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Page added on May 1, 2017
Michael Lynch: …And This Is Where The Oil Will Come From
During the height of the peak oil scare, a pundit commented to me that the lack of billion-barrel discoveries in recent years seemed alarming, and my reassurance that this primarily reflected the shift of drilling from the Middle East to other, less prospective, areas was less than compelling. Additionally, while many industry observers focus on the ‘elephant’ fields, which have historically counted for the bulk of supply, it is also possible to be ‘nibbled to death by ducks,’ that is, smaller fields that are much more numerous.
Not that there aren’t elephants, most notably in the new ‘presalt’ plays offshore South America and West Africa, especially Brazil. There, a number of multi-billion barrel fields have been found and are in the process of being developed. The Carwash scandal has slowed operations offshore Brazil, but the financial strain on the national oil company, Petrobras, has caused it to sell off some of its assets to foreign, mostly private, companies, so an influx of capital will allow for production to increase by about 1 mb/d over 5-6 years.
And Exxon’s giant 1.4 billion barrel Liza discovery offshore Guyana has increased attention to other deepwater areas off the South American coast, even as Exxon confirms two more discoveries in its block. Neighbor Suriname is now expecting its first deepwater wells, and could deliver similar results.
Kazakhstan’s supergiant oil field Kashagan has been cited as indicative of the challenges the industry faces in increasing supply, and pessimists have sneered at the repeatedly delayed start-up date as if that were proof it would never contribute new supply. However, it has now entered production, currently about 160 tb/d, and is expected to reach 370 tb/d by year-end. This will represent the largest single-field increment of supply outside the Middle East in many years, even if the long-term target of 1.5 mb/d is never reached.
The East Coast of Canada has also become a major hot spot, with the Hebron oil field planned for start-up this year, and the Bay du Nord field undergoing appraisal. Combined, they contain at least a billion barrels of recoverable oil, and oil companies have recently committed $1.2 billion to seven leases, although predictions that the region could approach North Sea production levels seems optimistic.
Mexico’s energy reform means that its production is likely to increase significantly. Despite over a century of production, the nation remains a relatively immature oil province. Shallow water finds of 100-200 million barrels are far above what was found in the U.K. twenty years ago, and drilling has only recently begun in the country’s deepwater—yielding two discoveries already. Additionally, the country has unexploited shales, the supergiant but geologically challenging Chapultepec field, and many mature fields whose redevelopment should yield significant new amounts. Mexico’s production might not grow as Venezuela’s did in the 1990s after its reform, when supply rose by 1 mb/d in five years, but an enduring growth trend will represent a significant difference in net production, after a 1.2 mb/d decline from the peak in 2004.
Other areas, like the Falklands and East Africa, will add modest increments to global supply levels, offsetting declines in mature provinces like Colombia and Australia, while a recovery of some of the 1 mb/d of shut-in supply in South Sudan, Syria and Yemen should also make a positive contribution.
In Europe, attention has long been focused on the peak and decline in production, particularly for Norway and the U.K. However, discovery of fields like Johann Sverdup and Edvard Grieg have seen Norwegian production stabilize and growth is expected for the next few years. The Goliat field in the Barents Sea has begun production, and heralds the opening of a new province.
U.K. production has likewise stabilized after years of sharp decline, and exploration in the West of Shetlands could result in at least modest growth. Hurricane Energy has recently announced a billion barrel find in that area, and explorationists are showing renewed interest.
Still, North Sea production will not do much more than gradually increase, but after a decline of 3 mb/d from its peak, this represents a significant gain in net production. As the previous post noted, production growth is not just the result of rising supply in some areas, but the degree to which production declines—or doesn’t—elsewhere.
The IEA’s 2016 medium term oil report projects an increase from 2017 to 2021 of 2.6 mb/d in non-OPEC supply, much of that coming from the United States. Naturally enough, It assumes that South Sudan, Syria and Yemen will not resume production, something nearly impossible to predict but with the potential for an upside surprise. More surprisingly perhaps, they foresee modest declines in Mexico and the Former Soviet Union, both of which seem likely to increase given current developments.
Overall, my expectation is that non-OPEC production will increase by more than 4.5 mb/d from 2017 to 2021, two million barrels per day more than the IEA foresees, and meaning that demand for OPEC oil will only increase modestly. (As the table below shows, I am also more optimistic about global demand.) Recovery of currently shut-in production from some combination of Libya, Nigeria and Venezuela could easily be sufficient to balance the market, will rising production in Iran and Iraq will mean pressure on other members of OPEC to restrain their supply.
As always, there will be many a slip ‘twixt cup and lip, and some of these areas will not deliver as promised, but the supply picture now is more positive than it has been for many years. Certainly, expectations of a tighter oil market within 2-4 years appear much too optimistic and if U.S. shale oil continues current trends, it might be difficult to maintain the current $50/barrel price.
17 Comments on "Michael Lynch: …And This Is Where The Oil Will Come From"
Plantagenet on Mon, 1st May 2017 11:38 am
Interesting to hear about new oil production coming on line even though we’re still in an oil glut. It means the oil glut has a bit longer to run.
Cheers!
onlooker on Mon, 1st May 2017 11:55 am
Even if everything Mr. Lynch says is true and the many of the new oil plays could be exploited, the world would pay much to heavy a price economically/energetically, in its Environment and its social cohesion as Wars with potent weapons would almost certainly continue as part of competition for remaining resources and refugee would continue to destabilize areas
Hello on Mon, 1st May 2017 12:00 pm
That’s a very complicated sentence you wrote, onlooker. Does it have a meaning?
Cloggie on Mon, 1st May 2017 12:02 pm
Plant says: It means the oil glut has a bit longer to run.
You haven’t been called “the glutser” for a long time now, congratulations with your stamina.
What happened to NWR anyway?
rockman on Mon, 1st May 2017 3:03 pm
If the looker will allow I’ll paraphrase:
Sh*t has happened in the past just as sh*t is happening today and sh*t will continue happening in the future.
The only change is that different sh*t happens to different people in different places at different times. As Forest might say: Life is like a box of chocolates. Sometimes that dark nugget you take a bite of is actually just a piece of sh*t.
I’m sorry…that was a sh*tty thing to say.
onlooker on Mon, 1st May 2017 3:12 pm
That is what is maddening damned if we do, damned if we don’t. What a friggin conundrum
tahoe1780 on Mon, 1st May 2017 4:30 pm
Cognitive dissonance! https://srsroccoreport.com/future-world-economic-growth-in-big-trouble-as-oil-discoveries-fall-to-historic-lows/
Go Speed Racer on Mon, 1st May 2017 7:08 pm
Let’s pump out all the oil fields, in North Korea.
Just after we wipe out their military.
DMyers on Mon, 1st May 2017 8:46 pm
Make a fist. Raise it with each word.
“Glass half full! Glass half full!…”
That’s right. Keep it up.
That’s all we get out of Mr. Lynch, so let’s just take it as that. Need a billion? Well, hey, we have 1.2 million over here, and there will be a lot more little pots where that came from.
Celebrate every tiny increment. It’s a sign of bigger things to come. No end in sight. A million here, a million there, and pretty soon, you can run a civilization. Simple as that.
Thank you, Mr. Lynch. I had almost drifted into negativity.
Boat on Tue, 2nd May 2017 12:33 am
If Lybia and Nigeria get their shyt together oil prices may drop so low the US fracking resurgence may come to an end. The glut could easily last till 2020. Even with OPEC cuts the prices could drop to $40 per barrel. Supply and demand folks.
Remember Short’s prediction of world demise by 2019. 1 year and 7 months left till global meltdown. All I see is glut and continued demand. PS, short promised fast dropping demand. Weird how global demand for vehicles continues to rise along with miles driven. One wonders how those trends were not factored in.
Gennady Krasovsky on Tue, 2nd May 2017 1:28 am
There are still questions to be answered allowing us to see the road:
– How many “duck” fileds should be put on stream to replace undiscovered “elephant” fields? More “ducks”, more pressure on cost side.
– Good old “elephant” fields, put on stream 60-30 years ago, support $20-30/bbl price environment. They are dying now. Shale oil requires $40+/bbl, pre-salt & deep-water – $60-80+/bbl.
– How many extra mn bbl. per day of oil consumption will we see in the next 5 years – 5-7 mn. bbl.?
– How many mn bbl. per day of production from good old “elephant” fields would be lost by 2023-2025? 7-10 mn bbl. per day?
Definitely, we get it out. But at what cost and at what price?
rockman on Tue, 2nd May 2017 4:34 am
Gennady – Exactly. You offer all the questions folks like Lynch avoid because they either have no answer or what is a fact does not support their spin.
Jan on Tue, 2nd May 2017 8:01 am
It is rather worrying that Michael Lynch can only think of about 8 countries that can increase oil production. When you have to pin your hopes on the likes of Venezuela, Kashagan, corrupt Brazil and perhaps South Sudan you really are in trouble.
Saudi Arabia and OPEC have created so much instability over the last few years. Once the market is more balanced it will be clearer which countries can increase production and by how much. At the moment any predictions are futile.
bobinget on Tue, 2nd May 2017 12:52 pm
Supply, supply. Nary a word aboot demand.
Not too much concerning rust.. or should we call it
decay or just plane old ‘decline’.
Cheap affordable oil is of paramount importance to Forbes subscriber, investor class.
Demand is already outstripping affordability, even at these below cost of production prices.
Artificially holding prices in check at this juncture, suicidal. No amount of cheerful articles, can now stop ruinous, vertical, price rises.
Off-shore ultra deep exploration, where most of the world’s supply will come from is dead in the water)
Today’s story, not much different than yesterday’s.
Keep choking Venezuela. When Maduro can no longer control the situation, China moves in.
Our Author neglects to mention, wars in Syria, South Sudan, Yemen, Nigeria, Libya, Iraq, after decades, are
still happening. Because oil, and oil revenue fuels wars
we still see moderate amounts being sold.
I’m guessing, for lack of proper maintenance, so called natural events, (explosions, leaks, fires) will slow production.
In any case, with oil below cost, there is little incentive to spend billions bringing above mentioned ‘finds’ to market. At this time.
Finally, lets not confuse ‘production’ and exports.
As KSA just figured out, what gets burned up at home can’t be sold.
green_achers on Tue, 2nd May 2017 9:36 pm
Interesting metaphor. I would prefer death from neither elephant nor duck, or anything in between if I could help it.
Jan on Wed, 3rd May 2017 1:01 am
bobinget
Oil is currently well above cost in many fields.
http://www.telegraph.co.uk/business/2017/05/02/bp-returns-profit-thanks-higher-oil-prices-cost-cutting/
Oil companies are making money.
The cost of oil is not a problem.
The cost of crime cost me 5 times what I spend on petrol
http://www.telegraph.co.uk/news/10013830/Violent-crime-costs-the-UK-economy-124-billion-report-suggests.html
spike on Fri, 5th May 2017 6:40 am
Gennady, Rockman, you seem surprised that my Forbes column on non-OPEC supply didn’t cover depletion, and presume that I avoid the subject. If only I could write a book covering these many issues–oh, wait, I did!