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Exxon Operating Results - 2002
                                    Fourth Quarter      Twelve Months
                                     2002     2001      2002     2001
Net Income
  $ Millions                        4,090    2,680     11,460   15,320
  $ Per Common Share
     Assuming Dilution               0.60     0.39       1.68     2.21

Earnings Excluding Merger Effects,
Discontinued Operations and Other
Special Items
  $ Millions                        3,790    2,869     11,501   15,528
  $ Per Common Share
     Assuming Dilution               0.56     0.42       1.69     2.25

Revenue - $ Millions               56,211   47,744    204,506  212,785

Capital & Exploration
Expenditures - $ Millions           4,025    3,863     13,955   12,311
From notes accompanying the news release:

Production totaled 1.6 billion oil-equivalent barrels in 2002, comparable to 2001, although production capacity increased. Liquids production was 902 million barrels, and gas production totaled 4.2 trillion cubic feet.

With 21.9 billion barrels of proved oil and gas reserves at year-end 2002, ExxonMobil's reserve life at current production rates is over 13 years. For total resources, ExxonMobil added 2.2 billion net oil-equivalent barrels in 2002 to the industry's largest resource base. Additions to the resource base were once again characterized by geographically diverse and high quality discoveries from drilling and acquisition of discovered but undeveloped resources. The company's total oil and gas resource base of 72 billion oil-equivalent barrels includes proved reserves and other discovered resources that will likely be developed.

Key 2002 additions were associated with successful exploration drilling campaigns in West Africa including Angola, Nigeria, Chad, and the Congo; Australia with the West Jansz discovery; North America in Alaska and the lower 48 states; the Kashagan field in Kazakhstan; and further expansions of our activities in Qatar.

[source]

Bringing the Gas Cap South: EIA Planning Assumptions

While the original oil supply found at Prudhoe and other Alaskan north slope locations is now in decline, most of the gas remains, either because the gas associated with oil production was re-injected or because it was never produced in the first place as there was no economic way to bring it to the lower 48.  With the second gas price spike in three years, the owners of that gas, Exxon, Phillips, and BP, are reviewing the feasibility of bringing it south.  Here is what they advised EIA on the relevant costs:

North Slope gas reserves are estimated to total 35 trillion cubic feet, and another 16 trillion cubic feet is expected to be found and developed [21]. Thus, a total resource base of 51 trillion cubic feet could be available to support the Alaskan gas pipeline. Gas reserves in the MacKenzie Delta/Beaufort Sea area of Canada’s northern frontier are estimated at 9 trillion cubic feet, with an additional 55 trillion cubic feet expected to be found and developed in the same area [22], providing a total resource base of 64 trillion cubic feet to support the MacKenzie Delta pipeline either independently or in conjunction with an Alaskan pipeline.

The two pipelines would bring gas to Alberta, from where it could be moved to both Canadian and U.S. markets. The MacKenzie Delta and Alaskan gas volumes transported into Alberta are expected to be 548 billion cubic feet and 1,642 billion cubic feet per year, respectively, with an additional 23 percent capacity that can be added to each pipeline through expansion [23]. Although some MacKenzie Delta gas is expected to be used in Canada to support oil sands production [24], some analysts contend that, in addition to the MacKenzie Delta/Beaufort Sea gas, other deposits will be discovered and developed along the MacKenzie Delta pipeline that can supplement the MacKenzie Delta supplies.

... The production costs of Alaskan gas and MacKenzie Delta gas are estimated to be $0.80 per thousand cubic feet and $1.00 per thousand cubic feet, respectively (costs and prices cited in this discussion are in 2001 dollars). ...  When the estimated capital and operating costs for pipelines from Alaska and the MacKenzie Delta are added to gas production costs, “trigger prices” for the projects—the minimum lower 48 wellhead prices needed to make them economical—can be estimated. For a pipeline from the MacKenzie Delta, the estimated trigger price is $3.37 per thousand cubic feet. The trigger price for an Alaskan pipeline is $3.48 per thousand cubic feet. The trigger prices are based solely on economics and do not include provisions for any type of Federal or State support.

[source]

Primary Assumptions for Natural Gas Pipelines from Alaska and MacKenzie Delta into Alberta, Canada Alaska to Alberta MacKenzie Delta to Alberta
Initial flow into Alberta 4.5 Bcf/d  1.5 Bcf/d
Expansion potential 23 percent  23 percent 
Initial capitalization  11.6 billion (2002 dollars)  3.6 billion (2002 dollars)
Discount rate  0.075  0.075
Depreciation period  15 years 15 years
Minimum wellhead price $0.80 (2001 dollars per Mcf) $1.00 (2001 dollars per Mcf)
Treatment and fuel costs $0.46 (2001 dollars per Mcf)  $0.40 (2001 dollars per Mcf)
Risk Premium  $0.56 (2001 dollars per Mcf)  $0.39 (2001 dollars per Mcf)
Additional cost for expansion  $0.08 (2001 dollars per Mcf)  $0.08 (2001 dollars per Mcf)
Construction period  4 years 3 years
Planning period  3 years  2 years

[source]


BP worker on tricycle, at least so the company says. How Green Is BP?

Now that they've got the boys tooling around on trikes, Pete would have to concede BP's greener than he thought.  What next, Sir John on in-line skates?

BP has released its 2002 results. q.v.


That Giant Sucking Sound* Again  

Kevin McCormick writes to suggest a link to a BBC piece on recent trends in Chinese auto production. q.v.  ". . . But with almost 3.25 million vehicles (1.09 million cars) sold in the massive country in 2002, 40% more than in the year before, the rate of change is blistering by any standards. . . ." 

2002 oil imports were up 15% over the previous year. q.v.

* of all the petroleum leaving the world market for China.

 


Changes in Three Year Average Oil Company Finding Costs

Region 1998-2000 1999-2001 Percent Change
United States Onshore 4.90 6.01 22.8
Offshore 9.99 6.99 -30.1
Total United States 6.47 6.39 -1.3
Foreign Canada 6.84 10.70 56.5
OECD Europe 7.43 5.51 -25.9
Former Soviet Union and Eastern Europe 7.01 3.26 -53.5
Africa 2.78 3.68 32.3
Middle East 5.61 7.66 36.7
Other Eastern Hemisphere 7.49 4.07 -45.7
Other Western Hemisphere 4.37 6.22 42.5
Total Foreign 5.26 5.25 -0.1
Worldwide 5.81 5.78 -0.6
   Notes: The above figures are 3-year weighted averages of exploration and development expenditures in current dollars per barrel of oil equivalent, excluding expenditures for proven acreage, divided by reserve additions, excluding net purchases of reserves. Gas is converted to barrels of oil equivalent on the basis of 0.178 barrels of oil per thousand cubic feet of gas.
   Source: Energy Information Administration, Form EIA-28 (Financial Reporting System).

Unconventional Future

Pete's been wondering where all the natural gas is going to come from to allow the US to burn the 35 Tcf EIA projects for 2025. A couple of years ago Pete sleuthed it out and learned EIA thought the gas will be from "onshore unconventional."  EIA is sticking to it's story in its most recent projections (Figure 18).  q.v.

The Unprescendented Rise of Onshore Unconventional Gas

But what is onshore unconventional? EIA uses the term to mean gas from low-permeability tight sand formations, from Devonian and other low-permeability shales, and from coal bed methane. Whatever it is, EIA expects it to dominate reserve additions from known fields throughout the forecast period (Figure 15).  As EIA explained in its Mid-Term Prospects for Natural Gas Supply q.v.,

The Rocky Mountain region contains approximately 35 percent (293 trillion cubic feet) of the remaining unproved technically recoverable natural gas resources in the lower 48 onshore United States.....Most of the Rocky Mountain resources (81 percent) are “unconventional”—65 percent in low permeability sandstones (tight sands), 16 percent in coal formations (coalbed methane), and a negligible amount in low permeability shales (gas shales)

The 293.3 trillion cubic feet of unproved Rocky Mountain natural gas resources are subject to a variety of access restrictions. Of that amount, 33.6 trillion cubic feet is officially off limits to either drilling or surface occupancy. An additional 57.7 trillion cubic feet of the resources are judged to be currently de facto off limits because of the prohibitive effect of compliance with environmental and pipeline regulations. Of the 202 trillion cubic feet of resources that are accessible, 50.8 trillion cubic feet are located in areas where Federal lease stipulations are estimated to increase development costs by 6 percent and to add 2 years to their development schedule. The remaining 151.2 trillion cubic feet of unproved Rocky Mountain natural gas resources are located either on Federal land without lease stipulations or on private land and are fully accessible subject to standard lease terms (without lease stipulations).

OK gas reserves are up but it isn't exactly a spike.Coal bed methane really is a rapidly developing resource: coal bed methane production from Wyoming's Powder River Basin is up about 200% over the past two years and it appears that production could grow to eventually support as much as 5 Bcf per day, or about as much as would eventually be brought from Alaska by pipeline were that pipeline ever to be built. q.v.  

But it is unclear how to get from the 1.8 Tcf from this source to the 10 Tcf EIA is projecting.  There must be 4 more Powder River Basins that EIA knows about.  A quick look at actual proved reserves, while better in the past two years largely because of onshore unconventional, is not exactly spiking upward (Figure 3). It is also uncertain whether EIA projected 2025 real gas price of $3.90 Mcf ($7.00 nominal) could pay for all the hydraulic fracturing required to get gas to flow from tight formations. Still the Annual Energy Outlook 2003 is well worth reading. q.v.

 


On the Continuing Absence of a National Energy Policy

Yet another year passed without Congressional action toward a sensible energy policy.  Dependency on foreign oil and gas grew ever greater, as did the current account deficit, while coal and natural gas continued to fuel an expanding share of electricity generation despite the consequences for the global climate.  If there was anything good to report, it may have been the hard-learned lesson that a deregulated utility industry could not trade its way out of the hole, or a paper bag for that matter. As investors licked their wounds, the US again prepared to fight for its interests in the Middle East.


US CO2 Emissions Declined In 2001

The decline was attributed by EIA to reduced economic activity during the recession, so it's hardly a policy triumph. q.v.  But at least it was a decline.

Meanwhile, the rope-a-dope about emissions intensity ratios continued to fool no one other than a few senior members of the US climate change program.  Certainly mother nature wasn't fooled, as temperatures kept rising, particularly in the Arctic*, Russia, and Europe.

Trend of global annual surface temperature relative to 1951-1980 mean.Global map of temperature anomalies for the 2002 meteorological year (Dec. 2001-Nov. 2002) relative to the 1951-1980 baseline.

  *Including damage to the Greenland Ice Sheet. q.v.


World Ultimate Recovery

The argument over how much oil remains and when supplies will peak has always seemed a bit weird.   Of course it's an important question, but is there enough good data to hazard a guess?  If so, is there a valid methodology to dress up that guess a bit? After all, in addition to what is known, we're talking about the volume of all the oil that hasn't been discovered but might or might not be there if and when someone gets around to discovering it. Whatever the problems, many have taken a crack at the answer, and the range of their estimates is pretty broad, particularly after the federal government's most recent effort.

EIA's recapitulation of the state of play in 2000.

Pete missed it when it originally came out, but thought readers would be interested in an EIA presentation on the subject, apparently made in 2000. q.v. There's lots of interesting stuff available for further reading. q.v. For example, Campbell's critique of USGS methodology q.v. or M. Lynch's critique of Campbell's methodology. q.v.


Just How Much Income Tax Do the Oil Companies Pay?

Not that much, it turns out.  True, it's a complex question, because they definitely do pay lots of excise tax, many other domestic and foreign authorities get a bite before the feds, the sample only includes the big and pretty big companies, and during the period covered by the table the oil industry went from hard times (1998) to very good times (2000) almost overnight. Still paying less than 18% after the best year in a decade or two doesn't seem too onerous.

Reconciliation of Accrued U.S. Fede 1995 1996 1997 1998 1999 2000 2001
    Consolidated Pretax Income / (Loss)                    34,233 52,808 51,453 16,017 33,837 86,702 68,246
    Less: Foreign Source Income not Subject to U.S. Tax 4,038 6,230 5,827 251 2,160 13,355 8,918
    Equals: Income Subject to U.S. Tax                   30,195 46,578 45,626 15,766 31,677 73,347 59,328
    Less: U.S. State & Local Income Taxes                440 782 785 570 486 1,497 895
    Less: Applicable Foreign Income Taxes Deducted       377 554 312 32 107 353 82
    Equals: Pretax Incom Subject to U.S. Tax            29,378 45,242 44,529 15,164 31,084 71,497 58,351
    Tax Provision Based on Previous Line                 10,281 15,834 15,621 5,332 10,902 25,032 20,438
     Increase/(Decrease) in Taxes Due To:
       Foreign Tax Credits Recognized -5,661 -6,926 -6,982 -3,563 -5,963 -9,787 -8,513
       U.S. Federal Investment Tax Credit Recognized      -97 -123 -137 -124 -98 -129 -486
       Statutory Depletion                                -70 -54 -63 -30 -8 -3 -1
       Effect of Alternative Minimum Tax                    0 1 0 -16 23 11 16
       Other                                                -868 -1,273 -1,399 -1,485 -2,068 -447 -582
Actual U.S. Federal Tax Provision (Refund)               3,585 7,459 7,040 114 2,788 14,677 10,872
Portion of Pretax Income Spent As US Income Tax 10.5% 14.1% 13.7% 0.7% 8.2% 16.9% 15.9%
Source: For all but the last line, EIA.  The last line was  computed by dividing the next to last line by the first line.

On the Relationship Between Price and Activity to Boost Supply: Natural Gas

Scatter Plot of Monthly Natural Gas Drilling Rigs Versus Wellhead Natural Gas Prices 6 Months Earlier, July 1992 - September 2001.  For more detailed information, contact the National Energy Information Center at (202) 586-8800.

Moral: two bucks per Mcf or thereabouts will get you somewhere between 250 - 800 drilling crews out looking for gas.  If you want to raise the activity level by 25% to get through a crunch period, it'll cost you somewhere between 100 to 400% more. Naturally, the extra crews only keep working as long as you keep paying.  The actual increase in supply produced by all this activity is so small that it may be difficult to discern (dry natural gas production, below left) but it works out well for the industry (below right).  

 


Renewable Energy In 2001

The Role of Renewable Energy Consumption in the Nation's
     Energy Supply, 2001.

EIA has released its assessment. q.v.  Keep in mind that biomass is primarily things like the use of process waste from the lumber industry.  The role of solar and wind remains frighteningly minute.


Joint bar association, foreign policy assn. and international law association video on when pre-emptive attacks may be used legally. q.v.

When Rumsfeld met Saddam q.v.

US military operations around the world q.v.

Given the instability of natural gas prices, Pete bets there are lots of investors in combined gas turbines who are licking their wounds about now. Hope the big banks aren't holding their paper.  What does due diligence mean anyway?

Utility commissioner survey on response to gas price spikes. q.v.

Pete missed it when it first came out, but BP reports it replaced 175% of 2002 production, which is encouraging. q.v.

Closing the barn door ... Conference on energy independence for US and Israel.  q.v.  Bit late, sniffs Pete.  Should have been working on this for the last several decades, but better late than never. .

Sandia battery breakthrough q.v.

Perle berserks out yet again. q.v.  Read what set him off. q.v.  

More on the legality of the war. q.v.

Effect of state MTBE bans on gasoline prices q.v. 

Marking to model and the dangers of derivatives q.v. 

Energy statistics, damned lies, and intervention analysis q.v.

 


More On the Mystery Why the Belgian Dentist Doesn't Want Her Money Back

Despite the dismal tanking of equity markets, the rest of the world continues to invest their savings in the US.  It used to make sense, when the bubble was still expanding, but why now with it popped? Federal Reserve Governor Donald Kohn had a go at the issue before a European banking congress:

... To be sure, developments of the past few years suggest that expectations for returns on investment were not fully realized. Still, the remarkably similar asset price movements around the globe in the past two years and the relatively modest correction of the dollar imply that investors are not having major second thoughts about the relative distribution of their savings. Moreover, judging from the fact that productivity in the United States did accelerate in the latter half of the 1990s and continues to grow rapidly, the spending financed through the deficit apparently did add to real GDP growth, even though the financial returns to capital proved disappointing. ....

It is crucial in thinking about this deficit to keep in mind that, to the extent that it reflects an imbalance, the imbalance is shared around the world. The U.S. current account deficit is two-sided: Low saving relative to investment demand in the United States necessarily implies the reverse--a shortfall of domestic demand relative to production in the rest of the world. Therefore, any adjustment that proves necessary will also be shared around the world and will not fall solely on the United States.

It is hard to imagine that present trends in this global imbalance can continue indefinitely. U.S. assets are occupying a growing share of global portfolios. At some point, reflecting both the decline of marginal returns as resources shift toward stocks of U.S. capital and other durable assets and the inevitable flagging in the willingness of investors to place an ever-increasing share of their portfolios in dollar-denominated assets, the net flow of saving to the United States will taper off. As that happens, the level of U.S. spending on foreign goods and services will have to begin to match more closely the level of foreign spending on U.S. goods and services. U.S. and foreign asset prices, including the real exchange rate, will have to adjust to close the trade gap or, from another perspective, to bring domestic demand in the United States and elsewhere into closer alignment with domestic production. ....

Are there steps policymakers can take even earlier--to reduce the possibility, however remote, that the adjustment will involve dislocations? Over the long-run, using fiscal policy to boost domestic saving in the deficit country might help, but such an adjustment would be counterproductive now, when the U.S. economy is operating well below its potential. Conversely, fiscal policy expansion in the surplus countries could be used to augment domestic demand, but any such adjustments would need to take account of medium-term goals for fiscal consolidation. Furthermore, fiscal policy adjustment cannot guarantee current account adjustment. For example, in the late 1990s, the fiscal stance of the United States switched from deficits to surplus, and the switch was only partly offset by declines in private savings, leaving national savings higher. Nonetheless, the current account deficit continued to grow as a result of the surge in U.S. investment and productivity and the associated capital inflows seeking the higher U.S. rates of return. ....

As I have emphasized, the major reason for the growing deficit has been that the United States has been an attractive place to invest, and such investment has helped foster higher productivity and economic potential at home and a more efficient use of foreign savings. No policymaker would deliberately try to make his or her economy less attractive to reduce the discrepancies in relative returns. Monetary and fiscal policy in the United States will continue to be aimed at fostering high employment and price stability and a favorable environment for growth in productivity and incomes. Surely the best way to make perceived returns more equal around the globe would be for authorities in other countries to take whatever steps might boost expected rates of return in their domestic economies. Required actions might involve policies to improve expected cyclical performance over the next few years as well as structural reforms--to increase the flexibility, transparency, and receptiveness to risk-taking and innovation that enhance productivity and growth.*

In short, the Fed doesn't know, but look out when the European and Japanese central banks take steps to boost internal rates of return.

*Pete may have been a tad too selective in choosing bits of the speech to present.  It is better and fairer to the author to read the whole thing. q.v.  It's also worth noting that dollar/euro has fallen to 1.04 since Pete first ran this, suggesting that at least someone wants their money back.


On the Desequestration of Coal

Only in America would anyone lavish funds on sequestration strategies. q.v. Instead of digging up the carbon, burning it, and then returning the CO2 back into the earth, why desequester it (er, dig it up) in the first place? Just keep it sequestered in situ and start generating electricity from non-fossil fuel sources.

[Note that despite Pete's antipathy to clean coal, Heiko Gerhauser makes a good point in the email from readers section]


EIA Releases Preliminary Mid-Term Projection

The energy future according to the EIA is more of the recent past and then some. Per capita energy consumption continues to increase, as do greenhouse gas emissions and petroleum imports. Domestic petroleum production stops declining and levels off. Nuclear and renewable fuels continue to exist, but never become important. q.v.  

Figure 6.  Energy Production by Fuel, 1970-025 (quadrillion Btu).    For more detailed information, contact the National Energy Information Center at (202) 586-8800.

Things That Didn't Go Bump in the NightOPEC

Once again the Bush administration has the Saudis to thank for what didn't happen: the fledgling economic recovery, still a tentative thing, could have been stopped dead had OPEC actually held to its announced production levels.  But it didn't, and the Saudis, who have the surplus production capacity to make price moderation possible, have again played the wise role.  Prices have largely stayed within the agreed bounds, and the stock market has started the first tentative leg of a recovery.

OPEC was correct to avoid the temptation of a quick price run up followed by the inevitable decade long price slump, as happened in the 80s.  Now it must adjust theory and practice a bit in favor of raising the production quotas to reflect the actual situation. Doing so will not be a defeat but a victory for long-term stability.


The US Climate Change Policy

US climate change policy appears to be to keep changing the climate. Here is the most recent formulation, given to the mandarins meeting in New Delhi for the "High-Level Segment Roundtable on Climate Change and Sustainable Development"  by P. Dobriansky, Under Secretary of State for Global Affairs:

"... the United States has adopted a climate change policy that is both ambitious and practical. We are committed to reduce the greenhouse gas intensity of our economy 18% over 10 years. This climate change policy will challenge the American people, our businesses, and our society without stalling our economy. .... The United States is devoting an unprecedented level of resources to this effort. Our budget devotes $4.5 billion to addressing climate change; this is an historic commitment. In fact, since 1990, we have spent some $18 billion on climate research.

What we are doing at home is only part of the U.S. commitment. We are fully engaged internationally, especially in helping developing countries address and adapt to global environmental problems. Some examples include: 

In conclusion, we are committed to a climate change policy -- one that is predicated upon the basic idea that economic growth is key to environmental progress..."  

Pete wasn't there to see if Ms. Dobriansky was able to keep a straight face. 


The German Elections: Energy and Environmental Policy

The recent German elections may mark the beginning of a true divergence between European and American energy and environmental policies.  Rudolf Rechsteiner writes from Switzerland with a report on what it all means:

Energy policy played an important role in the German elections, and it drove the Social Democrats (SPD) and the Greens to their second victory in a row.

In the summer, the chances of the governing coalition looked bleak. Then there was first the immense rainfall in Eastern Germany that provoked rivers to rise to levels never seen in history. The incumbent Christian democrats (CDU) had no concept for environmental policy and declared these issues as secondary; during the flood its leaders spent their time on vacation while Schroeder (SPD) showed an excellent performance in organizing help for people hit by the floods.

The SPD also had a winning concept on Climate Policy and for phase out of all nukes, while the Conservatives proposed to erect another 70 Nuclear Power Stations for reducing CO2-emissions - a fact that mobilized many green voters and became part of their victory (the Green managed to win 25% more votes).

Then there was the Bush policy on Iraq that many Europeans see as a rogue concept of colonial theft for oil. With his denial of war support, Schroeder won the hearts of the Germans. 

What will the new government do on energy now? The policy is comprehensive and goes in a different direction of what George W. Bush in the US does:


Energy Policy and Advertising

Years ago, in the first energy crisis, Pete was asked to review the storyboard for a series of public service ads the government was going to sponsor. He found the inevitable sunset over the gas pumps theme too clichéd and factually incorrect to approve.  It ran anyway, which shows how much power Pete had.  He thought readers might be interested by Arianna Huffington's recent efforts. q.v.  Course, Pete would spike those too, but they seem a bit more compelling. 


Fiber to the Home

Long-time readers will know of Pete's odd belief that a key to energy policy is telecommunications policy.  While there's good reason to say Congress either made, or is in the process of making, something of a hash of both in its most recent efforts, the Eighth Circuit has opened an important new front in the world of telecommunications through a decision that seemingly would allow almost anyone to provide telecom services.  The internet, with enough broadband access, could become the backbone of the local and long distance markets and the services available at home could rival or surpass those at the office. The nub of the problem is how to go that last short distance from the street into the home. 

The energy policy angle comes in when one realizes that the need to have most of the white collar world commute to work could be reduced, perhaps sharply reduced.  An important center of activity for bringing about these changes is the group of fiber-to-the-home merchants who are meeting in convention in mid-October. qv1 qv2 The Bush administration would do well to pay attention if it really wants to do something to promote energy conservation while boosting the fortunes of a particularly hard-hit technology sector.


So What Happens When the Chinese and Indians Start to Drive?

That's OK, I prefer walking and crowded buses.EIA seems to think that while many more Chinese and Indians will be driving in 2020 than of late, the absolute number won't be that great. q.v.  But imagine what would happen to oil demand if either nation took to owning as many vehicles per capita as, say, Mexico? (Perish the thought they would ever want to own as many as the US does.) While every man, woman and child in the US gets to own 8/10ths of a vehicle, or 8 'cars' for 10 people, the US will be very lucky if the average Chinese or Indian, after a half century of hard-working modernization, is content to share his or her car with 15 others. But where will the oil come from if he or she is not?

 

 

 

 

 


 

Relationship Between Strategic Reserves, Commercial Stocks, and "Tertiary Storage"

The chart shows quarterly US crude oil stocks for selected periods

The strategic petroleum reserve is filled to the brim (not shown), so it's a good time to go after Iraq right? Not necessarily. Oil prices are running 12 percent above year ago levels, and commercial stocks, as shown above, are lower than usual.  While the strategic reserve will be more than adequate for any likely shortfall, assuming the Straights of Hormuz are kept open, there are two other factors to consider: the turmoil in Venezuela (the largest US supplier of foreign oil) which has already produced disruptions in export oil supplies and remains unresolved, and, secondly, the 'tertiary storage' phenomenon.  

Assuming the lessons of 1974 remain valid, the sudden increase in tertiary storage occurs when the American people realize a shortage is developing and they start topping up their tanks far more frequently so they have the feeling of having it covered.  Since there are well over 100 million vehicles, the sudden shift of even a half dozen average gallons from commercial storage to consumer gas tanks can produce a sudden draining of primary and secondary commercial stocks, even if no real shortage has yet happened in international supply, and produces sharply higher price pressures almost immediately. This in turn means that strategic reserves must be released into the system sooner rather than later, even though most administrators have the natural instinct of not going to reserves until it can be shown there is no other choice.  

 


World Oil Consumption by Region, 1970-2020  (Million Barrels per Day). OPEC's Rodriguez Forecasts World Demand

According to news accounts, Mr. Ali Rodriquez Araque, head of Venezuela's state oil company PDVSA and former head of OPEC,  told a conference on world development that oil demand could be as high as 120 million b/d in 2020. q.v.  This is very similar to EIA's forecast of 118.6 millions b/d, shown in the figure at right. q.v. So will this growth in demand, primarily in the developing countries, be a problem? No, thinks EIA. q.v.


European Scientists Achieve Fusion Record

Whatever its ultimate promise, new developments in fusion energy research are slow to happen.  It is one of those programs not expected to produce results in the immediate future, but it receives continued funding because it may actually produce sustained, meaningful amounts of net energy sometime in the indefinite future. Then again, it may not. The US has played for decades with programs in New Jersey and Texas.  But it looks as though some of the most promising work is being done in Europe as part of the multinational effort q.v. Of course, promising means being able to produce net power for a few seconds before the awesome forces pulling the plasma apart gain the upper hand.  Every few years one group of researchers or another announce that they have managed to confine the fused plasma a little longer. For instance, the Joint European Torus produced a maximum of 16 megawatts for a few seconds in 1996. That record was surpassed this August when net power was produced for 210 seconds. q.v. The next step for everyone but the US, that is the Europeans, Russians, Canadians and Japanese, will be ITER, which will produce power in the hundreds of megawatts, but also only for short periods.  ITER is seen at the final step before the development of a demonstration fuel-cycle-self-sufficient power plant.  But none of that is expected to lead to the beginnings of real use until after 2050.  There is some chance that the US will return to the fold and rejoin the multinational consortium.


Pete's Quick Guide to US Transportation Demand

OK, it's really EIA's quick guide ... click to view the full thing

Minor changes to SUV fuel economy rules have been issued. q.v. But look how they've come to dominate growth trends in vehicle numbers:

Figure 1 - Highway Vehicle Trends: 1989-1999

So is anyone using their SUV's to carpool? Can't be too many, based on this DOT study of how people get to work, 1985-1999:

Figure 1 - How People Get to Work: 1985-1999.


Interior's Study of Remaining Resources 

... or some such*, is due out soon.  The venerable Energy Policy and Conservation Act was revived in 2000, with a provision requiring Interior's BLM, the USGS, and EIA to prepare a study of what was left and what was preventing the resources from being developed.  The EPCA calls for it to be out this month. q.v.

*Actually, the report will be given the delightfully 19th century name: Scientific Inventory of Onshore Federal Lands Oil and Gas Resources and Reserves and the Extent and Nature of Restrictions or Impediments to Their Development.


EIA's Summary of US Energy Sanctions

The United States maintains energy sanctions against several countries, including Iran, Iraq, and Libya (an oil embargo against Serbia was lifted by President Clinton on October 12, 2000). Iraq remains under comprehensive sanctions imposed after its invasion of Kuwait in August 1990. Iran and Libya are affected by the Iran-Libya Sanctions Act (ILSA), passed unanimously by the U.S. Congress and signed into law by President Clinton in August 1996. ILSA imposes mandatory and discretionary sanctions on non-U.S. companies which invest more than $20 million annually (lowered in August 1997 from $40 million) in the Iranian oil and natural gas sectors. The passage of ILSA was not the first U.S. sanction against Iran. In early 1995, President Clinton signed two Executive Orders which prohibited U.S. companies and their foreign subsidiaries from conducting business with Iran. The Orders also banned any "contract for the financing of the development of petroleum resources located in Iran." On March 13, 2001, President Bush, citing threats posed by Iran to U.S. national security, extended Clinton's two Executive Orders on Iran for another 6 months. On August 3, 2001, President Bush signed into law the ILSA Extension Act of 2001. This Act provides for a 5-year extension of ILSA with amendments that affect certain of the investment provisions.

Attempts by the United States to implement ILSA have run into opposition from a number of foreign governments. The European Union (EU) opposes the enforcement of ILSA sanctions on its members, and on November 22, 1996 passed resolution 2271 directing EU members to not comply with ILSA. On May 18, 1998, the EU and the U.S. reached an agreement on a package of measures to resolve the ILSA dispute at the EU/U.S. Summit in London, but the Summit deal is contingent upon acceptance by the U.S. Congress before full implementation may take place. 

On April 5, 1999, following the Libyan handover of two suspects in the 1988 bombing of Pan Am flight 103 to stand trial before a Scottish Court in the Netherlands, the United States modified its Libya sanctions on April 28, 1999 to allow shipments of donated clothing, food and medicine for humanitarian reasons (trade in informational materials such as books and movies is also allowed). However, all other U.S. sanctions against Libya remain in force. On February 1, 2001, one suspect was convicted by the Scottish court, while another was acquitted. The U.S. and British governments both said that they still expected Libya to accept responsibility for the murders, which Libya has said it would not do.

[source]


Is the UK in a Gas Fix?

Pete warned you some months ago that the UK's energy policy was far too reliant on natural gas, and that the North Sea was not going to be up to the task.  These views have now received partial confirmation from the Royal Academy of Engineers. q.v.  Meanwhile, BP is showcasing its UK solar solution -- a building that, at enormous expense, gets 10% of its energy needs from the sun. q.v.  Good luck going that route in the UK.

Note that Pete does not maintain there isn't enough gas for the UK to rely on gas turbines, just not enough domestic gas.  Russia and Kazakhstan have enough for all of Europe for many, many decades, but it will take some time to get it all hooked up and flowing.


For the Record: US Reserves

The early report shows that 2001 was a pretty good year for reserves, particularly for natural gas.  The oil industry certainly responded to higher prices with far higher activity levels, and a large portion of this activity resulted in a good year overall. q.v. The context for assessing the difference appears below.


Future Production from the Gulf of Mexico

Roger Blanchard has sent in an interesting analysis of future production trends for the deepwater Gulf Of Mexico production under several cases.  He writes from Sault Ste. Marie, Michigan as follows:

"{The three figures show] oil production (crude & condensate) for the mature producing area of the US lower 48 states (Figure 1) and two views of historical and projected production for the deepwater (>1000 ft) Gulf of Mexico (GOM) (Figures 2 and 3).  These graphs for deepwater GOM oil production assume ultimate recoveries of either 10 or 15 Gb.  I would expect claims that the ultimate recovery for the deepwater GOM will be higher than 15 Gb but I think 10-15 Gb is a reasonable expectation of ultimate recovery. I've separated the deepwater GOM productionfrom the rest of the U.S./48 production (Figure 1) to give a clearer picture of production from the mature producing area of the U.S./48. Production from the deepwater GOM started in earnest in the middle 1990s."

"Oil production from the deepwater GOM increased about 621,000 b/d from 1997 through 2001 and it should be above 1 mb/d this year. Oil production from the U.S./48, excluding deepwater GOM production, declined about 908,000 b/d from 1997 through 2001. The graph for the 10 Gb EUR (estimated ultimate recovery) (Figure 2) has a peak in 2008 at about 1.7 mb/d. The graph for the 15 Gb EUR (Figure 3) has a peak in 2010 at about 2.1 mb/d. At least 25 deepwater GOM fields will come on-line from 2001 through 2007 with at least 8 of them reaching a peak production level above 100,000 b/d. The Crazy Horse field will reach the highest production level with an estimated peak production of 250,000 b/d."

"If deepwater GOM oil production goes into rapid decline after ~2010, it will make it difficult or impossible for U.S. oil production to increase in the future even if the Arctic National Wildlife Refuge  (ANWR) is opened to oil production. It appears unlikely that ANWR will be opened and producing before 2010 and by then, increasing oil production from ANWR will be largely or wholly negated by decreasing production from the deepwater GOM, as well as that from the mature Alaskan North Slope and US lower 48."


Money For Nothing and Dollar/Euro Parity

Somewhere in the back of your mind, note two things:  the Federal Reserve lowered the real cost of money to nothing, and the Euro eased across parity with the dollar to close slightly north.  It will be interesting to see if the short-term money flows that drive the dollar up or down can be kept on this side of the Atlantic by the prospect of better stock prices. Because if stocks do not start to lurch upwards quickly, it certainly won't be short-term rates that keeps the Belgian dentist's money here.*  [Also see story above]

*Of course, not everyone thinks Europe is much of an investment just now. q.v.  Maybe she doesn't either.


The US Elections

Pete had hoped to provide some insight into the meaning of the US elections for energy policy, but can't think of anything useful to say. Energy wasn't an issue. While the political class had been, and no doubt still is, considering some relatively minor changes, they did their best to bury any public consideration of the issue.  They buried it so deep no one is now sure whether energy policy will again see the light of day anytime soon. True, for many people the possible war with Iraq was about oil, but even that issue wasn't really fought out, and it's fair to say the electorate didn't see it as an oil issue.  The consolidation of power in Republican hands undoubtedly means there'll soon be more talk of drilling Alaska, plus a few more obvious changes in emphasis, and perhaps even a watered-down energy bill eventually, but it would be hard to trace any of that back to the election.  Americans seem content to drift along with a minimalist approach to energy.

Perhaps the politest thing to say about the election was what the Washington Post said in an editorial: " ... the term 'election' -- with its implications of voter choice and real competition -- seems almost too generous to describe what happened on Tuesday. Voters went to the polls, and they cast ballots, and they did so without coercion. Yet somehow, at the end of the day, 98 percent of House incumbents seeking reelection won -- and by margins that suggest that many of the races were never serious." q.v.


Natural Gas Prices Enough to Increase LNG Imports

... or so says the Algerian energy minister. q.v.  Pete isn't quite sure what happened to the US energy bill, but if it still exists, and if the government is still going to game prices to hold the $4 mmBtu level required to build the pipeline for arctic gas, then the Algerians are clever to suppose they can get in on the game. May get a bit expensive for the rest of us. 

EIA has also published a recent piece on LNG. q.v.


Exxon, BP, and Thunder Horse

One of the really big plays in the deep Gulf of Mexico is about to be developed. The two Thunder Horse (also known as Crazy Horse) fields, about 150 miles southeast of New Orleans with over a mile of water above them, will be developed jointly by BP and Exxon using the world's largest semi-submersible.  Production will be begin in 2005 and is expected to reach a quarter million barrels of oil per day and 200 million cf of gas. (See Roger Blanchard's analysis below).  


More on who provided Iraq with WMD, reportedly from the redacted portions of the Iraqi UN declaration. qv1, qv2.

Who's to blame for Saddam having anthrax? q.v. Who's to blame for Saddam having smallpox? q.v. Who armed Saddam? q.v.


EIA Issues Its Report Card

Predicting the future is never easy, whether one's tools are extraordinarily complex mathematical models or a few sticks thrown on the dirt.  EIA, which prefers the former, has issued its own report card: good job overall on supply and demand; prices are harder to get right; consistent small underestimates of electricity demand, and natural gas wrong more often than it should be.  q.v.  Pete's view:  B+, well worth the money, needs to be slightly more adventuresome.