• “Carbon-based fuels, in their cleaner forms, must keep carrying the load. Renewables just cannot ramp up fast enough to replace them. Let’s consider what gas can mean for the future. The real future, not the pipe dreams of the hydrocarbon deniers.”

1. Prices and Production

Oil prices spent the week in the vicinity of $82 a barrel. On Friday prices rose briefly to a two-month high of $83.16, then fell back on concerns about US economic growth. For the past six months, the oil markets have cycled between optimism and pessimism about the prospects for an imminent economic rebound. Increasing demand for oil in Asia continues to be the key prop under oil prices. The IEA reported that preliminary data shows apparent Chinese demand in January increasing by 28 percent year over year - albeit from a relatively low base. February data from China shows oil imports increasing to 4.8 million b/d from 4.0 million in January.

The weekly stocks report showed total US commercial petroleum inventories dropping by some 5 million barrels last week as there were large, unexpected draw downs of gasoline and distillate stocks. US gasoline demand remains steady at about 8.8 million b/d; prices increased by 5 cents per gallon last week and the national average is now $2.79 a gallon - nearly 90 cents a gallon more than at this time last year.

Natural gas futures fell to the lowest price in 16 weeks as forecasts of milder weather ahead is expected to lead to lower-than-normal demand this spring.

As oil prices seem unable to climb higher than the low $80s, analysts are beginning to wonder if we will see the traditional spring price jump. Every year since 2004, oil prices have increased anywhere from 34 to 119 percent from winter lows to summer highs as refineries increased production for the summer driving season. But this year OECD economies are all mired in significant economic difficulties, which raises the question as to whether demand will increase significantly during the summer driving season. OPEC has been slowly raising production to keep up with increased demand from Asia and the oil producing nations. The Saudis are reported to have increased output by 100,000 b/d in February to 8.25 million b/d. The CEO of Saudi Aramco reiterated last week that they have 4 million b/d of spare capacity that can meet increasing demand from Asia.

2. From the IEA

The Agency’s chief economist, Fatih Birol, said last week that the “era of cheap energy is over,” that oil supply is unlikely to keep up with demand, and that he expects oil prices to “stay on the high side” due to structural not cyclical changes.

Global oil supply increased by 900,000 b/d in February to 86.6 million b/d. OPEC members bound by a quota increased production by 80,000 b/d last month, putting the cartel 1.9 million b/d above quota. For now the Agency says oil markets are well supplied and that there is an element of geopolitical tensions in current oil prices.

In its monthly Oil Market Report, the agency once again increased its forecast for 2010 global oil demand by 70,000 b/d to 86.6 million b/d. This would be a gain of 1.6 million b/d from 2009 levels. The growth will come from non-OECD countries with Asia accounting for half of the growth. OECD demand for oil is now forecast to shrink by 120,000 b/d in 2010.

With the Chinese economy continuing to grow very rapidly, the IEA increased its estimate for China’s oil demand in 2010 by 130,000 b/d to 9 million b/d - an increase of 6.2 percent over 2009.

Non-OPEC production for 2010 is now estimated to be 51.8 million b/d, an increase of 330,000 b/d from 2009. Increased production from the North Sea, Egypt, Russia, Thailand and Columbia is projected to account for much of the increase.

3. China

Hardly a day goes by without major economic news coming from China. Last week’s reporting shows China continuing to grow at astonishing rates, leading some to say “too rapidly.” The official numbers are impressive: exports and imports up 46 percent year over year; industrial production up 21 percent and retail sales up 18 percent in the first two months of the year; oil imports up 800,000 b/d in February to 4.8 million.

There was of course a downside to all this “astonishing” economic growth. Consumer prices rose by 2.7 percent in February, year over year, and factory gate prices increased by 5.4 percent in February.

While clearly concerned, Chinese officials seem content to let the 2008 stimulus program, which is nearly over, run its course during the remainder of the year while cutting the pace of bank loans. These appear to have dropped by 50 percent last month from January levels.

Doubts about Beijing’s statistics are beginning to surface even in Chinese newspapers. While there is little doubt that the country is growing rapidly and that its strong demand for oil, coal, copper and iron ore continues to support world prices, some of the numbers being released seem too high and could be influenced by political concerns as happens in many other countries.

A major issue at the minute is whether China will allow its currency, the renminbi to rise against the dollar. So far Beijing has resisted US admonitions to revalue, but many see indications that such a move is in the offing.

It remains clear, however, that Chinese economic development, be it boom or stagnation, is likely to be the major factor influencing oil markets for the next year or so. Nothing outside of major supply disruptions in the Middle East is likely to come close.

4. CERA Week

This year the annual Cambridge Energy Research Associates conference, which traditionally is attended by many of the major personalities in the energy industry, seems to have focused mainly on the prospects for shale gas.

Speaker after speaker spoke ecstatically about the prospects for the natural gas industry: demand from the power industry will double gas consumption in the next 20 years; there is enough gas to power America for 100 years at current rates of consumption; shale gas will account for 50 percent of US gas consumption in 25 years. One speaker, however, pointed out that Europeans, with a more pristine landscape than the US, may be reluctant to let highly intrusive shale gas drillers have as much latitude as they do in the US.

The simultaneous growth of the global LNG industry and US shale gas is bringing so much gas to market, at a time when industrial demand is dropping, that it may be a while before prices recover to economic levels. Several speakers expect that the demand to replace coal with natural gas will quickly clear the current surpluses of gas and in the long run the challenge will be to find still more.

Speaking at the conference, US Energy Secretary Chu called natural gas a transitional fuel that will used until renewable sources such as sun and wind are more widely available.

Quote of the Week

• “Carbon-based fuels, in their cleaner forms, must keep carrying the load. Renewables just cannot ramp up fast enough to replace them. Let’s consider what gas can mean for the future. The real future, not the pipe dreams of the hydrocarbon deniers.”

– James Mulva, CEO of ConocoPhillips

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

• Kuwaiti scientists now say that global oil production will peak in 2014. The Kuwaiti study created its world model for peak oil based on 47 individual models for each major oil-producing nation. It also took a separate look at OPEC, which includes nations that control about 35 percent of the world’s oil reserves. (3/13, #7)
• Nigeria’s controversial oil industry bill is expected to eventually pass but the government may find it tough to later shift gears as international oil firms targeted under the legislation scale back their investments. Last year about $8 billion was invested in Angola’s deep-water resources–more than twice as much as in nearby Nigeria. (3/13, #8)
• Venezuela would continue producing crude oil even if its ailing electricity system were to suffer a collapse, the country’s oil minister said Friday. Oil accounts for more than one-third of Venezuela’s gross domestic product, more than half of government revenue and about nine-tenths of the country’s exports. (3/13, #9)
• The Venezuelan government plans to increase its consumption of oil and natural gas by a third in 2010 to fuel power plants with which President Chávez hopes will overcome their electricity crisis. (3/10, #14)
• Oil production in its aging fields is sagging so rapidly that Mexico, long one of the world’s top oil-exporters, could begin importing oil within the decade. (3/10, #25) [See the Commentary]
• India’s biggest energy explorer, Oil & Natural Gas Corp., may borrow $10 billion over the next decade as it competes with rivals from China and South Korea to buy oil assets overseas to meet domestic fuel demand. (3/8, #14)
• Iraq’s major coalitions were locked in a surprisingly close race on Thursday, in initial results from elections that deepened divisions across a fractured landscape. Candidates were quick to charge fraud, heightening concerns whether Iraq’s fledgling institutions were strong enough to support a peaceful transfer of power. (3/12, #11)
• The storm brewing on OPEC’s horizon over future Iraqi oil output could engulf the producer group sooner than it would like. OPEC is unlikely to discuss Iraq at its meeting on March 17 but it may need to do so within a couple of years. The consensus among analysts is that it would take around 5 years for Iraq to boost output by 1-1.5 million b/d. (3/12, #12)
• Saudi Arabia is pressing ahead with the biggest offshore oil development in its history, despite having about 4 million b/d of idle crude production capacity. Development of the supergiant Manifa oilfield, containing an estimated 10 billion barrels of reserves, is “on time and on budget.” Production from Manifa will start in 2013, two years before the project’s scheduled completion. Output is projected to reach 900,000 bpd of crude. (3/12, #13)
• Petrobras CEO Gabrielli told a Houston group that, while operating in Brazil’s pre-salt region does require an array of technologies, a bigger challenge lies in meeting logistical demands for operating in deep waters offshore. By 2018, Petrobras is looking for 58 new drilling rigs, with 23 being delivered between 2009 and 2011, nine being charted in 2012 and the remaining 28 being built in Brazil between 2013 and 2018. Petrobras has budgeted $174.4 billion for 2009-2013 under their business plan. (3/10, #15)
• Tullow Oil will keep half its big Ugandan oil and gas discovery, but it can’t afford to develop by itself the $10 billion worth of likely downstream and upstream investment. Hence the decision to sell one-third stakes to France’s Total and China’s CNOOC. (3/11, #12)
• Exxon Mobil outlined plans Thursday that rely heavily on oil from tough to reach places, extracting it from the depths of the ocean, the frozen Arctic and the tar sands in Canada’s frozen tundra. But oil pumped in these places tends to be much more expensive than oil from more conventional sources. Exxon isn’t alone. Easily accessible oil is becoming harder to find, and nations that have it are demanding a bigger cut of the profits. The entire industry is confronted with drilling for more expensive oil. (3/13, #12)
• Exxon Mobil is counting on natural gas to provide the bulk of its future growth. CEO Rex Tillerson is counting on a $28.8 billion acquisition of gas producer XTO Energy as well as new gas developments from the South Pacific to the Celtic Sea to counter a 6.7 percent drop in output in the past five years. (3/12, #23)
• The newly built, ultra-deepwater drillship Discoverer Inspiration has started operations for Chevron in the Gulf of Mexico under a 5-year drilling contract. The drillship targets the drilling of wells up to 40,000 ft of total depth and can drill in up to 12,000 ft of water. (3/13, #16)
• In Pennsylvania, about 1,000 shale gas wells have been drilled and state and local tax revenues from shale gas may reach $871 million this year, according to the Marcellus Shale Coalition, a Canonsburg, Pennsylvania-based industry group. Drilling is on hold in New York while state regulators complete rules to address environmental impacts. (3/11, #24)
• Researchers at Texas A&M’s Global Petroleum Research Institute are testing a new “fraq-water” membrane filtration system to determine if it sufficiently cleans the drilling water to reuse or recycle it. (3/13, #20)
• The International Air Transport Association said it expects the airline industry to incur a $2.8 billion loss in 2010. IATA also lowered its 2009 loss estimate to $9.4 billion. The improved forecast has been driven by economic recovery in the emerging markets of Asia-Pacific and Latin America. Worldwide passenger demand is forecast to increase 5.6% in 2010 and cargo is now expected to rise 12% this year. Revenues are half-way to recovery—$42 billion below the 2008 peak and $43 billion above the 2009 trough. (3/11, #8)
• Shell said it has stopped gasoline sales to Iran, becoming the latest European energy company to scale back ties with Tehran as the threat of tougher U.S. sanctions against the country looms. Iran has little refining capacity and is forced to import as much as 40% of the refined products it needs at a cost of several billion dollars a year. (3/11, #10)
• A senior Iranian oil official said increased gasoline rationing imposed late last year has failed to reduce domestic demand, an acknowledgment that reflects the OPEC nation’s economic struggles as it faces possible new sanctions. (3/9, #8)
• Iran and China have signed an agreement to allow China to set-up an oil rig in the Gulf despite increasing international calls to enforce tougher sanctions against Iran. (3/9, #9)
• China reaffirmed its position that dialogue and consultation were the best method of resolving the Iran nuclear issue and should not be abandoned lightly. (3/9, #10)
• US Defense Secretary Gates arrived in Riyadh on Wednesday for talks with the Saudi royal family that senior defense officials said would be focused on Iran. His visit follows recent trips to Riyadh by Secretary of State Clinton as well as Gen. Petraeus and Adm. Mullen. Saudi officials are very concerned about Iran’s nuclear program. (3/10, #8)
• Indian power companies are stepping up interest to secure coal resources in Indonesia and Australia to meet power needs. Coal demand in India could be 1.4 billion metric tons by 2020, exceeding domestic supply of 1.1 billion tons. Coal India, the nation’s monopoly producer, is looking at 10 proposals in Indonesia, Australia and the US for strategic coal alliances. (3/10, #19)
• BHP Billiton, Anglo American, and Xstrata are shipping coal 10,000 miles to China from their Cerrejon mine in Colombia for the first time this year because of surging demand and rising prices in Asia. Prices 45 percent higher than in Europe make it worthwhile to transport the fuel to ports that are twice as far as European harbors such as Rotterdam. (3/12, #19)
• Lithium-ion batteries are the favored type for electric and hybrid vehicles because they carry more energy with less weight than other materials and because they lose their charge more slowly. Bolivia, which has almost half of the world’s reserves, is building a pilot production plant and drilling exploratory holes. That Bolivia is a remote, unstable country often hostile to foreign investment has spurred serious interest in producing lithium in Argentina, Chile, Australia, Serbia, China, Finland, Mexico and even in the USA. (3/12, #26)
• A growing army of Beijing residents is returning to two-wheeled transport, but this time around it is to electric bikes. The explosion in purchases of electric bikes helps buyers move around more quickly in an increasingly auto-congested city. (3/11, #26)
• Saudi Aramco chief Khalid Al-Falih expressed worry about assumptions in the political realm that alternative energy sources could “transform the face of energy overnight”. The over promise and under deliver of such technologies could lead to “green bubbles” which could collapse and damage their potential for success in the long term. (3/10, #9)

SA: Is Mexico’s well-being tightly tied to oil production?

David Shields: I think the oil industry is roughly 3-4% of Mexican GDP, which is not that high. It’s a much bigger proportion of tax revenues. So it’s very relevant. But oil prices have fluctuated wildly over time. There have been very bad years of Mexican oil revenues and Mexico has survived them. When you have a bad year you have to reduce your expenditures. But Mexico is a very troubled country and a very unequal country, so when there are oil revenues there is one part of society that seems to benefit and another large chunk that never seems to do so. So I think the answer to that is not a straight yes or a straight no, it’s a complex issue.

SA: A recent New York Times article asserts that Mexico’s basic problem is that a lot of it’s easy oil is “used up.” That’s a very imprecise turn of phrase, but do you generally agree with it?

Shields: I think a large amount of it is already used up. As a ballpark figure, roughly 70% of Mexico’s proven reserves have been consumed. So I think there is an awareness at Pemex that the future is about secondary oil recovery, enhanced oil recovery, and about finding more reserves, which is easier said than done. And also, peak water is an issue for Mexico going forward, but it’s an area in which we have no experience. And so it will be hard to do that unless the ways of working in Mexico are changed quite substantially which is political out of bounds right now.

SA: What’s the status of Mexico’s effort to create a new model for working with foreign oil companies.?

Shields: For many years here, people have been thinking about models to use with international oil companies. But there is social and political opposition that is very strong. There is a perception among ordinary Mexicans that foreigners only come into to Mexico to take away our riches. That comes from the Spanish conquest centuries ago. So this is a long term barrier to international investors, particularly in oil. International investors have made their way into other areas of the economy successfully, but people here have some resentment, especially in banking. There are virtually no Mexican banks anymore; they’re all owned by Spaniards, by Americans, by Canadians.

Recent reforms in Mexico do have an intention to get international investors more involved in the oil industry. It’s possible IOCs would get involved, but probably the new reforms don’t go far enough to allow IOCs to get involved in Mexico because they do not allow any kind of sharing of revenues, sharing of production, and they don’t allow companies to book reserves. I think almost any IOC will tell you that a key condition for them to get involved abroad is for them to be able to book reserves wherever they work.

SA: Your oil minister Georgina Kessel has been quoted as saying that Mexican oil production will level off this year. Do you agree with that?

Shields: I don’t agree. Production may level off momentarily, either now or at different times in coming years, but I think the trend will continue to be downward. I basically agree with the analysis in the very good article by Roger Blanchard in your publication. He thinks Mexican oil production will fall by about 5% annually over the coming years. I think that is basically correct and what I would expect. It may be less or more than that in some years; it is not necessarily a linear thing.

I think the biggest problem Mexico has is that this is a country with some giant oil fields that are now either all mature or declining, with the exception of Ku-Maloob-Zapp. And KMZ is basically at its highest level right now, producing over 800,000 barrels a day. It’s not clear how long it will be able to keep up that production—maybe two years, and at best 5 or 6 years.—so there is a field that will soon join the decliners. And we have not had any major discoveries for a quarter of a century. Some of us believe that it could be feasible to find other major oil fields in Mexico, if you drill much further down or if you go further out into the Gulf of Mexico, but that hasn’t happened yet.

SA: Kessel has been quoted about the potential for 50 billion barrels in the deepwater Gulf.

Shields: That is kind of a generic assumption, but I don’t think it’s 50 billion in the deepwater. I think the 50 billion is what the government is calculating for undiscovered fields in Mexico in general. Some 29.5 billion is the estimate for what could be discovered in the deepwater. This is based on satellite studies and the seismic that they have.

SA: Do you have a sense for the time frame for when first oil might come from the deepwater?

Shields: It’s certainly unclear. The first deepwater oil would be at least 6 or 7 years down the road and it may be more. And first production may not be very high. To get major production from the deepwater, we’re talking about 12 years or more.

SA: The US EIA forecasts that Mexico’s production will decline by 600,000 barrels a day by 2020, at which point the country would become an oil importer. Do you agree with that view?

Shields: If we were to project the 5% annual decline rate mentioned earlier, production would probably not be very far away from that. There are many unforeseeable factors, but I would imagine that Mexico’s production by 2020 could be something like 1.8 or 1.9 million b/day. It could be lower.

The idea of importing oil has been a taboo in Mexico because we have been a large oil exporter. But political discourse is changing now. There is a growing awareness that even in the short term Mexico could possibly start importing light oil, regardless of our heavy oil exports. Some 20 or 30 years ago, Mexico’s output was largely light oil. Then Cantarell production moved up and Ku-Maloob-Zapp came in and they are heavy oil. Mexico’s refineries were built to process light oil and they haven’t really been revamped as they should have been. To get lighter blends for our refineries, we need to import some light oil. So in the near term we will import light oil even as we continue to export about 1 million barrels a day of heavy oil. But that figure will also gradually decline.

SA: Could you comment on the Chicontepec field? Right now it produces about 35,000 b/day.

Shields: The current administration has committed to this project and is still committed to it despite all the criticism and the problems. They went in without doing the prior studies to figure out what would be the right kind of exploitation to overcome geological problems that they have encountered. They are now doing the studies, testing technologies for Chicontepec. My opinion is that they went to the wrong place because historically, geologically, it has been such a challenge. If they had concentrated in proven basins in the southeast of Mexico, they probably could have done better.

Recent criticism is such that it is creating a negative feeling about the project that could be politically problematic going forward. Depending on the results over the next two years, the new government in 2012 will then make a decision whether or not to continue with Chicontepec. Unless results improve, I think they will not go on with it beyond 2012.

SA: At the ASPO conference, you laid out how Pemex gives different outlooks to different audiences—to the public vs. to the politicians in hearings. Is that still the case?

Shields: We are already sensing a change. To most people, the discourse was, “things are fine.” But most people, especially banks and international investors, realize that things are not fine. Their credibility has fallen before that audience, so they see there is no other way to treat that audience other than to give them the truth. The discourse had the intention of hiding or masking the decline of Cantarell. Well Cantarell has declined. So there is not much left other than to be honest about where things stand, though I think they are still being more optimistic than what reality would justify.

1. Prices and Production

Oil prices rose steadily last week closing on Friday at $81.50 after touching a high above $82. Prices have yet to regain the 2010 high of $83.95 reached on January 11th. The dollar’s reaction to the EU sovereign debt crisis, Beijing’s announcement that it expects 8 percent GDP growth this year despite fiscal tightening, and a well-spun jobs report all contributed to the price increase. Early in the week the Chilean earthquake contributed to upward pressure as the country’s refining and oil distribution network was badly damaged, threatening thermal power generation and ultimately copper production.Wholesale gasoline futures surged to their highest level since October 2008, and settled at $2.27 a gallon on hopes that an economic recovery will be coming soon. Natural gas prices, which have fallen some 18 percent this year, touched a three-month low of $4.47 /mbtu last week on a stock report showing a smaller decrease than expected for this time of the year.

With crude hovering around OPEC’s “sweet spot” of $75 a barrel, the cartel is not expected to make any output changes at its meeting on March 17th.

Attention is focusing on increased demand for oil products from the Middle Eastern oil-exporting nations. The IEA is estimating a 2010 demand growth for the region of 4.5 percent. Saudi demand is expected to be up by 3.8 percent; Iranian by 6 percent; and UAE demand by 3.4 percent.

Coupled with what could be a 4-5 percent increase in Chinese demand and increasing imports by India and Korea, Asian/Middle Eastern demand may be sufficient to generate upward pressure on prices later this year. US and OECD demand will likely remain stagnant unless there are marked price moves.

2. Iraq’s elections

Despite bomb and rocket attacks that killed at least 25, many of 19 million eligible voters went to the polls on Sunday and cast votes for the 6,200 candidates from 86 parties and factions running for the 325 parliamentary seats. With numbers like these and the likelihood that there will be no clear-cut winner, it could take weeks or even months to sort out the balance of forces in the new government.

It will take months or perhaps years before the impact of this election on Iraq’s contribution to world oil supplies will be known. Should all go well and the aspirations of Iraq producing 10 or 12 million b/d be realized, then Iraq production alone could delay the decline in global oil production by a number of years. Conversely, should the situation deteriorate with increasing violence, then even Iraq’s current production of 2.5 million b/d could be threatened.

3. The National People’s Congress

While clearly not a democratic institution in the western sense of the term, the annual meeting of the 3000 delegate, National People’s Congress serves as a focal point for China’s political calendar. In a series of “state of the nation” addresses, the country’s leaders outline the government’s accomplishments and plans for the future. Although 3000 people cannot conduct meaningful debate on anything, outside observers maintain that the atmospherics surrounding the two-week meeting can indeed feed back to and influence government decisions.

This year many of the presentations have focused on economic growth and whether the government’s massive stimulus and freewheeling lending policies are getting out of hand. Chinese real estate prices are in a speculative bubble, much industrial overcapacity is reported to be under construction, and there a serious labor shortage in the industrial southeast as workers are staying closer to home in rural areas and working on local government-financed projects.

In an address to the Congress last week, Premier Wen Jiabao admitted that there are risks involved in the government’s current stimulus policies, but that the government would “strictly control” new projects for the rest of the year. Wen said the government would expand social spending, bolster lending, curb inflation and meet its GDP growth target of 8 percent this year.

The announcement of 8 percent growth and continued stimulus was greeted by a jump in oil prices on the expectation that China’s oil imports would continue to grow by the anticipated 4-5 percent this year. A growing chorus of outside observers is skeptical that China can maintain rapid economic growth in the face of sluggish exports and an inflationary real estate bubble. The outcome of all this is likely to have a major impact on the course of China’s demand for oil and global oil prices during the next couple of years.

4. Global Warming

Several new reports on the prospects for, and impact of, global warming were released last week. The UK Meteorological office said it is becoming clearer that human activities are causing climate change and that the evidence is now stronger than when the IPCC made its assessment in 2007.

A report funded by the Pew Environment Group puts the cost of arctic ice melting over the next 40 years at anywhere from $2.4 to $24 trillion. The damage would be caused by a combination of rising sea levels, floods, and crop-killing heat waves.

A research team, led by University of Alaska scientists, reports that the East Siberian Arctic Shelf seafloor that holds vast stores of frozen methane is becoming unstable and there is widespread venting of methane. This gas is said to have 21 times the impact on global warming as carbon dioxide.

Meanwhile, back in Washington, the administration’s efforts to reduce emissions continue to run into trouble from a skeptical Congress. Last week a group of Democratic lawmakers introduced legislation to block the administration’s use of the Clean Air Act to control carbon emissions.

Quote of the Week

• “I think it might not be a bad idea to examine the faith-based assumption that the US has a virtually unlimited supply of natural gas from shale formations that can be extracted at a low price for the indefinite future. Perhaps the few people who think shale gas will be produced at a higher cost, and more slowly, than generally believed should be heard out, rather than be executed or sentenced to work in the salt mines.”– John Dizard, the Financial Times

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

• Russian crude production neared a post-Soviet record in February as TNK-BP raised output at new fields in both western and eastern Siberia. Crude production reached almost 10.08 million barrels a day, a gain of 3.3 percent from a year earlier. (3/3, #22)
• Australian oil production in 2009 declined by 17% to its lowest level in four decades and is expected to continue falling as fields age after a temporary increase over the next year. Natural gas production increased by 10 percent. (3/5, #16)
• Mexican oil production was down 5.3 percent in the final quarter of 2009 at 2.583 million barrels per day compared with the same period in 2008, although the reduction in output was offset by higher oil prices, which were 53.9 percent higher. (3/3, #15)
• Middle East oil demand could grow by 5 percent in 2010, outpacing a modest recovery in global energy demand as the world’s top oil exporting governments continue spendingpetrodollars to boost economies. Cheap subsidized fuel has encouraged rapid energy-consumption growth that some regional governments have struggled to meet. (3/6, #8)
• Nigeria’s oil minister warned that losses and liabilities of more than $2.5 billion threaten the existence of the state-owned Nigerian National Petroleum Corporation….Last week alone, the Port Harcourt-Aba products pipelines was vandalized at 21 different points, making it impossible to pipe products to Aba, Enugu, Makurdi and Yola depots. The NNPC boss said vandalization of pipelines is the single biggest challenge facing NNPC and the Nigerian oil industry today, (3/6, #12-13)
• Brazil and Nigeria currently offer fairly good contract terms to international oil giants like ExxonMobil and Royal Dutch Shell that operate within their borders. But now they’re hoping to collect a much bigger chunk of the profits from the oil produced in their countries. If the two countries do successfully extract better terms from the oil companies, it could slow the development of some major new oil fields. (3/6, #5)
• Kazakhstan is currently scrutinizing all the landmark oil deals it signed in the early 1990s, many of which are now seen as being unfairly skewed towards the international oil companies. (3/1, #6)
• The US had remarkably strong oil production growth of 7.1 percent in 2009. The “best guess” scenario is that production will grow around 200,000 b/d for the next two years and then flatten after that. (3/2, #26)
• Petrobras, keeping with its original timeline, is set to begin producing oil by mid-2010 from two ultradeep-water fields in the Gulf of Mexico known as Cascade and Chinook. (3/2, #18)
• State-run Oil & Natural Gas Corp., India’s largest, expects crude oil and gas production from its onshore fields to fall in the next financial year as the fields are aging. A senior executive said Wednesday that their fields have been in production for more than 30 years and there hasn’t been any major discovery in the last few years. (3/3, #19)
• The Haradh III development at the southern tip of the Ghawar oil field in Saudi Arabia, completed in 2006, has been portrayed by Saudi Aramco as the turning point in the battle between geological adversity and engineering prowess. But when you look at a satellite photo and count the number of producer wells they ended up drilling, it adds up to quite a few more than they have been claiming — about 60% more. (3/5, #23)
• Saudi Arabia agreed to almost double crude shipments to India-to 770,000 b/d-and study “enhancement” of joint projects as Asia’s third-largest economy seeks to increase supply for planned refineries. (3/2, #13)
• As energy companies rush back into the oil sands, surging demand for labor and equipment threatens to drive construction costs skyward once again. The cost to build an oil sands project roughly tripled during the last decade. (3/6, #22)
• A Russian oil tanker will test a trial shipment of oil to Japan this summer, for what is said to be the first shipment to sail the Arctic Ocean route from northwest Russia to Asia. China also is preparing for the Arctic being navigable during summer months. (3/6, #23)
• Royal Dutch Shell spent $19 billion, triple the original estimate, to build the world’s largest gas-to-liquids plant (Pearl) in Qatar. Now, it’s pay-off time and the company says the project may generate $6 billion a year. At full capacity, Pearl will produce 140,000 b/d of liquid fuel and 120,000 barrels equivalent of ethane gas and condensate. Operating costs at Pearl will be about $6 a barrel….The 34,000-barrel-a-day Oryx GTL, Qatar’s only operating gas-to-liquids plant, reached full power last year after hitting snags following its start in 2006. (3/4, #9)
• A consortium led by China National Offshore Oil Corp. is the frontrunner to win the right to develop Iraq’s 2.5 billion-barrel Missan oil-field complex after agreeing to Iraqi governmentproposals. Cnooc’s rival China National Petroleum Corp. has been the predominant Chinese player in Iraq. (3/5, #8)
• Baker Hughes said the US rig count rose by 83 to 1,350 last month, climbing 2.3% from a year earlier. The international rig count rose 2% on month to 1,068 and increased 4.7% from last February. (3//5, #21)… The gas drilling-rig count rose by 12 to 905 last week, up 36 percent from a seven-year low reached in July, according to Baker Hughes Inc. data. The number of horizontal drill rigs rose by 21 to a record 679.
• Russian monopoly Gazprom expects liquefied natural gas shipments to compete with rising output of shale gas in the US as the Russian producer aims to expand into the world’s biggest energy market. (3/4, #17)
• Zhang Guobao, CPPCC member and head of the National Energy Administration (NEA), made it clear that China’s natural gas price will be linked to the oil price. (3/6, #17)
• Ben Dell of Bernstein Research in New York who has done some of the deepest drilling into the shale gas industry numbers, believes that the full cost of finding, developing, and operating shale gas wells, and paying an average return on capital to investors, requires a spot gas price of $7.50 to $8 a thousand cu ft. (3/6, #19)
• Many environmental groups talk of how wind and relatively clean-burning natural gas can partner to displace dirtier coal, creating a path to power the US while releasing fewer greenhouse gases. A bitter fuel fight in Texas points to a different future: one in which gas and wind are foes. (3/2, #23)
• Proposals expected to be announced next month would give the EU its first funding which would not come from national governments. Algirdas Semeta, the new European commissioner for taxation, is planning a “minimum rate of tax on carbon” across the whole EU as a “priority”. (3/5, #22)
• China said last Sunday it will spell out greenhouse gas emissions goals and monitoring rules for regions and sectors in its next five-year plan, with monitoring to show it is serious about curbing emissions. (3/1, #11)
• The logic of a gasoline tax is simple: when gas prices rose a couple of dollars instead of a couple of dimes, people find ways to use less — whether by taking fewer trips, carpooling or buying more fuel-efficient cars. Tax receipts could go to deficit reduction, or they could be rebated directly to households, rendering the tax far less regressive — and more politically palatable — while still sending an appropriate price signal. (3/5, #24)
• The Obama administration, still struggling to win China’s pivotal backing for a new round of United Nations sanctions against Iran, is increasingly worried about gaining the support of some other members of the UN Security Council, particularly Brazil, Turkey and Lebanon, according to U.S. and European officials. (3/4, #8)
• Starting this summer, the US Postal Service, which operates the world’s largest civilian vehicle fleet, will begin a year-long pilot program of electric mail trucks in the Washington area, using vehicles converted by five manufacturers. (3/4, #15)
• Carlos Ghosn predicts that the car industry will be scrambling to build capacity to meet demand for both electric cars and the lithium ion batteries that power them in less than two years. (3/4, #20b)
• Ford Motor plans to increase electric and hybrid vehicles to as much as a fourth of its lineup by 2020 as governments push for higher fuel efficiency. (3/5, #27)
• Roland Berger Strategy Consultants released an analysis suggesting the world is building a battery bubble, where there is far more production capacity than demand by 2015; as aresult, sometime in the latter half of this decade, there is going to be an industry shakeout that will leave 6-8 advanced battery manufacturers in the world. (3/3, #25)
• Venezuelan plans to cut electricity demand by 20% amid a looming energy crisis are not feasible for businesses in Caracas, the chamber of commerce said. The National Electric Corp. announced during the weekend that only 37 percent of heavy energy consumers in Caracas were meeting that goal. (3/3, #10)
• Manila and several neighboring provinces will experience blackouts in the coming days as the country grapples with a drought that has devastated more than a dozen provinces, drying up rivers and reducing the water levels in lakes behind hydroelectric dams. (3/5, #17)
• Frequent power blackouts are taking a toll on the confidence of India’s Silicon Valley-Bangalore. The city is reeling under frequent unscheduled power cuts-sometimes lasting 3-4 hours. (3/2, #21)
• In Pakistan, the days of doing business by candlelight are far from over. Power cuts in many areas of the country last as long as 16 hours every day, and consumers will be paying about 45 per cent more for electricity by the end of this month compared with last year as government subsidies are withdrawn. (3/4, #10)
• Utilities have turned to state legislators and regulators to help contain the capital costs of new nuclear power plants. In states such as Georgia, Florida and South Carolina, utilities have won permission to charge customers for some of the cost of new reactors while construction is still in progress — a financing technique that would save utilities a couple of billion dollars for each reactor. But businesses and other users are fighting back. Utilities admit that without the relief, they would not consider building the plants. (3/2, #22)

Peak Oil Review, Vol. 5, No. 9, March 1, 2010

1) In the Ed Stein cartoon, one has an interesting contrast between the giant hyperbolic cooling tower and the small orange cylindrical building to the right of the tower. The small orange building houses the nuclear reactor. There is nothing nuclear about the giant tower, although in the minds of many, the tower is the visual symbol of a nuclear plant. Coal-fired electric plants sometimes have these same large hyperbolic cooling towers.

Why the cooling tower? The Second Law of Thermodynamics says that all heat engines doing work must discharge waste heat. For either coal or nuclear plants, this discharged heat is approximately two-thirds of the chemical energy released by the burning coal or of the nuclear energy released by the nuclear reaction. This is a lot of waste heat. You can make small changes in this fraction of heat that is wasted by changing operating temperatures, but this results in changes in efficiency of only a few percent.

So what do you do with this waste heat? The hyperbolic cooling tower is a structure in which the exhaust steam from the turbines is condensed and the heat released in the condensation is used to evaporate water which comes out of the top of the cooling tower as whisps of steam.

There are other ways of getting rid of the waste heat. I believe that the big wartime reactors at Hanford, Washington heated the Columbia River by a degree or two.

In cogeneration, the exhaust heat from the turbines is used for heating buildings if they are not too far away from the generating plant. Heating buildings via cogeneration is commonplace in Europe.

2) In the Briefs we read that Mexico’s oil production fell from 2.685 million barrels per day to 2.615 million in the space of one year. This gives an average rate of decline of 2.6 percent per year. Let’s see how this is calculated.

Rate of decline = (100 / 1) ln (2.615 / 2.685) = - 2.642 percent per year. The 1 in the denominator is the 1 year and the minus sign with the answer indicates a decline.

Here are the keystrokes:

2.615 ÷ 2.685 = ln x 100 =

When one has a steady decline there is a “halving time” that is analogous to the “doubling time” that one has with steady growth.

Halving time in years = 100 x (ln 2) / Annual percent growth

The keystrokes here are:

100 x 2 ln ÷ 2.642 = 26.24 years

Thus, if the decline in the Mexican production continued steadily at this rate it would reach half of its current value in 26.24 years.

The halving time is called the “half-life” when one is speaking of the steady decay of a radioactive substance.

Vol. 5, No. 7, February 15, 2010

1) Page 5. From the Commentary by Roger Baker: “Why not subsidize research that could lead to the restructuring of US food production based on energy efficient agriculture?”

Before we start restructuring agriculture we need to think about preserving agricultural land. On Thursday February 11 my daughter and I rode the California Zephyr from Chicago to Denver. Leaving Chicago the train runs through many western suburbs of Chicago. But to my surprise, at several places along the track west of the established suburbs there were thousands of new homes as far as the eye could see from the train. A few years ago this land was all agricultural land, probably some of the best agricultural land in the U.S., and now it has produced its last crop, namely new homes. Reforming agriculture is important, but first we must save the agricultural land.

2) Pages 2-3. “The cost of discovering each new barrel of oil has risen three-fold over the last decade as technology has pushed the frontiers of exploration into ever more remote areas…”

What’s the average annual percent increase in the “cost of discovering each new barrel of oil during the last decade?”

Answer: Just under 11 percent per year.

Here are the keystrokes to do this calculation with an inexpensive Texas Instruments TI-30XA hand-held scientific calculator. Here’s the formula:

Percent = 100 x (1/10) x ln(3)

The 10 in the denominator is the “decade,” the 3 is the “three-fold” and the 100 converts the fraction to a percent. Here are the keystrokes:

3 ln ÷ 10 x 100 = 10.986… This is just under 11% per year.

Dr. Albert A. Bartlett, professor emeritus of physics at the University of Colorado in Boulder, has delivered versions of his famous talk—“Forgotten Fundamentals of the Energy Crisis”—to 1783 audiences world-wide during the last 40 years. Albert.Bartlett@Colorado.EDU

(Note: Commentaries do not necessarily represent the Peak Oil Review’s position; they are personal statements and observations by informed commentators.)

1. Prices and Production

After two weeks of increasing prices which brought oil from $70 a barrel to the vicinity of $80, last week was rather quiet with oil gyrating between $78 and $80 in response to the latest reports. As has become normal recently, increased Chinese demand for oil was offset by generally bad news about the prospects for the US economy. Prospects for settling the Greek debt crisis were balanced by a fluctuating dollar and equity markets. US consumption of petroleum products has increased slightly in recent weeks; however stockpiles remain abnormally high. When the week was over, oil closed just below $80 a barrel, a touch below where it started.

A widespread refinery workers strike in France over the closure of a Total refinery was settled at mid-week without serious supply interruptions. The unions agreed to return to work after Total pledged not to close any more refineries for the next five years, excluding the Dunkirk facility.

OPEC increased its production in January by 125,000 b/d to an average of 29.1 million b/d, the highest since December 2008. World production of all liquid fuels decreased by 40,000 b/d in January to 85.8 million b/d. The IEA reports that average world liquid fuels production in 2009 was 84.9 million b/d; in 2008 86.6 million b/d; and in 2007 85.3 million b/d.

The Iranian nuclear enrichment situation continues to move along with Tehran defiantly announcing plans to build more enrichment plants and announcing it can handle any sanctions on its gasoline imports. The US is expressing confidence that a UN agreement on sanctions can be reached soon, while Beijing is back to saying the matter should be settled through diplomacy. In a bizarre move, UN inspectors say Tehran has moved almost its entire stock of enriched uranium to an above-ground facility where it could be bombed more easily. This comes after weeks of talk about building secret enrichment facilities under mountains.

More forecasters are coming down on the side of higher oil prices later this year. Open interest in long oil futures contracts is increasing, and Goldman Sachs is talking about $95 oil later this year due to increasing economic growth.

2. Looming Electricity Shortages

A combination of factors is coming together that is likely to lead to increasing electricity shortages and higher coal prices in coming months. The underlying problem is increasing worldwide demand for electricity as relatively cheap electrical appliances are being distributed far and wide. This is compounded by droughts which are reducing the capacity to generate hydro electricity in several key areas, receding of glaciers which is reducing runoff into hydro-electric dams in the Andes and the Himalayas, and the inability to keep ramping up coal production as the high-quality, easy-to-mine coal is consumed around the world.

The most immediate problems are in Venezuela and Pakistan which are already enduring rolling blackouts and hampered industrial production. Both are likely to face more severe problems in the next few months. Pakistan is planning additional hydro dams while Venezuela is scrambling to import more oil and gas powered generating capacity.

Cold weather and snow have reduced coal production and slowed coal shipments in northern China. This has forced industrial facilities in the south to rely on increasing amounts of imported coal, up six-fold year over year to a record 16 million tons in December. China’s annual coal consumption of 3.1 billion tons is now around 37 percent of the world’s total and is growing rapidly to support economic growth in excess of 10 percent annually. The Chinese are moving quickly to establish long-term contracts for coal from Australia, Indonesia, and Africa in order to reduce their dependence on the troubled domestic coal industry.

The final piece of this equation is India. It too is rapidly increasing demand for imported coal due to slow development of new mines, declining quality of its coal production, and problems transporting increasing quantities to support the steady growth of its economy. Indian coal imports are expected to nearly double from 28 to 48 million tons in the coming year.

As China locks in an increasing share of Australian coal production and other countries step up imports to counter persistent droughts, coal prices are likely to keep climbing for the foreseeable future. Although using oil and natural gas to generate electricity is much more expensive than hydro and coal in most places, shrinking water and coal resources will eventually force increased use of liquid fuels and gas for power generation.

Overshadowing all this is the need to reduce coal-fired electric plants to control emissions.

3. China’s Macro Control

In a rare moment of candor, China’s top economic official, the Chairman of the National Development Commission, admitted last week that China’s economy is at a testing point as the country hovers between inflation and recession. Last year China’s banks loaned out $1.4 trillion, twice as much as in 2008 and nearly half of the country’s GDP.

This year the government has started to put the brakes on lending - too little braking and an inflation spiral could occur; too much and China’s 10 percent annual economic growth and increasing demand for oil is threatened. China’s real estate bubble could pop.

An interesting footnote to China’s rapid economic growth is a severe labor shortage in the southeastern industrial areas. Eighteen months ago when China’s exports collapsed, millions of workers were fired and sent home to their rural villages. It appears that last year’s economic stimulus was so wide-spread that many rural workers now can find jobs closer to home and are reluctant to return to the industrial cities.

Quote of the Week

• “Shale gas has a fairly short history of production. [Companies] are projecting stable production for 20 to 30 years, but we don’t have a history of that kind of long-term production to say that with any certainty.”

–Mike Dawson, president of the Canadian Society for Unconventional Gas

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

• Colombia’s crude oil output in January rose to an average 742,000 b/d from 623,000 b/d in the same month last year. In 2009, average crude oil output totaled 671,000 b/d, the highest since 2000. (2/27, #8)
• Iraq’s crude oil production could be increased by more than 250,000 b/d by the end of this year as some oil deals recently signed with international oil companies to develop giant Iraqi oil fields have become effective. (2/25, #5
• Mexico’s oil production continues to fall from year-ago levels as the government struggles to implement hard-fought energy reforms designed to boost exploration. January crude production was 2.615 million barrels a day, a 2.6 percent decline from 2.685 million in the same month of 2009. The bright side is that January output was the highest level in nine months. (2/27, #7)
• Russia remains the largest exporter of oil and gas in the world-bigger even than Saudi Arabia. But unlike the Gulf nations, Russia is fast pumping its existing wells of both oil andgas dry. To tap its reserves-and to maintain Russia’s status as an “energy superpower”-Russia needs to stop ripping off its investors (most recently BP) just because a demand falloff has hurt its bottom line. (2/25, #25)
• Russia’s oil shipments through their new ESPO pipeline are growing as output heads toward 600,000 b/d by 2012. These shipments are a sign of success for Russia’s strategy to boost its share of sales to Asian crude-oil importers, at the expense of Middle East suppliers. (2/27, #19)
• Oil fields discovered in Uganda’s Lake Albert basin may have the potential to produce up to 350,000 b/d after 2018, although Tullow Oil is sticking to its target of 150,000 b/d for 2013. (2/23, #9)
• While the Argentine government has expressed outrage over drilling in the Falkands, it has made little mention of a glaring absence the British endeavor has highlighted: No oil-drilling rigs are operating in Argentina’s own expansive waters, largely because many oil companies are wary of working in Argentina these days. (2/26, #13)
• Economic recession has been hard on many oilfield-service providers as pinched oil and gas producers have cut back on drilling, but ultra-deepwater drilling has been profitable and is likely to remain so. (2/26, #5)
• During 2009, Exxon Mobil Corp.’s spending ($53.1 billion) exceeded its cash flow ($29.9 billion), drawing down by two-thirds one of the oil industry’s largest treasure troves in a single year of weak energy prices. (2/27, #13)
• The main driver for ExxonMobil’s XTO acquisition was reserves, particularly in natural gas. Increasingly, ExxonMobil has had difficulty replacing reserves along with most major oil companies. The worst years ever for reserve replacement were 2007, 2008 and 2009. While 2008 additions were officially 103% of production, without the contribution of oil sands, which the SEC does not consider reserves, replacement was only 27%. Another important motive for the acquisition is the company’s belief that overseas opportunities now carry too much political risk. (2/23, #16)
• BP and Shell may falter in their campaigns to save billions in oil and gas project costs as a resurgence in drilling and demand for engineers threaten to revive inflation in the industry. (2/22, #4)
• BP is expected to invest more than $2 billion in Value Creation’s oil-sands project in Alberta, beating out rival bidder India’s Reliance Industries. (2/26,#20)
• Shell has invested almost one-third of its resources in extracting oil from tar sands and produces 155,000 b/d. However, it is reported to be ’scaling down’ some of its investment because of concerns over the high costs of extracting the oil. (2/27, #18)
• Estimated oil reserves in Florida’s waters would provide the US with less than a week’s worth of oil and have no discernible effect on prices or US reliance on foreign oil, says a recent report which is part of a state Senate review of whether a ban on offshore drilling should be lifted. Estimated reserves off Florida in federal waters are more substantial than state waters at a bit less than 4 billion barrels but “pale in comparison” to the central and western regions of the Gulf of Mexico, the report says. (2/27, #12)
• Oil from Bakken Shale has helped North Dakota oil production double in the past three years, surging to 80 million barrels in 2009-tiny in comparison to the more than seven billion barrels consumed by the US every year. If current projections hold, North Dakota’s oil production could double again by end of the decade. The Bakken Shale could contain up to 4.3 billion barrels of recoverable oil, according to the USGS. That would make it the biggest oil field discovered in the contiguous U.S. in more than 40 years (2/26, #18)
• China’s imports of crude oil in the spot market have increased fivefold over the past 10 years to the equivalent of more than 55 Very Large Crude Carriers per year. (2/22, #15)
• According to petroleum geologist Jeffrey Brown, it’s the future net oil exports, not production, we should be paying closest attention to when searching for signs of peak oil, because that’s the factor that crashes first. (2/26, #24)
• US ethanol output rose to 787,870 b/d in December as distillers took advantage of low prices for corn and natural gas, the Energy Information Administration said. (2/27, #13)
• The number of US oil and gas rigs climbed to 1,373, up 28 from the previous week, according to data from oil-field services company Baker Hughes. (2/27, #17)
• When U.S. natural gas prices began to fall in late 2008, big gas producers slashed budgets and reduced drilling. But the number of rigs drilling for gas has bounced back 36% since July, as energy companies plowed into new fields in Pennsylvania, Louisiana and elsewhere that remained profitable even at low prices. Gas production in the lower-48 states has declined just 1.2% since its peak in February 2009. (2/27, #16)
• Australian energy producer Oil Search Ltd is warning of a possible glut of liquefied natural gas (LNG) in coming years when several large projects come online. (2/25, #4)
• The mainstream belief that shale gas plays have ensured North America an abundant supply of inexpensive natural gas is not supported by facts or results to date. The supply is real but it will come at higher cost and greater risk than is commonly assumed. (2/23, #16)
• Environmental groups are urging New York’s environmental regulator to impose restrictions on emissions from drilling into Marcellus shale. Aside from benzene, which the U.S. government has classified as a carcinogen, emissions from natural-gas well sites can include methane, fine particles and carbon monoxide, as well as carbon dioxide. (2/26, #19)
• A rally that has boosted coal prices 21 percent from their lows last year may have further to go as the coldest U.S. winter in nine years and China’s record imports increase demand and drain stockpiles. Prices will average $59.28 a ton this year, up 41 percent more than last year’s low in April. (2/22, #5)
• The Indian government increased the prices of gasoline (6%) and diesel (8%), a move which will fan inflation but is unlikely to offer much relief to oil companies beyond offsetting the impact of proposed federal higher taxes. India’s headline inflation rate rose close to 9% in January from a year earlier, while wholesale food prices rose by nearly 18%. (2/27, #10)
• Three key US senators are engaged in a radical behind-the-scenes overhaul of climate legislation, preparing to jettison the broad “cap-and-trade” approach that has defined the legislative debate for close to a decade. (2/27, #11)
• The head of the US Environmental Protection Agency said the agency would delay subjecting large greenhouse-gas emitters such as power plants and crude-oil refiners to new regulations until 2011. (2/23, #12)
• Motor vehicles emerged as the top contributor to atmospheric warming now and in the near term, according to a new analytical approach taken to the issue by researchers at NASA’s Goddard Institute for Space Studies. Rather than analyzing impacts by chemical species, the researchers analyzed the climate impacts by different economic sectors. (2/27, #4)
• China’s top leaders began considering proposals from the country’s senior researchers in an attempt to help achieve the country’s ambitious goal of cutting carbon intensity by 40 to 45 percent by 2020. The move is a sign that China will roll out more economic and industrial policies to tackle climate change this year. (2/24, #10)
• China is pushing forward the development of new energy vehicles–in particular electric cars-and aims to become the world’s largest exporter of new energy vehicles. (2/26, #25)
• A plan to build the world’s biggest power generation complex-a 100,000 megawatt hydro project in the Democratic Republic of Congo-may never happen because the government is too indecisive. (2/26, #14)
• The Vermont Senate blocked efforts by Entergy to win a 20-year license renewal for its Vermont Yankee nuclear power plant, an action that could encourage opponents of nuclear energy in other states. (2/25, #21)
• Global trade contracted by about 12 percent in 2009 but has started to pick up, the head of the World Trade Organization (WTO) said on Wednesday. (2/24, #4)
• The historic drop in US vehicle miles traveled that began in 2007 and the dramatic decline in gridlock that accompanied it have ended, according to a report today by a firm that tracks congestion in the USA. (2/24, #11)
• General Motors’ deal to sell its Hummer brand to a Chinese automaker fell through Wednesday and the company said it now plans to shut down the brand. (2/25, #22)
• The U.S. Department of Energy will guarantee $1.37 billion in loans for the Ivanpah Solar Complex, a 400 megawatt solar energy project in California’s. The project mounted by BrightSource Energy would be the world’s largest solar thermal power plant when built, nearly doubling the existing generation capacity of US solar thermal power. (2/24, #18) [Editors' note: current US solar thermal power must be under 0.04 % of total US capacity.]
• Danish biotechnology company Novozymes says it has cultivated a new enzyme that could convert maize, straw and woodchips into ethanol for as little as 32 pence/litre. (2/24, #19)
• Bloom Energy Corp.’s claim that it has a cost-effective fuel cell technology is meeting with skepticism, because fuel cells so far have proven too expensive to serve as a viable alternative to grid-supplied power. (2/25, #27)

• In the coming three years sufficient oil supply capacity to supply world demand is available under any economic scenario. Supply constraints can only arise if OPEC proves to be too slow in turning available capacity into production.
• Oil supply can no longer meet growing demand beyond 2013 in case of an unlikely rapid economic recovery.
• In case of a fairly weak economic recovery the oil market will begin to tighten in 2014 when production capacity begins to decline and growing demand can no longer be met around 2017.
• If we suffer another economic downturn, ample oil supply will be available for a period of at least a decade.

These results are based on a study that will be published next month, written by ASPO Netherlands in collaboration with NEA transport research. As a part of this study a boundary assessment was made for total production capacity. The resulting picture gives lower and upper boundaries for production capacity between 87 million and 98 million barrels per day in 2015, and 63 million and 111 million barrels per day in 2030. This is based on analyzing production developments from current fields, an oil field projects database, estimates for unconventional oil and natural gas liquids production, enhanced oil recovery developments, and future discovery estimates. Comparing these boundary estimates with demand forecasts from the IEA makes it clear that the International Energy Agency demand scenario from the World Energy Outlook 2009 can only be met under the most optimistic of assumptions. An excerpt from the decline rate analysis from the report has been added below.

Figure 1: Estimated lower and upper boundary for oil production capacity to 2030 in comparison with the IEA Demand forecast in the reference scenario of the World Energy Outlook 2007 and 2009.

Table 1: Values for different production streams for the lower and upper production boundaries from 2009 to 2030 and a comparison with the  IEA 2009 reference scenario demand forecast.

*Fields starting production at end 2006.

**Enhanced Oil Recovery from new projects implemented after 2007.

***Unconventional defined as bitumen including streams from Canadian Tar Sands and Venezuelan Orinoco Belt.

****OPEC Spare Capacity figure for 2008 and 2009 taken from the International Energy Agency Oil Market Report, excluding Iraq, Venezuela and Nigeria

Decline rates over current conventional production.

Three recent studies have been conducted to date on the global decline rate of total conventional oil production, including fields with rising, declining and plateau production. The first was conducted by Cambridge Energy Research Associates in 2007, showing that 2007 average decline of oil fields under production was 4.5% per year (CERA 2007). This study used data from 811 oil fields representing two thirds of global oil production, obtained from the IHS Energy database. The selection was comprised of 400 fields, each with reserves of more than 300 million barrels, that produced half of global production in 2006, and 411 fields with less than 300 million barrels that produced only 8.5% of production in 2006.

The second study, performed by Höök et al. (2009) estimated that the overall decline rate is 6% globally based on the finding that decline rates in smaller fields are equal or greater than those of giant fields.

The third study was published by the International Energy Agency (IEA 2008), but the figures from this study are not comparable because only an average decline figure of 6.7% for production of already peaked fields was published, not a figure for overall conventional production including fields with rising, plateau and declining production. Without any explanation in the form of a published figure, the IEA in their reference scenario in the World Energy Outlook 2008 (WEO) took an average decline rate over total production of 4.1% per year from 2008 to 2030, as inferred from the reference scenario chart in the WEO. That this decline rate remained quite stable for most of the forecast horizon in the IEA reference scenario, and improved near the end after 2025, contradicts published figures in the same report that the global decline in peaked fields will increase from 6.7% now to 8.6% in 2030.

Based on these studies, a starting point for current decline lies between 4.5% and 6%. Within this range a decline rate around 5% can be taken as a reasonable number. The value given by CERA (2007) of 4.5% probably over represents giant and super giant fields and hence is likely too low as small fields have bigger decline rates. The value given by Höök et al. (2009a) of 6% is probably too high as the total decline rate is inferred directly from post-peak decline of giant and supergiant fields on the assumption that smaller fields will tend to have an equal and higher decline, ignoring the effect of fields still on a plateau and in build-up.

Although 5% is a good starting point, the catch lies in knowing what will happen in the future. More supergiant and giant fields will go into decline due to depletion as time passes by, causing an increase in the average decline rate that needs to be compensated. This was shown by Höök et al. (2009) who found that the world average decline rate of the 331 giant fields was near zero until 1960, after which the average decline rate increased by around 0.15% per year. However, the production-weighted decline rate used by the IEA does show a divergence from this trend since 1985 as the rate remained quite stable up to 2005 (CERA 2007; Höök et al. 2009). The production-weighted decline is lower than the average decline because fields with higher production levels are usually larger and decline slower.

As an explanation Höök et al. (2009b) argue that the stable production-weighed decline rate was caused by the revival of giant fields, in mainly the Middle East and Russia, and the introduction of new technology, especially horizontal drilling and fracturing, resulting in a halt in the decline of many giant fields. This situation is temporary as the production-weighted decline inevitably has to catch-up with the average decline as the effect of technology in halting decline has its limits, as shown by the production evolution in many countries including Norway and the United Kingdom. The big question is when this catch-up process will occur, as it can lead to a rapid increase in the global decline rate in a short period of time.

For scenario analysis we can take optimistic and pessimistic boundaries based on the studies describe above. The most optimistic stance is to extrapolate the starting point decline rate, in estimated here at 5%, onto the entire forecast horizon up to 2030. The most pessimistic view based on current information would be a rapid increase in decline in the next five to ten years up to 6.7% as the production-weighed decline rate rapidly catches up with the average decline rate. After this a more smooth decline increase of 0.15% per year as historically was the case, up to a value of 8.6% in 2030 is an informed estimate. Reality will likely lie somewhere in between these two decline bounds that are shown in figure 2 in percentage and figure 3 in million barrels per day.

Figure 2: Production decline trajectory in percentage in current fields between lower and upper estimated bounds, and decline rate assumed in the World Energy Outlook 2008 and 2009 of the IEA inferred from the reference scenario.

Figure 3: Decline trajectory of conventional production capacity in million barrels per day in current fields between lower and upper estimated bounds using percentages from figure 2.

Rembrandt Koppelaar is president of ASPO-Netherlands and publishes the Oilwatch Monthly. For a version of this article that includes three figures and two tables, go to http://www.aspousa.org/?dl_id=530

References
CERA, 2007. Finding the Critical Numbers: What Are the Real Decline Rates for Global Oil Production? September 2007, pp. 21

Foucher, S., 2008. Wikipedia Megaproject Update: August 2008, Institute for the Study of Energy and Our Future, August 25 2008, www.theoildrum.com

Höök, M., Hirsch, R., Aleklett, K., 2009. Giant oil field decline rates and their influence on world oil production, Energy Policy Vol. 37, pp. 2262-2272

IEA, 2008. World Energy Outlook 2008, International Energy Agency Publications, Paris France, pp. 569

(Note: Commentaries do not necessarily represent the Peak Oil Review’s position; they are personal statements and observations by informed commentators.)