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 - Tensions over oil in the South China Sea

In the introductory remarks to these posts on Chinese energy supplies and usage, I mentioned that one of the concerns beginning to be evident lies in disputes over the ownership of some of the oilfields offshore. Disputes over ownership have been continuing for some time, and this week was no exception, with Chinese moves to create a new city, Sansha, on Woody Island and thereby strengthen their claim to the region. Woody Island, or Yongsing lies in the Paracel chain of islands in the South China Sea.
(The post has been slightly modified to recognize the speculative nature of the overall resource available.)

Figure 1. Location of the current region of dispute in the South China Sea (Agency France Press)

Ownership of the territory, and underlying potential hydrocarbon reserves, is a matter of dispute between several countries, although China has administered the region since a 1974 conflict with Vietnam.

The Chinese government declared the establishment of Sansha last month, saying its role is to administer the disputed Paracel and Spratly archipelagos and surrounding South China Sea waters, which are believed to hold oil and natural gas deposits. The islands are claimed in whole or in part by Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam.

The China National Offshore Oil Corp (CNOOC) has recently sought foreign interest in exploring nine blocks in the region, coming as close as a mile to the Paracel Islands – a region that Vietnam claims lies within its territorial waters, and which it used to occupy.

Further south, near the Spratly Islands, the dispute switches to include the Philippines with the latter already getting bids for some of the blocks, which the Philippines also claims lie within their 200-mile territorial waters. The benefit that China achieves by claiming the Spratly Islands can be seen by looking at the change that this brings to their territorial waters, in contrast with those of the other adjacent countries.

Figure 2. Disputed territories around the Spratly Islands, and the territorial waters in dispute. (EIA ) The extent by which the Spratly’s extend Chinese territorial waters can be understood from the location of the red line showing their claims.

In more detail, the areas of dispute can be broken into more specific locations, names that will likely become more familiar as these disputes continue to fester. The actual amount of oil and gas that might be available is still relatively speculative, since there has been little actual drilling in the region, as yet. However, by some estimates, much of which is Chinese, the region is thought to hold up to 213 billion barrels of oil, more than that left in the Saudi reserve. On the other hand, as Joules and Art have reminded me, the USGS estimates put the total at only on the order of 20 -30 billion barrels. Only drilling into the putative fields will realize an answer to that question, but then this turns to the debate into who gets to sell the permits for such drilling.

Figure 3. Regional identifying names in the South China Sea. (Next Big Future )

The disputes are now moving to possibly bring in additional players, with China already accusing the United States of meddling, and this just after Secretary Clinton had appeared to make some progress in defusing the tensions.

These tensions in the region are not new, and in his book “Resource Wars” Michael Klare listed some of the conflicts that had taken place between some of the involved parties in the years to 2001, when the book was written. In several cases shots had been fired and people died, as the different nations tried to establish claims, most particularly to various, otherwise uninhabited islands in the Spratly Islands.

In 1974 China seized the Paracel Islands from Vietnam, and in the resulting conflict a Vietnamese naval vessel was sunk, and several soldiers were killed.

In 1988 the Chinese and Vietnamese navies exchanged shots at Johnson reef (video here ) with Vietnam losing three ships.

In 1992 Vietnam accused China of landing troops at Da Luc Reef, and China seized 20 cargo ships in the ongoing dispute. Both parties have landed on different islands as a way of seeking to claim the territory and the Vietnamese Parliament has just (2012) passed a law establishing sovereignty over the Paracel and Spratly Islands. This has raised more tension with China.

The conflicts are not just between China and Vietnam, in 1995 the Phillipine government discovered that China had built a military base at Mischief Reef, which lies some 150 miles from Palawan Island, and as Michael Klare notes, well within the 200 mile territorial waters of the Philippines (which extend 200 miles – to simplify the explanation of the nuances of maritime law). Given that there are mutual defense treaties between the USA and the Philippines (dating from 1951) and that China militarily rebuffed the Philippine ships sent to investigate, created new tensions in the region. An Army War College review paper has noted the military buildup that is now occurring:

Aside from China's long-term modernization plan for both her Army and Navy, Brunei, Malaysia, and lndonesia have purchased aircraft from the United Kingdom. Malaysia bought guided missile frigates from the United Kingdom and lndonesia purchased sixteen corvettes from the former East Germany. Even the financially strapped Philippines is acquiring Italian aircraft and is also considering an additional $14 billion for defense modernization. The possibility of a regional arms race is clearly very real, if not already underway.

The situation at Mischief Reef has continued to evolve. As Strategy World notes:

For over three decades China has been using a gradual strategy that involves first leaving buoys (for navigation purposes, to assist Chinese fishermen), followed by temporary shelters (again, for the Chinese fishermen) on islets or reefs that are above water but otherwise uninhabited. If none of the other claimants to this piece of ocean remove the buoys or shelters, China builds a more permanent structure to aid passing Chinese fishermen. This shelter will be staffed by military personnel who will, of course, have radio, radar, and a few weapons. If no one attacks this mini-base China will expand it and warn anyone in the area that the base is Chinese territory and any attempts to remove it will be seen as an act of war. The Vietnamese tried to get physical against these Chinese bases in 1974 and 1988 and were defeated both times.

Since the initial incident the small base at Mischief reef has been expanded into a more substantial military base, whose presence is now being used to justify a Chinese objection to the Philippine authorized drilling for oil off Palawan Island. The Chinese have also prepared to start drilling around Palawan Island, bringing the Philippine Navy back into the dispute.

And further north the Chinese Drilling Ship the CNOOC 981 has begun (in early May) to drill around the Paracel Islands. This is the first deep water well that the company has drilled itself, the fifteen earlier such wells being drilled by CNOOC partners. The exploration vessel Ocean Oil 708 is now also working in the disputed region.

Although the tensions have not accelerated as swiftly as Michael Klare anticipated when he wrote “Resource Wars” over a decade ago, they are nevertheless indicative of the aggressive position that China is taking to secure as much oil and gas as it can for future needs. With the modernization of their navy there some quite serious concerns developing over their future plans, since territorial issues can lead on to much greater conflict that we have seen so far in the region.

The disputes has now spread to Scarborough Shoal where an initial arrival of Chinese fishing vessels has been followed by support vessels from Chinese government agencies. Scarborough shoal lies 124 miles from the main Philippine island of Luzon. However

China insists it has sovereign rights to all of the South China Sea, even waters close to the coast of other countries and hundreds of kilometres from its own landmass.

This makes claims for even the smallest piece of land projecting from the sea more critical.

Figure 4. Raising the Philippine flag over part of Scarborough Shoal. (News Com)

Figure 5. Chinese flag flying over Scarborough Shoal (or Reef) (Huang Yang Dao Google Earth)

OGPSS - Countries producing over 500 kbd - Malaysia, Australia, Colombia and Ecuador

Over the past few weeks I have been briefly discussing the amount of oil that the major producers of the world generate each year. Starting at the top, with Russia and Saudi Arabia, I have now arrived at the bottom end of the list of countries producing more than 500,000 bd. I am concluding with Malaysia (727 kbd), Australia (586 kbd), Colombia (602 kbd) and Equador (504 kbd). For those interested the list (the EIA top producers in 2008) would have continued with Sudan (480 kbd), Syria (401 kbd), Equatorial Guinea (359 kbd), Vietnam (337 kbd), and Thailand (328 kbd) to cover the countries that produce more than 300 kbd.

But my interest in these countries stems for the need that the world has for significant increased production, and the further that one moves down the list the harder it is to see any country being able to produce an extra 200 kbd say, to provide the additional power that Japan might need to replace the destroyed nuclear reactors, not to mention the 1.4 mbd that has been projected for the growth in demand of the world economy this year, nor the 1.6 mbd that the loss of Libyan production will impose on global supply.

So let us begin by looking at the production from Malaysia, which seems to have hit a plateau in production of crude oil in recent years. Production levels are projected to stay about current levels, slightly below 700 kbd through 2020, with some of that coming from enhanced oil recovery techniques. Malaysia is also the second largest producer of palm oil, at around 300 kbd though a lot of the latter is used in cooking.

Malaysia lies north of Indonesia (covered earlier in the series)

Malaysia (EIA map )
While production is holding relatively steady, consumption within the country is steadily increasing so that, before too long, it is likely that the country will cease to export oil, in a similar fate to that of Indonesia. This despite plans to further develop offshore fields.


Extrapolation of the above lines suggests that Malaysia has hardly any time left until it stops being able to export oil.

Natural gas, however, is another story, with steadily increasing production, to date, being able to out-perform increasing domestic consumption. Thus exports, which ran around 1 TCF in 2009, have continued to grow.


The country exports around 1 TCF of LNG, two-thirds of which went to Japan. With only one of the re-gassifying plants in Japan out of operation, LNG provides a way of meeting some of the current energy shortfall in Japan, and Malaysia is willing to help. Malaysia is also now supplying China with LNG, with flows into Shanghai anticipated to rise to 3 million tons/year next year.

Australia is next on the list and it appears to have passed peak oil production, and as a result exports have dropped from over 500 kbd in 2007, to just above 300 kbd today. The declines in production are expected to continue

"The recent start-up of BHP Billiton's Pyrenees oil field and Apache's Van Gogh field - both situated off Western Australia's north-west coast - will provide a boost in the short-term, however the long-term trend is for production to keep falling," EnergyQuest Chief Executive Officer, Dr Graeme Bethune, said today.

(this from April 2010). Current production is at around 540 kbd, having fallen 40 kbd in 2010.

The decline with a projected drop of 85% in 10 years can be seen from this graph:

Anticipated future Australian production (Geoscience Australia )

At the same time Australian consumption has been steadily rising, and is hovering just below 1 mbd.

Australian oil consumption (Index mundi )

In contrast Australian natural gas reserves are significant. As with Malaysia it has supplied LNG to Japan, starting in 1989 and has just signed a $41 billion contract for a 20-year supply of LNG from the Gorgon field, taking 2.25 million tons of the anticipated 15 million tons (0.75 Tcf) of annual production anticipated from the field, as overall gas production continues to rise.

Current estimates of Australian natural gas reserves are of over 108 Tcf


Colombia (Source EIA )

Colombia sits next to Venezuela, and I referred to some of the interplay between the two countries in an earlier post on Venezuela. Production of oil has fluctuated but has recently been increasing, so that it is now running at 800 kbd, and this is anticipated to increase to 1.2 mbd by 2012. It is thus one of the few countries that might be able to increase supply to the United States as some of the more traditional sources lose production.

Colombia oil statistics (Energy Export Databrowser )

The problems that currently exist relate to the need for additional pipeline capacity to carry the newly developed reserves to a point where they can be exported. Investments in the country from China, among others, support a prediction of further growth to 1.4 mbd by 2014.

As I referred to in the Venezuelan post, some of Colombia’s natural gas has been exported to Venezuela, with the intent that in 2012, as the Colombian reserves start to decline the flow can reverse. Much of the natural gas has been used for improving oil production in the past with the country consuming some 265 Bcf while producing 318 Bcf.

Ecuador (EIA )

And the final country producing more than 500 kbd is Ecuador, although that was in 2008, and by last year production had fallen to 485 kbd. The country shows the more standard shape illustrating the Export Land model with an accelerated decline in exports as consumption rises, even as overall production now falls.

Ecuador oil statistics (Energy Export Databrowser )

It would seem, since Ecuador exports to the United States, that the increase in Colombian production is timely.

In regard to natural gas, perhaps the EIA says it best

Ecuador has relatively small proven natural gas reserves and a limited natural gas market.

The supply that it has is used internally, mainly for electricity generation, while much of that associated with oil is either flared or reinjected to help with production.