Of China, Strategic Petroleum Reserves, and "them again"
Posted by Heading Out on November 15, 2006 - 10:52am
Topic: Supply/Production
Tags: cera, china, russia, spr [list all tags]
In the meantime, the election is over, and a small, cynical, part of my mind wonders how long it will be before we start adding more oil to the Strategic Petroleum Reserve. Last year's Energy Policy Act authorized increasing the size of the reserve to 1 billion barrels. The current reserve is made up of 273.5 million bbls of sweet and 415 million bbls of sour, for a total of 688.5 million, as of November 3rd. However, over the past few months there has been very little activity. The reserve had been filled to its initial target of 700 million barrels by August 2005, but then, following Katrina there was a period where it proved its intended value:
On August 27, 2005, Hurricane Katrina entered the Gulf of Mexico and began a path of destruction that caused massive damage to production platforms, terminals, pipelines, and refineries in states along the U.S. Gulf Coast. Because of the severe disruption to petroleum supplies, Secretary Bodman immediately approved six requests for emergency loans of crude oil from the SPR and President Bush directed that a drawdown and sale of crude oil be conducted. Ultimately, 9.8 million barrels were loaned and 11 million barrels were sold. Because the loaned oil is repaid with similar quality oil, plus a negotiated volume of premium barrels, 10.3 million barrels were scheduled to be repaid. By late Spring 2006, repayment of 8.6 million barrels had been completed. However, delivery of the remaining 1.7 million barrels was deferred at the President's direction as part of his Four Part Plan to Confront High Gasoline Prices. The final 1.7 million barrels will be delivered during Spring 2007.One can thus anticipate, that purchase coming in the spring. However, in the President's message in April, the deferral of purchases was meant only to be temporary.
The President has directed the Department of Energy to defer filling the Reserve this summer. Our Strategic Reserve is sufficiently large to guard against any major supply disruption over the next few months. Deferring deposits until the fall will leave a little more oil on the market - and when supplies are tight, every little bit counts.
The example of Katrina provides a justification for the SPR's, and this has, perhaps, not been lost on the Chinese, who have suffered a more-than-normally-vicious typhoon season this past year, including Saomai and Prapiroon. They had initially planned to start filling their SPR about this time last year, but hesitated because of concerns that the price was high and that buying for the reserve would drive prices up further.
They have obviously now changed their minds, and have been buying for over a month, but the size of the reserve anticipated may now be considered too small. The current size is sufficient for about 7 days, though this is projected to increase to 10 days.
China's first batch of the four strategic petroleum reserve bases are designed to be in Zhenhai (Ningbo of Zhejiang Province), Huangdao (Qingdao of Shandong Province), Daishan (Zhoushou of Zhejiang Province) and Dalian (Dalian of Liaoning Province). The other three reserve bases are expected to be completed by 2008. By then, they will form a total petroleum strategic reserve capacity for consumption of more than ten days.A second set of sites is now in process of being identified.
Now that the current sites are being filled, there remains the issue of price,
The Ministry of Commerce issued the statistics on increase of major import commodities of China in the first half. Of them, import volume of crude oil increased 15.6% year on year, and the value surged 53.9%; while import volume of oil products went up 16.1%, and the value up 71.8%. According to the latest statistics from the General Administration of Customs, the average price of import of crude oil was 452.9 US dollars/ton in the first half, up 33% year on year, and the average price of imported oil products was 423.3 US dollars/ton, up 48%.But the fact that China is now pressing ahead suggests that they might be recognizing that, as the supply volumes shorten, there might not be a time when the price is cheaper than now. Their current source is apparently Russian oil, with some 3 million bbl already stored, about 10% of that available. It is expected that they will have another 4.4 million bbl in storage by mid-December. There will be additional space available in the beginning of the year.As the second biggest oil consumer in the country, China's dependence on import of oil products is 40%. Prices of oil, as a basic energy, have influenced the prices of the whole industrial sector, and will finally affect the GDP growth.
A second batch of tanks at China's second reserve site in Zhejiang province should be ready by the end of the year, a newspaper reported on Monday.The actual rates at which the SPR is filled is giving rise to some concern. There is also some worry that the Chinese will use their reserve in a more commercial manner. But this is where my opening question regains a bit of relevance, since if the US starts to fill it's SPR at 100,000 bd, and the Chinese start filling theirs at 100,000 bd, and this is added to current incremental growth in demand, and the change in purchasing practices of those nations now in depletion, then the drivers to higher gas prices may already be falling into place.More tanks are also planned for Qingdao in Shandong province and Dalian in Liaoning province as part of a first phase of a reserve plan, due for completion in 2008, that will have a total capacity of 16.2 million cubic metres (102 million barrels) -- or about a month of imports at current rates.
Oil traders fear China will have to increase imports by as much as 100,000 barrels per day (bpd) in order to fill the reserves. That would be a relatively small volume in global terms but represent a 3.4 percent rise from current imports.
It is also worth noting that the Chinese are getting their additional oil from Russia, and that they are paying for it from their dollar reserves. This leads on into questions about Russian exports, but that would get us into another lengthy story, that is better left to another day.
In similar fashion the CERA inability to distinguish between what they call reserves, which includes
Those who believe a peak is imminent tend to consider only proven remaining reserves of conventional oil, which they currently estimate at about 1.2 trillion barrels. In the view of many petroleum geologists, this is a pessimistic estimate because it excludes the enormous contribution likely from probable and possible resources, those yet to be found, and plays down the importance of unconventional reserves in the Canadian oil sands, the Orinoco tar belt, oil shale and GTL projects. CERA believes the global inventory is some 4.8 trillion barrels, of which about 1.08 trillion barrels have been produced, leaving 3.72 trillion conventional and unconventional barrels, an order of magnitude that will allow productive capacity to continue to expand well into this centuryand their reliance on un-named new technologies, also requires a much lengthier rebuttal - although it will largely be a repeat, as their press release and report appears to be, of ground that has been plowed before. Well, I am sure that we will return to this again, before long.
That's all.
Thanks Heading Out for this great post. To westtexas, please continue to be a contributor of the TOD. You are one of the contributors I have come to respect most.
On the CERA report, I think that there is no doubt that peak oil is now firmly on the agenda. This in of itself is a great accomplishment. The TOD and others have all played a part. It is my fond hope that TOD continues to do so.
It is thanks to the TOD, ASPO and others that care about this issue that I took the time to author a teaching case on this subject for an MBA class (it is as far as I know the first to explicitly do so). Still, it is for me just a beginning in trying to play my part and there is still a long road ahead but it is worth traveling.
Despite Hothgar and others like that, I will continue coming to TOD
I do wish there were an ignore button on TOD. You would be the first to whom I would apply that button.
Oh, hint - if you want to understand how useless the small fields are, go wade through Matthew Simmons' presentations. The data is in there. I'm not going to assist you further or repeat everything here because you do not deserve it.
But I can see how you MIGHT confuse the two :P
He isn't behaving like a troll in this thread so its best to let bygones be bygones...
Never forgiving or giving a second chance gives no room for improvement.
OTOH, this is a tough site and unless someone appeals for a "learners permit" as they struggle with the complex issues here, they should be judged by the same standard.
And I miss WesTexas.
Best Hopes,
Alan
The conspiracy theorist in me wants to think that the Saudis were pumping unsustainably to keep their Bush friends in control of Congress, but perhaps this increased supply is just the result of the increased drilling worldwide in response to 2004-2005 prices in conjunction with a few megaprojects (Caspian, etc.) coming online.
Is this a final surge to the late 2006-early 2007 peak?
Have I been not paying attention here at TOD or has there been a lack of discussion about this decline in price and what it might mean for a blip in supply (i.e. ultimate peak right now?)
The trailing data looks like a plateau, but this price decline suggests that the fat lady is still singing ...
... and the tune? Gotterdaemerung baby!
Cassandra
Not trying to make any big point here other than there has been no surge in production, possibly no actual increase at all. We'll have to wait for revisions, and even then any increase or decrease will be almost negligible.
Though a few million barrels may not seem like much, and the oil is 'loaned' so to speak - that is barrels out are replaced by barrels in, it is not a cash transaction - what I find interesting is that the refilling was either pretty much finished (without the extra compensation) before Bush stopped it, or what he was stopping was something else.
It strikes me more over time how murky many subjects are becoming - for example, if the Saudis had tankers of crude just brimming over with nowhere to go, and Congress had already authorized the filling of the SPR, then why not simply place a phone call to help the Saudis out? (And what happened to those tankers, anyways, now that the Saudis are cutting production?)
So many pieces just don't fit on the puzzle table we are using, somehow.
This is not a conspiracy framework, fun as they can be, but something much more fundamental. As an example - how important is oil in direct GDP - that is, if you actually reduce America's oil use by 500,000 bpd through pure efficiency gains, how does that affect how people view the economy using various numbers? Obviously, crude is generally imported, which detracts from GDP, but the sale of gasoline is considered part of GDP.
Somehow, using perspectives of what was considered rational in the past doesn't work very well anymore. And I think a 30 year old is going to be astounded by how little of their current framework will apply in the next ten years - either inflation or deflation, they have no real experience of either, much less an awareness of what that means. Or of extreme price swings within fairly short periods of time.
As a side note - German gasoline prices fell over the last few months, spiked a touch around the election, and are now seemingly stable at under $4 dollars a gallon - roughly 1.20 euro a liter, from lows of around 1.15 euro a liter in the last few weeks. There is a worldwide market in gasoline, and the American prices were not an island.
Really? I make it $5.81 per US gallon. As calculated here. UK is slightly more expensive at $6.14.
I also spent some more time at the SPR DOE site - there is still no information about returned oil, that I could find, and that the numbers seem a bit fuzzy - the 11 million barrel drawdon seems to be from the SPR itself, but the 'loan' is in a separate category.
This seems to be more of that unique brand of American accounting - what is borrowed actually adds to future wealth, so that means debts are actually assets.
To get back to my basic definition of how to measure peak oil, it is only what comes out of the pipeline that matters, nothing else. And in this case, the SPR is down more than 11 million barrels plus whatever was returned. This means that refilling it to it previous amount requires more coming out of the pipeline than the number which seems most commonly bandied about by the DOE itself.
You are left to speculate whether the oil won't actually be 'repaid,' thus spreading some pocket change around without anyone noticing it in the shuffle. Or maybe there will be a mysterious leak discovered in six years, which accounts for that now forgotten missing amount. But this enters in to the realm of graft and corruption, which is only a historical footnote in American history, right? Teapot Dome is so much more fun than Enron, at least in the history I learned - the link at http://en.wikipedia.org/wiki/Teapot_Dome_scandal is pretty good. And yes, this is how government works, including this concise summary - 'In return for leasing these oil fields to the respective oil magnates, Fall received gifts from the oilmen totaling about $404,000. It was this money changing hands that was illegal--not the leasing. Fall attempted to keep his actions secret, but the sudden improvement in his standard of living prompted speculation.' Nothing about the SPR oil 'loans' is illegal at all, only obvious personal enrichment is illegal. Getting a job at company X or a consultant contract 6 years after leaving government service is perfectly normal, after all. And anyone even hinting at corruption will just be dismissed as someone who has no experience with such honorable, dedicated public servants - except for the occasional Air Force tanker contract -
http://www.foxnews.com/story/0,2933,138616,00.html
'Boeing Co.'s (BA) former chief financial officer pleaded guilty Monday to illegally hiring a top Air Force procurement officer who has admitted she gave the company preferential treatment on a $23 billion tanker contract.
Michael Sears (search), 57, pleaded guilty to a single count of aiding and abetting illegal employment negotiations.
Sears faces up to five years in prison when he is sentenced on Jan. 21, but his lawyer, James Streicker, said that under federal sentencing guidelines Sears most likely faces, at worst, a prison term of zero to six months.
Sears admitted that he offered Darleen Druyun (search), 56, of Vienna, Va., who was one of the Air Force's top contract officers, to a six-figure executive position at Boeing while she was reviewing whether Boeing should get a $23 billion contract to provide new refueling tankers to the Air Force.
Druyun, who was sentenced in October to nine months in prison, admitted that she provided an inflated price to Boeing on the contract as "a parting gift" and that she had helped Boeing obtain inflated deals on previous contracts, while at the same time she intervened to get her daughter a job at the company and later to keep her from being fired by Boeing for poor performance.'
Please notice that the link is from Fox, for those who feel that conservatives or criminals are unfairly depicted in the media. I may further add, look at the penalties these people are facing for trying to defraud American citizens of literally hundreds of millions if not billions of dollars. If only they had been caught with a joint or some crystal meth, the penalties would have been higher, but that is another tangent entirely.
the last time I paid <£2 a gallon was back in the early nineties here in the UK (the current US price if <$3).
I would postulate that while the US has 'spent' it's oil wealth on bigger and better (with emphasis on the bigger!) the UK and Europe as a whole have -via taxes- spent it on the so called 'European Social Model' -i.e. distribution of tax wealth to create a fairer kinder society, etc. In addition there have been numerous 'asset price bubbles' since the early 90s as all this wealth sloshes around the system, the latest being the global property bubble.
-I would also think that both models are about to come to an end. Perhaps Europe is a little better prepared for this as the high fuel tax regime has made us much more aware of the costs of energy than the US -but it ain't gonna be pretty...
Regards, Nick.
Perhaps it makes sense that an administration full of oil and MBA types would see the advantages of not only the strategic, but also the tactical, so to speak?
http://www.fossil.energy.gov/programs/reserves/spr/index.html
The DOE actually has an office of Fossil Energy!
HO
Yes, capacity is what I want to clarify.
Robert R. said:
"11.5 million barrels off of 700 means it is 98.4% full. That is nearly refilled. "
So, this suggests that capacity is 700, while the Dept of Fossil Energy(!) is saying it's 727.
Any idea which it is?
700 million barrels was the authorized limit before the recent Energy bill (now 1 billion barrels).
With the new authorization, once refilling starts it should go to 727 million barrels and then wait as a 5th SPR is set up and/or the existing ones enlarged.
IMHO, the small heating oil SPR should be enlarged and we should have at least 10 million barrels of product (heating oil, VLS diesel, gasoline) in the SPR. located in several critical areas with pipelines (say Phoenix, Dallas, Atlanta, Chicago, New Jersey).
Best Hopes,
Alan
So, since 2005 we could have been filling up to 727. Hmh.
From information Shell has released on its tar sands projects, development costs have nearly doubled and the cost of production gone up by the same percentage, largely due to inflation in the energy/industrial sector. This same scenario will also be true of oil shale and deep water, barring some great technological breakthrough.
Problem comes when very high prices for conventional oil cause severe damage to the economy, thus cutting off capital for energy projects (especially when interst rates & inflation go sky high due to excessive debt of US) and cutting off tax revenues for government energy projects. For example, any tax credits for energy projects that spur conservation and devolopment are of no use to companies that are losing money or going bancrupt in a failing economy.
I doubt that the oil fields we desperately hope are off Florida are going to be tapped.