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Peak Oil Review

Tom Whipple, Editor
Sharon Astyk, Commentary Editor

July 16, 2012

1. Oil and the Global Economy

Brent crude traded in a narrow range for most of last week between $98 and $100 a barrel as the markets reacted to generally bad economic news from Europe, China, and the US. On Friday prices moved higher to close at $102.40 after the US announced tougher sanctions on companies that have been helping Iran circumvent the sanctions. New York crude followed a similar pattern about $15 lower than Brent. Chinas inflation rate slowed to 2.2 percent in June and its rate of GDP growth slipped to 7.6 percent. Some see this as an opportunity for Beijing to stimulate its economy, while others see a period of deflation ahead as the outlook for Chinas exports darkens. The news from Europe was not good and some see the Eurozone fragmenting faster than policymakers can find solutions to the multiple financial crises. The ILO is warning of major drops in employment in the EU due to new austerity measures being implemented in several countries. It is interesting that many short term oil price jumps in recent weeks have been based on speculation that the Federal Reserve, the EU Central Bank, or Beijing will be able stimulate economic growth in the coming quarters. US natural gas prices held steady for most of last week around $2.85 per million on forecasts that unusually warm weather will last through much of July. Drilling for natural gas in the US continues to decline but so long as gas remains below $3 per million, it remains a better option for many electric power producers. Seasonal increases in stored gas are coming in less than expected suggesting that the oversupply may be ending. Cheniere Energy announced that it has obtained $3.4 billion in financing to build a major natural gas export facility in Louisiana. US crude inventories fell by 4.7 million barrels the week before last, but most of this went into larger inventories of gasoline and distillates which increased by 6 million barrels. US gasoline consumption continues to run about 4 percent lower than at this time last year according to the EIA and MasterCard retail records. Gasoline futures continued to climb last week. After falling from $3.15 per gallon in early April to a low of $2.45 in late June, prices have rebounded by nearly 40 cents a gallon to close Friday at $2.82.

2. The Iranian confrontation

The IEA reports that Iranian oil production in June was probably some 3.2 million b/d, about 100 million below Mays production. While the industry sources are telling the press that Iranian exports slumped in June, the IEA believes there was a surge in Chinese exports late in the month. The picture is likely to change in July however as sanctions tighten considerably. Iranian sources talk of cutting back on production which could damage some oil fields over the longer run. The EIA is

projecting that Iranian production will fall by about 1 million b/d by the end of the year to circa 2.6 million and an additional 200,000 b/d in 2013 unless the sanctions are ended. The US government granted China a waiver for sanctions in late June, presumably because Beijing agreed to lower its imports. This brings to 20 the number of countries that have stopped or lowered their imports of Iranian oil. Tehran has already played one of its best cards by turning off locator beacons, reflagging, renaming and in some cases repainting its large crude carriers in hopes that they can continue to deliver oil, undetected by the West. A one or two million barrel crude carrier is hard to hide, so this ruse is unlikely to be effective for more than a few weeks. Domestic pressures continue to grow in Tehran and the government has warned its media against reporting on the impact of the sanctions. This is the first time the government has used the sanctions as justification for censorship. With the continuing deterioration of the situation in Syria and Tehrans unswerving support for the Assad government, there are signs that many in Tehran are questioning whether this policy is tenable. In the meantime, Tehran is trying to put a good face on the situation by claiming that the sanctions are good for its domestic energy. Last week the Iranians announced that they have just discovered $50 billion worth of oil in the Caspian sea thanks to the sanctions. In an unusual semi-public forum, the current head of MI6, Britains intelligence service, said that his agency is forecasting that Iran would likely have a nuclear weapon within two years. This, of course, adds fuel to the debate of whether Iranian nuclear facilities should be bombed.

3. The IEAs monthly assessment

As the first half of 2012 comes to an end, the IEA reports that global stockpiles are again growing unlike in 2011 when demand outpaced production and stocks fell. The Agency notes, however, that only about 15 percent of the increase in stocks is taking place in the OECD countries and that the rest of the growth is in emerging nations, particularly in Asia. Outside of the OECD, however, stockpile data is scant so much of this assumption is based on estimates. The IEA says that, according to the latest assessments of economic growth, global oil demand will increase by about 800,000 b/d in 2012 and another 1 million b/d in 2013. About 190,000 b/d of the increased demand for this year is coming from the oil-producing Middle Eastern states. Next year Middle Eastern oil consumption is expected to increase by another 200,000 b/d with 60 percent of the increase coming from Saudi Arabia. The 2013 forecast represents an acceleration in demand following a 700,000 b/d increase in 2011 and an expected 800,000 b/d increase in 2012. Demand from emerging nations is likely to exceed that from industrialized nations for the first time next year. Even with GDP growth slowing, China should increase its demand by another 300-400,000 b/d in 2013. Increased production from North America and Brazil of about 700,000 b/d and an additional 500,000 b/d in additional crude and natural gas liquids from OPEC should be enough to cover the increased demand forecast for 2013. US oil production (all liquids) in May was about 8.7 million b/d, up about 720,000 b/d over last year. Growth in production of tight oil from the various shale plays may increase by another 400,000 b/d in 2013 to 1.6 million b/d. A recent study has production costs for this oil varying from $68 to $44 a barrel and due to transportation difficulties, it is selling at a $10 to $20 discount to West Texas Intermediate prices. With WTI selling below $80 a barrel in late June, some of this tight oil may have been selling for below production costs. If this situation continues into next year there could be a decline in the fast rate at which tight oil production has been increasing.

Quote of the week

"Today's inflation data show that deflation could become a larger concern for China than inflation." -- Ren Xianfeng, economist at HIS Consulting

The Briefs

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

Baker Hughes said the number of drilling rigs actively exploring or developing oil worldwide in June rose 4.5% from May and for the first time since 1990. The international count included Iraq, which helped offset the month-to-month decline in US rigs. The US rig count declined by 12 last week to 1953 units which is 48 higher than the same week last year. Rigs drilling for gas were down 20 to 522. (7/10 #7; 7/14 #17) Exxon Mobil announced the start of production from Kizomba Phase I oil product off Angola which is eventually to produce 100,000 b/d. (7/10 #14) Patriot Coal filed for bankruptcy last week. Patriot, like other U.S. coal producers, has struggled this year as decade-low natural-gas prices have sapped demand for power-plant coal. (7/10 #16) The UKs Coryton refinery, located at the mount of the Thames, will shut down this summer amidst the glut of refining capacity in Europe. The refinery once produced 10 percent of Britains refined oil products. (7/10 #18) Kurdistan has begun exporting crude to Turkey via tanker truck and receiving refined diesel and kerosene in return. The move represents an escalation of the conflict between Baghdad and the Kurds. Baghdad is considering cutting billions of dollars from the provinces budget in retaliation for the Kurds decision not to sell oil through Baghdad. (7/11 #5; 7/12 #14) Apache Corp will drill Kenyas first deepwater well next month, targeting resource believed to be 700 million barrels. If successful the project will make a major contribution to the economy of the East African state. (7/11 #8) Chinas motor vehicle sales rose 9 percent in June to 1.58 million units just before new rules go into effect in some cities restricting the number of new vehicle registrations. The move is an effort to control traffic congestion and smog. (7/11 #10) The fracking debate just became more complicated with the discovery that natural processes may allow contaminates from deep below the earth to work their way up, through the shale beds, and into drinking water aquifers. This should add a new dimension to the safety of fracking question. (7/11 #13) BP has decided not to proceed with a $1.5 billion oil project off the coast of Alaska after concluding that it would be too expensive. The field in question is in shallow water, 5 miles off Alaskas north coast, but is estimated to contain only some 100 million barrels. (7/11 #16) The BBC reports that Israel has started drilling for oil some 100 yards from the West Bank. Much of the field, which is estimated to contain 1.5 billion barrels, is believed to be under Palestinian territory. (7/12 #15) The British-Russian consortium, TNK-BP, announced that it has increased production of Venezuelas heavy Orinoco oil to 130,000 b/d. TNK-BP says it is gaining invaluable experience working with the heavy Orinoco crude, (7/12 #18) An independent research firm, ITG Investment research, has called into question the size of Chesapeake Energys proved reserves of oil and natural gas. ITG calculated reserves for Chesapeake's developed wells in the Barnett and Haynesville shale at 2.8 trillion cubic feet, 70% of the amount estimated by a third-party engineering firm for Chesapeake (7/13 #16) Shell and Exxon will soon sign a agreement with Algeria to conduct exploration for shale gas. ENI and Canadas Talisman already have similar agreements. (7/14 #7) An Argentine province may revoke BPs license to operate an oil field in the region. The project has been plagued by labor unrest with BP threatening to fire workers who allegedly damaged company property. (7/14 #8)

A Russian state oil company will delay drilling its first exploratory well off the northern coast of Cuba, after having difficulty finding a suitable drilling rig that would not violate U.S. sanctions. Rigs that are built from more than 10 percent parts of US origin are banned from drilling in Cuba waters under US law. The Russians seem to have found and certified such a drilling rig at Kula lampur, (7/14 #9) Britain is on a collision course with Argentina over the sovereignty of the Falkland Islands after announcing support for a $1 billion plan to develop oil reserves around the Island. (7/14 #10) The US has been ranked 9th out of 12 major countries in the efficiency with which it uses energy. The UK was first followed by Germany. (7/14 #14)

Commentary: How changing the definition of oil has deceived both

policymakers and the public.

By Kurt Cobb (Note: This article originally appeared on Kurts blog Resource Insights) Everyone knows that world oil production has been running between 88 and 89 million barrels per day (mbpd) this year because government, industry and media sources tell us so. As it turns out, what everyone knows is wrong. It's wrong not because the range quoted above can't be found in official sources. It's wrong because the numbers include things which are not oil such as natural gas plant liquids and biofuels. If you strip these other things out, then world oil production has been running around 75 mbpd this year. The main thing you need to know about the worldwide rate of production of crude oil alone is that it has been stuck between 71 and 75 mbpd since 2005 (calculated on a monthly basis). And, that has already had huge negative effects on the world economy and world society through high energy prices that are partly responsible for our current economic stagnation. But because natural gas plant liquids production has been growing rather rapidly due to recent intensive drilling for natural gas and because those liquids are misleadingly lumped in with oil supplies, people have been mistakenly given the impression that world oil production continues to grow. Not true! What's growing is a category called "total liquids" which encompasses oil, natural gas plant liquids, biofuels and some other minor fuels. Total liquids are growing only because of large gains in natural gas plant liquids and minor gains in biofuels. And, this is why it is so important to understand what natural gas plant liquids are. But first, an important question. Why do government and industry officials, oil analysts, and energy reporters equate total liquids and total oil supply? They claim that these other liquids are essentially interchangeable with oil. (I will discuss some of the not-so-savory motives behind this claim later.) In a recent report the U.S. Energy Information Administration put it this way: "The term 'liquid fuels' encompasses petroleum and petroleum products and close substitutes, including crude oil, lease condensate, natural gas plant liquids, biofuels, coal-to-liquids, gas-to-liquids, and refinery processing gains." Let's see why the "close substitutes" assumption is demonstrably false when it comes to most natural gas plant liquids and decidedly disingenuous when it comes to biofuels. First, crude oil is what you think it is. It's a black, hydrocarbon-rich liquid that comes out of underground reservoirs. It can also be made synthetically from other hydrocarbons such as the bitumen found in the Canadian tar sands. Oil also includes something called lease condensate which refers to the light hydrocarbons that often occur in oil reservoirs. They are gaseous in the high-temperature environment of the reservoir, but condense to liquids when they escape the wellbore and are captured by special equipment located on the oil lease. These condensates become part of the crude oil stream. They are highly prized because of the ease in refining them, though they make only a small contribution to world oil supplies.

But what are natural gas plant liquids and are they good substitutes for oil? Unfortunately, confusion reigns because a very similar but more inclusive term, natural gas liquids or NGL, includes lease condensate, already discussed above and which we know is included in the crude oil stream. Usually, when people refer to NGL, what they really mean is natural gas plant liquids (NGPL). NGPL are hydrocarbons other than methane that are separated from raw natural gas at a processing plant. They include ethane, propane, butane and pentane. The amounts vary. For example, raw natural gas extracted off the coast of Malaysia contains 11 percent ethane, 5 percent propane, 2 percent butane and about 2 percent of something called natural gasoline or drip gas, a low-octane fuel that is used today primarily as a solvent. Raw natural gas from the North Slope of Alaska contains a higher percentage of methane and correspondingly smaller percentages of ethane (7 percent), propane (4 percent), butane (1 percent) and other components including carbon dioxide and pentanes (2 percent). In these two cases you can see that ethane makes up about half of the NGPL, propane makes up about a quarter, butane makes up 10 percent of Malaysian NGPL and 7 percent of Alaskan slope NGPL. So what is ethane used for? Its major use is as feedstock for the production of ethylene, one of the most widely used chemicals. Polyethylene is the world's most widely used plastic and found in such things as packaging film and trash bags. Other processes turn ethylene into automotive antifreeze. Yet others turn it into polystyrene which is used in insulation and packaging. Some ethane remains in the natural gas piped to our homes and factories, but not much. So far, it's hard to see how ethane, the most plentiful of the NGPLs, is a good substitute for petroleum-based liquid fuel products. How about propane? Everyone is familiar with propane use in backyard barbeques and camping stoves. It's also used to heat rural homes. In addition, the Green Truck Association reports that there are 270,000 propane-powered vehicles in the United States. That's about one-tenth of one percent of the roughly 250 million vehicles registered in the country. Some claim that 17.5 million vehicles worldwide run on propane. If true, that would be about 1.7 percent of the billion vehicle worldwide fleet. Yes, propane is a viable substitute for petroleum-based fuels in transportation. But a lot more vehicles would have to be converted to propane for that substitution to be meaningful. And, then there is a ceiling on how much propane could actually be made available because as we've seen, it makes up only 4 to 5 percent of all raw natural gas production. To the extent that propane displaces heating oil, it is a good substitute for oil. But again, limits on its production prevent it from being a panacea. Of course, natural gas itself is often a substitute for heating oil, especially given its comparatively low cost. So there can be a limited substitution effect where natural gas infrastructure is feasible. How about butane? Everyone recognizes butane as the fuel for butane lighters. When it is mixed with propane, it is called liquified petroleum gas or LPG which is used for space heating. It's also used as a propellant in aerosol sprays. But no one can put butane into a vehicle. It's not a suitable liquid fuel for transportation. I suppose one could say that we'd have to use petroleum to make lighters if we didn't have butane. I'm not sure that's a good start for making intelligent energy policy based on the central role of oil in global civilization. Pentanes have industrial and laboratory uses, but aren't used as liquid fuel. The case for lumping NGPL with oil supply is not very strong. In fact, given that little substitution is possible and the growth in the substitutes that are available is limited, the merging of NGPL with oil seems more like a facing-saving gesture on the part of those who have consistently been wrong on oil supplies and prices in the last decade. And, it seems to be a move of desperation by an industry that has been having trouble in recent years replacing its oil reserves. If investors caught on to the idea that oil companies are now essentially self-liquidating enterprises, valuations would be cut drastically. And that, of course, means that stock options and stock holdings for top executives would be devastated as would positions held by big investors.

NGPL currently constitutes about 9 mbpd of so-called total liquids. Biofuels, some coal-to-liquids, and a tiny amount of (natural) gas-to-liquids constitute another 2 mbpd. Turning coal into liquid fuels for vehicles is now done mostly in South Africa, a holdover from the days of apartheid when the South African government feared an oil embargo could leave the country without fuel for transportation. Turning coal into gasoline and diesel is extremely dirty and extremely expensive. But South Africa paid for the equipment to do so long ago and now must simply pay for domestic coal to supply its coal-to-liquids refineries. Only a relatively small amount of natural gas is currently being turned chemically into liquid fuels, mostly diesel. The process is capital intensive and expensive, and thought to be suitable for converting natural gas that might otherwise be flared. As for biofuels, America is already approaching the current limit of its ability to absorb the supply of ethanol. Most cars can only run with a 10 percent mixture. Above that engine parts in the vast majority of vehicles start to degrade. Of course, we could continue to increase the ability of automobiles to burn ethanol. But the scale problem is the deciding factor. In North America it would take 1.8 billion acres to grow enough corn to supply enough ethanol to run the North American vehicle fleet. That's four and one-half times the amount of arable land available. And besides, corn ethanol takes more energy to produce than it provides. It's not an energy source so much as an energy carrier. Similar limitations apply to biodiesel which is made from vegetable oil. The remaining volume of total liquids production, about 2 mbpd, is what is called refinery gain. Simply put, the total volume of crude oil increases once it is separated into its various fractions. This is not a source of oil so much as a consequence of spending energy to refine it. Even when non-oil products are considered, total liquids have barely budged, up just 3.5 percent for the entire period from 2005 to 2011. Even if these liquids were interchangeable with oil, they would be making very little headway in substituting for it. But because few of the non-oil products now being lumped in with oil supplies are genuine substitutes and the ones that are have serious limitations on the volume they could provide, we should consider the truth about oil. Its supply is stagnant which accounts for the record prices of recent years. And, the promise that high prices would bring on copious new supplies has proven to be nothing more than wishful thinking. The limitations on oil supplies are now upon us. The salient issue is the rate of production, not the supposedly huge resources that optimists may conjure up in their imaginations. How much oil you can get out out of the ground on a daily basis is what counts, and it's getting harder and harder to extract the amount of oil we desire from the Earth's crust each day. We extracted the easy stuff first. We cannot now expect to extract the difficult stuff at the same high rates as the easy stuff. And, we cannot expect that total percentage recoveries from the smaller, more complex and challenging reservoirs which we are now forced to exploit will be as high as those we've gotten from large, simple, straightforward reservoirs in the past. Facing up to this reality will be difficult because it will require so many changes in our thinking and our society. And, it would require the immediate markdown of the value of one of the world's largest and most powerful industries because it now faces contraction in the not-too-distant future. No wonder the powers that be decided to change the definition of oil instead of accepting reality.
Kurt Cobb is a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.