Decline in light oil forces rethink

Tuesday 17 July 2007

LIGHT oil production is already in decline, except in the reserve-rich Middle East, forcing consumer nations to utilise unconventional resources such as heavy oil, sour crudes and natural gas liquids.

Geological constraints, although not the only reason, seem to have affected production levels in most of the main basins outside Opec, providing little comfort to those who hope a supply crunch can be averted.

Analysts at Barclays believe that mature basins outside Opec will be the biggest cause of a supply crunch:

“One of the key dynamics of non-Opec supply in recent years has been its ability to massively disappoint,” Barclays says.

“We believe that the main culprit is the dynamics of mature production, and this year it has been most evident in Mexico and Norway.”

The US has been in decline since the early 1970s, despite new output from Alaska and recent deepwater projects in the Gulf of Mexico.

In Latin America, only Brazil can boast rising oil production, mainly due to its long term investments in exploration and development of deepwater fields.

Mexico remains a strong oil producer, thanks to its giant Cantarell complex and the new Ku-Maloob-Zaap project, but its own growing domestic demand means exports are shrinking.

There could be huge reserves of hydrocarbons in Mexico’s deeper waters, but it will take around seven to 10 years to explore, discover and develop these resources.

Venezuela, which is an aggressive member and co-founder of Opec, continues to develop its own heavy oil Orinoco complex, but this does not improve the tight supply of light oils.

Other countries in Latin America are small producers that may be able to increase output, but not enough to influence consumer markets.

Across the Atlantic, West African production is not in decline, but is rising steadily year-on-year, perhaps giving hope that some of the supply crunch can be averted.

But Nigeria and now Angola are members of Opec, so they may be ordered to control production rates. Moreover, output and exports from the Niger Delta is continually reduced by militant attacks.

Other African producers such as Mauritania, Equatorial Guinea, Cameroon, Gabon and Ivory Coast have a production base too small to alleviate supply shortages.

In Europe, output is declining, with the North Sea already over its peak. There may be success stories in the UK and Norwegian sectors that could improve production rates for short periods of time, but in general output levels will never reach plateau rates again.

Russia, once seen as a saviour to oil supply because of its production growth over the last 10 years, has seen its oil output plateau. Investment from Western and domestic companies in Russia since the mid-1990s has pushed the country back to the top of producers’ tables, but any further rises will be constrained by the geology of western Siberia.

The eastern Siberia basins, including those off Sakhalin Island, look promising, but their potential is still to be tapped and will not be as good as the western areas.

The Russian Arctic is at a similar level of exploration and development, but the industry generally feels most of the hydrocarbon resources will be gaseous. Of the former Soviet Union nations, Kazakhstan and Azerbaijan have the most potential to build production levels.

They will become more important non-Opec crude sources in the medium term, but growth is constrained by limited pipeline export capacity, which is mostly controlled by Russia or Chinese interests.

In the rest of Asia, there appears to be no country that has the ability to sizably increase production rates, while these economies are driving strong market demand. There are plenty of oil projects in the pipeline off Borneo, in the Natuna Sea, Gulf of Thailand, onshore and offshore China and in India, but their impact on global supplies will be limited by declines elsewhere.

Australia’s hydrocarbon production will climb over the next decade, but the majority of this is liquefied natural gas.

So we are back in the Middle East for any significant gains in oil supplies. Saudi Arabia is currently the only nation with any proper spare capacity, and this is in the heavy, sour grades of crude that refineries do not want to handle.

Saudi Aramco is investing heavily in its existing onshore and offshore fields, but has not found large new fields for several decades, so even the world’s key oil exporter will, one day, be unable to raise its production.

Iran, which boasts the world’s second largest oil reserves, has plans to raise output levels, but does not have the political will, or the cash. Plus Iran often alarms consuming countries with its warnings of shutting off the taps, so it has the reputation of being potentially unreliable.

Iraq claims to have the world’s third largest proven reserves, but is not in any position to increase production in the next five years due to post-war deterioration of its infrastructure.

Kuwait and the United Arab Emirates are the only two other countries that have large reserves and big investment programmes, but they will have only a limited affect on markets.

In North Africa, Opec members Algeria and Libya could also increase production levels. Perhaps if these countries, along with Kuwait and the UAE, raise their capacities, together they could match Saudi Arabian output growth forecasts, but this is probably unrealistic.

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