Helping America Understand and Adapt to a New Energy Reality

Review December 20, 2010

By on December 20, 2010 in Peak Oil Review

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1. Oil and the Global Economy

There has been very little movement in oil prices for the last two weeks. Since climbing from the low $80s in late November, oil has traded between $87-89 a barrel, closing on Friday at $88.02. In London, Brent crude continues to trade about $4 a barrel higher than in NY, closing Friday at $91.40. The usual factors of the EU’s debt crisis, colder weather, prospects for a US economic recovery, and demand from China continue to motivate the markets. Last week the extension of the US tax cut bill helped a bit on the theory that letting taxes increase would hurt the economy and cut demand.

The weekly US stocks report showed a record drop of nearly 10 million barrels in US crude inventories, although some of this drop may be due to refineries deliberately delaying imports to avoid local inventory taxes along the Gulf Coast. The stocks report also showed that refined products supplied to US consumers climbed in November to 20.2 million b/d, the highest in nearly two years. The American Petroleum Institute issued a report also saying that US demand for petroleum products increased significantly to 20 million b/d and that consumption during the first 11 months of 2010 was up by 2.4 percent to 19.2 million b/d over last year. The API notes that demand for distillates was up 14 percent in November to over 4 million b/d and concludes that these numbers suggest that the US economy is rebounding nicely. As other indicators do not show the US economy rebounding at anywhere near this rate, it suggests that an increased portion of US distillate production may be going to exports.

Much colder than usual weather may be a significant factor in determining oil prices during the next two months. Europe, China, and Japan all reported unusually low temperatures and heavy snows. In London the government has asked its chief scientific advisor to evaluate whether climate change was effecting a permanent change in weather patterns that would require more spending on preparations for winter.

For the next few weeks, the oil markets are likely to be quiet as traders wait out the holidays and the New Year. In January, however, many analysts are talking about oil prices continuing to move upwards. They cite what are thought to be improving economic situations in the US and Germany, combined with continued strong demand from China and India and the lack of any significant increase in world oil production in the immediate future. Despite a pessimistic report from the US Federal Reserve, optimism that the US economy is recovering seems to be at its highest in many months and leading economic indicators suggest there will be a larger demand for oil next year.

2. Iran

On Sunday Tehran announced major cuts in food and gasoline subsidies. The subsidized price which covers the first 60 liters of gasoline purchased each month will increase from 10 cents a liter to 40 cents or roughly $1.60 a gallon. Any gasoline purchased beyond the monthly allocation will cost 70 cents a liter. The monthly allocation of “cheap gas” is also to be cut by 15 percent starting Wednesday. Some of the increase will be offset by direct government payments of around $80 a month into everyone’s personal bank accounts. Later the payments are to be modified according to ability to pay.

The charges for cooking gas are to increase five-fold, and electricity and water three-fold. Three years ago when the government instituted an earlier price increase, rioters took to the streets burning gasoline stations. This time, a heavy police presence around gas stations appears to have been effective in stemming disorder.

The reduction in the size of government subsidies will be seen as one more problem for Tehran which is attempting to cope with UN sanctions and gasoline import restrictions stemming from its nuclear program. A few months back, Tehran with its large oil export revenues and budding friendship with Beijing was thought to be invulnerable to western sanctions. Increasing problems at home are likely to prove a distraction which will make the government less willing to provoke international confrontations.

3. US Natural Gas

Last week the EIA released its Annual Energy Outlook 2011 which contains an estimate that doubles the “technically” recoverable US shale gas resources to 827 trillion cubic feet from the estimate contained in last year’s annual outlook. The 2009 report from the Potential Gas Committee (PGC) spoke of 1,836 trillion cubic feet of “technically” recoverable gas leading many to talk about 100 years of natural gas remaining at the current US consumption rate of 23 trillion cubic feet a year. The shale gas component of the US’s was thought to be about a third of the total US natural gas supply. With the recent reevaluation of the amount of shale gas that could conceivably be recovered, the percentage of shale gas could be substantially higher.

There are of course many unknowns concerning natural gas production and consumption that will need to be resolved in coming decades. Shale gas wells, while highly productive when first opened, seem to have a short life-time as compared to traditional gas wells. The cost of horizontal drilling and fracking the shale is several times more than for a conventional well, leading many to wonder about what natural gas price will be necessary to sustain shale gas production. Possible contamination of ground water with fracking liquids has still to be resolved.

The major issue, however, is what percentage of the “technically” recoverable gas is “commercially” recoverable at a price that is competitive with other forms of energy. Some believe that a close reading of the PGC’s report says that less than one quarter of the technically recoverable gas may be economically recoverable. If this turns out to be true, our 100 years may turn out to be only a few decades, especially if we turn to using more natural gas to power vehicles and generate electricity.

4. China

It was a cold week in China with new reports of low temperatures and snow coming every day. On Wednesday the government announced that some parts of China could face intermittent shortages of coal, oil, natural gas, or electricity for heating during the next two months. As most of China’s coal and oil resources are located in the west and north, far from the major sources of demand along the southeastern coast, should serious shortages develop there would likely be a surge in demand for imported oil and coal in the next two months.

It turns out that for the last few months some Chinese traders have been importing an exotic fuel, “power kerosene”, that can easily be converted into diesel. This fuel is not subject to the heavy tax that is applied to diesel and although 700,000 tons are said to have been imported in the last few months, it does not appear on the distillate import statistics.

Reuters is reporting that stockpiles of gasoline, diesel and kerosene held by China’s top two oil firms grew in November after nine months of steady decline. A combination of refilling company stockpiles, filling newly established strategic stocks, coal and oil supply disruptions during the winter months, and continued rapid economic growth make it likely that strong demand for oil from China will continue well into 2011.

Rapidly growing Chinese coal imports and the suggestion by a top official that China may have to cap its coal production at 3.6 billion tons is starting to gain attention in the mainstream media, even that of The New York Times. This year China is supposed to be producing 3.4 billion tons of coal and in theory has the reserves to keep going at that rate for another 30 years. Given that demand is growing at circa 10 percent a year and that China’s transportation system is already maxed out, it is unlikely that domestic production and transport will be available to supply increasing amounts of coal much longer.

The only ready answer for the Chinese is to import increasingly larger quantities of coal, or if that is not available, oil and natural gas. While more coal could be sent to China from Canada, Australia, Indonesia, the US, and South Africa, there are problems ahead. Some countries such as Australia may have second thoughts about shipping more and more coal to the Chinese while at the same time trying to cut back fossil fuel emissions. Efforts to build large coal export facilities in the northwestern US are likely to run into much local opposition thereby stymieing efforts to export Wyoming and Montana coal to China. India too will be forced to increase its imports if it is to continue growing economically. All this suggests higher coal prices ahead and possibly another factor increasing demand for oil and natural gas.

Quote of the week

“Fuel demand continues to strengthen, a positive sign for the economy.”

– John Felmy, Chief API economist

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

  • Global exploration-and-production spending is forecast to rise 11 percent in 2011 to $490 billion from $442 billion in 2010. The increase will be driven by gains in Latin America, the Middle East/North Africa and Southeast Asia; supermajors, not national companies, are likely to show the largest increases. (12/16, #7)
  • OPEC is breaching its production limits the most since 2004. Excluding Iraq OPEC pumped 26.78 million b/d this year, exceeding the quotas by an average of 1.934 million. Analysts say the crude rally may lead OPEC to raise output next year. (12/13, #6)
  • An excess of supertankers shipping 2 million-barrel cargoes of Middle East crude has cut what owners can charge. Returns from shipping Middle East oil to Asia average $15,562 a day so far this month; the previous worst December was $19,341 in 2001. (12/16, #5)
  • The world’s largest oil companies sold assets at a record pace this year. BP, Shell and ConocoPhillips led 95 sales in 2010 valued at $49.5 billion, the most in at least 12 years. China’s state-controlled oil companies were the biggest buyers. (12/16, #6)
  • BP will sell a portfolio of oil and gas assets in Pakistan to Hong Kong-listed United Energy for $775 million. (12/14, #18)
  • Crude oil in New York experienced a moderate rise while US retail gasoline prices appear poised to enter the holiday season near record levels for this time of year. (12/17, #11)
  • Uranium, having languished near $40 a pound, shot up to $65 a pound after a Chinese official estimated China could build 112 GW of nuclear capacity by 2020, though the official stressed 80 GW was more likely. The higher figure is 1/3 of the world’s current nuclear capacity and 60 percent above a “high” estimate forecast for China last year. (12/17, #15)
  • The UN is taking steps to lift sanctions on Iraq barring it from obtaining a civilian nuclear program. Iraq has six months to settle $22 billion with creditors before the UN lifts the immunity that since 2003 has protected Iraq from financial insolvency. (12/17, #6)
  • Kurdistan has demanded autonomy within Iraq’s oil sector in exchange for its support of the prime minister’s re-election. The prime minister is to formally present his cabinet lineup to parliament today, Monday. Kurdistan also says it has the right to the disputed city of Kirkuk, located above some of Iraq’s largest oil reserves. (12/14, #5; 12/15, #4;12/18, #5)
  • In southeastern Iran Wednesday a suicide attack killed at least 38 Shiite Muslims at an Ashura mourning ceremony near a mosque. (12/15, #5)
  • Ghana was set Wednesday to become Africa’s newest oil producer, with the 1.5 billion-barrel Jubilee field going online at an initial clip of 55,000 b/d. (12/15, #7)
  • Nigeria may drop charges against former US Vice President Dick Cheney and companies including Halliburton after discussions with the latter in London last week. (12/14, #6)
  • Statoil and Petrobras say they have struck oil on the Indra prospect in the Espirito Santo basin off the coast of Brazil. (12/17, #7)
  • Venezuela’s Chavez loyalist-dominated parliament has given the president decree powers for 6 months longer than the year he had asked for to deal with recent emergencies caused by floods. This will enable Chavez to keep opposition parties out of the legislative process until his re-election campaign is well underway in mid-2012. (12/15, #8; 12/18, #6)
  • China has been reselling oil it obtained for as little as $5 a barrel from Venezuela at a profit to other countries, a leaked US document reveals. Documents also show US officials have cultivated sources within Venezuela state oil company PDVSA. (12/16, #10)
  • China Oilfield Services has signed a long-term oil drilling contract with Norway’s Statoil, demonstrating that Beijing’s fury over the award of the Nobel Peace Prize to jailed dissident Liu Xiaobo may not stop major commercial deals. (12/13, #13)
  • China and India have sought to reach an understanding not to enter the global crude oil market for imports at the same time as it could lead to price spikes; and also the possibility of jointly purchasing crude at a better negotiated price from producers. (12/18, #7)
  • India’s state-run fuel retailers were likely to increase gasoline prices by 15-19¢ a gallon, but the government still didn’t give a time frame to decide on raising diesel prices. (12/14, #12)
  • Indonesian mining entity Bumi-Berau aims to acquire coal mines around the world. China’s CIC, a Bumi creditor, could invest. (12/17, #8)
  • South Korea is planning overseas projects to boost energy self-sufficiency next year to 13 percent of total oil and gas imports from 10 percent currently. The country plans to buy 1 million barrels of crude for reserves next year, down from 2.5 million this year. (12/15, #11)
  • Japan and Saudi Arabia have signed a contract allowing the kingdom to store its crude for commercial use in Japan in exchange for prioritizing the supply of crude to Japan in an emergency. Saudi Aramco will lease tanks in Okinawa with a total capacity of 3.77 million barrels from Jogmec for three years starting December to store crude oil. (12/16, #15)
  • Japan’s move to join Russia in building a liquefied natural gas plant in the latter’s far east aims to ensure a multitude of stable suppliers of LNG, instead of Japan’s current reliance on Asia and Oceania. (12/14, #11)
  • Russia fully replaced its oil and gas reserves in 2010 despite extracting crude at a record-high speed. According to preliminary estimates, oil and condensate reserves grew by 750 million tons, while gas reserves increased by 29 trillion cu. ft. (12/18, #17)
  • Gazprom says it is ready to deliver natural gas from Siberia to China if Beijing is ready to commit. Supplies could start by 2015 if all agreements are signed next year. (12/16, #16)
  • Chevron and its partners in the Caspian Pipeline Consortium have approved a $5.4 billion expansion. Capacity of the pipeline from Kazakhstan to the Black Sea will reach 1.4 million b/d from the current 730,000. The project will be implemented from 2012-2015. (12/15, #5)
  • Korea National agreed to buy Canadian oil and gas assets from Dallas-based Hunt for $521 million. The pertinent areas produced 11,720 boe/d in the third quarter. The fields hold 52.9 million barrels of proven and probable reserves. (12/15, #15)
  • Developers of Canada’s oil sands have agreed to collaborate on research into reclamation of northern Alberta land that the developers’ toxic waste ponds, or tailings, cover. (12/14, #17)
  • Shell is preparing three exploration plans to meet new requirements for deepwater wells in the Gulf of Mexico after the US lifted a drilling ban. Statoil has applied for two new wells since the moratorium ended. (12/18, #10)
  • Chevron will spend $4 billion to extract oil and natural gas from a Gulf of Mexico deepwater project co-owned with Statoil and Marubeni. The project reportedly will be able to extract 75,000 b/d of oil and 25 million cu. ft. of gas. (12/18, #11)
  • Oil and natural gas rigs operating in the US fell from a 23-month high last week, declining by 14 to 1,709. (12/18, #12)
  • The Obama administration has provided new details about deepwater drilling rules. An 18-page guidance document contains no new rules but rather more information about how companies can comply with previously established mandates for testing safety equipment, estimating the potential size of oil spills and other issues. (12/15, #16)
  • US regulators are considering rules to curb speculation in commodities such as oil, natural gas, silver and gold, although they will miss a mid-January statutory deadline. (12/16, #17)
  • ExxonMobil has completed an expansion to the world’s largest carbon dioxide-capture plant. The $86 million expansion enables the capture of 50 percent more carbon dioxide, for a total capacity of 365 million cu. ft. per day. (12/14, #16)
  • California has adopted the US’s first large cap & trade program to start in 2012. (12/17, #10)
  • A US appeals court has rejected a request by the oil and gas industry and others to delay the EPA’s plans to begin regulating greenhouse gas emissions on January 2. (12/14, #13)
  • Of the US Gulf of Mexico’s 3,000 production platforms, half are at least 20 years old; a third date from the 1970s or earlier; and 100 structures built in the 1940s and 1950s still operate. Pipelines, often decades old, have a history of spills and leaks; yet offshore lines are subject to lower inspection standards than those onshore. (12/15, #17)
  • Two environmental groups claim in a lawsuit that ExxonMobil’s Houston-area oil refinery and chemical plant complex has generated illegal amounts of air pollution. (12/15, #18)
  • New York Gov. Paterson in an executive order halted fracking until July and until environmental regulators deem it safe. The industry and environmentalists both applauded. The governor vetoed a bill that would have placed a moratorium on fracking plus all conventional, low-volume, vertical oil and gas drilling until May 15. (12/14, #14)
  • Oil and gas drilling companies are touting new formulas that include edible ingredients to quell fears that the companies’ fracking contaminates water supplies. (12/15, #19)
  • Molycorp has received environmental permits to construct a new processing facility at its Mountain Pass Mine in southeastern California, the only one in the Western Hemisphere now producing rare earths. Meanwhile the Energy Department warns that the US risks major supply disruptions unless it diversifies its sources. A report released Wednesday predicts that it may take 15 years to break US dependence on Chinese supplies. (12/15, #22, 23, 24)
  • Israel’s Arava Power has started work on the country’s first large-scale solar field. Bank Hapoalim will provide $22 million in financing for the $28 million project. Israeli Electric will buy $70 million of energy from Siemans co-owned Arava over the next 20 years. (12/14, #20)

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