Tech Talk - Optimism is becoming harder to sustain

For some time the nations of OPEC have been suggesting that demand for their oil will remain relatively stable in the near future, as increased production from the non-OPEC nations is expected to more than meet demand increases. Thus, for example, in the May Monthly Oil Market Report OPEC anticipates that global oil demand will increase by 1.14 mbd this year, while non-OPEC production will increase by 1.38 mbd, allowing a slight reduction in the volumes OPEC market, which continues to fluctuate around 30 mbd. In the longer term, however, as previous annual oil company prognostications of future supply have emphasized, the MENA countries are going to be pulling an increased weight in supply. For example ExxonMobil has noted:

The Middle East is expected to have the largest absolute growth in liquids production over the Outlook period — an increase of more than 35 percent. This increase will be due to conventional oil developments in Iraq, as well as growth in NGLs and rising production of tight oil toward the latter half of the Outlook period.

At the same time BP pointed out that in just a couple of years demand for OPEC oil is likely to start to steadily increase.

Figure 1. BP view of the increased demands to be made on OPEC oil with time. (BP Energy Outlook 2035)

A large part of that increase has been expected to come from Iraq. With the end of the Iraq war, and the government encouraging development there were some claims that production might eventually rise to over 13 mbd (ahead of both Russia and Saudi Arabia). But those optimistic views had to be measured against the reality that the country has taken a long time to recover back to the 3 mbd levels of exports that it had achieved before conflict.

Figure 2. The fall and recovery of Iraq’s oil production. (EIA)

At present OPEC reports that Iraq was producing at 3.298 mbd in April, making it second only to Saudi Arabia (at 9.579 mbd) among the OPEC nations. There still seemed to be some chance that the country might be able to reach some lower target figures, such as those suggested in the OGJ.

Figure 3. Anticipated Iraqi exports and their market region (OGJ)

Regrettably violence is now significantly increasing in the country, with Mosul being over-run by Sunni militants. This puts them in charge of the main pipeline to Turkey, as well as giving them potential control of some of the adjacent oilfields.

Figure 3. Known Iraqi oilfields in 2010.

Euan Mearns has written of the potential for oil from the Kurdish regions and Turkey has just allowed a second tanker to sail from Ceyhan carrying oil from that region to the market, without Bagdad’s permission. The oil is being delivered through a new pipeline capable of carrying 100 kbd from Kurdistan into Turkey. The main pipeline (shown in Figure 3) can carry as much as 600 kbd and runs from Kirkuk and perilously close to Mosul. The new pipeline runs through Kurdish territory until it reaches Turkey.

The declining influence of the central government over the northern territories of Iraq does not bode well for future production gains. Conflicts are getting worse, and the country is approaching the point where it could well be partitioned, since the government forces seem unwilling to take on the insurgency. Violence has already spread to the Al-Bayji refinery some 130 miles north of the capital. This is the largest refinery in the country, and currently produces below its 300 kbd capacity, all of which is used for domestic consumption.

The problems that this reveals are unlikely to be resolved soon, it is much more likely that they will continue to escalate over the next months, if not years. The impact on Iraqi oil production should not be underestimated. While the oil in the Kurdish region can make its way through the smaller pipeline that is under Kurdish control, the greater flow rates needed to sustain future growth in supply cannot be met by that pipe.

In the South developments in the Mesopotamian region around Basra from the fields of Rumaila and Majnoon will likely continue, with production being shipped out from the new facility offshore, although this is already quite significantly behind schedule.

Figure 4. Oil fields of Southern Iraq (IEA )

One has only to look at the degrading situation in Libya, where production has fallen from 1.6 mbd to a current level of less than 200 kbd, with no path forward now evident for production levels to be restored. Those familiar with the region doubt that there will be much improvement in the situation this year, and if the country follows the Iraqi path (figure 1) then it is unlikely that the world will see significant Libyan production for this decade.

That loss of a million barrels a day is likely to become increasingly evident as world demand continues to grow at greater than that level each year. When this is combined with the increasingly inability of Iraq to increase production as it moves back into more vicious internal strife, then one has to ask from where can future gains in oil production be anticipated?

The major oil companies have urged complacency having bet on Iraq and OPEC coming through (and in the process assumed that Saudi Arabia would also increase production significantly above 10 mbd, something that they have consistently declined to commit to doing). As Libya and Iraq remove that surplus from the table then the question becomes where else can it come from?

It is increasingly unlikely that US increases in production can be sustained for long, given the very short high-level life of the new wells completed in shale, and as the sweet spots in the current fields are consumed. Thus within a couple of years we are now likely to see an increasingly desperate search for new reserves. But those reserves take years to find and develop (as well as large amounts of money), and if the crisis comes at a faster pace than most now expect, then $100 a barrel oil may seem an absurdly cheap price to have had to pay. It may even have an effect on the next Presidential election.

Tech Talk - Falling gas prices and Iraq

Filling up at the local gas station yesterday I noted that prices are still below $3.00 a gallon, though at $2.99 only just below. Going back to the BBC Calculator this is still $2.04 less per tank than the regional average, and $86 less than I would pay in Italy. So even though the costs are rising over the last time I looked, they are still relatively low.

Figure 1. Relative fuel costs ($/gal) in different locations around the world. (BBC Calculator)

The orange line in figure 1 shows what I paid, and the darker grey horizontal line the regional cost here in the MidWest.

The EIA have noted in last week’s TWIP that the national price is as low as it has been since the beginning of 2011.

Figure 2. Average US retail prices for gasoline (EIA).

The EIA continues to describe the causes of these relatively low prices:

Lower global crude oil prices, high profitability for diesel fuel that has been encouraging refiners to increase throughput, high inventories, and the switch to less-costly winter grades of gasoline are among the factors currently driving gasoline prices.

The OPEC Monthly Oil Market Report (MOMR) reports that global oil prices have fallen $2.04 a barrel (to $106.69) – the first decline in five months, as stocks increase and the Northern Hemisphere moves into winter. The estimate for global demand growth this year remains at 0.9 mbd, with the growth for next year anticipated to be at 1.04 mbd. This steady growth in global demand of a million barrels a day keeps raising the question as to where the increase is likely to come from. This is particularly germane given the disturbed conditions in a number of the MENA countries that provide a significant amount of baseline production, as well as anticipated increases.

The problems in Iraq, for example, have now reached the point that the Turkish government is directly working with the Kurds in Northern Iraq, to develop the oil in the Kurdish northern part of Iraq. This comes at a time that Iraq has been negotiating with the different major oil companies that had contracted to help Iraq reach an overall production target of 12 mbd by 2017. There have been considerable doubts cast on that original estimate, with the IEA producing a report, reviewed in an earlier post that concluded that the country would be lucky to achieve a production goal of 6 mbd by 2020, with an out year estimate that the country would be able to reach 8.3 mbd only by 2035.

Recognizing some of the difficulties in gearing up oil production at the different oilfields around Iraq (some of which were discussed in another post last June) production targets for 2017 had already been scaled back to a goal of 9 mbd by 2017, a drop of 25%. Now there has been discussion between Iraq and its partners for the various fields to drop those target values further, despite the large scale of the reserves that are considered available.

Figure 3. Oil reserves by field (Financial Times)

Exxon Mobil had 60% of the stake in the West Qurna oil field, but after it had started to work with the Kurds independently of Baghdad it found that relations with the Central Government rather chilled. Exxon Mobil has thus sold 25% of their stake to Petro China, and 10% to Pertamina of Indonesia, bringing the EM stake down to 25%. The current discussions between the companies and the Iraqi government are aimed at reducing the production target of the field by around 1 mbd..

Oil has just started to be produced at West Qurna Two, but the initial target is to have commercial production by the end of the year has suffered from local disruptions and the initial goal to reach a production of 400 kbd by the end of 2014 is now also in doubt. Commercial production is now not estimated to begin until perhaps the end of the first quarter of 2014. Initially the field was to be producing 1.9 mbd by 2017. That goal had been lowered to 1.2 mbd at the end of 2012. How the current disruptions will play into that target is difficult to estimate yet, but a year ago the parties were assuming that production would have already reached 150 kbd.

Earlier this year ENI had agreed with the Ministry of Oil to lower the target peak production from the Zubair field from 1.2 mbd to 850 kbd with that goal to be reached in 2016.

Discussions are not yet complete on new target production to be achieved from the Majnoon field. Shell has just announced the start of production from the field with the intent of raising production to over 175 kbd by the end of the year. However the long term target of raising production to 1.8 mbd is now in question. Shell is reportedly suggesting that the 2017 target be lowered to 1 mbd.

Similarly over at the Rumaila field BP is in discussion over long-term production, although earlier last month Schlumberger stopped work at the field because of local disturbances. With the field producing 1.4 mbd the disturbance was short-lived and is not reported to have affected current production, though it is indicative of tensions within the country. Current discussions are aimed at lowering the 2017 target production by around 800 kbd.

When these cuts are combined the total reduction is around 3.65 mbd, taking 2017 production down to 5.35 mbd, which is below the earlier best case scenario envisaged by the IEA.

OPEC notes that, after reaching a peak recent production of 3.194 mbd in August, production has fallen back below 3 mbd in September and October, and with Saudi Arabia also cutting back below 10 mbd in October the Organization is lowering production to meet the reduced winter demand, albeit the reduction from Iraq might not have been anticipated.

Figure 4. OPEC production figures through Oct 13, 2013 as reported by others to OPEC (OPEC MOMR )

This means, unfortunately, that if the world was anticipating that the roughly 4 mbd increase in global demand by 2017 would be met largely by increased oil production from Iraq then they are likely to be sadly disappointed. Enjoy the lower gas prices while you may.

OGPSS - Future oil production from Iraq - an optimistic view

There is often quite a debate in the Peak Oil community over the difference between a reserve and a resource. Simplistically a resource is the amount of, for the sake of discussion, oil that is in the ground in a certain country, while the reserve is the amount of oil that can be both technically and economically recovered from that resource. The numbers can differ quite markedly, and the judgment as to whether a certain body is a reserve is finally made when a well is drilled down, and production (or not) begins.

Just having the reserve available is not, however, within the global discussion of Peak Oil, an adequate sufficiency. Because oil well flow declines over time it is important that the rate of oil production from that reservoir, and the timeliness of its arrival within the supply chain be considered. This is particularly true in discussions over the help that the reserve will provide in ensuring that there is an adequate supply available when the global demand needs it. Normally, as noted, the decisions on production are made on geologic and economic grounds, but it would be foolish not to recognize that there are other factors. Consider the case of Iraq. It is common to find the assumption that Iraqi oil production will rise considerably, with some suggesting it will reach the levels currently only achieved by Russia and Saudi Arabia, although there are some who project it might even rise to as much as 13 mbd, given that there are contracts in place, which if all were fulfilled on time, would raise Iraqi production four-fold to 12 mbd by 2017.

In their Special Report on Iraq last year the IEA noted that the country is already the world’s third-largest oil exporter, with the potential and intent to increase production much further. And, as the EIA notes, Iraq became the second largest oil producer in OPEC, when it passed Iran at the end of last year.


Figure 1. Iraqi production of oil since 1990. (EIA)

Iraq is currently producing around 3.1 mbd of crude and thus the potential production levels, and their contribution to reserves and to the daily global need for supply, still has a way to go. With so much oil potentially available, and yet with considerable question over the rate at which it will arrive, it is worth examining the conclusions that the IEA came to, before the current increase in violence occurred. This new spate of attacks come after an interval when violence was decreasing in the country, and may prove a further impediment to significant growth in production.


Figure 2. Level of violence in Iraq showing the number of attacks each week since 2007. (IEA )

The IEA built three different scenarios in their report, for which their was extensive consultation in country. The main or Central Scenario that they project anticipates that GDP in the country will continue to rise, though tapering off as stability are achieved in the out years.


Figure 3. Anticipated growth rates for Iraqi GDP under the different models the IEA used. (IEA )

The Iraqi GDP grew 10.2% last year, and has been growing at an increasing rate over the past few years.


Figure 4. Actual annual growth rate in Iraq GDP (Trading Economics )

The oil fields in the country are largely concentrated in two separate regions, down around Basra in the south of the country, and in the region around Kirkuk and Mosul in the North.


Figure 5. Oil and gas fields in Iraq (IEA ).

This division is somewhat unfortunate from a politically stable point of view since the region in the south is predominantly Shiite, while the reserves in the north lie in the Kurdish region of the country. There is significantly less within the Sunni communities which are largely found in the central region of the country.

In recent times Euan Mearns has written of the potential for oil production in the Kurdish region in the north. In total this is estimated to hold around 4 billion barrels of oil, or around 17% of the national reserve. However, as exploration of the potential fields in Kurdistan continues, this estimate has been increased by the local government to a possible 45 billion barrels. Euan, for example, wrote about the development of the Shaikan oil field and the potential size of between 8 and 13.4 billion barrels that it showed in January 2012. Current plans are for production to reach 40,000 bpd “soon”, with production ramping up to 400,000 bpd. The Kurdistan Regional Government (KRG) see it playing a considerable role in achieving their target of 400 kbd this year, 1 mbd by 2015, and 2 mbd by 2019. The field is being developed by Gulf Keystone Petroleum.

In the south current production is centered around the Rumaila oil fields. BP has committed $2.85 billion toward improvements in Rumaila this year, with the intent of raising production from the current 1.4 mbd, through 1.45 mbd at the end of this year, up to 6 mbd by 2017. 300 new wells will be drilled in the field over the next five years, to meet the goal, with 150 of these being drilled in the second half of this year. BP operates the field in partnership with CNPC.


Figure 6. Detail showing the location of the Rumaila fields in south Iraq. (Energy-pedia)

The overall scale of Chinese involvement is of concern to some, since as oil supplies tighten in the years to come, it is expected that up to 80% of future Iraqi production will head towards Asia, and particularly to China.

With the growing development of the Majnoon field, with an estimated reserve of 38 billion barrels, it might thus appear that the country is well on its way to meeting the projections that the contracts might suggest. However there are many constraints on future production, including infrastructure and water availability, and I will discuss these and why they limit the IEA to an optimistic assessment that the country will produce 6 mbd by 2020, and only reach 8.3 mbd by 2035 in the next post.