Commentary: America’s new energy reality - A bidding war for declining global net oil exports
Americans are reading, almost on a daily basis, about increasing oil and gas production in the US. For example, Daniel Yergin wrote about his optimistic outlook for increasing US oil and gas production in an OpEd piece in the June 10, 1012 New York Times entitled “Americas New Energy Reality.”
It’s certainly true that US oil and gas production has rebounded from the production low following the 2005 Gulf of Mexico hurricanes, but a careful analysis of the production data suggests that the production outlook it not quite as rosy as most people seem to believe.
The primary new energy reality facing the US is an ongoing post-2005 decline in the supply of global net exports of oil, which we abbreviate as GNE, with the developing countries, so far at least, consuming an increasing share of a declining volume of GNE.
Net oil exports are most frequently defined as the total supply of petroleum liquids production (crude oil, condensate, refined products and natural gas liquids) that remains after domestic liquids consumption is satisfied in an oil exporting country. My colleagues and I have compiled a database of the top 33 net oil exporters in the world in 2005, accounting for 99%+ of total global net exports, which we define as GNE. We primarily used the BP global database, with some minor input from the EIA (Energy Information Administration).
Our database shows that GNE fell from about 46 mbpd (million barrels per day) in 2005 to about 44 mbpd in 2011. For every barrel of oil that the top 33 net oil exporters consumed in 2005, they produced 3.8 barrels of total petroleum liquids. For every barrel of oil that the top 33 net oil exporters consumed in 2011, they produced 3.2 barrels of total petroleum liquids. If this ratio were to fall to 1:1, GNE would be zero, but the trend line is toward a 1:1 ratio between top 33 total petroleum liquids production and domestic liquids consumption.
We define available net exports (or ANE) as GNE less China and India’s combined net oil imports. ANE fell from 40 mbpd in 2005 to 35 mbpd in 2011 as the developing countries, led by China and India, consumed an increasing share of a declining volume of GNE. For every barrel of oil that China and India net imported in 2002, there were about 11 barrels of global net exports. For every barrel of oil that China and India net imported in 2011, there were about 5.3 barrels of global net exports. If this ratio were to fall to 1:1, China and India would consume 100% of global net exports of oil, but the trend line is toward a 1:1 ratio between global net exports of oil and China and India’s combined net oil imports.
Canada has shown an increase in net exports, but the combined net oil exports from the seven major net oil exporters in North and South America, inclusive of Canada’s rising net exports, fell from 6.1 mbpd in 2004 to 5.0 mbpd in 2011.
Global annual (Brent) crude oil prices doubled from $55 in 2005 to $111 in 2011, in order to balance demand against a declining supply of GNE, with developed countries like the US generally being on the losing side of a bidding war, as developing countries consumed an increasing share of a declining volume of GNE.
But what about rising US oil and gas production?
It’s certainly true that US domestic production has increased, but we are seeing some troubling inconsistencies between EIA data and other data sources, such as the Texas Railroad Commission (RRC), which regulates and Texas oil and gas production and which has been keeping track of Texas production for decades. It’s important to note that the EIA uses a sampling approach to estimate US production, including Texas production, while the RRC sums the mandatory production reports from Texas producers.
Texas has seen a massive expansion of shale gas drilling efforts, especially in the Barnett Shale Play in North Texas. However, the RRC data show that Texas natural gas well production showed a recent annual peak in 2008, with annual gas well production declining in 2009, 2010 and 2011. The monthly RRC data show that Texas natural gas well production in January, 2012 was down by 20% from the January, 2009 production rate.
Note that the same RRC database shows a steady year over year increase in Barnett Shale gas production from 2004 to 2011. So, a common database shows increasing natural gas production from a large shale gas play, but declining overall total natural gas well production.
What I define as the shale play proponent’s model suggests that rising production from US shale plays and from new conventional discoveries will be sufficient to offset the underlying US production decline from existing production and to cause an ongoing and virtually indefinite net increase in US oil and gas production. Furthermore, the suggestion is that we can apply the US shale play model to the world, so we are looking at an indefinite increase in global oil and gas production, as the shale play model is applied around the world.
However, the three year 20% decline in monthly Texas natural gas well production—despite rising natural gas production from the Barnett Shale Play—directly contradicts the shale play proponent’s model.
In fact, if we use RRC Texas crude oil production data, instead of the EIA data for Texas (while using EIA data for other US producing regions), there was no increase in US crude oil production from 2010 to 2011, despite a huge increase in the number of rigs devoted to drilling for oil in the US.
Using the RRC data for Texas crude oil production suggests that annual US crude oil production in 2011 was only back to the 2004 production rate. In other words, it appears that the cumulative expenditures by the US oil industry for 2005 to 2011 inclusive only served to bring us back up to the pre-hurricane production level that we saw in 2004.
Our analysis suggests that at best we may only see a slow increase in US oil and gas production--especially if we use actual production data in lieu of EIA estimates. This is not to discount the critical importance of domestic US oil and gas production, but again our analysis suggests that the critical new energy reality facing the US is that we are still dependent on imports for about 60% of the crude oil processed in US refineries, while we have seen an ongoing decline in global net exports of oil, with the developing countries, led by China and India, so far consuming an increasing share of a declining volume of global net exports of oil.
We are currently seeing weakening oil prices, but the current oil price decline appears to be primarily related to an accelerating rate of decline in oil consumption in OECD countries. For example, Greece is having a great deal of difficulty in trying to pay their oil import bill.
Consider the Titanic analogy. Late on the evening of April 14th, 1912, at 11:40 P.M., the Titanic struck the iceberg. At around midnight, it seems likely that only about one-tenth of one percent of the people on the ship knew that the ship would sink, but that did not mean that the ship was not sinking. The ship’s pumps helped, but they were not sufficient to fully offset the flood of seawater coming into the ship.
I believe that the slow increase in US crude oil production is to the ongoing decline in global net exports of oil as the Titanic’s pumps were to the flood of seawater into the ship, and I suspect that perhaps one-tenth of one percent of the people in the world have some appreciation for the global net oil export situation, but that does not mean that global net exports are not declining, with the developing countries, led by China, so far consuming an increasing share of a declining volume of global net exports of oil.
(The primary data source for recent monthly and annual Texas production data is the following link, maintained by the RRC, which appears to be quickly and routinely updated: http://www.rrc.state.tx.us/data/production/ogismcon.pdf.)
Jeffrey J. Brown is a licensed Professional Geoscientist and a member of the ASPO-USA Board of Directors. He has discovered several oil and gas fields in West Central Texas, and currently manages an exploration program searching for oil and gas fields in this region. Jeff has conducted analysis of the Peak Oil issue for several years, and has written and coauthored several articles on Peak Oil related topics, with a special emphasis on world net oil export capacity.