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Page added on June 11, 2014
Tech Talk – Optimism is becoming harder to sustain
For some time the nations of OPEC have been suggesting that demand for their oil will remain relatively stable in the near future, as increased production from the non-OPEC nations is expected to more than meet demand increases. Thus, for example, in the May Monthly Oil Market Report OPEC anticipates that global oil demand will increase by 1.14 mbd this year, while non-OPEC production will increase by 1.38 mbd, allowing a slight reduction in the volumes OPEC market, which continues to fluctuate around 30 mbd. In the longer term, however, as previous annual oil company prognostications of future supply have emphasized, the MENA countries are going to be pulling an increased weight in supply. For example ExxonMobil has noted:
The Middle East is expected to have the largest absolute growth in liquids production over the Outlook period — an increase of more than 35 percent. This increase will be due to conventional oil developments in Iraq, as well as growth in NGLs and rising production of tight oil toward the latter half of the Outlook period.
At the same time BP pointed out that in just a couple of years demand for OPEC oil is likely to start to steadily increase.
Figure 1. BP view of the increased demands to be made on OPEC oil with time. (BP Energy Outlook 2035)
A large part of that increase has been expected to come from Iraq. With the end of the Iraq war, and the government encouraging development there were some claims that production might eventually rise to over 13 mbd (ahead of both Russia and Saudi Arabia). But those optimistic views had to be measured against the reality that the country has taken a long time to recover back to the 3 mbd levels of exports that it had achieved before conflict.
Figure 2. The fall and recovery of Iraq’s oil production. (EIA)
At present OPEC reports that Iraq was producing at 3.298 mbd in April, making it second only to Saudi Arabia (at 9.579 mbd) among the OPEC nations. There still seemed to be some chance that the country might be able to reach some lower target figures, such as those suggested in the OGJ.
Figure 3. Anticipated Iraqi exports and their market region (OGJ)
Regrettably violence is now significantly increasing in the country, with Mosul being over-run by Sunni militants. This puts them in charge of the main pipeline to Turkey, as well as giving them potential control of some of the adjacent oilfields.
Figure 3. Known Iraqi oilfields in 2010.
Euan Mearns has written of the potential for oil from the Kurdish regions and Turkey has just allowed a second tanker to sail from Ceyhan carrying oil from that region to the market, without Bagdad’s permission. The oil is being delivered through a new pipeline capable of carrying 100 kbd from Kurdistan into Turkey. The main pipeline (shown in Figure 3) can carry as much as 600 kbd and runs from Kirkuk and perilously close to Mosul. The new pipeline runs through Kurdish territory until it reaches Turkey.
The declining influence of the central government over the northern territories of Iraq does not bode well for future production gains. Conflicts are getting worse, and the country is approaching the point where it could well be partitioned, since the government forces seem unwilling to take on the insurgency. Violence has already spread to the Al-Bayji refinery some 130 miles north of the capital. This is the largest refinery in the country, and currently produces below its 300 kbd capacity, all of which is used for domestic consumption.
The problems that this reveals are unlikely to be resolved soon, it is much more likely that they will continue to escalate over the next months, if not years. The impact on Iraqi oil production should not be underestimated. While the oil in the Kurdish region can make its way through the smaller pipeline that is under Kurdish control, the greater flow rates needed to sustain future growth in supply cannot be met by that pipe.
In the South developments in the Mesopotamian region around Basra from the fields of Rumaila and Majnoon will likely continue, with production being shipped out from the new facility offshore, although this is already quite significantly behind schedule.
Figure 4. Oil fields of Southern Iraq (IEA )
One has only to look at the degrading situation in Libya, where production has fallen from 1.6 mbd to a current level of less than 200 kbd, with no path forward now evident for production levels to be restored. Those familiar with the region doubt that there will be much improvement in the situation this year, and if the country follows the Iraqi path (figure 1) then it is unlikely that the world will see significant Libyan production for this decade.
That loss of a million barrels a day is likely to become increasingly evident as world demand continues to grow at greater than that level each year. When this is combined with the increasingly inability of Iraq to increase production as it moves back into more vicious internal strife, then one has to ask from where can future gains in oil production be anticipated?
The major oil companies have urged complacency having bet on Iraq and OPEC coming through (and in the process assumed that Saudi Arabia would also increase production significantly above 10 mbd, something that they have consistently declined to commit to doing). As Libya and Iraq remove that surplus from the table then the question becomes where else can it come from?
It is increasingly unlikely that US increases in production can be sustained for long, given the very short high-level life of the new wells completed in shale, and as the sweet spots in the current fields are consumed. Thus within a couple of years we are now likely to see an increasingly desperate search for new reserves. But those reserves take years to find and develop (as well as large amounts of money), and if the crisis comes at a faster pace than most now expect, then $100 a barrel oil may seem an absurdly cheap price to have had to pay. It may even have an effect on the next Presidential election.
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7 Comments on "Tech Talk – Optimism is becoming harder to sustain"
Davy, Hermann, MO on Wed, 11th Jun 2014 7:59 am
From a view point of system/finance my question is when will a negative peak oil dynamics impact the current repressed financial system and the global economic system in disequilibrium? When will these two vital elements for all of our local support system begin to fail? When these two vital elements of our survival begin to fail we will see complexity drop significantly there by destroying much economic activity and most likely important infrastructure. This infrastructure is as much abstract as physical. For example what will happen to the organization of the various important components of society like communications, medical, and education? We know the physical will degrade rapidly for lack of energy, expertise, and spare parts. Currently we have a repressed financial system. This system is being kept alive by debt creation and wealth transfer. Confidence is secure as long as TPTB in wealth and command/control maintain control and order. Yet, how long can confidence hold in a world of collapsing complexity. Energy intensity reductions “WILL” destroy complexity. Without complexity our global system cannot function.
bob on Wed, 11th Jun 2014 9:35 am
Well if interest rise in America it is all over…first thing that will go are the fat pensions and retirement money…..and while that really sucks it is that generation that has layed the ground work for the disaster that is facing us now….All they do now is type away on their laptops,…telling us how screwed were are and telling us see…see I was right! I am not a crazy old man! Ha Ha…just kidding….
Northwest Resident on Wed, 11th Jun 2014 10:09 am
“…likely to see an increasingly desperate search for new reserves. But those reserves take years to find and develop…”
I thought that rockman in one of his posts made the point that there are no new reserves of any significance waiting to be found, that the entire world has been scoured over by geologists many times over and every notable reserve recorded.
It isn’t so much that we don’t know where the oil is. The problem is, how to get it. Human technology can only do so much, and when it comes to squeezing oil molecules out of rock layers that are deep below the surface, we ultimately run into physical limitations that are insurmountable. And even in those cases where the physical limitations can be overcome, the big question becomes “how much will it cost” — sometimes, and more often than not, the answer is “too much”.
Let’s face it. If you want to maintain your optimism that BAU will continue on into the distant future, that we have all the oil we need and that technology advancements will always save the day for us, then you need to stop reading the articles posted on this website and instead just “tune in” to Forbes, Motley Fool and other investment-oriented websites where they have great news for investors and “true believers” on a daily basis.
J-Gav on Wed, 11th Jun 2014 11:12 am
Maybe there’s more than one kind of optimism: The deaf, dumb and blind, “if you wish upon a star” sort and the reasoned variety – “The S could really HTF but if I take the right steps I have a chance to reduce the pain.”
The latter could also be called ‘realism’ but, so screwed-up is our language today, that for many people it’s the very definition of ‘pessimism.’
Which is why I’m always leery of dual thinking and facile dichotomies.
Makati1 on Wed, 11th Jun 2014 9:16 pm
All we can do is prepare for what we believe is coming as best we can and hope that it is enough. If we do end up in a Mad Max world, most of us will not be here to see it. Max’ world was created by a nuclear war. The same appears to be in our future. That, we cannot prepare for with any normal resources. We can only endure.
energy investor on Thu, 12th Jun 2014 12:02 am
IMHO we should never under-estimate the willingness of world governments to take action to protect BAU.
As a result I can only see a drift through a twenty to thirty year era of money printing and ZIRP while all our OECD standards of living corrode and the world’s first global depression (aka GD1 deepens). It will be what happens then that will define our future.
Many folks don’t understand that China has bought access (by providing huge dollops of loan finance to oil exporting nations)to a lot of future oil that it isn’t yet taking, because it doesn’t yet need it. Sure they are filling their SPR equivalent at todays oil prices, but aside from that there is much more committed to them than they are taking. When they do need it there will be global oil rationing issues (as well as very high market prices) but in the interim, GD1 could mean that both demand and oil prices fall back in that vexatious feedback loop that exists between energy (and its price) and economic activity.
After that – and a lack of consequent funding for high risk E&D – we may just find that the price of oil spikes far higher in the OECD than our economies can take and we then start really developing substitutes as a kneejerk reaction.
Right now, I would say that humanity is focused on the 21st century’s equivalent of Y2K….global warming. And for that reason, it is more convenient to deny peak oil and no-one is committed to finding any solutions to the inevitable post peak oil disaster. What happens when our minds are focused on the predicament will depend on whether we emerge from GD1 or enter a modern version of the “dark ages”.
Right now, who can tell?
rockman on Thu, 12th Jun 2014 12:12 am
NR – “I thought that rockman in one of his posts made the point that there are no new reserves of any significance waiting to be found”. Not so much acquisition of reserves…I would it this way: with the exception of the Arctic I see very little potential for currently unknown major oil TREND to be discovered. Though there’s still a lot of oil left to be developed in all the Deep Water trends around they globe these are KNOWN plays. And as long as there’s sufficient price support shale development will continue. But again all those plays were discovered decades ago. The higher oil price just made many of those trends viable but it didn’t lead to any new trends to be discovered.
Most of the surface of the Earth is covered by the oceans. And despite all the excitement over the Deep Water plays only a small percentage of the sea floor has any hydrocarbon potential due to a lack of the necessary rock types.
I make no prediction to how big or insignificant the Arctic will eventually be determined. But it’s the last big chunk of global real estate with hydrocarbon potential that has had little drilling done. Lots of oil left to produce for sure. But little or no potential for any NEW big plays IMHO.