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Industry Analysts Expect That Hundreds More Rigs Will

Industry Analysts Expect That Hundreds More Rigs Will

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Peak Oil Review
Vol. 3 No. 51December 22, 2008
Tom Whipple, EditorSteve Andrews, Publisher
1. Prices and production
Crude prices started the week with the January contract touching $49 on Monday on prospects foran OPEC production cut and closed out the week trading as low as $32 a barrel due to a shortageof storage space for the expiring contracts. Oil prices were rather confused last week as the futuresmarket is in “contango” with later months trading for higher and higher prices. Oil for delivery 5years from now and beyond, for example, is trading up in the $70 range.For days prior to OPEC’s meeting in Oran on Wednesday, numerous spokesmen emphasized thata “surprisingly sizeable” cut would be made. Moscow even chimed in by talking about a productioncut of up to 300,000 b/d. When the actual OPEC cut of 2.2 million b/d was announced and with nonew cuts from Russia for now, the oil markets were underwhelmed. Oil prices fell for three days,finally stabilizing on Friday after the January contract expired.OPEC is now aiming to cut production by 4.2 million b/d from September’s production total of 29.0million b/d. Only 900,000 b/d of this cut is scheduled to come from Venezuela and Iran, the twocountries in the most desperate economic straits and the most likely to evade their quotas. This isstill a sizeable cut even if only the Gulf Arab states adhere strictly to their targets. Venezuela,however, has already announced a production cut of 189,000 b/d. This is a good start on its cut-quota of 350,000 b/d and an indication that more of a cut may actually be made this time.The oil markets still appear seized with the idea that the worldwide demand for oil continues todrop rapidly. Traders cite the buildup in US and OECD crude inventories and note that the major oilcompanies are planning to store 50 million barrels onboard supertankers due to excess productionand the lack of conventional storage space.While US consumption is down by about a million b/d and demand in China and Japan is downtoo, there are signs that the decline could be stabilizing due to the relatively low product prices.China has just made cuts of 14 and 18 percent in the price of gasoline and diesel fuel respectively,which will stimulate demand. The hundreds of poorer countries and small islands that were indesperate situations last summer with oil at $140 a barrel should now be able to afford oil again.The latest official production estimates and forecasts from the IEA say that worldwide demand foroil in 2008 will shrink, but only by 200,000 b/d. The Agency now projects that the “call on OPEC”for 2009 will only be about 800,000 b/d below 2008. There are obviously major discrepanciesamong the market pricing of oil, the 4 million b/d production cuts planned by OPEC, and IEAforecasts for demand next year.
2. OPEC may meet in January
After touting for weeks the “sizeable” production cuts that would drive oil prices back to appropriatelevels, OPEC officials were obviously disappointed by the immediate results of the Oran meeting.With the February oil futures contract trading as high as $54 just before the meeting and closingthe week at $42.36, the announcement clearly did not deliver the desired results.Officials strived to put a good face on the market responses, reiterating that a 2.2 million barrel cutwas enough to balance the market and that it will be necessary to wait until January 1
, when thecuts become effective to see results from actions taken. OPEC’s Secretary General El-Badari
indicated that the cartel had about 60 percent compliance with the October 1.5 million b/d cutduring November.On Friday, OPEC’s President Chakib Khelil told reporters at an energy conference in London thatthe cartel will continue to cut production as much as necessary to stabilize prices. Khelil indicatedthat OPEC still believes the demand for oil will continue to fall and that the group may meet inKuwait on January 19
to discuss further production cuts.
3. Investment
Alarms continued to sound around the world last week bemoaning the sudden drop in oilexploration and production. Active drilling rigs in the US have fallen to 1,790 - down 12 percentfrom September. Industry analysts expect that hundreds more rigs will be idled by summer and thatthere could be a total drop of as many as 1000 rigs or a 50 percent decline during 2009 from theSeptember 2008 peak.In Alberta, Connacher Oil and Gas announced that it was cutting production from its oil sandsproject nearly in half because current prices for bitumen could not cover the costs of existingproduction. Other oil sands producers are expected to follow if prices do not revive. Shell, however,expressed the hope that production and engineering costs for oil sands projects will drop soon andthat it is waiting for the opportune time to revive new projects that were put on hold last month.At the LNG summit in Barcelona, speakers grappled with the issue of whether very expensiveinvestments in LNG terminals continue to make sense in face of the economic downturn. There willbe a 50 percent growth in world LNG production capacity during the next three years, but after thatthere could be a supply crunch as investment is scaled back.Saudi Oil Minister Naimi warned on Friday that plunging crude prices coupled with the world’sfinancial problems will harm the long term health of the industry. "Today's price levels are wreakinghavoc on the industry and threatening current and planned investments," Naimi told the Londonconference of producers and consumers that was a follow-up to the one held in Jeddah during theheight of the oil price spike last summer. The oil industry’s change in focus over the last six monthsis striking.
4. The IEA sets a date
In the IEA’s annual report, “The World Energy Outlook 2008”, the agency says that "althoughglobal oil production in total is not expected to peak before 2030, production of conventional oil...isprojected to level off towards the end of the projection period." This rather cryptic formulation,which sounds a lot like a compromise between factions in the IEA, says that at some date betweennow and 2030 world oil production will peak, but not to worry because the difference will be madeup by increasing production of natural gas liquids, ethanol, and heavy oil.When Fatih Birol, the IEA’s chief economist, was interviewed by the
newspaper last weekhe was pressed to explain just what “level off towards the end of the projection period” actuallymeans. To the astonishment of the interviewer, the answer came back as 2020 - only 11 yearsfrom now. For an Agency that has steadfastly maintained that there was plenty of oil to keep onincreasing production for the foreseeable future, this admission caps the turnaround that came withthe publication of this year’s
Energy Outlook 
. In that publication, the agency says new researchshows that oil production from the world’s existing oil fields may be declining at 6.7 percent a yearrather than the 3.7 percent rate previously estimated.The impact of this admission on government policy has yet to been seen. Many believe that a 2020date for the plateauing of world oil production is far too optimistic and that a more realistic timeframe is between 2010 and 2013 if it has not come already due to the economic slowdown. Thenext shoe to fall in the general recognition of imminent peak oil may be at the US’s EIA which willbe changing leadership in about a month.
5. Briefs
clips from recent
Peak Oil News 
dailies are indicated by date and item
Delays in energy investments
could curb future global fuel supplies by the equivalent of 4million b/d within the next five years, according to Peter Jackson, Cambridge EnergyResearch Associates. As scores of small wells are shut down, analysts have calculated thatoil production in North America could decline by 1.3 million barrels a day through 2010, or17 percent, to 6.14 million barrels a day. (12/16, #6)
Oppenheimer & Co. senior oil analyst Fadel Gheit estimates
world oil supply
is likely todrop by three million to five million barrels a day in 2009, due to OPEC cuts and smallercompanies slashing production, compared with a decline of just one million to two millionbarrels a day in global oil demand. This scenario of overtightening supply relative todemand would reduce global oil inventories a record 10% to 30%, pushing crude pricessignificantly higher later in 2009, Mr. Gheit said.(12/15, #4)
Oil companies
have begun cutting spending nearly across the board. A survey by BarclaysCapital found 2009 capital budgets were 12% lower than 2008 spending plans, and somebelieve they might head lower. Budgets in the U.S. and Canada are being cut the most, asprojects in the high-cost oil-sands and unconventional natural-gas fields now make lesseconomic sense. (12/20, #7)
would come under crippling financial pressure and may need to raise moneyabroad if oil stays at an average of $30 a barrel over the next two years, the World Bankpredicted Friday. The bleak scenario would mark a rapid unraveling of Russia's oil-fueledeconomic gains over the past eight years. (12/20, #13)
Russia’s oil output
is falling due to underinvestment, Russia already is, in effect,helping OPEC without actually turning off any taps. Any reduction from Russia, dependingon the size, could simply be repackaging naturally declining output as a "cut." (12/15, #4)
A survey of 200 oil and gas companies shows the
oil price
required to allow new oilprojects to break even has climbed from about $18 US per barrel in 1999 to $60 in 2007and an estimated $62 now…In addition to jeopardizing future conventional oil projects, oil at$45/barrel makes new tar sands production uneconomic, has the same effect on biofuels,and discourages development of more fuel efficient vehicles. (12/20, #14)
Iran's oil minister
said he considered the "real price" for a barrel of crude should be morethan $100. Saudi Arabia has said $75 a barrel was a fair price, comments echoed by anIranian official this month. Other OPEC officials have said OPEC states needed $70 to $80a barrel. (12/15, #9)
Last week
Iran’s President Ahmadinejad
acknowledged for the first time that due to lowoil prices the Government will have to cut spending and subsidies for food and fuel, as wellas raise taxes. (12/20, #10)
could report its first annual operating loss in 71 years and may issue a profitwarning at a scheduled year-end news conference on Monday. (12/19, #9)
today announced that it has successfully started production from the third and fourthwells at the Thunder Horse field with production now in excess of 200,000 barrels of oilequivalent per day. BP plans to start up additional production from the Thunder Horse Northfield in the first half of 2009. (12/19, #13)
John Holdren
, currently a Harvard University physicist, has been selected as President-elect’s Science Advisor. Holdren has said recently that the world is not running out ofenergy and that even "peak oil" is debatable. (12/19, #14)
A coalition
of 14 companies announced the creation of a new business alliance aimed atpromoting domestic production of
lithium ion batteries
. Automakers hope to use thebatteries in next-generation hybrids as well as plug-in electric cars. (12/19, #16)

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