By Steve Andrews.
Since the autumn of 2011, a storyline of “oil revolution” and oil abundance–even “North American energy independence”—has taken the US media by storm. That storyline seems to have lifted off in rough tandem with an op-ed in The Wall Street Journal by Daniel Yergin—“There Will Be Oil”—followed not long thereafter with a report by CitiGroup’s Edward Morse in early 2012 forecasting plenty of growth in US oil production over at least the next decade. Many if not most US policy makers, businesses, investors and commentators appear to have largely bought into the broader storyline here.
Q: What is your perspective on that storyline? Should we be bracing for the notion of energy independence in the USA or do you feel the future will diverge from that optimistic scenario?
A: It’s important to stick to specific definitions. There’s a huge difference between “energy independence” which includes gas, coal, nuclear, oil, condensates and NGLs and “oil independence” which refers mainly to oil and condensates. Oil and condensates have always been the main issue because they deliver the low cost transportation fuels every economy needs.
The advances in drilling and well completion technology have indeed reversed the declines in US oil and condensate production.We need to remember that monthly crude oil and condensate production that had peaked at just over 10 million barrels a day in October and November, 1970, had collapsed to 5 million b/d by 2007. Demand, meanwhile, had grown from about 12 million b/d to over 20 million b/d over the same time frame. So the crisis was one of both collapsing production as well as ramping up in demand.
Oil and condensate production has now recovered to a reported 7.8 million b/d as of October 2013 and is forecast by the EIA to peak at 9.7 million b/d in 2019.
However the EIA also estimates that US crude oil imports, at their lowest, will only drop to 6.2 million b/d by 2019 and will be supplemented by other imported hydrocarbon liquids estimated at 0.7 million b/d. So the total US oil production consumed in the US will only make up about 60 percent of total consumption estimated at around 18 million b/d. This doesn’t change much all the way out to 2040 even though the US will also be exporting refined products which are part of the so called “energy balance”. Given the need for these continued major oil imports, it’s hardly a case of US “oil independence” under the best of circumstances.
Q: There are even voices within OPEC nations which fear the longer term impacts of the North American unconventional oil boom. Do you line up with those who are concerned about the unconventional oil boom’s impact on world oil supply or do you see things otherwise?
OPEC nations with concerns regarding US production are focusing on short term markets and competition within the US where WTI and Louisiana light prices dropped from over $125/bl in 2012 to just below $100 in recent weeks. North African and Nigerian crudes dropped approximately $5/bl over that same time frame while Arabian Gulf crudes also dropped approximately $4 – 5/bl. All these prices are still 3 to 4 time historical prices of pre 2004.
In the long term, given the severe declines in shale oil productivity, the limited prospects for major new basins, and the plateau in US capacity starting in 2016, improved access to markets and so forth, domestic US oil prices are bound to make a strong recovery starting in 2016. This and the maturity of major fields across the world, the high cost of deep offshore and Arctic production, and the continued violent turmoil in many oil producing are bound to keep oil prices at historically high levels for decades to come.
Q: Have you estimated a range of what level of total oil production might come out of the USA, thanks to the tight oil boom? If so, how do you see the subsequent plateau and decline, in terms of approximate production rate and timing?
My forecast for the US is a little more conservative than the EIA’s due to limited shale oil opportunities and rapid declines. If the US were able to achieve 8.5 Mbd of conventional oil and condensates by 2016 and sustain it beyond 2020 that would be a very exceptional best case accomplishment.
This is because after several years of development, major increases in oil production are only occurring in the Bakken, Eagle Ford and Permian of West Texas. Even these basins are showing reductions in rig levels in large part due to limited drilling opportunities and productivity limitations in spite of drilling efficiencies and reduced well costs.
Q: What do you anticipate will be the progression of production growth from tight oil from outside of North America?
With the possible exception of China, hardly any region outside the US and Canada can rival the ability of the US to deploy equipment and provide financing and personnel to exploit tight oil resource on a scale that affects regional markets. The number of rigs, organizations, infrastructure investments, legal provisions, field support equipment and volumes of materials and consumables are a logistical hurdle that few regions outside the US are in a position to manage. This is a reality that cannot be overcome irrespective of favorable geology or the local demand for affordable energy. The economics and scaling up of oil shale developments outside the US will require decades of industrial evolution which is unlikely to materialize at the current pace of progress outside the US.
Q: In terms of conventional oil, the majority opinion seems to be that supply will have to grow considerably from the Persian Gulf states. Do you anticipate such growth over the next decade?
The political tensions and unresolved conflicts within the region will continue to destabilize the Arabian Gulf and disrupt significant capacity increases. Deep seated political issues have remained unresolved since the Iraqi invasion of Kuwait, the toppling of the Saddam regime, and the nuclear confrontation with Iran.
Major capacity increases from this region require massive funding and resource mobilization which remains dependent on a broad political stabilization that does not appear imminent.
Q: What about Iran? We’re hearing some commentators allege that oil exports might increase dramatically from Iran if the nuclear standoff is further resolved. How much might Iran add to world oil supply by just “reopening the taps” closed down because of the sanctions vs. how much might they add beyond that from expanded development?
Iran’s major fields are in disarray but they are in desperate need of income. There is good reason to believe that they could get back about 800,000 bd within a few months when the embargo is lifted. They will certainly pull every plug to get there and may eventually hit 3.8 – 3.9 million b/d production within a 1 – 2 year time frame.
Beyond that they’re looking at a 4 – 5 year investment program and its objective will be to sustain production as well as add capacity where possible. That may add another 600 thousand bd of capacity and run a total cost of $30 – 40 billion.
They also need massive investments in their gas and LNG sector and upgrading to their refineries, as well as responding to their collapse of civilian infrastructure. A very expensive list of capex projects and very limited financing or credit worthiness.
Meanwhile the nuclear negotiations are far from secure and the issues of dilution of their enriched uranium, shut down of their enrichment program and allowing complete transparency are far from resolved.
Q: In the larger context, how has your view of future world oil production supply evolved over the last four or five years? As a benchmark, I reference your slides from the 2009 Oil & Money Conference slides.
In 2009 I highlighted several factors that inhibit production expansion including: decline rates (more extreme than ever with shale oil and deep offshore), limited investments (quadrupled capex/barrel in the last few years) and economic growth (still recovering). In the long term, reserves depletion remains very high with totally inadequate reserves replacements regularly obscured by resorting to claiming “resources” as reserves.
The industry has moved into a higher cost paradigm with very limited growth in conventional oil and condensate supplies, accelerated “proven” reserves depletion, and high levels of violence and conflicts around the world’s major basins of low-cost oil production.
The realities of the 2009 O&M forecast of a limited plateau of oil supplies have been pretty much vindicated since then. The oil plateau may now inflated by about 1 – 2 Mbd of high cost unconventional oils but all major forecasters see this as pretty much transitional. The plateau itself remains a reality and unfortunately its duration is still unlikely to extend beyond the end of this decade.
Q: A key aspect of supply, going forward, is price volatility. How vulnerable is world oil supply to a drop in price to $60 or $70, which some economists are predicting?
The prospect of a severe oil price drop can only happen as the outcome of another economic collapse. On the other hand, an upward spike in oil prices is far more credible given the military tensions across the world that could disrupt oil supplies and the limited elasticity in supplies. Dysfunctional governments and failed states are now a pervasive syndrome across the world. There is little evidence that the collective global leadership is able to contain or to stabilize these many crises.
My base oil price forecast in 2012 dollars still ranges between $105 and $120/barrel Brent with a volatility floor of $ 95/barrel and more probable upward spiking to $140/barrel within 2016/2017.
Dr. Sadad Ibrahim Al-Husseini is the owner and founder of Husseini Energy Co. With in-depth experience spanning over 35 years, Dr. Sadad Al-Husseini, a retired executive vice president of exploration and development in Aramco, has been at the helm of Saudi Arabia’s largest oil and gas discoveries and developments. Referred to by the New York Times as “one of the most respected and accomplished oilmen in the world” and by the Wall Street Journal as “one of Saudi Arabia”s most powerful oilmen” one can argue that his knowledge and expertise in the industry is unrivaled.
Steve Andrews is a retired energy writer and consultant, and a contributing editor for Peak Oil Review.