Tech Talk - Where to look for more oil this year.

The news that Saudi Arabia is planning to employ 200 drilling rigs next year (up from 20 back in 2005) suggests that there is a recognition that future reserves may not measure up to the planned volumes needed. Plans now include exploration of the shale deposits in the country, looking primarily for natural gas. There are estimates that this resource could run as high as 600 trillion cubic ft. Current plans are to drill seven exploratory wells in the Red Sea, off Tabuk.

Figure 1. Location of Tabuk in the Kingdom of Saudi Arabia (WikiMedia )

This is across the country from the major oil fields currently in use, which lie more along the Persian Gulf coast, centered perhaps around Damman. It therefore suggests that they are looking for extensions of the Israeli and Egyptian fields into northern KSA. (Minister Al-Naimi said that they still “had to find them.”)

In discussing the venture Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi also noted that, choosing to look for – and presumably finding - natural gas, would take the pressure off the country to maintain its oil reserve.

Al-Naimi said that prospects for global production of shale gas and oil – including in China, Ukraine, Poland and Saudi Arabia – were so promising that the Kingdom might not need to continue with its decades-long policy of maintaining an oil-output cushion for use in global supply disruptions.
“It is not a question whether Saudi Arabia has spare (oil) capacity. It is a question of whether we need to spend billions maintaining it at all,” Al-Naimi said.

Now over the years KSA has lowered the volume it has projected that it can produce from 12.5 mbd to 12 mbd, and this is, perhaps, an early indication that they intend (whether by policy or natural reserve availability) to lower that maximum further.

This has to be of at least a little concern, since the number of places with significant flexibility to increase production are getting closer to zero every year. The gains in global production that are foreseen by OPEC in the next year, for example come in dribs and drabs.

OPEC notes that in May the 8,915 producing wells in North Dakota collectively produced over 800 kbd. (The Department of Mineral Resources reports 821 kbd in June, over the 811 kbd in May with well numbers of 8,932 in May and 9,071 in June. Production per well is thus running an average of 90 barrels a day, with a well cost of $9 million.) There are 187 rigs plus/minus working and this is still enough to keep production rising at a rate of 1.3% per month. One of the maps I find interesting is this, from the Department.

Figure 3. Location and production values for wells in North Dakota (Department of Mineral Resources )

It is this illustration of the relatively heavy drilling already in the “sweet spots” and the poorer performance in the less well drilled regions that gives me concern for the longer term prospects for the formations. And as an aside note that crude from Alaska is declining, July output was 498 kbd against the year-to-date average of 542 kbd. The EIA is noting that, since there aren’t any major oil pipelines running into California from the East, that there is an increase in rail traffic to make up the difference. The EIA is suggesting that the traffic is already at a level of around 100 kbd.

And this in happening in the most promising region to increase production (though it includes Canada, for which OPEC projects a growth over the year of around 40 kbd, which is set against Mexican production, for which OPEC sees a decline of around 60 kbd).

Malaysia is projected to increase production by 50 kbd, from the Gumusut field. This is a Deepwater project, and one can get some estimate of the shape of the field from the well pattern. The production gain is viewed by OPEC as likely being the highest in the region.

Figure 4. Planned Well pattern for the GUMUSUT KAKAP project in Malaysia (Rawingbadi)

In Latin America Colombia is expected to increase production by 80 kbd, though the country is having some issues with pipe damage from terrorism. There have been more than 30 attacks this year. OPEC also looks for an increase in Brazilian production of 10 kbd over the year, this gain coming after some 14 months of decline, which drop hopefully will be recovered before the end of the year.

Oman will grow production by 20 kbd, but it is in Sudan and Southern Sudan that OPEC anticipates the greatest growth, of 90 kbd. However the two countries are not the best of friends, with oil from Southern Sudan having to ship by pipeline to Sudan, for shipment onwards. At present oil, at an average rate of 75 kbd is continuing to flow up the pipe, but Sudan continues to threaten to halt shipments, leading Southern Sudan, in turn, to plan to shut-in the wells. The OPEC projection seems to be best defined therefore as “iffy.”

OPEC expect Russia to increase production by 80 kbd in 2013, yet there is some caution in that estimate, with other numbers suggesting that Russia is reaching a modern peak in production. Kazakhstan is projected to increase production by 50 kbd (coming from the startup of Kashagan, now expected at the end of September). The 100 kbd production will more than offset declines in the rest of the country. And China may increase production over the year by 60 kbd.

I have listed the countries that OPEC anticipates will grow production by more than 10 kbd, and have not listed the many countries that will see production decline by more than that amount. It is remarkable that listing the increases in production outside of OPEC can be done with just a few paragraphs. And it is a little disturbing that the threats to pipeline security throw questions over the reliability of some of the numbers. And yet this only addresses the possible growth in production, declining producers would require a much longer list. Combined it becomes a little more difficult, as turmoil in MENA continues to grow, to remain optimistic over the OPEC projections.

OGPSS - A June TWIP, and the OPEC MOMR

The EIA has noted, in This Week in Petroleum that, for the first time, the sum of Non-OECD country demand contributed more than half to the total of liquid fuels consumed in the world.

Figure 1. Changes in the relative shares of liquid fuel consumption between the countries in and out of the OECD. (EIA )

It does, however, point out that the projections of the Short Term Energy Outlook are for the two curves to re-intersect at the end of 2014.

Figure 2. Projected changes in liquid fuels consumption, through 2014 (EIA)

The reality of that second assumption is, I rather suspect, more based on hope than reality. Once you start providing power, and all its benefits, to the general population you are on a slippery slope that it is almost impossible to back away from. Consider (as a small example) the problems that Egypt is currently having with the supply of subsidized bread to the general populace. Once you start supplying a commodity at a subsidized price it becomes very hard to change the equation, and too much of the non-OECD world is now living in an economy where energy use is subsidized. The problem that the above graph fails to recognize is that you cannot wean a culture from subsidies in the immediate short term and still expect their government to survive in its present condition.

Thus when the EIA project that global demand will grow to over 92 mbd in the next year, they are likely only being realistic. Their assumption that it may then decline is perhaps more in the nature of wishful thinking.

Figure 3. EIA anticipated growth in demand and supply over the near term (EIA)

There are however a couple of caveats to that last statement, the first of which is that the decline in demand may be more reflective of a lack of supply capacity (our raison d'être) and alternatively it may reflect, as a result of the first, that prices will rise to influence demand. Nevertheless we remain in a condition where the harsh realities that lie just over the horizon remain obfuscated by other events.

As with many other international agencies the EIA continue to anticipate continued growth in the North American supply of liquid fuels. Outside of that growth the increased demand for more than an additional mbd of liquid fuels seems more likely to be likely to be desperately hunting for an invisible savior.

Figure 4. Anticipated growth in liquid fuels supply over the next two years (EIA)

The decline in supply from OPEC in the two years ahead should be noted. It should also be remembered that this is likely to be as much a voluntary control, to ensure price stability in the face of increased North American production, rather than as a result of a short-term supply shortage. However the reality of continued domestic growth in demand in the Middle East, as Westexas has reminded us, is something that cannot be neglected. It has been noted that Saudi Arabia, although having less than a third of Germany’s population, recently surpassed it in terms of oil consumption. It will add several new oil-fired power stations including those at Yanbu and Jeddah. This will feed into an anticipated continued growth in Saudi domestic demand of 5.1% pa.

And this brings us to the OPEC Monthly Oil Market Report (MOMR) for June. OPEC continues to anticipate a global demand growth of 0.8 mbd this year, though they note that there will likely be a growth of 1.2 mbd in the non-OECD nations, requiring a reduction in OECD demand to match the overall forecast. Major growth in demand will continue to be in China (at 0.4 mbd and the Middle East at 0.3 mbd). On the other hand OPEC anticipate cutting their supply (to match anticipated need) by 0.4 mbd over the course of this year. OPEC, therefore, has slightly dropped their projection for year end, however it will still crest above 90 mbd.

Figure 5. Estimates of global oil demand (OPEC June 2013 MOMR)

A large part of demand projection is tied to growth in the global and individual nation economies, and that is a murky crystal ball to view. But OPEC anticipates that these economies will continue to grow at an increasing rate, while recognizing that this projection is in an area with a high level of risk in the estimate. The continued, and perhaps growing unrest in the Middle East continues to cast a further shadow over predictions over both supply and the reality of future demand in those countries. And, as one of the less frequently discussed topics, future output from Russia is not as assured as the average analyst appears to assume.

OPEC is anticipating a relatively strong growth in demand in the second half of the year to almost reach 91 mbd by the end of the year. Overall the growth in supply to meet this demand continues to come from North America.

Figure 6. Anticipated oil supply for 2013. (OPEC June 2013 MOMR)

OPEC itself is reporting a slight increase in overall production (by about 128 kbd) although, as always, there are differences in the numbers between those supplied by the countries themselves, and those reported from other sources.

Figure 7. OPEC crude oil production as reported directly (OPEC June 2013 MOMR)

There continues to be a significant disparity between the numbers reported from Iran and Venezuela, for example, when other sources are reported to the tune of around 1.5 mbd roughly. In the short term Iraqi production appears stable.

Figure 8. OPEC crude oil production as reported by others (OPEC June 2013 MOMR)

With the continued global reliance on increased production from North America, and, in turn, that reliance on improved production from tight formations, I would be a little more confident of the future were it not for plots such as this, which I recently found.

Figure 9. Chesapeake typical well decline curve (Eagle Ford Forum)

It is a curve that I rather suspect continues to be optimistic.

Can Saudi Arabia and OPEC meet future demand

Looking forward to a return to more normal times for the global economy (something perhaps allowed by the improved health of some countries in Europe, and some stability in the U. S. housing market and increases in the miles driven in the United States) leads to a small wonder about what we will find when we get there. Doing some simple projection on Asian demand growth, non-OPEC declines and a rebounding economy suggests that we might only have a year's breathing space before we're back in trouble.

At the present OPEC is predicting that world demand for its crude will be at around 1.65 mbd below last years demand for the rest of this year and is anticipating that demand will fall another 0.5 mbd to 28 mbd next year. However that assumption is apparently also based on non-OPEC production will increase, and the world economy will rise only slowly. There is some evidence to suggest that change may be a bit more dramatic.

Of course in recognizing the above number OPEC has also recognized that they have actually been quietly increasing production and that is already back to some 28.57 mbd, with further increases predicted. Back in January the cuts were supposed to be 4.2 mbd, were actually only about 2.62 mbd down from the 31.2 mbd of last year. The odd thing is looking at those numbers and taking the 2.62 from the 31.2 gives 28.58 mbd, which is reported as the current figure. Yet after the initial cut there has been a slow relaxation in enforcement that has seen some production gains to date. The answer is that not everyone did the relaxing. Saudi Arabia increased the level of their cuts to match the increased production elsewhere, for example cutting production 320,000 bd in April down to a level of 8.04 mbd, though it has since crept back up to 8.11 mbd. Using the EIA tables indicates that total OPEC production may, in fact, already have reached 30.31 mbd, which is only down 900,000 bd from last year.

The reason that I bring this up is that the Chinese and Indian economies are continuing to sell cars. China has now reached and surpassed US car sales. VW sold 128,000 cars in China in July. To fuel those cars Chinese demand for oil has increased to 7.8 mbd, with the prediction for next year being that it will rise an additional 0.6 mbd to 8.4 mbd. Chinese demand in 2008 was 6.92 mbd.

Indian demand will also rise, since car sales have also been steadily rising over the last six months, with the introduction of cars such as the Tata Nano that started off selling 100,000 cars a month. (Total car sales in India last year were about 1.4 million – sales this July were 115,067 up from 87,901 last July). Indian consumption has increased so far this year by about 320,000 bd. Now if that trend continues through next year then the combination of Chinese and Indian demand alone will raise demand by close to 1 mbd.

If non-OPEC production has peaked and is falling, as we see from reports from Mexico, which may drop 300,000 bd over the next year; Russia which will slightly drop: and the UK, then we might assume at best that the production drops 500,000 bd next year in total.

So if non-OPEC goes down 500,000 bd and global demand goes up 1 mbd from India and China (not to mention the increase in demand as the rest of the world starts to come out of recession) then OPEC will have to raise production by at least 1.5 mbd next year just to meet this change in the supply:demand balance.

With the cuts that Saudi and friends made that amount is likely available and could be relatively easily produced if desired. If the supply is controlled, as it now is, to ensure that we don’t get back into a slight oversupply, this means that OPEC will control the price over the next year, but that the supply will be adequate.

What becomes interesting is what happens after next year. If Asian demand continues to rise by say another 1 mbd, the world, coming out of recession also increases demand back by say 1 or 2 mbd, where does it all come from? Because declining oil fields will continue to do so, and we may well see another drop of 500,000 bd from non-OPEC.

This is thus going to be an imposition of another 2.5 – 3.5 mbd demand on OPEC, over the 1.5 mbd demand increase for 2010. Bearing in mind the 6.5% decline in production reported from older fields as more and more of them contain horizontal wells in significant proportion, I don’t think they will be able to do it. Which means that 2011 and 2012 could turn out to be very interesting years indeed.

A gentle cough toward the New York TImes

The NYT sees the current movements in oil prices as being extremely volatile, with “no signs of slowing down.” This implies that the world can expect that not only will prices rise above current levels, but that they can equally well drop to levels down around $30 a barrel.

In my own mind, accepting there is some transience in price, given not only the variations we are now seeing in demand because of the global slowdown in the economy, but also because of the time factor in moving supplies, the market has much less volatility and much greater rationality in performance than it is being given credit for.

Starting with the collapse of the oil price last year, and with demand dropping due to the recession the world was, transiently, in a period where there were was a significant surplus of production. But as that became evident, so OPEC moved to cut back production, so that the dramatic drop in price that signified over production was only transient in nature. At the time OPEC commented that an oil price in the $65 - $75 range would be a fair one, and one that they could live with. It would appear that they now have sufficient control of the market that they can achieve, and hold that price. However that only holds true for the short term.

It is being increasingly accepted that non-OPEC producers cannot, overall, further increase their production, and that, instead, from this point forward, non-OPEC supplies will decline, albeit in the short term only slowly.
Thus control of the supply moves to OPEC, and by cutting back on supply, to match demand, they were able to stabilize, and then gradually force an increase in the price, to a level that they remain comfortable with. I expect that, over the next year, they will be able, by adjustments in supply, be able to sustain the balance and thereby stabilize the price of crude at levels they are comfortable with. As I noted recently there are some indications that the drop in demand for transportation fuel has reached bottom, and is picking up, not only in the United States, but with the increases in vehicle numbers in China and India, also globally.

Unfortunately, the ability of OPEC to further increase supply, bringing their production back to the highest levels of 2008, will not potentially, be able to overcome the decline in non-OPEC production for long – even though we are talking about differences of only on the order of 1 mbd. Because as soon as that inequality re-establishes then I fear we will be back to the rising prices of oil that take it beyond OPEC control since they will be unable to pump the additional oil needed to hold the supply adequate to demand.

When will that occur, at present the leaves are too difficult for me to read, but I strongly suspect that it will be before the next Presidential election. Within that time frame I suspect we also will not see the volatility that the Times anticipates, but rather (with relatively minor perturbations) a slow but inexorable rise in price

The Gathering Storm

It seems relatively quiet on the “Peak Oil” front. So much so that there are blogs, such as Peak Oil Debunked that are, you might say, powering down. To a first overview the new Administration is said to “get” the need for renewable energy, and the Stimulus package has had large sums of money set aside to create paths forward through the “valleys of death” which often greet innovative ideas as they move from lab to full-scale implementation.

One might think, therefore, that we had weathered the storm that disturbed the world as oil prices rose to their peak, just under a year ago, and that energy supplies are now adequate and prices may be stable, while the world moves on to attend to other aspects of its business. With the coming meeting in Copenhagen on Climate Change this December and the moves within Congress to get the Waxman-Markey bill on Energy and Climate acceptable to enough players to get it approved now in full swing, Climate Change seems to have moved back into the driving seat and Energy Independence and concerns over supply are diminished.

Sadly, however, the events that underlay the drive up in oil prices, and the resulting impact on the global economy, did not go away, but were only transiently made ineffectual. The facts that markets are tightening is shown, both by the price increase in crude, now back up to $70, and the increasing sale of oil that has been, until now, stored in tankers. The current rise in prices already has Goldman Sachs predicting oil prices over $85 by the end of the year. They note the IEA conclusion that the drop in oil demand is about over, with an average level of demand for the year expected to be 83.2 mbd. This presages what they are increasingly concerned about, that is an “unrecognized energy crisis.”

It is now recognized by a number of agencies and forecasters that non-OPEC oil production has peaked, and Goldman anticipates the impact that this will have:

The bank says global supply growth over the next five years will dwindle to just 650,000 barrels a day—due to lagging investment and output in non-OPEC countries, especially. Goldman expects non-OPEC supply, about 60% of the world market, to fall by 400,000 barrels a day this year and by 910,000 barrels a day in 2010.

This puts control of oil supply, and therefore price, firmly into the hands of OPEC. Whether the individual members thereof can control themselves sufficiently to maintain the tight demand:supply balance that gives absolute control to price is unlikely. For example, despite the supposed limit, OPEC increased production in May.

Oil output averaged 28.15 million barrels a day last month, up 405,000 from April, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 25.76 million barrels a day, 915,000 more than their target.

So production is up, stored oil is being sold, and, while US refinery usage remains down, Chinese refineries are moving into top gear and oil prices continue to rise. And the Tata Nano may come to the US in a couple of years. (My Jevons Paradox comment).

There are two parts to the “hidden” crisis, the first holds while OPEC retains the ability to increase supply to meet demand. Depending on how much oil can be brought into production from existing fields, how much decline in production there is from those existing fields, and how fast new fields can be brought on line, all control how far OPEC can go to meet increasing demand as the world economy and demand starts to inch back. Goldman believes that this will only hold true for another year.

2010H2: A likely return to energy shortages as dwindling OPEC spare capacity is likely unable to meet rising demand as Non-OPEC production growth is restricted by limited investment in oil production infrastructure. We are introducing an end 2010 WTI price forecast of $95/bbl.

In other words about a year from now the world will again see the intersection of available supply and demand – with consequent increase in prices. Goldman think that this will cause an increase in oil price to $95/bbl. I think they’re kidding themselves.

Of course they are likely more realistic that the Department of Energy. The latest TWIP has the following projection for prices over the next 20 years. It is already out of date. (I must get back to that in a future post, since having not looked for a couple of weeks, I see that summer demand is finally beginning to appear.)

But this is not the only energy source over which we should be concerned. While, as I noted the other day, natural gas might be able to meet half the gas demand in a decade from the gas shales, the question in the short term is where are we going to get the fuel this time next year. The continuing decline in drilling rig usage in the US, has the numbers down to about half the number active last year, and the short operational life of the highly-productive gas shale wells means that they must be replaced within two years. At present that is not happening. Thus we will see a coming shortage of natural gas, perhaps also by the second half of next year.

Which leaves me with coal, and I just happened to note that in the latest version of former-Vice President Gore’s slides that he has a couple where he happily notes the large number of coal-fired power stations that have had their plans cancelled.

The coal-fired power plant that was cancelled in Michigan on May 1st is the 97th to be rejected since 2001, and the ninth this year. The number of planned coal plants across America has plummeted from 150 to 60 in the past five years. Last year 5,465 megawatts (MW) of new electricity were announced, but more than twice that capacity—12,572mw, according to Edison Electric Institute, which represents the electricity industry—was subtracted because of cancellations or delays. The nine coal plants cancelled this year alone, Edison notes ruefully, would have provided about 6,650mw of power, or enough to heat almost 5m homes.

Now this may lead to an interesting Conundrum. Those who believe that current global temperatures are driven by greenhouse gases, such as those at Climate Progress, really need it to get hotter to validate their models, and thus have cast their hopes of a change from the current cooling on an upcoming El Nino. However, should this arrive, and give us a scorching summer next year, then we may not have the power available to meet demand, given the unfolding situations defined above. Which would make it difficult for the Administration (and other like-minded governments) that have themselves, or their supporters, go to the polls in the Fall of 2010.

And if that switch from cooling to warming doesn’t happen, then with another year of disparity with the AGW models, it will be more difficult to defend the current position, and lack of investment in short-term supplies rather than the longer-term initiatives that DOE is currently putting into place. So again the poll results may not be gratifying.

The storm is thus gathering, and while it may not hit at full force for a year yet, I am afraid no-one yet knows if there are even lifeboats on board, let alone where they are and how we should use them.

The TWIP and Mikael Höök's thesis

Being more than usually “out of it” last week I missed the new TWIP, but hopefully can get back on schedule this week. It is actually a good week to do so, since the Summary Page of this week’s information has been written to provide some explanation of the inter-relationships between World Oil capacity and crude prices (and thence gas pump prices). They point out (as I have tried to in the past) that by the middle of last year the spread between global crude production capacity and demand was down to 1 mbd, with operators running at 98 – 99% of capacity. As global markets have dropped, it is very largely the OPEC nations that have “eaten” the cut in production. And it is in this variation in OPEC capacity (non-OPEC continuing to produce about at capacity) that there lies (inversely) the world price of oil.


They end that section with the comment “Although forecasts of future oil market conditions, like the projections of the future performance of this year’s NFL draftees, are inherently uncertain, the development of forecasts that are likely to be most useful requires a good understanding of many contributing factors and indicators.”

Agreeing with that sentiment, it also allows me to disagree with the EIA conclusion that there is now sufficient excess capacity to dampen future price rises. There are two basic concerns – the first is that if the control truly now lies with OPEC, and that there is sensibly no extra production elsewhere (see below) then the OPEC desire to have a higher price (about $75/bbl) becomes more easily achievable for them, particularly if demand rises as it seasonally does. Covering that point with a couple of additional graphs from the TWIP first, I’ll come back to my second point thereafter. Oil has already returned back to $60.

With vacation time coming, and the possibility of more conservative vacations (which may mean more driving to nearby domestic destinations than flying to foreign ones) the intake to refineries is rising, as it seasonally does:

Source EIA
It is of interest to note that within that increased inflow, domestic production has fallen off its recent rise:

Source EIA

(The difference is coming from stock drawdown). On the output side, however, there has not been the usual seasonal increase, rather gasoline demand is remaining remarkably stable. (Given the continued decline in the economy this is worthy of note).

Source EIA

The other concern that I have with the EIA projections relates to decline rates. World projections have held these, as an average, at around 4-4.5%. The actual value is something that was often debated at The Oil Drum and continues to be one of my concerns. Back in February Merrill Lynch anticipated 5%, with a possible increase (due to reduced levels of investment) to 6%.

Arguing for higher numbers comes Mikael Höök's licentiate thesis (he’s one of Kjell Aleklett’s students) produced this month, in which actual field values, which prove to be significantly higher than 4.5%) have been found. He notes that the introduction of newer technology (such as, for example, horizontal wells) accelerate decline rates. He points to real production drops that exceed 10%, and notes that, with time these numbers accelerate (in contrast with many assumptions that they remain constant), citing the Norwegian giant fields where, in aggregate, the decline rate increases 1% per year. (It is only by adding new field production that this fate can be delayed). Smaller fields decline faster, the smaller the category the higher the rate.

Working from the initial Norwegian case, he moves on to consider the global situation. He points out the differences between land-based systems and offshore and between OPEC and non-OPEC (the former tend to see the impact of quotas that don’t usually apply outside OPEC). Decline rates had a mean value of 6.5%. But when land and offshore were compared land averaged 4.9%, while offshore was at 9.4%.

He notes that the OPEC strategy of “resting” fields to go for greater overall production, rather than the shorter term high production rates does yield lower decline rates. (Average OPEC decline 4.8% vs 7.5% for non-OPEC).
Field decline rates differ from those of individual wells, since in the pre-peak production years for the field additional wells can be added to compensate for the decline in older ones, and overall production can be held at a plateau. This plateau continues until somewhere around 40% of ultimate recovery, at which point the decline rate takes hold and increasingly dominates production. He does point out that Ghawar can be assumed to be in the 43 -48% range, which suggests that its decline and “Twilight in the Desert” is coming soon.

The thesis is very readable, covers the biotic:abiotic debate in much better detail than I just did, and in its tables and figures has enough data to be seriously worrying, since the numbers are not theoretical, but come from actual values.

It highlights the concerns that I have with the EIA projected future, and is a free (pdf) download that is well worth the time to read. And when you realize that virtually all the significant numbers for the decline rates are well above many current model presumptions, and that even in this time of recession decline rates continue to act we-e-ell. . . . . . .