1. Production and Prices
4. Energy Briefs
For another week fears of a credit-crisis induced recession competed with falling stockpiles and the threat of a hurricane getting into the Gulf oil fields to keep oil prices volatile. By the end of the week, however, Wall Street seemed satisfied that the Federal Reserve could and would save us from a recession so hurricanes and stockpiles took over to drive oil prices to $74.
The weekly US stocks report showed crude inventories slipped by 3.5 million barrels and gasoline inventories by 3.6 million. At 192.6 mmb, US gasoline inventories are well below normal and the decline was greater than analysts expected. The US gasoline delivery system requires a “minimum operating level” of gasoline (in transit fuel not available for delivery to gas stations) that is probably something on the order of 180 mmb. In some parts of the country, local gasoline inventories contain only a few days of reserves should supply disruptions occur. The EIA reports that the gasoline stockpile deficit is particularly severe in the Midwest.
Hurricane Felix seems headed for a Belize/Yucatan replay. It may slow oil and gasoline shipments from Venezuela, the Caribbean refineries, and perhaps the Mexico oil fields again. A third storm which may head in a more northerly direction currently is forming in the Atlantic. Coupled with the stockpile situation, growing US demand and refinery outages, this year’s hurricane season poses an unusually serious threat. Supply problems in the upper Midwest have already led to spot shortages in North and South Dakota, Nebraska, Iowa, and Minnesota.
Over in Europe, OPEC and the IEA continue to exchange words about the supply situation this winter. Senior OPEC officials profess deep concerns that the credit crisis will lead to a recession and less demand for oil. The IEA continues to argue that shortages will develop this winter unless OPEC increases production at their September meeting. At the minute, chances for an increase do not seem good.
Last week, a Nevada Congressman returned from an August trip to Iraq where he was told by unnamed officials that a premature US troop withdrawal would result in $9 a gallon gasoline in the US. The Congressman says he was told that without US forces, there would be genocide, a resurgence of al Qaeda, and Iran would take over the region. Fighting between Kurdish guerrillas and the Iranian forces continues with the Iranians shelling villages in Kurdish Iraq.
Last week British forces completed their withdrawal from the oil port of Basra, effectively leaving key facilities in the hands of Moqtada Al Sadr’s Mahdi Army which is fighting for control of the port with other Shiite groups. Iranian President Ahmadinejad helpfully declared that US political influence in Iraq is "collapsing rapidly" and that his government is ready to help fill any power vacuum “with the help of neighbors and regional friends like Saudi Arabia, and with the help of the Iraqi nation."
With General Petraeus’ report to Congress due this month, the situation seems to be coming to a head. A recent GAO report notes that it will require $50 billion and many years of stability to get Iraq’s oil and electricity industry up to 6 million b/d. This is after the US $4 billion already has been spent on restoration. Given the proximity of the US federal elections and the growing distaste for the war, some sort of US force reduction seems likely in the next year.
So far Iraqi oil production is tottering along at about 1.5-2 million barrels per day and unless the British withdrawal from Basra results in increased fighting there, this level of production seems sustainable and agreeable to all parties concerned in the short term. As the revenue from oil sales amounts to 90 percent of Iraq’s foreign earnings, all sides seem to fear the consequences of a complete production shutoff.
The Saudis seem to be increasingly concerned about the course of events in Iraq. Last week they announced an increase in their oil infrastructure protection force from 5,000 to 35,000 men.
In November 1997 a group of Western oil companies signed an agreement with the Kazakh government to develop the northern Caspian Sea. By 2000, exploratory drilling had determined that the Kashagan oil field was the largest discovered in 30 years and might be capable of producing 1.5 million b/d. Exploiting Kashagan oil turned out to be major technical challenge as the oil was 12,000 feet below the shallow seabed under 500 atmospheres of pressure, contains large amounts of deadly hydrogen sulfide and is frozen solid five months a year.
These technical problems coupled with disputes among the consortium partners resulted in delays and cost overruns that eventually became unacceptable to the host government. Startup of production was pushed back from 2005 to 2010 and costs for the initial phase increased from $10 billion to $19 billion.
Last week the Kazakh government, which had been counting on revenues starting in 2008, called a halt to the project by revoking the environmental permit. Accusing the consortium of numerous environmental, and fire and safety violations, the government is also threatening criminal charges for customs violations.
During initial talks with the oil companies, the government demanded $10’s of billions in compensation for the delays and possibly the replacement of Italy’s ENI with a local company as the lead contractor.
Negotiations are likely to drag on for some time, thereby pushing off Kashagan’s 1.5 million b/d of production to some unknown year in the future. Given the unprecedented technical difficulties of the project, it is unlikely anyone other than a consortium of the major western oil companies could muster the resources and technical knowledge to increase progress much faster.
Those who were hoping that near-term production from Kashagan would offset depletion elsewhere in the world are bound to be disappointed.
"Predicting peak oil is almost like predicting peak technology — an exercise, in other words, that to him seems inherently small-minded. Even absurd.”
— Paul Siegle, Chevron vice president for deepwater exploration