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1. Oil and the Global Economy

It was a rather quiet week with oil hovering around $82 a barrel and closing on Friday at $81.43. Large US crude inventories continue to keep a lid on prices as does the lack of much positive news on the economy. The oil markets continue to move along with the US dollar which is currently mired in the debate over whether another round of quantitative easing (QE2) by the Federal Reserve would lead to faster economic growth. Traders are concerned that QE2 could lead to a still weaker dollar and higher oil prices unrelated to the fundamentals of supply and demand. During the week the US dollar fell to a 15 year low against the yen.

France’s oil port strike was called off on Friday so that refining and oil product distribution should be back to normal in a week or two. At one point the strike had forced the shutdown of one of Switzerland’s refineries which receives its crude by pipeline from France.

China increased diesel and gas prices last week in reaction to a 14 percent increase in crude prices since last June. This is the 12th adjustment to domestic gas and oil prices Beijing has made in the last two years as it attempts to balance inflation and economic growth. China’s National Energy Administration said that efforts to cut energy consumption per unit of GDP by 20 percent before the end of the year may result in lower energy consumption in the 4th quarter.

At week’s end the dollar was rising on concerns that Europe’s debt crisis may be resurfacing. For the rest of this week oil prices will likely be moved by the Federal Reserve’s forthcoming announcement on quantitative easing and how the announcement fits into expectations. Any surprises emanating from results of Tuesday’s Congressional elections are likely to be felt in the markets.

2. Shale Gas

Last week Steve Forbes published an editorial in his Forbes magazine concerning shale gas in the US that reaches new heights for hyperbole. Entitled “Energy Crisis Over!,” the piece is rife with phrases such as: “amazing transformation”; “literally trillions of dollars’ worth of shale oil and gas can now be economically extracted;” “Oil production, too, in the U.S. will increase far beyond what experts thought possible;” and “The Earth is awash in energy.”

In his eagerness to declare the possibility of imminent energy shortages a dead issue, Mr. Forbes is overlooking a growing body of analysis that raises questions about the actual cost and long term commercial viability of shale gas. Misreading of the Potential Gas Committee’s 2009 report left many with the impression that the US now has 100 years of gas available at present rates of production. In reality, the commercially recoverable gas was only 441 trillion cu ft. with a current annual consumption of 23 trillion cu. ft. or 19 years’ worth. Shale gas will only provide 7 of the 19 years’ worth of gas consumption currently available. These numbers will of course change; any notion of replacing our coal-fired electricity with natural gas seems premature.

While horizontally drilled and fracked shale gas wells are initially very productive if they are drilled in just the right spot, their productivity drops off rapidly and they are very expensive to complete. This has led to a spate of commentary as to whether shale gas wells are not losing money below $7 per million cu. ft. and whether the drilling companies are simply accumulating massive amounts of debt as they continue to drill at current prices.

Two weeks ago London’s august Financial Times dived into the issue of shale gas by publishing a rather abstruse story about the differences between “hyperbolic” and “exponential” decline rates for shale gas wells. The Times recognizes that this is not just an esoteric debate among geologists, but an issue on which many trillions of dollars and much of our future is riding. If the average shale gas well only yields 2 billion cu. ft. rather than the 6 billion the proponents are claiming then the future of global natural gas production, electricity production and much else will look entirely different.

Someday a new source of energy could be developed that will end the energy crisis, but for the immediate future, the possibility that shale gas is that source seems rather problematic.

2. Sanctions on Iran

Contrary to the conventional wisdom that Iran would be immune to any sanctions the UN and the western powers could dream up, evidence is mounting that Tehran is starting to feel the sting of Western pressure on countries and firms to stop doing business with the Iranians. The most interesting development in recent months is that Russia and China, who for their own reasons are reluctant to cut ties with Iran, seem to be slowly but deliberately tightening the screws on Tehran.

Moscow and Beijing seem to have come around to the view that the Iranians are indeed doing things that could only be intended for the production of nuclear weapons and that Tehran’s acquisition of such a capability could have terrible consequences for not only the Middle East, but most likely the rest of the world including their own countries.

Although Moscow continues to fulfill its contractual obligations by fueling and starting up a large nuclear power reactor for Tehran, it has also canceled an advanced air defense missile that offered the Iranians better prospects of deterring an air strike against their nuclear facilities. Last week there were reports that China has reduced oil imports from Iran during the past nine months as sort of a gentle warning and that Beijing has told its energy firms to slow the pace of work on Iranian projects.

A recent drop in the value of Iran’s currency is being interpreted as a sign that its oil sales may be shrinking. Tehran is trying to remove domestic subsidies for food and fuel in order to cut expenses, but many in parliament are opposed. Many outside observers believe that a full-blown economic crisis is on the way due to the sanctions.

So far Tehran has responded to the sanctions with threats, bluster, and a lawsuit to force European oil companies to refuel Iran Air planes. The government still maintains that the sanctions are making the country stronger.

How this dispute will play out is impossible to predict. Tehran could drop whatever ambitions it harbors to become a nuclear power, or it could lash out in an effort to rally support at home. So long as Tehran can threaten the 17 million b/d or crude that transits the Strait of Hormuz, the dispute will remain among the top international issues.

Quote of the week

“Politics and economic activity in Peru is better than in other Latin American countries such as Venezuela.”

— Yang Xian, President of Shandong Kerui Group Holding Corporation

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

  • Halliburton knew cement it mixed for BP’s Macondo well was unstable, the presidential spill investigation says. Documents provided by Halliburton showed the mixture repeatedly failed lab tests; Halliburton notified BP about one of the tests. In response, Halliburton defended its work and blamed BP for the accident. Total and Chevron criticized the safety of BP’s design at Macondo. BP will sell four producing deep-water fields in the US Gulf with net production of 15,000 b/d to Japan’s Marubeni for $650 million. BP must keep drilling in the Gulf, new CEO Dudley says. (10/25, #21; 10/26, #22; 10/27, #18; 10/29, #8, 9; 10/30, #10)
  • Shell warns that the effects of the temporary deepwater ban in the Gulf of Mexico could last for two years. Shell has booked charges of $115 million to date after idling rigs and expects further losses in the fourth quarter. Oil/gas output this year has been 10,000 boe/d lower than it would have been otherwise, and in 2011 it may be 40,000 boe/d lower. (10/28, #14, 15)
  • The US Geological Survey reduced its estimate for conventional, undiscovered oil in Alaska‘s National Petroleum Reserve to 896 million barrels, versus 10.6 billion barrels in 2002. Recent exploration revealed 53 trillion cu. ft. of gas rather than oil in much of the area. Richard Heinberg writes that North Slope oil production has declined from a peak of over 2 million b/d to only 600,000 or so today. Once the flow drops below 500,000, there will be icing problems with the Trans-Alaska Pipeline. In Anchorage, nearly all houses are heated with gas, and supplies from Cook Inlet will run low in two years. (10/27, #24; 10/28, #14, 15)
  • Eleven US Senators raised questions about TransCanada’s proposed $7 billion, 2000-mile Keystone XL pipeline. They say the pipeline will bring “dirty oil” from Canadian sands to US refineries and significantly increase US reliance on fossil fuels. (10/30, #11)
  • Newfoundland boosted reserves estimates to 1.39 billion barrels for the Hibernia oil field off its Atlantic Coast, an increase of 151 million barrels or 12 percent over 2006. (10/30, #12)
  • Brazil said the Libra oil field in the Santos Basin off its southeastern coast may have up to 15-16 billion barrels, which would be twice previous estimates, twice the size of Tupi, and the biggest crude discovery in the Americas since Mexico’s Cantarell in 1976. The ninth Tupi exploration well in Brazil’s deep waters discovered light oil. Petrobras plans to produce 50,000 b/d from Tupi in 2011. (10/25, #11; 10/28, #10, 11; 10/29, #5; 10/30, #4)
  • ConocoPhillips shut in a small amount of its natural gas production in the third quarter and would like to shut in more at current low prices, but some of its partners need to drill. For the fourth quarter, the company expects curtailments of 20,000-30,000 boe/d. (10/28, #16)
  • Supertanker owners are facing the longest stretch of unprofitable rates in 17 years as the supply of new vessels increases nine times faster than demand for oil. Shipping companies are making $3,155 a day for a single voyage, 90 percent below the $30,900 Frontline, the biggest operator, says it needs to break even. (10/25, #3)
  • IEA says it is unclear whether recent increases in oil reserves in Iraq, Iran and Venezuela will contribute to future supply. (10/26, #5)
  • China is driving up world coal prices as clogged roads and railways from Beijing to Tibet restrict deliveries while the country tries to build stockpiles ahead of winter. The economy grew 9.6 percent in the third quarter, the least in a year. (10/26, #14; 10/27, #12)
  • Fears about Chinese supplies of rare-earth minerals have sent small mining company shares soaring. China told the US it would not withhold rare earths. China’s curbs on rare earth shipments may owe more to a 2006 policy to create fewer, larger companies than trade and territorial disputes. (10/25, #6, 7; 10/30, #5)
  • OPEC members are thriving on oil export revenue but eroding capacities by subsidizing domestic consumption, warns the Centre for Global Energy Studies, London. (10/27, #4)
  • In Iraq, former PM Allawi’s Iraqiya bloc rejected the recent government auction of gas fields; it wants all PM Maliki-era oil/gas contracts reviewed by the next government. (10/26, #6, 7)
  • In Saudi Arabia, the SRAK joint venture between Aramco and Shell to drill for natural gas in the Empty Quarter has extended its exploration license to 2015. (10/27, #7)
  • The UAE will award onshore oilfield service contracts in 2012 as part of a $10 billion program to boost output to 1.8 million b/d, a 30-percent increase, by 2017. (10/27, #10)
  • In Dubai, environmental problems include raw sewage in the Persian Gulf and rising salinity. The region is running out of energy sources to support its rich lifestyle. (10/30, #2)
  • Nigeria will export 2.15 million b/d of oil in December, up from 2.1 million in November and exceeding its OPEC target of 1.67 million. Militants have blown up two pipelines belonging to Agip, forcing a shut-in of 60,000 b/d of crude oil. BP former CEO Browne leads a group of bidders for $4 billion of oil fields being sold by Shell, which says it’s not planning a wholesale withdrawal from Nigeria. (10/25, #10; 10/28, #8, 9; 10/30, #3)
  • Russia started up its first major new oil refinery since Soviet times, the 140,000 b/d first phase of a three-part complex in Tatarstan. PM Putin called for investments of $292 billion to maintain crude production at 500 million tons/year in the next decade. Rosneft and Transneft are in talks over construction of a $2.1 billion, 600-km, 18 million tons/year pipeline from Siberian deposits to the Eastern Siberia-Pacific Ocean pipeline. (10/27, #22; 10/29, #17; 10/30, #13)
  • Russia and Ukraine couldn’t agree on a new gas supply deal, leaving the threat of a new-year’s gas war hanging in the air. (10/28, #21)
  • While China is projected to achieve universal electrification by 2015, India won’t reach this goal until 2030, according to the IEA. In India, 404 million people live without electricity, compared to 8 million in China. (10/29, #7)
  • In China, 220 mph trains began traveling between Shanghai and Hangzhou. (10/26, #28)
  • Cairn shares dropped the most in 19 months after announcing it will write off $185 million it spent on two exploratory wells drilled off Greenland after they failed to make a commercial discovery. Cairn, however, expressed optimism as it suspended operations for the season as it had agreed with Greenland authorities. (10/26, #20; 10/27, #19)
  • The American Petroleum Institute expressed concern about EPA’s proposals to reduce allowable ozone levels, to begin regulating greenhouse gases, and to raise allowable ethanol limits in gasoline to 15 percent. (10/29, #12)
  • The highest corn costs in two years are failing to dent profits for US ethanol producers as demand grows and prices for the biofuel and a byproduct used for animal feed increase. (10/29, #10)
  • California proposed cap-and-trade rules, a key part of a state climate law that is being challenged in the election tomorrow (Tuesday, Nov. 2). (10/30, #8)
  • Global warming, energy independence and good 21st-century jobs are three compelling reasons why Washington must do a lot more to promote renewable energy, according to an editorial in The New York Times. (10/28, #13)
  • Making a cellphone battery that lasts ten times longer is a first target for the Steeper research project of IBM, Infineon and a number of European universities. (10/27, #25)