1. The day of the whistleblower

The International Energy Agency captured headlines nearly all week. The publication of the IEA’s monthly Oil Market Report and annual World Energy Outlook, coupled with a front page exposé in the UK’s Guardian newspaper reporting that the Agency has been inflating forecasts of global oil production under pressure from the US, received an unusual amount of worldwide media coverage.

Publication of the World Energy Outlook 2009 (WEO) was overshadowed by the Guardian story, which may have given the peak oil story the most media attention it has ever had. The core of the Guardian’s article: according to a whistleblower who is a senior official at the IEA, “the US has played an influential role in encouraging the Agency to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves…. [he] questions the prediction in the last World Economic Outlook that oil production can be raised from its current level of 83m barrels a day to 105m barrels. ‘The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year. The 120m figure always was nonsense but even today’s number is much higher than can be justified and the IEA knows this. Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further.’”

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organization was that it was ‘imperative not to anger the Americans’” and “‘We have [already] entered the ‘peak oil’ zone. I think that the situation is really bad.’”

IEA’s Deputy Executive Director defended his shop: “We’re the ones that are out there warning that the oil and gas is running out in the most authoritative manner. But we don’t see it happening as quickly as some of the peak oil theorists. Generally, we’re viewed as more pessimistic than we should be by the (oil) industry.”

Of the hundreds of newspaper stories and web postings that were written commenting on the Guardian’s story, perhaps the most telling was a post by Kjell Aleklett, the president of ASPO international. Aleklett reported that he too had been told in confidence by IEA officials two years ago that the Agency’s long-range forecasts were inflated at the behest of the US government’s Energy Information Administration. He called on President Obama to establish an independent commission to investigate the IEA and establish the truth.

Aleklett also drew attention to new study he chaired which says that world oil production in 2030 is likely to be 75 million b/d rather than the 105 million that the IEA is forecasting in its reference case.

(For Dave Cohen’s column this past Wednesday on this topic, go to: http://pkoil.wpengine.com/index.php/2009/11/the-oil-situation-is-really-bad… )

2. A New focus for the World Energy Outlook

After the Guardian story, the release of the 700-page World Energy Outlook for 2009 was somewhat anticlimactic. The marquee reference case oil production level for 2030 turned out to be 105 million b/d, down 1 million from last year, down 15 million b/d from the 2006 forecast. For a second year in a row, however, the tone of the publication changed dramatically. The Agency acknowledges that given the recession, efforts to reduce carbon emissions, and the lack of adequate investment, the reference case is likely to become irrelevant as it will be overtaken by events.

This year the Agency uses the WEO to focus on supporting the carbon reduction negotiations and publishes a “450 scenario” which “depicts a world in which action is taken to limit carbon dioxide concentration in the atmosphere to 450 parts per million.” The publication contains many stern admonitions such as “Falling energy investment will have far-reaching consequences;” “Limiting temperature rise to 2o C requires a low carbon energy revolution;” “Energy efficiency offers the biggest scope for cutting emissions;” and “New financing mechanisms will be critical to achieving low carbon growth.”

In the Executive Summary, the publication highlights the increasing role of natural gas and the difficulties in exploiting it. It also points out the increasing demand for energy from the Southeast Asia ASEAN countries.

3. Production and prices

Last week started with a Gulf of Mexico tropical storm that forced a brief evacuation of roughly 30 percent of the region’s production platforms. The highlight of the week, however, came on Thursday when oil prices dropped from close to $80 a barrel to close out on Friday at $76. Earlier in the week prices had been supported by a weak dollar, which traded as low as $1.50 against the euro. But on Thursday the dollar strengthened a bit and new reports were released showing weaker-than-expected consumer confidence, increasing gasoline and crude stockpiles and record low refinery utilization. All this convinced the markets that an economic recovery is not imminent.

Despite weak US demand and rising OECD stockpiles, the IEA says OPEC production rose by 150,000 b/d in October. The Saudi’s announced they will supply more crude to Asia in December in an effort to stem rising prices. Refiners in Japan, South Korea, China, and Thailand will receive 100 percent of contracted shipments rather than the 85 to 90 percent they have been receiving since OPEC cutbacks began. The latest word from OPEC sources is that quotas are likely to be held at the current level during the December meeting. As many members are already above quota, and compliance with formal production cuts is now down to 61 percent, the quotas no longer have much meaning.

The debate continues between oil price fundamentalists who say oil is far too expensive (Exxon’s CEO said there is $25 worth of speculation in current prices) and those watching oil’s link to the dollar. Goldman Sachs is still saying we will have $85 oil by the end of the year due to increasing demand from China and technical analysts continue to talk about $90 to $100 oil in the near future.

US natural gas stocks are growing faster than expected and are now at a record high of 3.81 trillion cubic feet.

4. Oil and the recovery

The issue of whether higher oil prices might stifle the eagerly awaited economic recovery is starting to creep into the US and British mainstream media. This was sparked in part by a warning from the IEA in the November Oil Market Report which said loud and clear — “The recent price spike, if further extended, risks derailing the recovery.”

Last week Time Magazine and the Wall Street Journal carried stores exploring just what a continued increase in oil prices could do to what they consider to be a recovery already underway. Both understand the dynamics of the situation – China and India continue to import more oil and global production is “constrained.” There is growing discussion about how the 2008 oil price spike played a significant role in spreading and deepening the recession.

Looking ahead, these stories see continued growth in the Chinese economy and are starting to heed IEA warnings that significantly reduced investment in oil production will soon start taking a toll on global production. They also recognize that massive US deficits are likely to keep downward pressure on the dollar and the concomitant upward pressure on oil prices.

The writers are even grasping that the large discoveries of deep-water oil that have been made in recent years will take so long and cost so much money to develop they are irrelevant to prospects for economic recovery during the next few years.

All this is difficult for the Wall Street Journal to swallow for the trends suggest it will be impossible for the US to attain the economic recovery which the Journal repeatedly says is underway. The Journal seeks solace in what it calls “plenty” of OPEC spare capacity and a recent report by James Hamilton, the University of California economist who has been studying the relationship between GDP and oil prices. The Journal reports that Hamilton says that by “one reckoning, oil would have to go past $130 a barrel to start erasing economic growth.”

Actually Hamilton goes on to say that there is no compelling reason for a particular price to trigger economic damage in that every increase in oil prices adds more and more drag on the economy. He points out that when energy surpasses 6 percent of the average consumer’s budget it is an indicator of economic problems. This percentage peaked at 6.8 percent during the 2008 price spike, fell to 4.7 percent last winter, and in September 2009 was back up to 5.4 percent and has climbed since then.

Quote of the Week

  • “So far in facing this huge [peak oil] challenge, our political/economic system seems unable to cope with reality. We are forced to carry on living in an illusion that we have so much time to adapt to post-oil that we don’t even need to be talking or thinking much about what a world without plentiful oil would look like. Reality has become too dangerous.”
    — Madeleine Bunting, in The Guardian, November 11th issue

The Briefs

  • The controversy over the International Energy Agency (IEA) figures has highlighted the peak oil debate. What do the numbers say? The question is not if the world is running out of oil, it’s when. (11/14, #4) [Editors’ note: even when the Guardian breaks perhaps the oil supply news story of the year, their editorial page writers still manage to mangle the concept of peak oil. Peak oil is about maximum flows, never about “running out.”]
  • Saudi Arabia is expanding and upgrading its oil and gas production and refining business at a cost of $100 billion to tap rising demand in Asia, Oil Minister Ali al-Naimi said. Saudi Aramco pumped 8.15 million b/d in October, down from 8.2 million barrels a day in September, according to a Bloomberg estimate. (11/14, #6)
  • Halliburton was awarded a five year integrated turnkey contract for Saudi Arabia’s Ghawar field. Work will be performed in Uthmaniyah, Haradh, Hawiyah and Shedgum. Halliburton will engineer and manage the entire drilling operation. Three to four rigs will drill and complete between 153 and 185 oil and water injection wells. (11/9, #20)
  • The head of Saudi Aramco says there are no plans to expand production beyond development of the Manifa field, which was originally intended to add capacity of 900,000 b/d by 2011, but has since been delayed to around 2013 as demand has fallen. He says the Manifa production will offset declines rather than expand capacity. (11/13,#10)
  • In Nigeria, investment in the downstream sector, particularly in refinery projects, is now a condition for issuance and renewal of concessions and oil licenses to international oil companies. (11/13, #12)
  • OPEC raised its forecast for world oil demand growth slightly but says consumption may not return to levels seen before the global economic slowdown, even if growth recovers. OPEC will meet on Dec. 22 in Luanda to discuss production targets after agreeing to leave quotas unchanged at its past three conferences (11/12, #5)
  • In Mexico, as recently as 2004, Cantarell, the country’s main offshore field, produced 2.1 million b/d of crude. Now its output is just 600,000 b/d. There are no obvious replacements: 23 of the 32 biggest fields are in decline. Barring big new finds, the world’s seventh-largest oil producer is forecast to become a net importer by 2017. (11/13, #14)
  • Petrobras completed the drilling of the fourth well in the Tupi Assessment Plan area and the results reinforce the estimates of the potential of 5 to 8 billion barrels of recoverable light oil and natural gas in the pre-salt reservoirs of that area. (11/14, #8)
  • Last week, ExxonMobil became the first US oil company in 35 years to sign an oil-production contract with Iraq. Under immense pressure to increase production, the Iraqi Oil Ministry has been sweetening the deals it offers the oil majors. (11/14, #6)
  • Iraq expects three of its oilfields will together pump more than 6 million b/d once foreign companies complete development contracts they were awarded this year. (11/9, #4)
  • A handful of lawmakers from the Iraqi parliament’s oil and gas committee is questioning the legality of petroleum-development deals signed last week with BP, ExxonMobil and other big oil companies. (11/10, #16)
  • The president of Iraq’s Kurdish region criticized the central government on Tuesday for its failure to draw up a clear law on sharing oil revenues and said the Kurds would hold on to what they earn for now. (11/11, #17)
  • Iraq should be able to boost oil production significantly through fresh foreign investment, but plans to raise oil output to 10-12 million b/d are not realistic, the chief executive of French oil giant Total said. (11/14, #7) 
  • Lloyd’s List reports that there are now 129 tankers deployed off-shore, providing temporary storage of oil by traders and investment banks. (11/12, #9)
  • The IEA says that global demand is projected to increase in 2010 to 86.2 million b/d, 500,000 b/d more than in last month’s report. That stands against an estimated average production of 84.8 million b/d in 2009, which was in turn 1.7 per cent or 1.5 million barrels less than last year. (11/13, #4)
  • Kjell Aleklett, professor of physics at Uppsala and co-author of a new report “The Peak of the Oil Age”, described the IEA’s World Energy Outlook 2008 as a “political document” developed for consuming countries with a vested interest in low prices. (11/14, #3)
  • Oil sands producer Suncor Energy, which bought rival Petro-Canada in August, will spend C$5.5 billion next year. C$1.5 billion will go to boost production from oil-sands projects such as Firebag, while C$4 billion is targeted at sustaining existing operations. (11/14, #19)
  • The number of U.S. oil and gas rigs climbed to 1,101, up 23 rigs from the previous week, according to data from Baker Hughes Inc. The number of gas rigs was 728, down six rigs, while the oil rig count was 361, up by 29 rigs. (11/14, #15)
  • ExxonMobil and Chevron are expected to inch up their capital spending in 2010 and continue their massive investments in major projects in an effort to lift production. That contrasts with ConocoPhillips’ decision to cut 12 percent from its 2010 capital budget.(11/14,#13)
  • The People’s Bank of China, China’s central bank, has just released its report that hints that China is about to repeal its “quasi-peg” to the US dollar and allow its currency more flexibility, another way of saying Yuan appreciation. (11/13, #16)
  • China’s passenger car sales in October surged 75.8 per cent from a year earlier, official data showed, extending the explosive growth in recent months as government incentive policies continue to lure customers. (11/9, #13)
  • China promised $10 billion in cheap loans to Africa, pledged to cut customs duties and distributed a newspaper with photos of Chinese leaders among beaming Africans, as part of an effort to fight claims it is exploiting the continent’s minerals. (11/9, #10)
  • The bull case for global financial markets hinges partly on belief in a bulletproof Chinese economy. But China is vulnerable to the same Kryptonite that has hurt countless other economies: credit. (11/10, #19)
  • Russia’s President Medvedev, in his State of the Union speech last week, warned against complacency after the price of Urals crude oil and natural gas, 70 percent of export revenues, rebounded from the start of the year. He said the nation’s habit of living off oil exports hinders innovation and broader development of the economy. (11/13, #19)
  • Governments around the world stepped up efforts to stem the US dollar’s slide, as officials grow increasingly concerned about the impact of the weak greenback on their nascent economic recoveries. (11/12, #7)
  • The Commodity Futures Trading Commission held hearings last summer on limiting the investments in commodity index funds, and the Obama administration’s choice to lead the commission favored such limits. But the new chairman, Gary Gensler, needs two other votes on the five-member commission to join him, and this no longer appears likely. (11/12, #20)
  • In Europe, where banks hold over $350 billion of increasingly dubious shipping industry loans, the inability of New-York-based Eastwind Maritime to handle its debt of more than $300 million set off an anxiety attack on lending desks across the Continent. (11/12, #8)
  • Cuba has ordered all state enterprises to adopt “extreme measures” to cut energy usage through the end of the year in hopes of avoiding the blackouts that plagued the country following the 1991 collapse of the Soviet Union. (11/12, #13)
  • President Chavez ordered Venezuela’s military to prepare for a possible armed conflict with Colombia, saying the country’s soldiers should be ready if the United States attempts to provoke a war between the South American neighbors. (11/10, #17)
  • President Chavez came to power promising to harness Venezuela’s oil resources to create a 21st-century nation in which no one was deprived. Now, with water and electricity shortages and soaring crime and inflation, even his ardent supporters are beginning to turn away. (11/9, #11)
  • International climate change negotiators have signaled that an agreement is unlikely to be reached this year in the absence of a broad consensus on how to share the costs of switching to lower-carbon technologies and fuels. (11/11, #12)
  • The following conundrum has not been resolved: are oil prices high due to greater demand or too little supply? This ambiguity allows for vastly divergent interpretations of the same data and depending on the agenda you are trying to push, will easily support either…[We
    conclude that the theory of] non-recession-induced peak demand is not supported by the data. (11/12, #24)
  • Houston’s economy has clearly been stung by an unprecedented drop in crude and natural gas prices, with over 18,000 jobs lost in past months. Recent downsizing moves by Shell, ConocoPhillips and other oil and gas companies appear to go beyond the typical bottom-of-the-cycle belt tightening. They suggest a permanent shift toward doing more with less — in what could be a troubling trend for Houston. (11/10, #22)
  • The Obama administration, attempting to salvage a faltering nuclear deal with Iran, has made overtures, through the International Atomic Energy Agency over the past two weeks that have all been ignored, reducing prospects for a near-term deal. (11/9, #7)
  • In November, Spain’s wind farms were able to cover 53% of total electricity demand – a new record in a country that boasts the world’s third largest array of wind turbines, after the United States and Germany. (11/10, #24)