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.

Tech Talk - Oil Supply, Oil Prices and the Kingdom of Saudi Arabia

From the time that The Oil Drum first began, and through the years up to the Recession of 2008-9 there was an increase in the price of oil, and that resumed following the initial period of that recession, and, in contrast to the price of natural gas, oil has recovered a lot of the price that it lost.

Figure 1. Comparable price of oil from 1946 (Inflation data)

And if one were to draw a straight line on that graph from the low point in 1999 though now there hasn’t been a huge variation away from the slope of that line for long. That, of course, does not stop folk from pointing to the very short, roughly flat, bit at the end and saying that oil prices are going to remain at that level, or are even about to decline.

To address that final point first, I would suggest that those making such a foolish prediction should go away and read the OPEC Monthly Oil Market Reports. Remember that, for just a little while longer, oil is a fungible product. OPEC make no secret of the fact that they continuously examine the global economy and make estimates on how it is going to behave. This month they note that the economies aren’t doing quite as well as expected, and have revised down global growth to 2.9%, though they expect next year to be better, and hold to their estimate of a 3.5% growth rate.

But OPEC go beyond just making that prediction, they use it, and data that they have on consumption and oil supplies around the world, to estimate how much OPEC should produce each month to balance supply against demand, so that the price will remain at a comfortable level for the OPEC economies. And based on those numbers they tailor production.

This month, for example, they note that global oil demand is anticipated to grow by 0.8 mbd this year (and by 1.04 mbd in 2014). They anticipate growth in production of around 1.0 mbd from the non-OPEC nations, with projected increases from Canada, the United States, Brazil, the Sudans and Kazakhstan contributing to an additional 1.1 mbd next year. From these numbers they can project that demand for OPEC oil will be slightly down this year, at 29.9 mbd down 0.4 mbd on last year, with next year seeing an additional fall of 0.3 mbd on average.

Figure 2. Projected oil demand for 2013 (OPEC MOMR )

Thus slight reductions in production from OPEC, and particularly the Kingdom of Saudi Arabia, (KSA) can keep the world supply in balance with demand and more critically for them keep the price up at a level that they are comfortable with. Note that in relation to the overall volumes of oil being traded they are not talking much adjustment in their overall volume (around 1% of the total 30 mbd) in order to sustain prices. The USA produces more, OPEC produces less – not much less because global demand is growing – and the price is sustained.

This has virtually nothing to do with the speculators on Wall Street and the corrections they might impose, this is all about supplying a needed volume to meet a demand and controlling that supply to ensure that the price is sustained.

There are a number of caveats to this simplified explanation, one being the short-term willingness and ability of some producers to keep to their targets. One of the imponderables is the production from Iraq. Although Iraq has been given a waiver through 2014 on the need to limit their production, the increasing violence has led to a drop in production, back below 3 mbd.

Figure 3. OPEC production based on data from secondary sources (OPEC MOMR)

As I have noted in the past, OPEC is sufficiently suspicious of the reported numbers from the countries themselves that they check from secondary sources, and provide both sets of numbers.

Figure 4. OPEC production numbers from the originating countries. (OPEC MOMR August 2013)

Note, for example, that Iran says that it is producing over 1 mbd more than other sources report, and Venezuela is around 400 kbd light. The balancing act is largely the charge of KSA, since it produces the largest amount and can adjust more readily to balance the need.

One of the other caveats is that the internal demand in these countries is rising, and that lowers the amount that can be exported. This will in time require that OPEC produce more, just to sustain the amounts that they export. And the problem here is the biggest caveat of all. Because KSA cannot continue to produce ever increasing amounts of oil.

Just exactly how much the country can produce is the subject of much debate, and has been at The Oil Drum since its inception. But if I can now gently admonish those who think it can keep increasing forever, and that it has vast reserves that can flood the market at need. This fails to recognize that the major fields on which the country has relied are no longer capable of their historic production levels, and that, over the time that TOD has been in existence, production has switched to the new fields that KSA had promised it would, back in time.

But these new fields, including Manifa and Safaniya produce a heavier crude that, for years, KSA struggled, usually in vain, to find a market for internationally. It is only now that it is building its own refineries to process the oil that it can find a global market for the product. Yet those refineries have only a limited capacity. If you can’t ship, refine and market your product in the form that the customer needs, it can’t be sold, regardless of how much, instantaneously, you can pump out of the ground. And so KSA is starting to look harder for other fields. They have increased the number of rigs employed to 170 by the end of the year (in 2005 they had about 20 oil and 10 gas rigs operating), going beyond the 160 estimated earlier, seeking both to raise production from existing fields, but also to find new ones. This is almost double the number that Euan reported at the end of last year. That this is being expedited is not good news! Because new fields will very likely be smaller, and more rapidly exhausted, and may not have the quality of the oil produced from Ghawar and the other old faithfuls.

Realistically, over a couple of years, I would suspect that the oil price line, that I mentioned was rising at the beginning of the piece will continue to rise and we are just going to have to accommodate to it.

OGPSS - Saudi Arabia and Natural Gas Liquids

Stuart Staniford has been watching the decline in oil prices. He has then commented that, given the Saudi need for income to hold off “Arab Spring” dissatisfaction, they are unlikely to let prices fall too far, before cutting production, since even a 10% reduction in output could raise prices 20%, thereby resolving possible income concerns. This well reflects the role of the Texas Railroad Commission back when, which controlled US production in order to sustain an acceptable price for oil. But that role collapsed when overall US production was no longer able to spring to the rescue when demand rose, and US production could not, passing the control over prices to OPEC and more particularly the Kingdom of Saudi Arabia (KSA) who could, and have shown a willingness to, control output to ensure that it proximately followed demand and has kept prices within an acceptable range, for them.

 It is easier to do this by curtailing production, and as Stuart noted, this can increase KSA revenue at a time of falling global demand. However, in the opposing case, where the global economy requires a “reasonable” price for oil, and will require them to increase production, as they have done to the limits of demand growth in the past year, that ability may be limited and of a shorter duration. It also occurs at a time that the internal use of crude is limiting the amount that the KSA can export. But while there is considerable discussion about this situation, there has been some increase in natural gas liquid production that is also important, and thus a main point of this post.

 

Figure 1. Recent KSA production and exports of oil (Export Databrowser )


In the past, when the Kingdom has been challenged on the ability to increase production, it has listed the number of future fields that it would bring on line. Previous lists of future projects are, however, now reaching completion. Shaybah, for example, in the Empty Quarter, raised production in January 2009, from 500 kbd to 750 kbd, and will soon raise it an additional 250 kbd to 1 million barrels a day.


 The increased production at Shaybah, however, also helps identify an additional source of increased production, since is also increasing natural gas production to 2.4 bcf/day, with a concomitant production of 264 kbd of NGL. The increase in overall production of NGL from OPEC has, for some time, provided a significant volume of additional fuel. By the last quarter of 2011 OPEC as a whole was producing 5.42 mbd of NGL and NCF (non-conventional fuel), (up from 3.89 mbd in 2006) Rune has written about NGL production here and here with the relative importance of this supply perhaps best illustrated with this graph from the latter post. 

 
Figure 2. OPEC crude oil, condensate and NGL supplies over the decade from 2001 to 2010 (Rune Likvern) 



 OPEC is anticipating an overall increase in NGL production from the 2011 average of 5.3 mbd to 5.7 mbd in 2012, with final quarter 2012 volume reaching 5.86 mbd. Apart from the increased supply from Shaybah, KSA is developing the Arabiyah/Hasbah offshore fields with onshore processing at Wasit. This will produce 2.5 bcf/d of natural gas, with 240 kbd of NGL production associated with that. 


There is also the development of the Karan field that will, with the other programs in development, collectively raise KSA natural gas production to 15.5 bcf/day from the 10.2 bcf/d it was achieving in 2010. Unfortunately the high sulfur content of the gas to be fed to Wasit is causing some problems and that project completion may now be delayed until 2015, though the problem (of sulfur freezing in the lines) is not yet solved. Saudi production of NGL’s has steadily grown over the years.


 


Figure 3. Saudi Arabian NGL production (Index Mundi from EIA ) 


 Last August, for example, it shipped 197,824 metric tons roughly equivalent to 66 kbd, of exports through ports under the Saudi Port Authority – note that this does not include the amount used internally, but was 79% up on the previous year and does not include shipments from ports operated by Saudi Arabian Oil Co, or by Aramco. It should be also be noted that, following the drop in consumption caused by the recession, the United States has increased the amount of crude that it is importing from KSA over the last couple of years.

 


Figure 4. U. S. Imports of Crude and Petroleum Products from Saudi Arabia (EIA) 


 However, because of the increase in the volume of natural gas produced in the United States, there has been a concomitant rise in the amount of NGL produced. The volume of NGL produced varies with the field, with the relative differences shown in the following figure.

 


Figure 5. Volume of NGL produced per kcf of natural gas in different fields around the United States (NPC North American Resource Development Study) (PDF)


 In 2010 the US averaged a production of 2.42 mbd of NGL, and were production of natural gas to rise to 110 Bcf/day by 2035 as has been projected by some, this will, at that time yield some 3.9 mbd of NGL with an additional 0.69 mbd from refinery production. The US does not, sensibly, import any NGL, and with rising production will likely start exporting to Canada, where production is declining. The Saudi market for NGL lies largely in Asia, with an export terminal at Yanbu The terminal is connected to Abqaiq through a 1,170 km pipeline, and can handle exports of up to 2 mbd of NGL.