Amid High Oil Prices, Danger Signs in Production

[Brownian Motion]

The New York Times

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April 28, 2008

Amid High Oil Prices, Danger Signs in Production

By JAD MOUAWAD

As oil prices soared to record levels in recent years, basic economics suggested that consumption would fall and supply would rise as producers opened the taps to pump more.

But as prices flirt with $120 a barrel, many energy specialists are becoming worried that neither seems to be happening. Higher prices have done little to attract new production or to suppress global demand, and the resulting mismatch has sent oil prices spiraling upward.

“According to normal economic theory, and the history of oil, rising prices have two major effects,” said Fatih Birol, the chief economist at the International Energy Agency, which advises industrialized countries. “They reduce demand and they induce oil supplies. Not this time.”

A key reason that supply is not rising to meet demand is that producers outside of the OPEC cartel — countries like Russia, Mexico and Norway — have been showing troubling signs of sluggishness. Unlike the Organization of the Petroleum Exporting Countries, whose explicit goal is to regulate supply to keep prices up, the other countries are the free traders of the international market, with every incentive to produce flat-out at a time of high prices.

But for a variety of reasons, like sharply higher drilling costs and nationalistic policies that restrict foreign investments, these countries are finding it difficult, if not impossible, to increase output. They seem stuck at about 50 million barrels of oil a day, or 60 percent of the world’s oil supplies, with few prospects for growth.

Countries that are not members of OPEC have been the main source of production growth in the last three decades, as new fields were discovered in Alaska, the North Sea or West Africa. After the collapse of the Soviet Union, new opportunities emerged in Russia and the Caspian Sea.

Analysts at Barclays Capital said last week that non-OPEC supplies were “seemingly dead in the water.” Goldman Sachs raised similar concerns last month, saying that growth in non-OPEC supplies “can no longer be taken for granted.”

At the same time, oil consumption keeps expanding at a faster clip than production. Demand is forecast to increase this year by 1.2 million barrels a day, to 87.2 million barrels a day. In the United States, the world’s most oil-thirsty nation, consumption has actually fallen a bit because of the economic slowdown.

But that drop is being offset by growth in other countries. World consumption is projected to rise 35 percent, to around 115 million barrels a day, in the next two decades. Most of the growth will come from China, India and oil-producing countries in the Middle East, where retail fuel prices are subsidized, encouraging wasteful consumption.

“What is disturbing here is that things seem to get worse, not better,” an analyst at Goldman Sachs, David Greely, said. “These high prices are not attracting meaningful new supplies.”

Oil rose 23 cents Monday to $118.75 on the New York Mercantile Exchange. Longer-term oil futures, dated for 2013, now trade at $108 a barrel, a strong indication that investors see little cause for prices to drop in the next five years — partly because of low expectations about production growth.

The outlook for oil supplies “signals a period of unprecedented scarcity,” an analyst at CIBC World Markets, Jeff Rubin, said last week.

Oil prices might reach more than $200 by 2012, he said, a level that would probably mean $7-a-gallon gasoline in the United States.

Some regions are simply running out of reserves. Norway’s production has slumped by 25 percent since its peak in 2001. In Britain, oil production has plummeted 43 percent in eight years. The North Sea is now considered a dying oil basin. Alaska’s giant field at Prudhoe Bay has declined 65 percent since its peak 20 years ago.

In many other places, the problems are not located below ground, as energy executives like to put it, but above ground. Higher petroleum taxes and more costly licensing agreements, scarce manpower and swelling costs, as well as political wrangling and violence, are making it much harder to raise production.

“It’s a crunch,” said J. Robinson West, chairman of PFC Energy, an energy consulting firm in Washington. “The world is not running out of oil, but rather it’s running out of oil production capacity.”

Recently, the case that has attracted the most attention is Mexico, the second-biggest exporter to the United States, which seems increasingly helpless to stem the collapse of its largest oil field, Cantarell. Last week, the country’s state-owned oil company, Pemex, said that production had fallen 300,000 barrels a day so far this year to 2.9 million barrels a day, a stunning drop from its peak production of 3.4 million in 2004.

A combination of falling production and rising domestic consumption could wipe out Mexico’s exports within five years, including the 1.5 million barrels it sends to the United States each day.

Another country, Russia, is also clouding analysts’ forecasts. The country is not exactly running out of places to look for oil — a huge chunk of Eastern Siberia remains unexplored — and Russia has been the biggest contributor to the growth in energy supplies in the last decade.

But earlier this month, Russian energy officials warned that the days of stunning growth that followed the demise of the Soviet Union were over, as the country would focus on stabilizing its output. Russia today produces about 10 million barrels of oil a day, up from a low point of 6 million barrels in 1996.

About 75 percent of the world’s oil reserves are in OPEC countries, where governments voluntarily restrict their output to push up prices. As countries like Russia slow output, analysts say OPEC will have to pick up the slack. The oil cartel currently accounts for 40 percent of the world’s oil exports.

Further clouding the picture, Saudi Arabia, the world’s top oil exporter, signaled last week that it might have trouble increasing its production.

Saudi Arabia, the de facto leader of OPEC, signaled it would freeze any further expansion after next year. That dims the long-range outlook for OPEC supplies, though in the near term, Saudi Arabia is expected to loom larger in the market as it completes a $50 billion plan to increase its capacity to 12.5 million barrels a day. Yet that leaves it well short of the 15 million barrels that most experts expected the kingdom to produce in the long run.

The cartel’s 13 members say they plan to spend $150 billion to expand capacity by 5 million barrels a day by 2012, according to estimates by OPEC. But that falls short of most projections, which say OPEC will need to pump 60 million barrels a day by 2030, up from around 36 million barrels a day today, to meet the expected growth in demand.

Reaching that level is going to be impossible unless the violence and tensions in both Iran and Iraq are resolved, analysts said. Because of sanctions for the last 30 years, both countries have been producing much less than their huge oil reserves would permit.

Not everyone has a pessimistic outlook. The Energy Department forecasts sustained growth in non-OPEC supplies this year and next. A study by the National Petroleum Council, an industry group that provides advice to the secretary of energy, outlined a variety of possibilities for oil expansion, and concluded that the world still had plenty of petroleum resources that could be tapped.

In fact, high prices have sparked a global dash for oil. Companies are trawling deep oceans or seeking to drill in the Arctic Ocean. In some cases, the hunt has been successful. Brazil, for example, has struck large offshore discoveries that could turn the country into one of the world’s top 10 producers in the coming decade. Yet it takes years to bring such remote fields into production, and the market needs oil now.

To make up the shortfall, the world is increasingly turning to fuels made from unconventional sources, like biofuels or heavy oil. Canadian tar sands, for example, have attracted large investments, and biofuels have accounted for much of the growth in fuel supplies in the last two years.

The International Energy Agency estimates that current investments will be insufficient to replace declining oil production, let alone increase overall output. The energy agency said it would take $5.4 trillion by 2030 to increase global output, a level of investment that is unlikely to be met. It said a crisis “involving an abrupt run-up in prices” could not be ruled out before 2015.

[Chuck Nessa]

Let's attack another gulf state.

[Brownian Motion]

Let's attack another gulf state.

Texas?

[JSngry]

Let's attack another gulf state.

Texas?

Maybe 50-60 years ago. 80 years ago, definitely.

Now? Hardly worth it.

Personally, I think we should colonize the sun.

[jimi089]

The good of all of this is that it will help spur innovation and create a market for that innovation in buyers who see the urgency of new technology to patch this ridiculously broken system we've been relying on in regards to fossil fuels. In the mean time though, our wallets are in for a world of hurt.

[Joe G]

James Kunstler says "have a nice day."

April 28, 2008

Belief System

A friend asked me how come the public apparently grasps the reality of climate change but can’t seem to wrap its collective brain around the unfolding oil crisis.

I'm not convinced that the public does grasp climate change. It's perceived, perhaps, as a background story to daily life, which goes on regardless. Are you even sure Hollywood didn't invent it -- and maybe some boob at Time Magazine is selling it as though it were really happening?

Few have anything to gain by espousing denial of climate change. It's hard for most people to tell if they have been affected by it. It doesn't quite seem real. Those who actually make gestures in the face of it –- screwing in compact fluorescent lightbulbs, buying Prius cars -- end up appearing ridiculous, like an old granny telling you to fetch your raincoat and rubbers because a force five hurricane is organizing iself offshore, beyond the horizon.

The public appears aggressively clueless about the peak oil story. They do not accept any threats to the motoring regime. The news media is surely not helping sort things out. I saw a remarkable display of ignorance on CNN last week when the new resident idiot-maniac Glenn Beck hosted Teamster Union boss James Hoffa and they agreed that the oil companies were to blame for high fuel prices. To put it as plainly as possible, Beck doesn't know what the fuck he's talking about, and it's disgraceful that CNN gives free reign to this moron to misinform the public. It's perhaps equally amazing that Hoffa doesn't know we have entered a permanent global oil crisis based on demand having outrun supply. These two idiots think that if Exxon-Mobil built a new refinery down in Louisiana, everything would be fine, diesel fuel would go back down to 99 cents a gallon, and it would be Christmas every morning.

This has been a pretty remarkable month, actually, with all the problems of "The Long Emergency" accelerating impressively. Oil is now testing the $120 mark, the airline industry is imploding (largely over fuel costs), the housing scene has reached a degree of collapse unseen since the 1930s, food shortages have strayed out of the Third World and begun to affect Japan and the USA, bats are dying of a mysterious disease in the Northeast, and the Arctic sea ice is shrinking away to nothing.

We're in a strange collective psychic bubble. We'd like to forget about all these troubling rumors of hardship and bad weather and just get on with the daily task of making a living and paying for stuff and enjoying our customary entertainments. The comforting ceremonies of everyday life seem to continue. The freeways are still full of cars. Nancy Grace comes on TV dependably at 8 p.m. and is there deploring the latest pervert arrest. The baseball season has ramped up and the teams are criss-crossing the nation in their chartered airplanes. The stock market is actually going up -- what's wrong with that?

But there's an equally eerie vibe out there that things are seriously out-of-whack. We're on the edge of something. We're at the entrance of a dark passage where some of the ceremonies of daily life meet resistance. You go to the WalMart and five of your six credit cards are refused. Uh oh. It begins to dawn on you that you're spending a quarter of your take-home pay filling up the gas-tank every week. There's no dial tone when you pick up the telephone. How could all the supermarkets in town be out of rice? The local hospital just declared bankruptcy. The neighbors down the street auctioned off all their furniture in the driveway last week. Why does the cat pick up so many ticks these days?

Events are not through with us this year. They'll keep moving where they will whether we believe in them or not. I'm hardly even convinced that it matters who wins the presidential race this year. It could end up being the world's biggest booby prize.

[AllenLowe]

let me take this opportunity to point out that it was a Democrat, Jimmy Carter, who canceled the solar energy program, at the behest of his Department of Energy appointees, all of whom were from the Detroit auto industry -

just wanted to make sure that this is on the record -

I hate Jimmy Carter -

[Chuck Nessa]

Knew you'd find a reason.

[AllenLowe]

I always do - that and that stupid smile -

and the fact that Carter:

1) began the military buildup that Reagan continued; and that

2) his administration passed one of the most regressive tax bills in history, making drastic cuts in the corporate rate; and that

3) he destroyed the Legal Services administration by failing to make key appointments, appointments which Reagan than made and which crippled the organization

and there's more -

Edited April 29, 2008 by AllenLowe

[Jazzmoose]

Don't listen to Allen; he's in the pay of the giant rabbit lobby!

[BERIGAN]

Brazil Oil Trapped by 500-Degree Heat, Salt Barrier (Update2)

By Joe Carroll

April 28 (Bloomberg) -- Brazil's plan to become one of the world's biggest oil exporters hinges on exploiting crude 6 miles below the ocean surface in deposits so hot they can melt the metal used to carry uranium to nuclear plants.

Tapping what may be the biggest oil finds in the Western Hemisphere in three decades will require equipment that can withstand 18,000 pounds per square inch of pressure, enough to crush a pickup truck, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick.

Petroleo Brasileiro SA, the state-controlled oil company, is betting on the Tupi and Carioca fields to become one of the world's seven biggest crude exporters. Until the tools needed to exploit the reservoirs are invented, the crude will remain locked under the sea, said Matt Cline, a U.S. Energy Department economist.

``This is a very, very technically challenging environment where no one's ever done this,'' Cline, who tracks the Latin American oil industry, said in a telephone interview from Washington. ``These discoveries are in very deep water, and once you get to the seabed they are very deep under the floor, with a layer of salt that is definitely a difficult barrier.''

Brazil's oil will be harder to develop than the Gulf of Mexico, where the deepest wells are now in production, Cline said. Exxon Mobil Corp. and Chevron Corp., the two biggest U.S. oil companies, saw diamond-crusted drill bits disintegrate and steel pipes crumple when they attempted to tap deposits beneath the Gulf's seafloor two years ago.

Uncharted Depth

Pumping oil from the Brazilian finds, parts of which are 32,000 feet (10,000 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest producing offshore well.

The obstacles will discourage development unless crude prices stay high, said Tina Vital, an analyst at Standard & Poor's in New York. U.S. oil futures, which reached a record at $119.93 a barrel in after-hours electronic trading yesterday, have jumped 81 percent in the past year.

Engineers will have to overcome temperatures that range from near freezing above the ocean floor to temperatures that can melt bismuth, used for transporting uranium rods and for shotgun shells. Layers of salt will also increase the challenge because the crystals absorb seismic waves used to pinpoint oil deposits.

Seismic Issue

``The seismic issue is important because if you don't identify the location of the oil properly, you're going to waste a lot of money when you drill the hole in the wrong spot,'' said Vital, a former Exxon engineer.

Brazil pumped 2.13 million barrels of oil a day in the last three months of 2007, more than OPEC members Angola, Libya and Algeria.

Tupi, 155 miles (250 kilometers) off Brazil's coast, may begin production by 2012, according to consulting firm Strategic Forecasting in Austin, Texas. The field may have 8 billion barrels of recoverable oil.

No start date has been set for Carioca, which Petroleo Brasileiro said will take at least three months to evaluate. A Brazilian regulator said this month the reservoir may have 33 billion barrels.

If confirmed by further drilling, the reserves will be triple the size of Alaska's Prudhoe Bay, the largest U.S. field.

Record Depth

The ocean-depth record for production was set last year by Anadarko Petroleum Corp. The company is extracting natural gas from beneath 8,960 feet of water in the Gulf of Mexico, where pressure measures 3,069 pounds per square inch, squeezing joints and tearing at seals.

``What we do at that water depth in the ocean is similar to NASA's space program, but they get to do it without any pressure trying to attack them,'' Kevin Renfro, production engineering manager at Woodlands, Texas-based Anadarko, said in a November interview.

Petrobras hasn't said how much it spent to sink wells at Tupi and Carioca. Similar drilling by Exxon and Chevron Corp. in the Gulf of Mexico cost $180 million to $200 million for each well.

``A big find might not be a good find if it costs so much to develop that it's not commercially viable,'' S&P's Vital said. ``We don't have any idea at all yet of all the costs that are going to be involved. Those costs are going to set the floor for oil prices.''

$50,000 Drill Bits

Chevron, which has the deepest Gulf of Mexico exploration well, including distance below the seafloor, destroyed as many as a dozen $50,000 drill bits at each of the 14 wells in its $4.7 billion Tahiti project.

Exxon Mobil abandoned a Gulf project that would have been the deepest well after pressure and heat shut down the venture in August 2006. The Irving, Texas-based company developed pipes tough enough to withstand temperatures that would shatter regular steel at its Sakhalin-1 project in Russia. The metal may help make Brazil's offshore fields accessible, Vital said.

``These challenges in the Brazilian offshore area are too great for any one company or even country to be able to digest themselves,'' Vital said.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

[Chuck Nessa]

I hate it when that happens.

[BERIGAN]

I hate Jimmy Carter -

So it's agreed, everyone hates Carter...good!

[AllenLowe]

well, I no longer receive cash from the giant rabbits, but I do see them frequently -

[Brownian Motion]

let me take this opportunity to point out that it was a Democrat, Jimmy Carter, who canceled the solar energy program, at the behest of his Department of Energy appointees, all of whom were from the Detroit auto industry -

Allen,

This is simply not true. Here is a good overview of Carter's thinking on energy--

http://www.commondreams.org/views05/0503-22.htm

And here is a sentence that fairly leaps out of the page--

" And Ronald Reagan's first official acts of office included removing Jimmy Carter's solar panels from the roof of the White House, and reversing most of Carter's conservation and alternative energy policies."

And here are the White House solar panels today--they're in Maine, you can go visit them.

http://www.unity.edu/envresources/sustainability/carter.aspx

[AllenLowe]

1) sorry, that's incorrect - his words were one thing, his Department of Energy, which ran the solar program, was another - his appointments to that department were all Detroit auto types - and they slowly dismantled the program until there wa nothing left - this was well documented at the time by Fred Goodman, a great journalist, now dead, who did a series of articles in the 1970s on how the DOE was slowly discontinuing that program. Carter's words are a smokescreen - he did worse than nothing - somewhere in my files I have copies of Goodman's articles, but one only has to look at what happened to solar energy during the Carter administration - nothing -

2) solar panels, solar schmanels, as my kid would say - yea, he put them up in the White House, Reagan took them down - but once again this was mostly rhetoric on Carter's part - you need to go back to the 1970s; the solar energy program died on the vine. Secretly, Carter did big business's bidding - as in his refusal to institute price controls when the cost of energy basically doubled during his administration. He was the last prresident to have the right to do this, and he refused, though people suffered and died as energy costs outstripped people's abilities to keep up with them (shades of Bush et al)

[AllenLowe]

don't believe Carter's rhetoric on anything - his first Department of Energy appointment as Chairman was James Schlesinger - former Director of the CIA, former head of the Department of Defense - so they put some money into solar energy at the same time that they undermined the program - this fits Carter's m.o. on everything, domestic to foreign - a former Professor that I new from SUNY Binghamton, James Petras, has written the following:

"In the late 1970's Afghanistan was ruled by a nationalist secular regime allied with the Soviet Union. The regime promoted gender equality, free universal education for women and men, agrarian reform including the redistribution of feudal estates to poor peasants, the separation of religion and the state and adopted an independent foreign policy with a Soviet tilt. Beginning at least as early as 1979, the US, Pakistan and Saudi Arabia orchestrated a massive international recruiting campaign of Islamic fundamentalist to engage in a "Jihad" against the "atheistic communist regime." Tens of thousands were recruited, armed by the US, financed by Saudis Arabia and trained by the CIA and Pakistani Intelligence. Pakistan opened its frontiers to the flood of armed invaders. Internally the displaced Mullahs, horrified by the equality and education of women, not to speak of the expropriation of their huge land holdings, joined the Jihad en masse.

The Carter Presidency (and not Reagan) was responsible for the organization, financing, training of the Islamic uprising and the terror campaign which followed. Zbig Brzesinski later wrote of the US--Afghanistan campaign as one of the high points in US Cold War diplomacy--it provoked Soviet intervention on behalf of the secular Afghan ally. Even when confronted with the consequences of the total devastation of Afghanistan, the rise of the Taliban and Al Queda and 9/11, Carter's former National Security Adviser, Brzesinski replied that these were marginal costs in comparison with a war which successfully hastened the fall of the Soviet Union. President Carter's intervention in Afghanistan initiated the Second Cold War, which was pursued with even greater intensity by Reagan. Carter backed a series of surrogate wars in Angola, Mozambique, Central American, the Caribbean and elsewhere. Carter was clearly an advocate and practitioner of the worst kind of imperial intervention and a master of public relations: he was an early practitioner of "Humanitarian Imperialism"--humane in rhetoric and brutally imperialist in practice."

[The Magnificent Goldberg]

I've got a strong feeling you're right on this Allen. Carter may have had good intentions...

MG

[The Magnificent Goldberg]

Oh, and while we're on the subject, here are today's first quarter profits for BP and Shell.

£7 billion profit for oil giants

Press Assoc. - Tuesday, April 29 01:55 pmBP and Shell fuelled the anger of UK motorists after the two firms racked up combined profits of more than £7 billion in three months.

(Advertisement)

The AA said drivers would be shocked to learn of the £3.3 million-an-hour first quarter earnings, at a time when rising oil prices had left them struggling with average unleaded petrol prices of around £5 a gallon.

The companies argue that while record oil prices inflated returns at their exploration and production divisions, tougher conditions were felt in downstream operations such as refining and marketing. The pair also insist they already pay high levels of tax to the Treasury.

The figures were way ahead of City forecasts and caused shares in both companies to jump by 5% on the London market. Shell's profits were 12% higher at 7.78 billion US dollars (£3.92 billion) while BP improved 48% to 6.59 billion US dollars (£3.32 billion).

In January, Royal Dutch Shell reignited calls for a windfall tax after it announced annual profits of £14 billion.

AA president Edmund King said: "The motorist feels somewhat battered from all sides, seeing the oil companies going off with cash in their pockets and the Treasury filling its coffers.

"It's the ordinary motorist that's bearing the brunt of this while the oil companies and the Government are laughing all the way to the bank."

He called on the oil companies to reinvest more of the windfall in drilling and refining, in order to increase the supply of oil and create downward pressure on petrol prices.

Independent charity the RAC Foundation said anger over rising petrol costs needed to be directed towards the Government, adding that a flexible fuel duty would compensate for varying crude prices.

BP's said it was paid an average of 90.92 US dollars a barrel for its oil in the first quarter, compared with 53.43 US dollars a year earlier.

Ref http://uk.news.yahoo.com/pressass/20080429...ts-6323e80.html

MG

[Guy Berger]

2) his administration passed one of the most regressive tax bills in history, making drastic cuts in the

I will admit to not being familiar with the rest of the tax bill, but the sooner the corporate tax is junked and replaced with another more logical tax the better.

Guy

[Guy Berger]

2) solar panels, solar schmanels, as my kid would say - yea, he put them up in the White House, Reagan took them down - but once again this was mostly rhetoric on Carter's part - you need to go back to the 1970s; the solar energy program died on the vine. Secretly, Carter did big business's bidding - as in his refusal to institute price controls when the cost of energy basically doubled during his administration. He was the last prresident to have the right to do this, and he refused, though people suffered and died as energy costs outstripped people's abilities to keep up with them (shades of Bush et al)

It's a good thing that Carter refused to institute price controls - they are an absolutely terrible idea.

Guy