Tech Talk - Changes in global supply and demand

At the beginning of the month I pointed out that there are three components to the coming Energy Mess. The first of these is the steady increase in global demand for oil and its products, the second is the decline in production from existing wells and fields, and the third is the shrinking pool of places from which new oil can be recovered to make up the difference between the first two.

Internal demand gnaws away at that available for export, as the situation in Saudi Arabia clearly illustrates:

Figure 1. Changing relation between Saudi production, internal demand and thus available exports. (Energy Export Databrowser)

Internal consumption has now reached 3 mbd – out of a production of around 10 mbd, a trend bound to go higher, as the country’s population continues to grow, having risen from 20 million in 2000 to 28.3 million in 2012, with no significant change in rate apparent.

Back in 2011 Chatham House produced a report expressing concern over the future that this prefaces. The report began with this predictive plot:

Figure 2. Projected changes in Saudi production and consumption (Chatham House )

It is regrettable to note that there is really no viable justification given for the assumption that Saudi production will rise from the current 10 mbd to the roughly 14 mbd that the plot suggests by 2020. Without that increment the world is going to be in quite a bit of hurt somewhat earlier than the above graph would suggest – as perhaps will be the Kingdom of Saudi Arabia. (Hopes for large increases in domestic production of natural gas seem to have foundered in their tight shales and are switching to efforts to develop the tight sand deposits although the mechanisms of gas flow may not be as advantageous in the sand. Similarly there is little in the report to explain why demand – once it reaches the current levels, should suddenly stabilize for three years before starting back up. Without that “hiccup” the dark blue line (which is already down to around 7 mbd, not 8) will rather continue downward, rather than the optimistic uptick that Chatham House predicted.

On the other side of the house China provides a clear example of the changes in global demand, with imports in 2013 having increased by 5.8% over 2012, and with consumption now above 10 mbd.

Figure 3. Changing relation between Chinese production, internal demand and thus necessary imports. (Energy Export Databrowser)

The other country where demand can clearly be seen to increase is India. The recent flattening of demand is likely to prove only transient, given the policies of the new government.

Figure 4. Changing relation between Indian production, internal demand and thus necessary imports. (Energy Export Databrowser)

The Indian economy has been growing at around 7% a year since 2000 and the EIA anticipates that by 2020 it will become the world’s largest oil importer, even though overall demand will not surpass China’s – which is anticipated to rise to 15.7 mbd by 2025. Although a primary focus for the new government is to give every household at least one light bulb by 2019, a significant portion of this will come from solar power. This is particularly necessary in rural areas where there is poor to no grid service. However experience in Botswana would suggest that this policy can be more difficult to achieve and sustain, given the difficulty in getting adequate maintenance outside of the cities. The Energy and Resources Institute anticipates that growth will exceed 8%. (It should be noted that the Director-General of TERI is R K Pachauri – better known for his role at the IPCC). It might further be noted that while he was still Chief Minister in Gujarat before the election, the new Indian Prime Minister had raised the GDP of that state to an average of 13.4% in comparison with the national rate of 7.8%.

To a degree this problem of imbalance in the supply:demand situation that will develop in the next couple of years will be rectified by a change in the price structure of oil. Tightening of supply against even current levels of supply (let alone that needed to meet the July 2014 OPEC MOMR estimate of a continued growth in demand of the order of 1.16 mbd) will lead to an increase in price. It is that cost increase that will most likely impact countries such as India, who have, in the past, been bid out of a number of foreign oil investments by China, and who are likely to see that situation continue, of not get worse.

The presumption that Russia will be able to help China by exporting more oil East, while sustaining its exports to the West, is likely an unrealistic projection. Russia is already seeing their overall export levels decline, even before production itself significantly falls off, and the combination will tighten the market in the near future.

Figure 5. Changing relation between Russian production, internal demand and thus exports. (Energy Export Databrowser)

China is currently seeing an ongoing internal fight over the China National Petroleum Corporation (CNPC). Jiang Jiemin has been arrested and the investigation is progressing down his chain of command and influence.

CNPC is one of the world's largest companies, with global operations and 2013 revenue of $432 billion. Its publicly listed subsidiary, PetroChina, trades in Hong Kong, Shanghai and New York and is the world's fourth-biggest oil producer by market capitalization. Jiang ran both the parent and PetroChina from 2007 until last year, when he briefly headed the State-Owned Assets Supervision and Administration Commission (SASAC).

The investigation has already touched CNPC group operations in Canada, Indonesia, China and Turkmenistan, say people familiar with the proceedings. In addition to Jiang, the Chinese authorities have confirmed the arrests of CNPC vice president Wang Yongchun, PetroChina vice presidents Li Hualin and Ran Xinquan, and the listed unit's chief geologist, Wang Daofu.

The arrests and investigations will likely slow the rate of Chinese investment in the foreign energy market, but is not likely to have any impact on internal energy consumption. Rather it may make it more difficult for China to sustain their necessary supply of oil as times become more troubled.

An increase in the price of oil, just as the links to foreign suppliers become questioned through this internal investigation that may spread beyond China, may weaken those links and give countries such as India an opportunity to achieve supplies that might otherwise be more difficult to achieve.

OGPSS - Oil production within China

If one looks at a map of China, at first it seems to be a land that has been heavily endowed with gas and oil fields. However, with the continued rise in demand for liquid fuel, exploration and development are being aggressively pursued inside the nation, as well as offshore and abroad. Current levels of production, and those planned, still leave an increasing volume that must be imported each year to meet the national demand.

Figure 1. Exploration and Production map for PetroChina (PetroChina )

And yet, as has been noted earlier, while demand has continued to soar, overall domestic production has not changed all that much. China has three major oil production companies, PetroChina, Sinopec and CNOOC, where the last of these, the Chinese National Offshore Oil Company (discussed in an earlier post) deals – as the name suggests – with offshore deposits, and the other two are concerned with onshore production.

According to the 2012 BP Statistical Review China produced an average of 4.09 mbd in 2011, which was a 0.3% increase over that produced in 2010. As mentioned in the earlier post, CNOOC is only able to project a sustained production level this year because of the increasing production from its overseas properties in Canada and Iraq. In the first half of this year they produced some 127 million barrels of oil, close enough to 700 kbd in total, and similar to last year’s average.

Within the country the industry is split between two companies, the China National Petroleum Corporation (CNPC), which has PetroChina as its publically traded division, has some 60% of the oil production and 80% of the natural gas production. Just this year PetroChina was recognized as having passed ExxonMobil to become the largest listed oil producer in the world. With overall production of 2.43 mbd it exceeded the ExxonMobil total of 2.3 mbd in January. (Although it is suggested that PetroChina made only half the profit of its competitor).

One has also to distinguish between the production that the company is able to achieve in China, relative to that which it achieves through its acquisitions abroad. The company shows a domestic record of production that has averaged 2.42 mbd in 2011 with slight rises in production for the past two.

PetroChina domestic production through 2011. (PetroChina)

For the first half of this year the company has refined an average of 2.69 mbd which was expensive for the company given that the sales price for the resulting products are controlled in China. Additional production, to the tune of 343 kbd, comes from their foreign holdings. By 2020 the company intends that this amount (almost 10% of output) will be increased to 50% of the company production. Assuming that it can sustain domestic levels of production this anticipates that it will need to be able to find roughly 1.4 mbd of additional production from sites abroad.

PetroChina, runs, inter alia, the largest field in China, that at Daqing. After the discovery of commercial oil at Songji No. 3 well in September 1959, the field was brought into production over three years. The field was where “Iron Man” Wang Xinji gained national fame through his efforts as an oil driller with the 1205 Drilling Team to bring in the first production well. Production at the field peaked in 1976 at roughly 1 mbd with more than 14 billion barrels of oil now having been produced. Oil recovery is cited at 50%, a rate that is about 10-15% higher that the average in Chinese reservoirs. Just this week the company completed an addition to the refinery there that raises capacity to 197 kbd at that refinery of Daqing Petrochemical. Production at the field itself has now fallen, in overall average for 2011, to roughly 790 kbd, and relies on tertiary recovery using a polymer based flood in a field which has an over 80% water cut. The company believes that more than 70% of the recoverable oil now has been.

Next door to Daqing lies the Jilin Oil Province, containing some 21 oil fields. Of these the Fuyu field was first discovered with the well Fu-27 in September 1959, with full exploration in 1961 though it was not developed to full potential until 1970. CNPC, PetroChina’s parent, runs the Province, which is the seventh largest in China. Last year it produced some 148 kbdoe and this is to be raised to roughly 200 kbd by 2015. CNPC also began production in Iraq this past year, and anticipates some 59 kbd from that source.

The Changqing Oil Field is also operated by CNPC. Discovered in 1971 it reached a total of 800 kbdoe in 2011 with a year-on-year growth in production of some 7 million barrels.

Figure 3. China’s major oilfields (Energy-pedia )

Far out West in China lies the Tarim Oil Field, which has been set a goal of producing sensibly 1 mbdoe by 2020, though more recent announcements have lowered that target by 20%. Operated by PetroChina, achieving that target will move it toward the front of the fields in the country, from its current fourth place. It has a reserve estimated at 100 billion barrels of oil equivalent, and is the largest natural gas producer in China.

Shengli (Sinopec) Shengli field, which is, at around 557 kbd production in 2010 is currently the second largest producing field in China.

Sinopec anticipate that by 2020 it will produce more than half of its oil and gas from abroad and by 2015 expects that it will be close to that goal.

China Petrochemical, Sinopec’s parent, seeks to produce 50 million metric tons of crude a year overseas by 2015. Last year, foreign production was 22.9 million tons. Sinopec said it boosted first-half crude output 4.3 percent to 163.09 million barrels and overseas production jumped 82 percent to 11.13 million barrels.

If Sinopec sustains domestic production at some 895 kbd through 2020, then it will need to find nearly 1 mbd of overseas production to match that in just 3 years. In short, while China is working as hard as it can to sustain current levels of production into the future, in order to meet the growth that they anticipate they will be looking to buy (combining all three company goals) close to 2.5 mbd from overseas deposits.

The big question of course remains as to where that production will come from, and, if we are at a world plateau in overall production, at whose expense will that supply need be met.

P.S. On a continuing note, it is worth remarking that the Alyeska pipeline flowed at an average volume of 430,967 bd in July.