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World Oil Demand Falling.

The global recession in 2008/09 was an opportunity for the US and the other OECD powers to begin switching to low-carbon energy strategies. Led by the Obama administration, the main focus is on energy efficiency - the world's sixth main alternative fuel - and renewables. These issues, together with measures leading to demand destruction for fossil fuels, will figure high during the climate change conference at Copenhagen in December.

Already several studies are coming out on these subjects. Among them is a new report from the publicly-funded UK Energy Research Centre (UKERC) examining "peak oil", titled: "Global oil depletion, an assessment of the evidence for a near-term peak in global oil production". Another is one from Deutsche Bank, titled: "The peak oil market, price dynamics at the end of the oil age". There is also the IEA's 450 low oil demand scenario, saying: "the economic downturn has created an opportunity to put the global energy system on a trajectory to stabilize greenhouse gas (GHG) emissions at 450ppm of CO[sup.2] equivalent". This would cap global temperature rises at about 2?C.

Petroleum Argus of Oct. 12 says IOCs and OPEC "may worry about China repeating the fuel switching and vehicle efficiency gains in Japan and Europe" which led to oil demand destruction in the 1980s. Deutsche Bank says under-investment in oil (and, this is from APS, resource nationalism from oil price hawks) will see prices peaking at $175/b in 2016, contributing to peak demand, while natural gas supply will respond to high prices and take market share from oil. Argus concludes: "If OPEC then switches to defending market share, abandoning output restraint, the irony is that the cheap oil will be produced after peak demand".

The Obama administration's proposed overhaul of financial regulation has enormous implications for crude oil and refined products trading. Congress now is pushing to expand and clarify the roles of regulators. Change is driving ahead at breakneck speed as the Commodity Futures Trading Commission and the Federal Trade Commission both respond to the demand for oil market oversight. Argus is holding a conference on this in Houston on Oct. 21.

Bitumen, tar sands and unconventional gas will get other hits from new technologies now being used by Chevron to extending the life of very old oilfields. The US major is using them in one of the world's oldest and most prolific oilfields, and the process is being replicated elsewhere to help the energy industry squeeze more out of ageing oil basins. The Kern River field has produced more than 2bn barrels of oil in its 110-year history, but Chevron estimates it still holds another 1.5bn barrels. Chevron is using the Kern River field as a real-world laboratory, testing EOR systems and bringing in engineers from around the world to learn them. Chevron engineer Joe Fram says: "The thing about being in this old oilfield, you can try stuff".

To get as many barrels as possible out - cheaply enough to turn a profit - Chevron has high-tech temperature sensors to monitor its production, through 3-D computer models to plan its wells and filtering waste water from the fields through walnut shells so it can be re-used. Chevron's renewed focus on Kern River shows both the opportunities and the challenges facing the oil industry as the giant discoveries of the last century, from Alaska's Prudhoe Bay to Mexico's Cantarell, begin to dry up. Prudhoe Bay has suffered declines though over half its 25bn barrels remain in place.

To get the oil out of Kern River, Chevron injects steam to heat the rock and thin out the gooey liquid so it flows up more easily. The process is far more expensive than conventional oil production, with thin profit margins which can disappear when oil prices drop or costs rise. It has drilled 660 observation wells equipped with sensors to track the reservoir's temperature so engineers can see where heat is most needed, and has developed its equipment to direct the steam there. Those techniques have allowed Chevron to use half as much steam to produce an oil barrel - for an annual savings of about $300m. Senior geologist at Kern River Paul Harness says: "By turning the burner down, we save a lot of money".

ExxonMobil and Shell are interested in such projects. Occidental Petroleum (Oxy) has extended the lives of fields in Oman, Colombia, and West Texas by injecting carbon dioxide, steam and other substances into the oil reservoirs. Oxy President Steve Chazen says with fewer new fields being found, maintaining production at old fields is the only way the industry can meet oil demand, adding: "In the long term, it's not how many fields get discovered. It's keeping the base decline under control".

Chevron has not reversed Kern River's fall, but it has slowed it. Production is falling at about 2%/year, compared to an average of 7%/y from 1998 to 2005 - which will mean millions of extra barrels in 2009. Chevron hopes eventually to coax out as much as 80% of the field's oil compared with the 30% typical in many fields around the world. Kern River had 628m barrels of reserves at end-2007, up 16% from 2004. Its longevity is already remarkable.

In 1899, a father-and-son team of prospectors digging by hand struck oil by the bank of the Kern River, 100 miles north-west of Los Angeles. Within four years, more than 400 different firms produced 45,000 b/d there, more than anywhere else in the country at the time. Today, this field is a sea of pipelines, storage tanks and about 9,000 slowly bobbing pump-jacks which still pull nearly 79,000 b/d from the rock, down from 140,000 b/d at its peak. If firms can squeeze more oil out of their old fields, they do not need to find as many new ones - lowering the risk of expensive failures.
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Publication:APS Review Oil Market Trends
Date:Oct 12, 2009
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