Wednesday, May 13, 2009

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. . . . . . .

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