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Energy Insights:67: Deepwater Oil will not bail us out

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67: Deepwater Oil will not bail us out


Last week, the Oil and Gas Journal had a very interesting article entitled, "Future of deepwater, Middle East hydrocarbon supplies", by Ivan Sandrea and Osama Al Buraiki. The article was discussing one of the optimistic forecasts of oil supply (I would say it is a happy hopalong forecast), made by the Energy Information Agency (EIA). This report suggests that oil production will increase from 76 million barrels per day(b/d) today to 115 million b/d in 2020.

Let me start with the conclusion of these authors first, to get your attention. They write:

“If consumption were to stay relatively flat due to a sharp rise in oil prices, or if alternative energy sources were introduced, resource depletion could be delayed by several decades. However, under current and projected trends, world crude oil production will begin to fall within years, not decades. " Ivan Sandrea and Osama Al Buraiki, "Future of deepwater, Middle East hydrocarbon supplies," Oil and Gas Journal, June 17, 2002, p. 32

The article notes that there are several major assumptions in the EIA report. First, it is assumed that we will be able to recover much more oil from producing oil fields than we currently think. Secondly, it is assumed that Russia, West Africa and Latin America will provide most of the non-OPEC supply increases. Third, deepwater Brazilian fields, the West African fields parts of the former Soviet Union and the Gulf of Mexico deepwater will produce 7-9% of world oil (5-7 million b/d). Finally, it is assumed that the producers in the Middle East will double their production over the next 17 years.

The first assumption, that technology will double our recovery factors is doubtful as huge investments in waterflood equipment and energy investments in pumping water through the field are required and often such systems don't make sense economically. This is something I consider doubtful. We will improve recovery some but not that much.

The second assumption is not examined by the article. They go on to examine the third assumption, that the Deepwater will become a major oil supplier for the world. Here are the plain numbers today. Over the past 13 years, 130 fields have been found in what are defined as deepwater and they contain 20 billion barrels of oil. Only 46 of the fields have been developed and are producing. The rest are either uneconomic or marginally so at current prices. The producing represent 12 billion barrels and only 2% of the worlds global oil and gas production. Many analysists see the deepwater producing 7-9% of world production for only a couple of years after which the decline in production due to field depletion will be quick. And that then will do in the second assumption fairly quickly. Many of the undeveloped fields have been left alone for many years because no one can make money out of them. Indeed, if you put all those discoveries online at once, you would only get 1 million b/d which is only a little more than 1% of world production.

The authors then look at 3 deepwater areas of the world, Nigeria, Egypt and the Gulf of Mexico. In Nigeria deepwater exploration began in 1993 and since then 38 exploratory wells have been sunk. They have found only 4 deepwater fields, Bonga being the largest of them. Nine years after Bonga was discovered, and after a $2.7 billion dollar investment, it will begin producing 220,000 b/d. To achieve the production assumed by the Nigerian government and by the EIA, one must assume that by 2010 Nigeria's deep water will be producing 2 million b/d, equivalent to 10 Bonga's. Given that it is now 2002 and 2010 is only 8 years away, it is unlikely that this production target will be reached.

Egypt was examined and it has geological problems in being able to increase its deepwater production by much. The Nile sediments thin to the north and that means that there is a limited distance beyond which the oil can be found. They have almost drilled out that far.

The Gulf of Mexico has this said about it:

"Despite the GOM having the largest number of discovered fields of all known deepwater basins, it also has the highest number of undeveloped fields, largely because the majority of the fields are not economic under most scenarios (Table 3). This is partly because the size of many of these fields is difficult to predict. " Ivan Sandrea and Osama Al Buraiki, "Future of deepwater, Middle East hydrocarbon supplies," Oil and Gas Journal, June 17, 2002, p. 26

The authors then turn to the inflated reserves which have been claimed by the Middle Eastern countries. This was done because in the late 1980s and early 1990s OPEC quotas were assigned based on reserves. REserves mysteriously grew even though no wells were drilled. Here is what the authors say:

"Although world proved reserves are reported to be about 1 trillion bbl-of which two thirds are in the Middle East- this estimate may be artificially high. “

“Beginning in 1985, OPEC members, driven by the desire to increase their production quotas, which are related to the size of proven reserves, started reporting huge increases in their reserves. For example, in 1985, Kuwait reported an increase of 41%; in 1986, Venezuela doubled its reserves; in 1988, UAE reported a tripling of its reserves; and, in 1990, Iran and Iraq each doubled their proven reserves, while Saudi Arabia reported a 50% increase, by about 85 billion boe. " Ivan Sandrea and Osama Al Buraiki, "Future of deepwater, Middle East hydrocarbon supplies," Oil and Gas Journal, June 17, 2002, p. 28

"There have been creditable reports that, in the 1990s, the Saudi government mandated that the oil reserves would not decline. Thus, in spite of the production of some 16 billion bbl of oil, Saudi reserves are 3.6 billion bbl higher now than in 1989.”

“Under the generally accepted definition, the current proved reserves of Saudi Arabia probably would be about 160 billion bbl, leaving some 100 billion bbl as inferred reserves that, at very considerable expense, could be converted to proved reserves. Similarly, Kuwait currently has about 86 billion bbl of proved reserves, with field growth potential of perhaps 10 billion bbl produced at significant additional expense. “

“In the UAE, 61 billion bbl of oil may be proved, leaving 37 billion bbl of inferred reserves potentially available at substantially higher cost. In Iran, perhaps 69 billion bbl of the 99 billion bbl reported as oil reserves qualify as proved reserves, while in Iraq it is possible that as much as 91 billion bbl of the reported 112 billion bbl of oil reserves may qualify.”

“Iraq hiked its proven oil reserves by 12% in 1996 even though no significant exploration work was going on at the time. In general, the Middle East region has reported nearly a doubling of proven oil reserves since 1980, to 695 billion bbl from 363 billion bbl, largely from inferred reserve additions. " Ivan Sandrea and Osama Al Buraiki, "Future of deepwater, Middle East hydrocarbon supplies," Oil and Gas Journal, June 17, 2002, p. 28

Kuwait, they say, has the same reserves today that they had before the oil well fires burned up about 3% of their reserves in 1990. And inspite of producing 700 million barrels per year over the past 10 years, no reduction in their reported reserves has occurred. This means, that they aren't telling the truth about something.

The Saudi's, they point out, have no money to invest in increasing oil production, so the EIA, who believes that the Middle East will be the swing producer, must count on Saudi Arabia for that increase. They are broke , their living standard is falling, they have record unemployment, and as I note on a web page, they are ripe to fall soon.

So, as the authors conclude, world oil production will probably begin to fall within a few years. All scenarios I have seen for this mythical increase in future production depend upon unrealistic scenarios.

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