Sunday, June 26, 2005

Yergin and associates think otherwise - probably the most cited press release of this past week.

CAMBRIDGE, Mass., June 21, 2005 – Despite current fears that oil will soon “run out,” global oil production capacity is actually set to increase dramatically over the rest of this decade, according to a new report by Cambridge Energy Research Associates (CERA). As a result, supply could exceed demand by as much as 6 to 7.5 million barrels per day (mbd) later in the decade, a marked contrast to the razor-sharp balance between strong demand growth and tight supply that is currently reflected in high oil prices hovering around $60 a barrel.

In a rigorous new field-by-field, bottom-up analysis of the world’s capability to produce hydrocarbon liquids, Worldwide Liquids Capacity Outlook To 2010— Tight Supply Or Excess Of Riches, CERA indicates that worldwide capacity could rise by as much as 16 mbd between 2004 and 2010 -- a 20 percent increase over the period.

This significant expansion in liquids productive capacity will meet volatile and expanding demand later in this decade and beyond, according to the CERA report. “We expect supply to outpace demand growth in the next few years, which would take the pressure off prices around 2007–08 or thereafter and even lead to a period of price weakness,” observe the report’s authors, Peter M. Jackson, CERA’s Director of Oil Industry Activity and Robert W. Esser, CERA’s Director, Global Oil and Gas Resources. “Following development of the current worldwide inventory of major discoveries, we also foresee far more capacity expansion in the medium term from field upgrades than through exploration.”.

“Today’s high prices are the result of an exceedingly tight and precarious supply-demand balance,” says Daniel Yergin, CERA Chairman. “Yet significant new capacity will be coming on stream – much of it launched a few years ago on price assumptions much lower than today’s market prices. The addition of that new capacity is what is required to improve the supply demand balance.”

The full report will be presented and discussed in a special forum next week at CERA’s “East Meet West” International Energy Conference in Istanbul, Turkey, June 28-30.

Unconventional Oils

Jackson and Esser argue that “unconventional” oil will play a much larger role in the growth of supply than is currently recognized. These unconventional oils include condensates, natural gas liquids (NGLs), extra heavy oils (such as Canadian oil sands), and the ultra-deepwater (greater than 2,500 feet deep). By 2020, they could be almost 35 percent of supply.

The CERA analysis indicates the pace of new major projects coming onstream worldwide will be sustained to 2010, with fewer giant projects going forward after that. “We have some concerns as to whether the deepwater and Russian “miracles” can continue to shore up non-OPEC liquids capacity expansion past 2010, when non-OPEC capacity growth will start to slow significantly,” say Jackson and Esser. “This rate of growth will be closely related to the emergence of new deepwater plays in existing and new areas, and also the rate at which the huge potential of Russia is unlocked. However, OPEC can continue recent rates of capacity expansion after this time.”

“The main risks to our Supply Expansion scenario,” comments Yergin, “are above ground, not below ground – changes in the political and operating climate that could delay expansion.” In CERA’s downside “Delay and Disruption” scenario, the lower boundary in the analysis, capacity increases by 11.5 million barrels between 2004 and 2010.

Peak or Undulating Plateau?

The CERA analysis rejects the current fear that a near-term “peak” in world oil production and a coming exhaustion of supply are near. The report indicates that the “inflexion” point will come in the third or fourth decade of this century. Moreover, rather than a “peak,” it will be an “undulating plateau” that will continue for several decades.

“In the years ahead, the scale of the business will continue to grow, as long-term, multi-billion dollar projects become more and more common – and more and more necessary, and an expanding effort is put into upgrading existing fields,” say Jackson and Esser. “One of the most biggest challenges will be to find the giant projects of the next decade, which will put great pressure on the search for high-quality, significant opportunities that in themselves meet the criteria of ‘big’.”

Primary findings of the report include:

OPEC Outlook – Total OPEC liquids capacity will expand significantly to 45.6 mbd in 2010 from 36.8 in 2004, with the proportion of condensates and NGLs rising to almost 18% of total capacity. Post-2010, OPEC has the hydrocarbon resources to continue expanding capacity at a slightly lower rate than the current decade’s 10.9 mbd growth. CERA believes OPEC will accelerate key projects in anticipation of a non-OPEC slowdown in capacity growth.

Non-OPEC Outlook – Non-OPEC capacity will expand rapidly for the balance of the decade, adding 7.5 mbd to reach 55.8 mbd by 2010, with the increase dominated by contributions from Russia, the Caspian, Brazil, Angola and Canada. Beyond 2010, the rate of increase for non-OPEC liquids capacity is expected to slow dramatically to as low as 2 mbd by 2020. A step change would be needed in investment in exploration to stimulate more rapid expansion of non-OPEC liquids capacity.
Specific countries – The report expects Saudi Arabia’s liquids productive capacity to rise by 1.5 to 2.0 mbd by 2010, to about 12.5 mbd, and observes that the country is still “underexplored.” It describes “reduced near-term expectations” for output in Russia, reflecting “the slow development of the export infrastructure and political uncertainty.” Capacity in the United States will decline from 7.55 in 2005 to 7.15 in 2010 – about a 5% percent decline.

Supply sources -- A large number of major, new projects are approved and under development or looking highly likely to proceed, especially in the deep water, the Caspian, in extra heavy oil, and gas-related liquids from the gas boom. There are approximately 20–30 new major (greater than 75,000 barrels per day) projects coming onstream every year to 2010, and these are contributing between 3 and 4 mbd of new liquids capacity annually.

What Kind of Capacity? – Of the 17.7mbd of gross capacity expected to be added to the world production stream between 2005 and 2010, more than half (10 mbd) will be light liquids and almost 20% (3.2 mbd) will be heavy. Much of the impetus for high oil prices and increasing spreads between WTI and heavy crude in 2004 was that there was there was no ready refining capacity to absorb the growing quantities of heavy, sour oil. Given the time needed to build additional refinery capacity, this will not change in the short to medium term and, as Saudi Arabia, Venezuela and Canada step-up heavier crude production in the longer term, the prospect of wider light-heavy spreads will encourage either investment in refinery conversion capacity or upgrading capacity nearer the wellhead.

Unconventional liquids – Condensates, natural gas liquids (NGLs), extra heavy oils, and the ultra-deepwater (greater than 2,500 feet deep) will be the key component of the increase to 101.5mbd in 2010 when they will represent 30% of the total – compared with 22% today and less than 10% in 1990. Also by 2020 unconventional liquids will account for 34% of the total liquids capacity in 2020, compared with 22% percent today and less than 10% in 1990.

Supply balance -- The balance of supply over demand has the potential to expand significantly over the next five years, and this could drive oil prices to the downside. If demand growth averages a relatively strong 2.2% through 2010, prices could weaken from recent record highs and slip well below $40/bbl as 2007-08 nears. If demand growth were notably weaker, a steeper price fall would be conceivable; however such a fall would likely slow capacity expansion and bring a market rebalance within two to three years.

Peak or Plateau? -- CERA believes there will be no “peak oil” problem before 2020. However, sometime beyond 2020 an inflexion of sorts will occur, but it will not be followed by a precipitous decline in productive capacity At this time CERA believes that the worldwide capacity profile will track an “undulating plateau” for a number of decades before starting to decline more slowly than might be thought today, as a step change in investment occurs and new technology is pumped into exploration, field upgrades, stranded gas, and heavy oil projects in a manner quite unlike any other period in the history of the oil industry.

Methodology -- CERA’s methodology “for liquids production capacity forecasting adopts a bottoms-up in which the overall profile is the sum of the outlooks for fields in production, fields under development, and fields under appraisal, all of which is built into a national outlook. A component of capacity from future exploration investment, yet-to-find, is also included. For some countries, we include data from every producing field and upcoming major project, while in others the data is less comprehensive.”

Cambridge Energy Research Associates (CERA), a subsidiary of IHS Inc., is a leading provider of independent analysis to energy and power companies, consumers, financial institutions, governments, and technology companies. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, Massachusetts, and has offices in Beijing; Calgary; Mexico City; Moscow; Oakland, California; Oslo; Paris; Rio de Janiero; and Washington, DC.

© 2005, Cambridge Energy Research Associates, Inc. All rights reserved. CERA and the CERA logo are registered trademarks of Cambridge Energy Research Associates, Inc.

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