When oils ain't oils  

Posted by Big Gav in , , ,

The SMH is continuing their series on peak oil and the oil price - When oils ain't oils.

In this article, we examined why, for investors at least, ''peak oil'' theory was inconsequential. What really matters is the cost of getting the stuff out - or the ''marginal cost of production'', as the economists call it.

Here we're going to explain how, contrary to economic theory, the oil price can rise while supply is increasing.

Deep below the Santos basin off the coast of Brazil, several massive new oilfields were recently discovered. And deep is the operative word.

The Sugarloaf, Jupiter and Tupi fields are four kilometres beneath the seabed under a further two kilometres of thick salt layers.

Whilst salt is easier to penetrate than your typical rock, it's weaker. Even when cased in cement drilling wells through salt increases the risk of collapse. If this weren't demanding enough, the oil pumped back to the surface from these wells can be hot enough to melt drilling equipment.

Solving these problems will be expensive, which underlines a key point about oil production over recent decades: Oil supply can and may continue to increase but the costs of extraction are increasing, too.

The latest finds offshore Brazil illustrate the trend, as does a look at the global marginal cost of production for 2008 - one of the most successful in terms of exploration in the past 20 years.

In Saudi Arabia, home of the world's cheapest oil, producers face a full life cycle (that is, including amortisation and cash costs) marginal cost of US$20 per barrel. In Russia, it's about US$25.

North Sea fields have a marginal cost of about US$60 while the new deepwater discoveries off the Brazilian coast are expected to cost US$70 per barrel.

Deepwater production from Angola and Nigeria, considered (along with offshore Brazil) to be exciting new frontiers, operate with marginal costs of about US$90 per barrel. And at US$100 per barrel and more, Canadian tar sands and unconventional sources come into play.

Phil Hart has a post at TOD ANZ noting that neither the government nor the major opposition party seem all that interested in peak oil - Australian Senate: Peak Oil motion defeated 31:6.
The Government and Opposition today voted against a Greens motion in the Senate calling on the Government to plan for peak oil.

The Motion was defeated 31:6 with the five Greens Senators supporting the motion and presumably South Australian independent Senator Nick Xenophon as the sixth supporting vote.

The major parties are not just ignorant of 'peak oil'. They are, with clarity of purpose, voting against any attempt to respond or even investigate further.

The Australian reports that one sector of the energy industry that continues to generate attention and activity is coal seam gas - Gunnedah rents soar on coal seam gas boom.
NSW'S coal seam gas boom has been credited for the north-western wheat belt town of Gunnedah becoming one of Australia's major residential rental hot spots.

Property researcher RP Data has found that Gunnedah recorded NSW's third-largest increase in residential rents over the past 12 months on the back of the record mining activity in the area.

Rents in the town of less than 10,000 people have increased by almost 28 per cent, or $50 per week, as miners snapped up nearly all available rental accommodation.

The Business Spectator notes that wind power is doing well too - Wind farms 20% of Aust new power projects.
Wind farms account for about a quarter of Australian electricity generating developments now under construction or planned as the country moves to increase its reliance on renewable energy, a government report said.

The Australian Bureau of Agricultural and Resource Economics said renewable energy sources accounted for only 3 per cent of Australia's electricity generating capacity in 2007/08, according to the latest figures available.

But the country's new renewable energy laws, passed in August, were encouraging the development of new projects. Under those laws, Australia increased its target for renewable energy to 45,000 gigawatt hours by 2020 from a previous target of 9,500 gigawatt hours in 2010.

And Bloomberg reports that there may be some merger activity coming up for the swarm of small geothermal energy companies that have emerged recently - Australian Geothermal Projects May Seek Partnerships.
Australian geothermal energy companies may seek merger partners during the next year because of funding needs, said Geodynamics Ltd. and Petratherm Ltd., two businesses seeking to produce power from underground heat.

“The competition is not for acreage -- it’s for capital,” Gerry Grove-White, managing director of Brisbane-based Geodynamics, said by phone Nov. 13. “It’s going to be challenging for many of these companies to find the funding they require. That’s not to say they can’t.” He said to expect “consolidation in the next 12 to 18 months.”

The number of proposed geothermal ventures has expanded as Australia pursues a target of deriving 20 percent of its power from clean energy by 2020. Australia has awarded A$235 million ($220 million) to four companies, including Geodynamics and Petratherm, to spur development of renewable technologies, Energy Minister Martin Ferguson said Nov. 6.


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