacity, keeping downward pressure on the US gasoline market. One consulting firm has estimated that 2.8 million b/d of European refining capacity could be shut down over the next ten years. Over the longer term, should robust Chinese demand for crude or a weaker dollar keep crude prices increasing, the crack spread problem can only grow worse.

3. Ominous Forecasts

After the 2008 oil price spike, the deepening recession and the subsequent 2-3 million b/d drop in global demand for oil, many observers concluded that lower consumption would delay the “supply squeeze” which has become the euphemism-of-choice in the government and financial community for peak oil. In recent days, however, there have been several reports questioning whether peak production is not closer than generally accepted.

The general argument is that significant drops in investments during the past year, and relatively low spare production capacity, coupled with the widely expected economic rebound, will combine to leave us with global oil shortages and much higher prices in the next two-three years. There is also growing skepticism that many of the new deepwater finds announced in recent months can be produced quickly enough to make much difference.

Last week, such mainstream institutions as the Macquarie, a prominent Australian investment bank, Morgan Stanley, the Abu Dhabi Nation Oil Company, the Kuwaiti government, the Financial times, and the Executive Director of the International Energy Agency all released information or analysis suggesting that global oil shortages could develop in the next one, two or three years. As could be expected, all the forecasts start with the assumption that a rebound in demand for oil will begin shortly.

The most alarming of the reports came from Macquarie which sees global production capacity topping out at 89.6 million b/d during this year, spare capacity being wiped out by 2012, and world supply peaking in 2014 at 89.1 million b/d. [Macquarie turned down a request by ASPO-USA for an interview in London last week].

There is little new in these reports that has not been known by the peak oil community for some time, except that the imminence of the problem is starting to gravitate to a wider circle of organizations that are willing to talk about it.

More questions are starting to arise about the damage that $70 to $80 oil could do to economic recovery. Although these prices seem cheap in comparison with last summer, historical analysis suggests we are back close to a price point that has triggered economic setbacks in the past.

Quote of the Week

“Our medium-term global oil balance does not balance post 2013…(Oil near $150) would very soon create another set of global economic drivers which would spell much lower demand in the future…In the very long term we can see demand for oil falling quite substantially.” — Iain Reid, a senior oil analyst at Macquarie Bank


  • Nigeria depends on oil for more than 90 percent of its export revenue and more than 80% of its government revenue. According to government figures, this year attacks on oil installations have reduced the nation’s output to about 1.7 million barrels a day, from about 2.6 million in 2005. Some experts believe the actual figure is much lower. (9/19, #4)
  • Nigerian militants announced they will extend a cease-fire by one month, holding off on attacks on oil installations and kidnapping foreigners, but warned that the government must address the group’s grievances. (9/17, #10)
  • In Azerbaijan, the consortium led by BP that operates the Azeri-Chirag-Guneshli block in the Caspian Sea, produced 1.01 million b/d in the first eight months of the year, up 8.0% over last year. (9/18, #5)
  • Colombia’s crude oil production likely will rise to 700,000 b/d by the end of the year, the CEO of state-controlled oil company Ecopetrol said Monday. As of July, crude oil output rose to an average 657,000 b/d from 588,000 b/d one year earlier. (9/15, #11)
  • Libya plans to invest 12.1 billion dinars ($9.92 billion) in the development of 24 wells in fields it calls “technically, financially, and economically proven.” The investment will be undertaken by Libya’s state-owned National Oil Corp (NOC), its subsidiaries, and current foreign partners. (9/17, #8)
  • Venezuela’s PDVSa and the Consorcio Nacional Petrolero, a joint venture of five Russian oil companies, signed an agreement to develop the Junin 6 heavy crude block. The companies expect to produce 400,000 to 450,000 barrels per day. (9/14, #9)
  • Venezuelan President Chavez said China will invest $16 billion to boost oil production in the country, as part of a strategy to reduce dependence on the US and strengthen oil ties with other nations. (9/17, #11)
  • The good news is that BP just found a massive new oil field in the Gulf of Mexico. Tapping the Tiber (will be) a phenomenal technological feat. So what’s the bad news? That BP had to go to such extreme lengths to find new oil shows how difficult it is to replace fields being sucked dry. (9/14, #16)
  • Total said their oilfield decline rate now is projected at 5 percent a year, faster than a previous estimate made in February of 4 percent. However, they expect new production coming on stream next year to fill the gap. Spending plans for this year are $18 billion. (9/16, #18)v 
  • The Mexican government has proposed hiking income and consumption taxes in 2010 to offset lower revenues from crude exports as output from Mexico’s state-run oil industry is expected to remain weak. (9/16, #10)
  • Russia’s near 50 percent oil production increase since the year 2000 took a lot of heavy lifting. And it’s concerning that this very fast growth rate has now topped out…North American production is in decline. As the price of oil went from $31.08 in 2003 to the 2008 average of $99.67, North American crude oil production lost over a million b/d. (9/14, #4)
  • BHP Billington remains uncertain about short-term demand for commodities because of the lingering impact of the global financial crisis. But it is in no doubt about the longer term, predicting looming global shortages in energy and copper as the industrialization and urbanization of China and India pick up pace. (9/17, #11)
  • The rising cost of gasoline pushed overall US consumer prices higher in August even as prices for most other goods and services remained in check, the government reported on Wednesday. (9/17, #15)
  • When oil was trading at around $40 a barrel last December, Russia embarked on a charm offensive towards OPEC. It pledged to go along with the cartel’s plans to cut oil production with a view to shoring up prices. Less than a year later, Russia has instead supplanted Saudi Arabia as the world’s top oil exporter and is selling all the oil it can to take advantage of prices at $70 a barrel. OPEC members understandably aren’t amused. (9/15, #23)
  • The four interrelated draft bills aimed at modernizing Iraq’s oil sector will likely continue their three-year limbo until after the January national elections, when a new government is formed and a new Parliament seated. (9/16, #7)
  • Pakistani police say they thwarted an attack on an oil terminal in the southern city of Karachi and are investigating whether it was carried out by Taliban militants. (9/15, #6)
  • Repsol, the Spanish oil company that announced one of the world’s largest natural-gas discoveries in Venezuela last week, said the field will take as many as five years to be developed. The find is apparently twice as large as previously expected. (9/15, #10)
  • Europe faces the risk of another gas crisis this winter, a senior International Energy Agency official said, adding however that the danger should not be exaggerated.(9/17, #19)
  • Total SA’s Victoria, considered Norway’s biggest undeveloped natural gas find, may hold less fuel than originally estimated, possibly delaying development of areas in the Norwegian Sea, the Petroleum Directorate said. (9/17, #20)
  • PetroChina may double natural gas supplies to Beijing in six years as the Chinese capital city increases use of the fuel to cut pollution and boost energy efficiency. (9/16, #12)
  • Depressed natural gas prices could stymie new wind farms and bolster efforts to expand the use of the fuel – at least until policymakers mandate a wider role for renewable energy sources in power generation. (9/16, #20)
  • The Gorgon liquefied natural gas project in Western Australia state will come with a US $37.1 billion price tag, operator Chevron Corp. said after its partners Exxon Mobil and Royal Dutch Shell signed off on the development as expected. Initial work will begin immediately and the team aims to ship first gas by 2014. LNG sales to China, India and Japan in its first 20 years are projected at $258 billion. (9/15, #15, #16)
  • The US natural gas drilling rig count has gained in eight of the last nine weeks but is still down sharply since peaking above 1,600 in September last year, standing at 884 rigs, or 56 percent, below the same week last year. (9/19, #10)
  • The total adverse economic impact on Texas alone from the Obama administration’s proposed oil and gas changes would be about $20 billion over the next 4 years, a study by the Texas Alliance of Energy Producers said. (9/15, #21)
  • Global banks are engaged in a hiring boom for commodity traders as they add staff to benefit from surging metals and energy prices, offering $1 million packages for top employees. (9/14, #3)
  • Japan Airlines is prepared to undergo its largest-ever downsizing, cutting up to 6,800 jobs and many of its routes. (9/15, #19)
  • IHS Global Insight projects Chrysler’s September sales will fall 30 percent from September 2008, compared with a 19 percent slide industry wide. Meanwhile, Toyota, which also has low inventories, is expected to see US sales drop 15%. (9/15, #22)
  • Today’s solar cells lose much of the energy in light to heat. Now researchers at Cornell University have made a photovoltaic cell out of a single carbon nanotube that can take advantage of more of the energy in light than conventional photovoltaics. (9/15, #26)
  • Iraq’s parliament held an initial discussion yesterday of a bill that would impose a 35 percent income tax on foreign oil and gas firms working in Iraq. (9/14, #5)
  • The Chinese government’s investment arm is in talks on taking a minority stake in Virginia-based power-plant developer AES Corp. (9/14, #11)
  • China’s economy will be able to achieve the 8 percent GDP growth this year as set by the central government, although there are still difficulties ahead, a senior economist said Saturday. (9/19, #6)
  • A new study, “Estimating US Government Subsidies to Energy Sources: 2002-2008”, found that fossil fuels benefited from approximately $72 billion over the seven-year period, while subsidies for renewable fuels totaled $29 billion. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol (9/19, #11) [Editor’s note: no mention of subsidies per mmBtu supplied, which might be useful.]
  • Just before the start of the Frankfurt Auto Show, Toyota announced that after three years of secretly testing Priuses with lithium-ion batteries, it has reached the conclusion that it remained to be convinced that they made sense in terms of durability and cost, both inter-related. (9/17, #24)
  • Company costs and consumer gas and electric prices will increase if Congress imposes higher capital and margin requirements on hedging as part of legislation meant to rein in over-the-counter derivatives, industry leaders said. (9/18, #8)
  • Algae for fuel can be harvested at greater yields than many other potential biofuel crops. Algae is being eyed because it can thrive in difficult environments such as salty or polluted water or in the desert, freeing up valuable agricultural spacer. Algae-generated oil currently costs $20 – $30 a gallon to produce, with some estimates soaring to $60. Conventional gasoline costs less than $5 a gallon. (9/18, #14)
  • Offshore wind may provide as much as 17 percent of European Union electricity demand by 2030, surging from almost nothing now as the bloc promotes renewable energy, an industry group said. (9/21, #18)
  • A final proposal for new US fuel economy standards was unveiled in a joint announcement by the Department of Transportation and the Environmental Protection Agency. The regulation requires all passenger cars and light trucks sold in the United States to get an overall average of 35.5 miles per gallon by model year 2016. (9/16, #13)
  • Commentary: Mission Critical: Can Shale Gas Save the World?

    by Randy Udall

    In late August the Vancouver Sun ran an article on the bullish prospects for Canadian shale gas. The piece began this way: “What energy crisis? Despite what you may be hearing about a global peak in oil production, waning reserves, and $100-plus oil prices, North America is suddenly awash in fossil fuel.”

    The most arresting quote came from Mike Graham of EnCana, a Canadian company that holds dominant positions in British Columbia’s Montney and Horn River plays. “Natural gas will displace coal. It will displace oil. There is no reason North America shouldn’t be energy self-sufficient if we can displace a lot of the oil with natural gas.”

    Are we all of a sudden “awash in fossil fuel?” On the road to “energy self-sufficiency?”

    You may have your doubts, but when talking with key gas industry insiders, it’s clear they believe shale gas has changed the game. (We’ll explore the topic in depth at the upcoming ASPO conference in Denver, October 11-13th. To register: http://www.aspo-usa.com/2009denver/ )

    For example, Aubrey McClendon, CEO of Chesapeake Energy, believes the Marcellus shale, which underlies Appalachia, holds as much gas-in-place as the U.S. has used in its entire history. Production from the Marcellus is still negligible, and not all of that gas is recoverable, but the belief that America’s gas future is much brighter than we thought a few years ago is beginning to take root.

    Ignoring the ubiquitous hype, let’s presuppose for a minute that increased domestic drilling, combined with large hikes in LNG imports, could lead to big increases in U.S. gas supply. What would be the highest and best use of that new gas?

    To reduce the trade deficit and lessen U.S. dependence on foreign oil, you could launch an effort to use compressed natural gas in vehicles. (After decades of half-hearted efforts, there are still way fewer than one million CNG vehicles on American roads, out of a fleet nearing 250 million.) If the goal is to save money and enhance national security, this would be the smartest strategy.

    But if the goal is to save carbon, you would use the natural gas to displace coal in the electric sector. This idea seems to be gaining traction. For example, in July Colorado governor Bill Ritter addressed hundreds of natural gas executives at a conference in Denver. A year ago Ritter was in the midst of a bruising battle with the industry, as he championed aggressive new standards for drilling and wildlife protection. Now, facing a tough re-election challenge, he struck a conciliatory note.

    “Natural gas is a vital part of the new energy economy – not a bridge fuel, not a transition fuel, but a mission-critical fuel,” the Governor proclaimed. “We can’t begin to address climate change in a meaningful way without using more natural gas.”

    In recent months clean energy advocate Robert F. Kennedy, Jr. and former Colorado Senator Tim Wirth have echoed similar sentiments. “Climate disruption is real,” Wirth told the Denver conference. “We are in very deep trouble, the edge of catastrophe. The gas industry must play a major role in saving the world.”

    In Colorado, as in China, the question is what to do about coal. Each day 10,000 hopper cars heaped with coal – enough to fill a train 110 miles long – trundle out of the Rockies, bound for power plants as distant as Florida. (One insatiable coal plant near Atlanta owns 35 complete train sets, which trundle incessantly back and forth to Wyoming. That’s necessary since a trainload takes five days to get there, and is burned within eight hours.)

    Ritter is one of many governors who have called for a 20 percent reduction in greenhouse emissions by 2020. This is a very tall order, in no small part because his state may add one million people by then. Population is rarely broached in climate discussions, which is unfortunate because growth is a big deal. Reducing emissions while people are increasing is like running down an up escalator. To hit Ritter’s target, all growth in demand would need to be met through conservation and a multi-billion investment in carbon-free wind, solar, or nuclear. Simultaneously, you’d have to retire nearly one-half of Colorado’s coal plants, and somehow replace their output.

    Could conservation fill the entire gap? That’s unlikely. The potential for energy saving is enormous but getting it to happen on such a large scale in such a short time would be difficult. Efficiency may be the new apple pie, but the inconvenient truth is that the typical household is using 10 percent more electricity than it did a decade ago, due to the proliferation of air conditioning, plasma TVs, and other gadgets. That leaves burning more natural gas, a lot more, nearly twice as much as the state burns for electricity now.

    The politics of fuel switching are difficult, because it would raise electric rates and because coal’s markup rivals that of Fiji Water. Each year, the nation’s utilities spin $40 billion worth of coal into $160 billion of electricity. Thus, although the average coal plant is nearly 40 years-old, there’s no incentive to retire it, even though it produces three times more carbon dioxide than a modern gas turbine. If the nation was really serious about addressing climate change, the “cash for clunkers” program would have targeted those ancient coal plants, not F150s.

    Does Colorado produce enough natural gas to support such a strategy? Yes, plenty. One-fifth of the state’s current exports would suffice. The math is much more difficult at the national level.

    If the goal was to displace half the coal now burned in the power sector, the U.S. would have to increase its annual gas consumption from roughly 20 trillion cubic feet to 28 trillion cubic feet. That’s a big lift, since U.S. gas production peaked 35 years ago at 21.7 trillion cubic feet, and is today 5 percent lower.

    Right now, the Rockies gas industry is suffering through its worst year in recent history. Due to the recession, commodity prices have cratered. Not a single coalbed methane well was drilled in Wyoming’s Powder River Basin in June, welcome news to local environmental groups.

    For the next year or two, the nation is likely to indeed remain awash in gas. But if the country were to embrace fuel switching, as it may need to do to reduce greenhouse gas emissions quickly, the glut would disappear and boatloads more LNG and dramatic increases in drilling would be needed.

    Indeed, to displace half the coal we now use with gas, we’d need to complete 30,000 to 50,000 new wells a year for decades to come. If that’s our strategy for averting climate disaster, then we’ll need to put somebody like Sarah Palin in charge of drilling.