1. Production and prices
Oil prices fell 6.5 percent last week before settling at $68 a barrel. A 7 percent drop in the Chinese stock market on Monday triggered the decline which later was reinforced by reports of weak US demand for oil and increasing US unemployment. Market analysts are starting to talk about oil prices dropping further in the near future since the economic recovery is not shaping up to be as strong as anticipated, demand for oil continues weak, and stockpiles continue to build. These fundamentals will continue to be balanced against the value of the US dollar which is playing an increasing role in determining oil prices. There is also concern that possible restrictions on speculation may force oil prices lower.
The US’s EIA reported on Wednesday that US distillate stocks are at a 28-year high and that demand in recent weeks is at a 13-year low.
OPEC meets again on Wednesday and the organization is expected only to call for increased compliance with existing production restrictions. OPEC production cutbacks have slipped to 68 percent of cuts agreed on last winter. So long as oil prices remain in the vicinity of $70 a barrel, OPEC members have little incentive to comply.
A number of European refiners are shutting down their plants for extended repairs in an effort to help ease the glut of oil products. British oil production in the North Sea may drop as smaller producers are unable to get financing for projects. The Norwegians say their production will drop to 1.6 million b/d by 2013 after averaging as much as 3.1 million b/d in 2000.
In the last two weeks, three of the top world producers – Russia, Mexico, and Norway -- have warned that their production will decline faster than expected in the next few years.
Natural gas prices fell to the lowest since March 2002 after a government report showed stockpiles continuing to increase.
2. New Discoveries
Last week, the news was dominated by BP’s announcement on Wednesday that it had made a “giant” oil field discovery called Tiber, 35.000 feet beneath the surface of the Gulf of Mexico. BP did not announce the size of the find, but said it was comparable to other discoveries in the area, leading to press speculation that the Tiber find was on the order of 1-3 billion barrels. Initially the announcement that oil could be found so far below the surface was greeted with much enthusiasm with some stories suggesting that a new era of finding oil was at hand and that exploration in the Gulf would revive.
Within a day reality set in as reporters learned that it was likely to take ten years of difficult and expensive drilling before any oil could be produced and even then less than a third of the oil, and possibly as little as 5 to 15 percent, can be recovered. Given that production from existing fields in the Gulf is likely to start declining rapidly in the next few years, oil from the deep water discoveries is unlikely to be sufficient to increase production from the Gulf.
The Iranian government announced last week that 8.8 billion barrels of oil had been found in deeper layers in Iran’s Sousangerd oilfield. Given the recent deterioration in relations between Tehran and other governments, it may be difficult for Iran to find outside help to exploit this discovery.
A relatively small British oil company, Tullow Oil, has been drilling in Uganda for several years. Tullow says they have already discovered 700 million recoverable barrels, continue to make more discoveries, and remain convinced that there are large quantities of oil in the region.
Tullow is already in financial difficulties and there are reports that Shell, BP, and ENI are interested in buying or partnering with Tullow to exploit what could be relatively easy to produce oil. Uganda’s government is well aware of the troubles that have befallen other African oil producers and are determined to avoid becoming another Nigeria.
All this talk of “new finds” naturally is raising questions in the press about the imminence of peak oil production. Optimists are saying that peak oil has been pushed off indefinitely by the finds while others say that large scale production from these discoveries will be too long in coming to prevent global production from declining.
As minerals become harder to find, national governments are moving to ensure that they get as big a share of the profits from exploiting these deposits as possible. Last week Brazil introduced legislation that would scrap the present concession system and switch to a production sharing system that would give all the oil to Petrobras, the state-owned oil company, which would in turn award production sharing contracts to foreign oil companies.
In Libya the government announced that henceforth all oil companies operating in the country will have a Libyan CEO.
Iraq is preparing for another auction. The first auction was judged a failure after the government insisted on keeping so much of the profit for itself that only one of many possible contracts was awarded. The next time around Baghdad may be more realistic.
Beijing has discovered that it has a near monopoly on rare earths such as dysprosium that are needed for building advanced electro magnets that will be used in green technologies. Last week China clamped export quotas on the 17 rare earths. The draft policy would completely ban the export of dysprosium, terbium, thulium, lutetium and yttrium. The export ban plus a 42 percent export duty would force manufacturers to produce many advanced products in China. At week’s end there were indications that Beijing was modifying its stance in face of a worldwide outcry.
Quote of the Week
[About BP’s recent Tiber discovery] "We really need this. After 2012, given current developments, we will see production start to decline. Without continued discoveries . . . that decline could be steep."
--- Bob MacKnight, senior consultant, Washington consulting firm PFC Energy
Energy Stat of the Week
Production in the Gulf of Mexico accounts for about a quarter of total U.S. oil production, or about 1.2 million barrels a day. Gulf production peaked in 2003 at 1.56 million b/d. Most Gulf production wells tend to hit their peak within a year or two, and then begin to drop steeply several years later. Oil production in federal waters of the U.S. Gulf fell 9.8 percent last year, to the lowest since 1997, as new finds failed to keep pace with declining output from fields discovered in the 1970s and 1980s.