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Energy Insights – International Oil Production and Exploration

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International Oil Production and Exploration

What will happen to oil production in Iraq?

This is very uncertain. Iraq is currently producing some 1.8 million barrels per day. The country has oil reserves of about 112 billion barrels, second only to Saudi Arabia. With a standard depletion rate of 5% - this implies that the sustainable plateau production rate should be 6.6 million barrels a day. Clearly there is a long way to go.

The security concerns and lack of investment capital to expand infra-structure are key concerns. How long it will take to boost oil production is most uncertain and depends on stability. If things are highly unstable, production could stay at current levels for a long time.

If stability is restored and investment attracted, rates could rise to say 5 million barrels a day within 10 years. However, this would require some $80 billion of investment. With no guarantees on oil price, stability and security, it seems highly unlikely that such capital would be invested and the most likely outcome is a rise to double the current rate by say 2008 with more minimal investment and infra-structure refurbishment.

Will Russia go on increasing oil production?

Russia has raised oil production from some 4 million to 8.5 million barrels per day in the last 8 years. After the collapse of the Soviet Union – the oil fields fell into decline in part because this coincided with low oil prices and high pipeline tariffs.

In the last five years, better management of the pipeline infra-structure, reducing pipeline tariffs and a big injection of both the latest subsurface technologies and capital has dramatically increased oil production. However, the “easy wins” have been had and it will be increasingly difficult to sustain such rates moving forwards.

As water production increases and the fields become more mature, more drilling, water injection / secondary recovery (see next section - what is secondary recovery) will be required to sustain the rates. One would expect rates to stabilise at around 8.5 million barrels a day but not rise significantly higher. Drilling and development activity levels will likely remain high to sustain such production rates.

How important is oil exploration – will it have an impact?

Most of the oil reserves and major oil producing basins have now been discovered and developed. There are few virgin oil exploration areas with a lot of potential – almost all have been drilled. There is a process of creaming – through additional exploration and appraisal drilling and implementation of new technologies. In summary, it is likely that additional exploration will not markedly change the global oil reserves picture in the next 50 years. Most reserves additions are made from existing producing oil fields – this has been the case for the last 15 years.

Even when the small independent oil exploration companies strike oil, the accumulations do not make a significant difference to the global reserves picture. An example is the Cairn 2004 discoveries in India which – if they add 300 million barrels – only account for some 5 days of global oil production. That said, these discoveries have a big impact on the value of these oil companies and on the economics of countries where they are discovered, particularly if the country has a small oil reserves base.

Where are the opportunities to increase oil production?

Projections of oil production expansion in many of the OPEC and Non OPEC countries seem optimistic – too many mature oil producing countries have projected growing oil production over the next 15 years. If the expected capacity expansion does not materialise and/or reserves are lower than forecast, other forms of energy such as coal and gas production will be needed to supplement energy requirements.  But with the projected rapid expansion of automobile use in China, India and to a lesser extent the rest of Asia Pacific and North America and very little up-take in hybrid petrol-electric usage, it seems supply and demand are finely balanced and it would not take too many issues to put a lot of pressure on prices.

In a 6-12 month time frame, Saudi Arabia is likely to be able to increase its production from 9 million to 10 million barrels. The UAE has probably got an extra 300,000 barrels of spare capacity – but that’s it. Much relies on the production expansion effort in Iraq – can rates increase from 1.8 to say 3 million per barrels in the next 12-18 months? It seems rather optimistic. Meanwhile, if global GDP growth is close to the 4% projected for 2005 and China continues it’s massive and increasing appetite for oil consumption, then a supply crunch might occur.

The situation in 2004 was not helped by speculators piling into the market driving prices up and betting against the calming words of OPEC spokespersons. How much of this speculation is because investors see a short term money making opportunity and no better investment opportunity elsewhere in stocks, gold or bonds is an interesting debating point. New oil production from West Africa will not make a big difference and has already been largely factored into forecasts. The offshore US and North Sea production is in fairly steep decline – adding further pressure on prices. A compounding and important factor in high gasoline prices in the USA has been the complexity and high specifications of fuels and gasoline’s because of new environmental and fuel quality legislation.

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