1. Production and Prices
After rising by $10 a barrel since mid-April, oil prices continued to increase early last week, and at one point touched a six-month high of $60. Just as the equity markets remain largely detached from economic news and focus on hopes for recovery, the oil markets remain largely detached from the news of supply and demand. When the equity markets turned softer on Thursday, oil followed them down to close out the week at $56.34.
Most of the week’s news suggested too much production and slackening demand. OPEC crude output increased by 270,000 b/d in April after falling for seven months. OPEC is now 950,000 b/d over target. China’s industrial production grew by only 7.3 percent in April, well off the double digit increases seen in recent years. Beijing’s exports for April were down by 22.6 percent year over year. Numerous US economic indicators released last week, including retail sales, employment and housing, all suggest that the demand for oil will be weaker in the weeks ahead.
The weekly US stocks report showed a 4.7 million barrel decline in crude inventories, the first since February, with imports dropping to the lowest level since 2004, excluding disruptions caused by hurricanes.
The amount of oil and products stored at sea is now reported to be approaching 150 million barrels. As the older single-hulled tankers are no longer welcome in some ports, owners are happy to lease them out for storage as an alternative to scrapping them immediately. China is reported to be storing some of its increasing strategic reserve aboard leased tankers.
The economics of storing petroleum are based on contango in the oil futures markets which allow well-financed companies and speculators to make money by storing oil for future delivery at higher prices. Should the outlook for oil prices reverse and longer term contracts drop below near-term contracts, a very large amount of oil is likely to be dumped on the market, forcing down prices precipitously.
A few years ago when the oil supply situation was much tighter, every militant attack on an oil facility in the Niger Delta triggered an immediate jump in oil prices. However, ever since world oil supplies began outrunning demand last fall and OPEC began massive production cuts, nobody outside of the Nigerians and their contractors really cared if the country produced any oil or not. As more production shifted to relatively secure off-shore locations, Nigerian production settled somewhere below 2 million b/d. From time to time a pipeline or pumping station would be sabotaged, but these were usually repaired in short order.
Last week, however, the situation took a turn for the worse as fighting between the main militant group, the MEND, and government forces flared. As usual, the rhetoric soared as the MEND announced the beginning of a bloody civil war and warned foreign oil workers to evacuate from the Delta immediately.
The MEND promptly hijacked a condensate tanker and a cargo ship and took them to a MEND controlled village or militant base, depending on one’s point of view. The government attacked the village, using aircraft and helicopter gunships, killing some militants, dozens of villagers, and at least two of the ships’ crewmen that were being held there. Government forces, aided by 14 gunboats and 4 helicopter gunships, drove off the militants, occupied the village, recovered the ships and freed the remaining hostages.
In retaliation for the attack on the village, the MEND declared all-out war, summoned other militant groups to join them and blew up key pipelines supplying Chevron’s Escravos export terminal and the 125,000 b/d Warri refinery.
Along with everyone else in the oil business, the MEND, which is financed by selling stolen oil, has suffered from low oil prices. However, since its formation 4 years ago, the organization has repeatedly shown its expertise at blowing up scattered and highly vulnerable oil installations. The retaliation for what appears to be a high-casualty attack on a MEND village is likely to go on for some time and further reduce Nigeria’s oil exports. For the immediate future, this flare-up is likely to have little impact on world oil prices. Over the longer run, if the animosity and heavy fighting continues, Nigerian oil production could be seriously damaged.
3. IEA lowers demand
As a leading compiler of information relating to oil, the release of the IEA’s Oil Market Report around the middle of each month always draws much attention. This month the Agency concludes that it does not see any sign of a recovery in demand and that the oil market fundamentals remain weak. Demand for 2009 was lowered by a relatively small 200,000 b/d to 83.2 million b/d which is 2.6 million b/d below 2008 production.
While the IEA sees the drop in worldwide consumption beginning to taper off, it does not foresee a rebound in demand until next year.
4. A changing LNG story
On April 27th natural gas prices fell to a recent low of $3.25 /Mcf but have since rebounded to the vicinity of $4. The demand for natural gas, which has been falling lately in step with falling US industrial production, is the main reason for the decline. This decline in demand and the buildup of supplies in storage has resulted in a major drop in the number of rigs drilling for natural gas. From a high of 1600 rigs in the fall of last year, the number has now fallen 55 percent to 728. Many believe that a reduction of this magnitude will curtail supply to such an extent that prices will rise significantly this winter.
During the first part of this decade, as natural gas drilling moved to smaller gas pockets, it took more drilling to keep supplies relatively stable. Last year, shale gas changed the math. Yet the development of shale gas typically requires expensive horizontal drilling and fracing, further adding to the expense.
In recent years, very little LNG has been imported into the US, especially last year. As a major domestic producer with steady access to supplies from Canada, prices in the US generally have been too low to compete with the demand for LNG in European and Asian markets. This is now changing. With demand falling in the industrialized countries of Europe and Asia and with little capacity to store gas in most countries, an increased amount has been making its way to the US.
A sometimes underappreciated fact about the natural gas business is the large quantities of natural gas liquids that can be extracted from some wet gas streams. Gas produced in Qatar, a major producer, contains 48 barrels of liquids per Mcf of gas. This means there is so much money to be made from selling the natural gas liquids that there is enough left over to pay for liquefying the gas, transporting it and then regasifying it. In short, the producer of dry gas may be less concerned with how much it sells for so long as he can get rid of it. With global warming concerns, it is becoming unacceptable to flare natural gas, and unless one reinjects it into the earth (e.g., Prudhoe Bay, to boost oil production), the only way to get rid of the stuff is to find a market.
Between 1997 and 2011, LNG production will grow at an annual rate of 8.4 percent, nearly double what it did in the previous 14 years. There are serious implications the for the US gas industry. If LNG imports continue to increase, the prices will stay low and domestic drilling for gas is not likely to rebound anytime soon.
Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- Saudi Aramco produced 8.9 million b/d of crude oil on average last year, up from 8.5 million barrels a day in 2007, according to its 2008 annual report posted Wednesday. Reserves of crude and condensate remained unchanged at 259.9 billion barrels. (5/13, #9)
- Saudi Arabia needs to rein in fast-growing power demand—up 5.6 percent per year during 2001-2008. An economic boom fuelled by record oil revenues this decade and subsidized domestic prices have led to a rapid rise in electricity consumption in the kingdom. Natural gas supplies were insufficient to meet all demand for power, so Saudi Arabia burns oil products and some crude to meet demand. (5/15, #5)
- Norway, the world’s fourth biggest crude exporter, saw oil production fall a sizeable 7 percent in April to 1.99 million b/day last month from 2.15 million b/d in March. The data highlight one of the big underlying supply problems in non-OPEC states that many oil analysts believe is likely to send crude prices back over the $100 a barrel mark. (5/13, #21)
- In Mexico, Chicontepec’s output has reached just under half the 72,000 b/d of petroleum that planners hope for this year. Pemex promises to increase the field’s production to more than 700,000 barrels per day within the next eight years. (5/11, #10)
- Brazil’s President Lula da Silva is to sign a financing agreement for state-run Petrobras during a visit to China this week. The agreement with China will finance subsalt oil development offshore Brazil. (5/16, #8)
- Available oil storage is getting closer and closer to being full and the futures market contango has begun to flatten. When additions to storage cease, the resulting drop in demand can be expected to lead to substantial downward pressure on oil prices. (5/12, #18)
- Johns Hopkin’s School of Public Health hosted the world’s first gathering devoted to Peak Oil and Health, with support from the federal Centers for Disease Control and Prevention (CDC) in Atlanta. (5/12, #19)
- The number of drilling rigs actively exploring for oil and natural gas in the US fell by 10 this week to 918, and down 55 percent from the high of 2031 last September. (5/16, #13)
- As energy markets shrink, the tactics that the Kremlin used to build energy giant Gazprom into a fearsome economic and political power are now backfiring, slashing both its profits and its influence. Gazprom is committed to long-term contracts with Central Asian countries for gas at a cost far in excess of current world prices, so that the company is saddled with a glut of expensive Central Asian gas that it is forced to sell at a loss. The company also is forced to close its own wells in Russia, which produce gas for a fraction of the cost of that from Central Asia, in order to balance its supplies with declining world demand. (5/16, #20)
- Methane hydrates: a 21-day expedition discovered highly saturated gas-hydrate-bearing sands in two of three sites drilled in the Gulf of Mexico, according to the Office of Fossil Energy at the National Energy Technology Laboratory. NETL noted that these two sites were the first finds in the world of resource-quality marine gas-hydrate deposits. (5/16, #15)
- The commercial use of oil from US oil shale deposits is likely at least 10 years away and will require technological advances to get past hurdles standing in the way of its commercial use, Interior Secretary Ken Salazar said Wednesday. (5/16, #24)
- The Kurdistan Regional Government has signed two dozen contracts with international oil companies to explore for and produce oil. It cites the 2005 Constitution as giving it such authority. Iraq’s oil minister says the 2005 Constitution maintains the oil strategy as a right of the state, and claims KRG deals are a unilateral usurpation of such authority. (5/15, #6)
- So badly battered is the shipping industry that the daily rate to charter a large bulk freighter plummeted from $300,000 last summer to a low of $10,000 early this year, according to a London ship brokerage. The rate has rebounded to $25,000 in the last several weeks. (5/13, #8)
- China and Kuwait have signed a long-awaited agreement on a $9 billion oil refinery in southern China’s Guangdong province, said to be the country’s largest such venture so far. (5/12, #5)
- PetroChina plans to build two refineries in China to process heavy Venezuelan oil imports, company Chairman Jiang Jiemin said Tuesday. (5/12, #9)
- Exports from China slumped 22.6 percent in April from a year earlier — a fall that was not only larger than economists had expected but also bigger than the drop in March. (5/12, #10)
- Over 2,300 US auto retailers have been put on notice that they are being eliminated by Chrysler and GM. The latter had a widely recognized problem of having too many dealers competing for a shrinking share of US sales. Toyota Motor Corp, which has a bigger market share than Ford, also has far fewer US dealers: less than 1,500 showrooms versus 3,800 for Ford. (5/16, #11)
- The Air Transport Association projects a 7 percent decline in US air travel this summer compared to last year. (5/16, #16)
- European economies contracted 2.5 percent in the first quarter of 2009, or at a 10 percent annual rate, as activity stalled across the region. The American economy, in recession since December 2007, contracted at an annual rate of 6.1 percent in the first quarter. (5/16, #19)
- Pakistan is facing a 14 percent power generation shortfall of 1,650 megawatts, while the country’s production is 11,992 megawatts. This shortfall will increase to 21 percent during the peak demand months of June, July and August. (5/16, #5)
- Southern California Edison and BrightSource Energy have reached agreement on contracts for 1,300MW of solar thermal power, enough to serve nearly 845,000 homes. The accord, say the companies, will be the world’s largest solar power project. (5/15, #17)
- Last week Schott AG, the largest maker of solar trough collectors—cylindrical reflectors that concentrate sunlight to heat liquids and make electricity—inaugurated its first U.S. facility in Albuquerque, New Mexico. (5/16, #25)
- Trash incineration produces 0.4% of the country’s electricity. A new study concluded that incinerating a ton of trash emits at least 35% less greenhouse gas and yields 10 times as much electricity as burying it, then capturing and burning the associated methane. Today, the U.S. burns 13% of its trash, sends 54% to landfills and recycles 33%. (5/15, #18)
- Salida Capital analysts in Toronto believe that a possible 35 percent increase in the number of nuclear power plants operating worldwide this decade could create a shortage in the supply of uranium yellowcake–especially if China decides to stockpile the metal to avert domestic shortages. (5/14, #20)
- The first 630 MW of the planned 1 GW London Array UK offshore wind farm, a $4.6 billion scheme to build the world’s largest offshore wind farm in the Thames Estuary, has been given the go-ahead by the three project partners. (5/12, #20)
- Forget peak oil — a series of new estimates of the world’s coal supply suggests reserves may be vastly overestimated, and if the planet isn’t running on a majority of alternative energies within the next few decades, we could be facing an unprecedented global energy crisis. (5/12, #17)
Quote of the Week
“When I became president, the average gas mileage on a car was 12 miles per gallon, and we had mandated, by the time I went out of office, 27.5 miles per gallon. But President Reagan and others didn’t think that was important, and so it was frittered away.”
— Jimmy Carter, former U.S. President, testifying before a Senate committee