OGPSS - Pipelines through Canada

If one looks at the countries that are major importers of oil into the United States, Canada currently easily tops the list exporting 2.085 mbd of crude (2.524 mbd of total petroleum products) for example in June. Interestingly Saudi Arabia was in second place at 1.164 mbd and Mexico had fallen to third place at 1.108 mbd. In light of the countries that used to occupy places on earlier lists and no longer do, it is worth noting that places such as Chad and the Congo are now on the list.

Top 15 countries sending crude oil to the United States in June (EIA )

Since that summary review Canada has gone on to post some of the highest volumes of the recent past:

Weekly imports of crude from Canada into the United States (EIA)

This increase has occurred as the amount imported from Mexico has seen some of its lowest numbers.

Weekly imports from Mexico into the United States (EIA )

The numbers suggest a growing importance for that oil coming from the North. It was, for example, interesting to note that in the recent report reviewing available United States oil and natural gas, authored by the National Petroleum Council, (which I discussed earlier) and which had Daniel Yergin as Vice Chair, that Canadian oil has begun to get counted with that of the United States in the more generic classification of North America thereby acting as an anticipated aid in solving some of the “domestic” supply problems in the near future. Following that report, Dr Yergin wrote an article in the WSJ denouncing the idea of peak oil. Euan Mearns has provided his usual detailed and well-argued rebuttal to this (as does this entire series) so I will not go into that further at this point.

I briefly looked at Canada when I was writing the earlier summary posts on the top 30 producers in the world, Looking at the reported and projected production for this year, production is anticipated to steadily climb once the summer months have passed.

Production of Crude Oil and Equivalent in Canada in 2011 (Canadian National Energy Board)

The increase reflects a steady increase in the component from Western Canada, which started the year at 91% of the total, but is anticipated to reach 93% by the end, largely on the basis of an increase in production from the bitumen of the oil sands.

In passing it should be noted that not all the oil that will come from Canada necessarily started there, since, for example, there is currently a move to lay a pipe that would carry oil from the Bakken formation in North Dakota and Montana through Saskatchewan to the Enbridge terminal in Manitoba, and thence to refineries in the United States. Further not all future Canadian oil exports can be assumed to come to the United States. Two pipelines also being proposed are to run the 727 miles from Bruderheim, Alberta to Kitimat in British Columbia. The first of these would carry an average of 525 kbd west, while the second would transport back some 193 kbd of condensate, which would help to thin the crude going through the larger pipeline. Not surprisingly this $6.6 billion project is getting considerable support from China.

Not that this would be a totally new investment by China in Canadian oil,

Earlier this year, for example, five companies signed up for so-called firm service, or guaranteed access, to a portion of the Trans Mountain pipeline, which carries oil from Edmonton to a port at Burnaby, B.C. Among them is PetroChina International (America) Inc., a subsidiary of Chinese energy giant China National Petroleum Corp.

The investment is not just in the pipelines to get the crude to China, there has also been a growth of Chinese acquisitions of shares in the companies extracting the oil. Recognizing that, in contrast with many exploratory operations, the presence of the oil in Alberta is much more certain, the risks of investment are reduced and a return, or in this case the oil itself is a much more certain outcome. As a result there are now more Asian companies entering the oil sand business.

It is not unwelcome news in Canada. Bear in mind that at present 99% of Canadian oil exports go the United States, and as the President of the Enbridge Northern Gateway noted recently:

I challenge any of you to name one other country in the world that only has one market for its largest export. Right now our most valuable resource is landlocked in North America and isolated from the world market. That means it is often isolated from world price. The August spread between West Texas Intermediate and Brent Crude, the world price, was $22 per barrel. Canadian heavy crude has more often than not sold at a discount to U.S. light crude that goes well beyond the quality differential – simply because of lack of market.

In perhaps the same way as they acted to provide a second market for the natural gas of Turkmenistan (other than Russia) thereby allowing the Turkmen to be able to sustain higher prices, so now they can, to some eyes, be seen to be riding to the rescue of Canadian prices.

And then there is the controversial Keystone XL pipeline set to run from Alberta down to Houston and refineries south, and which is generating some high-level opposition.

Planned route for the Keystone pipeline

There are some current indications that the State Department will approve the pipeline, permission needed since it crosses an international border. It may not hurt those chances that the chief lobbyist for TransCanada was, apparently, the deputy manager of Secretary Clinton’s 2008 campaign. The latest step by the opposing forces has been to challenge the permit that TransCanada has to carry out construction on the Canadian side. Apparently the delays that are holding up the start of construction of the 700 kbd pipeline have carried the project beyond the year during which TransCanada had permission to start construction, without such construction beginning. On the other hand TransCanada are pointing to preparations for river crossings and the laying of foundations for oil storage tanks as evidence of such construction.

It is expected that with this increased demand production from the oil sands will double by 2020. This expansion is not without demands of its own, since the use of natural gas in the mining process (see earlier posts) will lead to an increase in demand from 1.1 bcf to 3.0 bcf to help in that production gain. And so I will take another glance at the plans for the oil sands in the next post in this series.
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President Obama's Blueprint for Energy, the world situation and the current TWIP

On Wednesday President Obama used a visit to Georgetown University to draw attention to a new Blueprint for a Secure Energy Future. The document provides that path through three mechanisms:

a) To develop and Secure America’s Energy Supplies by:
Expanding Safe and Responsible Domestic Oil and Gas Development and Production
Leading the World Toward Safer, Cleaner, and More Secure Energy Supplies

b) To Provide Consumers with Choices to Reduce Costs and Save Energy by:
Reducing Consumer Costs at the Pump with More Efficient Cars and Trucks
Cutting Energy Bills with More Efficient Homes and Buildings

c) Innovating Our Way to a Clean Energy Future by:
Harnessing America’s Clean Energy Potential
Winning the future through Clean Energy Research and Development
Leading by Example:
The Federal Government and Clean Energy.

The problem that I have had with the Administration’s Energy Policy since it first came to power is that it lacks an understanding of the time element in proposing answers. And let me put up a graph from the latest This Week in Petroleum to explain why I feel that this concern is now strengthened.

As I mentioned in my comment on Dr Saleri’s remarks that oil production bounced back after the revolution in Iraq, the TWIP has put up a plot showing how neither Iran, Iraq nor Venezuela have recovered the levels of oil production that existed in country before they had problems. Only Kuwait, after two years, was able to bounce back.

The drop in production from countries following conflict (EIA TWIP )

In all cases the flow of oil was disrupted for more than a year. Consider the current situation where, with supply and demand more closely now in balance, we have the risk of more than 2 mbd of oil disappearing from the world market for a couple of years. With a concomitant rise in demand of 1.4 mbd this year that means we need NOW to find ways of addressing the coming shortfall – not in 2020, but in 2011.

In that regard, how does the President’s new Blueprint stack up? Let’s go through the three different parts that I outlined above, in turn.

a) Developing and Securing America’s Energy Supplies.
The first part of this deals with increasing domestic oil and gas production, and the blueprint notes that the United States was importing 11 mbd when the Administration took office. President Obama, in introducing the plan, pledged that this volume will be cut be a third by 2020. One of the ways of doing this is to increase domestic production, and the blueprint contains this plot:


It looks a little more impressive than it is, because of the vertical scale, which in total is less than 1 mbd, and this makes the recovery of about 0.56 mbd look more significant than it is. Remember that the promise is that imports will fall by around 3.7 mbd and the gain in domestic production is tapering off in the plot above.

The most likely production gains will be achieved from the deep waters of the Gulf of Mexico (GOM). This is recognized in the document, which notes that while on-shore production from public lands increased from 109 million barrels in 2009, to 114 million barrels in 2010, that from the Outer Continental Shelf went from 446 million barrels to 600 million barrels. Yet with the problems that the industry has seen with the Deepwater Horizon disaster last year, the reduced production over that anticipated from the Thunder Horse platform and the slowed permitting and likely new drilling schedules it will be difficult to see how industry can maintain current production, let alone much increase it. However the Administration is currently developing a longer-term plan:

the Administration is developing a 5-year (2012-2017) comprehensive plan for offshore oil and gas exploration and production, which will ensure that areas with active leases, including the Gulf of Mexico and Alaska, are considered for further leasing and development. The strategy also calls for conducting studies to assess the potential oil and gas resources available in the Mid - and South Atlantic.

Sadly plans, in and of themselves, will not produce any additional oil. The President spoke of the importance of imports from Mexico and Canada. Unfortunately Mexican production continues to decline, and imports from there were down to 1.2 mbd in February. It would be helpful if resolutions in the American House of Representatives led to increased Canadian production but with Canada now heading for new elections that isn’t likely to happen in the short-term either. And Exxon Mobil, inter alia, has already responded to explain why there may a considerable gap between the President’s implication of vast untapped leases waiting to be made productive if industry would only get busy, and reality.

The Blueprint rightly draws attention to the “vast reserves of natural gas” and the potential that they hold, but much of the rhetoric in the blueprint is directed at the investigation of hydrofracking and ensuring that it is carried out “in a safe and responsible manner,” as though the thousands of wells that have used this technique already were not. The meetings and studies proposed will not, in reality, contribute much in the way of new gas to the nations need. Production is likely to be more tied to the price that can be obtained for the gas delivered to a pipeline, in contrast with the price for LNG delivered to the same pipeline from foreign sources. And at the moment, with the world having a surplus of NG, and more countries seeking to get onto this bandwagon, it is unlikely that the shale gas operators will be able to recover the full price of production in the next year or so from sufficient new production to have that much impact.

And so we turn toward the plan for the USA to lead the world towards safer and more secure energy supplies. Part of that answer seems to be based on persuading the BRICS nations not to grow their demand for oil so fast. It is also encouraging them, where possible, to switch from burning oil for power generation to using natural gas. (As though the price differential in itself won’t be a more powerful argument). The Administration is however encouraging the collection and use of methane from agriculture, landfills and wastewater, as well as the more usual sources.

The Blueprint notes that the United States would work as an energy partner to safely develop the oil and gas reserves in the pre-salt prospects off Brazil, though I suspect that US participation is not going to change the current progress and production in those parts. Further, in working to make bio-energy sustainable:

The Global Bioenergy Partnership will soon be launching a capacity building initiative in West Africa to encourage the transition away from the traditional use of biomass through effective forest management, to improve agricultural production, and to help countries capture the benefits that sustainable modern bioenergy can provide for energy access and food security.

While more energy for Africa is certainly needed, I am not, myself, convinced that those nations will not, instead, get the majority of their new energy from the indigenous coal supplies that seem to be plentiful. (In light of current developments in Japan, the encouragement of nuclear power was more euphemistic than usual). But while the blueprint also talks of transitioning fleets to natural gas and hybrid-diesel – though the EU is less than enthused about diesel emissions – none of this is going to have much impact other than to hope that by persuading other folk to buy less, the price won’t be as high as it otherwise might be.

b) To Provide Consumers with Choices to Reduce Costs and Save Energy
So how is the consumer to be helped? Well both by making more efficient vehicles available, and by producing more biofuel production. The goal remains one of getting a million “advanced technology” vehicles by 2015 and of increasing biofuel production. There is a slight snag, hidden in the report, however.

In 2009, the U.S. had only two factories manufacturing advanced vehicle batteries that power advanced technology vehicles and produced less than two percent of the world’s advanced batteries. But over the next few years, the United States will be able to produce enough batteries and components to support 500,000 plug-in and hybrid vehicles and will have the capacity to produce 40 percent of the world’s advanced batteries (2015). In part because of these strategic Recovery Act investments, battery costs are expected to drop by half (2009-2013).

The rest of the world had better not want too many of those advanced vehicles, since there will only be a few more than a million batteries produced by 2015. The Federal Government will begin buying plug-in hybrids this year, although only a hundred at first, and this will be one place where growth may reduce oil demand, although it is questionable whether the number on the road will be sufficient to perceptibly change the gasoline demand from the nation in the next nine years. But while the volume of fluid might increase, by increasing the percentage of ethanol in the mix to 15% (now allowed) some reduction in oil volumes might be achieved. However the source of the additional volumes is left as:

DOE and USDA have provided grants, loans and loan guarantees to spur American ingenuity for the next generation of biofuels.

Unfortunately as the experience with Range Fuels has shown, such hopes are no promise of success, and without an almost immediate success it is difficult to get to sufficient production by 2020 to have any significant impact on American supply. There is little evidence that the cellulosic ethanol process can be brought up to the needed level by then, and there are few alternative processes that can promise a significant contribution. Yet the government remains optimistic that

the Administration has set a goal of breaking ground on at lest four commercial-scale cellulosic or advanced bio-refineries over the next two years. In addition, the President has challenged his Secretaries of Agriculture, Energy and the Navy to investigate how they can work together to speed the development of “drop-in” biofuel substitutes for diesel and jet fuel.

One of the more promising sources is camelina but it has a limited growing range in the United States, and is not proving popular on the US farm, though it is now to be test grown by Airbus in Romania. (I am precluded from talking about algae).

In addition there are optimistic discussions about changing the way in which people travel, and the introduction of high-speed rail. Unfortunately the willingness of Republican Governors to shoot these plans down, no matter how well intentioned, makes much progress in this area unlikely.

The Blueprint goes on to talk about improving energy efficiency in buildings and through use of renewable energy. However the major fuel sources for electric power are coal and natural gas, so that changes here will likely have little impact on the amount of oil imported. Thus, even though the projections for the near term look promising for renewables, their overall effects on American consumption is likely to have little significance for some considerable time.


c) Innovating Our Way to a Clean Energy Future
The President proposes to eliminate fossil fuel subsidies, taking that money to help fund more research into developing clean energy innovation. Beyond that the clean energy future is concerned more with finding ways of saving energy, and particularly electrical energy than it is on reducing the need by the United States to import oil.

Given that we are likely to need as much fossil fuel as we can get over the next three or four years, as conventional supply tightens under the problems of MENA popular protest and government change, I continue to believe that the Administration, at the top, does not understand the problem.

We do not have the decades that Secretary Chu’s favored bugs will need to produce enough jet fuel at scale to meet a significant part of demand. I agree that we have to press forward to find long-term solutions to the coming shortages of oil, and then natural gas – but ignoring the reality of the precariousness of the current balance between supply and demand is becoming increasingly worrisome.

In short the Blueprint has really shown nothing new, or much learned from the experiences of the past year, which is sad, given that time is starting to run out rather fast.

Revolution - the threat to American imports

The countries of the Middle East and North Africa (MENA) are currently in the middle of a series of popular uprisings. While it is not possible to see the outcome in any of these countries at the moment, it is certain that some are likely going to end with a set of different governments and philosophies. This is not just of academic interest, since the countries involved produce collectively a significant amount of oil and natural gas, a lot of which is exported to North America and Western Europe. Looking just to the oil imports to the United States, and the natural gas imports (LNG) and averaging the volumes for October and November 2010, since there can be some wide variation month-to-month I came up with the following table, using the EIA information.

Average imports into the United States from MENA countries, averaged from October and November 2010 (EIA).

The largest concern at the moment is likely with Libya, since they supply Europe with needed oil.

Libya, a member of the Organization of Petroleum Exporting Countries, produced around 1.6 million b/d of crude oil during 2010, of which approximately 1.5 million b/d were exported, mostly to Europe. Therefore, unlike Egypt the situation in Libya has the potential to have a big impact on global oil supply. Latest news that has emerged is that oil output has stopped at Libya’s Nafoora field as workers have gone on strike.”

Algeria, as I noted in my last Tech Talk, plays a similar role in the supply of natural gas

The part of the Algerian gas in the gas balances in some European countries is significant. 86% for Portugal, 61% for Spain, 49% for Italy, 26% for Belgium, 25% for France and 21% for Turkey. Today about 97% of Algerian gas exports supply the European market next to Russia, and Norway, one of the main suppliers of the Europe. Algeria accounts for 29 percent of European Union gas imports and 15% of gas consumption

While it is too early at this stage to determine what the outcomes of the different struggles will be, it is realistic to expect some disruption of the current production in at least some countries, and the possibility of a reduced investment in future production, as the economies of the nations are restructured. And the consequence of that will be an increase in the price - Did somebody mention $147 a barrel?

Fuel for America's transport needs

When groups such as OPEC try to predict the future demand for oil and petroleum products, one of the significant factors in that analysis lies in the demands of the US transportation sector. I have intermittently tracked those numbers, through the Vehicle Miles Travelled plot which the FHWA publishes each month, and here is the latest plot, which includes figures through last November. Bear in mind that this is a rolling 12-month total of miles travelled.

12 month rolling total of vehicle miles travelled in the USA (FHWA )

It is becoming increasingly evident that the plot has returned to a steady increase that has now been sustained at about the same rate as being maintained up to the earlier peak.

The question now comes, as evidenced by the remarks of London’s Mayor, as to how much higher the price of gasoline/diesel fuel will rise before it, once again, has an impact on overall growth. Overall growth was around 1.1% in November, up more than the annual average increase of 0.7%.

Driving is, to an extent, seasonally controlled, as this plot of the last three years driving, by month illustrates.

Travel on US Urban Highways by Month (FHWA)

Thus the bitter cold and poor driving conditions of the last couple of months may have had a negative impact on the overall totals, moving forward from the end of the plot, yet overall the recovery seems to be being well maintained.

This return to a higher level of demand is the subject of the front page comment on This Week in Petroleum which the EIA issued today (Wednesday). They note that transportation accounts for 72% of US petroleum consumption, at 12.9 mbd out of the current national total demand of 18 mbd. In the latest Energy Outlook the EIA has projected that GDP will grow steadily at 2.7% over the next 25 years, including a steady growth in transportation fuel use.

DOE projections for energy distribution (Energy Outlook )

As an aside it is interesting to note the EIA comment:

Although the situation is uncertain, EIA’s present view of the projected rates of technology development and market penetration of cellulosic biofuel technologies suggests that available quantities of cellulosic biofuels will be insufficient to meet the RFS targets for cellulosic biofuels before 2022, triggering both waivers and a modification of applicable volumes, as provided in Section 211(o) of the Clean Air Act as amended in EISA2007. The modification of volumes reduces the overall target in 2022 from 36.0 billion gallons to 25.7 billion gallons in the AEO2011 Reference case, equal to the AEO2010 Reference case.5

Well I don't think that is much of a surprise. In regard to more conventional ethanol production, it appears to have reached a current plateau at 0.9 mbd.

Turning to the more usual look at the charts, the anticipated decline in demand over the quarter has led to a drop in refinery activity.

Refinery inputs (EIA)

However the production of crude dropped even faster:

US crude oil production (EIA)

The difference has come from increasing imports. We will see whether this is a transient or more permanent change.



Retail gas prices now average $3.11 per gallon in the US (locally we are still hovering around $3.00), still a fair way below the $7.75 of the UK, but one wonders whether the steady ramp up in price will continue for another year or so, and if it does, what the consequences will be.

TWIP, STEO and the prediction of natural gas and oil numbers

A quick glance to see what is new with this week’s “This Week in Petroleum” (TWIP) reminds me that this is the time when the EIA put out a new Short Term Energy Outlook (STEO), which gives their forecast for the happenings the next couple of years. Most particularly it looks at the way supply and demand will play out.

The first thing that caught my eye was the projection that natural gas prices will be (Henry Hub) $4.02 per million Btu (which is as near as need be a thousand cubic feet, which I will use for ease of comparison). This is $0.37 lower than the 2010 average, though they expect it to rebound to $4.50 by 2012. With the bitter cold in parts of the country at the moment (including here) natural gas is currently at $4.55, with $4.53 reported for February futures. It should be remembered that this is not the spot price – which was $17.04 in Florida on Wednesday. Contrast this with the $3.40 price from the Kern River pipeline that goes from Utah to California.

The concern with this relatively low price, going forward, is that it underscores the fragility of the companies producing natural gas from the gas shales around the country. For while there is a constant barrage of optimism about the amount of natural gas that is present in those fields, companies have to make a significant profit over the cost of production if that gas is to reach the market. I don’t see that ability in this sustained price.

There is currently a bit of a row going on in the UK about the state of preparedness of the UK Government for this very cold winter. The lack of proper precautions is being blamed on a forecast of a mild winter by the British Met Office, which is now trying to scramble out from under that prediction. (And apparently they are still guessing at how much that energy cost will be.) This is relevant also to the USA, since I note, at the top of the Natural Gas section of the STEO, this prediction:

EIA expects total natural gas consumption to decline by 0.9 percent in 2011. Projected residential and commercial consumption fall by about 2.7 percent in 2011 partly because of the forecast of 1.3 percent fewer heating degree-days during the winter months this year compared with last year.

Hmmm, temperatures in Tampa Bay are 15 -20 degrees below normal, as I write, and a cold spell, caused perhaps by the North Atlantic Oscillation, continues to make its presence felt across a lot of the country. The season is not, perhaps, turning out to be as warm as the EIA appears to have predicted. They are also projecting that next summer will be a normal one, rather than with the excessive warmth of last summer. As a result they foresee the quoted decline in natural gas use this year, although it will pick back up by 20102.

Total natural gas consumption grows by 1.6 percent in 2012 to 66.5 billion cubic feet per day (Bcf/d). While projected commercial and residential consumption decline by a slight 0.2 percent from 2011 to 2012, the electric power and industrial sectors drive growth with projected increases of 3.6 and 1.6 percent, respectively.

The decline is predicated on the drop in rig count, itself a victim of the lower prices.

While the EIA also sees world demand for oil increasing by 1.5 mbd per year, for the next two, they only project that 0.1 mbd of this growth can be met by countries outside of OPEC. And it is interesting to note that the growth in overall fluids production by OPEC is split almost evenly between crude and other liquids. (The increasing role of NGLs is discussed in more detail at Crude Oil Peak) Most of that growth in demand will come from outside the OECD, with China, the Middle East and Brazil as leading consumer growth. And on the down-side a combination of declining production from Mexico and the North Sea will take more than 500 kbd out of global supply. Alaskan production will fall 50 kbd in 2011, and an additional 20 kbd in 2012 – further slowing the oil flow down the pipeline and increasing the risks from shutdowns. It also foresees a decline of 220 kbd in GOM production in 2011, and a further drop of 180 kbd in 2012. Thus although there is some increase in other domestic fields, by the end of 2012 the decline will total around 150 kbd. And in another Ouch! Russian production, which has been rising, is anticipated to fall slightly this year, and then drop by 230 kbd in 2012.

With those sorts of numbers the power of OPEC can only be expected to grow over these two years. And within OPEC the countries that can increase production are similarly limited in number. That is not to say that OPEC has not, already been somewhat responsive to increased demand. Production overall was raised by 170 kbd in December, according to Platts. Most of this (130 kbd) came from Saudi Arabia, which is now producing some 8.35 mbd. It will be interesting to see how the numbers look a year from now. But I would personally doubt that the prices that we will see will be as low as the EIA predict, while the volumes may not reach the levels forecast – but time will tell.

Looking at the TWIP itself, crude inputs to refineries continued to run about 1 mbd above this time last year, but are set to dip down as demand drops based on the season. In line with that expected fall, both gasoline and ethanol production have also declined a little.

September TWIP and July VMT

One of the metrics of the economy that serves as a marker to me on how we are doing relates to the use of vehicles, and as a consequence the amount of gas that is being used. Prices of gas haven’t changed much over the past months, nor has the price of crude. Thus without price fluctuations confounding the causes of change, it is possible to get some measure of how we’re doing from how much gas is being used. Recognizing that the summer driving season is now over, but that information is now available on how the patterns of driving went.

This Week in Petroleum, where I get the data on this, has, this week, focused on the impact that Canada is having on imports, given that it is the largest supplier to the USA at the moment. Part of the story they told this week was that the impact of pipeline problems between the two countries had not ultimately had much impact, and service is now resumed.

From TWIP Sept 29, 2010

The Canadian supply has remained relatively steady over the years, and not been much impacted by the declines in demand recently, though as a seasonal event, the demand for crude is currently falling.


If one looks at the TWIP monthly figures rather than the annual demand, the fall in demand that started some months ago, is continuing, and given that domestic production remains relatively level, it will be interesting to see when this turns around.


The amount of gasoline produced from this crude input would, logically, also fall, as it has been though it has just recently had a little uptick, relative to the trend of a year ago.


That is as a result of an increase in demand that can also be seen in the TWIP figures.


One week’s data should not, of course, be construed as having much import on its own, but it is worth watching.

Ethanol production, after a relatively steady, though small increase, concurrently had a slight dip, though this is, I suspect, likely to be insignificant in the longer term.


Looking at vehicle miles driven, the last report for which relates to July numbers, the curve (bearing in mind that it is a 12-month rolling accumulation) has picked up and is now past the early “bump in the road” which we saw earlier in the year.


The slope is not yet that exciting, with the overall levels still equivalent to those back in 2005, but it is upward and a recognition that things are doing better. And it appears to be an across the board increase around the country, and in both rural and urban driving.

The question however, will likely arise before too long as to what impact the increasing demand is going to have on prices. For while the demand in the US and Europe has seen anemic growth, that in Asia is much more robust, and has been consuming the “slack” that had been left in global demand. We shall see how this impacts the capabilities of world suppliers to continue to meet this, in the months ahead.

Deepwater Oil Spill - and this week's TWIP

Admiral Allen helped with the release of some of the rescued turtles from the Gulf today before giving his press conference at Cedar Key, in Florida. He noted that while there has not been any final decision yet on what to do best in moving closure of the Deepwater well forward, some steps in that process are happening.

For example, the Blowout Preventer (BOP) from Development Driller II (the second relief well) is going to be needed at some point to allow drill pipe to be inserted into the Deepwater well, so that a top cement plug can be inserted. To that end the BOP transfer is now being expedited. At the same time the Q4000 and the Discovery Enterprise are being brought back over the well, for several purposes. Initially these will be used to flush other fluids from the BOP, the production casing and any other accessible volume within the well. (Note that this will likely not include the fluid trapped in the annulus since there is no easy way to displace this). Once the volumes have been cleared the fluid used to sweep them will be replaced with seawater, emulating the condition when the BOP is removed. By monitoring the pressures in the well during this process, and with the necessary safety valves in place, this will assure the scientific panel, and the Admiral, that removing the BOP and stack won’t cause a problem. Hopefully by doing this, among other things, it will resolve the problem of the slow bleedoff in pressure that has been occurring within the stack during the current testing process, but which is blamed on the escape of trapped gas. They will then decide whether to install the new BOP before completing the relief well. Since, in other words, nothing much has changed, let me go on to look at the new “This Week in Petroleum” which came out today.

As the adverts on television and the newspapers will tell you, summer is coming to an end, and school sessions are about to restart. Which means that we are coming to the end of the summer driving period and, as a result, demand will, likely in a couple of weeks, start to decline. As the latest TWIP (This Week in Petroleum) notes, we aren’t quite there yet, and demand is running some 250,000 bd above last year , for gasoline, but we are close to the turnover.


The oil companies can see the event coming, however since it occurs every year, and so the refineries are lowering demand for the season.


Which, given that domestic production continues relatively constant (but up around 200,000 bd over last year, at 5.4 mbd) means that there is a slight decline in imports. Though it should be noted that these are still running about 0.75 mbd above last year.


At the same time ethanol (which I haven’t tracked before so am less sure of the seasonal trends) continues at about 0.85 mbd.


As the driving season ends, so the US moves into the time when oil, particularly in the NorthEast is used for heating. TWIP this week is looking at the changes that may happen in that region as the various State legislatures look at reducing sulfur content of the heating oil to bring it into line with the regulations governing highway diesel, which are a lot more restrictive on sulfur content. (Note that it is the sulfur content of oil that gives it the “sour” designation, and the world is moving away from easy, cheap supplies of the preferable “sweet” crude which has a low sulfur content.) . As the TWIP notes:

Initially, the change to ULSD for heating oil may limit import supply sources, as many parts of the world do not produce ultra low sulfur distillate fuels. During the winter (December through February), high sulfur distillate imports into the East Coast account for about 20 percent of this region’s total heating oil demand on average, and about 50 percent of distillate imports. Furthermore, during past cold snaps when supplies run short, high sulfur imports have provided most of the relief to the increased heating oil demand.

The transition will present other challenges. Some refineries supplying the Northeast with heating oil will need to make investments to produce ultra low sulfur distillate fuel for this market. Terminal transitions to low sulfur heating oil will need to be made, as well as changes to supplies of low sulfur additives or blending components to create winter-blend heating oil.

Given that the world's supply is increasingly sour this will only make the problem worse, and will further mandate changes in refineries to cope with the change in demand, without which a bottleneck may develop within the system of supply.

TWIP for August 11th

Before the Deepwater Horizon incident I would follow the EIA weekly announcements known as This Week in Petroleum and occasionally comment on what I thought to be important. At the same time, trying to discern how the economy was improving, if at all, I would look at the data from the FHWA on the vehicle miles travelled, and include that each month. For a variety of reasons it looks as though I haven’t done that since February at which point the US demand for gasoline was falling below that of a year ago, inputs to refineries were below that for 2009, and the VMT (which appears three months later) were showing that November numbers were somewhat more positive.

So with this 6-month hiatus, and being now towards the end of the summer driving season, how have things progressed?

In terms of the demand for gasoline, this is up close to 200,000 bd over last year:




Just to see how it progresses over the next few months, as corn and grain prices may rise due to the problems, inter alia, in Russia I am going to add the ethanol production curve from TWIP to the mix I will look at.


Gasoline comes from refineries, and looking at the input to those refineries, this has been increasing, relative to last year, though it may have peaked, a little later than last year, for this season.


Domestic production of crude remains quite flat, and for the next couple of months may depend on how relatively calm the Hurricane season remains, remembering that it was predicted to be more severe than usual.


Which means that the increase in demand must be met by increased foreign imports, which is what is being reported.


The increase in imports indicates that there is a growth in the economy that it is rising to meet, and this is recognized in the Short Term Energy Outlook that the EIA released yesterday. They anticipate that, overall, demand will rise by 140,000 bd this year, and by 170,000 bd next year.

With the global economy also growing, the question arises as to where this oil will come from. The EIA notes that while non-OPEC production is expected to rise by 0.72 mbd (million barrels a day) this year (based largely on increased production from the USA, Brazil and Azerbaijan) it will drop by 0.16 mdb next year (mainly due to falls in production in the North Sea and Mexico). Which, with an overall estimate of world demand growth being 1.6 mbd this year, and 1.5 mbd in 2011 raises the reasonable question as to where it is going to come from.

The only answer is OPEC (which, as I’ve mentioned before, is why it is their production which is now controlling the price of oil). The EIA see their spare capacity as being around 5 mbd. I personally think this is about twice the real value, but that is a discussion for another day. (But if the growth rate continues for 3 more years it may well be consumed).


So will growth rates be sustained? Well the main story at the front of the TWIP this week was on the rising demand for jet fuel, for the first time since 2007, and having just come from a total of 3 flights that were all “full to the gunwales” the demand for travel may be picking up.

But if one goes back and looks at the VMT for May, that recovery that I was beginning to see in February, hasn’t continued through the Spring, but rather reached a plateau. We will have to wait a couple of months to see whether that number has picked up as well as the air travel.

12-month rolling summary of vehicle miles travelled through May 2010 (FHWA).

Gas demand, miles travelled and salt for the roads

It has been a while since we looked at the TWIP and natural gas pages of the EIA, so (in order to maintain the historic record) a quick trip over there, and to the VMT page of the FHWA is in order. I will get to natural gas in another post, but the increase in natural gas prices in New York from $6 to $11 over the last week (it was as high as $14/kcf last Monday) is something eye catching. It is interesting to note that while domestic crude is about at the highest point it has been in quite a while (allowing for a little drop due to the weather and season), there is now also a slight uptick in imports as well, indicating that the domestic gains in production may no longer be enough to keep up.

Domestic crude production end of 2009 (EIA)

Crude oil imports end of 2009 (EIA)

Gasoline demand has been relatively stable , but if you go back to the seasonality of demand this is the time of year when gas prices have historically been lowest, as has demand. From now on the growth should be relatively slow but steady into June when it reaches the peak during the summer driving season. So how are we doing this year?

Gasoline demand at the end of 2009 (EIA)

The question becomes whether we will drop down in demand through February, as we did last year, or whether we will return to the more historic curve with the earlier minimum. We shall see. (Robert Rapier’s recent essay on the possible perils of making predictions is still in my mind).

So what is happening with the VMT? Well, bearing in mind that these reports run a little late (the latest is for last October, there was a y-o-y drop overall of 0.5% in miles driven, after having seen an uptick in driving for the past few months. Interstate driving has risen, but it is the traffic in the “other” urban that was hardest hit, with other rural also being down over 1% (arterial and interstates were less affected). And for the overall summary curve?

12 Month running total of travel on US Roads through October 2009 (FHWA)

Well it is flattening out a bit, and may well do so through the next couple of months, given the typical drop in driving in winter, which will be exacerbated this year by the colder weather and greater depths of snow that are curtailing driving at the moment.

One of the things that I pointed out in comments after yesterday’s post was a direction to the Youtube video of the Head of the British Met Office getting his head handed to him by the BBC, in an interview that connected three erroneous medium term forecasts (for last winter, last summer, and this winter) with a 25% performance based increase in his salary. There is a relevance to this that may not be quite immediately discernable – but basically when, in times that are financially tough, counties, cities etc look to their budgets for the year, they tend to take such predictions of future weather into account when then order grit and salt that can be used on the roads to improve driving in winters such as the current one.

Unfortunately for the second winter in a row the Met Office has that prediction wrong, and the problem that it has caused is that there is now not enough salt and grit to go around. Villages in Britain have been cut off for weeks without the county doing anything to help, and this is unlikely to change soon.

But County Councillor Keith Young, who has a responsibility for highways, gave residents little comfort, asking them to 'bear with us'.

He said: ‘At the moment we have a very extreme set of circumstances and the priority is to keep the main roads clear.

‘As soon as we can we will treat the other roads we will do but we will not jeopardise our grit stocks.

‘My message to the residents in Cow Ark is that we are not doing this deliberately and I am sure their community spirit will see them through.’

I am sure that is a great consolation.

The role that highways play in providing access and communication, whether of bread, fodder for sheep or tankers for milk is often underplayed in the needs of those that live in more rural parts, but it is equally critical to the overall national picture since the costs to those living in the city may become more evident as milk becomes less available in consequence.

Salt for highways is often produced from underground mines, it should be kept dry until used, and for best effect should be spread on snow at a density of around 20 – 40 gm/sq. m.. There were some lessons that could be learned from the harsh winter in the UK last year (pdf) unfortunately (as is now becoming evident) those lessons were not well learned and there is now a national shortage of salt to treat the highways, even as the cold is anticipated to continue for another couple of weeks or more. In the UK there is only one major supplier of salt, a mine at Winsford in Cheshire, and while they can increase production to a degree with demand, beyond a certain point that becomes impractical due to a lack of machines, operators and suitable transport to deliver it to the customer. Thus the criticality of counties knowing in advance how much they will need, and the results of the failure of the Met Office to perform as they should, given their claim to be the best in this business in the world. (Not perhaps something they should have been stressing against their current record).

In the USA salt comes from regional mines, but there is the same basic need for information, and the same reliance on forecasts to assess how much salt and grit to stock. It might not have been politically correct, just before the Copenhagen meeting, to admit that the Northern Hemisphere was going to have a severe winter against AGW predictions, but it should have been the correct step, had folk been concerned about doing what they are paid (and apparently very well) to do.

If we can't get oil from Mexico . . . .?

The news from Mexico just continues to get worse with bad news from all three of their biggest oil fields, even as our perennial cornucopian talks of “a Mexican surprise.” As Gregor noted recently (h/t ft energysource) at the beginning of the year Cantarell was producing 862,000 bd and at the end of July this was down to 588,000 bd. The graph plotting decline continues to show a linear decent at the rate of 35,000 bd per month or roughly 100,000 bd every three months – giving it just 17-months at that rate (ending right at the end of next year) until there is nothing left. Somewhere in there the drop is likely to stabilize, but suddenly and soon the questions as to where the replacement hundreds of thousands of barrels are going to come from is going to stop being an almost academic exercise.

The peak and decline of Cantarell – where Mexico once got most of its oil.

But they aren’t the only ones in trouble. Consider U.S. imports from Mexico over the same period. That decline also looks pretty linear, with a projected intersection with zero in 2017, depending on where you draw the line.

Imports From Mexico (EIA)

Mexico itself is not likely to be able to come up with much of an answer.

The President just changed the head of Petroleos Mexicanos (Pemex) as the revenues that the state gets from sale of its oil (making up nearly 40% of the federal budget) dropped 30% in the first half of the year. Current Mexican Government predictions that overall Mexican production will stabilize at 2.5 mbd over next year don’t reflect the collapse of Cantarell, and also fail to recognize that the promised increases in production from other fields are not reaching the goals set. It is only a few days since the production at Chicontepec was “evaluated” after falling some 12,000 bd short of target. This field is still in development, with ultimate production targeted at 550,000 to 700,000 bd by 2017, but as it is already 16% behind the mark that does not augur well for that future.

As Euan Mearns pointed out the fields at Ku-Maloob-Zaap (KMZ) which lie adjacent to Cantarell are being produced in the same way as Cantarell, and thus production has recently risen dramatically.

Ku Maloob Zaap (KMZ) adjacent to Cantarell in the Gulf of Campeche is the largest source of new production growth. It recently overtook Cantarell as Mexico’s biggest producer, with record output of 814,000 b/d in April. The KMZ complex produced 740,000 b/d of crude in 2008, up from 550,700 b/d in 2007. Production has doubled in the last 3 years with a nitrogen reinjection program similar to one at Cantarell. Pemex expects KMZ production to peak at 820,000 b/d before declining to 810,000 b/d next year.

Read that last sentence again! Now the oil in KMZ is proving to be much heavier than that from Cantarell and so may not decline at quite the same rate, but given the very rapid increase in production, and that the peak is already here, this does not bode well for sustaining Mexican production using that region for any great period into the future. Rather it might increase the already precipitate drop in total production levels going into 2011.

Mexican exports of heavy crude (that from Cantarell and KMZ) had fallen, by July to 1.06 mbd from 1.22 mbd in January. Pemex had domestic sales of 1.8 mbd in July which is up some 45,000 bd from January, largely due to increases in sales of motor gasoline. The country imports some 550,000 bd of refined products.

If we go back to the Export Land Model, if internal demand continues to grow, and if Chicontepec proves to consistently fail to produce the needed production by as much as 20% or more (assuming that they are now working the best prospects first) and if we start to see the decline in KMZ next year . . . . . .

And to quote an “expert” on the subject:

Michael C. Lynch, president, Strategic Energy & Economic Research Inc., differs from the generally pessimistic consensus on Mexico. “I think Mexico will probably surprise many,” he said.

Lynch said, “[Pemex’s] first need has been capital; the government has a long tendency to starve them of money, and only recently has this been reversed. Mexican drilling activity is twice what it was a couple of years ago, and they have a lot of medium-sized fields that could make a serious contribution. (The decline in rigs rates has helped them, but the peso decline offset that somewhat). Deregulation and outside investment would certainly help, but capital is the main thing.”

Perhaps somebody could explain to Michael that when one uses the word “surprise” it generally means you’re going to hear good news – none of this is!