Future Global Oil Production.

Discussion in 'Economics' started by SouthAmerica, Jul 20, 2007.

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    July 20, 2007

    SouthAmerica: The hard copy version of The Financial Times of July 19, 2007 also had a chart showing the growth in oil production of non-Opec countries as part of the enclosed article.

    The chart showed the change over 2007 to 2012 in thousands of barrels per day. The chart showed growth and also decline in oil production by country.

    Production = + Growth and (Decline)

    (‘000 barrels per day)

    1) Brazil + 810

    2) Russia + 590

    3) Canada +590

    4) Kazakhstan +580

    5) US – Gulf of Mexico + 370

    6) Other US (380)

    7) Mexico (390)

    8) Norway (420)

    9) UK (600)

    It is ironic that Brazil is the country where we are going to have the largest increase in oil production growth in the next 5 years.


    “Drip feed”
    By Ed Crooks
    Published: July 19 2007
    The Financial Times - UK

    Yesterday's report on world oil and gas supplies from the US National Petroleum Council was a defining moment in the history of the global energy industry.

    The study, calling on the US to implement such radical measures as the fastest technically possible increase in vehicle fuel economy standards and an international framework for managing carbon dioxide emissions, echoed familiar demands from environmental campaigners.

    Yet it was commissioned by a US administration that has been a staunch defender of the traditional energy industry and was led by Lee Raymond, the former chairman of ExxonMobilwho is the epitome of the old-school oilman.

    The NPC proposals have crystallised the unease about global energy supplies that has been accumulating over the past couple of years. What they demonstrate, in the most comprehensive way yet, is not that the world is running out of oil and gas but that we are in for a sustained period of tight supply - and that policy needs to start responding to that right now.

    In the words of Dan Yergin, the chairman of Cambridge Energy Research Associates and vice-chairman of the study: "I think it will change the framework of the debate, not just in the US but around the world."

    Ahead of its publication, the report was criticised for not taking seriously enough the case for "peak oil": the argument that the world's oil production is close to or has passed its peak. But the core message of the 646-page study sounds far from complacent. It argues that there are mounting risks to traditional sources of oil and gas supply that "create significant challenges to meeting projected energy demand" and stresses the urgent need to mitigate those risks.

    The study's arrival, following a request in October 2005 from Samuel Bodman, the US energy secretary, could not be more timely. Congress is debating an energy bill in which many of the issues raised by the report, such as vehicle fuel efficiency standards, have been fiercely contested. Meanwhile, the price of oil has reminded everyone of how tight the market has become. On Monday, the benchmark Brent crude touched $78.40 a barrel, just 25 cents shy of its record high last August. Goldman Sachs suggested that the price could go to $95 by winter.

    It is certainly possible, although no one should put too much faith in any particular figure: the price of oil has long made fools of those who try to forecast it. In 1980, when it broke through $40 a barrel, people said it would go to $100. In 1999, when it fell below $11, there were those who said it would retreat to $5. What has become increasingly clear, however, is that the world is moving into a new era in which the balance of supply and demand for oil will be tighter than in the past. That is likely to mean that prices will be both higher and more volatile in the future.

    Over the past year, there has been a spate of upgrades from analysts of their long-term forecasts. This week, for example, Adam Sieminski of Deutsche Bank, who worked on the NPC study, raised his central estimate of the oil price in 2010 from $45 a barrel to $60.

    Predictions of a tight oil market into the early years of the next decade are based on an expected strong growth in demand, fastest in emerging economies, and slower growth in supply from sources outside the Organisation of the Petroleum Exporting Countries. The precise numbers vary; last week's medium-term oil market report from the Paris-based International Energy Agency projected faster growth in demand to 2012 than some other forecasters. But as the NPC report makes clear, the broad outlines are generally agreed.

    On the demand side, a booming world economy creates a strong call for energy to fuel its expansion. The International Monetary Fund's latest prediction is that world economic output will grow 4.9 per cent this year and by the same again next year.

    High prices have some effect on demand but in the short term the impact is limited. Last year, when oil averaged $66.32 a barrel, the growth in world consumption slowed to just 0.7 per cent, according to the BP Statistical Review of World Energy. However, warm winters in the US and Europe also helped to curb demand. Petrol demand in the US is remarkably robust in the face of price rises. It rose by 0.8 per cent last year and is up a further 1.3 per cent so far this year.

    There was also a sharp difference between the developed world and emerging markets. In the US, crude consumption fell last year by 1.3 per cent and in the European Union it rose just 0.3 per cent. In China it grew 6.7 per cent. In the coming decades, emerging markets are expected to create about two-thirds of the increase in demand, with the biggest single contribution coming from China.

    US oil consumption still dwarfs China's. Last year it accounted for more than 24 per cent of world demand, compared with China's 9 per cent. Even in 2030, US demand will probably still be greater. But China is on the verge of a level of income where car ownership is set to soar: at present it has just one car per 40 people compared with a car for every two people in the US.

    Over the next 25 years, China is expected to add another 9m barrels a day to its consumption, going from about 7m b/d last year to 16m b/d, while the US is expected to add just 4m b/d, going from 24m b/d to 28m.

    The only way to achieve a significant fall in oil demand would be through a global recession. Only five years ago, most economists would probably have said that $80 oil would have caused such a recession. But the world economy seems to be sailing on imperviously.

    IMF research published in April looked at the difference between a rise in the price of oil caused by a restriction in supply and one caused by stronger demand. In the case of the supply shock, inflation rises and output falls.

    But in the case of a demand shock, caused by a "significant increase in productivity growth in oil-importing countries", a high oil price can go along with higher economic growth. It is the latter that best describes the current scenario.

    While oil demand seems set to keep growing, the outlook for oil supply is murky. International oil companies such as Exxon, Royal Dutch Shell and BP, which have the most advanced technology and capabilities for extracting oil and gas, are finding it increasingly difficult to operate. They control just 6 per cent of the world's reserves and most of the countries where oil is plentiful are either closed to them or present daunting problems. The territories that are their traditional bases - Britain, Norway, onshore US - are in relatively steep decline.

    In the areas where there are significant reserves to which the oil majors have access, such as the deep waters of the Gulf of Mexico, there are technical difficulties that call the investment case for their projects into question. The travails of BP's much-delayed Thunder Horse platform in the Gulf, and of Eni's Kashagan field in Kazakhstan, have been the two best publicised demonstrations of the struggle the companies face to increase production.

    Their problems are compounded by shortages of steel, equipment and skilled personnel, which have sent development costs soaring. As a result, the IEA expects non-Opec oil output to grow by an average of just 1 per cent a year during 2007-12.

    That implies that a growing burden of meeting the increase in demand will fall on Opec. But in most Opec countries, too, it will not be easy to raise output. Iraq is in turmoil, Iran isolated, Nigeria unable to resolve strife in its oil-producing Delta region and Venezuela unwelcoming to foreign investment. A great deal rests on Saudi Arabia, the world's biggest oil producer and the Opec member putting in the most significant additional capacity; smaller contributions are coming from the United Arab Emirates and Kuwait.

    If that capacity becomes available, Opec will be able to meet a higher global demand for oil in the next decade. But the group's brusque rejection of calls for it to increase production this summer suggests it is unlikely to have any interest in helping prices fall from the vicinity of $80.

    Article will continue below.

  2. .

    Conclusion of above article.

    In the longer term, it seems likely that prices will fall once again. Eventually, a sustained high price of oil creates changes on both the demand and supply side of the equation. Cars, trucks and aircraft are designed to be more fuel-efficient, industrial processes are re-engineered and power generation turns to other fuels. On the supply side, higher long-term assumptions about prices change the economics of costly investment projects and research programmes. Oil companies typically test the economics of their investment plans down to $30 a barrel oil and want to be comfortable at $40. Those planning assumptions are likely to be revised upwards.

    Eventually, the companies will be able to recruit and train the engineers, geologists and other skilled staff that they want and the shortage of equipment such as drilling rigs will ease: the industry is in the middle of a construction boom, with old facilities not used for decades being reopened. Alternative sources of fuels including "unconventional" oil from regions such as Canada's oil sands also become more attractive, as do biofuels.

    Resource nationalism, too, has its cycle: countries that spurned foreign investment decide they need it to revive flagging production. One day, Iraq may be at peace and the oil from what may be the world's second largest conventional reserves may be flowing. However, all of these processes take time. Turning over the US car fleet takes about 15 years. The NPC estimates that the average time between a new production technique in the oil industry being devised and coming into general use is about 16 years. A big oil project can take 15-20 years from exploration to first production.

    In the meantime, there is plenty of scope for the oil market to cause economic and social disruption. The situation is made more serious because the outlook for natural gas, which can be a substitute for oil for some uses, also looks likely to tighten. Hence the urgency in the recommendations from the NPC, an industry advisory group to the US administration first convened under Franklin D. Roosevelt during the second world war. Its answer, drawn up by a 350-strong study group including governments, other industries and consultants as well as oil and gas executives, is that "actions must be initiated now and sustained over the long term"; in effect, to accelerate that process of adjustment to a tighter market for oil.

    First in its list of recommendations is moderating the growth in the demand for energy by raising efficiency, including the fastest improvement in fuel economy standards for cars and light trucks that is technically possible. The NPC says this means doubling miles per gallon by 2030, saving 3m-5m barrels a day of oil demand.

    Other proposals include regulatory changes to help the extraction of the remaining US reserves of oil and gas; the "environmentally responsible" development of areas that are currently closed, such as the eastern Gulf of Mexico; support for research into "second generation" biofuels such as cellulosic ethanol and unconventional resources such as oil shale; and support to encourage people to enter and stay in the energy industry workforce.

    On greenhouse gas emissions, the study takes the view that the US should take part in the policies that are emerging to control CO2. That includes joining "an effective global framework for carbon management" and adopting a US mechanism for setting a price for emissions that is "economy-wide, transparent, applicable to all fuels" and "predictable over the long term for a stable investment climate".

    Even if all its recommendations were adopted, the NPC says the US could do no more than cut its dependence on imported oil by one-third by 2030. Many of its proposals will be found controversial, by the motor industry on one side and environmentalists on the other. But the NPC is urging policymakers to take its whole package on board.

    As John Guy, the deputy executive director of the NPC, puts it: "It's not a Chinese restaurant menu:you cannot pick some measures and not others. What we keep saying is that you've really got to do them all."