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39 comments on The Evolving situation between Russia, Belarus and Azerbaijan

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westexas on January 9, 2007 - 11:17am Permalink | Subthread | Comments top

As someone predicted a year ago, the Russians have admitted to lower oil exports year over year, as the rate of growth in production slowed dramatically, and as the rate of increase in domestic consumption increased dramatically.

What if the decline in export capacity is accelerating, as Russia slips from showing a slight increase in production to a permanent decline in production?

"Voluntary" production cuts in Russia, just like Saudi Arabia? (Check out Leanan's headlines today)

A conservative Export Land model: http://static.flickr.com/97/240076673_494160e1a0_o.png

Note that the UK went from exporting one mbpd to being a net importer in six years.

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BrianT on January 9, 2007 - 11:32am Permalink | Subthread | Parent | Comments top

WT: A question about the oil market: Today Aramco announced that they are cutting supplies to customers (supplies already contracted for)meanwhile, the spot price of crude is falling. I would assume this action is being taken because the contract price is tied to the spot price and Aramco doesn't like the price. I would have expected that rather than cutting supplies, a negotiation would have ensued whereby Aramco's price would have risen somewhat and contracted amounts would flow. Am I right to assume this was offered yet Asian customers declined to pay more?

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westexas on January 9, 2007 - 11:46am Permalink | Subthread | Parent | Comments top

Am I right to assume this was offered yet Asian customers declined to pay more?

This is way out of my experience and knowledge.

In regard to the oil price situation, my guess--and it's only a guess--is that two things are driving the current downward spike: (1) the fact that the Nymex traders are going to work in short sleeves and (2) some hedge funds bailing out (or being forced to bail out) of highly leveraged positions. We saw something similar in the natural gas market last year, as one hedge fund took huge losses because of their speculative bet on natural gas prices.

In any case, my prediction for 2007 is that Russia will join Saudi Arabia is showing lower oil production. I have begun to wonder a little bit about somewhat of a future rebound in Saudi production. If Ghawar really is crashing, and not just declining, it's possible that overall production will fall so fast that mathematically Saudi Arabia may show some kind of rebound to a production level lower than their peak, but in any case, I think that 2007 will clear things up.

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alan on January 9, 2007 - 3:08pm Permalink | Subthread | Parent | Comments top

Right, all the recent price disputes between Russia and its former empire have been leading up to this. Why? To provide cover for Russia when it needs to make voluntary production cuts.

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westexas on January 9, 2007 - 3:34pm Permalink | Subthread | Parent | Comments top

There is no reason not to suspect that price disputes are occurring at the same time that Russia's production is falling--in fact the two would probably go together. They have already admitted to lower exports. The only question is whether lower production this year will accelerate the decline in exports.

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dissident on January 9, 2007 - 10:59pm Permalink | Subthread | Parent | Comments top

The inevitable decline in fossil fuel production is driving most of the current tension and is going to lead to much more in the near future. Judging by the current MSM (not just western) propaganda the true source of the conflicts will never be identified. I think the powers that be got caught by surprise with the pace of resource depletion. They were trapped into the same trance as the rest of the population by the endless repetition of "there are decades of oil and gas left" mantra for the last 40 years.

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sendoilplease on January 10, 2007 - 1:05am Permalink | Subthread | Parent | Comments top

Worth repeating...

"They were trapped into the same trance as the rest of the population ..."

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ThatsItImout on January 10, 2007 - 1:04am Permalink | Subthread | Parent | Comments top

Breaking News: GM places it's bet on cheaper oil, or Westexas vs. General Motors! :-)

UPDATE 1-AUTOSHOW-GM says oil price to drop, yen undervalued

By Kevin Krolicki

DETROIT, Jan 9 (Reuters) - Oil prices are set to decline sharply in 2007, dropping as low as $40 per barrel because of increasing production and a slowing U.S economy, the chief economist of General Motors Corp. (GM) said on Tuesday.

"Last year, I said oil prices would be in the forties," GM chief economist Mustafa Mohatarem told a conference of auto analysts. "Obviously, I missed that forecast by a few dollars. I think they will be in the forties this year."

In January, 2006, crude oil on the New York Mercantile Exchange was trading in the mid-$60 level, rising to a record high of $78.40 in mid-July. On Tuesday, crude oil was trading slightly under $55, the lowest level in 1-1/2 years.

Oil traders have cited forecasts for heating oil demand in the United States to average about 24 percent below normal for this time of the year due to abnormally warm winter weather.

Mohatarem on Tuesday cited rising oil production from non-OPEC economies and slower global economic growth as reasons for forecasting a slide in oil prices, a move that could take some of the pressure off the embattled U.S. auto industry.

"On the balance, the risk for oil prices is that they are more likely to go down than to go up," he said, saying one Wall Street forecast for $100-per-barrel oil had convinced him that the market was peaking.

"This morning the price is down to $54, so we're on our way to $40," he said.

http://yahoo.reuters.com/news/articlehybrid.aspx?type=comktNews&storyID=...

In a somewhat related story, GM showed it's "Volt" a series hybrid (although they don't like to call it that) showing a real world car that could be revolutionary, getting 100 plus miles per gallon in mixed used, and infinite onboard fossil fuel mileage in local around town driving, due to the electric drive (the cars wheels are never driven by the fossil fuel engine, used only as a range/performance enhancer by keeping the batteries charged)

It is a stunning piece of technical work, EXACTLY the car that the "Plug hybrid" supporters have always known has been possible for years, but is at least 3 to 5 years away, if ever. The combined weight of projections from General Motors, ExxonMobil, the Department of Energy's EIA, and CERA mean that no one in the executive suites are in a hurry on the effort needed to reduce energy consumption. And the American public and press seem just as uninterested, as the Volt showcar was not even featured on most national news coverage of the North American Auto Show, instead pushed off center stage by a new flashy Rolls Royce with a push button umbrella compartment and a Ford minvan with an artificial "electronic fireplace" and the full assortment of mobile hotel electronics, done up in art deco pastel colors (it was an atrocity, to put it mildly, but the crowds loved it...:-(

Oh well, a few thousand more troops in the burning sand and the road goes on forever and the party never ends,,,,,

Roger Conner known to you as ThatsItImout

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Sparaxis on January 10, 2007 - 10:25am Permalink | Subthread | Parent | Comments top

I was on a panel with this gentleman (the chief economist of GM) about 18 months ago discussing US energy security and Chinese oil demand. Privately, between sessions, I engaged him in discussion about oil depletion, peak oil, and alternatives, and he was--to put it bluntly--the economist's economist in his thinking. He said "There's something about energy that makes even sane people crazy talking about it", "Oil is just like any other commodity", and that "when oil gets to a certain price, we will switch to alternatives", denying that declining oil supply might create any problems. I asked him where the energy would come from to produce those alternatives (having just shown the assembled conference that for China to reach an E25 blend target would require 21% of its arable land), but he wasn't accustomed to thinking in those terms. To him, the input was nothing more than financial cost, which he argued would be feasible in a regime of high oil prices. So I reprised the Simmons bet with him for 2010 (the one he did with the NY Times columnist), and I fully expect to be paid. So despite GM's nod to alternative-powered vehicles with their concept cars, I truly doubt they are actually convinced of a peak oil crisis any time in the future.

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nth on January 10, 2007 - 2:39pm Permalink | Subthread | Parent | Comments top

Isn't it possible that Saudi Arabia can hide their production woes in 2007 behind the fact that there is little demand for them to produce at 10mbpd?

Due to market speculators, it is possible that 2007 will not see new highs, so SA will not produce more.

I hope you are not saying 2007 will definitely see Saudi Arabia force to go all out as they have done in 2005.

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mbkennel on January 9, 2007 - 12:08pm Permalink | Subthread | Parent | Comments top

What's the point of a long-term contract if one party can change its mind?

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doug fir on January 9, 2007 - 11:04pm Permalink | Subthread | Parent | Comments top

This is from the BBC

http://news.bbc.co.uk/2/hi/business/6243573.stm

"However, Russian Energy Minister Viktor Kristenko said the row with Belarus which led to the pipeline closure constituted a "force majeure" - which means that the events are beyond the country's control and it is free of its obligations."

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Darwinian on January 9, 2007 - 3:23pm Permalink | Subthread | Parent | Comments top

Am I right to assume this was offered yet Asian customers declined to pay more?

Brian, I don't think you can assume that at all. All this has to do with the current OPEC production cuts. Saudi is leading the way in production cuts. According to the EIA they produced, crude only, 8.8 mb/d in both November and December. http://www.eia.doe.gov/emeu/steo/pub/3atab.html

Those contracts go back several months but the cuts are more recent. They simply had to cut some of their promised deliveries if they were to keep their commitment to OPEC to cut production.

However Saudi Arabia began cutting production long before they were obligated to by the OPEC cut agreement. They produced only 8.8 mb/d in October, a month before the OPEC cuts were scheduled to go into effect.

Okay, they were under no obligation to OPEC to renege on their promises to Asian customers in October. Yet they produced the same amount of oil before the cuts went into affect as they did after the cuts went into affect.

Is it any wonder why some of us doubt the word of Aramco? But I can't say as I blame them. They have the perfect cover now. They no longer must claim that they have oil but no customers. They now can say "we have customers but are obligated to our commitment to OPEC to cut production.

Another point. The Saudi price of oil is not directly tied to the NYMEX. It is more closely tied to the Oman/Dubai crude price.

The most important element of formula pricing is the identification of the reference or benchmark crude. Brent, WTI and Dubai-Oman are the main crude oil benchmarks of the current oil pricing system. Nearly all oil traded outside America and the Far East is priced using Brent as a benchmark. WTI is the main benchmark used for pricing oil imports into the US. Dubai-Oman is used as a benchmark for Gulf crudes (Saudi Arabia, Iran, Iraq, the UAE, Qatar and Kuwait) sold in the Asia-Pacific market.

http://www.mees.com/postedarticles/oped/v49n37-5OD01.htm

Ron Patterson

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BrianT on January 9, 2007 - 5:18pm Permalink | Subthread | Parent | Comments top

Darwin: Thanks for the info re Saudi crude pricing.

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Hothgor on January 10, 2007 - 12:09am Permalink | Subthread | Parent | Comments top

So KSA has been producing 8.8 million bpd for the last 3 months, but are supposed to be experience a pervasive, always present decline of 8.8% year over year? I guess next your going to tell us that that 8.8% decline can occur only in the first 9 months of the year and still be valid :P

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expat on January 10, 2007 - 8:26am Permalink | Subthread | Parent | Comments top

No - they are experiencing a decline in existing fields (according to reliable sources - you know, people actually responsible for what comes out of the pipeline at Aramco). They are also bringing a series of new and new/old projects on-line (edit- or in the case of old/new, reactivating old projects).

The discussion concerns the pace of acknowledged current Saudi decline, new production in the short term, anticipated decline, and anticipated new production in the longer term.

Seeing as a few of those numbers will only be known in the future, the debate tends to be one of forecasting, if not prophecy.

Personally, I don't think the Saudis are ever going to go beyond 12 mbpd, much less 15 mbpd, but that is merely my opinion - plus that of a certain Saudi who would be expected to be in a position to know something about the basis for such forecasts. (OK, to dispel the suspense - he is Saddad al-Husseini, the former head of production at state-owned Saudi Aramco.)

It won't surprise me much if Saudi Arabia never goes above 10 mbpd ever again, though it can't be ruled out. After all, OPEC intends to defend $60 a barrel, the world's new $20 level.

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Aniya on January 11, 2007 - 12:28am Permalink | Subthread | Parent | Comments top

Hi expat,

Thanks.

Expat says:
"Seeing as a few of those numbers will only be known in the future, the debate tends to be one of forecasting, if not prophecy."

In my last set of questions (Jan 3), to WT Jeffrey and Robert R, (and after asking, I unfortunately was unexpectedly away for several days)...I was trying to get at something like this:

What - exactly (specifically) - is the description of the "data" that, if it were known, would settle the question? And, could someone please just set this out? (For the novice.)

Or...is it the case, that even with perfect "data", one could still not say something definitive that would satisfy the position Robert R is presenting, in terms of his questioning WT Jeffrey*s position?

In other words, is it the case, that having a set of numbers, for example, production to date, all information on field exploration and initial estimates, etc. (whatever else one might say) - having this, we could say - *for sure* - with what we could describe as "scientific certainty" ...what, exactly? (URR?)

That we have numbers to fit into a Hubbert model? That we can thus predict the URR?

Or, would the issue then (with "perfect data") be "no model needed - we know everything we need to know" in order to...predict, say, URR? (Is URR all we*re after?)
(Of course, it seems, even w. URR, we*d need to get into other factors about how production might look on the downside of Hubbert.)(but let*s put this aside for a minute.)

In other words, Roger C says "We*re running blind" (not a direct quote, my approximation of what he says). Okay, so, my question is: Is blind both a missing data state *and* a theoretical state? Or, simply a "missing data" state. Given data, then no quarrels?

(Or, could someone still pick a quarrel w. Hubbert?) (But they*d be grasping at straws, or ...we can bring in the other Hubbert-bolstering models to make the case...)

So, it seems we should be able to reach a consensus position on what is an accurate statement to make...?

Something like this: Just as an example: (Fill in the blanks):

"---If we knew X, (details on what X consists of)
---Then, we would know...Y.
---Which, when place into models of consumption A,
gives us the following implications: (whatever they may be). The models have these limitations...(whatever).

But not knowing this crucial X set, we can look at other factors as well, such as Jeffrey*s list of "coincidences?" etc."

Yes?
Am I making sense? If not, can you please help me out here? Thanks.

PS. Which is not to minimize at all Jeffrey*s list. The list might be part of the sample statement, in either case.
PS2 for some reason, it*s not letting me use single quotes tonight and still want to post while I can.

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expat on January 11, 2007 - 5:29am Permalink | Subthread | Parent | Comments top

It makes sense as the main topic of the discussion is essentially the future, which means the unknown, though not the unknowable.

At this point though, we can start spinning into various philosophies and tangents, but to give a clear idea of how hard the future is to know, the fall weather North America and Europe have been experiencing for the last 5 or 6 months was not part of any reasonable discussion about oil consumption beforehand. And if there is a sudden turn in mid-March to -10 (either scale) weather for weeks with a meter of snow covering the ground over a continental scale, things will look very different again.

And using price as an indicator is fraught with even more problems, which is why I like to focus on concrete measures - for example, yes, Saudi Arabia, Russia, and Norway are exporting less. Why that is, and what that means, then again becomes a discussion with different perspectives.

It is easy to get lost in the game, which is why the amount of oil coming out the pipeline is a good measure (not counting the entire logistical/geological discussion) to avoid losing sight of what is going on - currently, worldwide oil production (edit - conventional, etc., etc.) is declining, and has been for more than a year by all reliable sources of information available.

My opinion remains unchanged - peak has arrived, and from this point on, that reality will be ever harder to avoid. But it is just an opinion, which means as the facts change, so will my opinion. Till now, the facts haven't changed - though if we wish to argue logistical/geological peak, that could get complicated. My opinion - the current coming logistical peak (less demand from America as its economy faces hard times seems a fair prediction) will merge fairly seamlessly with the geological peak, in a way making it hard to recognize - as it will seem that merely more investment/higher prices after an economic decline will lead to higher production just at the point where higher production becomes geologically impossible - and then I expect the arguments to last a few more years, until it is beyond dispute, the amount of oil being pumped will never again increase. I tend to avoid that discussion in general - whether we could have produced more oil 'if' is not all that fruitful in my eyes.

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smekhovo on January 10, 2007 - 2:05am Permalink | Subthread | Parent | Comments top

I don't think those customers were given the choice between taking less and paying more - I've seen no reports that would suggest that. Aramco just cut the level supplied unilaterally - they did it before while the price was still over $60/bl.

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BrianT on January 9, 2007 - 11:36am Permalink | Subthread | Parent | Comments top

WT: Two seconds after I posted I remembered that your consistent thesis is that Aramco doesn't have the ability to meet these contracts. No reply necessary.

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westexas on January 9, 2007 - 5:18pm Permalink | Subthread | Parent | Comments top

An interesting Financial Sense editorial: http://www.financialsense.com/fsu/editorials/dorsch/2007/0109.html

Most interesting thing I saw was a chart showing that Russian oil exports to non-CIS countries were down by 600,000 bpd from June, 2006 to December, 2006.

Note that total Russian and Saudi consumption (total liquids) increased by 560,000 bpd from 2004 to 2005. I suspect that we probably saw at least this much of an increase in 2006. Ponder the impact of these two countries increasing their domestic consumption by about one mbpd every two years. Note that their total liquids exports in 2005 were 15.8 mbpd. In 2005, it took all of the exports from the next seven largest exporters to equal Russian and Saudi Arabia's combined exports.

Saudi crude + condensate production will apparently be down by 1.1 mbpd by February, 2007, from the high in 2005.

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ace on January 9, 2007 - 7:44pm Permalink | Subthread | Parent | Comments top

WT,

Do you or anyone else know what crude oil inventory levels are in China?

I've heard that they are building up their inventories. Say they want to increase their inventories by another two months of demand in 2007. This means that at consumption of say 7 million barrels/day, they need 7 mmb/d*60 days=420 million barrels.

420mmb/365 days equals a significant additional demand of 1.2 million barrels/day. Given "voluntary" production cuts in Russia and Saudi plus China's increased demand, the net export storm could start in about Oct - Dec 2007. Expect China to be just as aggressive this year in buying oil assets as in 2006.

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westexas on January 9, 2007 - 7:47pm Permalink | Subthread | Parent | Comments top

They are building their own SPR. I think Phase One is around 100 million barrels or so, but they apparently plan to ultimately more or less match the size of the US SPR: http://en.wikipedia.org/wiki/Global_strategic_petroleum_reserves

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ace on January 9, 2007 - 8:12pm Permalink | Subthread | Parent | Comments top

The wikipedia link
http://en.wikipedia.org/wiki/Global_strategic_petroleum_reserves

says that "China has begun development on a 800 million barrel strategic reserve" "to be completed by 2008".
the source of this is http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BBDDC6EA6-C0E8-4...
and http://www.iht.com/articles/ap/2006/10/06/business/AS_FIN_ECO_China_Oil_...

Another way to estimate China's demand just for their SPR, not for daily consumption, is to assume China SPR=100million barrels on Jan 2007. This means they need an additional 700 million barrels to achieve 800 mmb target.

700 mmb/(two years Dec 2008 - Jan 2007) or 730 days = 0.96 million barrels/day. This is a significant demand increase.

How many other countries need to increase their SPRs? What about increased SPR demand growth from India, South Korea, Middle East and others?

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ace on January 9, 2007 - 8:23pm Permalink | Subthread | Parent | Comments top

Found a recent article which states that "India is a new-comer in the community of strategic oil reserve holders. It has begun the development of a strategic crude oil reserve expected to be pegged at 40 million barrels."

http://www.bruneitimes.com.bn/section/opinion/26Dec2006-4.php

40 million barrels is only about 15 days on crude oil demand in India. That's not much!

Say that India starts filling their SPR in April 2007 and takes a year. 40 mmb/365 days gives increased demand of 0.11 million barrels/day. That's not much demand but it still takes half of the North Sea's Buzzard production.

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