Tech Talk - more on volcanoes, peak oil and slow transitions

Many news agencies are following the slow inundation of the Hawaiian town of Pahoa, as lava from Kilauea inches into the small town at the rate of around 15 ft an hour. It is a slow death to parts of the community since the lava started moving in June and the flow has travelled over 24 miles on its way to the sea. Not quite as prominent in the news is the continued outflowing of lava in Iceland where the flow from Bárðarbunga has now covered just over 25 square miles, and the threat from the outpouring of sulfur dioxide continues to move around the island as the wind patterns change. As the energy of the eruption falls, there is concern that less of this is getting into the upper atmosphere, causing higher concentrations in the lower layers of the cloud. The volcano is putting out about 35,000 tonnes a day more than all the industries in Europe. Safe concentrations are considered to be around 500micrograms/cu. m. while levels as high as 21,000 micrograms have been measured.

Figure 1. Gas cloud threat from Bárðarbunga on October 31 (Icelandic Met Office)

It is only the high winds of the Icelandic winter that dilute the gas below the threat to individuals. And yet the earthquakes in the caldera persist with events above level 5 still occurring almost daily. There were 200 yesterday, with ten being larger than magnitude 4.

Figure 2. Earthquakes in the Bárðarbunga region of Iceland in the last 48 hours. (Icelandic Met Office)

The water in the caldera is melting at an estimated rate of 2 cu. m/second with hot magma residing under the originally half-mile thick glacial cap.

While these events are generating hundreds of megawatts it is not in the form of useful energy at this point, but despite the disappearance from the headlines of the Icelandic event, it still has the potential for much greater societal impact than does that in Hawaii. But it will happen more slowly (at least until the potential eruption when the icecap is penetrated.) And sadly it is this demonstration of the short-term focus of the news media and the need for dramatic pictures that again bring me to the analogy of these events to what is happening with Peak Oil.

As noted in an earlier post, the EIA have pointed out that the current glut in oil availability and thus the fall in gas prices correlates inversely with the increase in production from Libya. Their OPEC governor has pointed out that the current global oversupply is at around 1 million barrels a day. Libya has recently produced about 800 kbd of this, and while OPEC as a whole is not worried out the imbalance (since they are projecting that global demand will rise this much over the next year), he would like to see current production curtailed by 500 kbd to get the price back over $100 a barrel.

It is this marginal supply of around half-a-million barrels a day which is now the level of volume that can transform us from having too much to not enough. Which goes back to the remarks that Charles Dickens put in the mouth of Mr. McCawber:

'My other piece of advice, Copperfield,' said Mr. Micawber, 'you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and - and in short you are for ever floored. As I am!'.

Our sixpence, it would appear, is now at around that 500 kbd. OPEC will not increase production much above current levels, in fact it is hard to see where they could anticipate being able to do so. Libya remains threatened by worsening violence, which has been approaching the El Sharara oilfield and it remains questionable as to whether they can continue to sustain production.

The other big question mark remains Iraq. How far the Kurds can increase production up through the pipeline to Turkey remains a question. They have recently announced that the new pipeline is carrying 240 kbd and if the logistics can be put in place the volume could well increase. Problems however with contractors, making the necessary field connections and the nearby conflict will likely combine to slow that progress.

If both sources of supply continue to produce, and even increase a little more than at current levels then the global surplus will still be eaten up by increased demand over the next year. The short-term drop in prices (which may well extend over the winter) will gradually disappear as the surplus reduces. And in so far as the current drop in prices discourages new investment in costly alternate places, even if only in the short term, that cannot but help OPEC as supplies tighten in the future, and that competitive oil is not in place in the market to reduce the consequent price increase.

The short-term loss therefore may well, before long, be returned in higher prices in the summer and towards the end of next year. Such a projection assumes that the recent increases in US production will slow down, and that seems to be a reasonable assumption, given the changing price structure and the lower returns on wells drilled outside the “sweet counties.” One can only drill so many wells where production is rewarding, before the land gets full.

In the short term the drop in prices will also encourage demand, helping to build back what had been a falling away from earlier OPEC projections of demand growth. It will be an interesting year, and perhaps one that will change faster than the slow but steady changes that the volcanoes are having on their local communities. But if so it may still be too slow for the media to closely follow, since many of the controlling events take place away from media attention and occur without, often, immediate visible impact.

Tech Talk - Optimism is becoming harder to sustain

For some time the nations of OPEC have been suggesting that demand for their oil will remain relatively stable in the near future, as increased production from the non-OPEC nations is expected to more than meet demand increases. Thus, for example, in the May Monthly Oil Market Report OPEC anticipates that global oil demand will increase by 1.14 mbd this year, while non-OPEC production will increase by 1.38 mbd, allowing a slight reduction in the volumes OPEC market, which continues to fluctuate around 30 mbd. In the longer term, however, as previous annual oil company prognostications of future supply have emphasized, the MENA countries are going to be pulling an increased weight in supply. For example ExxonMobil has noted:

The Middle East is expected to have the largest absolute growth in liquids production over the Outlook period — an increase of more than 35 percent. This increase will be due to conventional oil developments in Iraq, as well as growth in NGLs and rising production of tight oil toward the latter half of the Outlook period.

At the same time BP pointed out that in just a couple of years demand for OPEC oil is likely to start to steadily increase.

Figure 1. BP view of the increased demands to be made on OPEC oil with time. (BP Energy Outlook 2035)

A large part of that increase has been expected to come from Iraq. With the end of the Iraq war, and the government encouraging development there were some claims that production might eventually rise to over 13 mbd (ahead of both Russia and Saudi Arabia). But those optimistic views had to be measured against the reality that the country has taken a long time to recover back to the 3 mbd levels of exports that it had achieved before conflict.

Figure 2. The fall and recovery of Iraq’s oil production. (EIA)

At present OPEC reports that Iraq was producing at 3.298 mbd in April, making it second only to Saudi Arabia (at 9.579 mbd) among the OPEC nations. There still seemed to be some chance that the country might be able to reach some lower target figures, such as those suggested in the OGJ.

Figure 3. Anticipated Iraqi exports and their market region (OGJ)

Regrettably violence is now significantly increasing in the country, with Mosul being over-run by Sunni militants. This puts them in charge of the main pipeline to Turkey, as well as giving them potential control of some of the adjacent oilfields.

Figure 3. Known Iraqi oilfields in 2010.

Euan Mearns has written of the potential for oil from the Kurdish regions and Turkey has just allowed a second tanker to sail from Ceyhan carrying oil from that region to the market, without Bagdad’s permission. The oil is being delivered through a new pipeline capable of carrying 100 kbd from Kurdistan into Turkey. The main pipeline (shown in Figure 3) can carry as much as 600 kbd and runs from Kirkuk and perilously close to Mosul. The new pipeline runs through Kurdish territory until it reaches Turkey.

The declining influence of the central government over the northern territories of Iraq does not bode well for future production gains. Conflicts are getting worse, and the country is approaching the point where it could well be partitioned, since the government forces seem unwilling to take on the insurgency. Violence has already spread to the Al-Bayji refinery some 130 miles north of the capital. This is the largest refinery in the country, and currently produces below its 300 kbd capacity, all of which is used for domestic consumption.

The problems that this reveals are unlikely to be resolved soon, it is much more likely that they will continue to escalate over the next months, if not years. The impact on Iraqi oil production should not be underestimated. While the oil in the Kurdish region can make its way through the smaller pipeline that is under Kurdish control, the greater flow rates needed to sustain future growth in supply cannot be met by that pipe.

In the South developments in the Mesopotamian region around Basra from the fields of Rumaila and Majnoon will likely continue, with production being shipped out from the new facility offshore, although this is already quite significantly behind schedule.

Figure 4. Oil fields of Southern Iraq (IEA )

One has only to look at the degrading situation in Libya, where production has fallen from 1.6 mbd to a current level of less than 200 kbd, with no path forward now evident for production levels to be restored. Those familiar with the region doubt that there will be much improvement in the situation this year, and if the country follows the Iraqi path (figure 1) then it is unlikely that the world will see significant Libyan production for this decade.

That loss of a million barrels a day is likely to become increasingly evident as world demand continues to grow at greater than that level each year. When this is combined with the increasingly inability of Iraq to increase production as it moves back into more vicious internal strife, then one has to ask from where can future gains in oil production be anticipated?

The major oil companies have urged complacency having bet on Iraq and OPEC coming through (and in the process assumed that Saudi Arabia would also increase production significantly above 10 mbd, something that they have consistently declined to commit to doing). As Libya and Iraq remove that surplus from the table then the question becomes where else can it come from?

It is increasingly unlikely that US increases in production can be sustained for long, given the very short high-level life of the new wells completed in shale, and as the sweet spots in the current fields are consumed. Thus within a couple of years we are now likely to see an increasingly desperate search for new reserves. But those reserves take years to find and develop (as well as large amounts of money), and if the crisis comes at a faster pace than most now expect, then $100 a barrel oil may seem an absurdly cheap price to have had to pay. It may even have an effect on the next Presidential election.

Tech Talk - Fast destruction and slow reconstruction

Underlying many of the projections of future energy supply that are now being made there are, as mentioned earlier, a lot of assumptions that are beginning to appear more questionable as time passes. Much of the concern has to focus on the instability in the Middle East and North African nations (MENA) that are now increasingly unsettled by civil conflict. While optimism in many reviews anticipates that the turmoil will decline and nations will return to pre-conflict levels or higher, particularly in the case of Iraq, unfortunately this conflicts with much of what we have learned from recent history. Sadly there is also the history of Gazprom, which now also suggests that rosy visions of the future are only that, and what is coming is likely to be much grimmer.

Considering first Libya, once the infrastructure of an oilfield and its links to the outside world, and the operators that run it have been destroyed, seriously damaged or dissuaded from being there, then, particularly where conflict continues over time, restoration of pre-conflict volumes can take more than a decade. Once combatants become embittered by the realities of civil war, so their willingness to subsume the hatreds and other burdens brought on by loss becomes more difficult to engage, and conflict drags on with its continued losses for society. Libya is a sad example of how rapidly production can collapse.

Figure 1. Libyan oil production pre-current conflict (SEPM strata )

The country has now reached as low a rate of daily production (around 240 kbd) as it has seen in recent years.

Figure 2. Recent Libyan oil production (from OPEC MOMR)

For some time the powers that be have continued to hope and even project that Libyan production can return to levels of around a million bd, but those hopes seem dubious at best.

Just a week ago the National Oil Corporation announced that it was lifting the “Force Majeure” designation for the Oil Harbor at Zuetina. The first tanker was to load on Friday. According to a Bloomberg report the Ottoman Tenacity was to pick up a cargo of 600,000 barrels from Zuetina and carry it to Europe. The ship was reported to be loading on Friday and is currently just off Cagliari in Sardinia.

Figure 3. Location of the Ottoman Tenacity on Wed May 7th (Marine Traffic )

A second ship was supposedly loading up to 850,000 barrels at Haringa destined for France. Yet according to Marine Traffic it is now (Wednesday) off the coast of Tunisia, and does not, in the end, appear to have revisited Haringa.

The situation in Libya is not really stable, despite the hopes. On Sunday the Parliament swore in a new Prime Minister but his support is not strong, and factions continue to challenge his election. Attacks on the military are also on the increase. Meanwhile the blockade of the Sharara oilfield continues. It is hard to see oil production increasing much above the current levels, despite the optimism.

Yet if this effectively has removed a million bd from the global market, where can this be made up? In the short term Saudi Arabia increased production to cover the shortfall, and is still producing around 9.7 mbd. OPEC production overall remains at around 30 mbd, and is projected to remain at this level over the year.

OPEC notes that the Former Soviet Union is expected to increase production by around 200,000 bd this year, of which almost half will come from Russia itself, but OPEC are careful to include a word of caution in their predictions of Russian output.

The risk to Russia’s supply forecast remains high on technical, political and natural decline grounds.

It is the increasing political risks associated with Russian production, and the supply of that fuel to Europe that are perhaps of most concern. An article in Der Speigel points out that the Russian grip on German fuel supplies is only increasing. One of the Russian oligarchs has just bought one of the German oil and gas production companies for $7.1 billion, and now controls a fifth of German natural gas production and a quarter of its oil production. Another fifth of the German natural gas market, provided by Wingas, is also now Russian as Gazprom bought the company, and its distribution network, in a sale to be finalized this summer. And while Europe is seeing more LNG receiving facilities being constructed there is still a global shortage of export facilities to match that demand. As a result current facilities are significantly under-utilized.

Gazprom has, in the past, shown that it can, when necessary, play hard ball to ensure that it owns and controls the market for natural gas (just ask BP or Turkmenistan), and with the demise of the Nabucco pipeline is in increasing control of natural gas supplies into Europe. That condition cannot change in the short term, LNG facilities take years to plan, permit and construct, and thus the control which Russia exerts over Europe through this grip on the various supply pipelines is likely to continue to influence European opinion and, more realistically, actions in the next few years.

What this all means for the future of Ukraine is rather unfortunate – regrettably it is not clear that Russian ambition will end there and one would suspect that, given the limitations in response to the current and earlier (Georgia) Russian activity, that it will not. How this will affect overall oil and natural gas supply is unclear. OPEC concerns over future Russian production levels appear justified, especially since future developments in Russia will require increasing levels of capital, which might instead be directed at supporting Russian foreign policies – reducing overall volumes available, and more particularly the volumes that Europe has come to depend on. It could make for a couple of interesting years, since there are few alternatives that can be developed within that time frame. And certainly there is, at present, little will to make the capital investments that might bring them about.

Sadly history suggests that the outcome will not be a good one, there are few precedents that would show how one might get out of the increasing messes caused by political instability.

Tech Talk - of Alaska, Libya and the belated bleat of awareness of a problem

I have written in earlier posts about the problems that the Trans-Alaskan Pipeline System (TAPS) will face, as production declines below 500,000 bd. The conclusions from that post are pictorially summarized in a graph in the recent edition of the Oil and Gas Journal.

Figure 1. Declining throughput through TAPS showing the points of concern (OGJ)

Looking at current figures, in September the pipeline had an average throughput of 524,181 bpd against the year-to-date average of 528,092 bpd. It has just passed below the upper limit at which operational difficulties can be anticipated, due in part to the flow being too slow to keep the temperature high enough to prevent wax from separating from the fluid, and starting to block valves and critical infrastructure. Because of the long lead times, and high capital requirements for the development of new fields in the Arctic, and the likely probability that these will not yield significant production until at least 2025, the article is pessimistic about both the fate of the pipeline, and future Alaskan production.

Despite those declines OPEC remains optimistic, in their October Monthly Oil Market Report that the world producers can continue to meet global demand as they foresee it rising to an average of 89.7 mbd this year, and then going up to 90.8 mbd on average next year. They foresee, for example, that non-OPEC supply will increase this year by 1.1 mbd (to 54.1 mbd) led by production gains from the USA, Brazil, Kazakhstan, South Sudan and Sudan. Next year they see an additional non-OPEC growth of 1.2 mbd with Canada replacing Kazakhstan among the five countries that will make up this additional production. In contrast OPEC itself is reducing production, with overall production reported to be down 390 kbd in September.

The gain in crude oil production seen in the US, which has risen from 5 mbd to an average of 7.3 mbd in the first seven months of this year has had a significant impact on these projections, though the change in the mix of product now available to the Gulf refineries will continue to have some impact on the overall import picture. This is because, as the EIA note, some of the heavier crude refineries along the Gulf are tied to foreign producers including Pemex of Mexico, PDVSA of Venezuela, and Saudi Refining (for a combined total of just under 2 mbd).

Yet it remains difficult to sustain the optimism that OPEC project. Libyan exports, at one time running up around 1.25 mbd remain down at some 90 kbd, due to tribal disruptions and internal political disputes that show little sign of resolution.

Figure 2. Recent Libyan oil production (Energy Policy Info)

Certainly the physical ability to return to around pre-disruption levels has been demonstrated, but the weakness of the central government does not indicate that the political problems will be resolved in the near future. And until they are there is the best part of 1 mbd being with-held from the market. This drain from global supply is not yet disruptive since it has, to date, been largely picked up by the Kingdom of Saudi Arabia (KSA).

The picture from the combination of Sudan and South Sudan following the division of the one country into two has not been promising, however it appears that the overall total decline has now been halted, and recent reports have raised production to somewhere between 190 kbd and 240 kbd.

Figure 3. Change in oil production from Sudan and South Sudan following the division of one country into two. (Council on Foreign Relations )

The IEA is not optimistic that the return to production will be as smooth as others think:

“Industry sources have been quoted as saying that restarting oil production could take six months or even longer, since the lines have been filled with water and because some wells were not closed properly.”

The OPEC projection that overall Sudanese production has returned to the 240 kbd level may, therefore, be still an optimistic estimate. The increase to 175 kbd following the repair to the pipelines from the Majnoon field in Iraq is encouraging (although the high level of violence that continues in that country does not give high confidence that the pipeline might not be struck again.)

The increased production from the Kashagan field in Kazakhstan – anticipated to rise to 75 kbd - has again been hit following system leaks so that this increased production that OPEC had anticipated has, again, been postponed.

And while production has now started from the Espirito Santo in the pre-salt fields off Brazil, it is not clear whether the production gains will offset the declines that have occurred in Brazilian production in recent months.

Figure 4. The Espirito Santo floating production storage and offloading (FPSO) vessel (Shell )

Just as there is a perception that the United States is heading toward independence in energy needs (a fallacy I have written about several times in the past), so there is a perception that OPEC is becoming a less critical supplier. This is far from the case. KSA has been producing over 10 mbd for the last months, in order to offset the loss in Libyan oil to the market, and the combined production of KSA, UAE, Kuwait and Qatar now supplies 18% of global demand. This is only the second time that this number has been that high in the past 30 years. It comes at a time when the Middle East is supplying 25% of Chinese oil demand, as that country passes the United States to become the largest importer of oil.

Figure 5. OPEC oil production (numbers compiled from secondary sources (OPEC MOMR October )

This comes at a time when the world still wonders about the actual oil balance as it flows in and out of China.

Unfortunately the picture that is emerging continues to show that OPEC is tending to be overly optimistic in its forecasts for production, which does not bode well for future supplies of fossil fuel.

Given that a group of environmental scientists have just released a letter calling for increased investment in nuclear power since, to quote James Hansen:

Hansen, who’s now at Columbia University, said it’s not enough for environmentalists to simply oppose fossil fuels and promote renewable energy.

“They’re cheating themselves if they keep believing this fiction that all we need” is renewable energy such as wind and solar, Hansen told the AP.

This comes a bit late, since as I noted recently, it takes over a decade to build a new nuclear power plant, and with the current schedule for existing plant closures moving inexorably along their timetable, this may presage a decade of power shortages. We shall see!! But in the meanwhile we had better hope that those folk concerned over the possible shut down of the Trans Alaskan Pipeline because of inadequate flow are being just a tad pessimistic.

OGPSS - An update on Russian plans and the OPEC MOMR

The Arctic is a less forgiving place than many folk care to recognize. Shell have just moved back the date on which they plan to restart drilling in the Chukchi Sea and won’t be going up there this year. At the same time, last August, Gazprom announced that the development of the Shtokman gas field off the Russian coast and also in the Arctic had been put on an indefinite delay. Yet the region still shows considerable promise. ExxonMobil and Rosneft have agreed to exploration in the Chukchi, Laptev and Kara Seas, with the latter considered as possibly having the highest potential.


Figure 1. Location of the Kara and Laptev Seas. (Google Earth)

The blocks that will be explored are South of the island of Novaya Zemlya, in relatively shallow water. They lie north of the Yamal Peninsula, and the Shtokman field is on the other side of the island.


Figure 2. The locations of the East Prinovozemelsky blocks south of the island of Navoaya Zemlya (Rosneft)

Rosneft estimates that the reserves that are recoverable are 6.2 billion tons of oil, and a total of 20.9 billion tons of oil equivalent when the natural gas content is included. The first wildcat well is scheduled to be drilled in 2015.

While Gazprom and Rosneft share access to these offshore resources, Lukoil has found a site at Khatanga Bay in the Laptev Sea where it believes that it can be successful. Despite the difficulties, the need for Russia to sustain production is forcing the companies offshore into more difficult waters, it is where the future production lies, and the Russian economy needs the income.

The February OPEC Monthly Oil Market Report notes that Chinese demand has now topped 10 mbd on a quarterly average, the highest to date and growing at 6%. The greatest increase has been in the use of gasoline. Global demand is anticipated to top 91 mbd by the end of the year. Russia is anticipated to produce some 10.42 mbd on average this year. OPEC has, however, a few caveats:

The Vankor oil field is expected to average 435 tb/d in 2013, a minor increase from the level of 410 tb/d achieved by the end of 2012. Some operators provided that new technologies will be utilized to stop natural decline. On the other hand, the supply forecast remains associated with a high level of risk, due to technical, political, geological and price factors. On a quarterly basis, Russian oil supply is expected to average 10.43 mb/d, 10.42 mb/d, 10.42 mb/d and 10.42 mb/d, respectively. Preliminary figures indicate that Russian oil production stood at 10.46 mb/d in January, steady from the previous month.

As usual it is interesting to compare the OPEC production results for the last few months, based both on the reports obtained from secondary sources, and those numbers that the individual nations provide.


Figure 3. OPEC crude production based on secondary sources (OPEC February MOMR )

It is important to note that Saudi Arabia has dropped its production by around 300 kbd or so for the last couple of months. While I suspect that this to keep markets a little tighter and thus hold prices stable, others might suggest that the may have some slight difficulty sustaining the higher numbers.


Figure 4. OPEC oil production figures as reported by the producing countries. (sources (OPEC February MOMR )

Iran continues to have a disparity of around 1 mbd between the two tables, Iraq still seems to be struggling to get over 3 mbd, and Venezuela has a discrepancy of around 400 kbd. In short, not much new.

Turning back to look for just a moment at Gazprom activities, although they have continued to keep Lukoil out of the Arctic, they have also continued to seek resources abroad. The company has acquired territory in Iraqi Kurdistan and is reported to have an 80% stake in the Halabja project with reserves of around 700 mb. The field lies on the Iranian border in the Kurdish part of the country, and Baghdad objected to the deal going forward. It might, however, help raise Iraqi overall production. Gazprom has two other projects in the region at Garmian and Shakal, and one at Badra which falls under the control of the central government.

And, still in the Middle East, Gazprom is in talks with Israel to buy LNG from the offshore Tamar field and ship it to Asia to serve markets that it cannot easily reach with its pipelines. The intent is to use a floating liquefaction plant that will take gas from both Tamar and Dalit, at the rate of around 3 million tons a year with production starting in 2017.

Gazprom recognizes that, if it is to develop Asian customers it must provide LNG and so it has begun work on an LNG plant in Vladivostock with three trains, each capable of producing 5 million tons of LNG a year, from the Sakhalin, Yakutia and Irkutsk gas fields. With production aimed to begin in 2018, the market will, again, be in the Asia-Pacific region and may be one of the reasons to accelerate production from the Kovyktinskoye field. At the present time Gazprom has brought the Zapolyarnoye up to full production, and they estimate that this will produce 20% of Russian natural gas as the field moves to be the largest producer in the country.

And, while tracking down some of the information for this post, I did find a picture of a polar bear and cub in the region that ExxonMobil is venturing into. It was taken on the island of Novaya Zemlya. Hopefully environmental concerns won't raise the same sort of difficulties in developing these sites that they have in other places further East.


Polar Bear and cub on Novaya Zemlya on the Shores of the Kara Sea (the photo is on Google Earth and was taken at the red arrow in Figure 2 by

Oh, and before I forget the Alaska pipeline continues to run below 600 kbd with an average of 577, 604 bd. for January.

OGPSS - Miles travelled, gas used and OPEC

Leanan has noted the API report of the continuing drop in US oil demand. It would be wrong, I believe, to explain this purely by reference to the increased efficiency of vehicles now on the road, nor would it be realistic to expect that these changing conditions will result in a lowering of gas prices.

To explain the rationale behind these thoughts requires reference to two sets of data. The most potent is the behavior of the Kingdom of Saudi Arabia (KSA), but before discussing their actions the story begins with the changes in the miles travelled reports that are issued by the Federal Highway Administration each month. Driven by a comment on recent versions of that plot, it is worth revisiting the summary of the rolling total of miles travelled in the United States, with the October 2012 plot being the last available.

Figure 1. 12 month rolling total of miles driven on all roads in the United States (FHWA)

It should be noted that this is not the amount of fuel used, but rather the distance travelled, and thus in itself this does not reflect any changes in vehicle performance because of the increased efficiency of their engines.

And while there does not appear to be any great difference between the numbers for 2011 and 2012 when broken down by month, for rural and urban travel, they both lie below the values for 2010.

Figure 2. Travel on US Urban Highways by Month (FHWA)

Figure 3. Travel on US Rural Highways by month (FHWA)

This shows that folk are actually driving less than they have previously, which may be reflective of the current economic condition, when combined with the high price for gasoline in relative historic terms. One can compare these curves with the demand for gasoline from This Week in Petroleum., though this has data through the end of the year and has a slightly different lower scale range.

Figure 4, Demand for gasoline in the United States (EIA TWIP)

Demand for gasoline, as with miles travelled, seems relatively equivalent for data for 2011 and 2012. The demand for ethanol, on the other hand, seems to be significantly less, assuming production matches that demand.

Figure 5. Production of fuel ethanol in the United States (EIA TWIP)

OPEC take a keen interest in those activities in the United States that impact the demand for oil, and in their latest Monthly Oil Market Report (MOMR) have plotted the variation in oil price with miles driven:

Figure 6. US mileage plotted against the retail price of gasoline (OPEC January MOMR)

Driven by increased demands for vehicular fuel OPEC anticipates continued growth in domestic demand for oil, both in the Middle East, and in Latin America.

Figure 7. Increase in domestic oil demand in the Middle East over 2012 and 2013. (OPEC January MOMR)

Figure 8. Anticipated growth in domestic demand in Latin America (OPEC MOMR)

Both of these tables feed into and support the position that Westexas has discussed in regard to the drop in available exports of oil in the coming years.

OPEC is not expecting to increase production in the coming year, but rather expecting that increase in demand will be met by production growth from the non-OPEC nations with numbers similar to those discussed earlier. And, as noted, most of that production growth is expected to come from America. The report confirms that OPEC, and particularly Saudi Arabia is willing to cut production, when demand falls, so that price levels are sustained. As in previous months the numbers showing production differ when the reports come from the countries themselves in contrast with reports from secondary sources.

Figure 9. OPEC crude production as reported directly. (OPEC MOMR )

There are significant drops in production reported for Iraq, Libya, Nigeria and Saudi Arabia so that the reported drop in production comes close to 1 mbd. There is not quite the same amount of sacrifice evident in the numbers from secondary sources.

Figure 10. OPEC crude production as reported from secondary sources (OPEC MOMR )

Overall production is down only around 500 kbd, with almost all of that being a reduction from Saudi Arabia. The difference between the production numbers from Nigeria (they report cutting production 120 kbd while others report they have increased production 136 kbd) are perhaps indicative of some of the problems that exist within the OPEC organization when they try and balance the supply:demand equation.

However, given that KSA is willing to do the heavy lifting it seems likely that prices will continue at their current levels, despite any changes in American production levels.

OGPSS - Iran and the new EIA and OPEC Reports

With the possibility that demand for Iranian oil may fall below 1 million barrels a day (mbd) as sanctions continue to bite, Iran has announced that it wants OPEC to cut back production to the agreed quotas, rather than the overall additional 1 mbd that is actually being produced, and sold. Such a move would, of course, ,make it more difficult for those customers who have found a way of replacing Iranian oil, and perhaps incline them more towards disregarding the embargo.

OPEC has just released their December Monthly Oil Market Report (MOMR) in which they anticipate that earlier projections for 2013 oil demand growth will still be valid, at 0.8 mbd. (Though they note that December 2012 growth y-o-y was at 1.0 mbd as the US economy continued to improve). They expect that all of this increase will be met by non-OPEC increases in supply, and that demand for OPEC oil may even drop 0.4 mbd. Part of that projection continues to rely on increased US crude production, and the EIA TWIP of December 5th had the latest chart showing that projected growth, based on the newly released Annual Energy Outlook 2013.

Figure 1. Projections of future growth in US crude oil production. (EIA TWIP) from Annual Energy Outlook 2013)

As a footnote to that graph the Alyeska pipeline pumped an average of 582,755 bd in November, which brings the annual average up to 544, 625 bd. It is clear from looking at that plot that the gains in production are all assumed to come from increased production from the "tight" oil deposits that have produced the overall gains achieved to date. The optimism of this projection goes a little beyond the levels that I anticipate being achieved.

Coming back to the MOMR their projections do not include the recent news that Venezuelan President Chavez has had to have a fourth operation for cancer, and has named a successor, although the operation was apparently successful. This may complicate the decisions on how much to allocate among the OPEC partners, especially since all continue to need higher priced oil.

OPEC also give the price of various commodities in their report, and before going on to discuss country production, those prices are informative. (And can be read more easily by clicking on the table to get a better image). At present, with the decline in overall global demand, metal prices in particular seem to be continuing to slide.

Figure 2. OPEC report of commodity prices for November (OPEC December MOMR)

Equally informative is the demand that OPEC anticipates from the various regions of the world for oil in 2013.

Figure 3. OPEC estimates for regional oil demand in 2013. (OPEC December MOMR)

In total OPEC anticipates that global demand will reach 90.83 mbd by the fourth quarter of 2013, with the greatest growth continuing to be from China and the other Asian nations.

Looking at where this oil might come from, the main increase is still anticipated to come from North America.

Figure 4. Non-OPEC supply projections for 2013 (OPEC December MOMR)

The conflict in Syria is now reported to have led government forces to withdraw from the Omar and Al-Ward fields in the Deir Ezzor region, where much of Syria’s exports were produced. However the rebels do not, as yet control any of the refineries or export terminals and the result is that oil production is estimated to have fallen from 380 kbd to 160 kbd over the past few months. The regime is making up the shortfall in its needs by importing from Iraq.

Which brings us back to OPEC production levels. (Note that this is for crude oil and does not include the roughly 6 mbd in NGL that are currently being produced).

Firstly, this is what the various governments are reporting that they are producing:

Figure 5. OPEC production from official sources (OPEC December MOMR)

The total shows, among other things, how Libyan has recovered from their “Arab Spring.” In contrast with the official figures OPEC also posts the values from “secondary sources”.

Figure 6. OPEC production from secondary sources. (OPEC December MOMR)

The difference between the two figures for Iran is at around 1 mbd. Overall OPEC production is declining with the increase in non-OPEC production, so perhaps Iran won’t have quite as difficult a time persuading their colleagues to drop production a little more, to help them out. That won’t be at the latest meeting of the OPEC Ministers, which was held in Vienna on December 12th, where it was decided to maintain the current ceiling of 30 mbd.

The meeting was largely distracted by debate over who should be the new Secretary General, with this being “kicked down the road” for a decision at the end of May.

On the other hand, while Malaysia had promised to halt imports of oil from Iran last March, the IEA is reporting that they increased crude purchases from Iran in November. Whether this is oil ultimately destined for that country, or whether this a convenient transshipment point from Iranian tankers bringing in crude, which is then transferred to other carriers and a second purchaser is not clear, although a Chinese oil trader appears to be involved.

A move to make US natural gas available to NATO allies has begun in the Senate, with the intent that perhaps this could wean countries like Turkey from their use of Iranian and Russian natural gas. Whether this will ever amount to much is not clear, since Senator Lugar, the initial author, was defeated in the primary to the last election and thus leaves the Senate at the end of the term.

Gas Prices - when will $5.00 a gallon for gas be the US average?

It is hard to miss the recent rise in gasoline (gas) prices in the United States, and the rumblings that it has generated in the national press. It is a concern that has already entered the ongoing political debate with one Republican candidate promising that, once elected, he will bring the price of gas down to $2.00. (The unreality of that prediction has been explained earlier.) As a result there have been a number of reasons projected (for example here) as to why, in contrast with most seasons, gas prices are rising at the present, in the season of the year when demand is generally lower than normal. Today (Thurs the 1st March) they have risen for the 23nd straight day with prices about $0.30 above what they were a month ago. The Administration does not seem, however, concerned.

Changes in the price of gasoline (EIA TWIP)
Changes in US demand for gasoline (EIA TWIP)

Even though the economy is somewhat stronger than it was a year ago, the demand for gas is still down around 400 kbd. (8.746 against 9.101 mbd). In a more conventional market decreasing demand, against constant supply would lead to a fall in prices. That is not likely to happen, and in part this is because the USA only provides a part of the global market where the demand from the developing countries (as Stuart Staniford has noted) is steadily increasing. China, for example, is growing its oil demand at slightly more than 5% p.a. (0.51 mbd y-o-y for December growth) and has reached a total consumption of 9.3 mbd. It is also slowly starting to build its own reserve of oil and has been buying additional oil for that reason. How long that will continue this year is one of those questions to which there is no clear answer, although, since it is apparently buying heavier and higher sulfur crude and it may be acquiring those crudes that Saudi Arabia has previously had problems selling.

However I continue to have a concern that in the face of this growing demand there continues to be a question over the stability of supply during the next year. (And also thereafter, but that is less likely to affect current gas prices). Consider, if you will, that during the height of the summer US demand will, following the pattern shown above, rise about 1 mbd. Similarly with the driving season in Europe and elsewhere, demand in general can be anticipated to increase over the next four months. OPEC, in its February Monthly Oil Market Report, has lowered its projection of demand growth this year overall to 0.9 mbd, (for a peak of 89.95 mbd on average in the fourth quarter of 2012) having recently lowered the estimate based on doubts over the growth of the US economy, but nevertheless that additional supply has to be found from somewhere.

Projections of oil demand growth from OPEC (OPEC February 2012 MOMR)

And this is where the troubles that continue after the beginning of the “Arab Spring” may have consequences in meeting those targets, together with questions on the nature of the continued status of oil shipments from Iran. OPEC anticipates that, in total, it will (plus minus 100 kbd) continue to supply 30 mbd into the global market. For, as the EIA TWIP notes:

EIA estimates that the world oil market has become increasingly tight over the first two months of this year. Oil prices have risen since the beginning of the year and are currently at a high level. Global liquid fuels consumption is at historically high levels. While the economic outlook, especially in Europe, remains uncertain, continued growth is expected. . . . . With respect to supply, the world has experienced a number of supply interruptions in the last two months, including production drops in South Sudan, Syria, Yemen, and the North Sea. Both the United States and the European Union (EU) have acted to tighten sanctions against Iran, including measures with both immediate and future effective dates. There is some evidence that these measures may already be causing some adjustments in oil supply patterns. For example, there is emerging evidence that some shipments of Iranian crude oil under existing contracts are being curtailed . . . .

One should also remember, that, in discussing oil supply, price is set by that which is available on the market, and this usually discounts the volumes that are consumed domestically. Thus, if Saudi Arabia, for example, increases domestic demand by 100 kbd and the FSU increases demand by 100 kbd, both against a constant overall output, then the rest of the world has to find that additional 200 kbd from somewhere else. In the short term that might be the United States, since production overall rose some 360 kbd in 2011, largely credited to growth in production from the Bakken in North Dakota, and from Eagle Ford shale in Texas. OPEC anticipates that growth to continue, estimating a total gain of 260 kbd from North America this year, though only half of that will come from the United States (the rest will come from Canada).

Non-OPEC growth is, in total, expected to continue in 2012, with an overall production gain to 53.34 mbd by the fourth quarter.

But it is the volumes from the countries involved in continued conflict that raise concern. Libya is making considerable strides to return to pre-conflict levels of 1.6 mbd, having reached 1.4 mbd this month, with exports at 1.1 mbd but Iraq has yet to reach 3 mbd – being at 2.75 mbd in January. (It remains hard to be optimistic over claims that this will rise significantly in the near term.) The EIA are more concerned than OPEC. They note that in order to balance demand against supply Saudi Arabia was producing at 9.9 mbd in January and they consider that the country has only 2 mbd in additional production that it can bring to the market at present (and most of that is heavy sour crude). Further they see domestic demand rising to 3.2 mbd in the middle of the summer, cutting exports significantly. Some of this might be needed to offset supply from Syria, which has been shipping over 150 kbd into the market, but which has already had to cut back that amount as sanctions from Turkey have cut the market.

But it is Iranian production, which normally runs at around 3.5 mbd that raises the real concerns. If this all disappears from the market, the fear is that this cannot all be made up even if Saudi Arabia went into emergency production, and thus that there may be a shortfall of around 1.4 mbd in global supply. The ban will take full effect in July, but as sanctions continue to bite and nibble away at what is still being sold, so the flexibility of the market to adjust is going to be tested. And that may have already begun. Predictions of increases in production and thus global supply, appear somewhat more tenuous than one can be comfortable with, as oil – and thus gas – prices continue their rise.

OPEC in disagreement, the Saudi dilemma

OPEC Ministers, meeting in Vienna, have apparently had one of their more divisive discussions of recent times over the question of raising pumped volumes.

Saudi Arabia, Kuwait and the United Arab Emirates wanted an increase to dampen an oil price that has gained 25pc since tensions erupted in the Middle East this spring while Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran wanted to keep production unchanged.

The two camps are reported to be so far apart as to threaten the structure of the organization. While the lack of agreement (for the first time in 20 years) officially means that there will be no increase in the quotas of the different countries, Saudi Arabia may, unilaterally, move to increase production in order to meet growing demand and stop the steady increase in price. In the short term, however, the lack of agreement has had the immediate effect of increasing prices.

The proposed increase in volume was 1.5 mbd, which is roughly in agreement with the OPEC projection made through their Monthly Oil Market Reports, of a 1.4 mbd anticipated growth in demand this year. That estimate of demand growth recognized the 0.5 total drop in demand from Japan, though offsetting this with greater growth from China, and anticipating repair of the Japanese refineries. (The next report won’t be out until Friday). Given that we are now in the summer driving season for the largest customers, where demand has normally risen, the move, proposed by Saudi Arabia, would at first sight seem a rational step to keep prices under control.

But given the lack of agreement, the question remains as to whether Saudi Arabia (KSA) and its allies at the OPEC table will increase production in defiance of the rest. Bear in mind that should they have the increase, and prices fall, then those countries that don’t (or can’t) increase production lose money as the price falls. However, if the price rises too much, then the world could be kicked back into recession, and global demand could fall, making everyone lose money on smaller volume.

One has only to look at the latest gas prices in this week’s “This Week in Petroleum” to anticipate how this question over the available supply of crude may well kick the graph back into an upward trend.

US Gas Prices (TWIP )

Demand for gasoline flickered when the price peaked, but then despite the price, and with vacation time beginning, demand has returned to last year’s numbers and may well continue to increase over the next six weeks, following that curve. That depends on how the price changes. Any indication of more oil may hold it at current levels, but without that, as demand grows globally, then without supply to meet it the price will rise until a new balance is reached.

Demand for Gasoline in the USA (TWIP )

But this brings us back to the question as to how great a price increase the world can stand, and concurrently, whether OPEC could sustain a 1.5 mbd increase in production. This really (in terms of a significant step) throws the ball back into Saudi Arabia’s court, since they are the one nation that could provide the increase in volume. And certainly in the short term there are enough wells and fields that could have production increased to give the extra volume.

Life is, however, not that simple. To bring additional complexity to the discussion Goldman Sachs has been suggesting that OPEC production will top out next year, and then begin to dwindle. Since OPEC are sensibly the only folk capable of increasing production significantly to meet growing market demand, that prediction had already roiled the market a little. Non-OPEC production has risen 0.8 mbd in the first quarter, y-o-y, but the gains from the US may be over, at the moment.

US Production of crude (TWIP)

However Saudi Arabia will not over-produce in the short term to hurt the long term production from their fields, thus gains in production in the out years will have to come from new developments. Manifa is the most immediate answer as to where the additional oil will come from, according to the new (2010) Aramco annual review. But with that oil requiring special refineries to process that aren’t anticipated to be available until 2014 for the first, and the second still not finalized, that only gets the increase to 0.4 mbd. There is some additional production that is anticipated from Safaniya, another heavy crude source, but that is directed towards planned refineries at Yanbu and Jazan, but the former is scheduled for 2014, while the latter won’t be ready until 2017. The four new oil fields (Namlan, AsSayd, Arsan and Qamran) that Aramco announced will also take time to develop. As a result the increased production that will come from Saudi Arabia are unlikely to rise much above that available from the recent development of Khurais and Khursaniya, which totals some 1.7 mbd. Some of that new production will concurrently have to offset some of the declining production in older fields

Overall production will be limited to 12 mbd, acknowledged as the maximum sustainable rate for the country, but that number includes domestic use, which is already at 800 kbd and rising.

Unfortunately the 1.5 mbd proposed for the OPEC increase will likely also include any offsetting increased production to compensate for countries in turmoil in the MENA. So, as none of those countries is looking as though stability has yet been conclusively re-established, the combined picture was not really looking that good before we got the news from Vienna.

Gas prices and oil supply in light of EIA and OPEC monthly reports

I paid $50 to fill my tank at a gas station in Maine this morning, at a cost of almost $4 a gallon. When the Actress muttered some comment of protest, I told her that she had better get used to the price, because it is hard to see any normal reason for a decline in that price in the near future.

The EIA TWIP today was discussing the transportation fuel market this summer, and begins by noting:

Regular-grade gasoline retail prices, which averaged $2.76 per gallon last summer, are projected to average $3.86 per gallon during the 2011 driving season. The monthly average gasoline price is expected to peak at about $3.91 per gallon by mid-summer. Diesel fuel prices, which averaged $2.98 per gallon last summer, are projected to average $4.09 per gallon this summer. Weekly and daily national average prices can differ significantly from monthly and seasonal averages, and there are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by 25 cents per gallon or more.

Well right now, before driving season starts, the price was $3.97 for regular – but the EIA have the “out” that this is after all Maine, which is at the end of the delivery line. Ah, well!! But I suspect that the EIA is still being a tad optimistic, and may regret that $0.25 error bar by the end of the season.

Their estimate, and the rationale for it are given in the new Short-term Energy and Summer Fuels Outlook with the price of West Texas Intermediate (WTI) at $112 (it has since fallen $5) . The EIA is expecting the market to tighten, based on the turmoil in the Middle East and North Africa, and “robust” growth of demand. But they only increase the anticipated average price of WTI to $106 this year, and $114 next. And in this I think that they are being rather too optimistic given the times. And that includes their estimate that the price of gasoline will still be below $4 (at $3.80 average) through the end of next year. (Though they do add a caveat that there is a 33% probability that prices could get over $4 on average this July).

And in an aside (since the topic today is mainly crude oil) it is worth noting relative to my post on the EIA World Gas Shale report that the EIA are projecting that the Henry Hub price for natural gas will remain around $4.10 per kcf in 2011 i.e. below the 2010 average, and it will only rise to $4.55 per kcf in 2012 – which doesn’t make those gas shale drilling balance sheets look any prettier.

The oil supply problem itself is sufficiently worrying. As with others they are still predicting a global increase in demand of 1.5 mbd this year, expecting that it will rise an additional 1.6 mbd in 2012. OPEC (whose daily barrel is currently at $117) expects that with the tragedy of the earthquake and tsunami in Japan, that there won’t be quite as much growth as previously expected, and thus are only anticipating a growth in demand of 1.4 mbd this year. As their April Monthly Oil Market Report notes, they do not expect countries outside of Japan to be affected, and thus they continue to anticipate a world economic growth of around 3.9%.

As I mentioned in an earlier post there were a number of Japanese refineries which were damaged, and the country which was refining about 4.5 mbd had an immediate drop to 3.1 mbd. That has now been partially restored as some refineries have increased production, and others have been repaired. However the country as a whole is still reported to be about 617 kbd short of the pre-earthquake figure. (And there are three coal-fired power plants Haramachi Tohoku, Kashima Ibaraki, and Hitachinaka Ibaraki that are still off-line and 9 of 210 hydro-electric plants were damaged. )

Nevertheless Middle Eastern suppliers stopped some of the shipments to Japan, and this may well be what is being seen as a short-term decline in demand. (OPEC saw a drop of around 0.5 mbd in tanker shipments in March). However OPEC anticipate that there will have to be substitution for the loss in Japanese nuclear power, since that cannot be restored or replaced with equivalent new nuclear power stations in less than several years. As a result they expect that the demand for oil as a replacement fuel (the loss could be made up by about 200 kbd of oil equivalent fuel) will increase later in the year.

OPEC expects that 0.6 mbd of the overall global increase in demand will be supplied by non-OPEC countries, with Brazil, the United States, Canada, Colombia and China increasing production, while the UK and Norway will show the greatest declines. That leaves the rest for them, and bearing in mind the loss from Libya, and other potential losses around MENA, though OPEC itself only expects to see demand for its oil increase about 0.4 mbd. (Which arithmetic doesn’t quite compute – but never mind – I am assuming that the rise of 0,4 mbd includes the offset to cover the losses in production within OPEC, and that with the 0.4 mbd OPEC increase, and the 0.6 mbd non-OPEC increase, that the world will only be 0.4 mbd short – which might come from NGL increases). Incidentally OPEC anticipates that Chinese demand will grow 0.5 mbd to 9.5 mbd.

There is an interesting comment in the OPEC report relating to the poor performance of natural gas prices (as I have been discussing).

Nevertheless, a sustained upward trend in HH natural gas prices may appear if there is a radical change in the US energy policy regarding nuclear production, which seems unlikely at present. According to Barclays, in order to rebalance the US natural gas market via higher demand, it would be necessary to shutter a large amount (13-26%) of total North American nuclear capacity.

Well I have to confess that is one answer that I hadn’t thought of applying in order to get the shale drilling companies off the hook.