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  • 1. Production and prices

    Starting the week in the low $70’s, oil prices fell precipitously on Wednesday and Thursday after the US stocks report showed that demand for oil products continues to be weak and inventories continue to increase. The decline has more analysts questioning whether the increase in oil prices that has been going on since early this year may not be coming to an end for the time being.

    For months now, a combination of expectations for an imminent economic recovery, a weak dollar and increased Chinese demand has kept oil in the vicinity of $65-$72 per barrel in the face of weak demand. Talk of prices testing support areas in the low $60s is on the rise.

    Last week Saudi oil minister Naimi Ali Naimi told the press that the Saudis plan to keep production in the vicinity of 8 million b/d for the immediate future.

    During the last few weeks a spate of media stories talking about the quickening pace of new oil discoveries this year has reduced the threat that shortages and much higher prices will develop soon. This phenomenon was highlighted last week by a feature in the New York Times; it highlighted the more than 200 discoveries that have been reported this year and left the impression these discoveries, coupled with improved extraction techniques, will leave the industry in better shape for a while – so long as oil prices hold up.

    Mentioned, yet buried in these stories, is the simple fact that the world is still consuming close to 31 billion barrels of oil each year and that these new discoveries with their high costs are not going to replace current levels of consumption.

    2. The G20 Meeting

    At last week’s G20 economic summit in Pittsburgh, the world’s largest economies agreed to phase out state subsidies for oil and other fossil fuels in the “medium term.” The subsidies range from tax breaks for major oil firms to subsidized gasoline prices in many parts of the world and together are thought to total some $300 billion a year. These subsidies have kept retail prices artificially low and have resulted in higher consumption of fossil fuels than would occur without the subsidies.

    The issue of how to deal with the retail subsidies handed out by the poor countries will be the subject of a report due in November, prior to the meetings to draft a new climate-change accord in Copenhagen this December.

    While it is much too early to foresee whether restrictions on fossil fuel subsidies will actually be implemented on a significant scale, imposition of such restrictions has the potential to bring about fundamental changes in the energy markets. It is beginning to sound as if action on climate change is beginning to gain traction and that the leadership of the major countries is willing to step up.

    Yet there is still a long way to go. Many are skeptical that the US Congress will be able to craft meaningful restrictions on emissions in time for the Copenhagen meeting in December. The Chinese are still talking about more efficient use of fossil fuels while continuing to grow their economy rapidly, and the debate over per-capita emissions and richer countries absorbing the costs of slowing emissions by the poorer ones is only beginning.

    During the meeting, the US, UK, and France announced the discovery of an undeclared Iranian nuclear enrichment facility and called on Russia and China to join in increasing economic pressure on Tehran. Although in the past Moscow and Beijing have been reluctant to bring real pressure on the Iranians, the world is changing rapidly so that the Iranians may not have as much leverage as in the past.

    3. Mexico

    Despite a small (3,000 b/d) increase in production from the Cantarell oil field, Mexican oil production in August slipped to 2.54 million b/d, down nearly 8 percent from August 2008. For the first 8 months of 2009, total Mexican production is down by 200,000 b/d. Mexican exports in August fell to 1.1 million b/d as compared with 1.4 million last year.

    Despite optimistic talk about production from Cantarell stabilizing, PEMEX spokesmen emphasize that the situation is still serious. Production from the Ku-Maloop-Zaap oil field which was to at least partially replace output from Cantarell fell to 785,000 b/d last month as compared to 809,000 b/d in July. Output from other, smaller, fields is not going particularly well.
    There seems to be little that can be done about this situation. At current rates of decline, Mexican exports will be minimal or perhaps disappear in a few years. At the moment, the only hope for increased oil production is from deep-water fields that will be very expensive and will take many years to develop.

    4. ASPO-USA interviews in the UK last week

    ASPO-USA’s executive director Dave Bowden, a cameraman and TV producer in his previous career, just returned from a trip to the UK last week where he interviewed three key voices—Sadad al Husseini, Jeremy Leggett and Colin Campbell—who won’t be able to attend and present at the October 11-13 conference in Denver. Clips from each will be shown at the conference. Five questions from the interview with Sadad al Husseini are attached at the back of this week’s POR.

    Quote of the Week

    • “The industry can cope with $4 gas. The industry can’t grow or sustain production with $4 gas…We at Chesapeake think that price has to be three times the finding costs, and that translates to $6 to $9 in the next 12 months.”
      — Aubrey McClendon, Chesapeake CEO.

    Briefs

    • New oil discoveries have totaled about 10 billion barrels in the first half of the year, according to IHS Cambridge Energy Research Associates. If discoveries continue at that pace through year-end, they are likely to reach the highest level since 2000…Although they are substantial, the new finds do not match the giant fields discovered in the 1970s, like Alaska’s Prudhoe Bay, Ekofisk in the North Sea, or Cantarell in Mexico. (9/24, #3)
    • Oil and gas companies’ 2008 global investment for exploration and development projects totaled $492 billion—a 21% increase from 2007—yet oil and gas reserves fell, according to a report from IHS Herold and Harrison Lovegrove. In 2008, world oil reserves declined nearly 3%, primarily due to a 5.2 billion bbl decline in revisions that stemmed from reduced commodity prices. IHS expects reserves to drop in 2009 as well. (9/25, #2)
    • Aramco, along with other international oil companies, has expressed interest in helping Brazil develop its so-called pre-salt oil reserves. (9/26, #14)
    • Iraq’s oil sector is no longer easy prey for insurgents or smuggling gangs. Security forces are largely preventing what once wrought havoc in the country and, when an attack is actually launched, have been responding quickly. (9/25, #12)
    • Iran imports around 140,000 barrels a day of gasoline and diesel at a cost of $5 billion to $7 billion annually to meet domestic demand. (9/24, #7)
    • In Iraq, DNO International ASA’s suspension from producing oil highlights the risks for explorers seeking to tap the world’s third-largest reserves. ((/24, #8)
    • Total CEO Christophe de Margerie said recent gains in oil prices reflect market anticipation of a supply shortfall within five years rather than current demand. (9/23, #15)
    • Oil prices will rise to $80 a barrel by early 2010, while declining natural-gas production in the US is likely to drive up gas prices, according to Sanford C. Bernstein analysts. The supply of oil from non-OPEC countries is likely to decline later this year. (9/25, #4)
    • Production from Kuwait’s Burgan, the world’s second-largest oil field, may decline without the help of international oil companies. Kuwait, which produces 2.2 million b/d, has failed to renew agreements with international oil companies, including BP and Chevron. (9/24, #6)
    • China will increase crude oil refining capacity by at least 10 percent next year from 2008 levels to meet rising demand, according to a unit of PetroChina Co. (9/24, #12)
    • Shell is set to overtake BP after about $40 billion of investment from Qatar to Brazil. Shell will boost its oil and gas output by a third, adding 1 million b/d, according to company estimates, boosting production to 4.25 million, more than the 4.1 million BP anticipates for 2012. Total predicts output will fall this year and expects projects in Africa to help boost production an average of 2 percent through 2014. Exxon Mobil Corp. warned it may not meet a 2 percent production growth target this year. It still plans to boost output an average of 2 percent to 3 percent annually during the next half decade (9/25, #5)
    • In Canada’s oil sands, mining extraction currently accounts for 60% of the 1.4 million barrels of bitumen produced each day. In situ development represents the most significant growth potential for the industry and will contribute a growing proportion of future production…Although there is a high degree of variation, industry average emissions for oil sands production and upgrading are estimated to be 3.2 to 4.5 times as intensive per barrel as conventional crude produced in North America. (9/23, #17)
    • Producing a barrel of synthetic crude oil from the oil sands by mining requires two to four barrels of fresh water after taking into account water recycling. In situ development is less water intensive at approximately 0.9 barrels of water per barrel of oil, yet this is still higher than water use for conventional oil production, which averages 0.1-0.3 barrels of water per barrel of oil. (9/23, #17)
    • US demand for the four core petroleum products – gasoline, diesel/heating oil, jet fuel and residual fuel – fell to its lowest level since January 2002 in the latest week. Total oil demand showed a four-week jump of 4.4% from a year earlier, but the gains came in minor products such as propane/propylene and catch-all other oils. (9/25, #6)
    • Russia said it would welcome foreign energy firms lining up alongside local companies to develop a giant Arctic gas project on the energy-rich Yamal peninsula in the latest sign Moscow is seeking to bolster investment from overseas as it pulls out of recession. (9/25, #11)
    • Oil and gas rigs rose to 1,017, up seven rigs from the previous week, according to data from oil-field services company Baker Hughes. The number of gas rigs was 710, an increase of five rigs from last week, while the oil rig count was 297, an increase of four rigs. The rig count is still down 50% from 2032 in September 2008. (9/26, #20)
    • Pennsylvania regulators said on Friday they ordered Cabot Oil & Gas to stop all hydraulic fracturing operations at company natural gas wells in Susquehanna County following three recent chemical spills. (9/26, #21)
    • A Chinese threat to halt exports of rare minerals — vital for high-performance electric motors in wind turbines, hybrid cars and missiles — appears to have backfired, touching off a frenzied international effort to develop alternative mine sites. (9/26, #24) 
    • Sens. Saxby Chambliss and Johnny Isakson were among 35 signers of a bipartisan letter to Interior Secretary Ken Salazar asking him to support a proposal by the US Minerals Management Service to open up new offshore areas. (9/25, #7)
    • Volvo Car Corp. is postponing its plans to produce a full hybrid based on a diesel engine and instead build a plug-in diesel hybrid (PHEV) in Europe as early as 2012. The plug-in will support up to a 50 km (31 mile) all-electric range—sufficient to cover the daily transport needs of 75% of European drivers. For longer distances, the diesel automatically takes over. The combined range is about 1,200 km (746 miles). (9/25, #17)
    • Asian economies slumped steeply when exports plunged during the winter, but most of the region is now rebounding quickly, the Asian Development Bank said in a report Tuesday. The multilateral institution declared that economic growth in China would be 8.2 percent this year and 8.9 percent next year. The bank raised its 2009 growth forecast for India to 6 percent and for developing Asian countries as a group to 3.9 percent. (9/22, #15)
    • South Korea, Asia’s third-biggest buyer of crude oil, increased domestic consumption of oil products for a fifth month in August, adding to signs of an economic recovery. (9/24, #14)
    • Fear of gasoline shortages similar to 2008, when Western North Carolina motorists sat in line for hours, is now spurring counties and towns to create a regional supply plan. (9/24, #17)
    • In Nigeria, those companies hit worst by the credit squeeze are operators in the oil and gas sector, particularly oil marketing firms, compelling them to halt the importation of petroleum products into the country. (9/23, #9)
    • China pledged on Tuesday to substantially improve the energy efficiency of its factories, homes and power plants in a bid to make headway in the stalled United Nations climate change talks. But Hu Jintao, President of China, failed to set specific targets on emissions, disappointing other governments which had been hoping for more. (9/23, #11)
    • Toyota Motor Corp. said carmakers risk damaging the long- term reputation of battery-powered vehicles by over-promising on what the technology can deliver. (9/23, #19)
    • Demand for Nigeria’s oil by the US, its biggest consumer, crashed on Monday as crude stockpiles in America neared a 27-year high, forcing prices to slip below $71 per barrel. The stockpile has swiftly led to weak demand, which threatens Nigeria’s economy that relies 95 per cent on oil revenue. (9/22, #14)
    • New fuel-economy rules proposed by the federal Department of Transportation and the Environmental Protection Agency includes miles-per-gallon requirements and national emissions standards under the EPA’s greenhouse-gas-emissions guidelines for model years from 2012 to 2016. What has critics worried are all the pro-industry rule tweaks and what they see as slanted calculations. (9/22, #17)
    • In the first big study of the impact of the recession on climate change, the IEA found that CO2 emissions from burning fossil fuels had undergone “a significant decline” this year – further than in any year in the past 40. The fall will exceed the drop in the 1981 recession that followed the oil crisis. (9/21, #8)