Oil And Gas Journal Predicts Emerging Oil Supply Crisis

".... a series of crises in oil supply is likely over the coming decades. The first, related to the peak and decline of non-OPEC production, is practically upon us and underpins the currently high oil prices...... The imminent inability of non-OPEC production to meet incremental demand and its decline after 2010 precipitates the second crisis as OPEC’s diminishing spare capacity (even with Iraq’s production back to preinvasion levels) becomes less and less able to accommodate short-term fluctuations.....The third crisis, due to OPEC’s incremental supply being unable to meet incremental demand, follows in the first half of the next decade. This assumes that OPEC’s reserves are as published. .....These crises will have global economic and geopolitical significance: The oil price will be high and volatile, and demand growth will have to be curtailed..."
Oil Supply Challenges - 2: What Can OPEC Deliver?
Oil and Gas Journal, 7 March 2005


OPEC Situation

Note:
1. In the piece immediately below remaining global reserves of conventional oil are stated as being potentially as low as 1.29 trillion barrels, with consumption to date 1.224  trillion barrels. This represents a depletion level of 49% .
2. 'Peak' global oil production is generally expected to cut in after global depletion reaches 50%.
3. The more pessimistic projections referred to are based in part on world demand for oil increasing at 1.5%
per annum
4. However, during 2004 world oil consumption grew by more than 3%.

"The global market will need increasing volumes of oil from members of the Organisation of Petroleum Exporting Countries after non-OPEC production reaches a maximum of about 50 million b/d between 2007 and 2011... A question crucial to future oil supply, therefore is: Can OPEC's old fields deliver....  Most of the supergiant oil fields have had water or gas injection installed to maintain pressure for 20-30 years. Handling produced injection fluids is a growing problem in Iran, Saudi Arabia, the UAE, and in older fields in Iraq (Kirkuk, Zubair, and Rumailah).... The oil fields of Iraq are the least depleted and least developed of any of the Persian Gulf oil producing countries, and Iraq has the potential to rapidly increase oil output.... Combined with earlier results, these predictions for OPEC yield an estimate of the world's ultimate recoverable oil reserves of 2.5-2.9 trillion bbl, with 1.29-1.66 trillion bbl remaining (1.224 trillion bbl produced to end 2003)..... It seems unlikely that OPEC can increase production at the rate that was possible in the 1960s and 1970s, when the fields were fresh and initial well production rates were higher... Only Iraq has undeveloped supergiant oil fields (West Qurna, Majnoon, and East Baghdad) and the potential to rapidly increase production to 8-10 million b/d...... The five Persian Gulf countries (Saudi Arabia, Iraq, Iran, Kuwait and the UAE) are crucial to raising OPEC production. The political situation in Iraq is unlikely to be conducive to major investment in new oil production capacity for some years. Saudi Arabia has serious internal problems, which threaten to destabilize the ruling royal family. Iran remains under unilateral US sanctions. US military intervention in the Gulf and its failure to effectively and fairly engage in resolving the Palestinian-Israeli conflict conspire to provide a hostile backdrop to western interests in the Middle East. The combination of burgeoning future oil revenues and growing hostility to the US in the region is not conducive to major capacity expansion and will not provide a stable investment environment or offer easy opportunities to the major international oil companies to assist in any capacity expansion projects. Based on these considerations and the maturity of OPEC’s major fields, it seems more likely that OPEC’s considerable reserves will be expressed as a long plateau rather than a sharp peak. It is quite possible that the Persian Gulf countries will not raise production capacity high enough or quickly enough, either for political reasons, the slowness of internal decision-making, or the hostile security environment. The consequences of this for world oil supply are immense, with the likelihood of further military interventions and conflicts within the Middle East ….. It is unlikely, except in the high reserves case, that OPEC production will be able to meet the high demand forecast of 121 million b/d for 2025 by the US Energy Information Administration. OPEC is able to meet mid-demand growth (1.5%) until 2013-15 if OPEC’s oil reserves are low or until 2017-20 if OPEC’s reserves are high. OPEC is able to meet low-demand growth (about 1%/year) until 2020 under either reserves scenario. These forecasts suggest world oil demand is likely to be dampened by a rising oil price due to supply constraints, particularly after non-OPEC production peaks (2007-11), but also when OPEC production increases start to tail off. This could occur in 2010-15 if OPEC’s reserves turn out to be low or around 2015-20 if OPEC’s reserves are high. Oil supply will become increasingly concentrated in the Middle East and the former Soviet Union. The proportion of oil production from the main producers of the Persian Gulf (Iran, Iraq, Saudi Arabia, Kuwait, and the UAE) is forecast to rise to 45% in 2025 from 25% in 2003. Just seven countries – Russia, Iran, Iraq, Saudi Arabia, Kuwait, and the UAE and Venezuela – are expected to make up more than 60% of world oil production in 2025. For the range of oil reserves demand scenarios considered here, world oil supply is predicted to peak at 90-105 million b/d between 2016 and 2028…Based on these results, the EIA forecast of world demand of more than 120 million b/d in 2025 seems unlikely to be met by production ….. Total world oil reserves are estimated at 2.5 – 2.9 trillion bbl. The world has consumed 1.224 trillion bbl to the end of 2004, so remaining reserves are estimated at 1.3-1.7 trillion bbl (Table 1).As the different components of supply reach their maximum production rate, a series of crises in oil supply is likely over the coming decades. The first, related to the peak and decline of non-OPEC production, is practically upon us and underpins the currently high oil prices. Other factors are burgeoning world oil demand, driven primarily by China and the USA, and restricted output from Iraq. The imminent inability of non-OPEC production to meet incremental demand and its decline after 2010 precipitates the second crisis as OPEC’s diminishing spare capacity (even with Iraq’s production back to preinvasion levels) becomes less and less able to accommodate short-term fluctuations. The timing and depth of the crisis depend on world oil demand and OPEC investment in new capacity. While OPEC countries will have every incentive to make the necessary investments, the pace of past decision-making is not encouraging, and enough spare capacity may not be available in time. The third crisis, due to OPEC’s incremental supply being unable to meet incremental demand, follows in the first half of the next decade. This assumes that OPEC’s reserves are as published. If OPEC’s reserves are higher than published, this crisis may not occur until the latter half of the next decade and may be muted, particularly if demand moderates. These crises will have global economic and geopolitical significance: The oil price will be high and volatile, and demand growth will have to be curtailed..."
Oil Supply Challenges - 2: What Can OPEC Deliver?
Oil and Gas Journal, 7 March 2005

(The Author: Peter. R.A. Wells is managing director of Neftex Petroleum Advisors Ltd. He spent 12 years with Shell International in positions that included exploration manager for eastern Nigeria, followed by 4 years with BP PLC, where he was chief negotiator for Azerbaijan in 1992-3.)

Non-OPEC Situation

"The world faces challenges rather than impending doom with oil supply. The challenges include a sequence of supply crises likely to develop not when oil production peaks - the subject of much recent controversy - but earlier, when widening gaps appear between demand and sources of supply upon which the world has come to rely.... it is a mistake to assume that reserves of conventional oil can grow indefinitely and that abundant resources of unconventional oil resources, such as tar sands, can fully compensate for production declines. There is a fundamental difference between producing oil from a naturally flowing well and mining tar sands in Venezuela or Canada.... the feedback of tightening supplies through rising oil price will reduce demand growth and stimulate conservation and the development of alternative supply options. However, the crises will be real enough as markets rarely anticipate surprises, and many years will pass before material changes in behaviour and alternative energy sources significantly impact demand for oil..... the world's oil industry is mature in terms of exploration success and in terms of the age of most of its production. Discoveries peaked in the mid-1960s. In every year since 1985 the world has consumed more oil than has been discovered. The application of technology and the production of unconventional resources are not likely to  significantly impact the peak of world production but will ameliorate the subsequent decline.... Most of the world's supergiant oil fields are in the Middle East and are more than 40 years old.... [Non-OPEC excluding FSU - former Soviet Union] Production seems to be approaching a well-defined maximum in the quite near future (2005-07).... This [Non-OPEC] analysis also incorporates some 30 years of production from Canada's tar sands... While important to the oil market in the short term, the FSU [contributes only 10-15% to world production.... Peak production from the FSU is expected between 2008 and 2014... The most likely outcomes for non-OPEC oil production can be obtained by combining the forecasts for the FSU and the rest of non-OPEC. Non-OPEC oil production is predicted to reach a peak between 2007 and 2011...  The US Energy Information Administration forecasts non-OPEC oil production to rise to about 54 million b/d (about 20 billion bbl/year) by 2025. Based on the analysis presented here, non-OPEC oil production at this level in 2025 is highly unlikely..... This analysis.... represents a shortfall to the EIA forecast of non-OPEC supply of 20 million b/d in 2025. The failure of non-OPEC to meet a large part of incremental demand, as it has done for more than 20 years, is likely to precipitate the first crisis in oil supply. Depending on demand and FSU supply, this crisis is practically upon us and is expected to be acute after 2005.... The rapid increase in the call on OPEC after 2010 is due to the widening gap between non-OPEC supply and forecast demand. The world's spare oil production capacity (essentially only OPEC maintains spare capacity) has declined steadily since the mid-1980s as OPEC has curtailed investment in the face of rising non-OPEC production. Surplus capacity has declined from 10 million b/d in 1987 to 3-4 million b/d in 2003 and to probably less than 1.5 million b/d in 2004. Most analysts consider that spare capacity of 2-3 million b/d is required to ensure smooth oil supply... Depending on the rate of decline of OPEC's capacity (possibly as high as 4% /year), current spare capacity will be fully utilized sometime in 2005 if demand remains high or by end 2007 if demand moderates...Apart from political factors, the expansion of OPEC's production capacity will be constrained by the maturity of OPEC's fields and the scale of effort, investment and pace of decision-making required, primarily in Persian Gulf countries. At capacity costs of $6,000-10,000/b/d, the investment required between now and 2020 to achieve the high demand case is 300-500 billion - a rate of $20-30 billion per year.  There is no indication that the major OPEC countries are embarking on oil production capacity investments on this scale. The lead time on major capacity expansion projects are 3-5 years. Unless the principal Persian Gulf producers initiate major capacity expansion within the next few years, there will be a further supply crisis later in this decade driven by the complete elimination of spare capacity...."
Oil supply challenges - 1: The non-OPEC decline
Oil and Gas Journal, 21 February 2005
(The Author: Peter. R.A. Wells is managing director of Neftex Petroleum Advisors Ltd. He spent 12 years with Shell International in positions that included exploration manager for eastern Nigeria, followed by 4 years with BP PLC, where he was chief negotiator for Azerbaijan in 1992-3.)


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