In order to estimate the near to midterm future of oil prices, both future supply and future demand must be assessed. This article focuses on the global supply outlook to the year 2010 and beyond.
Total sustainable world oil production as reported in the March 2005 IEA monthly oil market report is 82.44 Mb/d. In order to project into the future, a number of factors must be considered. The first factor is the net annual decrease in annual production caused by depletion of existing oilfields. According to Chris Skrebowski (left), who is editor of the UK trade magazine Petroleum Review and a board member of the Oil Depletion Analysis Centre (ODAC), this currently amounts to about one Mb/d per year, with the rate of decline gradually increasing over time as depletion becomes more advanced.
A second factor is the amount of new oilfield production that is projected to come online. This can be projected fairly well several years into the future, because deployment of the necessary infrastructure for a new oilfield investment takes about six years on average, and the major oil companies are on the whole willing to disclose considerable details about such products to the financial community and the public.
Two competing views on the amount of new production that will be coming online in the next several years that have been made public include ODAC's Oil Field Megaprojects 2004 authored by Mr. Skrebowski and his recent comments in an Interview with Julian Darley updating the same, and the figures offered by Julian West of Cambridge Energy Research Associates in the article Oil in Troubled Waters that was in the April 28, 2005 print edition of The Economist Magazine. The juxtaposition of these estimates is rather interesting to those following the oil depletion debate, because Mr. Skrebowski and ODAC are associated with the community of experts who are warning of the approach of Peak Oil, while The Economist is perhaps the most authoritative source for the "cornucopian" viewpoint that the markets will ensure an adequate long term supply of oil.
According the The Economist article:
Julian West of CERA, an energy consultancy, has compiled a list of all of the oil projects, led by both government companies and by private firms, that are due to come on stream over the next few years, “all found, all commercial, and all economic at half today's price.” He calculates that this “river of supply” could lead to a dramatic net increase in global oil production, with 2007 perhaps seeing the largest rise in production capacity in history. By 2010, this might add 13m bpd to the 2004 total of 83m bpd. Not everyone agrees with his assessment, and Mr West himself cautions that geopolitics could choke off this pending supply, but otherwise “the supply problem in two to four years will be too much oil.”
The picture that is provided by Mr. Skrebowski and the ODAC Megaprojects study differs considerably. He projects 3.45 Mb/d of capacity to be added in 2005, 2.5 Mb/d to be added in 2006, 0.5 Mb/d in 2007, 1.27 Mb/d in 2008 and 1.20 in 2010. The 2009 data is incomplete as it does not provide production capacity for the Karachaganak phase III project in Kazakhstan, but according to the project's joint operator BG International this field is projected to produce 12 mtpa, which converts to about 0.24 Mb/d. This gives a total figure of about 8.9 Mb/d from 2005 to 2010, or about 69% of the added production predicted by CERA. It should be noted that the ODAC study focused exclusively on so-called megaprojects that are projected to produce in excess of 100,000 barrels a day. Acoording to Mr. Skrebowski:
Now that is in effect the cut off point where a project will make a useful difference to a company's or a country's production. Once you get much below that you're into quite small projects. There are large numbers of them and they're difficult to tabulate and they make rather less impact on the whole.
Nonetheless, these smaller projects in aggregate can be expected to make a measurable difference to the amount of capacity that will be added in the next five years. Taking this into account, it might be reasonable to assume an additional 2 Mb/d in global production capacity will be added between now and 2010, for a total of about 11 Mb/d. 11Mb/d added to the current production capacity of 82.44 Mb/d gives us 93.44 Mb/d. Assuming an average annual depletion of 1.25 Mb/d for the next six years gives us a a global production capacity of 85.82 Mb/d in 2010. This is significantly less than the 88.38 Mb/d global production capacity that is anticipated by the US EIA for year 2010. Whether this supply will be adequate or not will of course depend on demand growth. The figures, and in particular the added production that will be added in 2005 and 2006, however, show that it is unlikely that the worldwide peak in oil production has already happened as some have posited or is going to occur later this year as Princeton Professor Kenneth Deffeyes has predicted. However, Professor Deffeyes can take comfort in the fact that his prediction is much closer to reality than the cornucopians who predict a Peak Oil date of 2035 or beyond.
By making a simplified assumption that depletion will run 1 Mb/d in 2005. 1.25 Mb/d in years 2006-2009 and 1.5 Mb/d in 2010, and assuming a 0.4 Mb/d contribution in years 2006-2010 from smaller new oilfields, my modified ODAC scenario predicts global supply in the next five years to be as follows: 84.89 Mb/d in 2005, 86.53 Mb/d in 2006, 86.15 Mb/d in 2007, 86.57 Mb/d in 2008, 85.72 Mb/d in 2009 and 85.82 Mb/d in 2010.
In other words, there will be a double peak in 2006 and 2008, with production gradually declining thereafter.
This analysis assumes that there are no major political disruptions that will affect the supply of oil in the next five years. It also assumes that Saudi production is not poised to precipitously decrease, as investment banker and presidential advisor Matthew Simmons has been warning. Geopolitics is certainly the third important factor that will determine the global oil supply picture in coming years, and it is the most difficult factor to predict. The situations in Iraq, Saudi Arabia and Russia are of pivotal importance. Iraq is the only country in the world that possesses significant underproduced oil reserves. It has been estimated that Iraq, with a significant investment in infrastructure could produce 5-6 Mb/d more oil than it currently does. Such investment, however, cannot reasonably be expected to occur until there is some guarantee of long term political stability in the country, which seems years away at this point in time. Even when conditions become favorable, it would take several more years for Iraqi production to increase. The prospect for increased Iraqi production affecting the world supply picture before the year 2010 is therefore dim. It might turn out to be serendipitous good fortune for the industrialized world that Iraq's production has been effectively sequestered in the present decade, because this additional 5-6 Mb/d will be sorely needed in the future as depletion eats it way further into global production.
As I have previously written, the United States is exerting a great deal of political pressure on both Russia and Saudi Arabia to increase their production capacity. The Saudis seem willing to comply with U.S. demands; it is their physical capacity that is in question. Despite heavy international pressure to increase production in the past year, Saudi Arabia's production is not much more than it was before the present crisis, and the small amount of additional oil that has been produced has been sour oil that is difficult to refine.
Russia has strongly telegraphed its intent to chart its own course on energy policy by effectively nationalizing the Yukos oil company and passing legislation that will prohibit foreign majority ownership of energy projects. I suspect that Russia will resist pressure from the United States and aggressively and skillfully use its energy leverage for its own benefit in the future.
If the CERA projections in The Economist turn out to be more accurate than the ODAC study, the oil production picture will be improved by about 2 Mb/d in the year 2010, possibly delaying Peak Oil by a year or two. One would think, however, that The Economist would be able to present a more convincing case for its cornucopian outlook.
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