Peak Oil Review
Vol. 5 No. 2
January 11, 2010
Tom Whipple, Editor
Steve Andrews, Publisher
1. Prices and Production
An outbreak of very cold arctic air across much of the northern hemisphere was the main energy price driver last week. The unusual weather air brought extensive snows from the middle of the US across Europe to northern China, causing a jump in the demand for heating fuels. Starting below $80 a barrel on Monday, oil capped a 20 percent rally in the last few weeks to touch $83 a barrel on Wednesday and closed at $82.75 on Friday.
Despite the cold weather, the EIA reported that, contrary to expectations, US crude inventories rose by 1.3 million barrels the week before last. On Thursday, Beijing raised interest rates, suggesting that more credit tightening and slower growth may lie ahead. Most observers believe that Chinese demand for increasing amounts of oil was behind the 78 percent price increase during 2009.
On Friday, the US Labor Department reported that the US economy is still shedding jobs at a faster rate than expected. After the report’s release the US dollar fell, sending crude higher. The weak jobs report also sent natural gas futures lower due to fears of weaker industrial demand which accounts for 29 percent of US consumption.
Although the Iraqi cabinet approved the oil deals with foreign firms last week, it also banned 15 political parties with ties to the Saddam era from participating in the upcoming elections. The move could backfire if the disenfranchised turn to violence as US troops withdraw and the country starts a major effort to increase its oil production.
2. Gasoline Prices Rising
With the average price of gasoline in the US about $2.74 a gallon, an increase of nearly a dollar a gallon from January 2009, more worries about an economic recovery are starting to arise. Gasoline is already above the psychological barrier of $3 per gallon in California, Hawaii, and Alaska.
There is more to the story than simply the price of crude, which at $82 a barrel is getting into territory not seen since the price spike of 2008. The weak US dollar continues upward pressure on oil prices. The current outbreak of arctic air increases the demand for heating oil across the northern hemisphere. US refineries are operating at less than 80 percent of capacity as refiners attempt to increase the unusually low profits they have been making from refining operations. A handful of major refineries in the US and Europe are being shutdown permanently and many more are undergoing lengthy overhauls.
All this suggests that higher prices are still ahead. Another $10 or $15 increase in crude prices is likely to put the average US gasoline price above $3 a gallon. We are currently in the low-price season and, as usual, upward pressure can be expected in the next 6 months as gasoline is modified for summer driving standards.
Discussions are starting to arise as to the damage higher gasoline prices might do to the US economy. Every 10-cent rise in the price of gasoline takes about 14 billion more dollars from consumer pockets each year that are no longer available for other purchases. The US economy, with millions more unemployed, is in far worse condition to handle another gasoline price spike that it was two years ago. To add to the problem, analysts are starting to talk about increasing food prices this year due to droughts and unusually wet weather across the US’s Midwest last fall.
3. Venezuela
With oil prices above $80 a barrel, new pacts being signed for more Chinese investment each month and new-found friendship with Russia to keep the Americans at bay, one would think all is well in Caracas. Such is not the case. Last week President Chavez was forced to devalue the Bolívar by some 50 percent after Venezuela’s economy contracted by 2.9 percent and inflation hit 25 percent in 2009. Oil exports dropped from $95 billion to $61 billion between 2008 and 2009, due to lower world oil prices and sagging Venezuelan production. At the same time, other exports dropped from $6 to $3.3 billion.
A second major problem is a severe electricity shortage. Venezuela gets 73 percent of its electricity from the giant Guri Dam; at present it is the third largest hydro-electric plant in the world with 10,200 MW of installed generating capacity. Generation from Guri is suffering from a severe drought, and Caracas is scrambling to cut electricity consumption across the country to prevent the generating turbines from stopping completely. Water levels at the dam are reported as dropping by 1-2 feet a week and the rainy season is not due to start until May.
Thousands are being thrown out of work as factories and malls are closed to save electricity. Venezuelan unions are claiming that the government is concentrating the electricity cuts on privately owned establishment in order to undermine capitalism and eliminate labor unions in the country. Elections are coming up in December. Should the electric power situation continue to deteriorate, Chavez may be facing serious political problems and may have difficulty increasing or even maintaining current rates of oil production.
4. China Rolls On
Yesterday Beijing announced yet another surge in its economy with exports and imports in December growing much faster than expected. Exports increased by 18 percent from December 2008 which, however, was down 21 percent from December 2007. Imports were up by 56 percent from last December. Based on the trade data, it is likely China will report its industrial output grew by 25 percent in December vs. 2008 and its fourth quarter GDP growth was back up to 11 percent. Despite an increase in interest rates last week, President Hu was quoted as saying over the weekend that “moderately loose” monetary policies would continue.
The December growth spurt suggests that China will continue to increase its oil imports in coming months, keeping upwards pressure on prices. South Korea and Taiwan reported year over year export growth in December of 47 and 34 percent respectively, also suggesting increased demand for oil from these countries. The very cold weather and heavy snows across northern China could also increase the demand for oil and coal imports.
In the meantime, Chinese officials continue to search the world for more oil supplies. Last week the Foreign Minister was in Nigeria in an effort to convince their government that China could do a better job in developing the nation’s oil resources than the international oil companies. The Foreign Minister is also visiting Kenya, Sierra Leone, Algeria, and Morocco. PetroChina took a big position in Caribbean oil storage in an effort to get into oil trading in the region, and a Chinese delegation visited Antarctica in an effort to assess the continent’s potential for mineral resources. A senior Chinese official said last week that Beijing “will intensify the development of overseas resources to ensure ‘stable’ energy supplies for economic growth.”
Quote of the Week
• “It seems to me that the possibility that Iraq may actually succeed in doing this… bring[ing] production up from the current 2.5mbd or so to 12 mbd over the course of the next 6-7 years… should be taken seriously. If it did succeed, that would act to delay the final plateau of oil production by a decade (ballpark), make that plateau be at a higher level (95-100mbd ballpark), and significantly moderate oil prices in the meantime.”
-- Stuart Staniford, energy commentator, posting on The Oil Drum
The Briefs
• The price of crude oil will likely be more volatile this year and range between $60 and $100 a barrel, the CEO of French group Total told newspaper Le Journal du Dimanche. The CEO added that crude oil was becoming more expensive to produce. (1/9, #6)
• Floating oil storage: In late December, a total of 122 tankers were holding roughly 85.63 million barrels of oil products, mainly distillates - a category that includes diesel and heating oil - compared with 136 tankers storing 97.65 million barrels in late November. (1/9, #8)
• A dispute between Iraq and Iran over an inactive oil well has become a rallying cry for Iraqi nationalists and exacerbated fears of excessive Iranian influence in Baghdad. Forces from both sides are now dug in a few hundred yards apart, the oil well between them, about 250 miles east of Baghdad. The incident has inflamed passions in Iraq over two deeply sensitive subjects: sovereignty and oil. (1/9, #11)
• The oil market will remain under the influence of external factors including investment, environment and a possible depletion of crude resources but such fears are exaggerated, according to a BP official. Peter Davies, chief economist at BP, admitted that the world's oil potential is limited but dismissed what he described as theories about peak oil. (1/5, #17)
• By 2008, about 8% of global oil production (nearly 6 million b/d) came from deepwater fields. Many in the industry argue the new fields have expanded the limits of where the industry can find oil, potentially delaying a decline in global production. [But] Offshore projects are expensive, time-consuming and prone to failure. (1/5, #12)
• Orders for offshore rigs placed in 2006-2008, near the top of the offshore rig demand cycle, will result in many rig deliveries over the next several years. Likely having peaked in 2009, the current rig construction cycle is one of the largest in the offshore rig industry's history. However, with only a handful of orders placed since the credit crunch, the offshore rig order book is likely to continue to wind down. (1/9, #24)
• Exxon is mulling over a deal with leading offshore rig contractor Transocean to construct a drilling rig ($1 billion) capable of operating in extreme Arctic conditions. (1/9, #10)
• The US Environmental Protection Agency gave preliminary approval for Shell’s drilling exploratory wells off the coast of Alaska, one of the last remaining hurdles facing the company's plans to begin drilling this summer. (1/8, #15)
• Gas rigs operating in the US — now up to 781 — rose by 22 last week and have gained 17 percent since reaching a seven-year low of 665 in the week ended July 17. Gas rigs peaked at 1606 in September 2008. (1/9, #3)
• A rise in US natural gas prices above those in Britain has helped coax incremental LNG cargoes to the United States in January as shippers look for the best netback in the Atlantic. Throughout last year prices favored delivery to Britain. (1/8, #11)
• Surging productivity from US natural gas fields will end the need for natural-gas imports and provide enough additional fuel to run vehicle fleets and reduce coal-fired power generation, said consulting firm Bentek Energy LLC. Bentek, which tracks gas flows across the nation, predicted in 2008 that output gains could push Canadian imports and liquefied-gas cargoes sent by tanker ships out of the US market by 2020. (1/9, #20)
• Predicting the timing of when US gas supplies will go into severe deficit is very difficult. Timing is affected by a host of factors such as the vagaries of economic activity, the weather and uneconomic production. Its occurrence, however, is imminent (2011). (1,9, #23)
• Chesapeake Energy calls the proposed New York state regulations for the shale gas drilling industry unnecessarily onerous and likely to scare energy companies out of state. (1/6, #17)
• Ultra Petroleum drilled 30 Marcellus horizontal wells in 2009, 13 of which were producing in late December. Initial production rates for the producing wells average 7.5 MMcfd, and preliminary estimated ultimate recoveries range from 3.5 to 4 bcf. (1/6, #18)
• The size of the US car fleet dropped by four million vehicles to 246 million, the only large decline since the Dept. of Transportation began modern recordkeeping in 1960. (1/6, #15)
• US gasoline consumption fell to the lowest level in more than 13 months as Americans drove less between Christmas and New Year’s Day, according to MasterCard. (1/6, #16)
• Since early 2008 Mexico's deficit has grown to unsustainable levels. Two major reasons for this escalation: a severe contraction in the economy and plummeting oil revenues. If its oil production continues to decline, the country could lose its status as a net exporter within five years -- a change that would have devastate Mexico’s fiscal health. (1/6, #7)
Commentary: Mexican Oil Production Continues to Dive
By Roger Blanchard
(Note: Commentaries do not necessarily represent ASPO-USA’s positions; they are personal statements and observations by informed commentators.)
At this point in time, anyone who knows anything about Mexican oil production knows it is declining rapidly, particularly production from the supergiant Cantarell complex.
In the early years of the decade 2000-2009 it seemed obvious, at least to me, that Cantarell, and Mexican, oil production would start declining around 2006. Apparently it was not so obvious to the U.S. Dept. of Energy/Energy Info. Admin. (US DOE/EIA). In their International Energy Outlook 2003 (IEO2003), the US DOE/EIA stated:
“Mexico is expected to adopt energy policies that will encourage the efficient development of its resource base. Expected production volumes in Mexico exceed 4.2 million barrels per day by the end of the decade and remain near that level through 2025.”
Over the years, I’ve been critical of the US DOE/EIA’s wildly inaccurate estimates of future oil production for countries. It has appeared to me that their projections have been based upon desire and demand projections rather than data analysis.
In my 2005 book, The Future of Global Oil Production, I stated:
Declining production from the Cantarell complex will strongly influence Mexico’s future oil production since Cantarell produces such a large percentage (~66% in 2004) of Mexico’s oil. If production from the Cantarell complex starts declining in 2006, it’s realistic to expect Mexico’s oil production to decline as well. The situation would be comparable to Alaska when the Prudhoe Bay field started declining. The Ku-Zaap-Maloob development, and possibly others, will slow the decline of Mexican oil production but it’s unrealistic to assume, as the US DOE/EIA does, that production can increase until 2010 and remain near that level through 2025.
In my book, I had a graph of historical and projected Cantarell oil production. The Cantarell complex actually started declining a year earlier (2005) than I was projecting and didn’t quite reach the peak level I projected.
Jean Laherrere places the estimated ultimate recovery (EUR) for Cantarell at ~19 Gb, which correlates with data from Simmons & Co. Int’l. At the end of 2009, Cantarell’s cumulative production will be ~13.3 Gb. An average decline rate of 4.0%/year after 2009 would give an ultimate recovery of ~19 Gb. It could be that the 19 Gb estimate is inflated, meaning that the average future decline rate could be greater than 4.0%/year.
Table I shows production/decline rates for Cantarell since 2004 (tables I-IV from Pemex).
Table I: Cantarell Production and Decline Rates
Year Production Rate (mb/d) Absolute Decline (b/d) % Decline
2004 2.14
2005 2.04 100,000 4.67
2006 1.80 240,000 11.76
2007 1.49 310,000 17.22
2008 1.04 450,000 30.20
2009 .70* 340,000 32.69
2004-09 Production Decline 1,440,000 67.29
*Data through October 2009 from various sources
As Cantarell’s production has declined, Mexico’s liquid hydrocarbons production has declined as well, in spite of a rapid production increase from the Ku-Zaap-Maloob complex. Table II contains Mexico’s total liquid hydrocarbons production from 2004 to the present.
Table II: Mexican Total Liquid Hydrocarbons Production and Decline Rates
Year Production Rate (mb/d) Absolute Decline (b/d) % Decline
2004 3.825
2005 3.760 65,000 1.70
2006 3.683 77,000 2.05
2007 3.471 212,000 5.76
2008 3.157 314,000 9.05
2009 2.976* 181,000 5.73
2004-09 Prod. Decline 849,000 22.20
*Data through October 2009
Mexico’s liquid hydrocarbons production decline rate has been lower than that of the Cantarell complex largely due to rapidly increasing production from the Ku-Zaap-Maloob complex (Table III).
Table III: Ku-Zaap-Maloob Oil Production and Incline Rates
Year Production Rate (b/d) Absolute Increase (b/d) % Increase
2004 304,400
2005 321,700 17,300 5.68
2006 403,800 82,100 25.52
2007 527,200 123,400 30.56
2008 706,100 178,900 33.93
2009 800,000* 93,900 13.30
2004-09 Prod. Decline 495,600 162.81
*Data is an estimate for year based upon several reported monthly values
The Ku-Zaap-Maloob complex is now at its projected peak. Based upon my data, the Ku-Zaap-Maloob complex will have produced 2.9 Gb of oil at the end of 2009 (Ku produced for many years prior to expansion). I have come across an EUR value for Ku-Zaap-Maloob of 4.9 Gb although I don’t know how accurate it is.
A representative of Pemex has claimed that Ku-Zaap-Maloob can produce at its 2009 rate for the next 7 years but that would put the cumulative recovery in 2016 at 4.96 Gb. Pemex representatives have had a strong tendency to exaggerate production rates so I’m skeptical of the claim. If the 4.9 Gb EUR is accurate, then Ku-Zaap-Maloob would have to decline at an average rate of about 13%/year after this year. It will be interesting to see what happens.
In 2006, Vincente Fox announced that Pemex would invest $37.5 billion over 20 years in the Chicontepec Basin with the expectation that production would ultimately increase to over 1 mb/d. The problem is that Chicontepec has a complex geology which does not lend itself to easy oil extraction. During the summer of 2009, the production rate for Chicontepec was ~30,000 b/d, not much higher than in 2008. Production was projected to reach 60,000 b/d by the end of 2009 but that doesn’t appear likely.
Spending money on oil exploration does not ensure finding large quantities of oil, as the U.S. experience during the late 1970s/early 1980s proved. Some analysts make the case that ~90% of Mexico’s Gulf of Mexico (GOM) has not been explored and that with exploration, large quantities of oil will be discovered.
Geologically, Mexico’s GOM consists of two distinct regions: the southern GOM and the northern GOM. The southern GOM is where Cantarell, Ku-Zaap-Maloob and other prolific offshore fields are located and where almost all of the Mexican GOM oil has been discovered. The region has been sufficiently explored so that all, or almost all, of the major fields have been discovered so I don’t expect much in terms of new discoveries in this region. The reservoirs in the southern GOM consist of carbonate reef structures.
In Mexico’s northern GOM, the rock that could conceivably contain reservoirs is sandstone. The sandstone is not as thick and uniform as farther north, in the U.S. GOM, and the rock quality is not considered good. Some experts feel that good reservoirs are unlikely in this region and that prospects for significant oil discoveries are poor. To date there have not been any significant exploration successes in the region.
While Mexican oil production has declined, so have Mexico’s net total liquid hydrocarbons exports, as shown in Table IV.
Table IV: Mexican Net Total Liquid Hydrocarbons Exports*
Year Net Exports (mb/d) Absolute Decline (b/d) % Decline
2004 1.789
2005 1.670 119,000 6.65
2006 1.612 58,000 3.47
2007 1.371 241,000 14.95
2008 1.043 328,000 23.92
2009** 0.974 69,000 6.62
2004-2009 Export Decline 815,000 45.56
*Net total liquid hydrocarbons exports are the difference between (crude oil + refined product exports) – refined product imports
**Data through October 2009
It appears likely that Mexico’s oil exports will decline to zero within the next 10 years, with implications for the U.S. which imports most of the oil that Mexico exports.
Colin Campbell has estimated Mexico’s EUR at 55 Gb. Based upon that value and a cumulative production at the end of 2009 of 38.3 Gb, it would suggest an average decline rate for future Mexican oil production of about 5%/year.
Roger Blanchard teaches chemistry at Lake Superior State University and authored book The Future of Global Oil Production: Facts, Figures, Trends and Projections by Region, McFarland & Company (2005). He also grows fruit trees and hay on acreage outside Sault Ste. Marie (MI).