The Citicorp Energy Projection - a Gentle Cough

Gasoline prices remain high, and Reuters recently noted that there are enough countries with civil unrest, technical problems and bad weather that there are around a million barrels a day of possible supply that are not getting to the market. . Yet with Saudi Arabia continuing to reassure that it is willing to pump more oil, if needed, there appears to be, superficially, little cause for supply concerns this year. By the same token, in the longer term, concerns over supply also seem to be increasingly discounted. For example Citigroup has just released a new report on Energy 2020:North America as the new Middle East. The report suggests that there is really no concern with future supplies of oil and gas, perhaps most clearly shown with this plot:

The Citigroup view of the coming energy future (Citigroup)

I would argue that the numbers for Saudi Arabia and Russia are difficult to realistically justify. For the Kingdom, which is reported to be producing 9.9 mbd, to increase production by another 2 mbd is optimistic, given the ageing of their primary fields and the decline in remaining volumes that I will discuss in future posts in the current series on that country. The projection of an increase in Russian production is a similar concern. With the decline in production from Western Siberia there is not enough new production coming from Timan-Pechora and Eastern Siberia to sustain existing levels let alone see an increase in production – a point that has been made by Russian officials in the past. However the real concern lies with the relatively unrealistic image that is being projected for US production over the next eight years.

North American shale plays (EIA map, cited by Citigroup)

The image that the above figure projects is that the country is covered in shale, all waiting to provide its wealth to the nation. But that is not the case and shale plays have been a hot topic for a number of years now. And while the map above shows a carpet of shale that has the potential to produce oil and/or natural gas it does not clearly enough distinguish the considerable difference between deposits that are presently economic, and those that are not. (The small number of fields that are labelled as prospective does not speak well for the future).

If one examines the prediction for future production it shows that overall US growth in production of all liquids will rise from some 9 mbd at the end of 2011 to 11.6 mbd in 2015 and then go on to a figure of 15.6 mbd in 2020. (Note that this includes natural gas liquids (NGLs), refining gains and growth in the production of biofuels). The contribution of the various sectors is broken down into:

Projected growth in US production (Citigroup )

In the Deepwater category Citigroup cite existing production from Atlantis, Perdido, Shenzi, Silvertip, Tahiti, and Thunder Horse. Future gains will then come from Big Foot, Gunflint, Hadrian, Jack, Knotty Head, Lucius, Moccasin, St. Malo, Stones, Tubular Bells and Vito. Tiber, Buckskin, Kaskida, Appomattox and Heidelberg. But the report sees gains in the Gulf of Mexico (GOM) total liquids as likely peaking in 2016 at around 2.2 mbd and the gains projected in the above table that might come beyond that as being an “upside potential” based on a change in regulatory factors and the ability of oil companies to bring their reserves on line.

Citigroup projection of future production from Deepwater (Citigroup)

Part of my problem with this approach is that it totally seems to discount the declining production and failure to meet target projections from existing GOM platforms which, among others, has been well documented by Jean Laherrère (here, here and here) and by Darwinian at The Oil Drum (TOD). Looking at the fields that Citigroup have cited it is pertinent to examine first their relative size, as Jean illustrated.

Discoveries in the GOM (Jean Laherrère)

In this context it might be well to remember that as a rule of thumb (from the Russian posts) a 500 mmboe field may produce around 120 kbd. However it should be noted that some of the GOM fields are having problems reaching their target, and that production is falling at a rate of around 20% per year, as Darwinian showed for the cumulative production of Thunder Horse Atlantis and Tahiti, which were projected to produce 550 kbd in total.

History of production from Thunder Horse, Atlantis and Tahiti combined (Darwinian )

With production having already fallen 300 kbd from projections, mainly through lower production from Thunder Horse and Atlantis, it is hard to see how to justify the numbers that Citigroup are using.

The Citigroup projection for Alaska anticipates possible gains from the Shell activities in the Chukchi Sea, although the exploratory wells have yet to be drilled and the geographical challenges to be met in bringing that oil ashore are not yet fully addressed. The Alaskan pipeline is currently flowing at around 609 kbd, which is high enough to prevent wax and ice build up, but with ongoing declines in production and problems arising once the flow falls below 600 kbd how long it can continue to perform satisfactorily is open to question. They cite heavy oil operations at Milne Point which has been declining in production, and West Sac which is a very heavy, cold oil which has raised considerable technical issues in achieving the production of around 15 kbd at present, with existing plans only adding 150 million barrels in total to reserves. The other source that is cited is to produce the light crude from the National Petroleum Reserve in Alaska (NPRA). Given that the bridge from Alpine into the Conoco-Phillips wells in the NPRA has just been approved suggests that an increase in production from the region is still some time away. Put together it suggests that the estimates for a 500 kbd increase in Alaskan production within the next eight years is not a reasonably likely occurrence.

Location of fields and development along the North Slope (Free Republic )

And the third source that Citigroup cite are the oil from shale deposits shown at the top of the post. They see growth of 2.4 mbd in oil production and 1.5 mbd in NGLs from the increase in production from natural gas. The production gains are broken down as follows:

Projected sources of oil from shale plays (Citigroup)

The plot, again, includes a large volume of “upscale potential” which might come from a change in regulations, government and oil company attitudes. I have written about some of the more realistic views of the possible future production of the Bakken and the Niobrara, the Tuscaloosa and the Chatanooga. In this regard it is worth noting that while Citigroup see production from the Bakken rising to around 1 mbd in 2016, and being sustained at that level through 2022, this is not the view of the folk in North Dakota who are monitoring well production and permits.

Anticipated production from the Bakken and Three Forks in North Dakota (DMR March 2012 )

It is instructive to this argument to note that Fidelity E&P has just celebrated reaching a production record of 3,500 bd in the Bakken which it derives from 58 wells. As they continue to run 5 rigs, and have been able to drill a long lateral horizontal well in 28 days they should be able to increase production this year, but they are fighting the rapid decline in existing wells, which requires that more wells be drilled every year, and that (as the better spots become drained) so the drilling activity must accelerate to sustain existing production.

Typical Bakken well production (ND DMR )

Production from the Bakken in North Dakota reached 546 kbd in January, and this production came from 6,617 wells which gives an average of 82.5 bd production from each well. Activity is such that some 250 wells are waiting on fracture services and rigs capable of drilling 20,000+ ft are at 95% utilization in the area. And prices of natural gas are down to $1.89/kcf. Bear in mind that, after a while, it becomes harder to find a spot where no-one has already been.

Map of wells planned and drilled in a section of the Bakken (DMR Presentation to Farm Bureau )

On the ground it looks more like this:


Well sites in the Bakken (Vern Whitten for DMR – Farm Presentation)

The North Dakota Department of Mineral Resources has a series of very informative presentations on the Bakken, including hydraulic fracturing, and the above were taken from the Presentation to the Piece Country Farm Bureau on March 15th.

Current plans anticipate that the Niobrara may reach 250 kbd of production by 2020. The problem, however, as Art Berman has skillfully pointed out is that, as the ND plot above shows, the current wells have a high decline rate, and production levels drop dramatically once the wells are brought on line. Art has explained the background to this for gas wells drilled into shale but the impact for oil wells, where the oil has a higher viscocity than the natural gas, can be significantly greater. Given that well costs are in the order of $10 million per well (depending on location DMR gives the ND price at around $8.5 million, and numbers for the Eagle Ford have been quoted at $8 million) the amount of oil that must be produced over the first few years to justify investment is significant. There are, for example, some 1,400 wells producing in the Eagle Ford play. The play produced 30.4 million barrels of oil in 2011, and is anticipated to add 200 kbd of production this year with the potential to reach 1.2 mbd by 2015. But the high decline rates mean that wells must be replaced rapidly to sustain those levels of production.

It is this disregard for the declining production from existing and future wells that appears to be neglected in the Citigroup study. Those plays which will yield rapidly in generating high initial well production will, in turn, be the first that decline significantly and need replacement. Yet replacement will, over time, have to be in poorer parts of the formation, requiring that multiple wells replace the initial producer, and so bounds on production will be reached, likely before the end of the decade. Citigroup anticipate that the risks in development of the shale plays, whether in Texas or California, come as much from an inability to transport the oil generated and from environmental policy, they see few geological risks – which is a pity, since it is the geology that will control production and its decline, and the ultimate profitability of these ventures.

And finally Citigroup see that cellulosic ethanol will come into its own this decade, and that it will provide half the 2 mbd of biofuels produced in 2020. Unfortunately the economics of large scale production that have led to failures of ventures to date have over-ridden the mandated production levels that the group cite as their foundation, and there is no indication that this will change in the next eight years.

In short, though this is an interesting exercise it is too full of “could” and thus will not make much of a useful contribution to meaningful discussion of future production.

OGPSS - The production from the Kingdom of Saudi Arabia - part 1

The United States Government has just asked the Kingdom of Saudi Arabia (KSA) to raise the levels of its oil production this summer. Oil production is otherwise anticipated to be at some 9.8 mbd this summer, with fluctuations of around 200 kbd about that number. (There are rumors it has just hit 10 mbd.) It is reported that the KSA could raise production to 12.5 mbd if needed. And the Saudi Oil Minister, Ali al-Naimi has now stated that the KSA is able to meet that commitment.

Since I started writing about peak oil back in 2005, the possible maximum sustainable production achievable from the Kingdom has been one of the recurring issues at The Oil Drum, and there have been a number of very perceptive analyses carried out by folk such as Euan Mearns, Stuart Staniford, and JoulesBurn that I do not intend to try and surpass. I will, however, try and summarize some of their conclusions as I work through a few posts that look at the overall production from the various fields that are found both on and offshore Saudi Arabia.

As an initial point, not all the oil that comes from the country is of the same quality, and this is often one of the initial factors that folk do not appreciate when they look, for example, at the two numbers I gave above, that which the KSA is producing, relative to that which it might be able to achieve. The problem arises with the heavier crudes that make up a part of the surplus, and for which there is not a great market out there, as yet. So let me begin the review with, this week, just simply looking at an overall view of the country, the oilfields that comprise regions of major production and what sort of oil that they are producing.

Back in 2005, production from the different oil fields added up to 9.07 mbd, and at the time I had figures suggesting that the total broke down as follows:

Abqaiq 400 kbd;
Abu Sa'fah 200 kbd;
Berri 300 kbd;
Ghawar 4,500 kbd;
Hawtah 200 kbd;
Hout 300 kbd;
Khurais 300 kbd;
Marjan 270 kbd;
Qatif 800 kbd;
Safaniya 700 kbd;
Shaybah 600 kbd; and
Zuluf 500 kbd.
This adds up methinks to 9.07 mbd.

JoulesBurn has since pointed to me that my initial attributions were incorrect and that, in a paper given in 2006, Mendez et al had reported that the target for Hout was only 50 kbd, while that for Khafji was 300 kbd. I will explore those issues more in later posts on this region. But a hat tip to JB for catching my error.

The major fields in Saudi Arabia (EIA)

Not all these fields have oil of equivalent quality, and this is a point that often fails to be understood when there is a global shortage and the KSA offers more crude to the market. If that crude is sufficiently sour (i.e. too much sulfur) and heavy (low API gravity) then it cannot be refined by some of the refineries that may be hurting the most. Thus the oil might not find a market, even though there is a shortage. What the KSA tries to do is to swap deliveries, but that does not always work as it might.

Different grades of oil supplied by Saudi Arabia.

(For those who have forgotten the API gravity classification in degrees, I explained it in an earlier post. Suffice it to say that the higher the number, as a general rule, the lighter the crude and the better the market. As the share produced from the historic fields changes, so the KSA has offered the heavier crudes to the market, but, as I noted, even with the increase in global demand, those crudes have been less successful in finding a permanent market.)

Way back when the world was more innocent, there were four major fields that produced most of the oil from KSA:
Ghawar (the King), which started producing in 1951. Peak production was at 6.6 mbd. Current production is under 5 mbd. Water inflow percentages are increasing, and overall output is decreasing. It is divided into various regions, Ain Dar oil has an API gravity of 34, and 1.66% sulfur. Shedgum is at an API gravity of 34 and sulfur content of 1.75%. Uthmaniyah has an API of 33, and 1.91% sulfur. Hawiyah is at an API gravity of 32,and 2.13% sulfur, while Haradh oil has an API gravity of 32 and 2.15% sulfur. The levels of sulfur define how “sour” the crude is, and this must be recognized by the refineries, such as the Fujian Refinery in Quanzhou, China which is designed to refine 240 kbd of sour light Arabian crude. The oil from Ghawar flows to the Abqaiq processing plant, this can handle up to 7 mbd of light and extra-light crude., and cleans the crude before sending it on to refineries at Ras Tanura, Jubail, Yanbu and Bapco.

Abqaiq (The Queen) saw peak production in 1973 at 1 mbd, has now fallen to a level of around 200 kbd. It is a field that is “rested” from time to time in order to sustain an even displacement as the water flood progresses. The oil is at API 36.

Safaniya (2nd Queen) started producing at 50 kbd from 8 wells in 1957, peak production was at 1 mbd, and is now down to about 770,000bd. The field lies offshore, and is a producer of some of the heavier crudes, with an API gravity of 26, and a sulfur content of up to 2.96%. It has a current production capacity of 1.2 mbd, but because of the heavier nature of the oil has more trouble in finding a world market, and thus often much of this production is withheld. (In 2008, for example some 700 kbd was being withheld from the market.) The field is currently being further developed with a larger pipeline being installed to allow a higher flow rate from the field onshore. It is also intended that the gas that is now flared will be captured. The upgrade will also involve the installation of submersible pumps and an upgrade to the distribution network, and is scheduled for completion in late 2013, when the capacity will rise to 1.5 mbd.

Berri (the Great Lord) saw peak production at 788,000 bd in 1977 and more recently that fell to around 300,000 bd. This was the fourth of the original set of fields in Saudi Arabia that were responsible for 93% of Saudi production back in 1978. It is slowly watering out and has been occasionally left resting except when additional production is required. The oil has an API gravity of 38, with about 1% sulfur. The field has been reworked so that it now has a capacity of 1.15 mbd though some 300 kbd of this is considered part of the reserve production in case of need, rather than normal production.

Looking back seven years, the plans that the kingdom had, back then, for sustained and increasing production (they recognized that existing wells would decline and thus planned for their replacement) were clearly stated by Abd Allah Al-Saif :

major projects that Saudi Aramco is undertaking to ensure meeting future demand:

The Abu Sa'fah and Qatif projects came on stream in 2004 adding 650,000 bpd.
300,000 bpd of Arabian Light will come on stream in the Haradh field in mid-2006.
500,000 bpd of Arabian Light will be added to capacity through the Khursaniyah development, planned for 2007.
2008 is the target date of approved expansion plans that would add 300,000 bpd of lighter crude at Shaybah and central Arabian fields.
A Khurais increment of 1.2 million bpd of Arabian Light will be commissioned in 2009.
"This is a very aggressive program that will require the mobilization of immense resources, such as rigs, material and manpower, but which we are confident to successfully execute, as we have done for the past 70 years," he said.

Concerns at the time, over the ability of the kingdom to meet these plans focused not only on the quality of the mix, but were more immediately initially aimed on the number of drilling rigs that the KSA had available to drill the required number of wells. Back in 2005 the country did not have a whole lot of rigs at their disposal. This has since been highlighted by Euan Mearns:

Rig Count for the Middle East (Euan Mearns 2011)

Bear in mind that when we started posting we were just coming to the end of the relatively flat section of the Saudi plot, and were, at the time, unable to see how they could continue operations with only 20 odd rigs. Well, with hindsight they could not, and as the plot suggests they rapidly acquired all the spare rigs available at the time and this allowed the increase in the number of wells that afforded the new levels of overall production. Sam Foucher has also posted on the rig count, and his plot agrees more with my memory of the dramatic transition in rigs that the KSA employed back in the 2006-7 timeframe to move them from the placid conditions pre-2005 to the sudden realization that BAU would no longer work.

Various Saudi plots from Sam, though the critical one is the rig count change (Sam Foucher)

The point of the illustration is to indicate that circumstances do change operating conditions, and that folk do respond when they have to. Up, that is, to the limits that they are able to achieve. Some of those limits are imposed by the fact that you cannot suck beer from a conventional pint glass forever, as I discovered when in college, and it is in regard to those issues as well as some more of the above that the discussion will swing toward as the next few weeks unfold.

There have been many other posts on the subject on the Oil Drum over the years, (if one includes Drumbeat there are more than 2,000) here are but a very few
JoulesBurn- Abqaiq
Intro to Satellite sleuthing
Khurais me a river
Happenings in Harmaliyah
Ghawar Numerology

Stuart Staniford
Satellite o’er the desert

Euan Mearns
Saudi Production laid bare

I will add to this list as I move on and start to address some of the concerns that have been raised.


Normandy Inn
Carmel-by-the-Sea

Dr. Judith Curry on the IPCC

A fairly long time ago Jimmy Carter was elected President of the United States, and the Federal Agencies scrambled to find projects in Georgia that they might propose. The National Science Foundation looked to improve the quarrying of granite, one of the centers for which was in Elberton, GA, and some of the technology at the time was relatively unhealthy. Georgia Institute of Technology (GIT) was prime on the contract, and I was initially a member of the Advisory Panel, but eventually took a crew down to Georgia and, working with the Georgia Tech folk and the Elberton Granite Association, went to a quarry and cut a slot some 11 ft long, and about 2 ft deep to demonstrate that high pressure waterjets were a practical tool for use in the quarries. The technology has since transitioned into use around the world, and we carved the MS&T Stonehenge out of Elberton Granite (with water). It left me with a pleasant memory of the folks that deal with Earth Science down at GIT.

This week James Stafford, who runs the Oilprice.com web site contacted me to ask if I wanted to run an interview that they had conducted with Dr. Judith Curry, who is now the Chair of the School of Earth and Atmospheric Sciences at Georgia Tech. Dr. Curry writes the discussions on climate change at her Website Climate, Etc. The original interview can be found at Oilprice.com. I am glad to reproduce it here.

. . . . . . . . .
OilPrice.com: What are your personal beliefs on climate change? The causes and how serious a threat climate change is to the continued existence of society as we know it.

Dr. Curry: The climate is always changing. Climate is currently changing because of a combination of natural and human induced effects. The natural effects include variations of the sun, volcanic eruptions, and oscillations of the ocean. The human induced effects include the greenhouse gases such as carbon dioxide, pollution aerosols, and land use changes. The key scientific issue is determining how much of the climate change is associated with humans. This is not a simple thing to determine. The most recent IPCC assessment report states: "Most [50%] of the warming in the latter half of the 20th century is very likely [>90%] due to the observed increase in greenhouse gas concentrations." There is certainly some contribution from the greenhouse gases, but whether it is currently a dominant factor or will be a dominant factor in the next century, is a topic under active debate, and I don't think the high confidence level [>90%] is warranted given the uncertainties.

As I stated in my testimony last year: "Based upon the background knowledge that we have, the threat does not seem to be an existential one on the time scale of the 21st century, even in its most alarming incarnation."

OilPrice.com: You have said in the past that you were troubled by the lack of cooperation between organizations studying climate change, and that you want to see more transparency with the data collected. How do you suggest we encourage/force transparency and collaboration?

Judith Curry: We are seeing some positive steps in this regard. Government agencies that fund climate research are working to develop better databases. Perhaps of greatest interest is the effort being undertaken by the Berkeley Earth Surface Temperature project, which is a (mostly) privately funded effort to compile and document a new data base on surface temperatures, in a completely open and transparent way.

OilPrice.com: Do you feel climatologists should be putting more effort into determining the effect of the sun on our climate? As the IPCC primarily focuses on CO2 as the cause of climate change – Is the importance of CO2 overestimated and the importance of the sun is underestimated?

Judith Curry: I absolutely think that more effort is needed in determining the effect of the sun on our climate. The sun is receiving increased attention (and funding), and there is a lively debate underway on interpreting the recent satellite data record, reconstructing past solar variability, and predicting the solar variability over the 21st century. Nearly all of the solar scientists are predicting some solar cooling in the next century, but the magnitude of the possible or likely cooling is hotly debated and highly uncertain.

OilPrice.com: You are well known in climate and energy circles for breaking from the ranks of the IPCC and questioning the current information out there. What do you see as the reasons for the increase in skepticism towards global warming over the last few years.

Judith Curry: Because of the IPCC and its consensus seeking process, the rewards for scientists have been mostly in embellishing the consensus, and this includes government funding. Because of recent criticisms of the IPCC and a growing understanding that the climate system is not easily understood, an increasing number of scientists are becoming emboldened to challenge some of the basic conclusions of the IPCC, and I think this is a healthy thing for the science.

OilPrice.com: What are your views on the idea that CO2 may not be a significant contributor to climate change? How do you think such a revelation, if true, will affect the world economy, and possibly shatter public confidence in scientific institutions that have said we must reduce CO2 emissions in order to save the planet?

Judith Curry: Personally, I think we put the CO2 stabilization policy ‘cart' way before the scientific horse. The UN treaty on dangerous climate change in 1992 was formulated and signed before we even had ‘discernible' evidence of warming induced by CO2, as reported in 1995 by the IPCC second assessment report. As a result of this, we have only been considering one policy option (CO2 stabilization), which in my opinion is not a robust policy option given the uncertainties in how much climate is changing in response to CO2.

OilPrice.com: There has been quite a bit of talk recently on geo-engineering with entrepreneurs such as Bill Gates and Richard Branson pushing for a "plan B" which utilizes geo-engineering to manipulate the environment in order to cool the atmosphere. Geo-engineering could be much cheaper than reducing emissions, and also much quicker to produce results and scientists are lobbying governments and international organizations for funds to experiment with various approaches, such as fertilizing the oceans or spraying reflective particles and chemicals into the upper atmosphere in order to reflect sunlight and heat back into space. What are your thoughts on geo-engineering? Is it a realistic solution to solving climate change or is it a possible red herring?

Judith Curry: With regards to geo-engineering, there are two major concerns. The first is whether the technologies will actually work, in terms of having the anticipated impact on the climate. The second is the possibility of unintended consequences of the geoengineering.

OilPrice.com: You have been noted to criticize the IPCC quite openly in the past on several topics. Even going so far as to say: "It is my sad conclusion that opening your mind on this subject (climate change controversy) sends you down the slippery slope of challenging many aspects of the IPCC consensus."
Do you believe that the organization as a whole needs to be assessed in order to better serve progress on climate change? What suggestions do you have on how the organization should function?

Judith Curry: The IPCC might have outlived its usefulness. Lets see what the next assessment report comes up with. But we are getting diminishing returns from these assessments, and they take up an enormous amount of scientists' time.

OilPrice.com: Would renewable energy technologies have received the massive amounts of funding we have seen over the last few years without global warming concerns?

Judith Curry: I think there are other issues that are driving the interest and funding in renewables, including clean air and energy security issues and economics, but I agree that global warming concerns have probably provided a big boost.

OilPrice.com: What do you believe are the best solutions to overcoming/reversing climate change; is a common consensus needed in order to effectively combat climate change?

Judith Curry: The UN approach of seeking a global consensus on the science to support an international treaty on CO2 stabilization simply hasn't worked, for a variety of reasons. There are a range of possible policy options, and we need to have a real discussion that looks at the costs, benefits and unintended consequences of each. Successful solutions are more likely to be regional in nature than global.

OilPrice.com: I saw an interesting comment on another site regarding climate science that I thought I'd get your opinion on as it raises some very interesting arguments: Climate science has claimed for 30 years that it affects the safety of hundreds of millions of people, or perhaps the whole planet. If it gets it wrong, equally, millions may suffer from high energy costs, hunger due to biofuels, and lost opportunity from misdirected funds, notwithstanding the projected benefits from as yet impractical renewable energy. Yet, we have allowed it to dictate global policy and form a trillion dollar green industrial complex - all without applying a single quality system, without a single performance standard for climate models, without a single test laboratory result and without a single national independent auditor or regulator. It all lives only in the well known inbred, fad-driven world of peer review.

Judith Curry: I agree that there is lack of accountability in the whole climate enterprise, and it does not meet the standards that you would find in engineering or regulatory science. I have argued that this needs to change, by implementing data quality and model verification and validation standards.

OilPrice.com: Do you believe that the language used in papers and at conferences is a problem? The public just wants straight answers to questions: Is the climate warming, By how much, and what will the effects be? Scientists need to step out from behind the curtain and engage the public with straight answers and in their own words. Is this achievable, or is climate science too complex to be explained in laymen's terms? Or is it because even climate scientists can't agree on the exact answers?

Judith Curry: I think the biggest failure in communicating climate science to the public has been the reliance on argument from consensus. We haven't done a good job of explaining all this, particularly in the context of the scientific disagreement

OilPrice.com: What resources would you recommend to people who wish to get a balanced and objective view on climate science and climate change.

Judith Curry: There is no simple way to get a balanced and objective view, since there are so many different perspectives. I think my blog Climate Etc. at judithcurry.com is a good forum for getting a sense of these different perspectives.

Interview by. James Stafford, Editor Oilprice.com
Note that both sites appear on this site's blog roll.

OGPSS - A recap with some updates on North American production

This series of posts has just completed a review of the different regions of Russian oil production, with the conclusion that while Russia may maintain current production levels of around 10.4 mbd for a short while, it faces rising domestic consumption levels at the same time that it is not replacing existing production at a fast enough rate to be able to sustain exports. Without more investment than is likely available, the rate of new field development (given the harsh and remote nature of the sites) means that there will be a slow decline in available oil to the market starting fairly soon. (Given the large supplies of natural gas that are coming available, this series is going to focus a bit more on oil as we continue the review).

As the series continues, and moves slightly down the list to consider the future of the oil and gas fields in Saudi Arabia, it is worth noting that while there is little that Russia can do to significantly raise production in the short term, that does not hold for the desert kingdom. However, before moving on to KSA in detail, this week is a pause to consider some contextual changes in the overall picture.

One of the questions that has been raised many times relates to the reality of the true maximum production levels that Saudi Arabia can achieve. As oil prices have continued to rise politicians are calling for the Saudi’s to increase oil production, so that the price may fall. (This is a rather odd and unrealistic request when the KSA needs all the income it can get to help domestically.) The EIA, in considering the global oil flow as sanctions begin to bite on Iran have projected that OPEC has a spare capacity of 2.5 mbd, most of which comes from KSA. At present the KSA is producing at around 9.7 mbd up some 600 kbd from this time last year, according to the EIA, although there is a little question as to how accurate that number is. (The IEA is reportedly saying that KSA is already producing at 11.5 mbd.. However the IEA counts all liquids, as Gail has pointed out, while EIA values are for the crude and condensate, which add up to 9.7 mbd, so that while there appears a discrepancy there really is not). The debate is likely to see some harder numbers in the months ahead. Iran is already having problems marketing their oil, since after January 23rd the European Mutual Protection and Indemnity Club is no longer covering shipping contracts. This is making it difficult for consumers such as India to maintain supply, and they are already considering the use of sovereign guarantees for its shipping lines. At the same time the EU is not calling for coverage to be phased out until July 1.

The EIA report notes that Iran is currently the 5th largest producer of liquid fuels at 4.1 mbd, although it consumes 1.8 mbd of that internally. Thus the threat to the global market runs at around a 2.3 mbd reduction on current overall demand of around 88.1 mbd. The series will discuss Iranian production, and its prospects somewhat later, but before getting into an analysis of Saudi Arabia, it might be worth just a quick glance back at a couple of countries that have been covered earlier.

Estimates of future production are only that, and, as has been noted in comments on recent posts, not all anticipated production or plans work out as anticipated. To give but a few examples pointed out in comments, and elsewhere:

The Russian oilfield at Yuzhnoye Khylchuyu was initially estimated to hold 505 million barrels of oil, but has now been reported as only having reserves of 142 mb.. (Noted by voiceinyourhead) On the other hand the Sarmatskoye field in the Caspian is now considered to have double the original estimate, and is estimated as just under 1 billion barrels of oil equivalent in natural gas and condensate. It is anticipated to come on stream in 2016. And, while on the topic of natural gas, both toolpush and RayRay have noted that the natural gas from Sakhalin Island is not going to see the 3rd LNG train that I mentioned in the post on that topic, and that the natural gas will instead feed into a pipeline to the mainland.

In regard to the posts that were written to cover the United States and Canada, the February monthly flow of oil through the Alaskan pipeline has fallen to an average of 609,805 bd. This is down from an average of 624,716 bd in January and gets the flow closer to the point where solidifying wax and water start to cause problems.

In the time since the posts were written on North American production and promise (politically including Canada with the United States makes the overall change in production figures look better than if the figures were based solely on US production, particularly as oil from the Albertan oil sands rises to production levels of 3 mbd by 2015) the Canadian National Energy Board (NEB) released their “Canada’s Energy Future: Energy Supply and Projections to 2035” report. In seeking to predict future production the NEB anticipated that the price of a barrel of oil would rise relatively modestly over the next 20-years. Even in their high estimate they do not see the price rising to more than $160 a barrel by 2035 (who would bet that the estimate is exceeded this year or next?).

Canadian estimate of the future of crude oil prices (NEB )

The report estimates that in the Reference case, oil production from the oil sands will reach 5.1 mbd in 2035, which is three times 2010 production. This will be mainly from in-situ methods.

Canadian crude oil production (NEB )

Over the ten years from 2010 to 2020 in-situ production is anticipated to grow at 9% p.a., while mining production will rise at 5% p.a. The North West Upgrader is anticipated to come on stream in 2014, with an initial 50 kbd of throughput. Carbon dioxide produced during the process will be used in Enhanced Oil Recovery (EOR) locally. If the price rises to the highest levels anticipated, then production might be estimated to rise to just under 7 mbd in total for Canada by 2035.

Canadian production for different case estimates of price, as above (NEB

However the NEB do recognize that domestic consumption will affect overall supply, but consider that it will likely only significantly impact the lighter crudes, and that the difference between the roughly 4 mbd of heavy crude produced and the 3.8 mbd available for export in 2035 will reflect a relatively constant 0.2 mbd of internal consumption.

Canadian light oil future predictions (NEB

With considerably more oil, therefore, being available from Canada, albeit there remain concerns over how much will be shipped to the USA, there is somewhat less pressure on domestic producers. Which is likely good news since the likelihood of US production remaining at current levels is still doubtful.

One of the hopes for the future comes from the wells being drilled in the Gulf of Mexico, with DoE projecting that gulf production will rise to some 2 mbd by 2020, from 1.3 mbd at present.

One concern that remains however, lies in the actual levels of production that will be achieved. As Jean Laherrère has noted the wells in the deep water have not all held up their promise, peaking on average within a year of coming on line. Jean notes that the production decline with the Mars and Ursa fields are at about 9% per year, which he notes is less than half the decline rate at Thunder Horse. Darwinian is also tracking production, and although he notes that Tahiti is performing relatively consistently at 110 kbd, Atlantis is not coming close to the 185 kbd projected.

Atlantis production (Darwinian )

Exploration and development in the Gulf are, apparently now back to pre-Deepwater Horizon levels, one can only hope that future developments will be less dramatic and more successful.

The speed of that recovery is encouraging, though the results to date have been a little less promising than anticipated. But, as with operations in the Arctic, investment costs are going to be high for any new finds that are viable, and will take a number of years to develop, at a time when demand is going to continue to increase. The Gulf discoveries, for example, will likely start to come ashore about the time that the Bakken and Eagle Ford plays start to fall in production, and thus, overall, may not give the boost to American volumes that are currently being projected.

Gas Prices - when will $5.00 a gallon for gas be the US average?

It is hard to miss the recent rise in gasoline (gas) prices in the United States, and the rumblings that it has generated in the national press. It is a concern that has already entered the ongoing political debate with one Republican candidate promising that, once elected, he will bring the price of gas down to $2.00. (The unreality of that prediction has been explained earlier.) As a result there have been a number of reasons projected (for example here) as to why, in contrast with most seasons, gas prices are rising at the present, in the season of the year when demand is generally lower than normal. Today (Thurs the 1st March) they have risen for the 23nd straight day with prices about $0.30 above what they were a month ago. The Administration does not seem, however, concerned.

Changes in the price of gasoline (EIA TWIP)
Changes in US demand for gasoline (EIA TWIP)

Even though the economy is somewhat stronger than it was a year ago, the demand for gas is still down around 400 kbd. (8.746 against 9.101 mbd). In a more conventional market decreasing demand, against constant supply would lead to a fall in prices. That is not likely to happen, and in part this is because the USA only provides a part of the global market where the demand from the developing countries (as Stuart Staniford has noted) is steadily increasing. China, for example, is growing its oil demand at slightly more than 5% p.a. (0.51 mbd y-o-y for December growth) and has reached a total consumption of 9.3 mbd. It is also slowly starting to build its own reserve of oil and has been buying additional oil for that reason. How long that will continue this year is one of those questions to which there is no clear answer, although, since it is apparently buying heavier and higher sulfur crude and it may be acquiring those crudes that Saudi Arabia has previously had problems selling.

However I continue to have a concern that in the face of this growing demand there continues to be a question over the stability of supply during the next year. (And also thereafter, but that is less likely to affect current gas prices). Consider, if you will, that during the height of the summer US demand will, following the pattern shown above, rise about 1 mbd. Similarly with the driving season in Europe and elsewhere, demand in general can be anticipated to increase over the next four months. OPEC, in its February Monthly Oil Market Report, has lowered its projection of demand growth this year overall to 0.9 mbd, (for a peak of 89.95 mbd on average in the fourth quarter of 2012) having recently lowered the estimate based on doubts over the growth of the US economy, but nevertheless that additional supply has to be found from somewhere.

Projections of oil demand growth from OPEC (OPEC February 2012 MOMR)

And this is where the troubles that continue after the beginning of the “Arab Spring” may have consequences in meeting those targets, together with questions on the nature of the continued status of oil shipments from Iran. OPEC anticipates that, in total, it will (plus minus 100 kbd) continue to supply 30 mbd into the global market. For, as the EIA TWIP notes:

EIA estimates that the world oil market has become increasingly tight over the first two months of this year. Oil prices have risen since the beginning of the year and are currently at a high level. Global liquid fuels consumption is at historically high levels. While the economic outlook, especially in Europe, remains uncertain, continued growth is expected. . . . . With respect to supply, the world has experienced a number of supply interruptions in the last two months, including production drops in South Sudan, Syria, Yemen, and the North Sea. Both the United States and the European Union (EU) have acted to tighten sanctions against Iran, including measures with both immediate and future effective dates. There is some evidence that these measures may already be causing some adjustments in oil supply patterns. For example, there is emerging evidence that some shipments of Iranian crude oil under existing contracts are being curtailed . . . .

One should also remember, that, in discussing oil supply, price is set by that which is available on the market, and this usually discounts the volumes that are consumed domestically. Thus, if Saudi Arabia, for example, increases domestic demand by 100 kbd and the FSU increases demand by 100 kbd, both against a constant overall output, then the rest of the world has to find that additional 200 kbd from somewhere else. In the short term that might be the United States, since production overall rose some 360 kbd in 2011, largely credited to growth in production from the Bakken in North Dakota, and from Eagle Ford shale in Texas. OPEC anticipates that growth to continue, estimating a total gain of 260 kbd from North America this year, though only half of that will come from the United States (the rest will come from Canada).

Non-OPEC growth is, in total, expected to continue in 2012, with an overall production gain to 53.34 mbd by the fourth quarter.

But it is the volumes from the countries involved in continued conflict that raise concern. Libya is making considerable strides to return to pre-conflict levels of 1.6 mbd, having reached 1.4 mbd this month, with exports at 1.1 mbd but Iraq has yet to reach 3 mbd – being at 2.75 mbd in January. (It remains hard to be optimistic over claims that this will rise significantly in the near term.) The EIA are more concerned than OPEC. They note that in order to balance demand against supply Saudi Arabia was producing at 9.9 mbd in January and they consider that the country has only 2 mbd in additional production that it can bring to the market at present (and most of that is heavy sour crude). Further they see domestic demand rising to 3.2 mbd in the middle of the summer, cutting exports significantly. Some of this might be needed to offset supply from Syria, which has been shipping over 150 kbd into the market, but which has already had to cut back that amount as sanctions from Turkey have cut the market.

But it is Iranian production, which normally runs at around 3.5 mbd that raises the real concerns. If this all disappears from the market, the fear is that this cannot all be made up even if Saudi Arabia went into emergency production, and thus that there may be a shortfall of around 1.4 mbd in global supply. The ban will take full effect in July, but as sanctions continue to bite and nibble away at what is still being sold, so the flexibility of the market to adjust is going to be tested. And that may have already begun. Predictions of increases in production and thus global supply, appear somewhat more tenuous than one can be comfortable with, as oil – and thus gas – prices continue their rise.