Tech Talk - A Gentle Cough!

When I last wrote about the global supply of oil, it was back in October, as the fall in oil prices was developing. Since then the price has continued to fall, with prices now below $60 a barrel. I was doubtful back then that the price would fall as far as it has, and remain cynical that it will remain down for very long. Since this seems to go against much current wisdom, let me explain why I remain pessimistic that the boost to the global economy from access to cheaper fuel will continue for any great length of time.

It depends on whose data you believe credible as to how much more oil is available than that currently in demand. When looking at the numbers in the past I used a number of roughly 1 mbd, but this is hard to realistically quantify. Why – well the problem comes with the regions of the Middle East and North Africa (MENA) where there are current conflicts. The ones of particular concern are Libya and Iraq, although the fluctuating state of exports from Iran cannot be neglected. When the Libyan conflict first impacted the export of oil from that country Saudi Arabia began increasing its production to offset the loss in Libyan exports.

There came a time in September when Libyan exports, which had fallen to around 300 kbd from a high of over 1.6 mbd, shot back up to around 900 kbd. The EIA has recently shown an inverse correlation between Libyan production and oil price:

Figure 1. Brent Oil Price and Libyan oil production (EIA )

Thus, when an additional 600 kbd suddenly appeared back in the marketplace, it is not surprising that it had an impact on prices. However while there was already some surplus in the market (from increased production in the US etc, as I will comment on below) the volume of the addition had a more significant impact on prices, and when KSA decided not to reduce production this led the market to assume that we had returned to plentiful sufficiency, and prices have continued to fall since.

However, this perception is already unraveling. Libyan conflict has continued to embroil their oil fields. The Sharara field, which produces 300 kbd closed in November as conflict overwhelmed it. At the moment two of the oil export terminals are threatened, and with them another 300 kbd of oil. But it is not possible, at this point, to predict what is going to happen in either location. There is little sign that the conflict is any closer to resolution, meaning the production will continue to be threatened into the foreseeable future. Sadly it it more likely that this will have negative impact on oil production, so that it might be wiser to assume lower rather than higher volumes coming from the country.

The situation is a little clearer and more optimistic in Iraq, where the pipeline through Kurdish territory has lessened the impact of the Islamic State take-over of a large swath of the country. The recent agreement between the Iraqi Federal Government (IFG) and the Kurdistan Regional Government (KRG) approved early this month is already raising questions over the volumes that the KRG will put onto the market. The agreement calls for sales of around 550 kbd, but there is an additional 100 kbd that is available, the status of which is unclear. The country is exporting, overall, around 2.51 mbd and the pipeline to Turkey is currently carrying 280 kbd, but is being boosted to carry 400 kbd, with an ultimate throughput of 700 kbd. Part of the problem in assessing the market for this, however, in the short term is that the Iraqi crude is often heavier and of relatively lower quality than the market average. This is currently causing some marketing problems, leading the IFG to lower prices in order to find a market. In neither case, however, is the current conflict likely to impact the production for export, and while it is difficult to anticipate much production above 3.5 mbd. (The December OPEC MOMR suggests that they are producing 3.36 mbd at the moment) we are unlikely to se any significant reduction in production going forward. The significant growth in global production to meet a still predicted rise in demand next year (albeit down slightly from previous estimates) will, therefore, not come from OPEC, who still anticipate that they will produce, on average 400 kbd less than they have this year. It is still expected that American production will continue to rise to meet expectations of increased global demand.

The problem, unfortunately, with that view, is that increases in US production are tied to output from fracked horizontal wells that are expensive to drill, and have a relatively short production life, with the majority of production coming in the first year of operation. Thus, in order to sustain production, more wells must be drilled each month to cover the loss in production from existing operations. The North Dakota Department of Mineral Resources projects that 225 or more drilling rigs are needed to sustain the growth of production from the state over the next three years (at which time it will plateau at around 1.5 mbd). Presently there are roughly 180 rigs operating, with the count falling by the week, as the rewards, at present, do not match the cost. The agency anticipates that the number will fall by an additional 40-50 rigs by the middle of next year. Well completions are also falling by the month, as the industry likely plans to wait out the current hiatus in prices. The impact of this on even short term production should not be discounted. There has already been a slight fall in production, rather than a gain, in October, and that will likely accelerate.

Without any gain in production, and in fact seeing the potential for a drop in US production over the next year, then the anticipated surplus between oil supply and demand will likely disappear. Remember that the MENA nations are seeing a growth in their internal demand for oil (in the KSA this has already passed 3 mbd) so that if they had no impetus to reduce production and exports in the face of falling prices, so they are unlikely to increase production when prices pick up. (They haven’t before).

When will this all happen? Well I got the size of the price fall wrong, so don’t hold me to the exact timing, but I would anticipate that when we see the start of the driving season next year, the oil market will tighten rather quickly. Following that (given the inertia in getting production back in the US) we will (as I have been expecting for a couple of years) see the global concern over supply start to be a significant factor in 2016.

Have a Happy Holiday!

Tech Talk - more on volcanoes, peak oil and slow transitions

Many news agencies are following the slow inundation of the Hawaiian town of Pahoa, as lava from Kilauea inches into the small town at the rate of around 15 ft an hour. It is a slow death to parts of the community since the lava started moving in June and the flow has travelled over 24 miles on its way to the sea. Not quite as prominent in the news is the continued outflowing of lava in Iceland where the flow from Bárðarbunga has now covered just over 25 square miles, and the threat from the outpouring of sulfur dioxide continues to move around the island as the wind patterns change. As the energy of the eruption falls, there is concern that less of this is getting into the upper atmosphere, causing higher concentrations in the lower layers of the cloud. The volcano is putting out about 35,000 tonnes a day more than all the industries in Europe. Safe concentrations are considered to be around 500micrograms/cu. m. while levels as high as 21,000 micrograms have been measured.

Figure 1. Gas cloud threat from Bárðarbunga on October 31 (Icelandic Met Office)

It is only the high winds of the Icelandic winter that dilute the gas below the threat to individuals. And yet the earthquakes in the caldera persist with events above level 5 still occurring almost daily. There were 200 yesterday, with ten being larger than magnitude 4.

Figure 2. Earthquakes in the Bárðarbunga region of Iceland in the last 48 hours. (Icelandic Met Office)

The water in the caldera is melting at an estimated rate of 2 cu. m/second with hot magma residing under the originally half-mile thick glacial cap.

While these events are generating hundreds of megawatts it is not in the form of useful energy at this point, but despite the disappearance from the headlines of the Icelandic event, it still has the potential for much greater societal impact than does that in Hawaii. But it will happen more slowly (at least until the potential eruption when the icecap is penetrated.) And sadly it is this demonstration of the short-term focus of the news media and the need for dramatic pictures that again bring me to the analogy of these events to what is happening with Peak Oil.

As noted in an earlier post, the EIA have pointed out that the current glut in oil availability and thus the fall in gas prices correlates inversely with the increase in production from Libya. Their OPEC governor has pointed out that the current global oversupply is at around 1 million barrels a day. Libya has recently produced about 800 kbd of this, and while OPEC as a whole is not worried out the imbalance (since they are projecting that global demand will rise this much over the next year), he would like to see current production curtailed by 500 kbd to get the price back over $100 a barrel.

It is this marginal supply of around half-a-million barrels a day which is now the level of volume that can transform us from having too much to not enough. Which goes back to the remarks that Charles Dickens put in the mouth of Mr. McCawber:

'My other piece of advice, Copperfield,' said Mr. Micawber, 'you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and - and in short you are for ever floored. As I am!'.

Our sixpence, it would appear, is now at around that 500 kbd. OPEC will not increase production much above current levels, in fact it is hard to see where they could anticipate being able to do so. Libya remains threatened by worsening violence, which has been approaching the El Sharara oilfield and it remains questionable as to whether they can continue to sustain production.

The other big question mark remains Iraq. How far the Kurds can increase production up through the pipeline to Turkey remains a question. They have recently announced that the new pipeline is carrying 240 kbd and if the logistics can be put in place the volume could well increase. Problems however with contractors, making the necessary field connections and the nearby conflict will likely combine to slow that progress.

If both sources of supply continue to produce, and even increase a little more than at current levels then the global surplus will still be eaten up by increased demand over the next year. The short-term drop in prices (which may well extend over the winter) will gradually disappear as the surplus reduces. And in so far as the current drop in prices discourages new investment in costly alternate places, even if only in the short term, that cannot but help OPEC as supplies tighten in the future, and that competitive oil is not in place in the market to reduce the consequent price increase.

The short-term loss therefore may well, before long, be returned in higher prices in the summer and towards the end of next year. Such a projection assumes that the recent increases in US production will slow down, and that seems to be a reasonable assumption, given the changing price structure and the lower returns on wells drilled outside the “sweet counties.” One can only drill so many wells where production is rewarding, before the land gets full.

In the short term the drop in prices will also encourage demand, helping to build back what had been a falling away from earlier OPEC projections of demand growth. It will be an interesting year, and perhaps one that will change faster than the slow but steady changes that the volcanoes are having on their local communities. But if so it may still be too slow for the media to closely follow, since many of the controlling events take place away from media attention and occur without, often, immediate visible impact.

Tech Talk - Pessimistic Talk in a time of surplus

The oil markets are concerned that there is too much oil currently available on the market, and that, as a consequence, oil prices may continue to tumble. Saudi Arabia is reportedly telling Reuters that it is happy with prices that may fall as low as $80 a barrel. As I mentioned the other day, some of this has to do with market share, and the KSA increasing production, and thereby seeking to weaken the likelihood of investment in other places, in turn ensuring their share holds up, not just now, but also down the road. The effect on gas prices has been rapid, with prices in parts of Missouri down to $2.65 a gallon – about a dollar less than I was paying only a week ago.

The effect will also have the benefit of a boost to the economy, which of course can’t hurt in the run-up to an election. But in the longer term it is hard to see how this boost can be sustained for more than a year. In the last post on this I mentioned that, outside of the US, Russia and KSA global oil production had dropped around 3 mbd over the past couple of years. Yet increased production (KSA raised production by 100 kbd in September as part of a total 400 kbd increase from OPEC overall) has, for now, been able to match and surpass this in order to meet the global demand. OPEC continues to expect that demand will increase by a million barrels a day this year and 1.19 mbd next. They further expect that the increased production to meet this will be met from outside the cartel, with the gain declining from 1.68 mbd this year, to 1.24 mbd next year, holding OPEC production to a decline of 300 kbd from the current 29.5 mbd. Simplistically the gains are maximized in increased production from the United States (880 kbd); Canada (250 kbd) and Brazil (190 kbd). They are anticipating a slight drop in Russian production, as part of an overall decline of 80 kbd for the FSU countries.

Part of the problem in projecting the balance revolves around estimating the production from Libya, Iraq and Iran (LII). Libya has reported raising production back to around 800 kbd, but some of that comes from the Shahara field, which was still involved in factional fighting, even as it came back on line at some 20% of normal. The three countries produce around 7 mbd (Iran 3 mbd, Iraq 3.2 mbd; Libya .8 mbd) so that the fluctuations in their production and sales can have a very significant impact on the global oil market, and the prices that are paid – but they function within OPEC, and it may be that the current drops in price are reminder that the big dog in that trailer is KSA, currently running at around 9.7 mbd.

It is foolish to try and predict, over the immediate short-term, how the fighting in Libya and Iraq will progress. Similarly it is hard to see how relations with Iran will change, potentially easing sanctions and allowing them to sell more product into the global market would upset the current balance in trade, and could, in the short-term, increase the glut and lower prices.

But supplies from those outside the cartel and the Americas are continuing to decline. That is not going to change. The rates may fluctuate a little (though the current drop in prices is not going to encourage large scale investment in declining fields) but the overall trend is steadily downward. And it is within that picture that potential changes in the production from the three LII countries have to be placed.

Figure 1. Libyan oil production through September 2013. (EIA)

Yet, as the fields have brought oil back to the market, there is a concurrent fall in global prices, as the EIA note.

Figure 2. Recent oil production from Libya and the price of Brent Crude (EIA)

Pre-conflict Libya was producing over 1.6 mbd, it recovered to 1.4 and is now struggling at around 0.8 mbd. But the prospects for the levels of peace required to sustain even that level do not seem promising. The conflict is worsening and seen as spiraling out of control.

Moving East to Iraq, despite the use of air power, the situation in the North is not improving, although the Kurds have now a pipeline to carry oil up into Turkey that is not controlled by the Islamic State. While it is still a matter of debate how much oil they will be able to sell, they hope that, by the end of next year they may be able to pump as much as 1 mbd, up from the initial 0.1 mbd when the pipeline went on line. At the same time, in the South, the oil fields lie some distance from the conflict, and there seems little threat, at the moment, to the plans to increase production, and move the majority of the oil to the coast for export. It is, therefore possible to foresee an increase in Iraqi production of perhaps a million barrels a day in the next couple of years. Is it likely? It is hard to say. Factional fighting is always hard to predict, and the willingness of those involved to use explosives makes it even more of a problem to predict what will occur, given the vulnerability of pipelines to attack.

Predicting how Iran will change is similarly conflicted, in that it is hard to predict the behavior of those who control the country, and in turn impact oil exports.

But putting this within the context of OPEC, I suspect that overall production will not fall much outside of the current volumes that the MOMR are predicting – which is sensibly overall stable output over the next year or so. And if that is the case, then I would, as mentioned last time, expect to see that the global surplus of oil supply over demand will gradually disappear over the next year, with the impact becoming evident once we reach the summer of 2016. It would be nice to be wrong, but I think it unlikely.

Tech Talk - the numbers keep going down

One problem with defining a peak in global oil production is that it is only really evident some time after the event, when one can look in the rearview mirror and see the transition from a growing oil supply to one that is now declining. Before that relatively absolute point, there will likely come a time when global supply can no longer match the global demand for oil that exists at that price. We are beginning to approach the latter of these two conditions, with the former being increasingly probable in the non-too distant future. Rising prices continually change this latter condition, and may initially disguise the arrival of the peak, but it is becoming inevitable.

Over the past two years there has been a steady growth in demand, which OPEC expects to continue at around the 1 mbd range, as has been the recent pattern. The challenge, on a global scale, has been to identify where the matching growth in supply will come from, given the declining production from older oilfields and the decline rate of most of the horizontal fracked wells in shale.

Figure 1. Growth in global demand for oil (OPEC MOMR )

At present the United States is sitting with folk being relatively complacent, anticipating that global oil supplies will remain sufficient, and that the availability of enough oil in the global market to supply that reducing volume of oil that the US cannot produce for itself will continue to exist.

Increasingly over the next couple of years this is going to turn out to have created a false sense of security, and led to decisions on energy that will not easily be reversed. Consider that the Canadians have now decided to built their Pipeline to the Pacific. The Northern Gateway pipeline that Enbridge will build from the oil sands to the port of Kitimat.

Figure 2. Route for the Northern Gateway pipeline (Northern Gateway )

The 731 mile long pipeline will carry 525 kbd to the port, and a twin pipe will carry some 193 kbd of condensate back to Bruderheim to help in the processing of the initial crude. It will, sensibly, move the oil that was to have come down through the Keystone pipeline to American refineries instead to tankers out to the Canadian coast, where it will be shipped to Asia to meet their growing demands. Given the investment in the pipe, infrastructure etc once this oil is committed to that market and the US will not be able to gain that supply back when it is needed in a few years.

There is a secondary impact to the opening of that market that may not be evident for a little time, but it something that the Russians discovered after the gas pipeline connected Turkmenistan to China. Suddenly there is a second market for the product, and producers are no longer tied to having to accept the price that the sole purchaser is willing to pay. At the moment, when there is a sufficiency of oil, that is an incidental, with significant impact only in improving the economics of the oil sand operations, but since it now ties the American refineries that would have received this oil more closely to the Venezuelan production it now receives (a somewhat less reliable supplier) this change remains as something of a future concern. It is not likely, in itself, to initially change the price of oil much ( a minor increase) but it will change the names and nationalities of those that profit from the trade.

The problems that the Keystone pipeline had are, to a degree, a function of the lack of concern over the supply of oil to the American market. As long as oil production continues to increase, from the Bakken and Three Forks in North Dakota, and the Eagle Ford in Texas, then there is no clear evidence for concern. But those wells are cumulatively starting to reach peak production, and the next shales on the list (the Spearfish and the Tyler) don’t hold the potential to match the gains that have been achieved to date. Particularly this is when, as the North Dakota DMR notes, the wells see an average decline of 65% in the first year.

Figure 3. Typical Oil production from a well in the Bakken:Three Forks region of North Dakota (ND DMR Oil and Gas Division )

The projections that gains in production continue thus rely on a continued high level of drilling and production with a defined rig count required having been estimated, and an assumed sustained level of production even beyond the time that the “sweet spots” start to disappear.

Figure 4. Projected production from the Bakken:Three Forks formations, assuming well productions are sustained and that the rigs are available. (ND DMR Oil and Gas Division )

At the end of June, 2014 the rig count in North Dakota is less than 190 (DNR says 189, but Kirk Eggleston notes that some 15 of these are moving, so that the real number is 173, a bit less than 225. That suggests that peak production may be delayed, and lowered from 1.75 mbd down to around 1.4 mbd. This reduction in short-term supply will have less impact in the US than elsewhere since it will be used to release oil that the US would otherwise have bought to the world market, but less than anticipated, and at a slower rate than expected. (Note that Eagle Ford production growth rate is also slowing and that this also affects OPEC projections which anticipates that US oil production will grow some 950 kbd this year).

At the same time, as I have noted in an earlier piece the reliance of many models of future oil supply have focused on Iraq as the next major supplier to sustain growth in production, even as other suppliers decline. But those projections are increasingly obsolete. It is unrealistic to expect the oil export business from Iraq to be sustained and continue to grow in the face of the developing civil war. The nature of the conflict makes it difficult to see how it can be easily resolved, and particularly if the country becomes divided, then the oil pipelines become a target of opportunity to attack the financial underpinnings of the different sectors. It is likely that the pipeline from Kurdistan into Turkey will carry increasing volumes up to Ceyhan and thence to the world market, under better security, given that does not now venture into Sunni territory, but the vulnerabilities likely remain.

The result of these declines in anticipated production (not to mention Libya, the Sudan’s etc) is likely to become evident within a year, while demand continues to grow. The balance need change only a small amount however, for the consequences to be dire. As Mr. Micawber said in “David Copperfield”:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Tech Talk - More on Iraq

A single picture is sufficient to tell the story of the fate of the Baiji Refinery in Iraq. Recently reached by the ISIS forces, it has been the largest refinery in Iraq, with a capacity of 310 kbd, and has been used to provide products for domestic use. Since it would provide fuel for both sides in the conflict it had been left largely intact, but that “understanding” seems to have fallen apart.

Figure 1. View from space of the fire at the Baiji Refinery in Iraq (Slate)

The remaining significant refineries in Iraq are at Daura near Baghdad which can produce 210 kbd, although promised at 280 kbd and Basra in the south, which can produce 140 kbd. There are an additional 11 very small refineries located around the country.

The conflict has already led to a drop in Iraqi exports of around 300 kbd and while this will not immediately impact the United States, given that imports have been declining in the face of growing domestic production, it will affect the overall global market, with longer term impacts on price and availability. India, for example, is already worried. It is quite possible that Iraq will partition, with the northern tier ending up Kurdish.

Figure 2. The Kurdish part of Iraq (Talking Points Memo)

This region has already run a separate pipeline through its own territory up into Turkey and thence to Ceyhan. From there it is tankered, and the Kurds have just sold a shipment to Israel, which arrived at Ashkelon on Friday and unloaded that night. The report has, however, been denied by the Kurdish Ministry. Three more tanker-loads destined for other customers are now in process at Ceyhan. The tanker was one which has, until recently, been unable to find a market.

In May, the Kurds took a further step by leasing two tankers, loading them in Jihan and looking for buyers. Attempts to sell oil to Morocco and other countries were rebuffed, out of solidarity with Iraq and concerns over legal action. It now seems that the Kurds have re-discovered their old ally Israel, which agreed to purchase the oil. To avoid a direct sale, the Kurdish tanker unloaded its oil onto another tanker. It’s unclear if the purchase is a one-off deal or the start of a permanent arrangement.

But the Kurdish pipeline is currently limited to a capacity of 100 kbd, whereas the main pipeline running up the center of the country (and through ISIS territory and control) can handle 600 kbd. The potential for a continued drop in Iraqi exports flowing north to Turkey of over 500 kbd is thus now quite possible. However the oilfields in the Kurdish territory are only, at present, producing around 120 kbd. Yet, by the end of the year it is projected that the pipeline can be expanded to handle flows of up to 400 kbd, with that capacity being reached as additional oilfields around Kirkuk are connected into the system and production raised. In the meantime additional oil is being trucked up to Turkey.

The impact of the conflict has already caused bidding on the Nassiriya oilfield and refinery to be postponed indefinitely.

Figure 3. Location of Nassiriya (Red point) (Google Maps)

Bidding on development of the 4 billion barrel oilfield, and associated 300 kbd refinery, was scheduled to have taken place on Thursday, but after being postponed in December and January has now been put off indefinitely.

At the same time Lukoil remains optimistic about expanding the West Qurna 2 field over the next year. The field has started production, and reached 200 kbd and Lukoil is hoping to start filling tankers in the third quarter of this year. The project was shared with Statoil, but they dropped out in 2012. West Qurna is in the South of Iraq, and at present a considerable distance from conflict.

Figure 4. The location of the West Qurna 2 field. (Statoil)

The field is anticipated to ultimately be capable of yielding 1.8 mbd of oil. In order to handle higher flow rates a new agreement has just been signed in which Lukoil will build two new pipelines from the field down to the off-shore terminal at Fao.

As long as the conflict remains north of Baghdad, and the oilfields in the South are not threatened then the major restriction on plans to grow exports from the south to 6 mbd may continue to lie with the Iraqi bureaucracy and the delays in installing the necessary infrastructure needed to support both production and also transport of the oil to the offshore terminals. There has also been some reduction in targets, for example Zubair which had been producing at 200 kbd was originally scheduled to produce at 1.2 mbd a target that was dropped to 850 kbd last year. A 200 kbd gas and oil separation plant (GOSP) has just been contracted, with completion in 2016.

This does not discount, however, that sabotage and terrorist attacks will not have some impact. The main pipeline to Turkey has been closed for months due to such attacks, but while that pipeline runs through Sunni territory, the lines from the Southern fields are all within Shia controlled land, and those in the north are now controlled by the Kurds. Oil companies have, however, as a precaution, begun repatriating some of their employees. Gazprom has just begun production from the Badra field. Originally projected to begin, at 15 kbd, in 2013. Production has now begun, although it is now anticipated that it will be another couple of months before the field reaches that initial 15 kbd target, and 2017 before it peaks at 170 kbd. Gazprom have, at least publically, “no problems” at the site.

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.

OGPSS - Insecurity in the Middle East

The continuing conflict in Syria, and the slow spread of violence in the region around it, continue to make it difficult to make accurate predictions about the future of oil exports from the region. Within Syria itself production had fallen into decline about ten years ago, before the current struggle began. The precipitate drop over the last two years has, however, been much more dramatic. As Energy Export Databrowser noted from the BP statistic review, production fell by 49% last year.

Figure 1. Syrian oil production showing the recent fall in volume. (Energy Export Databrowser ).

As with most oil-producing nations oil consumption had, on the other hand, been steadily rising with net exports (some is exported as crude and re-imported as refined product) falling to around 100 kbd. The conflict has, however, also reduced internal consumption at similar rates earlier in the conflict.

Figure 2. Syrian production and consumption until 2011. (EIA )

At the same time that Syrian exports have sensibly disappeared, the exports from Iran have continued to fall. Data through the end of last year shows that sanctions continued to bite, with exports falling 31% last year.

Figure 3. Oil production, consumption and exports for Iran (Energy Export Databrowser)

Much of the oil from Iran goes to China, India and Turkey. In May 2013 the total exports are reported to have fallen to 700 kbd although individual monthly numbers fluctuate given the complexity of now getting oil into the hands of customers. (H/t Gail - that report may only cover Chinese imports, since Bloomberg reports a different set of numbers, and an IEA estimate that Iran is averaging 1 mbd of exports this year.) India is hoping that the change in the Iranian Presidency will lead to an easing of sanctions. In the interim, the exemptions that China, India and Turkey are receiving to some of the sanctions have just been extended another six months. Part of this comes from the cuts those countries have already made. India, for example is now down to around 117 kbd around half that of a year ago.

Oil imports into China are reported to have increased, perhaps because the Chinese have just agreed to buy a number of Chinese drilling rigs. Total exports are projected to fall to 1.3 mbd over the current Iranian fiscal year (which started in March). If Iran is having to store more of its oil in off-shore tankers, this may explain the fall in regional tanker availability over the past month.

In a recent post I discussed my concern over the likelihood of Iraq being able to achieve the increased volumes of production within the time frame that their Central Government has suggested. However, as Leanan caught recently, Kurdish Iraq is moving more and more toward independent action in regards to their oil. From the Turkish side a pipeline will be allowed, that can go to the border, but not cross it. Mysteriously it will likely then fill, over time, with a flow of 1 mbd. Turkey is working with BP to develop the resources of Kurdish Iraq. In the interim Turkish demand has stabilized to a greater degree than it has in its southern neighbors.

Figure 4. Oil imports and consumption in Turkey (Energy Export Databrowser)

To a degree the instability is feeding off itself. Egypt continues to have problems in ensuring an adequate supply of fuel, and while Iraq and Libya have agreed to help, they prefer cash up front for the delivery, and that is proving to be a bone of contention. The country has reached the point where domestic production can no longer keep up with consumer demand, and these imports are going to become more critical to the budget, and, as a follow-on, national stability.

Figure 5. Change in oil consumption and the need for more imports for Egypt (Energy Export Databrowser)

The hope is that a pipeline can be built from Iraq, through Jordan, but that requires that a mutually acceptable line of credit be established, and that appears to be a problem. Egypt has the same soft-credit deal with Libya for a supply of a million barrels a month. The price, however, will be at that of the world market.

Unfortunately as the level of violence continues to grow one starts to get into an almost inevitable snowball effect, and there is a consequent negative impact on much industry, likely including that of oil production. The most likely consequence will be a further fall in the regional export of oil, which has a follow-on consequence in that the customers who have lost this supply (Japan has given up all Iranian oil for example) must then go onto the world market to find an alternate source of supply.

As those sources become even scarcer than they are already, marginal amounts of oil become more critical to maintaining a global balance. But such supplies don’t become available at the drop of a hat.

It seems to be a drum that I beat perhaps a bit often, but it is a message that bears repeating. Without significant and ongoing investment in the more difficult regions of the world, funds to identify the necessary availability of resource, and then to drill, in a timely manner, to prove the resource and start the process of turning it into a reserve, the oil balance cannot be sustained at a viable and acceptable price. It does not matter how glowing a set of reports are put out about how we can all relax because the world has plenty of oil in shale.

The largest of those resource sites is in Russia, where there may be as much as 75 billion barrels. But two things should be remembered. The first is that peak oil is reached, not when we run out of oil, but when we start producing less each year than in the previous. And the second is that getting much of the oil in the shale into the proven reserve category is going to take a fair amount of time, after which production rates, going from the results seen, for example, in the Bakken will decline at such a rate that a continued and expansive program of expensive drilling will be required to sustain production. And all this time the flow of oil from existing reservoirs will continue to fall.

Figure 6. A pretty wall hanging . (EIA)

Editorial Note: Because of one of those delightful family events that occur from time to time, this series will be on hiatus for a couple of weeks, since we will be traveling, when I would otherwise be writing.