Gas flare (r.) and example of a gas-to-liquid reactor (l.) that can fit on a FSPO vessel. It looks like a chemical processing plant dropped onto a raft. (image: epmag.com and r3sciences.com)

Brazilian oil company Petrobras is aggressively financing technology that will convert flare gas, a byproduct of oilfield production so named because it is commonly disposed of by continuous burning during drilling operations, into a synthetic and commercially viable form of crude oil.

It may seem surprising that natural gas, a valuable natural resource, is emitted in great quantities as a consequence of oil extraction only to be thrown away like garbage. When underground oil is subjected to high pressure, gas dissolved in the liquid escapes through a separate pipeline valve that reaches the surface. Yet, the practice of combusting this “associated gas” as quickly as possible (i.e. gas flaring) has become standard for decades in oilfields too remote from potential markets or transport infrastructure to take advantage of the fuel’s value. Official estimates place the global amount of gas squandered in this way annually at ¼ of the natural gas consumption in the US. Though technology does exist for converting this gas into liquid crude oil, initiatives pursued by Petrobras-financed companies Compact GTL (UK-based) and Velocys (Ohio-based) aim to create equipment compact enough to fit on Floating Production Storage and Offloading vessels used in offshore drilling.

Layers (top) separating the Tupi oilfield from the water's surface. For reference, keep in mind that the world's tallest building (bottom), the Burj in Dubai, is just under 1000 meters. (image:oildrum.com and amitbhawani.com)

The ability to conduct a gas-to-liquid process onboard drilling modules is very attractive to Petrobras, which this year plans to begin production on Tupi, the world’s largest oilfield that just happens to sit underneath 2 kilometers of water and 4-5 kilometers of rock and salt. The project is almost prohibitively expensive, and converting superfluous gas to oil would be a critical offset for the expected losses that come from poking holes in the wrong parts of the seabed, a necessary part of locating a drill location.

Thinking big, it’s logical that oil from surplus gas could supplement profits for unconventional oil projects such as shale oil and oil shale, of which the world will only be seeing more in the future.

The development of viable gas-to-oil technology would not only provide revenue that would offset the costly trial-and-error stage of deepwater oil drilling, it would solve offshore drillers’ problem of what to do with excess gas. Since 2002, gas flaring has come under worldwide scrutiny because of its significant contribution to global warming. The World Bank’s Global Gas Flaring Reduction partnership (GGFR) estimated in 2009 that 1.5% of the world’s total carbon emissions comes exclusively from gas flaring. Any technology that reduces carbon emissions by that magnitude is a benefit for the entire planet.

German chemists Franz Fischer and Hans Tropsch in the 1920s first pioneered the science of creating liquid oil from coal, which was later extended to gas stocks. The process required reacting natural gas with hot steam to form a synthesis gas of carbon monoxide and hydrogen. When passed over a cobalt catalyst, the gaseous hydrocarbons mix with ions and grow into longer chains, forming a wax within seconds that is easily converted into diesel. Previously, large reactors were required to process the large amount of heat produced by the reaction, but companies Compact GTL and Velocys are able to build a compact system because of their use of microchannels, which allow heat to be distributed more efficiently, reducing the temperatures and reaction time involved and shrinking the size of the unit.

Synthetic oil contains less sulfur and pollutants than naturally occurring crude oil. When produced from biomass, synthetic fuel is called biofuel, but most biofuel production processes involve a chemically different and less direct method than the synfuels conversion. In the late 1970s, the development of synfuels was slated to receive $88 billion in support over 20 years from the US government, but was later cut by the Reagan administration due to low oil prices and skepticism about the technology’s effectiveness.

The EPA is taking on the controversy surrounding hydrofracking, and plans to deliver an answer in 2012. (image: asmalldoseof.org and sierraactivist.org)

Following years of controversy over a technique used for extracting hard-to-reach oil and natural gas called hydraulic fracturing (a.k.a. hydrofracking), the EPA announced on Thursday that it would invest two years and almost $2 million to study hydrofracking’s possible threats to human health and the environment. The Wall Street Journal reported on the agency’s announcement, as made by Paul Anastas, assistant administrator for EPA’s Office of Research and Development:

Our research will be designed to answer questions about the potential impact of hydraulic fracturing on human health and the environment. The study will be conducted through a transparent, peer-reviewed process, with significant stakeholder input.

The process of hydraulic fracturing involves pumping water and chemicals deep underground at extremely high pressure to crack layers of rock known as shale to access the oil or natural gas below. Environmentalists and residents of communities near hydrofracking sites have expressed concern that the chemicals used in the process could contaminate underground aquifers that supply drinking water. Other concerns over disposal and treatment of the chemical-laced water, depletion of water resources, and effects on surface environments have been voiced as well. In December of 2009, New York City’s Department of Environmental Protection released a report highlighting the threats that hydrofracking in upstate New York poses to the City’s water supply, the largest unfiltered water source in the country.

Hydrofracking has been used by the oil and natural gas industries for decades, but the process has come under scrutiny in recent years as new technology has made oil and gas deposits hundreds of feet underground accessible. The use of the technique has expanded rapidly following the discovery of massive natural gas reserves trapped under shale beds around the US, such as the Marcellus Shale formation that stretches from Tennessee to western New York State.

The oil and gas industry points to the 50 years of hydrofracking as evidence that the process is safe and effective, and frequently state that links between hydrofracking and water contamination and other environmental problems have never been scientifically proven. The EPA undertook its first study of hydrofracking six years ago, as the Associated Press reported: “A 2004 EPA study found no evidence that fracking threatens drinking water, but critics argued that the report was flawed and last year Congress asked EPA for a new study.” The critics referred to by the AP usually cited the cozy relationship between the George W. Bush administration and the oil and gas industry as source of pro-industry bias in the 2004 study. The energy bill shepherded by former Vice President Dick Cheney and passed in 2005 specifically blocked the EPA from regulating hydrofracking.

Groups on both sides of the hydrofracking issue seem to be pleased with the EPA’s recent announcement. An in-depth, scientific study conducted by an objective federal agency will hopefully provide well-supported answers to the many questions about hydrofracking and give a clear picture of the how the potential health and environmental drawbacks of the technique weigh against the economic benefits of increased domestic oil and gas production in the US. The EPA is expected to complete the study by 2012.

Along with other factors, the euro's plunge following Greece's escalating debt situation has indirectly lowered oil prices. (image: www.europeanbusiness.gr and Nicholas Whitaker via heatingoil.com)

A strong dollar pushed down the crude and heating oil prices on Thursday. The euro fell against the dollar on news that Greece, whose deficit crisis has battered the euro over the past month, may have to turn to the International Monetary Fund for a bailout. As the dollar gets stronger, commodities that are priced in dollars (like crude oil and heating oil) become more expensive for traders who hold other currencies, which lowers demand and prices. Weekly inventory reports and OPEC’s meeting on Wednesday generated conflicting interpretations, leaving the value of the dollar to lead oil prices.

Today’s average retail heating oil price in the Northeast is 2 cents lower than Thursday’s average price.

Gov. Chris Christie of New Jersey reached into his state’s Global Warming Solutions Fund to help resolve New Jersey’s budget deficit. (image: media.nj.com)

New Jersey is one of 10 states taking part in the Regional Greenhouse Gas Initiative (RGGI), a cap and trade market in the US Northeast that caps emissions from power plants and auctions off emissions permits. Profits raised through the auctions were intended to fund clean energy projects, but New Jersey has moved the nearly $65 million that auctions have earned since late 2008 from its Global Warming Solutions Fund to its General Fund, reported Reuters.

The state faces a huge budget deficit, and Gov. Chris Christie decided to move the $65 million away from clean energy to help close that deficit. Any revenue raised by the auction of emissions permits through June will be included in the transfer of funds.

Environmental groups have opposed removing money from the Global Warming Solutions Fund, saying it will harm the environment and delay job creation that could be spurred by investments in clean energy.

New Jersey is not the first state to make such a decision. Last year, Gov. David Patterson of New York battled that state’s budget deficit by taking $90 million raised by New York’s RGGI auctions.

The RGGI is closely monitored because it represents an existing cap and trade market for carbon emissions, and a possible model for a national cap and trade system as proposed in the Waxman-Markey bill, the House climate change bill passed last summer. The Senate bill being developed by Sens. John Kerry (D-MA), Lindsey Graham (R-SC), and Joe Lieberman (I-CT) will likely include a cap and trade system for power plants—even more similar to the RGGI than the economy-wide system proposed by the House.

As Reuters points out, New Jersey’s decision shows how difficult it could be to direct profits from cap and trade to clean energy programs. The RGGI aimed to increase investment in clean energy in order to create jobs and develop low-carbon sources of energy, rather than simply raise the cost of emitting carbon through caps and permit auctions. New York and New Jersey have short-circuited that plan by re-routing clean energy funds to solve budget deficits.

But while the RGGI may not be functioning according to plan, cash-strapped states have nonetheless been eager to make use of the tens of millions of dollars raised by auctioning emissions permits. States in the Midwest and the West are considering regional cap and trade markets of their own; it’s uncertain what final form any federal climate bill will take, but more and more people in the US could soon find themselves affected by cap and trade.

Cap and trade will raise costs for energy producers, and at least some of those costs will find their way to consumers in the form of higher energy bills. Where heating oil fits in, though, is hard to tell. The RGGI and the latest cap and trade proposals in the US Senate target power plants fired by coal or natural gas to produce electricity—not oil refiners, as the House bill did—which would mean your utility bill and not your heating oil bill would be most affected. The Kerry-Graham-Lieberman proposal does, however, put forth a carbon tax on transportation fuels. It’s not aimed at heating oil, but a carbon tax will hit refiners, and prices for all refined oil products could go up.

(image: s.wsj.net and Nicholas Whitaker via heatingoil.com)

Oil prices continued to be buoyed by the Federal Reserve’s announcement on Tuesday that interest rates would be kept at low levels, which contributed to a weaker dollar yesterday. Because crude and heating oil futures are priced in dollars, a weak dollar makes them cheaper for investors who hold other currencies and drives up demand. Higher oil prices got further support from the EIA’s inventory report, which showed a decline in supplies of distillates, which include heating oil and diesel, and in supplies of gasoline. Despite rising crude inventories, traders took this as a sign of growing demand. OPEC also announced that it would maintain its current production quotas, even as it anticipates growing global oil demand.

Today’s average retail heating oil price in the Northeast is 2 cents higher than Wednesday’s average price.

Crude oil prices over the course of today, March 17. (image: ft.com)

The price of heating oil increased today as inventories of distillates, which include heating oil and diesel, fell by more than expected. That inventory decline, combined with a drop in US oil imports, led some to forecast an eventual supply crunch that would lift oil prices. OPEC announced today that it would maintain its current production quotas even though it foresees growing oil demand, which supported higher prices across all oil markets.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Up 1.5 percent, $82.94 per barrel.
Heating oil (April 2010 contract): Up 1.2 percent.

A global oversupply of oil enabled by OPEC's quota violations could lead prices to fall. (image: tehrantimes.com, blog.redfin.com, and AP via cbsnews.com)

Monday, an article in the Financial Times questioned the strength of OPEC in light of its members’ extensive quota breaking, and stated some analysts believe that a current global oil glut could drag down prices by the end of the year.

OPEC quota compliance has become an especially important issue as quota “cheating” is happening with increasing frequency, and OPEC announced on Wednesday that it would maintain current quotas, despite some members exceeding them.

Back in December 2008, the cartel responsible for 1/3 of the world’s oil agreed to make the biggest production cut in its history; a slash in output of 2.2 million barrels per day. The cut was motivated by the financial crisis’ blow to global oil prices, which plummeted by nearly 70% in the months following July of that year. Since then, OPEC’s official quota has not budged, remaining at 24.845 million barrels a day despite the widely-recognized fact that the true output of its members has run hundreds of thousands of barrels per day above this level.

In 2008, analysts estimated OPEC overproduction ranged from 600,000-800,000 barrels daily. This past January, Reuters Africa reported that an OPEC document registered overproduction at 1.87 mbpd. The FT article stated that OPEC quota compliance—a percentage measure of how real output matches agreed-upon levels—has slipped to a low of around 50 percent (its highest in the past two years was 80 percent, in spring 2009).

Iraq’s lode of international oil contracts could soon boost OPEC production by several million barrels, the article pointed out. With the second-largest oil reserves in the world, Iraq’s new participation in OPEC (after years of sanctions and disruption brought by war) could, in a scenario where quotas remain unchanged, either force the body to curtail the above-quota production in other countries, or explode the fissure in compliance to a point where OPEC loses the unity it needs to keep order and retain control over prices.

When OPEC nations break their quotas, they profit from the higher prices permitted by the supply restraint of fellow members.

However, some countries pump excess crude in order to stave off consequences of their own economies’ severe fragility. This is the case with the worst quota breakers: poverty-stricken Angola, which has observed no cuts in its production, and Nigeria, which was overproducing by 300,000 barrels daily in December. It’s also an expected motivation for war-torn Iraq, which is currently the only OPEC member exempt from quotas but whose pending contracts will soon change this as its production soars.

Additionally, when many members break their quotas and overproduce, previously compliant nations are pushed to overproduce in order to make up for the loss in profit that resulted from the supply glut’s depreciation of their oil. Compliance brings higher prices through supply restraints, so quota violations bring lower prices through increased supply. In a somewhat ironic feedback loop, members increase output to compensate for lower prices; the further increase in world supply contributes to lower prices.

Exceeding quotas, in conjunction with low oil demand worldwide, could be the reason for the oversupply the FT article mentions:

Some analysts and traders note that despite recent upward revisions in demand – especially from China – markets remain oversupplied and Opec faces some risk that prices will fall this year.

A global oil glut has been present for years, ever since the recession dampened demand from developed economies, and worldwide oil demand has only increased nominally in the last year or so. The current supply-demand imbalance would indicate that prices should fall, yet the price of crude has climbed by 79% over the past 52 weeks.

Therefore, any price declines would have to be brought on by a confluence of several factors. According to the FT, some analysts see nearing-termination of government stimulus packages (both the US and China), and the new limits on energy trading in the US (which could lessen price-hyping speculation activities) as two such important factors.

Rebels attacked government meetings in the southern Nigerian city of Warri. (image: cnn.com)

Last September, an amnesty program initiated by the government of Nigeria had convinced thousands of militants to lay down their arms and succeeded in bringing some calm to the crucial oil-producing region of the Niger Delta. In October, the fragile peace in the Niger Delta had helped increase Nigeria’s oil production and exports. By December, the peace in the Niger Delta had begun to unravel. President Umaru Yar’Adua had left the country for medical treatment, and the amnesty program stalled.

On Monday, talks aimed at re-starting the amnesty process were interrupted by two car bombs, Reuters reported. The car bombs exploded near a government building in the southern Nigerian city of Warri and injured some six passersby, but no serious injuries or deaths were reported. The main rebel group operating in the Niger Delta, MEND, claimed responsibility for the attacks. The group said the bombings were in response to comments from a provincial politician that labeled MEND “a media creation.” The group also expressed frustration at the exclusion of community representatives from the amnesty process under President Yar’Adua’s acting replacement, Goodluck Jonathan. The MEND statement made clear its intention to step up attacks on oil infrastructure in the Niger Delta and included a specific threat against installations operated by French corporation Total, which has not previously been targeted.

The car bombings are the latest in a string of sporadic but escalating attacks that have taken place since January. Last month, the attacks resulted in a near 5 percent decrease in Nigeria’s oil production.

With the government straining to push forward an amnesty program that it hopes will bring lasting peace to the Niger Delta and a measure of stability to the nation’s oil industry, Nigeria is not in great political shape. Ethnic clashes in central Nigeria add to the government’s problems and paint a picture of instability that could very well further slow down oil production in the near future.

As unrest simmers in Nigeria, the world’s seventh-largest supplier of crude oil and member of OPEC, oil traders around the world will keep a watchful eye on the nation’s political situation. If political conflict comes to a boil and makes deeper cuts into the nation’s oil output, the resulting reduction in world supplies could bring major oil price spikes that would filter down to heating oil and gasoline prices in a matter of days.

(image: electricscotland.com and Nicholas Whitaker via heatingoil.com)

A late rally in crude oil prices late in the trading day on Tuesday has brought higher St. Patrick’s Day heating oil prices this morning. Anticipation of the US Federal Reserve preserving interest rates at its meeting yesterday and OPEC holding production quotas steady at its meeting today helped drive up market prices on Tuesday. The trend continued this morning, partially in response to the Fed’s announcement that it will keep interest rates low and added comment that the economic state of the country is “likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Additional price support came from OPEC, as comments by cartel ministers made it clear the organization is perfectly content with current oil prices and will not adjust production quotas at its meeting later today.

The API’s weekly inventory report, released yesterday, showed a smaller-than-anticipated build in US crude inventories, adding even more upward support to prices. Today’s inventory report from the EIA will further extend or mitigate that support. With three major events aligned in lifting oil prices, chances are heating oil prices will continue to increase for the next two days or more, despite warm weather along the East Coast.

Today’s average retail heating oil price in the Northeast is 6 cents higher than Tuesday’s price.

Despite weak fundamental forces tied to the global recession, crude oil prices have risen by 79 percent in the last year. The obvious culprit is excessive speculation. (image: ft.com)

In recent months, the task of uncovering and reporting the causality behind rising or falling oil prices has become increasingly difficult. Throughout the world, right now, demand for oil is low and supplies of oil are high. Together, these fundamental forces should be driving down the prices of crude oil and petroleum products and keeping them low. Despite those fundamental factors, oil prices have stayed on a steady upward path for the last year, with crude climbing from about $50 a barrel to $80.

What do you say when all logical analysis points to falling oil prices, but reality moves in the other direction? The heavy hitters in the oil price reporting sector, business news outlets like CNBC and the Wall Street Journal, usually respond to inexplicable movements on the oil markets with vague guesses at what traders are thinking as they “look to China” or “anticipate” this or that government report. Making such guesses does make a certain amount of sense—as I reported last week, the whims and perceptions of oil traders can have a major impact on oil prices.

But what’s really going on with oil prices? There’s much more crude and petroleum product in the world than we need, and yet prices for crude, heating oil, and gasoline continue to climb. As our own Steven Zweig persuasively argued in January: it’s the speculators. And he’s not alone—many big names in the oil industry and commodities markets have identified increasing speculative activity on the part of large institutional investors (investment banks and hedge funds, for example) as the main cause for rising prices over the last six to twelve months.

Two articles published last week echo Zweig’s assessment of speculation as the main culprit behind rising oil prices.

Writing for the Fort Worth Star-Telegram, business journalist Ed Wallace laid out a clear case for the excessive influence of speculation on oil prices. He referenced various statistics that show demand for oil in the US and around the world is still in a deep rut and others that show world supplies at incredibly high levels. But Wallace’s article included a fascinating and somewhat disturbing point: the link between US financial policy aimed at improving the economy and rising oil prices:

[Investment banks] were taking those near-zero-interest loans [from the federal government] and, instead of using the money to restart lending (and thus, it’s hoped, the economy), they were pumping much of it into equities and commodities. There they were profiting from the ever-rising paper prices caused by the huge influx of cheaply borrowed money.

In short, the size of those investments had the effect of artificially driving up the prices of commodities like crude and heating oil. As prices went up, so did investors’ profits, encouraging them to invest more…and the cycle continues.

Money intended to help pull the US economy out of a recession was used by speculators to enhance their already-considerable wealth, and had the side effect of driving up the prices of heating oil, gasoline, and other necessities for average Americans. Though not illegal, it’s certainly unfair and downright infuriating. Wallace concludes his article with a call for government regulations to stop the speculative cycle that’s driving up oil prices, but makes clear his belief that Congress does not possess the will to implement such regulations.

For his part, Huffington Post blogger and oil commenter Raymond J. Learsy made the ineffectual Commodity Futures Trading Commission (the agency charged with regulating commodities markets in the US) the focus of an article that covers much of the same territory as Wallace’s. As we have done repeatedly at HeatingOil.com, Learsy notes that since the CFTC, led by chairman Gary Gensler, first announced its belief that speculation was the main cause of the 2008 oil price spike, it has produced lots of talk and no action. Though the agency has taken some unexpected steps toward enforcing trading rules, sweeping action and stiff curbs on speculation are nowhere to be found. Even as the evidence showing speculation as the main force driving up oil prices continues to pile up, Learsy notes, the CFTC does nothing:

The outrageous dysfunction of the commodity markets and the tepid CFTC oversight continued blithely along. Late in the week of November 9th, 2009 the Energy Information Service announced that oil stocks had surged by 1.762 million barrels, much more than expected, and that the U.S. refineries processing rate sank to 79.7%, the lowest in more than two decades. Against all reason, instead of collapsing prices, the price of oil jumped by $2.50 on the very day of the announcement.

The title of Learsy’s blog post, “Gary Gensler of the CFTC: Reformer or Wolf in Moth Eaten Sheep’s Clothing?” intimates that the lack of reform from the CFTC is a result of Gensler (a former investment banker himself) dragging his feet.

Whether or not that is true, one fact remains: excessive speculation is still driving up the price of goods that Americans need to survive. Speculation is what an investor (be it one person or a huge investment bank) does in pursuit of profits, so it’s obvious that speculators will not police themselves. The only answer is strict, comprehensive limits on speculative activity in commodities markets that are diligently enforced with serious consequences ($10,000,000 fines instead of $10,000, for example) for violators.

Lax regulation and inattention to the goings-on in financial markets already ruined the global economy. Let’s force our government to make sure it doesn’t devastate our heating oil and gasoline budgets as well.