Tech Talk - Production, Profit and Projection

As we move steadily through the first month of this new year, US production of crude has continued to increase, with the EIA now showing levels of around 8.2 mbd production.

Figure 1. US Domestic Crude production through the end of 2013 (EIA TWIP)

Finished gasoline production has been floating around a level of 9.2 mbd.

Figure 2. U.S. Finished gasoline production at the end of 2013. (EIA TWIP)

At the same time ethanol production continues at around 0.9 mbd.

Figure 3. U.S. Ethanol production at the end of 2013 (EIA TWIP)

US gasoline demand, on the other hand, has fallen below 9 mbd, in the normal seasonal decline during the winter months.

Figure 4. US gasoline demand at the end of 2013. (EIA TWIP)

In the latest Director’s Cut of the news from the North Dakota Department of Mineral Resources the state reports that production averaged 973 kbd in November, up from 945 kbd in October). The rig count is running around 190 rigs (below the all time high of 218 – roughly 18-months ago) and the agency notes that companies are moving toward a higher density for horizontal wells as a means of enhancing oil recovery. They estimate that at the current rig count there will be enough work under this program to sustain the industry for more than 20-years. However production will decline as the richer spots are drained, and in the most favorable scenario production will rise for another 2 to 3 years before stabilizing and then declining. At present the rate of growth in production is in the range of 300 kbd per year.

Figure 5. North Dakota Oil Production – historical and projected (ND Dept of Mineral Resources )

This is roughly similar to the growth in production from the Eagle Ford Shale in Texas over the past year.

Figure 6. Changes in production from the Eagle Ford Shale in Texas (Texas Railroad Commission )

Growth in production from the deep waters of the Gulf are likely to be closer to 50 kbd. Even combined, and recognizing that there may be some additional production from developing shale prospects, it is difficult, as the above three regions hit production peaks in the near future, to anticipate that US production will increase by the 2 mbd that is projected by some forecasts.

Some of this doubt comes from North Dakota agency itself, which has some concerns over the continued ability of the industry to attract drilling capital, as well as the impact of additional regulations. This limit of available funds is something that Gail Tverberg has pointed out in a recent post. Shell is only one of the major companies recognizing that the increasing costs of development in more difficult parts of the world are not being offset by compensating increases in production, price and profit. As operations around the world continue to attest, (offshore Brazil being but one example) just because the money is invested does not mean that production will of a certainty arrive on the original date forecast, nor will it be at the original price estimated. In the case of Brazil, while new fields show the promise for the future with a steady increase in the reserves that the country projects, this has yet to be reflected in increased production.

Figure 7. Growth in projected reserves offshore Brazil over the past 30 years (Offshore )

The problems of development are being blamed on a lack of available drilling rigs as well as budget constraints. This may be a considerably simplified version of the realities which are likely to continue to see delays in production against target figures into the medium term future. This is unfortunate since there remain few places where global production can be expected to increase in the near future.

In the latest Monthly Oil Market Report (MOMR) OPEC notes that non-OPEC supply growth is anticipated to be 1.2 mbd this year, with the bulk of that growth coming from the United States, Canada, Brazil and the two Sudans. Oil production from the Canadian oil sands is anticipated to reach 3 mbd by 2015 on its way to a total production estimate of around 6 mbd by 2035, at an approximate growth rate of 100 kbd per year.

Figure 8. Anticipated growth in Canadian oil production (NEB )

Perhaps more than most the Canadian growth is likely to follow the projected path, although there, as in other parts of the world, the need to ensure future capital for the increasingly expensive operations, and the provision of sufficient infrastructure to handle the increased production are matters that will continue to provide caveats to the overall levels achieved.

And as regards the increase in production from Sudan and South Sudan, certainly the conditions in South Sudan are not encouraging to hopes for increased production at any time in the near future. Fighting in the regional capital of Malakal shows the increasingly tribal nature of the conflict and this may well indicate that fighting will not easily be stopped and order (let alone oil flow) restored. This is of concern to China, which imported some 14 million barrels of oil from the region in 2013 but is now faced with the problems of sustained investment in the face of lost production and facilities after seeing a similar collapse in production from Libya. And while these problems are considered relatively small at the moment, at this time when global production and supply are relatively closely tied, the continuation of problems will mean the China must look elsewhere for that production, with consequent impacts on overall prices.

The problem, as the very short list from OPEC illustrates, is that there are not that many places around the world where increased production is likely and where China can invest to achieve the levels that it anticipates that it will need as demand continues to grow. And as the market becomes more competitive, so prices are unlikely to decline much (apart from regional short term issues such as the recent desire in the US to produce more diesel from refineries). Yet while this will give some reassurance to those seeking to invest capital in the industry it comes at a time where there remain concerns over regulation in some countries, and conflicts in others both of which cause investors to hesitate in their commitment. The problem is that there aren’t that many alternative strategies that hold much hope for working.

Tech Talk - of Alaska, Libya and the belated bleat of awareness of a problem

I have written in earlier posts about the problems that the Trans-Alaskan Pipeline System (TAPS) will face, as production declines below 500,000 bd. The conclusions from that post are pictorially summarized in a graph in the recent edition of the Oil and Gas Journal.

Figure 1. Declining throughput through TAPS showing the points of concern (OGJ)

Looking at current figures, in September the pipeline had an average throughput of 524,181 bpd against the year-to-date average of 528,092 bpd. It has just passed below the upper limit at which operational difficulties can be anticipated, due in part to the flow being too slow to keep the temperature high enough to prevent wax from separating from the fluid, and starting to block valves and critical infrastructure. Because of the long lead times, and high capital requirements for the development of new fields in the Arctic, and the likely probability that these will not yield significant production until at least 2025, the article is pessimistic about both the fate of the pipeline, and future Alaskan production.

Despite those declines OPEC remains optimistic, in their October Monthly Oil Market Report that the world producers can continue to meet global demand as they foresee it rising to an average of 89.7 mbd this year, and then going up to 90.8 mbd on average next year. They foresee, for example, that non-OPEC supply will increase this year by 1.1 mbd (to 54.1 mbd) led by production gains from the USA, Brazil, Kazakhstan, South Sudan and Sudan. Next year they see an additional non-OPEC growth of 1.2 mbd with Canada replacing Kazakhstan among the five countries that will make up this additional production. In contrast OPEC itself is reducing production, with overall production reported to be down 390 kbd in September.

The gain in crude oil production seen in the US, which has risen from 5 mbd to an average of 7.3 mbd in the first seven months of this year has had a significant impact on these projections, though the change in the mix of product now available to the Gulf refineries will continue to have some impact on the overall import picture. This is because, as the EIA note, some of the heavier crude refineries along the Gulf are tied to foreign producers including Pemex of Mexico, PDVSA of Venezuela, and Saudi Refining (for a combined total of just under 2 mbd).

Yet it remains difficult to sustain the optimism that OPEC project. Libyan exports, at one time running up around 1.25 mbd remain down at some 90 kbd, due to tribal disruptions and internal political disputes that show little sign of resolution.

Figure 2. Recent Libyan oil production (Energy Policy Info)

Certainly the physical ability to return to around pre-disruption levels has been demonstrated, but the weakness of the central government does not indicate that the political problems will be resolved in the near future. And until they are there is the best part of 1 mbd being with-held from the market. This drain from global supply is not yet disruptive since it has, to date, been largely picked up by the Kingdom of Saudi Arabia (KSA).

The picture from the combination of Sudan and South Sudan following the division of the one country into two has not been promising, however it appears that the overall total decline has now been halted, and recent reports have raised production to somewhere between 190 kbd and 240 kbd.

Figure 3. Change in oil production from Sudan and South Sudan following the division of one country into two. (Council on Foreign Relations )

The IEA is not optimistic that the return to production will be as smooth as others think:

“Industry sources have been quoted as saying that restarting oil production could take six months or even longer, since the lines have been filled with water and because some wells were not closed properly.”

The OPEC projection that overall Sudanese production has returned to the 240 kbd level may, therefore, be still an optimistic estimate. The increase to 175 kbd following the repair to the pipelines from the Majnoon field in Iraq is encouraging (although the high level of violence that continues in that country does not give high confidence that the pipeline might not be struck again.)

The increased production from the Kashagan field in Kazakhstan – anticipated to rise to 75 kbd - has again been hit following system leaks so that this increased production that OPEC had anticipated has, again, been postponed.

And while production has now started from the Espirito Santo in the pre-salt fields off Brazil, it is not clear whether the production gains will offset the declines that have occurred in Brazilian production in recent months.

Figure 4. The Espirito Santo floating production storage and offloading (FPSO) vessel (Shell )

Just as there is a perception that the United States is heading toward independence in energy needs (a fallacy I have written about several times in the past), so there is a perception that OPEC is becoming a less critical supplier. This is far from the case. KSA has been producing over 10 mbd for the last months, in order to offset the loss in Libyan oil to the market, and the combined production of KSA, UAE, Kuwait and Qatar now supplies 18% of global demand. This is only the second time that this number has been that high in the past 30 years. It comes at a time when the Middle East is supplying 25% of Chinese oil demand, as that country passes the United States to become the largest importer of oil.

Figure 5. OPEC oil production (numbers compiled from secondary sources (OPEC MOMR October )

This comes at a time when the world still wonders about the actual oil balance as it flows in and out of China.

Unfortunately the picture that is emerging continues to show that OPEC is tending to be overly optimistic in its forecasts for production, which does not bode well for future supplies of fossil fuel.

Given that a group of environmental scientists have just released a letter calling for increased investment in nuclear power since, to quote James Hansen:

Hansen, who’s now at Columbia University, said it’s not enough for environmentalists to simply oppose fossil fuels and promote renewable energy.

“They’re cheating themselves if they keep believing this fiction that all we need” is renewable energy such as wind and solar, Hansen told the AP.

This comes a bit late, since as I noted recently, it takes over a decade to build a new nuclear power plant, and with the current schedule for existing plant closures moving inexorably along their timetable, this may presage a decade of power shortages. We shall see!! But in the meanwhile we had better hope that those folk concerned over the possible shut down of the Trans Alaskan Pipeline because of inadequate flow are being just a tad pessimistic.

Tech Talk - complacency does not see the slow erosion of supply

There has been some talk this week over the volumes of oil and natural gas that is being produced in America, with the WSJ, for example, noting that the US is on track to surpass the volumes produced by Russia. Given that Russia is the leading producer of crude oil at the moment, in August OPEC noted that their production was running at 10.51 mbd, in which month they noted that Saudi Arabia was producing 9.96 mbd. OPEC carefully give two numbers for US oil production, total production is given, for August, as 10.88 mbd, but of this only around 7.2 mbd is crude oil. (While the 9.96 mbd of Saudi production is their crude output, and they also produce some NGL’s from their gas production, as well as seeing some refineries gains as their processing capacity increases). However the WSJ notes that the grand total for the US also contains oil, natural gas and other related fuels to reach the 22 mbdoe, relative to the 21.8 mbdoe that Russia is estimated to be producing.

While the overall impression that is being bandied about, that the US will become energy independent, has been shot down more than enough times (see for example Chris Nelder, last year) there remains, however, a broad complacency that, with increasing production from tight rock, in both oil and natural gas, there is no reason to have concern over future supplies.

If one looks at the make-up of the US supply of energy, natural gas has been steadily increasing its share, as has crude oil, to the cost of the coal market.

Composition of the US energy supply sources, supply shown in quadrillion Btu’s (EIA )

The break-out for June gives more explicit figures:

Figure 2. US Energy supply by Source for June, 2013.

The gap between supply and demand for petroleum products (particularly for transportation) can then be assessed by looking at the consumption side of the equation.

Figure 3. US energy consumption by sector (in quads, EIA )

The bull stirring in our China shop (pottery variety) continues to be the levels of petroleum that we need, and that is unlikely to decline all that much in the intermediate term.

The problem that the world faces is that the balance between available supply of crude oil and the demands for it now lie within very narrow range of production. It is still not that much more of a concern that additional oil this month comes from the US, rather than the Kingdom of Saudi Arabia (KSA) since, give or take a few weeks, supplies can still be purchased from different sources and rapidly shipped by tanker to where it is needed. But if the US were to be asked to meet an additional production need of 1 mbd over existing supply, because of even a short-term failure of supply from another country, it would not be able to meet that demand. (Short, that is, of draining the strategic supply).

Most of the other countries in the world are in a similar predicament. And that includes Russia. Russia gets more than half of its budget from oil and gas revenues, and with their economy flattening out it needs more revenue. It would help considerably if that help came in increasing volumes of oil and gas for export. But the remaining oil and gas deposits are being found in more remote parts of the country, where the expense of not only drilling the wells, but also of getting the product to market, requires a very large capital and time investment. Thus, while it would be nice if they could, they can’t be expected to meet an upsurge in external demand by turning the odd tap on an oilfield to produce additional supply.

And if one goes around the world, as I have been noting recently, outside of the KSA, there is virtually no-one else who can relatively rapidly respond to bring the global market into balance. But even the KSA capabilities to meet that demand are limited. I would suspect that they would get uncomfortable if they had to produce over 10 mbd for any length of time.

And this is where the kicker in the story lies, because, if that is the case, and conflicts around the globe continue to nibble away at the production capabilities in places such as Sudan, Iraq, Libya and their neighbors, then the additional global reserve between available supply and demand is going to increasingly tighten. It is a relatively imperceptible change every month. A little less oil flows down the Alaskan pipeline (439,686 bd in August against the average ytd of 528,572 bd); South Sudan is running about 100 kbd behind the figures for January 2012; Libya continues to suffer from the actions of the militia that control two of their oilfields to the point that production is now around 1 mbd below normal production for the country. There are some indications that the situation is now improving, with flows returning to around 700 kbd but this is still only half of the original volumes. And while the problem is political, rather than technical, the optimism of the Libyan oil minister who projects a return to production levels of 1.6 mbd is perhaps difficult to justify realistically.

Figure 4. Recent changes in Libyan oil production (WSJ )

Libya is, perhaps, with Iran, an exemplar of the nations with the potential to produce more, but who are constrained by immediate political problems. Iraq, who might otherwise also be in the group, is challenged also to develop the fields that are required for it to bring in the additional volumes of oil to the world market.

If these countries remain at their current levels of production, and there is little to indicate any positive change in the near term, then the narrow band over which KSA production fluctuates to keep the balance may not be enough for much longer.

Complacency that there is currently enough oil and natural gas to go around, at current levels of price, lets the market focus on other, more immediately pressing issues. But the slow erosion of the remaining global production surplus continues, and accumulates, and the time when this becomes evident may only be when that reserve no longer exists. And that may not be nearly as far into the future as most seem to expect.

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.

The Sundering of Sudan - it may increase oil production

The disruption that began in Tunisia is continuing in Egypt, with changes also starting in countries such as Jordan and Yemen. And in the midst of this turmoil, the (finally) democratically dictated separation of Sudan into two separate countries is moving towards the July 9th separation date. At that time Southern Sudan will divide from the North. Sudan has only been selling its oil on the world market since 1999 and the transition will impact those exports.

With the hopeful end to the conflicts in the country, there is also now an increasing possibility that the oil and natural gas resources of the two new nations will be developed. Until recently China has been the most active player in the region, but as the results of the vote have become apparent, Russia too is indicating an interest.

Like other players in the world oil market, Russia would like to promote its energy interests in that region. Moreover, it is capable of becoming a serious competitor for both Western and Chinese companies in oil production and power supply. Russia’s clear competitive advantages are its technological experience in developing oil fields in many regions of the world, its investment potential and the absence of any political conditions for energy cooperation. The latter is important both for Khartoum and Juba, the current administrative centre of South Sudan, because after the referendum both sides will have to reconsider the criteria of their independence.

Map of Sudan (United Nations ) The blue tone marks the bounds of the South Sudan States.

The EIA notes that in 2009 oil was the major revenue generator for the country, bringing in more than 90% of foreign earnings. Within the country the primary energy source is that of combustible renewables and waste, reflecting the rural, non-electrified population of much of the country. And although BP (as reported by Energy Export Databrowser) suggests that virtually all the oil it produces is exported:

Oil statistics from Export Data Browser, based on the BP review.

The EIA find that there is a significant, and growing, domestic market, that uses a significant percentage of production. Various estimates of the size of the export market (for reasons given below) hover around the FT estimate of around 500,000 bd.

EIA statistics on Sudanese oil production.

The EIA note, as is shown on the graph above, that production and exports developed after a pipeline was run 1,000 miles from the oil fields up to Port Sudan. And it should be noted that while about 75% of the oil reserve (perhaps 6.5 billion barrels) is mainly in the South, that port (map above) is in the North. And as European nations in particular, but also those of the FSU, know from the past, those who control the pipeline can often remain in a position of power. The previous arrangements and actual distribution of funds have been viewed with some suspicion.

Much of this is due to the opacity with which Khartoum's captured state machinery operates, siphoning as much as 40% of total oil revenue through various forms of mispricing. Meanwhile, though the Comprehensive Peace Agreement (CPA) of 2005 established that 50% of revenues must be remitted to the Government of South Sudan (GOSS), this share is determined not by volume but sales. Khartoum markets the oil nearly exclusively and determines price as well as volumes exported, with little or no independent monitoring. According to U.K. watchdog Global Witness, major discrepancies of between 9% and 26% have been documented, underpaying the GOSS by as much as $700 million. Little is known of the $7 billion in oil revenues remitted to the South as accountability mechanisms were never factored into the CPA.

That initial agreement is set to expire this July. The pipeline supplies oil to two refineries (at El Obied and Khartoum) that supply the domestic market.

Current pipeline and bid blocks in Sudan (USAID )

One thing that may change this is the construction of s second pipeline, running from the South to Mombasa in Kenya. This would also feed a new refinery proposed for Lamu, which is near Mombasa. However the pipeline would be 870 miles long and have to go uphill to get into the Kenyan highlands, making it quite expensive. An extension of a railway line has been suggested as an alternative. But it now appears that the rail link will go through Uganda, rather than directly to Lamu.

Possible oil routes South from the new capital at Juba.

North Sudan is currently producing about 100 – 110,000 bd of Sudanese total production, but it hopes, by increasing production from the Balila oilfield in South Kordofan from 60 kbd to over 100 kbd, among other gains, to raise this level to 195 kbd by 2012. It has also been exploring for oil offshore in the Red Sea.

Meanwhile exploration in the South is expected to increase, and there are hopes that production might increase to 2 mbd by 2015, from their current estimated production of 450 kbd.

Conditions in the South however are not currently ideal for oil production, even for the Chinese

He said trucks bringing in fuel vital to operations were stopped at 12 illegal checkpoints on one 200km stretch of road alone, each time being charged $300. Waste oil has been set ablaze and workers kidnapped, he added.

These conditions may make China less likely to invest at the scale required for the new transport network. On the other hand China is but one of several partners in production.

For while China has a 40% interest, Malaysia has a 30% interest, and India in 3rd place with 25% in the current production company. And with the Russians expressing interest, who knows what may transpire.