Peak Oil Review

Vol. 3 No. 52
December 29, 2008
Tom Whipple, Editor
Steve Andrews, Publisher

1. Prices and production

It was another down week for oil prices. Starting out in the low $40s, oil fell as low as $35 a barrel
before jumping to a close at $37.71 after the UAE announced the details of the production cuts it
was making to comply with the recent OPEC decision.
Despite widespread skepticism that the cartel will actually cut production on the order of 4 million
b/d in the next few months, several OPEC members have already announced the details of how
and when they plan to make the required cuts. Despite an OPEC tradition of ignoring production
cuts, this time it may be different. Prices have fallen so far that nearly every member of OPEC is in
serious trouble. The realization may be growing that if they don’t hang together and temporarily
swallow the reduced revenue from lower exports, it may be a long time before prices rebound.
Billions in oil revenues that were flowing into OPEC coffers as recently as last summer now remain
in the pockets of consumers around the world. In the US, the cost of fuel is now down by nearly $2
billion a day which is making a major contribution to cushioning the effects of the recession.
Although a drumbeat of harsh economic news continues to flow from around the world, it is still
unclear just how far the worldwide demand for oil has dropped. While US demand is down by
about 1.2 million b/d, OECD reserves have been growing, and other major consumers are
reporting lower imports, these factors are balanced by much lower oil prices. China is reported to
be filling its strategic reserve, the US will resume doing so after the 1st of the year and South
Korea will start filling its reserve shortly.
The rapid and unprecedented drop in prices clearly indicates that there is too much oil available for
current demand. Whether this surplus is measured in hundreds of thousands of barrels per day as
suggested by the IEA, or several millions as suggested by other observers, has yet to be
determined.

2. Russia
Of all the countries exporting oil, Russia seems to be suffering the most serious consequences
from the precipitous drop in oil prices. The Russian stock market has collapsed and the ruble,
devalued eight times in recent months, has lost 20 percent of its value vs. the US dollar since
August. Although Moscow managed to accumulate a substantial reserve during the good years,
this is being rapidly dissipated bailing out troubled industries and $100 billion in foreign obligations
are coming due next year. Worldwide demand for Russia’s minerals is dropping and
unemployment is increasing.
The country is bracing for civil unrest as more workers are not being paid or are losing jobs. The
unspoken social contract between government and the Russian people, in which the people ceded
some political freedoms in return for prosperity and consumer goods, is breaking down.
The annual dispute over how much cash-short Ukraine will pay for past and current deliveries of
Russian natural gas is in full swing. Russia supplies about one-fourth of Europe’s natural gas
through the Ukrainian pipeline system. In 2006, when Moscow tried to pressure Ukraine by
reducing the gas feeding into Ukraine’s pipelines, shortages developed in Western Europe.
Moscow already is warning the EU that this situation could occur again.
Early next year Moscow will begin shipping LNG from Sakhalin Island and thus increase the share
of LNG in the world’s gas supply. Last week Moscow hosted a meeting of the Gas Exporting
Countries Forum that formalized the organization by adopting a charter and agreeing to set up a
headquarters in Doha and hire a secretary general. Most members of the Forum deny any
intention of becoming an OPEC-like cartel to control world LNG prices, but others are suspicious
since OPEC too had innocuous beginnings.
Despite economic problems that may or may not turn out to be worse than those of other countries,
Moscow continues to maneuver.
3. Electric Cars
It is now generally acknowledged that if the automobile is to have a future, it will be completely or
partially electrically powered. GM is staking its future on its plug-in hybrid, the Volt, which is due out
in 2010. A Chinese automaker is already selling a competing vehicle, and several Japanese
manufacturers are planning to announce new all-electric or hybrid vehicles in January.
At the Detroit auto show, Toyota will unveil the next generation of its successful Prius that is said to
have a new hybrid power train which will deliver higher mileage and improved performance. Honda
will unveil a new competitor for the Prius, and Mitsubishi will show a four seat all electric with a 100
mile range and a top speed of 87 mph.
Perhaps the most interesting new car in recent weeks is the one built by BYD in China. BYD
started life as an advanced battery manufacturer that moved into building cars about 5 years ago.
BYD says it has developed a new, proprietary battery technology that will move a four passenger
car 62 miles at highway speeds on electricity alone. Built with a range extending gasoline engine
like the one in the Chevrolet Volt, this vehicle is already on sale in China for $22,000.
If this vehicle works as advertised, it will mark a paradigm shift in the automobile industry for it is
coming on the market with better performance specifications, two years earlier, and at half the
rumored cost of GM’s Volt. If the US automobile industry can survive for the next two years it may
find difficulty competing with just the Volt. It is worth noting that Warren Buffet has invested $230
million in the BDY electric car project in hopes of introducing them in the US by 2011.
One of the subplots of the anticipated switch to plug-in electric cars is the availability of places to
recharge them. In China nearly all housing in urban areas where people can afford cars is in high
rise buildings – unsuitable for recharging without a major investment in wiring parking spaces. In
America, however, one of the redeeming features of suburban sprawl is easy access to electricity
either in garages, driveways or simply in front of a house. This could make the adoption of plug-in
cars much more acceptable in the near future.
While the plug-in car has the potential to provide urban transportation with only a fraction of the
amount of liquid fuel currently being consumed, the transition to electric cars will be lengthy and
expensive. The world’s fleet of liquid fueled cars is now approaching 1 billion vehicles and many
question whether there will be enough resources to make the transition.

4. Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
UUU

• Japan, the world’s third-largest consumer of oil, said its crude imports fell 12 percent during
November as the country’s industrial output plunged the most in almost 55 years. Industrial
output in Japan declined 8.1 percent in November intensifying worries that the world's second-
largest economy was headed for a deeper and more protracted recession than previously
thought. (12/27, #2, #5)
• In China, energy demand is falling as the fourth-biggest economy enters its deepest slowdown
in almost two decades. (12/25, #5) China’s policy makers are becoming convinced that the
country’s current economic situation is direr than had been expected and may not bottom out
until well into 2009. As a result, new economic stimulus measures are being formulated and will
be launched in the following months. (12/26, #7)
• China's crude oil imports are expected to register a year-on-year growth of 1.2 percent in
2008, down sharply from 14.7 percent in 2007 and 14.5 percent in 2006. (12/26, #5)
• China has started filling tanks at its largest oil reserve, taking advantage of low world crude
prices. The facility's 10 tanks have a total capacity of 6.3 million barrels. (12/27, #5)
• The excavation of Alberta’s tar sands could reduce the region's migratory-bird population by
almost half, according to a study released by US and Canadian environmental groups. The
report calls for a moratorium on new tar sands development pending further study of
environmental impacts or, failing that, measures that include noise reduction and habitat
restoration. (12/27, #9)
• South Korea warned it faces an "unprecedented crisis" as global demand wilts. (12/26, #6)
• India's Reliance Industries started operations at its new 580,000-barrel-a-day refinery in
western India, likely raising the pressure on refining margins globally. The new refinery, along
with Reliance's neighboring 660,000 barrel-a-day refinery, will form the world's largest refining
complex in Jamnagar in western India, with a capacity of 1.24 million barrels a day. (12/26, #9)
• Growing US natural gas production from onshore fields has left the market oversupplied by
four billion or five billion cubic feet per day, according to Houston-based investment banking
boutique Tudor, Pickering, Holt & Co. (12/24, #11)
• Natural-gas prices remain in a slump because manufacturers, which are bigger users of gas
than homeowners, have cut back their operations in response to the recession. Natural-gas
futures are down 16% from last year despite colder weather. Prices haven't been this low in
December since 2003. Storage levels remain 3.4 percent higher than normal even after the
frigid start to the heating season. But the price slump spells bad news for gas producers, who
have been forced to slash spending on drilling. (12/26, #11)
• Chesapeake, based in Oklahoma City, plans to cut its 2009 and 2010 capital spending by a
combined $2.9 billion, or 31 percent. (12/25, #11)
• Putting a price on carbon dioxide emissions could help rebalance the natural-gas market by
changing the economics of power generation. At current fuel prices, the variable cost of
generating one megawatt hour of electricity from the average natural-gas fired plant is $45; for
a coal-fired plant, it's $30. Put a price of $25 per metric ton on these emissions - in line with
average prices in Europe since it began trading of emissions allowances - and the economics
change dramatically. (12/24, #11)
• The price of corn has dropped to $3.98/bushel, a 50 percent drop from the all-time high of
$7.99 on June 27, despite crop-threatening drought in Argentina and Brazil, the world’s
second- and third-largest corn exporters after the US. (12/25, #3)
• The weakening US labor market is compressing consumer incomes and spending, though
sharp declines in gasoline prices are offsetting the troubles for now. (12/25, #9)
• Despite dropping gasoline prices, a sense of urgency for efficient vehicles may still remain,
according to congressional and environmental leaders, because of a confluence of factors
including broad anxiety over global warming, enthusiasm for green elements in economic
stimulus packages and President-elect Barack Obama's repeated vows to act. (12/25, #10)
• US airlines are cheering the jaw-dropping decline in fuel prices, but at the same time are
wincing that some of the insurance they bought to hedge against fuel spikes seems to have
been a waste of money. (12/25, #12)
• Aviation will not be able to grow after crude oil production peaks. The competition with diesel
fuel production will probably increase. Diesel for agricultural tractors or jet fuel for aviation?
(12/25, #18)
• Reeling from its financial problems and a collapsing SUV market, General Motors on Tuesday
closed its factories in Janesville (WI) and in Moraine (OH), marking the passing of an era.
(12/24, #12)
• The profit margin, or crack spread, for turning crude oil into gasoline in the US has been
negative for all but four days since Oct. 21. (12/24, #13)
• Ammonia is probably the most critical manmade substance to the existence of human society.
The expansion of the world’s population is based on fertilizer driven agriculture...and modern
nitrogen fertilizer is ammonia. Global ammonia production comes about 69 percent from natural
gas and 29% from coal. US domestic ammonia production was 10.7 million tons in 2007 and
imported ammonia totaled 7.9 million tons. Major suppliers: Trinidad (55%), Russia (21%), and
Canada (12%). (12/24, #18)
• Demand for oil tankers will continue to slip. Pledged OPEC production cuts translate to an
approximate 8% to 9% contraction in crude oil tanker demand in 2009, while the crude tanker
oil fleet is likely to expand 14% to 15% next year. (12/23, #2)
• Mexican oil production slid by an average of 9.3 percent during the first 11 months of this
year to 2.8 million barrels a day. Exports fell by 17.3% during the period, to 1.4 million barrels
a day…Petroleos Mexicanos is already adding rigs, and it plans to double drilling activity next
year. (12/23, #7, #8))
• Brazil’s Petrobras said the offshore pre-salt oil fields, including Tupi, the largest discovery in
the Americas since 1976, remain viable even after crude prices plunged. (12/23, #9)
• Private oil company Flying J filed for reorganization under US bankruptcy laws, citing the
collapse in oil prices and tight credit markets as the root of its financial troubles. (12/23, #13)
• Be it late 2009, 2010 or even 2011, the price of energy will head back to its old highs and
likely well beyond. Deleveraging and psychological forces can rule the markets for any short
term period. Looking ahead, the fundamentals will prevail.(12/23, #19)
• Alaska’s North Slope oil production is expected to average 689,000 barrels per day this year,
a decline of 3.8 percent from last year, according to a revenue forecast released in Juneau. For
2010 production will decline to 665,000 b/d. (12/22, #11)
• The US drilling rig count—which peaked in September at just over 2000 rigs—should decline
by slightly over 1,000 rigs from the peak to the trough. Since the rig count has already fallen by
165 rigs, the 800-rig drop estimate recently made by Nabors Industries could prove pretty
accurate. (12/22, #10)
• Cambridge Energy Research Associates, in a new report, say they anticipate that spare oil
production capacity will increase significantly in the next few years due to falling oil demand
and as supply materializes from investments already under way. As low as 1 million b/d in 2005
and 2.4 million b/d in 2008, spare capacity could reach 7-8 million b/d in 2010-12. By 2013,
another cycle of supply tightness and high prices could hit us again. (12/22, #18) (Editor’s note:
we would be shocked if it took another four years for high oil prices to take hold again.)
Quote of the Week
• “Cheating on OPEC quotas is not a problem. It’s a tradition.”
-- Byron King, energy analyst and writer

Commentary: Drill Baby Drill—A Reality Check

By Roger Blanchard
(Note: Commentaries do not necessarily represent ASPO-USA’s positions; they are personal statements and
observations by informed commentators)
Many Americans want to believe that the US still has unlimited oil resources within its boundaries,
if only the pesky environmentalists would just get out of the way. Throughout the recent
presidential campaign, the “Drill baby drill” mantra was exploited relentlessly by John McCain, his
supporters and rightwing media sources.
The oil industry has contributed to the belief that if it is allowed into presently protected offshore
areas, the Arctic National Wildlife Refuge (ANWR) and any other place presently under a drilling
moratorium, US oil production is sure to surge.
One of the Briefs in the Dec. 15 issue of the ASPO-USA newsletter stated:
A study commissioned by the American Petroleum Institute (API) concluded that
developing offshore areas covered by congressional moratoriums until recently, along
with resources in the Arctic National Wildlife Refuge and a small portion of currently
unavailable land in the Rocky Mountains, could increase US crude oil production by as
much as 2 million b/d by 2030, offsetting nearly a fifth of the nation's crude imports.
(12/9, #12)
The API recently started a radio campaign to convince the public that if every acre of
America is opened for oil exploration and development, the American public will be
rewarded with ample supplies of US oil in the future.
How realistic is it to believe that opening all of America to oil exploration and development will
cause a surge in production?
It may surprise most Americans, but over the last 15 years, millions of acres of federal lands and
waters have been opened to oil exploration and development. Particularly important in that regard
are the millions of acres in the deepwater Gulf of Mexico (GOM) and the National Petroleum
Reserve-Alaska (NPR-A).
A large number of fields, many quite large, have been brought on-line during the last 15 years
including Alpine (Alaska), Northstar (Alaska), satellites of the Prudhoe Bay field (Alaska), satellites
of the Kuparak field (Alaska), satellites of the Alpine field (Alaska), Mars (GOM), Auger (GOM),
Ursa (GOM), Ram-Powell (GOM), Thunderhorse (GOM), Mad Dog (GOM), Tahiti (GOM), Holstein
(GOM), Diana-Hoover (GOM), Atlantis (GOM), Na Kika (GOM), Brutus (GOM), Matterhorn (GOM),
Neptune (GOM) and many more.
In spite of all the oil field development in the US over the last 15 years, field production of crude oil
+ condensate has declined every year during that period with a total decline of about 2.1 million
barrels/day (b/d) from 1992 to 2007. Even since 2000, when the pace of new oilfield development
in Alaska and the deepwater GOM has increased, US oil production has still declined about
760,000 b/d.
In Alaska, the addition of all the Alaskan fields listed above only caused a plateau in Alaskan
production for a few years around 2000. Production has since reverted to the relentless decline
that started in 1989.
Several points should be made concerning future oil developments in recently opened areas or
areas that are still off limits:
1). US government agencies that make estimates of recoverable oil reserves have a history of
greatly exaggerating reserves. I have previously calculated a government overestimate of ~2.4
times the actual recoverable reserves for the onshore contiguous 48 states. It appears that the
ratio of government estimated recoverable oil reserves/actual recoverable oil reserves could be
considerably greater than 2.4 for the deepwater GOM and the NPR-A.
2). Much of the offshore US will have little or no oil. I expect that to be the case for the offshore
Atlantic, the Pacific from northern California to the Canadian border and around much of
 Alaska. The gas-prone eastern Gulf of Mexico will have only a relatively minor volume of
recoverable oil.
Most of the oil that the Minerals Management Service estimates for Alaskan offshore waters is
located in the Beaufort and Chuchi seas of northern Alaska. Colin Campbell makes the case
that most of the hydrocarbons below Arctic Ocean waters will be natural gas rather than oil; I
suspect that will be the case. Even if there were some sizeable fields in the Arctic Ocean,
there would be major challenges in developing those fields due to the harsh conditions of the
Arctic Ocean. That would limit the amount of recoverable oil and slow the process of recovery.
My personal view is that the oil industry will be lucky to ultimately recover 7 billion barrels of oil
from offshore waters that aren’t presently producing oil. To put that in perspective, the
deepwater GOM will ultimately produce around 10 billion barrels of oil.
In terms of the ANWR, I believe the oil industry would be lucky to ultimately recover 3 to 4
billion barrels of oil there.
3). Predicting a significant US oil production increase, such as 2 million b/d, in the future has to
ignore the fact that producing fields that are presently in decline will continue to decline and
those that aren’t presently in decline will go into decline in the not-too-distant future.
The not-too-distant future decline of presently producing oil fields will be an important aspect
for the deepwater GOM. Typically, deepwater GOM fields reach a maximum production rate
within 5 years of start-up and decline at rates greater than 10%/year. I’m predicting that
deepwater GOM oil production will reach a maximum production rate around 2010 due to the
recent start-ups of Thunderhorse, Tahiti, Neptune and Atlantis. Beyond those 4 fields, only two
+50,000 b/d projects are scheduled to come on-line through 2012: Shenzi and Perdido. In the
meantime, older fields in the deepwater GOM will continue to decline at rates greater than
10%/year.
Once deepwater GOM production starts declining, I expect the decline rate to be at least
5%/year. It could easily be 10%/year or higher. That will add to the present decline for most of
the rest of US oil production.
4). If 10-11 billion barrels (7 + 3-to-4 mentioned above) of oil from presently non-producing
areas are produced over the course of the next 50 years, the average production rate would
only be ~550,000-600,000 b/d. Over the next 50 years, the decline from presently producing
fields will likely be on the order of 4 million b/d or more.
5). I hear radio talk show hosts state that since there are hundreds of billions of barrels of oil in
oil shale deposits, that millions of barrels per day can be produced if we again get rid of those
pesky environmentalists as well as problematic politicians. This illustrates how easy it is to
make exaggerated claims.
It’s questionable whether any significant amount of oil will ever be produced from oil shale. The
technical and economic problems associated with oil shale oil production are substantial. I
predict that no significant amounts of oil from oil shale will be produced over the next 20 years.
In conclusion, I think there is a high probability that after 2010, the US will not see any yearly US oil
production increases even if every last acre of the US is opened for oil development. If there are
any increases, they will be minor and of short duration. Exaggerated claims of future US oil
production potential prevent us from doing what is necessary to restructure our society to deal with
a world that will have substantially less oil.
Roger Blanchard teaches chemistry at Lake Superior State University and authored the book “The Future of
Global Oil Production: Facts, Figures, Trends and Projections by Region”, McFarland & Company.