The Origin Of Challenge – Oil Supply And Demand (Part 2/2)

The Origin Of Challenge – Oil Supply And Demand (Part 2/2)

By Leif Magne Meling

The following paper by Leif Magne Meling, Statoil ASA, was presented at the IQPC Improved Oil Recovery Middle East conference in Dubai, May 22-23. The work is a personal assessment and Statoil does not necessarily support the conclusions. The author thanks Statoil for permission to publish the paper and Farouk Al-Kasim for constructive support and feedback. Part 1 was published last week.

Sensitivity Analysis Of Supply Growth

Commercial media, professional journals¹, magazines and institutions² normally focus on reserves and resources, an over-simplification of factors that affect supply. This work includes a sensitivity analysis to identify the critical factors among the variables; demand growth, exploration potential, OPEC reserves, OPEC outtake growth, reserve growth and yearly developed reserves (Figure 8). The Base Case is set to: OPEC outtake growth 4% (compared to the present average of some 3%), demand growth 1.6% similar to the “historical average” and so forth as shown in Figure 8. A standard deviation of 30% is used as input for each variable to estimate the resulting effect on supply-demand balance by comparison to the base case.

The analysis shows that OPEC outtake growth is by far the most critical factor. A plus-minus 30% standard deviation of the input data shows a supply-demand balance variance of more than 10 years. A similar input regarding demand growth indicates a variance of more than nine years. Yearly developed oil, reserve growth, OPEC reserves and exploration potential are of lesser importance. For some this is a surprising conclusion, but a reserve volume growth, be it due to exploration or reserve growth adds a volume at the tail of the future production and will affect more the production peak level rather than the timing of the end of supply – demand balance. A volume of 200bn barrels adds some three years. To add significantly more time, significantly more volumes have to be added.

Increasing market shares by non-OPEC producers have made OPEC very conservative regarding future call on its members. On average they produce at a very low outtake, less than 2% of remaining developed reserves (Figure 6). Their investments in producing fields have been marginal relative to non-OPEC countries. Annual outtake growth has been around 3%. To increase production, OPEC countries need, as non-OPEC countries have done since the early 1990s, to upgrade their outtake significantly from producing fields (Figure 9). To supply a demand growth of 1.6% for 10 years, OPEC countries need to double their present yearly outtake growth.

The demand surge by emerging economies is critical to supply. An annual demand growth of 3% is approaching a level where the production capacity will not be able to balance short term demand (Figure 10). This is due to low spare production capacity and insufficient investments for field renovation and new field development. Demand growth is however dynamic; a high growth will at the present circumstances significantly increase oil price, slow down economic growth, hamper oil demand, make room for substitutes and improved energy efficiency.

Production Assessments

The supply-demand model developed takes into account historical reserve and production data, demand growth, outtake growth, improved and enhanced recovery, new field developments, exploration and spare production capacity.All major oil-producing countries are evaluated and summarized into a world oil production assessment. The model distinguishes between OPEC and non-OPEC producers by imposing different production and field development strategies. Defining the critical issues makes it easier to make different production assessments or scenarios. Since the critical issues are OPEC outtake growth and global demand growth, the assessments or scenarios focus on these issues only.

Base Case

The Base Case is a “more of the same” scenario where demand growth is assumed equal to the historical 20-year average of 1.6% and OPEC countries only marginally increase their yearly outtake growth to some 4%. By splitting the future oil production into different segments it is possible to predict the relative importance of each constituent (Figure 11). Global production additions due to improved and enhanced recovery will contribute more than 60%. Combined with new field development, additional exploration and mining of oil sands in Canada³, the production may grow to around 90mn b/d.

Non-OPEC oil production growth will be restricted mainly by limited increased outtake growth potential (Figure 6) and limited reserves growth (Table 1). Production will probably flatten out and decline from 2010 resulting in a major call for increased OPEC production. The major part of the production growth will be a result of outtake growth and a minor proportion by new field developments.  Production growth is probably only possible by a significant increased outtake from countries such as Saudi Arabia, Iraq, Iran, Kuwait and Abu Dhabi, the OPEC-5 countries.

With the above assumptions the outtake growth is insufficient to supply a yearly demand growth of 1.6% from around 2011. In 2020 the supply is reduced by some 10mn b/d compared to a 1.6% demand growth scenario. The OPEC-5 countries will be the major contributors to production additions and will produce close to 27mn b/d in 2010 and 37mn b/d in 2020 (Figure 12). OPEC is estimated to produce 52mn b/d, corresponding to 57% of global supply in 2020.

Optimistic View

The optimistic view can be regarded as a “liberal market scenario” with high global economical growth, very high field renovation investments in the OPEC countries, especially in the OPEC-5 countries. This scenario assumes a demand growth of 2%, somewhat above the “historical average”, but less than that experienced in 2003 and 2004. OPEC countries are assumed to increase outtake by 6% annually compared to the present value of around 3%. The supply from OPEC will significantly increase and the global production will peak at 115mn b/d around 2030 (Figure 13). The OPEC-5 countries will produce close to 26mn b/d in 2010 and 45mn b/d in 2020 and enable a global supply-demand balance towards 2020. OPEC is estimated to produce 67mn b/d, corresponding to 63% of global supply in 2020, significantly above any scenario published by OPEC.

Pessimistic View

This assessment assumes that OPEC countries protect a high oil price by only marginally increasing production growth and by applying maximum production constraints. The assessment includes a demand growth of 1.4%, an OPEC outtake growth of 4% and a maximum production constraint for the OPEC-5 countries of 35mn b/d. These constraints will seriously affect global supply. The OPEC-5 countries will not be able to fill the gap between non-OPEC production and global demand from around 2015 and reach a peak close to 90mn b/d (Figure 14). They will produce close to 25mn b/d in 2010 and some 35mn b/d from 2020 and towards 2040. OPEC production is estimated to 38mn b/d and 48mn b/d in 2010 and 2020 respectively, corresponding to 45% and 55% of global oil supply.

Comparison With Other Assessments

It is a difficult task to make reliable assessments of future oil production. The methodology to do so is available, but uncertainty of input data and the different views on critical issues produce a variety of very different results and conclusions. A comparison of some assessments will however reveal some common reasons for discrepancies. The Association for the Study of Peak Oil and Gas (ASPO)⁴ publishes annually an updated assessment. ASPO uses a decline-type model that with the right tuning may produce reliable results. It is a pure reserve and resource driven assessment which does not include reserve growth and does not distinguish between developed and undeveloped reserves. Their model assumes a constant outtake rate which is the model’s major weakness. To illustrate this fact we can compare their recent assessment which includes 1.3bn barrels of future conventional and heavy crude compared with the Base Case of this study, including 2.2bn barrels of future reserves and recourses.  ASPO predicts a production peak around 2010 and the Base Case 2011. A total of 900bn barrels of additional reserves and resources add only one year of production growth, despite significantly larger reserves and resources. It is the constant outtake incorporated in the ASPO model and the limited outtake growth assumed at the Base Case that make the two assessments comparable.

The most optimistic assessment is made by the Energy Information Administration at US Department of Energy (EIA-DOE). Its 2005 study⁵ assumes remaining reserves and resources in the order of 2.9bn barrels due to significantly higher exploration and reserve growth potential, respectively 730 and 940bn barrels. These estimates are based on the USGS 2000 assessment⁶. The EIA model includes both reservoir growth and increased outtake. EIA predicts a supply demand balance way beyond 2030, stated to be dependant on total reserves and resources. However, the model⁷includes an assumption that the global R/P ratio will increase to the R/P ratio of US, 10 years or an equivalent outtake rate of 10%. At present the global outtake is around 3%, a tripling to 10% is equivalent to tripling of reserves. This is a very optimistic assumption compared to this study (Figure 6) and is the main reason for the very prolonged supply – demand balance.

The most recent IEA assessment⁸ is very similar to this study regarding total remaining reserves and resources, 2.3 trillion compared to 2.2 trillion barrels, but more conservative than that of EIA. IEA uses its World Energy Model 2005 (WEM)⁹ combined with the IHS model for Middle East and North Africa countries. Very little is documented about how the supply model works other than it is a resource based model taking into account technological developments and the effect of oil price, probably comparable to the EIA WEM model. Outtake improvements are not documented nor discussed, but have most likely been included to obtain the prolonged demand-supply balance. IEA use a fixed and variable volume growth for demand which makes a direct comparison to other studies more difficult. 

Both EIA and IEA have a very optimistic belief in non-OPEC production. Non–OPEC production is assumed to be oil price dependent; higher oil price results in higher production and reduced call for OPEC. As discussed earlier, it is challenging to find any basis for such a profound oil price dependant conventional non-OPEC production. 

Table 1

Base Case, Reserves And Resources

(Bn Barrels)

	Non-OPEC	OPEC	World
Remaining Developed	245	749	994
Undeveloped	106	106	212
Canada Mining	196	-	196
Remaining Reserves	547	855	1,402
Exploration Potential	201	104	305
Reserves Growth	89	436	525
Reserves and Resources	837	1,394	2,231
Produced	631	402	1,033
Ultimate	1,468	1,797	3,264