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 - Global crude oil and Iran

There has been a little stir in the news on Energy lately, as folks have begun to extrapolate the growth in American oil and gas production to the point that they predict that the United States may out-produce Saudi Arabia, in terms of the totality of hydrocarbon production. Of course, in some cases, it has been North American oil independence that is featured, rather then that of the USA. And the reason for the generalization is that by broadening the geography so that the region also includes Canadian and Mexican production then the US imports from those countries magically disappear (which does not mean that they don’t have to be paid for. The US imported around 2.5 mbd from Canada and 1 mbd from Mexico in July). The stories also don’t dwell on the comparison of apples and apples. Consider the following quote from NPR. It is that easily missed sentence at the end of the first paragraph that is critical.

In 2011 the U.S. produced 5.66 million barrels of crude oil a day, according to the Department of Energy's Energy Information Administration. By next year the agency projects that will increase 21 percent to 6.85 million barrels a day. Add in things like natural gas liquids, biofuels and processing gains at refineries and that number increases.

"By 2013, we'll probably be a little over 11 million barrels a day," says EIA administrator Adam Sieminski. "That puts you pretty close to Saudi Arabia's" production of more than 11 million barrels a day, he says.

In which regard it might be pertinent to note that some of the crude produced in the Kingdom of Saudi Arabia (KSA) will be refined in the US, providing refinery gains here, and further distorting the comparison. Ah, well!

The current production gain in the US has resumed, after a short plateau, although the gains following the shut-ins for Hurricane Isaac seem to be leveling off.

U.S. Crude Production through mid-October 2012 (EIA TWIP)

The information in the October Monthly Oil Market Report from OPEC, show that crude oil production from KSA is running at 9.85 mbd, as reported by other sources.

Figure 2. Reported production from the OPEC nations through September 2012, as reported by others (OPEC MOMR)

When one looks at the production that KSA itself is reporting the numbers are slightly reduced.

Figure 3. Reported production from the OPEC nations through September 2012, as they reported to OPEC (OPEC MOMR)

While the comparison of the two levels of crude suggest that the US has a long way to go in matching KSA crude production, the two sets of figures also point to the answer to another question.

Looking at the figures for Iran, it is clear that the sanctions which have been imposed on that country by the West are having a serious impact. Not only is this seen in the fall in oil production, likely around 1 mbd, but in the more consequential cut to exports this fall is reflected in a $7 billion reduction in income. Iran has just started to admit that this bite in their export market is hurting production. And it is only now that they recognize that this will further fall, though they are now also threatening to carry this drop to its ultimate conclusion, and to stop exports entirely. An immediate impact to this would fall on Turkey, which has cut oil imports from Iran by about 20%, but which has a six month exemption from the full impact of the sanctions. It is currently importing around 200 kbd of crude. Some of the value of that oil is apparently returning to Iran as gold bullion, which can be easier to spend.

However the primary question might well be, if world oil markets are so tight, how come taking a million barrels out of production hasn’t had a more significant impact? And the answer to this comes in part because of the increase in production from KSA (Note that a year ago the country was producing around 500 kbd less than it currently is), and also from the gains in production from the United States. (As shown in Figure 1).

Further, given that the global economy, though regenerating from the depths of recession, is still not operating at levels sufficient to bring unemployment to more normal levels, overall demand also remains below what it might be.

Since we live in a global economy the problems of Europe and America are reflected in a reduced demand for goods from China and other Asian countries, which impacts the energy demand from factories. China has been taking some 40% of the Iranian export. OPEC has noted that Chinese demand has declined, and that part of this decline has been through an 18% reduction in imports from Iran. Interestingly this was partially made up through an increase in imports from Iraq.

Figure 4. Change in Chinese petroleum imports over the past year (OPEC MOMR )

One of the threats that Iran has made it that it will shut down its exports completely. The country was initially exporting some 2.3 mbd before sanctions occurred, and sanctions have dropped this already to around 860 kbd. Of this 200 kbd are going to Turkey, but this is a country with pipeline connections that give it options. There is a pipeline running from Iraq, the Kirkuk- Ceyhan connection which carries 300 kbd, and was briefly damaged by fire in August; and, more famously, there is the Baku-Tiblisi-Ceyhan pipeline from the Caspian. This can carry 1 mbd of crude, and having run 190 mb through September this year, it is running not quite full.

Figure 5. Oil and Natural gas pipelines through Turkey (Journal of Energy Security )

In short, as with the suggestions mentioned the other week, that Iran might seek to challenge Qatar in going into the natural gas LNG market, the threat this week that it might shut off exports of crude seems to be likely only geared for domestic consumption.

The global demand at present is not such that the Iranian supply is critical to ensuring a balance at an acceptable price between supply and demand. It would seem that the global economy would need to regenerate further, and for North American and KSA to reach some form of current peak in production against that potential of rising demand before this balance is threatened. But, in consolation to Iran, resting oilfields can sometimes help in terms of their longer-term production (as KSA have practiced for years).