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1. Oil and the Global Economy

After undergoing a $4 bounce last week occasioned by the leak in the Enbridge oil pipe outside of Chicago, prices fell back to the vicinity of $74 a barrel where they have been trading since mid-August. Pessimism over future economic growth continues to dominate the markets despite signs that demand from China may be reviving after a dip in August. Several Federal Reserve reports showed the US economy in decline and consumer confidence slipped significantly.

In general it was a quiet week. Hurricane Karl forced the closure of Mexico’s export terminals, but had little effect on the production platforms in the Bay of Campeche. Gasoline shipments to the US from Europe are dropping as the Europe/US price differential closes and the US stockpiles remain well above normal.

BP’s Macondo well 252 is now “effectively” sealed, although the government may insist on more plugs. Attention has shifted to the 400 lawsuits filed by numerous entities seeking to collect damages from BP and its partners, and contractors.

The World Petroleum Congress meeting in Montreal and other economic meetings in New York and China were told that global demand for energy (mostly coal and oil) will increase by 40 percent in the next 20 years. To meet this demand will require an investment of $7 trillion or $350 billion each year to find and develop new sources of energy. Part of the industry’s pitch is that the US must lower taxes on oil companies to keep them competitive with state-owned Chinese firms.

The recriminations over US and EU sanctions against firms that sell gasoline to Iran continue, with Tehran claiming they can get all the gasoline they need. Some evidence suggests that Iran’s gasoline imports are falling and the Tehran is paying a premium to acquire the supplies it needs.

2. Economic recovery?

Pessimism is increasing over the prospects for rapid economic recovery in the US and the OECD. Last week a story in the Wall Street Journal, which normally is among the most optimistic of prognosticators, carried a decidedly pessimistic message. Although the economic recovery that began last year is still “on track”, a full recovery is likely to be some time away. Noting that government stimulus spending and the need to rebuild inventories is over, the Journal sees nothing to boost growth and increase employment in the immediate future.

The Journal foresees either a protracted period of feeble growth, another down leg to the recession, or a surprise economic surge fueled by the $1.8 billion in cash held by US companies. The Journal dismisses the surprise surge option as unlikely, and is ambivalent between feeble growth and more contraction. The paper points out that prolonged economic weakness could develop in a vicious cycle in which rising unemployment leads to lower consumer spending and still more job cuts. The political impasse in Washington is seen as adding to the problem of increasing consumer confidence and sending shoppers to the malls.

While recurrence of economic shocks is seen as likely, these are seen as financial in nature such as the eurozone’s ongoing public debt crisis and the EU’s austerity programs. Nowhere in the discussion of our economic future is there any mention of energy costs. With prices holding between $70 and $85 a barrel for the past 18 months, oil prices have moved off most radar screens as a topic. Despite steady increases in Asian and oil producer domestic consumption and little to no growth, there seems to be little concern.

The recent Journal article is more evidence that the notion of a recovery in the next quarter or so is fading and attention is turning to a recovery two or three years from now. Should US and OECD oil consumption hold relative steady no matter what happens to GDP and employment, it seems inevitable that higher oil prices and supply constraints will become involved with the recovery.

3. Taxes, Regulations and Moratoria

Now that the Macondo well is safely sealed and the legal disputes over reparations are lost in a legal maze, the controversial issues remaining from the disaster are the government’s moratorium on deep water drilling, drilling in the Arctic, and the nature and scope of the new government offshore drilling regulations. Last week, the first of these new regulations surfaced when the Interior Department announced that some 3,000 inactive wells in the Gulf will have to be permanently sealed and some 650 unused production platforms will have to be dismantled. Regulations on these subjects have been in place for years, but were rarely enforced.

Litigation over the six-month drilling moratorium continued last week. After a Federal judge ordered an end to the moratorium on June 22nd, the Federal government issued a new ban on July 12th. For now the new moratorium is wrapped up in legal wrangling and seems unlikely to be overturned before it expires. The Obama administration says that, contrary to industry claims, only some 2,000 jobs have been lost as a result of the ban. Drillers have retained their skilled offshore workers and much of the oil service industry was kept busy dealing with the leaking well.

Michael Bromwich, the head of the agency that regulates offshore drilling, said it is “highly unlikely” that the administration would extend its moratorium on deep-water oil drilling beyond its scheduled expiration date of Nov. 30. Bromwich said his agency is planning to roll out new offshore drilling regulations by the end of this month. He said the industry should expect additional regulations as investigations by the Coast Guard and his agency and by a presidential panel uncover additional information.

The administration’s decision to repeal tax deductions and credits for oil and gas producers has set off a new round of recriminations with a new study claiming that 154,000 jobs will be lost in 2011 as result of the repeal. With the mid-term elections drawing near, none of this seems likely to be settled in the near term. The only thing that seems relatively certain is that it will take longer and cost much more to drill new wells in the Gulf and possibly elsewhere than before the Macondo disaster.

4. Brazil in the news

Last week Brasilia announced that an independent certification firm has verified that the deep water Libra field may contain 8 billion barrels of oil, rivaling the nearby Tupi field which is estimated to hold 5- 8 billion barrels. A development well currently being drilled in the Libra field is to be completed in 30 days. Licensing of exploration rights could begin around mid-2011 after the Congress approves a bill making Brazil’s state-controlled oil company, Petrobras, the sole operator of all new blocks in the pre-salt.

In sum, the Brazilians are saying that the pre-salt offshore fields may contain 50 billion barrels of oil. Petrobras has always been blasé about its ability to produce large amounts of oil from Brazil’s deep water pre-salt formations. Recent reports from the Gulf of Mexico suggest that extracting oil from as much as 3,000 meters below the surface may not be as easy or as productive as the company has been saying.

A floating production vessel is on its way to the Tupi field and is to start pilot production next month. The Brazilians are hoping to produce 100,000 b/d from the field by the end of next year, and 5 million b/d by 2020. Troubles with maintaining production from earlier test wells suggest that this may be difficult to accomplish.

In the meantime Petrobras is planning to sell $79 billion worth of stock to finance its deep water drilling operations. The offer, however, includes some $42 billion in shares that will be given to the government in exchange for development rights. Ultimately the country will need some $224 billion to carry out its ambitious development programs. Beijing, as could be expected, is already well into the act, loaning Petrobras some $10 billion this year.

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

  • The Obama administration is set to notify Congress of plans to offer advanced aircraft to Saudi Arabia worth up to $60 billion. The administration plans to tout the package as a major job creator, supporting at least 75,000 jobs, and sees the sale to Riyadh as part of a broader policy aimed at shoring up Arab allies against Iran. (9/13, #12)
  • Tullow Oil said the Owo prospect in Ghana is a “major new oil field.” Owo is the second major oil discovery Tullow has made off Ghana’s shores, potentially adding one billion barrels of oil equivalent to the resource estimate for the area. (9/13, #14)
  • China National Petroleum Corp. started building the Chinese section of oil and gas pipelines linking China to Myanmar. The oil pipeline is designed to receive 22 million metric tons of crude a year and the gas link will be able to pump 12 billion cubic meters annually. The Chinese side of the project will be completed in 2013. (9/13, #20)
  • The governor of Wyoming told the US EPA that state law forbids regulation of greenhouse gases. The EPA wants 13 states to toughen up their emissions rules by Jan. 2011 and proposes to regulate emissions themselves for states that miss the deadline. Wyoming isn’t among the 13 states. (9/13, #27)
  • Maryland Congressman, Roscoe Bartlett, 84, is seeking a 10th term. Bartlett describes himself as a conservative favoring limited government, spending and taxation and considers his specialties: ethical stem-cell research, peak oil production and electromagnetic pulse. Bartlett has spoken for years about peak oil. (9/13, #31)
  • French energy group Total wants to sell up to 500 UK petrol stations and Russia’s Gazprom Neft is interested in buying the assets. (9/13, #35)
  • Although Venezuelan President Chavez is settling arbitration cases and paying off debts for nationalized companies, a string of major incidents, an airline crash and several oil refinery fires involving government-run companies, occurred this week. Critics cite underinvestment and poor management which has created dangerous conditions, but Chavez suggested they may be part of a plan to destabilize the country ahead of congressional elections. (9/14, #7 and #8)
  • China’s demand for raw materials has added a fivefold increase in direct investment in Brazil, from $73 million at this time last year to $367 million this year. China Petrochemical Corp. and Cnooc may offer at least $7 billion for Brazilian oil assets and a stake in OGX Petroleo & Gas Participacoes SA of Rio de Janeiro. Chinese oil companies are also interested in the Brazilian assets of Spanish oil firm Repsol. 9/14, #9, 9/15, #11)
  • EPA officials said they plan to widen their investigation into hydraulic fracturing, or “fracking”, looking beyond the chemicals used to evaluate water quality and the impact of the heavy volume of water “fracking” requires. They said they also want to study the way gas wells are constructed and the risks that wells could leak gas or chemicals into underground water. (9/14, #14)
  • The San Francisco gas pipe explosion along with an oil pipeline leak near Chicago is likely to draw regulators’ attention to fuel transportation networks, some of which have been in service more than four decades. The US is crisscrossed with more than 2.5 million miles of fuel pipelines and U.S. regulators may now step up inspections and increase the industry’s maintenance costs. (9/14, #16)
  • The EU could produce 24 billion gallons of next-generation ethanol in 2020, or about 65 percent of predicted gasoline consumption, Bloomberg New Energy Finance said in a study. At least 100 refineries a year could be built in the region from 2013. (9/14, #17)
  • OPEC doesn’t plan to change output quotas at its next meeting amid the recovery of world oil demand after the recession. OPEC President Pastor said. “The world economy is growing, it’s exiting the recession and as the economy grows, that will go hand in hand with robust growth in oil prices.” (9/15, #5)
  • A recent study estimates coal production rates will decline after 2011, reaching 1990 levels by 2037 and that future mines won’t be able to reverse the trend. Current estimates of coal don’t reflect the reality that hard-to-get, lower quality coal reserves may never be harvested because it is not economically or environmentally feasible. (9/15, #7)
  • The Senate Appropriations Committee had planned to vote Tuesday on a proposal to fund offshore drilling regulation and the operations of the EPA. But that vote was canceled and Republicans said Democrats may have balked because of the possibility that Sen. Murkowski would offer an amendment to prohibit the EPA from spending any money to regulate greenhouse gases from power plants, factories and other major emitters. (9/15, #14)
  • Russian oil output grew by around 1.5 percent in 2009 to a post-Soviet high of 494 million tons and a more moderate ruble appreciation will offset the negative impact from tax hikes in the domestic oil industry. (9/15, #15)
  • For the year-to-date period (January-August), the Earth is enduring its warmest year since records began. The warmest anomalies were seen in Eastern Europe, the eastern half of the contiguous US, parts of eastern Canada and eastern Asia. Western Russia had a phenomenally warm summer where readings consistently reached above 100 degrees. (9/16, #4)
  • Abu Dhabi is bankrolling infrastructure projects in the easternmost emirate, Fujairah, to gain direct access to the Indian Ocean. The country is investing in an oil-storage terminal and a $3.3 billion pipeline and is building the country’s biggest power and water treatment plants as well as a facility to store imported grain. (9/16, #6)
  • BP is facing mounting opposition to its strategy of stalling the lawsuits of some Gulf oil spill claimants by forcing them to apply to a $20 billion compensation fund first. Plaintiffs’ lawyers allege that BP is using pollution legislation to “confuse, delay and frustrate claimants.” (9/16, #14)
  • Shell announced the successful start of production of a 100,000 b/d expansion of its oil sands operations in Canada. The new mine will combine with existing production from the Muskeg River Mine to feed the Scotford Upgrader which processes the oil sands bitumen. The upgrader expansion will be online early next year. (9/16, #16)
  • The Medgaz gas pipeline between Algeria and Spain is expected to operate at full capacity in the fourth quarter after all tests have been carried out and authorities have given final approval. The pipeline has an annual capacity of 8 billion cubic meters. (9/16, #18)
  • China may not meet an energy efficiency target set for this year because its efforts to revive its economy in the wake of a global slump have set back several years of progress on reducing its energy usage. China is focused on clean energy innovation to reduce its greenhouse emissions, but a booming economy has made this goal uncertain. (9/17, #8)
  • Oil refiners are stepping up their campaign to push back a landmark California environmental law by backing Proposition 23, which would suspend the 2006 law that requires emissions of greenhouse gases in the state to be reduced to 1990 levels by 2020.
  • Refiners Valero Energy Corp. and Tesoro Corp. have given about $4 million and $1.5 million so far in support and an oil-refining subsidiary of Koch Industries Inc. contributed $1 million. (9/17, #12)
  • The US and China are working on a memorandum of understanding to share energy data and are likely to reach an agreement soon. The “very broad” accord would cover a spectrum of energy information including supply and consumption levels. The Chinese data would be released on a government-to-government basis, not publicly, though the EIA could then use it in its long- and short-term forecasts. (9/18, #2)
  • Russia’s Lukoil awarded a mine clearing contract at Iraq’s West Qurna oil field to G4S Risk Management. Lukoil along with Statoil won the right to develop the 13-billion barrel West Qurna at a licensing auction held in December last year. (9/18, #4)
  • Pakistan is bracing for a major shortage of petroleum products as the Pakistan State Oil company moves closer to a financial emergency. PSO is on the verge of defaulting on its international payments as $190 million in debt is due to foreign suppliers. Islamabad was warned that PSO is unable to make its payments to refineries and exhausted its financing for future supplies. (9/18, #6)
  • Fuel scarcity in Uganda and the region continues. Most stations have completely run out of petroleum. The situation is not any better in neighboring Kenya. Repairs on the Mombasa fuel jetty, which started early this month, thereby causing fuel shortage, are expected to be complete by the end of the week. (9/18, #7)
  • The plaintiffs suing Chevron over oil contamination in Ecuador‘s jungle have raised their estimate of damages to a range of $40 – $90 billion. A Chevron spokesman rejected the new estimate as wildly distorted. The suit stems from operations in Ecuador by Texaco from 1972-90. (9/18, #10)
  • British explorer Rockhopper said it believed its controversial oil discovery offshore the Falklands Islands will be commercially viable. A test at the Sea Lion 1 well produced sustained rates of over 2,000 barrels of oil per day, in line with its hopes. (9/18, #13)
  • Russia will work more closely with the OPEC, Prime Minister Putin said. OPEC ministers have voiced exasperation with Russia as it has pumped to full capacity, while leaving the work of supporting oil prices by reducing output to members of OPEC. (9/18, #20)
  • A Norwegian oil discovery announced by Sweden’s Lundin Petroleum may be the biggest one off Norway in years. The geology around Lundin’s oil strike west of Norway indicated there was lots more oil in nearby acreage, where several oil companies have exploration licenses. (9/18, #22)