Energy Production
Committee
Understanding the Petroleum Industry
Price Overview | Demand |
Supply | Trade and
Imports | Refining | Stocks
What's Hot: Demand | Supply
| Trade and Imports | Refining
| Stocks
- Founded in 1960, OPEC did not become a household word until the fall of
1973, when the Arab-Israeli war led almost overnight to production cutbacks, the Arab oil
embargo and a massive increase in prices. OPEC’s members seized the opportunity to
revolutionize the structure of the oil market by taking over control of their production,
prices and sales from the oil companies and then operating as a cartel, coordinating first
prices and then volumes.
- OPEC had 5 founding members. By 1975, its membership had grown to 13, but
this has dropped to 11 with the exit in the 1990’s of first Ecuador and then Gabon.
Even so, OPEC oil still accounts for 40% of world production, nearly 80% of world reserves
and essentially 100% of the world’s spare capacity.
- The first and second oil price shocks led to the view that OPEC was
all-powerful. Subsequent events have demonstrated that this is not the case, and debate
nowadays focuses on OPEC’s death. How imminent is it? Does the fact that 1998’s
two rounds of producer cutbacks were masterminded by a combined OPEC/Non-OPEC troika
comprising Saudi Arabia, Venezuela and Mexico mean that the cartel’s death has
actually already occurred?
- (Back
to Supply Chapter) (Back
to Top)
- Iraq, with proven reserves of 112 billion barrels, has the potential to
be one of the world’s major oil producers, but its production has been severely
constrained by military and political actions over most of the last two decades.
- Just prior to Iraq’s August 1990 invasion of Kuwait, Iraqi
production had almost fully recovered from the impact of the Iran/Iraq war and was back at
3.5 million B/D, close to its all-time, end-1979 peak. Then, the UN’s post-invasion
export ban constrained Iraqi production below 600 mb/d until the end of 1996, when the
so-called Humanitarian Oil Sales program was finally authorized. This allowed Iraqi oil
back into the world market under a strictly-controlled deal structured to raise a set
amount of revenue over successive 6 month periods. Iraq quickly doubled its production and
then, forced by its revenue target, it pushed its production even higher as prices fell.
- Early in 1998, the UN more than doubled Iraq’s revenue ceiling, to
$5.28 bn. At 1998 price levels, Iraq would need to produce at 3.0-3.5 million B/D to raise
this much from exports. Without investment in its war-damaged infrastructure, Iraq cannot
come close to such levels, but its production has spiked to over 2.5 million B/D at times
this year, exacerbating the problems faced by other producers in trying to restore balance
to an oversupplied market.
- Many experts estimate that, with massive injections of foreign capital,
Iraqi production could reach 6 million B/D, close to current U.S. levels. Such volumes lie
far into the future because actions by the dozens of foreign companies interested in a
role in Iraq’s upstream are stalled until sanctions are lifted. US companies are
worried that when Iraq does open up again, they will be competing for access to its
attractive, underdeveloped reserves on a far from level playing field.
- (Back
to Supply Chapter) (Back
to Top)
- The North Sea (which comprises the offshore production of Norway, the
U.K., Denmark, Germany and the Netherlands) is one of the Upstream sector’s major
success stories of the last decade. By fundamentally redesigning working methods through
joint oil company/contractor initiatives and by adopting cutting-edge technology like
directional drilling and 3-D seismic, costs were slashed. By the mid-1990’s, the
region had became the benchmark for exploration and production activity throughout the
world.
- Production, which began in the early 1970’s, stalled in the second
half of the 1980’s at 3.8-4.0 million B/D, when high costs made the North Sea
uncompetitive despite the oil’s generally high quality. Since then, production has
risen rapidly. It is expected to average 6.5 million B/D this year, significantly more
than Russia -- where production is still declining -- will produce. The North Sea, with
its production peak still seen to be several years off, may well soon displace the FSU as
the world’s 3rd largest producing region, especially with the new
political and economic uncertainties in Russia, and the Caspian’s much delayed
exports.
- The U.K. and Norway account for nearly 95% of North Sea production. After
a slow start, Norway grabbed the top North Sea production slot from the U.K. in 1991. The
U.K. is closing the gap again now, especially as the Norwegian government decided in early
1998 first to slow the pace of field development to reduce the risk of its economy
overheating and then to cut production to support the "Riyadh Agreement", the
first round of 1998 producer cutbacks. This support reflects Norway’s position as the
world’s 3rd largest exporter, after Saudi Arabia and Russia.
- (Back to Supply Chapter) (Back to Top)
- The Gulf of Mexico is poised to become the preeminent oil producing
region of the U.S., with its production expected to double to 2 million B/D in the next
few years. Such growth will slow or even temporarily halt the long term decline in U.S.
production and curb the rate of growth of U.S. crude oil imports even as the growth in
domestic oil consumption is expected to accelerate.
- The Gulf’s confounding of the "Dead Sea" label it acquired
during the cutbacks of the second half of the 1980’s is the consequence of
technological advances, aided by industry restructuring and a more sympathetic fiscal
regime, that have made operating in the deepwater both feasible and economic. This is
reflected in activity in the deepwater in 1997 reaching record highs and record depths
across the board, from leasing to drilling to numbers of development plans to numbers of
producing fields to production.
- By 1997, 24 fields had come onstream in the deepwater Gulf, an average of
less than 2 a year. Companies’ plans indicate that this number is likely to jump to
over 60 by the turn of the century. These development plans are the basis for the
aggressive forecasts of production growth in the region that lead to annual production
increments that are four to five times larger than those achieved during the first part of
the decade.
- The new flows are lower quality crude oil than the Gulf of Mexico's
traditional supply. Therefore, the combination of rapid volume growth and dramatic quality
change in the baseload source of crude supply will have a significant impact on crude
markets throughout the Gulf Coast and the Midwest, and on some of the traditional
suppliers of U.S. imports.
- The current surge in development plans and new field start-ups reflects
the deepwater leasing boomlet of the late 80’s/early 90’s. The current leasing
and drilling booms will have their own production echo early next century. That means that
the newly found importance of the Gulf of Mexico as an oil producing region is not purely
transitory but will continue into the twenty-first century.
- (Back to
Supply Chapter) (Back
to Top)
- The Caspian Sea and the surrounding region have become a focus of
attention for two reasons. First, despite being one of the world’s oldest producing
regions, it remains substantially underdeveloped; production is only around 1 million B/D,
even though proven reserves, at 15-29 million barrels, are equivalent to those in the U.S.
Second, with the collapse of the Soviet Union, the Caspian Sea has become accessible to
the industry at large.
- The majority of the Caspian reserves are offshore in the land-locked
Caspian Sea. The newly-formed Republics that constitute the Caspian region have been
anxious to attract foreign companies for their access not just to capital but also to
cost-effective offshore technology. They have been relatively successful, but development
is moving ahead painfully slowly. Not only have the legal framework and associated
institutions for a commercial oil industry had to be developed from scratch, but there has
also been intense political wrangling over export routes for the expected incremental
production.
- These negotiations would have been complex if they had been limited to
just the producing countries, their potential customers and the countries through which
the oil exports might pass. Several of the countries are antagonists in regional conflicts
while several of the routes assume use of the already crowded and politically and
ecologically sensitive Bosporus. In addition, however, the Caspian has become a strategic
and geopolitical issue for both the U.S. and Russia, and one that in the case of the U.S.,
is also entangled with its sanctions on Iran, another potential transit country for
Caspian oil.
- As soon as at least one new export route is in place, production is
expected to increase rapidly to 4 million B/D and exports to 3 million B/D, turning the
Caspian into one of the world’s top oil exporting regions.
- (Back to Supply Chapter)
(Back to Top)
- The tug of war between knowledge and finite resources in the oil industry
has in recent years been resoundingly won by knowledge, in the shape of new technologies
and operating practices. These have both dramatically improved the economics of many
traditional producing areas and also opened up new areas, like the deepwater Gulf of
Mexico, by making development and production there feasible.
- Three technological advances have been particularly important. Firstly,
3-D seismic, which, thanks to the revolution in computing power, builds up a 3-dimensional
picture of the underground strata and, therefore, of the possible location of oil and gas,
that is both clearer and more detailed than traditional 2-D seismic. Secondly, horizontal
and directional drilling, which allows the redirection of a well from the vertical to an
angle and even to entirely horizontal and which, in combination with sophisticated and
highly sensitive new measurement devices, allows companies to target an oil zone 2-3 miles
underground with almost pin-point accuracy. Thirdly, multi-lateral completions, which
allow oil to be extracted from several oil bearing strata or pools simultaneously with
just one instead of multiple wells.
- Together, these new technologies have enabled companies to reduce the
number of dry holes, optimize well locations and maximize well productivity, thereby
reducing uncertainty, slashing unit costs and raising capital efficiency. As a result, the
industry was more profitable at the lower prices of the mid-1990’s than the higher
prices of the first half of the 1980’s.
- (Back
to Supply Chapter) (Back
to Top)
- The average well in the U.S. produces only just over 11 barrels a day.
This low rate is a product of the maturity of the U.S. as a producing province, since flow
rates drop off as wells age, and also of the unusually widespread private ownership of
resource rights, which has contributed to there being thousands of small independent
producers in the U.S. Many of these operate on a part-time basis and are not subject to
the level of overhead incurred by the more established companies.
- Pressured by a mix of politics and a desire to have as little oil
abandoned as possible, the U.S. has long had a special classification, stripper wells,
those that yield less than 10 barrels a day, with special, more generous rules.
- In 1997, 70% of all U.S. wells were stripper wells. In total, these
produced around 1 million B/D of crude, 16% of the U.S. total – implying an average
flow of only 2 barrels/day!
- A large proportion of these wells have been unable to cover even their
cash operating costs in 1998. As a result, many of these wells will be permanently shut
in, the number of independent production companies operating in the U.S. will drop
sharply, and production will become even more concentrated in the two main regions, the
Gulf and West Coasts.
- Back to Supply
Chapter
<
back to top > |
