Tech Talk - The BP Energy Outlook 2035

BP begins its new forecast for the energy future with the statement:

We project that by 2035 the US will be energy self-sufficient while maintaining its position as the world’s top liquids and natural gas producer.

This illustrates the optimism which BP are projecting in their image of future production. But it carries with it a lot of inherent assumptions, some of which are relatively easy to identify in the summary graphic presentation that accompanied the initial presentation of the new report. Perhaps the most illustrative of their optimism is this plot, which shows the increasingly decoupled changes in energy supply relative to projected increases in GDP.

Figure 1. The reducing dependence on Energy growth as a control on GDP. (All figures are from the new BP Energy Outlook for 2035)

Each year there are significant projections for the future of energy over the next few decades. Recent posts have reviewed this year’s projections from the IEA and ExxonMobil. These projections, were also reviewed last year and those reviews included the previous BP projection although that only projected forward to 2030 – the current review has added five years to this.

The relative contributions of the different fuel sources to the overall mix have not changed appreciably in the past year. Oil is anticipated to continue to shrink in percentage contribution, and coal will also decline in relative contribution after around 2020. Natural gas and renewables are anticipated to make up the supply needed.

Figure 2. Relative contributions of the different fuel sources to overall global energy supply to 2035.

BP have made it a little easier to see how this breaks down by plotting the ten-year increments in fuel contribution as well as the overall totals.

Figure 3. Changes in projected fuel supplies over the period to 2035.

Changing the plot to show the ten-year incremental changes illustrates how coal, now surging as an international fuel source, is anticipated to decline beyond 2020.

Figure 4. Projected ten-year incremental changes in fuel supply through 2035.

Note that in overall total BP is projecting that global consumption will rise by 41% over today’s numbers, most of which increase will come from the rapidly-developing countries of the world.

Figure 5. Regional increments of energy consumption growth over the decades to 2035.

The reliance on the improvements in energy efficiency to stall further growth in energy demand from the OECD countries is evident in this picture.

BP notes that the decade from 2002 to 2012 saw the “largest ever growth in energy consumption in volume terms,” but anticipates that this rate will never be exceeded in the decades to come. And they anticipate that as Chinese growth fades in the decades, so the growth of the Indian and adjacent economies will almost match that of China by the end of the period. As the nations of the world complete their industrialization, so the growth in the demand for fuel will see a greater emphasis on transportation demands.

Interestingly the decline in the demand for coal that BO projects is linked to the completion of industrialization in China, and this assumption is, of course, predicated on oil and natural gas remaining available to meet the demand at a reasonable cost.

Figure 6. Anticipated primary sources for generation of electric power.

The projections for changes in liquid fuel supply are also relatively simply presented. First one can see the projected changes in demand, with the OECD countries declining, as demand increase seems to focus in the Eastern nations.

Figure 7. Anticipated changes in global demand for liquid fuels

It is where this growth in supply is to come from that is of the greatest concern, and BP suggest the following:

Figure 8. The anticipated sources for growth in liquid fuel supply through 2035.

BP note the largest sources of these gains as being:

The largest increments of non-OPEC supply will come from the US (3.6 Mb/d), Canada (3.4 Mb/d), and Brazil (2.4 Mb/d), which offset declines in mature provinces such as the North Sea. OPEC supply growth will come primarily from NGLs (3.1 Mb/d) and crude oil in Iraq (2.6 Mb/d).

One of the more interesting plots in the report shows how, over last year, the changes in US production more than compensated for the declines in production from the MENA countries.

Figure 9. The ability of increased US production to balance declines in production from the nations in turmoil in MENA.

BP anticipates that continued US increases in production will more than balance the anticipated increases in global demand, so that the continued disruptions will not significantly affect global supply even though, as they have historically, they extend for more than ten years. The US gains are anticipated to continue to such an extent that OPEC will be required to rein in their supplies in order to sustain global prices.

Figure 10. Changes in the demand for OPEC oil and the result on their production reserve capacity.

One anticipates, given that KSA has said that they will not increase overall supply much above current levels, that the increases in production that BP anticipate will likely come from Iraq, and Iran if the sanctions are lifted. Given the current situation in those parts the latter seems increasingly more likely than the former. Further BP note that the increasing populations in these countries and their consequent increases in demand for energy is likely to constrain the levels at which these countries can continue to export.

In conclusion, and to justify the heading at the top of this piece, BP anticipate a continued growth in US oil production such that, by 2035 imports are virtually eliminated, being more than offset by the gains in the export of natural gas products. BP anticipates that the latter will increase by 2025 to around 12 bcf/d and continue at about that level.

Figure 11. BP projections for changes in the US oil supply sources for the period to 2035.

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.

OGPSS - A June TWIP, and the OPEC MOMR

The EIA has noted, in This Week in Petroleum that, for the first time, the sum of Non-OECD country demand contributed more than half to the total of liquid fuels consumed in the world.

Figure 1. Changes in the relative shares of liquid fuel consumption between the countries in and out of the OECD. (EIA )

It does, however, point out that the projections of the Short Term Energy Outlook are for the two curves to re-intersect at the end of 2014.

Figure 2. Projected changes in liquid fuels consumption, through 2014 (EIA)

The reality of that second assumption is, I rather suspect, more based on hope than reality. Once you start providing power, and all its benefits, to the general population you are on a slippery slope that it is almost impossible to back away from. Consider (as a small example) the problems that Egypt is currently having with the supply of subsidized bread to the general populace. Once you start supplying a commodity at a subsidized price it becomes very hard to change the equation, and too much of the non-OECD world is now living in an economy where energy use is subsidized. The problem that the above graph fails to recognize is that you cannot wean a culture from subsidies in the immediate short term and still expect their government to survive in its present condition.

Thus when the EIA project that global demand will grow to over 92 mbd in the next year, they are likely only being realistic. Their assumption that it may then decline is perhaps more in the nature of wishful thinking.

Figure 3. EIA anticipated growth in demand and supply over the near term (EIA)

There are however a couple of caveats to that last statement, the first of which is that the decline in demand may be more reflective of a lack of supply capacity (our raison d'être) and alternatively it may reflect, as a result of the first, that prices will rise to influence demand. Nevertheless we remain in a condition where the harsh realities that lie just over the horizon remain obfuscated by other events.

As with many other international agencies the EIA continue to anticipate continued growth in the North American supply of liquid fuels. Outside of that growth the increased demand for more than an additional mbd of liquid fuels seems more likely to be likely to be desperately hunting for an invisible savior.

Figure 4. Anticipated growth in liquid fuels supply over the next two years (EIA)

The decline in supply from OPEC in the two years ahead should be noted. It should also be remembered that this is likely to be as much a voluntary control, to ensure price stability in the face of increased North American production, rather than as a result of a short-term supply shortage. However the reality of continued domestic growth in demand in the Middle East, as Westexas has reminded us, is something that cannot be neglected. It has been noted that Saudi Arabia, although having less than a third of Germany’s population, recently surpassed it in terms of oil consumption. It will add several new oil-fired power stations including those at Yanbu and Jeddah. This will feed into an anticipated continued growth in Saudi domestic demand of 5.1% pa.

And this brings us to the OPEC Monthly Oil Market Report (MOMR) for June. OPEC continues to anticipate a global demand growth of 0.8 mbd this year, though they note that there will likely be a growth of 1.2 mbd in the non-OECD nations, requiring a reduction in OECD demand to match the overall forecast. Major growth in demand will continue to be in China (at 0.4 mbd and the Middle East at 0.3 mbd). On the other hand OPEC anticipate cutting their supply (to match anticipated need) by 0.4 mbd over the course of this year. OPEC, therefore, has slightly dropped their projection for year end, however it will still crest above 90 mbd.

Figure 5. Estimates of global oil demand (OPEC June 2013 MOMR)

A large part of demand projection is tied to growth in the global and individual nation economies, and that is a murky crystal ball to view. But OPEC anticipates that these economies will continue to grow at an increasing rate, while recognizing that this projection is in an area with a high level of risk in the estimate. The continued, and perhaps growing unrest in the Middle East continues to cast a further shadow over predictions over both supply and the reality of future demand in those countries. And, as one of the less frequently discussed topics, future output from Russia is not as assured as the average analyst appears to assume.

OPEC is anticipating a relatively strong growth in demand in the second half of the year to almost reach 91 mbd by the end of the year. Overall the growth in supply to meet this demand continues to come from North America.

Figure 6. Anticipated oil supply for 2013. (OPEC June 2013 MOMR)

OPEC itself is reporting a slight increase in overall production (by about 128 kbd) although, as always, there are differences in the numbers between those supplied by the countries themselves, and those reported from other sources.

Figure 7. OPEC crude oil production as reported directly (OPEC June 2013 MOMR)

There continues to be a significant disparity between the numbers reported from Iran and Venezuela, for example, when other sources are reported to the tune of around 1.5 mbd roughly. In the short term Iraqi production appears stable.

Figure 8. OPEC crude oil production as reported by others (OPEC June 2013 MOMR)

With the continued global reliance on increased production from North America, and, in turn, that reliance on improved production from tight formations, I would be a little more confident of the future were it not for plots such as this, which I recently found.

Figure 9. Chesapeake typical well decline curve (Eagle Ford Forum)

It is a curve that I rather suspect continues to be optimistic.

OGPSS - Iran and the new EIA and OPEC Reports

With the possibility that demand for Iranian oil may fall below 1 million barrels a day (mbd) as sanctions continue to bite, Iran has announced that it wants OPEC to cut back production to the agreed quotas, rather than the overall additional 1 mbd that is actually being produced, and sold. Such a move would, of course, ,make it more difficult for those customers who have found a way of replacing Iranian oil, and perhaps incline them more towards disregarding the embargo.

OPEC has just released their December Monthly Oil Market Report (MOMR) in which they anticipate that earlier projections for 2013 oil demand growth will still be valid, at 0.8 mbd. (Though they note that December 2012 growth y-o-y was at 1.0 mbd as the US economy continued to improve). They expect that all of this increase will be met by non-OPEC increases in supply, and that demand for OPEC oil may even drop 0.4 mbd. Part of that projection continues to rely on increased US crude production, and the EIA TWIP of December 5th had the latest chart showing that projected growth, based on the newly released Annual Energy Outlook 2013.

Figure 1. Projections of future growth in US crude oil production. (EIA TWIP) from Annual Energy Outlook 2013)

As a footnote to that graph the Alyeska pipeline pumped an average of 582,755 bd in November, which brings the annual average up to 544, 625 bd. It is clear from looking at that plot that the gains in production are all assumed to come from increased production from the "tight" oil deposits that have produced the overall gains achieved to date. The optimism of this projection goes a little beyond the levels that I anticipate being achieved.

Coming back to the MOMR their projections do not include the recent news that Venezuelan President Chavez has had to have a fourth operation for cancer, and has named a successor, although the operation was apparently successful. This may complicate the decisions on how much to allocate among the OPEC partners, especially since all continue to need higher priced oil.

OPEC also give the price of various commodities in their report, and before going on to discuss country production, those prices are informative. (And can be read more easily by clicking on the table to get a better image). At present, with the decline in overall global demand, metal prices in particular seem to be continuing to slide.

Figure 2. OPEC report of commodity prices for November (OPEC December MOMR)

Equally informative is the demand that OPEC anticipates from the various regions of the world for oil in 2013.

Figure 3. OPEC estimates for regional oil demand in 2013. (OPEC December MOMR)

In total OPEC anticipates that global demand will reach 90.83 mbd by the fourth quarter of 2013, with the greatest growth continuing to be from China and the other Asian nations.

Looking at where this oil might come from, the main increase is still anticipated to come from North America.

Figure 4. Non-OPEC supply projections for 2013 (OPEC December MOMR)

The conflict in Syria is now reported to have led government forces to withdraw from the Omar and Al-Ward fields in the Deir Ezzor region, where much of Syria’s exports were produced. However the rebels do not, as yet control any of the refineries or export terminals and the result is that oil production is estimated to have fallen from 380 kbd to 160 kbd over the past few months. The regime is making up the shortfall in its needs by importing from Iraq.

Which brings us back to OPEC production levels. (Note that this is for crude oil and does not include the roughly 6 mbd in NGL that are currently being produced).

Firstly, this is what the various governments are reporting that they are producing:

Figure 5. OPEC production from official sources (OPEC December MOMR)

The total shows, among other things, how Libyan has recovered from their “Arab Spring.” In contrast with the official figures OPEC also posts the values from “secondary sources”.

Figure 6. OPEC production from secondary sources. (OPEC December MOMR)

The difference between the two figures for Iran is at around 1 mbd. Overall OPEC production is declining with the increase in non-OPEC production, so perhaps Iran won’t have quite as difficult a time persuading their colleagues to drop production a little more, to help them out. That won’t be at the latest meeting of the OPEC Ministers, which was held in Vienna on December 12th, where it was decided to maintain the current ceiling of 30 mbd.

The meeting was largely distracted by debate over who should be the new Secretary General, with this being “kicked down the road” for a decision at the end of May.

On the other hand, while Malaysia had promised to halt imports of oil from Iran last March, the IEA is reporting that they increased crude purchases from Iran in November. Whether this is oil ultimately destined for that country, or whether this a convenient transshipment point from Iranian tankers bringing in crude, which is then transferred to other carriers and a second purchaser is not clear, although a Chinese oil trader appears to be involved.

A move to make US natural gas available to NATO allies has begun in the Senate, with the intent that perhaps this could wean countries like Turkey from their use of Iranian and Russian natural gas. Whether this will ever amount to much is not clear, since Senator Lugar, the initial author, was defeated in the primary to the last election and thus leaves the Senate at the end of the term.