Peak oil review - Mar 23
by Tom Whipple
1. Production and Prices
Last week started with oil falling to below $44 a barrel on Monday as OPEC voted to hold production steady. As the week progressed, prices climbed to a three-month high of nearly $53 after the US announced a plan to fight the recession by having the Federal Reserve purchase US government debt.
Tanker tracker Oil Movements reports that OPEC production continues to decline in March and that by early April the cartel will be very close to completing its announced production cut of 4.2 million b/d. A shipping source reported that crude oil in floating storage still totals some 80 million barrels so that even with lower OPEC production, it may be some weeks before this inventory is worked off and prices start to increase.
The IMF and World Bank continue to forecast that the global economy will slip in 2009. Beijing, however, is still insisting that it will achieve an 8 percent growth rate this year, but nearly all other countries are forecasting an actual economic decline. The question of whether the demand for oil slips more or less than the 4 million barrel production cut is still crucial. Non-OPEC production is forecast to be steady during 2009, leaving the level of demand for crude the key variable for the next few months.
Saudi and OPEC officials continue to issue strong warnings about the damage low oil prices are doing to investment and the prospects for oil supplies in coming years. Saudi Oil Minister Al-Naimi went so far as to warn that “in years to come, if traditional energy supplies should prove inadequate because capital expenditure was curtailed due to unsustainable prices, unreliable indication of future demand or hopes for a substitute that oil cannot deliver, such a supply crunch would be catastrophic."
2. Mexico’s Cantarell
Mexico received the bad news last week that production from the giant Cantarell oil field continues to decline faster than expected. Although the state oil company PEMEX continues to talk optimistically of producing 2.75 million b/d of crude during 2009, production in February was 2.66 million b/d, down 8.6 percent from February 2008.
The EIA and IEA have issued pessimistic forecasts concerning Mexican oil production in 2009. The EIA expects production to fall 10 percent this year. The IEA predicts that production from Cantarell will be around 600,000 b/d this year compared to PEMEX’s target of 756,000 b/d despite an investment of $3.6 billion in a effort to maintain production.
Production from Cantarell has been falling in accordance with the worst-case scenario contained in a confidential PEMEX document leaked to the press 4 years ago. If the slide in production continues at current rates, Mexico will not be exporting much oil in about 4 years. Before the economic slump took hold, oil exports amounted to about 15 percent of Mexico’s foreign exchange earnings.
3. Investment in Venezuela
As exports slide, oil prices remain stagnant, and its economy falters, Caracas is searching for new investment to replace the US and European oil companies that were largely driven out two years ago. With cash short, Venezuela is holding up payments to contractors. Oil service companies are halting drilling for non-payment of bills and last week the Brazilian firm building the Caracas metro slowed work for non-payment. In addition to bills from contractors, the government is said to owe abut $10 billion to pay for firms it has nationalized in recent years.
President Chavez is pinning his economic hopes on increasing production from the Orinoco heavy oil deposits which the government says contains 272 billion barrels of oil. Last week Chavez announced a $6 billion dollar deal with a consortium of Russian firms to drill in the Orinoco basin. Caracas is also evaluating bids from two Chinese state oil companies for blocks in the Orinoco; holding talks with South Korea to help develop heavy oil and gas fields; and has signed an energy agreement with Japan. Caracas says four Japanese oil companies are considering investment in the Orinoco.
These agreements will take many years to produce results. Exploiting heavy oil fields is both technically challenging and expensive. Besides Beijing, only several of the international oil companies Chavez kicked out last year have much spare capital to investment in long term oil projects right now. Given the precarious state of the global economy and the increasing likelihood of political unrest, it is doubtful that much will come from all this activity.
4. The Natural Gas Glut
With US manufacturing slumping and cars produced for sale in the US currently down to an annual rate of about 4 million vehicles, the demand for natural gas has dropped markedly in recent weeks. Natural gas in the US now goes for around $4 per thousand cubic feet as compared to $13 last July. Six new LNG plants are due to come on stream this year adding to the glut. LNG imports into the US are expected to at least triple in the second half of 2009 as demand in Spain, Japan and Korea, the big three LNG importers, falls. Drilling in the US is down by nearly 50 percent in the last 27 weeks. This drop is much faster than that seen in previous drilling slumps back in 2001, 1997 and 1981.
Even the drop in US domestic production later this year is not likely to cause a rebound in prices as there will be so much LNG available for import.
In another development, companies drilling in Louisiana’s Haynesville shale are reporting extraordinary success. One well in Red River Parish averaged 23 million cubic feet/day in December as compared to the 2 or 3 million cubic feet a day that vertical wells have been producing from other natural gas formations in recent years. While these highly productive wells often have very rapid first-year decline rates, their productivity is enabling drillers to make a profit even at the low prices currently prevailing.
Until the US and global economies improve, natural gas prices are likely to remain low.
5. Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
OPEC's decision to resist new supply cuts laid the ground not just for cheaper oil to help heal the economy, but for warmer relations with the world's biggest energy consumer. Two days after U.S. President Barack Obama called Saudi King Abdullah, OPEC said it would stick to existing supply targets, even though fuel inventories have swollen and oil prices are much lower than it would like. (3/16, #4)
Kuwait's government will cancel a $15 billion oil refinery project, which met opposition in parliament. The Audit Bureau's report on the refinery was not made public, but according to media reports, it had concluded the project was not feasible. (3/16, #7)
Brazil may join OPEC, but an entry makes sense only after Brazil becomes an oil exporter, the country's Energy and Mines Minister Edison Lobao said Wednesday. (3/19, #10)
Deep water drilling ventures that were planned as of August would have added 6.3 millions barrels a day to global oil supplies, but so far projects that would have provided 2.4 million barrels have been canceled or delayed, analysts with Morgan Stanley reported. (3/20, #5)
Angola's oil production capacity hit 2.1 million barrels per day, but the country has intentionally scaled back output to 1.7 million b/d in order to respect OPEC-mandated production quotas. (3/20, #7)
Mexican oil production fell 9.2% last year and is down 21% from peak levels in 2004. (3/20, #8) Pemex also said crude oil reserves last year fell for the 10th straight year. (3/19, #11) Exports are down 12% from one year ago. (3/21, #8)
Venezuela is considering hiking its extraordinarily cheap domestic gasoline price as it copes with the global crisis. After having kept prices at the pump frozen for the past 13 years, gasoline in Venezuela costs about 16 cents a gallon. (3/18, #9)
The head of Canada's biggest energy lobby is pushing his industry to pursue exports to Asia out of concern that the new US administration will bring in environmental rules that could restrict cross-border exports from the oil sands. (3/19, #15)
Nigeria has about 606,500 barrels per day of oil shut in due to sabotage to oil facilities, according to oil companies and trading sources. The outage volume represents about 25 percent of the African country's installed output capacity of around 3 million bpd. (3/18, #7)
As the Obama administration outlines its energy plans, it is caught between oil companies, who are reminding the president of his campaign pledge to allow offshore drilling on off-limits areas, and environmental groups, who are demanding a reinstatement of the drilling ban that Congress lifted in September. (3/18, #11)
Alaska lawmakers are rethinking the state's support for a $30 billion natural gas pipeline amid sharply lower gas prices and concerns about availability of financing for the massive project. (3/20, #14)
Natural gas, opposing views: 1) Falling global gas demand, production continuing to outpace demand, and the likelihood of greater gas imports to the US from Canada and from LNG could combine to send US gas prices into a collapse in 2009, according to a study from Energy Solutions. (3/18, #14) 2) Natural gas drillers from Devon Energy Corp. to XTO Energy Inc. are idling rigs at the fastest pace since 2002, setting the stage for this year’s worst commodity to almost double as supplies drop faster than demand. (3/16, #12)
The emergence of the global market in natural gas is about to take a giant leap. The world’s capacity for liquefied natural gas exports of 200 million tons a year will increase by 25 percent with the completion of six new plants in Qatar, Russia, Indonesia and Yemen, totaling $48 billion in investments. The supply excess should hold prices down. (3/21, #16)
The US EIA and the IEA should make official statements about peak oil production in 2008 to renew the focus on oil conservation and alternative energy sources. Peak oil has passed and new oil projects can only serve to slow the production decline rate. (3/18, #15)
Russia has proposed sending a permanent envoy to the OPEC Secretariat in an effort to coordinate policies, again declining membership in the group. (3/17, #3) Russia will cut oil exports and increase domestic oil consumption in a bid to stabilize world oil prices amid the ongoing financial crisis, Deputy Prime Minister Igor Sechin said on Sunday. (3/16, #4)
Saudi Arabia's oil minister said Monday that petroleum-producing countries need a price of at least $60 a barrel to bring more energy resources on the market. (3/17, #6)
Saudi Arabia’s oil production capacity will be 12.5 million barrels a day by June, according to Saudi Oil Minister Ali al-Naimi. He was referring to the nation’s ability to produce oil, not its actual production. (3/16, #6)
Chinese companies have been on a shopping spree in the past month, snapping up tens of billions of dollars' worth of key assets in Iran, Brazil, Russia, Venezuela, Australia and France in a global fire sale set off by the financial crisis. The deals have allowed China to lock up supplies of oil, minerals, metals and other strategic natural resources it needs to continue to fuel its growth. (3/17, #12)
At its Perdido project, Shell has completed installing the drilling and production platform atop a 555-foot cylindrical spar floating in about 8,000 feet of water 200 miles from Houston in an isolated sector of the Gulf of Mexico. It is the deepest such facility in the world. (3/17, #17)
Shell will no longer invest in renewable technologies such as wind, solar and hydro power because they are not economic, the Anglo-Dutch oil company said last Tuesday. It plans to invest more in developing a new generation of biofuels which do not use food-based crops and are less harmful to the environment. (3/19, #19)
Growing world population will cause a "perfect storm" of food, energy and water shortages by 2030, the UK government’s chief scientist is warning. (3/19, #18)
Spending on travel and tourism declined last year for the first time since Sept. 11, 2001, the Commerce Department said Thursday, as Americans canceled vacations, a strong dollar kept foreigners away and businesses slashed travel budgets. (3/20, #15)
US motorists cut back on driving for a record 14th straight month in January as Americans pared travel and spending with unemployment on its way to the highest in more than 25 years. Vehicle miles traveled fell by 3.1 percent, from January 2008. (3/21, #20)
Scientists at the Massachusetts Institute of Technology have developed a way to charge lithium ion batteries in seconds, instead of hours, that could open the door to smaller, faster-charging batteries for cell phones, cars and other devices. (3/18, #20)
Quote of the Week
We don't have a crystal ball on oil prices, so we are planning on the basis that the downturn could last more than a year,"
-- Jeroen Van der Veer, CEO of Royal Dutch Shell
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