February 2008 Archives

I will follow my colleague Larry Chorn's posting about diesel with one of my own. The trends he writes about in this post are showing up already in diesel prices.

Many analysts have been projecting for a long time that the world oil markets were about to enter the age of dominant diesel. They cited numerous long-term factors: the growing use of diesel in Europe; tighter sulfur rules, which has the effect of lowering refinery yields and making some refining capacity uneconomic; the fact that diesel consumption for road transportation often grows before gasoline consumption in a developing country; and the growing number of people flying, which increases demand for jet fuel -- which, like diesel, is part of the distillate pool.

Last Fall I chaired a panel discussion on refining capacity and capabilities at Platts' conference, European Refining Market: The diesel demand/supply crunch. The meeting, held in Brussels, is where I learned about the impending shortage of European diesel refining capacity.

It seems there are no intentions to build new refineries or significantly increase capacity in existing ones in Europe. Several speakers described the trend of transportation fuel further towards diesel from reformulated gasoline. European industry's perspective is that Russia will continue to improve its diesel quality and maintain exports to meet Europe's needs. One hopes that Russia holds the same perspective.

Overzealousness recently backfired on the peak oil crowd after Platts investigated the actual data behind their claims that the first generation of deepwater Gulf of Mexico fields has failed to fulfill expectations.

Challenged on that assertion to provide backup data, peak oil guru Matt Simmons was unable to comply.

Yesterday, the NYMEX WTI crude oil price settled at $100.74 per barrel, a new closing high and the peak of a remarkable price run-up of more than $12 per barrel since the first of February.

NYMEX crude futures Wednesday rocketed above $101/barrel for the first time, despite ample US crude and product inventories.

The general financial news media, playing their favorite game of "pin the reason on the rally," found a new culprit: the minutes of the last Federal Reserve meeting.

Of course, since there was no smoking gun -- such as Ben Bernanke saying "crude is real cheap, I think everyone should go out and buy some" -- in the minutes of a meeting that occured weeks ago, the headlines hedged a bit, saying that crude hit a new record "after" the minutes were released.

The US Department of Energy has continued to fill the Strategic Petroleum Reserve with light, sweet crude oil as futures prices are rocketing over $100/barrel, while rebutting criticism by saying that the purpose of the reserve is not to protect refiners against high prices, but to be the last resort in case of a serious supply emergency.

But then Friday the DOE said that the SPR could be made available to ExxonMobil if the company faces a severe supply shortfall due to Venezuela's decision to stop selling it oil...

Does anyone see a double standard?

The Bahamas is well-known as a resort and cruise-ship resting spot, located just 80 miles off the Florida coast. But for crude and fuel oil traders, the most important part is a terminal in Freeport, valued for its 20 million barrels of storage, strategic location and deep-draft jetties.

The Bahamas Oil Refining International Limited, or BORCO, is a subsidiary of the Venezeulan state-owned oil company PDVSA. It was built by Chevron in 1968, began operation in 1970 and was sold to PDVSA in 1990. And just this week, it was purchased by a private equity company named First Reserve, and will be operated by global terminalling giant VOPAK.

There are almost 2,000 people here at the annual conference of Cambridge Energy Research Associates in Houston this week, with "oil day" kicking off the festivities. Here are some recurrent themes/interesting things being said.

We continue to provide readers of The Barrel with our estimate of how much crude capacity in Nigeria is out of commission as a result of civil strife, with estimates also on the amount that has been shut in for maintenance.

Platts' chief Africa correspondent, Jacinta Moran, reports from Cape Town that the latest set of numbers definitely is not showing signs of improvement. In her most recent report, a month ago, Jacinta estimated that 708,000 b/d was still shut in due to community unrest and operational problems such as pipeline damage, etc. that marked an improvement from August estimate of 978,000 b/d. But Platts is now revising upward its estimate of shut in production to 1-mil b/d.

We wrote the other day about criticism leveled at Cambridge Energy Research Associates' relatively optimistic view of world oil supplies from followers of the Peak Oil theory. The latter group has now thrown down the gauntlet.

The size of the bet offered up to CERA is $100,000, and the base for it is the question of whether global oil supplies will actually rise by 2017, as CERA projects, or peak and begin to decline by then. The challenge came from members of the association for the Study of Peak Oil & Gas (ASPO), and also challenged CERA to a "public debate on the issue of peak oil."

You've heard it before: there hasn't been a new refinery built in the US in the last 175 years. Actually, it's closer to 32 years or so, but the repeated references to it, as if some giant opportunity was squandered by the industry, don't go away.

If nothing else, the developers of Arizona Clean Fuels Yuma are certainly determined. They received another setback this week, pushing the development of the plant back again. But if they're getting near the end of the road in trying to build the first US refinery since the Garyville, La. refinery was opened back in the 70's, it doesn't show.

Years ago, one of my mentors at Mobil E&P politely listened to me as I extolled the financial possibility of "just build a pipeline through three countries into [the un-named country] and monetize the discovery in three years!" Then, as a result of his 40 years of industry experience, he carefully and graphically explained to me how natural gas volumes move through cross-border pipelines and "magically" disappear, leaving the producer with a fraction of the annual revenue anticipated and the end-user partners scratching their heads wondering where their gas supplies went.

There is an urgent need on the part of analysts, think tanks, politicians and so on to say something about virtually everything. That is the only explanation for the statement yesterday by Daniel Weiss, Senior Fellow and Director of Climate Strategy at the Center for American Progress, in the wake of ExxonMobil's enormous fourth quarter profits.

The Center was set up by former Clinton White House Chief of Staff John Podesta. The idea behind it was to match the conservative think tanks that have been partisan yet primary intellectual generators of ideas for many years: the Cato Institute, the Heritage Foundation, etc. Podesta's view was that the American left had nothing similar.