Sunday, April 25, 2010

Crude + Condensate Trends

I argued recently that it appears possible that the 2008 peak of liquid fuel production will be exceeded, even if Iraq does not increase production much (see also here).  My argument was based on looking at IEA numbers and showing that whereas the decline in production in late 2008 came mainly from intentional cutbacks by OPEC, the subsequent recovery in production came mainly from non-OPEC sources.  If OPEC were to restore their cutbacks, production would then go above the 2008 total.

A number of commenters argued that I was presenting too rosy a picture by using all-liquids, rather than just looking at narrower definitions of oil.  It certainly is true that biofuels and natural gas liquids (NGLs) have grown rapidly of late, so just looking at crude + condensates always presents a slightly more pessimistic picture.  On the other hand, as far as consumers are concerned, biofuels do get burnt in engines, and NGLs get made into petrochemicals, also burnt in engines (eg butane in winter gasoline etc), so I certainly think it's legitimate to look at all-liquids.

In any case, what I wanted to argue in this post is that the situation is not qualitatively different if one just looks at crude+condensate (basically fossil-fuel hydrocarbons of molecular weight of pentane and higher).  Above, I show a graph based on the EIA's Table 1.1 for this aggregate, for the whole world, OPEC, and Non-OPEC.  To show all the trends conveniently on one graph, I have plotted changes from the January 2001 level, and I have circled a couple of regions of interest.  The following points should be clear from the graph:
  • The 2008 peak was above the 2005 peak.
  • The late 2008 decline in world production was largely due to OPEC's cutback (believed voluntary to support prices).
  • If OPEC were to restore production to their peak level, with no change in Non-OPEC production, global production would go above the 2008 level.
Of course, we can't say at this point that that will definitely happen.  We don't know what price OPEC will demand to restore that capacity to production, and we don't know what will happen to demand (particularly if the Greek situation unravels in a nasty way).  And of course, if all demonstrated OPEC spare capacity was used up, it's likely another price spike would follow shortly.

But the possibility appears to be there.


Stephen O'Brien said...


Again, a very nice analysis and one that raises the important question of whether or not it is possible for production to exceed the 2008 peak. Your point about the 2008 decline being voluntary in order to support prices is perfectly valid and provides a reasonable basis for expecting an increase in production to be possible. Certainly, such authorities as Chris Skrebowski have said that all liquids production above 90 mbd is possible, and I certainly respect his opinions. I do not hold myself out as an expert in oil production, however, I would point out three things that I feel could make it unlikely that the 2008 peak in C+C production will ever be exceeded.

1) I believe that in mid 2008 Saudi Arabia was pumping full throttle as it has done at times of emergency in the past. As in the past, that brief spurt was followed by a long recovery period as the high rates of production were not sustainable. I'm sure the post peak production decline was mostly voluntary, but it may have also have been necessary. Simmons has argued that Saudi willingness to open the taps in these emergency periods in the past produced only temporary increases and at a substantial cost, harming the fields' long term production capacity. One wonders whether the Saudi's will be willing or even able to open the taps in such a manner yet again. I'm not saying they can't or won't produce more than they do now, but could they produce enough more to get us back to 2008? Perhaps 2008 was the last great spurt. Now, it's true that Saudi Arabia is not the only producer of C+C, but I believe they are the only one that is considered to have substantial reserve capacity, so focusing on them is, I think, warranted.

2) There seems to be abundant evidence that C+C production in mature fields is subject to a decline rate in the range of 4% to 6% annually. Nearly two years have passed since the 2008 peak, so that means there is an even taller moutain to climb to reach that level again.

3) Even if production were to get to the peak 2008 level, growing internal consumption in producer countries would mean less available to the export market.

On the other hand, Non-OPEC production is up in 2009. Could that continue? Could Non-OPEC be the key to getting back to previous levels? I don't think so, but it remains to be seen.

In my mind, the biggest question is how real is the 4mbd Saudi spare capacity that we keep reading about? And if it is real (and I have my doubts) how long could that 4mbd capacity be sustained?

Thanks so much and keep up the good work.

Manolo said...

Cannot help but quote Jeffrey Brown's comment from yesterdays Drumbeat, regarding the Saudis:

A Possible Future article follows, based on the article linked uptop. Note that oil prices are currently about three times the upper limit of $28 that Saudi Arabia pledged to defend in early 2004. So, if we multiply by three again. . .

INTERVIEW - Oil over $300 damaging, OPEC would act - Kuwait (April, 2016?)

KUWAIT (Reuters) - OPEC would pump more oil to prevent a rally in oil prices above $300 from hurting the global economic recovery, Kuwait's oil minister said on Sunday.

Oil is well below the $300 a barrel mark, settling at just over $255 a barrel on Friday. For a month, oil has traded over the $210 to $240 levell that many in OPEC have pegged as fair. But there was room for more upside before the producer group would respond, Sheikh Ahmad al-Abdullah al-Sabah told Reuters in an interview at a media event.

"If it's sustained above $300 that would damage the economic recovery," he said. When asked if OPEC would boost supply to prevent that, he replied "I would say so."

Current oil prices were acceptable to both producers and consumers, he said.

A trip down memory lane, before collapsing demand forced oil prices up to $100 in 2008, forcing Saudi Arabia to curtail their net oil exports from 2006 to 2008, because of a lack of demand:
Opec studying plan to boost oil price band by a third (April, 2004)

Mr Al-Naimi said: "Saudi Arabia continues to be committed to OPEC's $22-28 price band. There are signs that worldwide inventories have begun to build but no one really knows for sure. I do not believe there is a fissure [within Opec]. There is dialogue. Opec in general is committed to the band," he said.