Oil prices started out last week by falling to $61, the lowest since May 2007. By the end of the week, however, prices recovered due to stronger equity markets, climbing above $70 a barrel on Thursday and closing at $67.81 on Friday. A new report that the US GDP is declining, however, served to hold down price increases.
The average price received by OPEC members fell $6.35 last week to $61.53, prompting new talk of a second special OPEC meeting and further production cuts. Venezuelan President Chavez said that after talks in Moscow he was sure that Russia would coordinate production cuts with OPEC. Tehran announced that it already was cutting production by 199,000 b/d and was willing to make further cuts until “stability” returns to the oil market.
There was little news about production fundamentals last week and most price changes continue to come in reaction to financial developments. Several OPEC members have announced that they are starting to reduce production in line with the 1.5 million b/d cuts announced two weeks ago. US Gulf of Mexico oil production is still down by 28 percent due to the September hurricanes.
Low oil prices and lack of credit are taking a heavy toll on the possibility that new oil production will offset much of the decline from existing oil fields. Last week there was a steady stream of reports concerning delays or cancellations of new oil exploration and production projects.
As many as 20 of the 100 deepwater oil rigs currently on order worldwide may be cancelled due to the unavailability of finance. Many of these rigs, which can cost up to $800 million to build, have been ordered on speculation by smaller under-financed companies. With oil around $60 a barrel, deepwater projects in the Gulf and off Brazil and West Africa are no longer economically feasible with deep-water drilling rig rentals running at $600,000 per day.
Executives from Chevron and ConocoPhillips told a conference last week that project delays should be expected due to low oil prices. The major, well-financed, oil companies have made it clear that they intend to continue with projects currently underway, but are becoming increasing reluctant to undertake new drilling until the global economy and oil prices stabilize.
Also at risk is further development of the tar sands where high construction costs have made new production projects uneconomical below $70-90 a barrel. Shell Oil followed in the wake of several other Alberta sands developers by announcing it was delaying the second phase of its expansion plans. In Brazil enthusiasm for rapid development of the newly discovered offshore fields has disappeared. Even in the Middle East, Saudi Arabia and Kuwait postponed plans to increase production at the Khafji oil field by five years.
As projects of this scale have long lead times, the impact of these delays will not be fully felt for several years. Most forecasts by those who understand peak oil say that world oil production should be clearly past peak and on the decline five or six years from now. If this turns out to be true, world production will soon be declining faster than previously thought.
Developments in Russia were much in the news last week. In London the former chief of the TNK-BP consortium said that Russian appears to have reached its peak in August and is now going into a gentle decline. This view was backed up by the CEO of Russia’s Lukoil who forecast a 1.5 percent decline in Russian oil production next year. In July the Russian government approved tax breaks to spur investment and last week cut export duties in response to complaints that prices were now so low that Russian companies were actually losing money on shipments to foreign customers.
In what may be a policy shift, a vice-president of Lukoil said last week that the future of Russia’s oil industry hinges on cooperation with OPEC to help prop up prices. He added that Russia could afford to cut production and exports by 300,000 to 400,000 b/d to help OPEC, and said executives from Russian oil companies could attend OPEC's next meeting. Last month the company’s president said Russia should not join OPEC as it would harm Russian production.
In another development, Russia and China signed a pipeline deal last week to create a new overland export route for Siberian oil to the Far East. China will loan Russia some $25 billion to pay for the pipeline and other projects and will be paid back by oil deliveries from Siberian fields which could reach 300,000-600,000 b/d. This move frees Russia from dependence on Western markets, without investing their own resources, and gives the Chinese yet another source of relatively secure supply.
Overshadowing these developments however is the state of Russia’s economy which has become highly dependent on oil and other commodity export revenues. In the last few weeks, a 70 percent plunge in Russia’s stock market, the global credit crisis and a run on Russia’s private banks has forced Moscow to spend its foreign reserves, which have fallen from $600 billion to $484 billion in recent weeks. After many years of increasing oil prices and rebounding oil production, Russia is headed into trouble along with most other countries. Foreign investors have fled the country and nobody is getting much in the way of bank loans these days.
Moscow says that the state budget will be all right if oil averages $60 a barrel for 2009, but after that will have to start cutting unless oil prices go higher.
Last week the Financial Times published excerpts from a leaked copy of the IEA’s World Energy Outlook that will be released to the public on November 12th. Although the IEA still refuses to embrace the idea that there will be geological constraints on world oil production in the near future, it acknowledges that production from mature oil fields is declining rapidly and that investment in new production is likely to be inadequate to prevent an overall production decline.
In the Financial Times brief summary of the report, the Times notes that without “extra” investment to increase production, the natural annual rate of decline is 9.1 percent. This is a spectacularly high percentage for world oil depletion for it suggests that, without lots of new drilling, world oil production would be down to fraction of current output in a decade or so.
The IEA released a statement the day following the Times story saying that the draft which was leaked apparently was several months old and that the numbers should not be quoted or considered to be official IEA results. The IEA will release the report at a press conference in London on November 12th and at that time they will discuss the results of their research and the implications for world energy supply.
Last week a report from the Peal Oil Group, a recently established industrial taskforce, received broad attention in Britain where it was run in at least 130 newspapers. The report warns that the declining availability of oil will hit the UK earlier than generally expected, possibly as early as 2011.
In a Guardian OpEd discussing the report, the Group’s Chairman, Jeremy Leggett, said “Today, eight British companies are warning of a ruinous oil crunch five years from now. We warn that the global peak of oil production will arrive unexpectedly early, resulting in not just a global energy crisis, but potentially the withholding of exports by oil producers and energy famine in oil-importing countries. Previously unimaginable policy interventions in financial markets have suddenly become imperative, and similar interventions in energy markets today may be worth their weight in gold tomorrow, in terms of economic and social damage avoided, especially as this would also help tackle climate change.”
“The prevailing oil industry view, echoed by the government, is that there are well over a trillion barrels of proved reserves, and several trillions more in tar sands. In a world burning just over 30 billion barrels a year that means decades of supply before we need worry. But peak oil happens when flow-rate capacity coming on-stream from oil discoveries fails to exceed declining flow-rate capacity from depletion of existing reserves. Peak oil is as much a problem of flow rates as it is of reserves. In our report, the consulting editor of Petroleum Review – a flagship oil-industry journal – shows how the flow rates from reported discoveries will drop below depletion rates no later than 2013, and possibly a good deal earlier.”