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Posted on Sustainabilitank.info on February 6th, 2010
by Pincas Jawetz (pj@sustainabilitank.info)

US Oil Imports From Western Hemisphere Countries To The US Are Dropping:

Mexico Petroleum Supply, Exports to U.S. and Net Exports. Source: EIA. Chart by Chris Nelder.

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Venezuela Petroleum Supply, Exports to U.S. and Net Exports. Source: EIA. Chart by Chris Nelder.

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Combined Annual Net Oil Exports From Canada, Mexico and Venezuela. Source: Jeffrey J. Brown, Samuel Foucher, PhD, Jorge Silveus.

= = = =

The Oil Export Crisis Has Unofficially Arrived.
By Chris Nelder | Friday, February 5th, 2010

Last March, his study of the effect of peak oil on U.S. imports had
brought Mexico to the forefront. “As our #3 source of imports, the
crashing of its supergiant Cantarell field had put the future of our
oil supply in serious jeopardy.”

The possibility that Mexico’s oil and gas exports to the U.S. could go
to zero within seven years looked very real.

As I explained in that piece, rising domestic consumption coupled with
declining supply puts an ever-tightening squeeze on imports. I have
found no evidence that policymakers are paying any attention to this
critically important dynamic, but it is the very point of the peak oil
spear.

Were it not for the market meltdown and recession, it would have
pierced our vital organs. Instead we felt a pinprick. Hardly anybody
realized what it really was, and most ran off on a wild goose chase
for evil oil speculators.

Now Venezuela has appeared on my radar for similar reasons… only
this time, we’re really going to feel it.

Let’s begin with a review of Mexico’s exports.

Mexico:

Shortly after publishing that article, I casually remarked to my
friend and fellow energy analyst Gregor Macdonald that Cantarell’s
production could fall to under 0.5 million barrels per day (mbpd) by
the end of the year.

I arrived at this somewhat startling conclusion by calculating the
effect of its decline rate — 38% at the time and accelerating — on
production of 0.77 mbpd in January, down precipitously from its 2.1
mbpd peak in 2003.

Gregor’s recent data sleuthing on Cantarell found its production in
December 2009 was 0.527688 mbpd, just a hair above my estimate.

To update the data on Mexico, it’s now our #2 source of imported
petroleum because Saudi Arabia has fallen from #2 to #4.

As of November 2009 (the latest data available) the U.S. imported 1.08
mbpd of crude and finished petroleum products from Mexico. Its exports
to the U.S. peaked at 1.46 mbpd in 2004, the same year as its
production peaked. Net exports (production minus consumption) fell to
1.06 mbpd in 2008.

For the years 2005-2008, Mexico’s exports to the U.S. declined by 0.51
barrels per day. In 2010, supply is expected to fall to 2.5 mbpd —
nearly half a million barrels per day less than 2009.

Mexico nationalized its petroleum operations in 1938 in a
constitutional amendment and handed over total control to the state
oil company Petróleos Mexicanos (PEMEX), with predictable results.

Oil now provides more than 40% of the country’s revenues, which have
been used to pay for a vast array of public services and line the
pockets of the oligarchy while starving investment in both upstream
activities (new oil supply) and downstream (finished products).

Consequently, Mexico’s oil reserves have decreased by more than 75% in
two decades (owing partly to the correction of a previous,
ridiculously inflated figure), production has begun to decline and
exports are falling fast.

It now imports $4.5 billion a year worth of gasoline, $10 billion a
year in petrochemicals, and 25% of its natural gas, mostly from the
U.S. This despite having nearly 13 billion barrels of proven oil
reserves and more than 50 billion barrels of (unproven) reserve
potential.

Mexico would be in a far better position, were it not for its hostile
stance on foreign participation. PEMEX simply lacks the technical
ability to develop its more difficult, remaining resources —
particularly deep water.

Venezuela:

As of November, the U.S. was importing 0.9 mbpd from Venezuela, making
it our #3 source. Its exports to the U.S. peaked at 1.8 mbpd in 1997,
the same year as its production peaked. Net exports (production minus
consumption) have fallen 38% from the 1997 peak of 3.1 mbpd to 1.9
mbpd in 2008.

Venezuela’s oil exports to the U.S. have been declining markedly since
2004, after a long period of relative stability. From 2004 through
2009, Venezuelan petroleum exports fell 0.7 mbpd.

Like Mexico, Venezuela is endowed with enormous energy resources and
could be producing at a far higher level. Estimates of its oil
reserves range from 153 billion barrels of certified proven; to 513
billion barrels technically recoverable in the USGS’ January estimate;
to 1.5 trillion barrels in offshore potential, if you believe the
effervescent Dr. Marcio Mello of Brazil.

Most of it is heavy oil, a low-grade which must be upgraded to synthetic crude.

And like Mexico, President Hugo Chavez has exiled the Western oil
companies who might have made the investment to bring those resources
to market.

A Nation in Free Fall

The good times rolled for Chavez in the first years after his election
in 1998. His socialist programs to rebuild the country and raise its
standard of living were popular but expensive, and soon began to fail
under the crush of declining energy supply.

Oil revenues make up 90% of Venezuela’s foreign earnings, so its
dependence on oil exports is extreme.

Billions of dollars in profits from the national oil company,
Petroleos de Venezuela SA (PDVSA) were diverted to welfare programs
and into the pockets of oligarchs, while investment in future
petroleum and power supply languished.

The precipitous drop in oil prices since mid-2008 only compounded the
revenue shortfall.

Oil production has fallen 25% since Chavez was elected, and a long,
devastating drought has cut into its hydropower supply, of which 73%
comes from the massive Guri Dam.

Chavez responded by nationalizing most of its petroleum operations and
its grid in 2007.

In 2009, another 76 oil services companies on the Maracaibo Lake were
taken over. The projects now sit abandoned, waiting for PDVSA to
compensate the displaced operators and put them back into operation.

Almost half a million hectares of land were seized in 2009 with the
rationalization that it was underused.

Measures to counter the declining hydro supply have been implemented
in a haphazard fashion, resulting in frequent, unscheduled blackouts,
including seven national blackouts since 2007. Malls and government
offices have had their hours of operation cut and water rationing has
been imposed.

“Some people sing in the bath for half an hour,” Chávez cried at a
cabinet session in October. “What kind of communism is that? Three
minutes is more than enough!”

In January, a wave of public protest erupted, prompting Chavez to
implement a rapid series of desperate measures.

Rolling blackouts were imposed in the capital city of Caracas. After a
few days of protests, Chavez lifted the blackouts and fired the
electricity minister. Blackouts are expected to be reinstated in an
effort to keep hydro reservoir levels from falling to the point of
collapse.
A recent report gave the power shortage a paradoxical twist,
indicating that power from one of the state refineries may have to be
diverted to the grid, cutting distillate output by 200,000 barrels per
day — or more. This will result in less heating oil for China, who
will make up the loss by burning more coal.
Chavez devalued Venezuela’s bolivar currency by half; the president
went on to nationalize a chain of French-owned supermarkets over
alleged price gouging.
He ordered cutbacks in the operation of state-run steel and aluminum
manufacturing operations, which account for up to 20% of the country’s
power demand.
This week he turned to Cuba for help on how to cope with the power
shortage, since Cuba has been through similar problems. The island
nation is providing tens of thousands of energy-efficient lightbulbs
and cloud-seeding technology to Venezuela.
Last weekend, he forced six television channels off the air for
failing to broadcast one of his speeches — up to six hours in length —
in a continuation of his campaign for “communicational hegemony.”
Since December, all radio and television networks are required by law
to broadcast his speeches live, whenever he chooses to make one.
Nationwide student marches have been met by troops armed with rubber
bullets, and at least two deaths have been recorded.
Chavez has said he’s prepared to take “radical measures” should the
situation worsen, begging the unsettling question of what could be
more radical than what he has already done.

Looking East, Not North

Now Chavez is turning east for help in developing his nation’s oil and
gas resources. Recent agreements include a $20 billion joint venture
with Russia to develop the Junin 6 field in the Orinoco oil belt, with
a potential top production rate of 450,000 barrels per day.

China has agreed to build a refinery and develop the Orinoco heavy oil
fields, and Venezuela has guaranteed 560,000 barrels per day to China
this year.

Venezuela has launched its first major auction for drilling rights in
more than a decade, for access to areas east of the existing
operations in the Orinoco. Developing the leases will be expensive
because of their distance from the existing infrastructure, and
winning bidders are expected to make offers in the $10 billion-plus
range including early payments of at least $1 billion, financing
plans, and commitments to build the necessary roads, pipelines, ports,
and upgraders. Potential bidders include Spain’s Repsol, Japan’s
Mitsubishi, the UK’s BP, and Chevron.

Given the sheer size of its resources, it’s too soon to declare the
end of Venezuela’s glory days in the oil patch. However, it does seem
likely that the new barrels it brings to market will be headed east —
not north — and Western producers will have very little stake in the
projects.


Chavez will put exports to the U.S. on a short path to zero the first
chance he gets.

—————–

Oh Imports, Where Art Thou?

The combined decline in imports from Mexico and Venezuela for 2005
through 2008 is 0.89 mbpd. If the trend continues in 2009, then over 1
mbpd will have disappeared from the U.S. import stream in the last
five years — a decline of 8% from 2004 levels.

Since 2007, the loss of production from Cantarell alone was 0.7 mbpd,
but the recession cut U.S. demand by 2 mbpd, effectively masking the
decline. This raises the question: If U.S. demand rises from here,
where will those barrels come from… and how much will they cost?

The U.S. is not only in first place worldwide in its demand for oil,
but in paying the market rate for it. Nobody else buys 8.5 mbpd of
crude at retail.

Drivers in Venezuela are still filling up for 25 cents a gallon, even
as their exports decline.

Mexico’s gasoline prices are more on par with the U.S., but its
consumption has been rising steadily since 1997 and continues to cut
into exports.

Saudi Arabia’s domestic consumption is currently growing at the rate
of 7% per year, following a trend of more than three decades. It uses
a whopping 1.5 mbpd — 1.8% of total world oil supply! — to desalinate
water, at the equivalent of 7 cents a gallon.

Before the OPEC cuts of 2009, its exports to the U.S. had essentially
flatlined at 1.5 mbpd since 2004.

Exports from our #5 source, Nigeria, have also declined — from 1.17
mbpd in 2005 to 0.98 mbpd in 2008.

In fact, of the top five oil exporting countries to the U.S.,
representing 63% of our crude imports, only Canada posted an increase
(of 0.2 mbpd).

The combined annual net oil exports from our top three exporting
countries — Canada, Mexico and Venezuela — illustrate our situation:

Given the very modest increases from unconventional domestic production and Canada, the decline of imports from Mexico and Venezuela means the U.S. will be increasingly forced to depend on suppliers farther afield — the very same suppliers that China has been buying into in size. The “collision course with China” that I wrote about in July 2005 has nearly reached the point of impact.

It also means that when oil prices rise again, the pain will be far greater for the U.S. than it is for our top suppliers. Next time, the spear of declining oil exports will puncture a lung.

The oil export crisis has arrived… We just haven’t felt it yet.

Production, consumption, and export data herein is the latest available from the EIA.

Until next time,
Chris

Thanks to the following individuals for their contributions to this
article: Venezuelan oil expert Carlos Rossi for sharing excerpts from
his forthcoming book, The Completion of the Oil Era: The Economic
Impact; Gregor Macdonald for sharing his data on Cantarell; and
Jeffrey Brown and Samuel Foucher, for their work on net exports data
and the Export Land Model.

Investor’s Note: While declining oil imports from Mexico and Venezuela
paint a nightmare scenario for meeting future U.S. demand, all hope
isn’t lost… In fact, one U.S. oil play is developing at a breakneck
pace. You’re likely aware of the Bakken oil formation. But you may not
realize fully how the Bakken has single-handedly thrust North Dakota
into the international investment spotlight.

Of course, members of the $20 Trillion Report know how profitable the
Bakken oil formation is. So far, they’ve raked in gains of 305%, 249%
and 130%! We want you to share in their success.

—————————-

Our reaction to the above goes in two directions:

To every straights there is also the possibility for an answer that provides for new opportunities. in this case:

(1) it becomes even clearer that the US has here an opportunity to make policy accommodations with its neighbors to the south.

(2) the US does not have to – and will not – continue its dependence on oil alone as its source for energy. The US can go for novel and mostly renewable sources of energy, then the Saudis might also discover sun and wind as good replacement for this insanity of using 25% of their oil to provide their water needs. Whatever – energy independence – or at least oil imports reduction for the US – is not an excuse for  a “drill baby drill” US energy policy. Actually, put a carbon tax on the use of oil in the US as a good way to tell the world that the US is capable to detoxify from its addiction to oil imports.

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