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The ASPO-USA 2010 Peak Oil Conference

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1. Oil and the Global Economy

Early last week, oil prices fell by nearly $4 a barrel, but recovered later in the week to close at $74.60 on “better than expected” news. The “spinning” of economic stories to give the impression that an economic recovery is underway continues in high-gear, leaving many believing that the underlying economic situation is better than the numbers suggest. Friday’s US jobs report showed increasing unemployment in the US, while the headlines spoke of better-than-expected gains in private hiring. Another report on Friday showed that the US’s non-manufacturing business, which covers about 90 percent of the economy, continues to contract.

In general, oil prices continue to move with the equity and currency markets, which in turn are driven by the outlook for economic recovery. Oil prices are held down by large inventories in the US and by data showing that the US economy continues to slow. Upward pressure on prices comes from China where manufacturing rebounded in August, suggesting that increased demand for oil will follow soon. Some analysts are saying that Chinese demand, coupled with little to no growth in global oil production, is sufficient to keep a $70 floor under oil prices. Some technical analysts, however, continue to say that their charts show that $60 oil is on the way.

OPEC production is reported as falling to a seven-month low in August led by Iraq and Nigeria where pipeline bombings slowed exports. Flow through Iraq’s northern export pipeline to Turkey was halted three times last month due to technical problems and insurgent attacks. This pipeline, which can move 400,000 b/d, is particularly vulnerable, as there are insurgent groups on both sides of the Iraqi-Turkish border that find the pipeline a tempting target for expressing their political grievances.

The head of the IEA, Nobuo Tanaka, told reporters on Friday that while we have seen an increase in non-OPEC oil production from Russia, the US, and China during the past year, this will be short-lived, and dependence on OPEC during the next 5 to 10 years will increase as non-OPEC production declines. The IEA is still expecting a 1.8 million b/d year on year increase in global demand during 2010.

2. Food

The damage caused by this summer’s droughts and floods is starting to be felt as increasing food prices. The UN reports that global food costs increased by 5 percent in August mostly due to Russia’s ban on grain exports. Moscow announced a 12 month extension of its export ban on Thursday. Last week the first food riots of the year took place in Mozambique after the government announced price increases.

While the US was expected to have a bumper grain crop that could make up for the lack of Russian exports, a new private report issued last week suggests that the US corn harvest could be 4 percent lower than the latest USDA estimate due to a soggy summer in the US and high nighttime temperatures. The extension of Moscow’s export ban and the new US yield estimate combined to send grain futures higher last week.

A new study by Chinese scientists says that China’s climate “has clearly warmed”, creating hotspots in Inner Mongolia and melting the glaciers that are vital to feed China’s rivers. This year some 230 million Chinese were affected by floods and 15 million had to be evacuated from their homes. China has only 7 percent of the world’s arable land to feed 20 percent of the world’s population. While water is abundant in southern China, it is scarce in the north. Overall, China has only 25 percent of the world’s average per capita water supply.

While there are many unknowns, the study concludes that in the worst case, China’s food production could decline on the order of 20 percent in coming years. Last week a senior Chinese legislator gave a speech to a G20 meeting in Ottawa warning that the global food situation is grave for both the developed and undeveloped world. He called for global cooperation in the interest of human survival and development.

All this will clearly intensify the debate over using food grains to make motor fuel.

3. The Moratorium

BP is closing in on sealing the Macondo well. A new blowout preventer has been installed and preparations are underway to complete the final seal by pumping mud and cement down the relief well later this week. The faulty blowout preventer has been brought to the surface to determine just why it failed. An internal BP investigation of the explosion has concluded that BP’s onsite managers misread the results of test data resulting in actions that led to the explosion. BP reported that the explosion and spill has now cost the company $8 billion. BP is also warning Congress that if it should pass legislation barring the firm from drilling in the Gulf, it will never earn enough money to pay off all the liabilities resulting from the spill.

Attention is now turning to the government’s continuing moratorium on deep water drilling, which is scheduled to remain in place for another three months despite a drumbeat of protests from the oil industry and politicians whose constituents are affected by the ban.

The government’s case was bolstered last week by an explosion and fire on another oil rig operating in the Gulf. There were no injuries to the 13 man crew, and automated equipment shut down the flow from the seven producing wells so there was no leakage into the Gulf. In another year the incident would have gone unreported as just another of the scores of fires on offshore platforms that happen each year. In the wake of the BP explosion, however, the incident led to renewed calls from Congress and environmental groups to continue the drilling ban until satisfactory safety protocols are in place.

Last week federal regulators approved the first new Gulf oil well since the President lifted the ban on drilling in shallow water the week before last. The partial lifting of the ban was criticized by environmentalists, and by the petroleum industry that is demanding a complete removal of the moratorium. The industry talks of “tens of thousands” of job losses and says that the ban has stopped work on 33 exploratory wells. So far, however, it appears that only one drilling rig has actually left the Gulf and that most of the skilled offshore personnel remain on the payroll while the drilling companies wait for the lifting of the ban. As experienced oil workers are hard to find these days, it is doubtful that well-off drilling firms would fire large numbers of their best people during a temporary moratorium.

4. The Bundeswehr on peak oil

Last week a draft study of the impact of peak oil on the global economy prepared by an in-house German army think tank leaked to the Internet. The report, which has not yet (if ever) been endorsed by the German government, says that world oil production may peak as early as 2010 and impact Germany’s security situation 15 to 30 years later. However, the report lays out a number of scenarios that are more far-reaching and alarmist than is to be expected from a government study.

The report foresees the growing political strength of oil exporters, particularly Russia, and politics replacing free markets in oil exports. Shortages of petroleum will lead to the failure of many

industries and a shift into planned economies from market capitalism. There will be a global chain reaction that will lead to crises of political legitimacy and a rise in extremist and ideological alternatives to existing forms of government.

This study follows closely on one formally released by the US Joint Forces Command concluding that by 2012 the global surplus of oil production capacity could disappear and that a shortfall in global oil production could reach 10 million b/d by 2015.

While the German study predicts systemic collapse in 15 or 30 years, the US report predicts some sort of problems 2-5 years from now without going into the implications of such a shortfall.

It is interesting that the uniformed military, who don’t have to face voters to keep their jobs, and who are sworn to protect their nations from future threats are willing to talk and publish openly about the threat of peak oil than elected officials, the major media, financial, and industrial organizations, all of which fear a public backlash from too much talk about peak oil.

Of the major global powers, so far only the British and perhaps the Chinese seem to be studying the implications of global oil depletion at the ministerial level, albeit mostly in camera. Many other governments likely understand the threat, but are hoping that no serious consequences will erupt during their terms of office.

Quote of the Week

“The China-Pacific pipeline is the most important energy project in Russia since the opening of the gas pipeline to Europe–it means that Russia’s strategic importance to China has increased considerably.”

— Chris Weafer, Chief Strategist, UralSib Financial Corp.

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

  • The departing commander of American forces in Iraq, Gen. Odierno, said a new Iraqi government could still be two months away and warned that a stalemate beyond that could create demands for a new election. This would lead to even greater political turmoil. (8/30, #5)
  • Iraq’s oil minister said Baghdad will consider abiding by OPEC quotas once its crude production increases to at least 4 million b/d in two to three years. The minister also said the agreement Germany’s RWE signed with the Kurdish Regional Government, which included possible future gas supply for the Nabucco pipeline project, is illegal. “The export of crude oil, gas and their derivatives are exclusively under the authority of the Oil Ministry in Baghdad.” (8/30, #6,7)
  • It isn’t primarily Iraq’s violence that deters companies from investing in the country. It is its weak business laws. Seven years after the invasion Iraq largely has been unable to revamp business laws that would help make the country more attractive to investors. Foreign direct investment totaled $1.1 billion in 2009, according to the United Nations July World Investment Report. Neighboring Iran, under a fourth set of UN sanctions, took in three times as much. (9/2, #4)
  • Despite the fact that Iraq is generating almost double the amount of electricity it did immediately before the 2003 invasion, the amount is still woefully inadequate to meet ordinary Iraqis’ needs. Thanks to increasing demand Iraqis get most of their electricity from the generators in the house and the generators on the street and that is all. (8/31, #9)
  • Kazakhstan plans to double its oil export tax next year to $40 a metric ton to raise revenue, according to two state officials. The country began taxing crude exports in May 2008 to raise cash as global credit markets tightened. The export duty, which had been cut to zero in January 2009, was raised to $20 a ton this month for about 40 producers including Chevron’s Tengiz Chevroil venture, the country’s biggest oil exporter. (8/31, #10)
  • Partners in Israel’s offshore Leviathan natural gas field say that new tests reveal the possibility of finding up to 4.2 billion barrels of oil below the underwater gas field in the Mediterranean Sea. Further testing is needed. In June, the partners announced that the Leviathan field contains 16 trillion cubic feet of natural gas. (8/30,#8)
  • Kuwait posted a budget surplus of $22.4 billion in the past fiscal due to strong oil revenues. It is the 11th consecutive year of budget surpluses, which have allowed Kuwait to accumulate $145 billion in public revenues. The emirate’s revenues were $61.5 billion dollars in the fiscal year that ended on March 31(8/30,#9)
  • Chevron will invest $500 million to explore for oil in Turkey‘s Black Sea waters. The agreement calls for Chevron to pay $50 million to Turkiye Petrolleri, a state-owned oil company to share in its exploration license. (8/30, #10)
  • Brazil’s Petrobras will need some $224 billion over the next five years to produce the 9-15 billion barrels of oil which are located in deep water 200 miles off its shore. This is a lot of debt for Petrobras to handle, but so far there is no sign that the Brazilians want to share the risk with the international oil companies. (8/30, #11)
  • Beijing continues to pump money into state-owned companies at the expense of the private sector that led China’s economic boom. The share of industrial production coming from state-owned companies edged up last year. (8/30, #14)
  • Russian Prime Minister Putin opened a pipeline branch to carry Siberian oil to China and hailed Russia’s energy business in China as an important counterweight to its traditional European clients. The Chinese section of Russia-China oil pipeline is scheduled for completion by the end of October. A project manager said 500,000 tons of crude would be pumped through the pipeline in November and a million tons in December. (8/30, #26)
  • A team of researchers from the University of Florida and the biotechnology company Chesapeake-PERL have isolated two enzymes that termites use to break up lignin. Widespread use of such enzymes to break down the lignin at room temperatures could drastically change the economics of producing cellulosic ethanol. (8/30, #30)
  • Shell announced its Nigerian SPDC joint venture was close to completing a new $1.1 billion pipeline to the Bonny export terminal which will have a capacity of 600,000 b/d. The company said the pipeline was part of an ongoing program to keep its facilities well-maintained in the Niger Delta, where decades of oil extraction have left land and water polluted. Shell says 98 percent of the oil spilled from its on-shore operations last year was due to vandalism and theft. (8/31, #11)
  • Chevron has signed an agreement to explore three deep water concessions in Liberia. Work is expected to begin in the fourth quarter. (8/31, #12)
  • Mexico’s state oil company Pemex is increasingly optimistic about the potential of a new cluster of light crude oil fields around its Tsimin discovery and at Xux. Pemex plans to drill additional exploratory wells at the two finds to allow it to reclassify the oil discoveries as proven. If Pemex succeeds in its efforts to reclassify Tsimin and Xux, the two fields would account for more than 10 percent of Mexico’s total proven oil reserves. (8/31, #13)
  • India’s economy grew 8.8 per cent from April to June compared with the same period last year, driven by a strong pick-up in manufacturing, trade, transport and services. India’s economy expanded 7.4 per cent last year despite a severe drought that hit farm production and caused food prices to rocket. New Delhi is forecasting that growth will exceed 8.5 per cent in the current financial year and that inflation will drop sharply to more manageable levels. (8/31, #16)
  • A process and related technology that research at the US Department of Energy’s National Energy Technology Laboratory (NETL) helped to develop could enhance the use of the world’s vast methane hydrate resources. A method for rapidly forming methane hydrates, along with concurrent development of specialized nozzles to facilitate the process, are breakthroughs that could lead to significant reductions in gas storage and transportation costs. (8/31, #22)
  • Mexico’s Pemex says its oil production declined slightly in August to 2.55 million b/d from July’s 2.57 million b/d. Output at Cantarell, which once produced 2 million b/d, slipped to 495,000 barrels a day in August from 497,000 barrels in July. Pemex plans to invest $269 billion by 2019 to increase production, the company’s chief executive officer said. (9/1 #7,8)
  • Ecuador and the China Development Bank Corp. signed a $1 billion loan agreement. The loan will have a fixed interest rate of 6 percent and will have two tranches, one for $800 million and another for $200 million. It will finance Ecuador’s investment program for infrastructure and other budgetary outlays for the 2010-11 period. (9/1, #9)
  • Coal India, the world’s largest producer of the fuel, said it may be forced to set up power plants to use coal that’s piling up because there aren’t enough railway wagons to carry supplies to utilities. More than half of India’s electricity generation is coal fired and imports to meet a shortfall in local production have fallen short of target as cargoes are held up at ports awaiting transportation to plants. (9/1, #13)
  • A group of coal and power companies said it has decided to stick with a government-backed project to cut greenhouse-gas emissions from a coal-fired power plant despite a significant change in plan. Earlier this month, the DOE awarded $1 billion to the project, as part of a broad initiative to combat climate change. The department, however, completely revised the project from an earlier plan. The new project, known as “FutureGen 2.0,” would retrofit a now-shuttered Ameren Corp. (AEE) coal-fired power plant in Meredosia, Ill. (9/1, #17)
  • Petrobras, Latin America’s largest company by market value, agreed to pay the Brazilian government $42.5 billion in new stock for the right to develop 5 billion barrels of offshore oil reserves. The company will pay an average of $8.51 a barrel for the oil according to a regulatory filing. More than half the oil will come from the Franco field in the offshore Santos Basin. Petrobras stock has plunged 26 percent in Sao Paulo this year on concern it would pay more for the oil than it’s worth. (9/2, #8)
  • US Senate Majority Leader Reid said he hoped to pick up Republican votes for a pared-down energy bill after the midterm congressional elections. With Republicans eyeing gains in November 2 elections, Democrats may face fierce campaign opposition on all major initiatives. The modest energy bill that Reid introduced in late July sought to reform oil drilling after the BP crude oil leak. It also included incentives for energy efficiency in homes and alternative vehicles fueled by natural gas and electricity. (9/2, #10)
  • Nissan is taking actual orders for the first next-generation fully electric car from a major automaker, the Leaf. Even though now you can actually pay for one, deliveries won’t start until December. (9/2, #20)
  • China offered a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly in dollars. A central banker said the mountain of cash could face depreciation risks. The Chinese government’s currency reserves, the world’s largest such stockpile at $2.45 trillion, are held roughly in line with what was described as the global average: 65 percent in dollars, 26 percent in euros, 5 percent in pounds and 3 percent in yen. (9/3, #7)
  • Cairn Energy said it has restarted operations on the oil drilling rig it has under contract offshore Greenland following the end of a protest by Greenpeace. Four Greenpeace protesters had attached themselves to the bottom of the rig, halting drilling operations for around 40-hours. They abandoned the protest Thursday due to freezing weather conditions by climbing aboard the rig, where they were arrested. (9/3, #17)
  • The CEO of Toronto Hydro said that if 10 percent of the homes on any given street attempted to recharge an electric car, it would crash the grid. Toronto Hydro, Hydro One and the Ontario Power Authority have pledged a total of $7 million over the next five years to study the issues at Ryerson’s University’s new Centre for Urban Energy. (9/3,#18)
  • Ukraine is willing to give Russia joint control of a pipeline to southeastern Europe in exchange for access to natural gas supplies. The governments are seeking to create the venture between NAK Naftogaz Ukrainy and OAO Gazprom, both of which were once part of the Soviet gas monopoly. The agreement would reduce the price Ukraine pays for Russian gas. (9/4, #14)