May 12, 2008
Kashagan Oil Field Production Start Hits Another Delay
On a day when oil hit a new intra-day trading high of $126.40 we also received indications that attempts to boost world oil production continue to hit roadblocks.
Eni, Italy's largest oil company, and partners developing the Kashagan oil field in the Caspian Sea may delay production by as much as two years, the fourth postponement at the 7 billion- to 9 billion-barrel Kazakhstan discovery.
The start of commercial output may not occur until 2012 or 2013, said Dinara Shaimardanova, an aide to Energy Minister Sauat Mynbayev, confirming his remarks earlier in the capital, Astana. Eni in January said the field, which was the world's biggest discovery in three decades, was expected to start in 2011.
The original plan was to get it into production in 2005. Then it slipped to 2008 and then to 2011. Now production on this field, which is projected to peak at 1.5 million barrels per day, looks to come too late to delay Peak Oil. In a way that is a good thing since the late arriving Kashagan oil will slow the rate to production decline as the world comes off peak production.
Indonesia's leaders think they should leave OPEC because Indonesia has become a net oil importer.
While polemics were going on on its plan to increase domestic fuel oil prices prompted by world crude price hikes, the Indonesian government came up this week with an idea to quit the Organization of Petroleum Exporting Countries (OPEC).
The story of Indonesia fits perfectly with the Export Land Model where demand in the exporting countries soars while their production declines. Look at how oil production and consumption have played out in Indonesia.
House Speaker Agung Laksono said Indonesia`s domestic oil prices much depended on the price of world oil. Indonesia`s oil production and consumption were quite unbalanced with a production of 925,000 barrels per day while its consumption reached 1.4 million barrels per day.
He said that 15 years ago, Indonesia`s daily oil production reached 1.4 million barrels while its consumption reached only about 300,000 barrels per day.
Other oil producing countries are heading down Indonesia's path. Some of the big oil producing countries sell gasoline internally at far below market prices. Venezuela, Saudi Arabia, Iran, Qatar, Bahrain
and a few other countries sell gasoline for less than $1 per gallon. These gasoline prices mean demand surges in those countries and if they only maintain constant production their exports go down. On top of that Asian demand rises. The Western industrialized countries can afford to outbid some of the poorest countries. But Asian demand and oil producer internal demand will take oil away from the West. Hence the rapid run up in oil prices.
Russia has peaked.
The country's oil production fell for a fourth straight month in April, confirming pessimistic forecasts for the year, while exports rose on the back of improved weather.
Industry and Energy Ministry data released Sunday showed that production stood at 9.72 million barrels per day, down from 9.76 million bpd in March and more than 2 percent lower compared with the post-Soviet high of 9.93 million bpd in October.
Russia is one of the more rapidly growing markets for cars. More metal mouths to feed.
Russian oil executives are claiming that lower taxes could turn around oil production. But this is the same message we heard from the US oil industry in the 1970s. It didn't work then. It won't work now.
Oil output in Russia, the world's biggest supplier after Saudi Arabia, has ``peaked'' and may decline in the coming years, said billionaire Viktor Vekselberg, an owner of BP Plc's venture TNK-BP.
Russian companies need tax breaks to spur exploration and development of new fields to revive growth, Vekselberg told an American Chamber of Commerce conference in Moscow today.
Lukoil president Vagit Alekperov tells a similar story. Leave aside the reason they say Russian production will decline and focus on the decline itself. Russia is one more country that has crossed over onto the list of countries on the down slope for oil production.
The sooner you prepare for what is coming the easier your transition will be. Go smaller with your next car purchase. When you buy that car gasoline will sell for much less than gas will cost when you sell it. Think about how else you can get yourself more energy efficient. Think about whether you can move closer to work or switch to a job which is closer to home. Your commute will make a big impact on your living standard. Find lower energy hobbies. Our energy situation will get much worse before it starts to get better.
Update: Fund manager Tim Guinness, chairman of Investec Asset Management, says oil demand destruction in the industrialized countries is getting offset by demand growth in China, India, and the Middle East. He expects oil prices to hit $200 by 2010.
"What is going on is that OECD demand destruction is somewhere between 200,000 to 500,000 barrels per day (bpd) at the moment, while demand growth in the developing world is still over one million bpd," he said.
This will be a recurring pattern in coming years. Oil consumption in industrialized countries has probably peaked. I expect prices to keep going up at least until the whole world goes into a recession.
This belongs to a different topic, but since you have covered this before I thought it might be of interest: If you recall this story: http://www.cnn.com/2003/HEALTH/11/04/cholesterol.breakthrough.ap/index. The Company was later bought out by Pfizer as you may know. I came across this recently: http://industry.bnet.com/pharma/2008/05/01/esperion-escapes-the-pfizer-borg/?tag=insight The bad news is that Pfizer apparently sat on this for 5yrs citing "manufacturing difficulties", the good news I suppose is that the discoverer is starting up his company again, perhaps he will try to get this going again, but the story seems to say that Pfizer will retain its Esperion acquired patent to the drug. Personally I think Pfizer is sitting on this on purpose to prevent competition to its Statin drugs.
It doesn't make sense to talk about Russian oil peaking now. The tax issue is only one important factor. Another is that Russian oil is state controlled and is behind with technology that the US and EU have. There will be further incentive over time for some joint ventures while the incentive isn't there now especially when oil is at $120.
I wonder how many reading FuturePundit are being duped into just the latest wave of alarmism. Seems like quite a few.
I notice a pattern here... you tell us when production is down, but not when techology finds new oil. Why?
Why didn't you have a post on Brazil's find 6 months ago? After all, this is FuturePundit, and it is because of recent technology that so much was discovered:
"Brazil reports massive oil discovery" - November 2007
Oh for pete's sake. This is a temporary blip caused by the relatively low demand/low price environment when both market makers and producers blew it in terms of predicting the production they needed to have.
Within ten years reserves will exceed expectations, price will collapse again, alternative *oil* producing tech will come online (fuel-producing bacteria, shale oil, coal-to-oil, liquefaction, thermal depolymerization) not to mention substitutes in solar, wind and nuclear. Oil, is and remains, the most plentiful fluid on Earth after water. The absurdity of Peak Oil approaches imbecility. This plateau is virtually NO DIFFERENT than the same plateau that was hit in 1985.
Plus how in God's Green Earth, can anyone claim Peak Oil when we have used, more or less, only 1/3rd of known reserves, which keep growing every month? I suppose since the mass of the Earth is finite there must be a Peak Oil moment, but it is clearly not here.
In other words, by definition, we are still on the upslope!
bwahahaha.....temporary blip, just consider these facts:
The world's largest oil fields were all discovered more than 50 years ago.
Since the 1960s, annual oil discoveries tend to decrease
Since 1980, annual consumption has exceeded annual new discoveries.
Till this day (Oct 2007) more than 47,500 oil fields have been found, but the 400 largest oil
fields (1 percent) contain more than 75 percent of all oil ever discovered.
The historical maximum of oil discoveries after some time has to be followed by a maximum
of oil production (the “peak”).
(Report to the Energy Watch Group Oct 2007)
Have we reached production peak yet or not, depends largely on the main producer's output.
The output can either be increased voluntarily (if enough juice is on tap), or if not, then the source is supply constrained.
So, take a look at the Saudis as the main producer and ask yourself why there isn't enough crude pumped to keep prices down.
Either they can't because they've reached or surpassed peak production, or.....
.....Maybe someone's had the brilliant idea of supplying just a tad under what the world needs. Doing so assures a handsome return and the OPEC guys are raking in US currency in huge proportions...and investing it back in the US and/or buying their goods and services. After all, they have to fork out big time for the restructuring of their own country for the time after the "peak".
Don't forget, the US$ is in demand worldwide because so many nations buy their oil in this currency.
And the higher the cost of oil, the more the Dollar will appreciate (or decline less dramatically, it's all relative)....or, if they overdo it, then it's back to 1974...
I tend to believe though that this time, they are not in control of the situation like in '74.
An 8 billion barrel discovery doesn't amount to much in a world burning thru 30+ billion barrels per year. As Pete correctly points out, we've been consuming faster than we've been discovering since 1980.
I've told you before but it bears repeating: The discovery rate is key.
As for some of the big discoveries of the last few years: Even if they were large enough to keep up with consumption (and they aren't) they are in areas that are in the edge of our technological capability. PetroBras and other oil companies are going to need 10 years to get some of these fields into production.
The fact that these discoveries are taking place in such deep water tells us a lot about what's left on land to discover: not much. Eventually even the very deep water discoveries will stop.
It is still interesting that you didn't post either in 2006 or in 2007 when the huge oil fields were discovered in the Gilf of Mexico and off of Brazil using technology that wasn't possible in the 20th century, despite this being "futurepundit".
Instead, you make a big deal out of one oil field which is located in both a technologically and economically backward country.
It is not a matter of discovery rates since when prices were so low in the 90s through 2003, there was no incentive to go "discover" places that were thought to exist. rsilvetz is exactly right.
I could have done a story about how Tupi is being trumpeted in the press but ends up not being enough to get the global discovery rate above the global consumption rate. Ditto for Jack 2. The post would have served as a small antidote to irrational exuberance some Panglossians showed in reaction to these discoveries. But I found the stories boring and depressing. Irrational people were grasping for straws. Jack 2 and Tupi are too small. We need 4 of them per year to keep world oil production even. To meet growing Asian demand we need 5 or 6 a year. Come back and complain if that happens and I do not report it.
I could have written a post about how Tupi and Jack 2 will take 10 years to get into production or longer. I could have written a story about how since 2000 the length of time it takes to get a field into production has increased by years. I read a really good analysis about that recently and probably ought to have done a post about it. Did my failure to write a post about that general trend with lots of facts and figures indicate that I'm being biased by not writing about some of the bad news in the oil industry? After all, I wrote this weaker piece that didn't prove the larger pattern. This leaves more room for you to be unrealistic.
You start out from a point of optimism about the power of markets and technologies to bring forth more oil. Then you look for anecdotes to support your optimism. The bottom line is rate of discovery versus rate of consumption.
Another bottom line: The rate at which projects get into production. If you look at the graphs on this page you will see one graph that shows how much oil supply growth the International Energy Agency (IEA) thought would get added from 1995 till today. The interesting thing: The IEA usually is excessively optimistic. Another thing: Another graph at that page paints an excessively optimistic view of recent increases in oil production. They are including natural gas liquids and probably bioliquids in the chart while just saying it is oil. In fact, oil production wasn't rising in recent years. The NGLs and bioliquids can't continue rising. Hence the price of oil is now solidly above $120 unless the world slips into a recession.
cancer_man, Petrobras expects to increase production by 2 million barrels per day in the next 7 years
Petrobras expects to increase production to the equivalent of 4.2 million barrels of oil a day by 2015, Gabrielli said. The company produced 2.34 million barrels a day in March.
But a lengthening list of countries will have declining production during that time. We need about 5 to 10 more sources of 2 million barrel per day production increases to compensate for all the post-peak countries.
"The bottom line is rate of discovery versus rate of consumption."
Randall, this isn't correct. You need to crack the econ 101 book again. (Well, maybe micro 301)
It is weird how some who are very educated in the natural sciences fall on their faces when it comes to economics.
I'm not sure why.
You confidently tell me I'm wrong simply by asserting that economics explains why. Well, no.
It is weird how some believe that economics is more powerful than geology. I'm not sure why.
I've tried to explain where you are not understanding the economics a few times. Until the basics with respect to cartel pricing sink in, there isn't much I can write to convince you.
It isn't a battle over disciplines except the vast majority of geologists don't understand the price mechanism. And as with many scientists, they are very focused on what current technology can yield and consitently underestimate advances. This is why the past predictions were outstripped by future finds.
Mr Parker are you seeing any advances in converting natural gas to liquids? Syntroleum was the only name I can remember, and it maybe a penny stock.
Cartels can only control pricing if they have spare production capacity. But OPEC has reached the same point as the Texas Railroad Commission reached in the early 1970s. They do not have spare capacity. Therefore they can not control prices. The Saudis might have some spare heavy crude capacity which few refineries can handle. But little spare capacity exists in OPEC and certainly not enough to lower prices by much.
NGL production: Think about the other uses of natural gas. Can NGL outbid them? I do not know about the efficiency and economics of NGL to say. The cost of natural gas per million BTU has to be far enough below the cost of oil per million BTU to make the conversion worthwhile. Maybe it will be.
This brings up an interesting question: How fast can other uses of natural gas develop substitutes? Every wind mill cuts demand for natural gas for electric power generation for example. So high oil prices create conditions for more NGL which raises natural gas prices which makes solar and wind more competitive for electric power generation.
Other analysts think OPEC has 1-2 million barrels of spare capacity. But some of that is heavy crude. Even if the claims at that link about OPEC space capacity are correct and OPEC has 4 million barrels of spare capacity (and I suspect they have much less) that would be only 2 years of regular world demand growth if prices weren't already so high. The IEA has cut its world demand growth estimate for 2008 from 2 million to 1 million barrels per day because prices are so high.
But that spare capacity could only provide 2 years of demand growth if non-OPEC production doesn't decline. So imagine the non-OPEC producers maintain current production (say Brazil increases production enough to compensate for declining production Mexico and Russia) and OPEC quickly opens up 4 million barrels of supposed spare capacity. That'd get oil prices down for a year or two - assuming this is even possible.
I do not see where the oil is supposed to come from for a much bigger increase in production. Saudi Arabia hasn't discovered big fields in a long time.