Peak oil review – August 4

1. Production and Prices
2. Iran
3. Nigeria
4. China
5. In the Congress
6. Energy Briefs

Production and Prices

It was another volatile week during which oil prices moved between $121 and $128 in response to various news reports. The perception that slowing US and OECD economies will stem the demand for oil still dominates the markets. This sentiment is punctuated by occasional threats to the oil supply. Last week the Iranian nuclear enrichment situation heated up again accompanied by renewed threats to attack Iran and to close the Straits of Hormouz. In Nigeria a pair of successful insurgent attacks on pipelines shut-in still more oil production.

Accompanying reports of record high international oil company profits came the news that their production is slipping. Exxon reported a 10 percent drop in oil and a three percent decline in natural gas production. Shell reported a 1.6 percent decline in output and Repsol’s production fell by nearly 20 percent.

Taken together the decline of production of all the major international oil companies may now exceed 600,000 b/d. This decline reflects the difficulties they are having in gaining access to new oil fields amidst a myriad of political difficulties around the would as production declines in their mature fields.

A new study funded by the natural gas companies claims that the US has 50 percent more natural gas than once thought because of higher-than-expected yields from 22 shale formations in 20 states. The report concludes that the US now has a 118 year supply of natural gas.
Although new drilling techniques have allowed access to small pockets of natural gas imbedded in shale, we, and some of the people that contributed to the study, are skeptical that the data permits the industry’s conclusion that US natural gas reserves have jumped by 50 percent.

1. Iran

Oil prices jumped by nearly $5 a barrel on Friday when Israel’s Deputy Prime Minister and candidate for Prime Minister Mofaz told a Washington audience that Iran is driving toward a “major breakthrough” in its nuclear development efforts and poses an “unacceptable” danger. Last month Mofaz told the Jerusalem Post that “all options are on the table. If there won’t be a choice other than a nuclear Iran or a military option, it’s clear what our decision has to be.”

The statement brought the usual rejoinder from Tehran about closing the Straits of Hormuz should they be attacked. The Iranians are also sticking to their position in the face of yet another threat of harsher sanctions from the Western powers over their uranium enrichment program. Thus far the US and its European allies have been successful in persuading European oil companies to largely withdraw from Iranian projects. To an extent the western companies have been replaced by the Chinese who are eager to gain access to new supplies of oil and gas.

This situation is likely to hover over the oil markets for many years as the possibility that the oil flow through the Straits could be halted or slowed is about the most serious threat to the global economy imaginable.

In the meantime, Iran has been hit by a serious drought which has cut hydro-electric production and forced daily blackouts. Tehran now has halted the export of heavy fuel oil to Asia as it is required for power generation and stockpiles for next winter.

2. Nigeria

Step by step the situation in Nigeria continues to deteriorate. The government has imposed a blackout on news about militant attacks so that it is now taking a week before there are official figures as to how much production has been shut-in. Last week’s attacks, which the government now admits damaged two major pipelines, are slowing exports by 150,000 to 230,000 b/d for the next two months unless there are more attacks. The most recent attack was spurred by reports that the government had bribed the militants to go easy on oil facilities, suggesting that the attacks are mainly a criminal enterprise that can be cured with money.

The most effective militant group, the Movement for the Emancipation of the Niger Delta, took umbrage at the charge they could be bribed. Within days they blew up two important pipelines as proof that theirs was a selfless political cause of helping the people of the Niger Delta.
Lawlessness is also on the rise as rival gangs fought hours-long gun battles in the streets of Port Harcourt over the weekend. Power shortages are widespread and most refined oil products have to be imported.

3. China

Over the weekend China’s State Council announced a major national energy saving campaign by ordering government agencies and local governments to cut the use of energy consuming equipment. The order requires less use of cars, air conditioners, elevators, street lights and lamps, plastic bags and disposable goods, and the development of equipment that uses electricity and oil efficiently.

This decree is probably in response to the coal shortage which is threatening China’s power supply. A state agency reported last week that coal supplies are only sufficient for 11 days of operation and that aging equipment threatens wide scale blackouts.

China’s immediate energy situation is precarious. For the next two months efforts to clear the air around the Beijing Olympics will result in large savings of oil and coal as driving has been seriously restricted and many industrial enterprises have been temporarily shut down.

By the end of September, the Olympics will be over and Beijing’s overriding priority will once again be 10 percent economic growth. How this will mesh with orders to save electricity and oil has yet to be seen. Some outside analysts are already predicting that coal shortages will require increased oil imports if goals for economic growth are to be maintained.

4. In the Congress

After two months of nearly continuous debate over how to deal with the soaring price of gasoline, Congress adjourned Friday without doing anything about energy. Many in the Congress recognize that energy is a top issue for the voters this fall and favored staying in session until something was passed. The final vote for adjournment in the house passed 213 to 212. The Senate vote to adjourn was 48 to 40 on what is normally a unanimous vote. After the vote a group of Republicans remained on the floor demanding that the Democrats return to vote on energy legislation.

In general the Republicans are calling for lifting restrictions on off-shore drilling while the Democrats favor more incentives for renewables, restrictions on speculation and, as a short-term fix, releasing oil from the Strategic Petroleum Reserve. Both sides cite polls showing that the voters favor their position. Last week various compromises emerged with something from both side’s positions but failed in floor votes.

Some widely favored measures such as renewing tax credits for renewable energy have been to the floors of both houses many times without passing. Some of these measures are caught up in Republican efforts to renew President Bush’s tax cuts before he leaves office. The fear is that increased expenditures for energy without offsetting cuts will weaken the argument for continuing the cuts. The requirement for 60 votes to pass any significant legislation in the Senate is not helping the situation.

Congress will return in September, but seems unlikely to do anything significant about energy until after the voters have their say in November.

5. Briefs

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

• Natural gas used to produce electricity is now the biggest source of demand in the US. Power generation accounted for 30 percent of the 23 trillion cubic feet consumed in 2007, and has increased by 21 percent to 6.874 trillion cubic since 2002, according to the Energy Department. Residential use is unchanged since 2002 and industrial consumption, the second-biggest use, fell 11 percent. (8/2, #2)
• Spain’s energy minister intends to lower the speed limit on the country’s motorways to 80 km/h (50 mph) in order to reduce fuel consumption. (8/1, #11)
• The perennially oversupplied Asian fuel oil market may change into one of the tightest in the next five years, as a massive program of refinery upgrades cuts supplies and Middle Eastern demand surges. This will cut supplies available for the fuel oil-driven utility sector in South China, the manufacturing hub in a booming country already at risk of a power crunch this summer due to low coal stocks. (7/30, #11)
• An important Dutch energy institute recently published a report which concludes that the floor price of oil is now 110 dollars per barrel, that supply will not rise beyond 100-105 million b/d in the coming decades, that there will be an oil supply constraint for most of the next decade, that there are insufficient quantities of alternative fuels available, and demand destruction is inevitable. (7/31, #21)
• TransCanada Corp won Alaskan legislative approval to build a pipeline to ship natural gas from Alaska to an existing pipeline hub in Canada. TransCanada estimates the project will cost $26 billion, while consultants estimate $31 billion. The pipeline is to be operational in 2018. (8/2, #13)
• Petrobras plans to start crude production at the offshore Tupi field in the first quarter of next year. The initial output will be between 20,000 and 30,000 barrels a day, ramping up production at the pilot project to 100,000 barrels a day in 2010. (8/2, #6)
• China may face electricity blackouts nationwide this year due to inadequate power coal supply, the country’s power regulator said in a new report. A drop in coal quality is part of the problem. (8/2, #9)
• Business Secretary John Hutton said the UK Treasury is considering a one-time tax on energy and utility companies after record oil prices boosted profit at BP and prompted Centrica to raise electric and gas bills. (8/2, #15)
• G.M. reported a second-quarter loss of $15.5 billion on Friday because of a continuing fall in sales and charges for job cuts, plant closings and the falling value of trucks and sport utility vehicles. G.M. and Ford had expected economic conditions to improve in the second half of this year, but now are forecasting even more dismal sales. (8/2, #18)
• GMAC and Ford Motor Credit plan to cut back on auto leases in a move that leaves them facing the risk of even more pressure on auto sales (7/30, #13)
• StatoilHydro, the Norwegian oil company, has become the latest big western energy group to commit not to invest in Iran, following pressure from the US. (8/1, #4)
• Pemex pumped 2.856 million barrels a day in the first six months of the year, a 9.7 per cent decline from 3.162 million barrels a year ago. (8/2, #5)
• The Beijing-Tianjin Intercity Railway, which opened Friday, will be the world’s only rail line on which passenger trains could run at 350 km per hour.. (8/1, #8)
• A new, cheaper way to store electricity promises to make solar power competitive with traditional generation, Massachusetts Institute of Technology researchers said. The process uses natural materials to convert sunlight into gases. (8/1, #14)
• China, the world’s biggest greenhouse- gas emitter, is poised to lead world production of solar cells, wind power turbines and low-carbon energy technology. (8/1, #16)
• Iran is considering raising electricity prices five-fold in September in order to curb domestic consumption. The country has a power crisis brought on by the worst drought in more than a century. Hydroelectric output has fallen by 75 per cent. (7/31, #2)
• Energy tycoon T. Boone Pickens said on Wednesday he is creating an “army” of business leaders and mainstream Americans to lobby for his plan to revamp U.S. energy policy in favor of wind power and natural gas over imported oil. (7/31, #17)
• BP said its giant Thunder Horse field in the US Gulf of Mexico was currently producing over 40,000 barrels of oil per day and would reach full capacity of 250,000 bpd by the end of 2009. (7/30, #12)
• Russia’s Economic Development Ministry cut its forecast last Monday for 2008 oil production as output declines at older fields in Siberia, but the new figure remains just above last year’s production. Russia will have the smallest growth in production since 1998 should the ministry’s forecast prove accurate. (7/30, #14)
• The world’s first commercial tidal-power system has been connected to the National Grid in Northern Ireland. Built by the British tidal-energy company Marine Current Technologies, the 1.2-megawatt system consists of two submerged turbines that are harvesting energy from Strangford Lough’s tidal currents. (7/30, #18)
• Mexico City residents voted against the president’s proposal to give private companies a bigger role in the country’s state-run oil industry, according to results of a nonbinding referendum released Monday. (7/29, #8)
• A Costa Rican refinery will be off-line for three weeks due to lack of money to buy oil. (7/29 #9)
• Japan’s government will provide $694 million to aid fishermen who are losing income because of the rise in the price of oil. (7/29, #11)
• FIJI’S tuna fishing industry is on the brink of winding up with companies likely to go into receivership and boats put on sale if the interim Government does nothing. (7/29, #15)
• Tokyo Gas Co., Japan’s largest natural gas distributor, forecast its first full-year loss since the end of World War II, saying the cost of importing LNG may surge 51 percent. (7/29, #12)
• Nepal’s acute fuel shortage is causing serious concern among local food traders about its impact on food prices. Transportation costs have increased by 27 percent over the past six months, in turn feeding into food prices, which have risen by 20-30 percent. (7/29, #14)
• A consensus estimate produced by 17 Chinese and foreign institutes is that China’s gross domestic product will grow 10 percent and the consumer price index will rise 6.1 percent during the third quarter, down 0.1 percentage points and 1.7 percentage points, respectively, from the second quarter. (7/28, #7)
• China Petrochemical Corp., the nation’s second-biggest oil producer, increased its crude-oil output by 2.4 percent in the first half from a year earlier as demand rose in the world’s fastest-growing major economy. (7/28, #9)

Quote of the Week

• “Every time we lift our feet off the accelerator, we are improving GDP and employment. The era of cheap energy has passed.”
  — Spain’s Energy Minister, upon introducing 50 mph speed limit