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These are the good years

Everyone is entitled to their own opinion, but not their own facts
    —Daniel Moynihan

The Energy Information Agency's latest Short-Term Energy Outlook (STEO) contains a supplement on the Outlook for Non-OPEC Oil Supply Growth in 2008-2009. If the EIA's forecast is correct, the world is due for a huge increase in liquids production this year and next. The STEO notes that "recent history has shown that non-OPEC capacity growth projections often fall short of expectations," so it behooves us to review the report's strengths and weaknesses.

There will probably be a sizeable increase in world oil production in 2008-2009, but the addition will likely be considerably lower than the EIA's "best case" estimate. The non-OPEC outlook looks bleak thereafter. These are the good years.

Some Editorial Remarks

It is regrettable that the peak oil debate has now become so debased that opposing statements are usually completely divorced from an actual analysis of how much oil is coming on-stream measured as the net of declines, when it will be produced, and where it is coming from. Speculation runs rampant in the absence of any meticulous, unbiased consideration of the data. Uninformed opinions, or usually, opinions based on uninformed opinions, that do not quote or reference chapter & verse on the oil supply data—all of the data, even if the data is not the best we could hope for—are just so much mumbo jumbo. Some people even go so far as to play hide-and-seek with the data. This isn't high school.

Peak Oil Mad Max The EIA has given us specific non-OPEC predictions based on their field-by-field expectations in various countries. The likelihood of their estimate can be examined now. In the future, we will be able to see how the forecast fared in hindsight. The lengthy analysis that follows is a critical review of only part of the territory covered by the EIA. If the review is long and boring—some entertaining bits have been thrown-in to keep the reader's attention—this is only because looking at actual oil production is not as sensational as talking about trillions of barrels of resources or saying that the end of the world is nigh. People like to talk the talk, but only an analysis of all of the data we can see walks the walk.

Review of the EIA's Forecast

EIA 2008 Non-Opec Forecast The EIA's non-OPEC prediction includes crude + condensate (C+C) only. The energy agency shows production rising 0.9 million barrels per day (b/d) in 2008, and 1.5 million b/d in 2009 (graph left). The world's C+C production has only exceeded 74 million barrels per day three times, in April, May and December of 2005. It is thus apparent that the EIA believes the world will finally breakthrough—without OPEC's help—the C+C production plateau (peak) that has held up since the beginning of 2005.

How could the EIA's forecast be wrong? Even without examining specific countries and fields, as we do below, it is possible to sum up the general reasons for overly optimistic non-OPEC forecasts in recent years.

  1. For a specific country, e.g. Norway, there may be an underestimate of the rate of decline in the existing production base. The new oil will not provide the anticipated net addition in this case.
  2. New projects may be delayed or production may ramp up more slowly than anticipated. Peak flow rates often spillover into the next year. If the host country's production is declining, e.g. the United States, delays lower the net addition coming from new fields when the oil finally does come on-stream.
  3. Production gains from the field itself may not meet expectations. Peak production rates may never equal the built-out capacity, e.g. Murphy Oil's Front Runner has never produced 60 thousand b/d in the Gulf of Mexico. Moreover, the peak production rate may not be sustained over as long a period as was originally envisioned by the field's operator. This factor comes into play in the deep and ultra-deep water, e.g. Brazil's Santos Basin or the Gulf of Mexico, where difficult geology affects accurate reservoir characterization. Declines may also be steeper than anticipated in the post-peak (tail end) part of the production curve in the deepwater. (See A Non-OPEC Progress Report, ASPO-USA, September 12, 2007.)

Armed with these insights about why cheerful non-OPEC forecasts have fallen short of the mark, it is possible to delve into the details of the EIA's non-OPEC supply report.

EIA 2008 Non-OPEC Net Additions The EIA expects net additions from several non-OPEC producers (graph left). One could quibble about the small fry (e.g. China, Egypt), but it's more efficient to concentrate on the Big Fish with net additions ≥ 250 thousand barrels per day, which leaves troubled Sudan out of the picture.

Brazil makes the largest contribution to new oil supply in the 2008-2009 period, 0.72 million barrels per day. One reason to doubt this forecast is that even Petrobras, Brazil's national oil company, does not believe it can add this large an increment to world oil production by 2011, as specified on page 21 of its 2006 Annual Report. See God Is Brazilian?, ASPO-USA, December 5, 2007. Petrobras expects to produce 2.374 million b/d per day in 2011, an increase of 0.596 million b/d over the 2006 production level of 1.778 million b/d. (These figures include natural gas liquids.) Brazil's national oil company would not be expected to be pessimistic in their forward looking statements, so this no doubt represents their most realistic best case scenario for investors. 

With help from the newly installed P-54 Roncador floating platform, Petrobras announced a new production record of 2.0 million b/d on December 25, 2007, eclipsing the old record of 1.912 barrels set on October 23 2006. It took quite a while to break the previous high water mark. It still appears that Brazil's 2008 daily production target is about the same as the Christmas Day high (reprint, Dow Jones Business News, November 13, 2007). December 2007 domestic production stood at 1.855 million b/d, up from the yearly average of 1.79 million b/d. (Petrobras also produced 121,957 b/d of oil and natural gas liquids in December outside of Brazil.)

Brazil will thus easily achieve a 0.21 million b/d increment in 2008, but the EIA forecast then requires them to put an additional 0.51 million b/d on-stream (net of declines) in 2009, a tall order. The EIA assumes only an 8% decline rate in Brazil's existing production—this value is too low, ≥ 10% is a more realistic estimate in light of past performance.

Golfinho (100,000 b/d) will reach maximum production in the first half of 2008, and both the P-52 and P-54 projects, each with a capacity of 180,000 b/d, are expected to reach peak output in late 2008. How long these fields will stay at their peak production levels, if they actually make the capacity targets, is anybody's guess. Another 480,000 b/d scheduled to come on-stream in the first half of 2009, which sounds like a lot until you factor in the 10% decline rate in the deepwater, possible delays and the time required to ramp up to peak production. For example, the EIA assumes that 100,000 barrels will come from Chevron's Frade development, where first oil is expected in the 1st quarter of 2009, but Chevron reports that the field will reach its peak heavy oil output of 85,000 b/d in 2011. In this case, the EIA has got it wrong.

It's remotely possible that Brazil could briefly pump another half million barrels per day one day in late 2009, but its not very likely unless God Really Is Brazilian. The smart money would bet that Brazil's non-OPEC contribution will be somewhere around half of the EIA's estimate in the 2008-2009 period.

Next up is the United States, where the Federal Gulf of Mexico (GOM) is slated to put 0.5 million barrels per day on the books in 2008-2009 net of declines in Alaska, the Lower 48, and elsewhere in the Gulf. According to the EIA—

Oil production in the Gulf of Mexico is expected to increase by 50,000 bbl/d in 2008 and 350,000 bbl/d in 2009. The Atlantis field came online in late 2007 and production should hit peak capacity by the end of 2008. The Thunder Horse platform is expected to come online by the end of 2008, while the Tahiti platform should come online in early 2009.

Let's go out on a limb here and predict that the oddly named Thunder Horse—once called "Crazy Horse", the name changed (apparently too late) out of respect to the legendary Lakota warrior, operated by the now accursed British Petroleum—will actually come on-stream in the 4th quarter of 2008. If this miraculous event occurs, and the field achieves its peak rate of 250,000 b/d in 2009, the EIA prediction may come true. The energy agency acknowledges the risks:

Because EIA’s non-OPEC supply forecast depends on a relatively small number of key projects, it is very sensitive to any delays in project schedules. The forecast includes allowances for project delays, but delays are difficult to predict with much accuracy.

Atlantis, with a peak rate of 200,000 b/d, will take a full year to reach its maximum output. Industry observers are waiting to see how Tahiti's wells perform. Will Chevron get the full 125,000 b/d capacity? See The Gulf of Despair?, ASPO-USA, June 27, 2007. Can the oft-delayed Thunder Horse save the day and contribute substantially to the supposed 350,000 barrels per day net addition from the Gulf in 2009? Your guess is as good as the EIA's, or ours. And be sure to make a ritual sacrifice to the Hurricane Gods. History tells us that a goat is the animal of choice.

Canadian Crude Oil Production Forecast It's hard to tell about Canada. The EIA estimates a net +300,000 b/d in 2008-2009, 150,000 barrels in each year, all of which must come from the tar sands. Canada's conventional oil production is slowly declining as shown in the forecast of the Canadian Association of Petroleum Producers (CAPP, graph  left). East coast production will have peaked by 2010 and will decline at a brisk pace thereafter. CAPP's projection for the tar sands shows rapid annual growth out to 2020.

Tar sands expansion has slowed considerably in the last few years. See What's New at the Tar Sands?, ASPO-USA, January 2, 2008. Production grew only 25,000 barrels per day in 2007, an insignificant addition. If one looks at scheduled projects, capacity additions amount to 255,000 barrels in 2008, and 268 thousand barrels in 2009 (Oil & Gas Journal, July 23, 2007). This is considerably more than the EIA's more conservative prediction. Any estimate will depend on the success of the Horizon project, which is supposed to add 110,000 barrels per day in the 3rd quarter of 2008. Only time will tell at the tar sands.

The EIA includes 0.48 million barrels per day from Azerbaijan, 0.39 million barrels from Russia, and 0.25 million barrels from Kazakhstan. Each estimate depends on one or two big projects. The Azerbaijani oil will come from the phased Azeri-Chirag-Gunashli (ACG) field development, especially completion of East Azeri (Phase II) and inauguration of the Gunashli deepwater production (Phase III).  Azerbaijan's oil production jumped from 0.871 million b/d to 1.005 million barrels in November, 2007, so the EIA's 2008 addition is partially on-stream now. The EIA's estimate seems reasonable in light of the successful implementation of Phase III up to now.

The EIA's Kazakhstan estimate holds few surprises if the government there co-operates.

[John] Roberts [an energy analyst at Platts] also doubts that [the Kazakhstan government] is inclined to move against two other major ventures – the Tengiz oil field, which is being developed by a Chevron-led consortium, and the Karachaganak oil, gas and gas condensate field, operated by the BG Group and Eni SpA. Such moves, if they do occur down the road, will depend on "whether oil remains at current levels of relative scarcity and high prices".

It is in the best pecuniary interests of the Sultan of the Steppes, Kazakh President Nursultan Nazarbayev, to "step up exploration of new natural resource deposits in his oil-rich Central Asian state," especially because of the lack of any revenue whatsoever from Kashagan.  The Sultan is unlikely to interfere with money-making projects, so there is no reason at present to question Chevron's production expansion at Tengiz, which promises to add another 140,000 barrels per day by the end of 2008, nor is there any reason to doubt that Karachaganak will add significant quantities of new oil in 2009.

Finally, there is Russia, which the EIA anticipates will increase production by 390,000 b/d in 2008-2009. See For Russian, An End to Growth is In Sight, ASPO-USA, August 15, 2007. Increases there depend on Sakhalin II, which is a good bet, and Vankorskoye, which is not, at least in the EIA's time frame. Rosneft (the operator) and Transneft (the pipeline) are duking it out. From Forbes' report Rosneft's Bogdanchikov says ESPO pipeline delays will not hit Vankor

Construction delays on the Eastern Siberia-Pacific Ocean pipeline (ESPO) pipeline will not affect development of the Vankor oil and gas field in Kransoyarsk territory, Rosneft OJSC President Sergei Bogdanchikov told journalists at an economic forum here today, Interfax reported. Rosneft has already invested 70 bln roubles in the Vankor development, he said. 'We plan to bring the field on-stream this year,' he said...

The ESPO pipeline system is being built to transport oil from Siberian fields to the Asia-Pacific region. The project is being carried out in two stages. Earlier Transneft chief Nikolai Tokarev said completion of ESPO's first stage could be postponed by up to six months, citing delays at various sites on the pipeline route.

Tokarev said the first phase of the ESPO pipeline will not be able to be put into operation before the fourth quarter of 2009, Interfax reported, citing Vesti 24 news channel. 'It will take 20 months after we have the full set of documents in our hands for the oil port to be built. Technologically, it is impossible to do this any earlier,' Tokarev said.

If the ESPO is not ready until the 4th quarter of 2009, it seems clear that Vankorskoye will not be contributing much to Russia's oil production in 2008-2009. The EIA states that—

Much of the production from Vankor is slated for delivery to Asian customers via the Eastern Siberian Pipeline (ESPO). As a result, delays to the completion of the ESPO system could theoretically impact large-scale production at Rosneft’s Vankor, although it is possible that initial quantities of oil could be shipped west or used locally instead.

Used locally? If you ask Transneft head Nikolai Tokarev, who requires a full set of documents before he rolls out of bed in the morning, he would no doubt tell you that there is nothing "theoretical" about the impact of his delayed pipeline on large-scale production at Vankorskoye. Stay tuned.

EIA 2008 non-OPEC Net Declines Length considerations preclude a detailed discussion of other parts of the EIA's non-OPEC report, but the declines portion deserves a mention (graph left). The world loses a combined 0.52 million b/d from Mexico and the UK.  Another 0.17 million b/d net decline comes from some of the usual suspects (Columbia, Oman, etc.). However, the EIA's estimate of a 70,000 b/d decline in Norway seems curiously optimistic.

Norway Oil Production ForecastThe Norwegian Petroleum Directorate's (NPD) The Shelf in 2007 shows a large drop-off in oil production in 2008 (graph left). The right-scale shows that the NPD expects to produce just over 2 million b/d this year, a loss ≥ 250 thousand barrels compared with the EIA's 11-month 2.273 b/d average for 2007. Norway's January output was 2.186 b/d.

The next four years show smaller annual declines, but there is considerable uncertainty in NPD's forecast, which was revised downward in 2007. (See the NPD Shelf document.) Norway will be starting up the Alvheim, Vilje and Volve fields in 2008, but this new oil is not expected to slow the downward trend until 2009. There is every reason to expect that Norway's decline will be somewhere north of 200 thousand b/d in 2008-2009, not 70 thousand as the EIA claims.

These Are the Good Years

This week's Peak Oil Review summarized some findings of Citigroup report The Pump Decline... and Fall? about the dangers of oil depletion. Concerning non-OPEC production, Citi found that—

At the root of the supply problem appears to be non-OPEC's failure to grow volumes. And yet this is certainly not a function of a lack of opportunities currently. As highlighted by the Petroleum Review's "Mega-projects" analysis, there is visibility on as many as 175 global Greenfield liquid project start-ups from 2007 and beyond. Of these, the vast majority (140) are planned to be on-stream by 2010, with almost all the rest on-stream by 2012. There is far less visibility on project start-ups from 2013 and beyond.

Most of large non-OPEC "mega-projects" are scheduled to start-up in the 2008-2009 period covered by the EIA's report. If there is be any growth in crude + condensate production beyond the 73-74 million barrels per day plateau of the last 3 years, it will come this year and next, and perhaps in 2010 because of inevitable delays. After 2010, most of the large fields that might come on-stream also come with a lot of attendant risk, e.g. Tupi (Brazil) or Kashagan (Kazakhstan).

This review of the EIA's non-OPEC forecast points to a possible increase in C+C production of perhaps 1.4-1.6 million barrels per day in 2008-2009, approximately 750 thousand barrels per day in each year. The EIA's report covers the period of highest growth outside of OPEC, a pattern that will likely never be repeated in all the years to come. It's a one-off, this is forever. This finding ought to be a source of concern to policy-makers but, as of now, this historically momentous event seems to be completely off the radar in discussions of the world's energy future. What can one do about it? The oil supply data is there for all to see.

Contact the author at [the original article]

Editorial Notes: UPDATE (Feb 21): Updated the text to fix a few errors, at the request of Dave Cohen. -BA

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