Peak oil review - April 7

1. Oil and the Global Economy

Oil prices declined during the first three days of last week, and then partially recoveredon Thursday and Friday to close at $101.14 in NY and $106.72 in London. The decline came on weaker economic data out of China and the expectation that Libya may soon resume substantial oil shipments. The climb at week’s end was due to skepticism about a settlement in Libya and optimism that the US job picture might improve. Last week’s stocks report was dominated by the four-day closure of the Houston Ship Channel which reduced US imports by some 800,000 b/d from recent levels resulting in a 2.4 million barrel decline in US crude stocks — the first in 11 weeks. The Channel is now open and the missing crude imports should be unloaded in the next week or so.

As US crude imports fall, the share that comes from Canada, Mexico, and Saudi Arabia has climbed to 60 percent of US imports — highest in 40 years. Continuing rapid growth of US shale oil production, which most expect to continue for at least another two years, is likely to increase this share even more and could bring US imports down to the vicinity of 6 million b/d from the current 7.3 million.

The North Dakota Petroleum Council weighed into the debate about the future of US shale oil production with a new report from the research firm of Wood-Mackenzie which forecasts that production from the Bakken shale will average 1.1 million b/d this year, up by nearly 250,000 b/d from 2013. The firm is also talking about Bakken production hitting 1.7 million b/d by the end of the decade, and Bakken wells lasting for 25 or 30 years. The next report covering February’s oil production in North Dakota, which is due next week, should give us a better idea as to how badly production has been hampered by the cold winter. Cold and snow continued in the region as recently as last week. Needless to say, many analysts are skeptical that the Bakken can keep growing shale oil production by an average of 100,000 b/d each year until 2020.

There is growing skepticism about the EIA’s forecast models. In December the Administration said that Bakken oil production in January would average 1.025 million b/d. When North Dakota released the actual production for January, it was only 871,000 b/d or 153,000 b/d less than the EIA estimated a month earlier. While some of this shortfall was due to the cold weather, the size of the misestimate raises questions about the EIA’s reliance on models to produce the forecasts of US shale oil production it continues to issue.

US gasoline prices are climbing again due to declining supplies and the rapidly rising costs of the ethanol used for blending – up 81 percent in the last quarter. Railroad congestion is blamed for the higher ethanol prices. The AAA says the national price of regular gasoline is now $3.58 a gallon which is up nearly 10 cents in the last month and the highest since last summer. California is already above $4 a gallon. This is still well below the $3.78 we saw in February 2013. The AAA is expecting gasoline prices to peak this month at around $3.65 a gallon, or higher if things do not go well. While the EIA forecasts that US demand for gasoline this year will remain around the 8.8 million b/d we saw last year, demand for exports of US gasoline, which is highly profitable for US refiners, is likely to remain strong.

The report that US natural gas stocks fell by 74 billion cubic feet last week, at a time when drawdowns are usually minimal, has traders concerned about the prospects for the US natural gas supply in the next year or two. Last week was unusually cold in the northern US suggesting that the drawdown may continue for another week or so before storage facilities begin refilling again. The selling price of natural gas is still too low to be profitable in some areas and the number of rigs drilling for natural gas is down from last year.

Whether the storage caverns can be refilled to an adequate level in time for next winter is an open question. A unusually hot summer would require more gas to meet the demand for air conditioning; a substantial increase in prices would encourage more drilling; and if next winter is anything like the one we just had, partially restocked storage caverns would likely result in shortages. In the next few years, the US is planning to export substantial quantities of LNG as well as shutdown numerous coal-fired power plants which will add a new drain on US natural gas supplies.

2. The Middle East & North Africa

Iran: Expert-level nuclear talks resumed in Vienna last week amidst reports that Moscow is contemplating a $20 billion oil-for-goods swap in which Tehran would essentially send its oil to Russia for marketing in return for Russian goods and equipment. Washington says it has no information on the alleged deal, which could undercut sanctions on Iran, but indicated that it will extend sanctions should such a deal come to fruition. The nuclear negotiations will continue at the chief negotiators level in Vienna this week.

Tehran has given China’s National Petroleum Crop three months to get moving on exploiting the South Azadegan oil field which Iran shares with Iraq. In the seven years China has had access to the field, it has drilled only seven of 185 wells promised and is producing only 50,000 b/d. In contrast, Iraq is already pumping 175,000 b/d from its sector of the field and plans to raise this to 400,000 b/d.

Iraq: Campaigning for the 30 April parliamentary elections began last week amidst the ongoing sectarian turmoil. The elections will be the first in four years as Prime Minister al-Maliki tries for a third term with bloodshed at the highest in seven years.

The Kurds have postponed plans to export 100,000 barrels of their oil per day through the government’s northern export pipeline. The pipeline, which is blown up frequently by Sunni insurgents, was reported to be out of service again last week. Erbil had announced that it would start sending oil through the pipeline as a “goodwill” gesture to ease tension with Baghdad.

Russia’s Lukoil considers its stake in the West Qurna-2 oilfield one of its most valuable assets. The field is estimated to contain 14 billion barrels of oil which is one of the largest undeveloped oil fields left in the world. The plans are to start with production of 400,000 b/d which will be increased to 1.2 million and which is expected to keep producing at this rate for 20 years.

Libya: Tripoli reached an agreement with the rebels on Sunday to open two of the smallest export terminals that have been closed since July. Zueitina and Hariga, the two smallest oil ports with a capacity of 200,000 b/d. The larger occupied ports, Ras Lanuf and Es Sider, are be reopened after two to four weeks of further negotiations. Under the agreement the protestors are banned from further interference with the two ports turned over to the government. The return of the two ports could increase Libya’s oil production to some 350,000 b/d from the current 150,000, but will still be a million b/d below the 1.4 million that was being produced before the troubles started.

On Sunday there was a general strike in Benghazi to protest the lack of security provided by the government.

Without the oil revenues, some Libyans have taken to running the vast stores of guns that the Gadhafi regime left behind to insurgent groups in the Sinai and Palestine. Occasionally these gun runners are caught by the Egyptian authorities and given lengthy prison sentences. In one such incident last week, fellow tribesmen of a jailed gun runner kidnaped 50 Egyptian truck drivers transiting Libya and held them for release of the gunrunner. The drivers were freed after negotiations. In the meantime, Cairo has warned its citizens to only travel in Libya by air and if already in the country to exercise utmost caution.

3. China
New economic figures show China’s manufacturing growth fell to an eight-month low in February; however, part of this decline likely is due to the nation-wide lunar holiday. Of more interest is the announcement that the government is undertaking a “mini-stimulus,” the first stimulus program since the great recession six years ago. This suggests that Beijing is worried that the country may not be able to attain the 7.5 percent GDP growth targeted for this year. The new stimulus program mostly involves speeding up railroad and housing construction as this is the quickest way to record more GDP growth. Some believe that Beijing is on the wrong track by emphasizing capital-intensive infrastructure projects rather than undertaking efforts to boost consumer consumption.

The conventional wisdom seems to be saying the China’s economy is slowing and with it will go the demand for as much growth in oil imports. This notion is already having an impact on oil prices which will be amplified if we start seeing slower growth in China’s oil import numbers as the year progresses.

4. Quote of the Week

· "Nuclear power is probably the biggest asset we have in the fight against climate change…But I’m a business guy and I’m a pragmatist, and there’s no future for nuclear in the United States. There’s certainly no future for new nuclear…The fact that distributed solar is going to take over the built environment in the United States, it’s a completely foregone conclusion that that’s going to happen. …[Very few know] how close the system came to collapsing in January because everyone wants to go to natural gas and there wasn’t enough natural gas in the system. The purpose of having old coal plants, to be frank, is keeping the lights on for the next three, five, 10 years…I’m not anti-utilities, I’m not anti-nuclear, I’m not anti-coal, I’m just anti-bullshit."
— David Crane, CEO of NRG Inc., the U.S.’ largest independent power generator

5. The Briefs

Russian state-controlled oil company Tatneft said it’s planning to resume operations this year in Libya, which were idled at the onset of the Libyan revolution in 2011. (4/3)
In Nigeria, the shutdown of a major refinery—due to a combination of functional problems and vandalism—stirred fears that the country’s nationwide shortage of petroleum products, especially petrol, may worsen. (4/3)
Production at the giant Kashagan oil field in Kazakhstan is unlikely to restart this summer as the companies involved in the consortium running the project are still awaiting a report on a gas leak that closed the field last October. Resuming output is important so Exxon, Shell, France’s Total and Italy’s Eni and others can start generating revenue to recoup some of the $50 billion they have already invested in Kashagan over the last 17 years. It is also important for the Kazakh government, which had based its economic forecasts on revenue from Kashagan, where output was expected to ramp up to 370,000 b/d from 180,000 b/d. (4/5)
Iran announced it launched operations at its first-ever floating gas condensate export terminal in the waters of the Persian Gulf. In January Iran exported 878,631 tons of gas condensate. The new facility has the capacity to export 600,000 barrels of gas condensate per day and can help Iran boost its capability to export both crude oil and condensate. (3/31)
India’s crude oil imports rose by nearly a quarter in February due mainly to the steady rise in demand for fuel products as political parties burn more gasoline and diesel to power their campaign for the federal elections. The world’s third-biggest crude oil importer after the U.S. and China bought 4.3 million b/d of oil. (4/2)
Exxon said on Monday that risks related to climate change pose little risk to its oil and gas reserves because the resources will be needed to meet expected growth in energy demand. (4/1)
Petroleos Mexicanos’ March crude oil production slid to 2.47 million b/d, its lowest monthly level in almost two decades after output declines accelerated at the world’s fifth-largest crude oil producer. (4/2)
Approximately 71 percent of Canada’s crude oil production last year was exported to the U.S. and 2 percent was exported to overseas markets, showing the dominance of U.S. demand on Canadian production. (4/2)
In Brazil a judicial panel ruled a Chevron Corp. subsidiary and 10 of its employees will face criminal charges related to offshore oil spills in 2011 and 2012. (4/5)
Danish company Maersk Drilling said it’s trying to breathe new life into an industry working with a fleet of offshore rigs in need of replacement. Maersk will eventually reach deeper into the ultra-deep water and ultra-harsh drilling environments with new rig technologies. Holm said a large share of the global drilling rig fleet is more than 30 years old and will need to be replaced. (4/5)
If the US eliminated oil export restrictions, what might actually happen to supply, demand and prices? That’s what JBC Energy GmbH, a Vienna-based research company, offered in a report last week. The upshot? Producers win, refiners lose, global prices converge — and the question of energy independence, is, well, irrelevant. Lifting the ban would increase U.S. crude-oil production by about 700,000 b/d, raise exports by about 1.5 million b/d and push up imports by about 500,000 b/d by 2020, JBC estimates. So the net effect on the country’s energy balance sheet is pretty negligible. Global supply wouldn’t change much either, as other producers would adjust. (4/5)
Five states and the Gulf of Mexico supplied more than 80 percent, or 6 million b/d, of crude (including lease condensate) produced during 2013: Texas (35%), the federal offshore Gulf of Mexico (17%), North Dakota (12%), California and Alaska at close to 7% each and Oklahoma at 4%. (4/1)
America’s shale oil and gas rush is depleting water supplies in the driest and most drought -prone areas of the country, from Texas to California. Of the nearly 40,000 oil and gas wells drilled since 2011, three-quarters were located in areas where water is scarce, and 55% were in areas experiencing drought. Fracking those wells used 97bn gallons of water, raising new concerns about unforeseen costs of America’s energy rush. (4/4)
US ethanol and railroad industry groups clashed Thursday over transportation constraints that have triggered soaring prices for the biofuel in recent weeks. Analysts say a backup of railcars has kept ethanol from making it to coastal refineries that mix it into gasoline. (4/4)
Floating liquefied natural-gas vessels (FLNGs): In an effort to cut expenses, an increasing number of natural-gas producers are planning to pack entire gas-production plants onto super ships bigger than aircraft carriers instead of building expensive land-based industrial complexes. These huge floating gas factories are creating a multibillion-dollar market for Asian shipyards. The new fleet of FLNGs also demonstrates how the global race to provide cheaper gas supplies to Asian economies is pushing the boundaries of technology in the oil-and-gas sector. Oil-and-gas exploration is going deeper and farther into the oceans, and the size of gas discoveries is shrinking, making it more economical to build a single floating facility and move it to small fields. (4/3)
In Spain, energy companies from Texas, Canada and Ireland are going after exploration and drilling permits in hopes of capitalizing on geology that indicates the country has a sizable chunk of the 883 trillion cubic feet of natural gas in shale estimated to sit under Europe. What’s changed? A sluggish economy for one — the energy industry estimates fracking could eventually create tens of thousands of jobs in a nation with an unemployment rate of 26 percent. Unlocking gas deposits might ease what consumers pay for the heating fuel. It’s about triple the U.S. price. (4/3)
In the UK, Lord John Browne says fracking for natural gas would secure a new domestic energy source, create thousands of jobs, generate billions of pounds in tax revenue and be a far cheaper alternative than constructing nuclear plants. Seven years after leaving BP, he’s at the forefront of a push by major energy companies and wildcatters to take fracking global. Cuadrilla and other UK operators would have to drill 2,000 to 3,000 new wells in the immense Bowland-Hodder formation, a belt of shale that stretches across England’s midsection, every year to match the annual volume of imported natural gas. (4/3)
Shale gas production in Britain could begin within four years if the current crisis in Ukraine escalates to such an extent that a national state of emergency is declared, the chief executive of Cuadrilla Resources said. Britain is in the early stages of exploring for shale gas. Cuadrilla is two to three years away from establishing whether its British shale gas operations are commercially viable. (4/3)
China’s first deep-water natural gas field has started producing gas. The $6.5 billion Liwan-3 project, operated and 49% owned by Canada-listed Husky Energy Inc., is in undisputed Chinese waters about 325 kilometers southeast of Hong Kong. Beijing wants to increase gas use to around 10% of China’s energy mix by 2020 from less than 5% now. (3/31)
As Pennsylvania shale gas production flows in from a total of 6,489 unconventional wells under development or in production as of December 31, 2013, total impact fee revenue has also flowed in at $630 million over the past three years, in addition to the more than $2.1 billion in state tax revenue generated by the industry since 2008. (4/5)
In Corpus Christi, lured by growing port facilities and ready available cheap natural gas from the prolific Eagle Ford Shale play, two foreign-owned firms are bringing a newcomer – iron and steel manufacturing – into the Coastal Bend’s economic fold. (3/31)
UK Coal is appealing for government support to stave off a collapse that would cost 2,000 jobs. The largest coal miner in Britain was rescued last year by the Pension Protection Fund, but it is on the brink of insolvency again. (4/2)
The US needs to keep coal in the mix for electricity generation because it’s cheap and plentiful, say power utilities American Electric Power Co. and Southern Co. “Coal has to be part of the puzzle,” Nick Akins, chairman and chief executive of power giant AEP said Thursday. (4/4)
Fuel subsidies in Egypt account for 22 percent of the state’s annual budget, taking funds away from other sectors like health (3 percent) and education (7 percent). Estimates for fuel subsidies for this year amount to the equivalent of $20.1 billion. (4/1)
Battling food shortages in Venezuela, the government is rolling out a new ID system. The cards track families’ purchases and may foil people who stock up on groceries at subsidized prices and then illegally resell them for several times the amount. Critics say it’s another sign the Venezuelan economy is headed toward Cuba-style dysfunction. (4/1)
British Energy Minister Greg Barker said the government wants to install solar panels on top of the more than 900 square miles of south-facing rooftops. Barker said the measure is part of the so-called Solar Strategy, touted as the first plan of its kind for the country’s renewable energy sector. He said the strategy envisions a shift away from large-scale solar farms to one that expands the market on top of the estimated 250,000 hectares of south-facing commercial rooftops in the country. (4/5)
The World Trade Organization rebuked China last week, criticizing their manipulation of natural resource supplies and prices, especially of so-calledrare earth raw materials. The WTO ruling made public on March 26 centered on the Chinese strategy of restricting exports of raw materials, declaring the restrictions illegal and opening the door to retaliatory tariffs from the United States, Japan and others. (4/4)
China may exempt electric-car buyers from paying 10% sales tax as part of expanded state measures to bolster sales of such vehicles after past incentives failed to spur demand. (4/3)
China is emerging as an important player in the race is to unlock one of the world’s biggest untapped sources of clean energy: ocean energy. That could heighten competition with Western companies, especially if Chinese businesses begin using technologies developed with joint-venture partners to expand rapidly. There are three principal techniques: underwater turbines that draw power from the ebb and flow of tides, surface-based floats that rely on wave motion, and systems that exploit differences in water temperature. (4/1)
In China, protests against a planned chemical plant in the southern city of Maoming ended with demonstrators throwing stones and water bottles. The protests were the latest sign of growing public anger in China over pollution. (3/31)