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Where the Oil Rally Goes: Facts and Speculation

Jim Kingsdale, Seeking Alpha
… let us keep in mind the One Eternal Truth of the oil market: nobody knows anything. Well, maybe a few people know something, but you can be sure that they are not talking. The oil market is enormous; demand is global; supply is complex with a variety of types of oil; and the inventories are hard to measure.

… [Very] important has been the Saudi announcements that they will hoard their reserves and will not build new capacity beyond the three projects now under way that supposedly will build their capacity to 12.5 mbpd by the end of 2009. With this decision, the Saudi’s are canceling previously announced intentions to build capacity to 15 mbpd. They are also devastating the arguments of the “don’t worry about peak oil” crowd that the Saudis will supply the growth in oil demand projected for future periods.

Oil analysts were virtually aghast at the significance of these Saudi statements. One reason is that KSA is the bell cow of OPEC, and particularly Middle Eastern members. Nobody knows whether the reasons for the Saudi decision was geological or political, but most observers credit it to some of both. To the extent that the Saudis were making a voluntary political decision to hoard their reserves for use by future generations, then that also becomes a strong argument for other countries to do the same thing.

So I credit the new Saudi policy with having a substantial impact on recent oil prices. More significantly, it is clearly more of a long term than short term factor. It will increasingly impact prices as the future unfolds.

… What makes the current price seem a bit speculative in my opinion is that nearly all the causation factors cited above have more impact on the supply and demand for oil in a year, three years, five years out than on today’s market. So it would make more sense to me for oil in 2010 to be moving up faster than oil in June, but that has not been the case. They have actually been move virtually in lock step.

… If you talk to oil geologists about peak oil, they will often admit that light, sweet crude oil has probably reached peak. So, in that sense, perhaps it does make sense that the near term price is rising because it is the price of light, sweet crude, which almost certainly has peaked.
(23 April 2008)

Russian Oil Has `Peaked,’ Billionaire Vekselberg Says

Greg Walters and Maria Kolesnikova, Bloomberg
Oil output in Russia, the world’s biggest supplier after Saudi Arabia, has “peaked” and may decline in the coming years, said billionaire Viktor Vekselberg, an owner of BP Plc’s venture TNK-BP.

Russian companies need tax breaks to spur exploration and development of new fields to revive growth, Vekselberg told an American Chamber of Commerce conference in Moscow today.

Oil output is falling for the first time in a decade as Soviet-era wells dry up and the costs of developing harder-to- reach deposits surge. Russia pumped 9.76 million barrels a day in March, down from 9.83 million in December, according to CDU TEK, the Energy Ministry’s central dispatch unit.
(23 April 2008)

The Bakken Formation: How Much Will It Help?

Piccolo, The Energy Drum

Piccolo is a petroleum engineer working in the petroleum industry.

The Bakken formation in North Dakota and Montana has generated a lot of buzz in the past year. Reserve numbers in the billions of barrels, even tens or hundreds of billions show up in press reports and blogs. Now the USGS has weighed in with a comprehensive assessment of the resource. So just how much will this oil accumulation help the world’s largest importer of oil? Is it time to relax or is this just another small blip in the long-term decline of domestic production? We’ll examine these questions and others below the fold, using data from the IHS database.

… Conclusions

1. The Bakken shale has produced about 111 million barrels of oil during the last 50+ years in Montana and North Dakota.

2. Total Bakken production is still rising, and producing at the rate of 75,000 BOPD in October 2007.

3. Because of the highly variable nature of shale reservoirs, the characteristics of the historical Bakken production, and the fact that per-well rates seem to have peaked, it seems unlikely that total Bakken production will exceed 2x to 3x current rate of 75,000 BOPD.

4. The latest boom in Bakken production is driven by the application of horizontal wells and hydraulic fracturing technology, which has added about 70 million barrels of production in 7 years. Ultimate recovery of the already-drilled wells should be at least double this volume.

5. The USGS estimates the mean volume of technically recoverable hydrocarbons to be 3,649 million barrels of oil. This is roughly 7 to 12 times the size of already known resources.

6. Based on current production and areas likely to be drilled, the USGS estimate of technically recovery resources seems optimistic.

7. The Bakken potential resource, while large by US onshore field standards, will have only a minor effect on US production or imports. Using 2006 US imports and consumption for comparison, the Bakken undiscovered resource of 3,649 million barrels of oil, if subsequently discovered and fully developed, would provide us with the equivalent of six months of oil consumption or 10 months of imports, spread over 20 or more years. In reality, the reserves developed are likely to be many times smaller than this value.

8. The October 2007 production rate of 75,000 BOPD amounts only 0.4% of US oil consumption, or 0.6% of imports.

9. Per-well Bakken production peaked in August 2005 at 116 barrels a day, and was down to 79 barrels a day in October 2007. If the Bakken production history in the 1990s can be used as a guide, the peaking of per-well production may portend a peak in total Bakken production.
(23 April 2008)