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Oil and gas
Alan Copeland
In the first half of 2008, the oil price in West Texas Intermediate (WTI) terms averaged US$111 a barrel, an increase of 81 per cent from the first half of 2007. In July 2008, the WTI price peaked at US$145 a barrel, a record high in real terms. The world oil price subsequently fell and in mid-September was trading below US$100 a barrel. The fall in world oil prices since mid-July reflects increased production from OPEC members and expectations that growth in oil demand will continue to slow in the second half of 2008 and during 2009. The slower rate of growth in global oil demand, including falling oil consumption in the United States and western Europe, reflects weaker economic growth across most of the world. In addition, there may have been a fall in speculative (or investment) activity on world oil markets. In the first half of 2008, investors purchased commodities such as oil to hedge against a falling US dollar. However, the US dollar has recently appreciated against major currencies and this has reduced the investment-related appeal of oil and other commodities.

For the remainder of 2008, world oil prices are forecast to continue to decline, albeit moderately. The combination of increased OPEC production and slower economic growth is expected to continue for the rest of 2008 and into 2009. In the second half of 2008, the WTI oil price is forecast to average around US$103 a barrel. For 2008 as a whole, the WTI oil price is forecast to average around US$107 a barrel.
Oil prices to fall
In 2009, the WTI price is forecast to average around US$98 a barrel, an 8 per cent decrease from 2008. The forecast fall in the oil price is based on expected falling consumption in OECD economies and slower growth in demand in non-OECD economies. In OECD economies, weak economic growth and high prices are expected to exert downward pressure on consumption throughout 2009. In many non-OECD economies, governments have reduced fuel subsidies in response to higher oil prices, and this is expected to result in slower growth in oil demand in 2009 compared with 2008.

Downward pressure on world oil prices over the next 15 months is also expected to come from the supply side. Non-OPEC production is forecast to increase by almost 2 per cent in 2009, compared with growth of less than 1 per cent in 2008. This reflects significant investment in new capacity over the past few years, which has been encouraged by high oil prices. In addition, OPEC production capacity is expected to increase in 2009 as projects in a number of member countries commence production.
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Risks to oil price outlook

While world oil prices are forecast to fall during the remainder of 2008 and in 2009, considerable uncertainty remains about the short-term outlook.

Oil price sensitive to supply disruptions…
In the Gulf of Mexico, oil production facilities may be threatened during the hurricane season which extends from July to November. Recently, 97 per cent of oil production in the Gulf of Mexico was shutdown as Hurricanes Gustav and Ike approached the region. However, only minor damage was sustained and production was able to restart at most fields within a week. However, if there were significant damage, as was the case with Hurricane Katrina in 2005, a significant proportion of production could be lost for an extended period. This would place upward pressure on world oil prices.

Potential delays to the start up of new production facilities and faster than expected depletion rates in oil fields in the North Sea and Mexico are additional risks to the outlook. The price forecast for 2009 is based on the premise that non-OPEC supply will increase by around 2 per cent.

This increased production is expected to be supported by the completion of new projects in late 2008 and early 2009 in the United States, Brazil and Australia. However, many of these projects have already been delayed as a result of a worldwide shortage of equipment and labour. Further delays to projects or difficulties in ramping up production to full capacity could reduce non-OPEC supply growth and place considerable upward pressure on prices.

New additions to non-OPEC production
 
field
capacity
location
year
kb/d
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Neptune
50
United States
started
Vincent
50
Australia
started
Angel
50
Australia
started
Thunder Horse
250
United States
late 2008
Blind Faith
45
United States
late 2008
Horizon
110
Canada
late 2008
Shenzi
100
United States
2009
Thunder Hawk
60
United States
2009
Tahiti
125
United States
2009
Frade
90
Brazil
2009
 

Oil prices in the short-term are likely to remain sensitive to geopolitical tensions such as unresolved issues relating to the recent incursion of the Russian army into Georgia. The Baku-Tbilisi-Ceyhan pipeline (capacity of 1 million barrels a day) travels through Georgia, delivering crude oil from Azerbaijan to Europe. If the pipeline’s operation were disrupted and oil deliveries to Europe were affected it could place significant upward pressure on oil prices.

…and unexpected changes in demand…
On the demand side, considerable uncertainty stems from a range of sources including seasonal oil consumption and unexpected changes in world economic growth. During the northern hemisphere winter, a significant proportion of oil is consumed for heating purposes. Above average temperatures, as have occurred over the past two winters, have the potential to lower oil consumption as a result of lower demand for heating oil. There is also considerable uncertainty about the short-term economic outlook for some OECD economies. A reduced rate of growth in OECD economies could have a flow on effect to developing economies resulting in lower than expected oil consumption and downward pressure being placed on prices.

New additions to OPEC production
 
field
capacity
location
year
kb/d
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Kizomba C
200
Angola
started
Agbami
250
Nigeria
started
AFK (Khursaniyah)
500
Saudi Arabia
2008
Gimboa
60
Angola
2008
Khurais
1 200
Saudi Arabia
2009
Hawiyah
300
Saudi Arabia
2009
Tombua Landana
100
Angola
2009
 

…underpinned by low levels of OPEC spare capacity
Over the past few years, a significant reduction in OPEC spare production capacity has increased the sensitivity of oil prices to unexpected supply disruptions and changes in consumption patterns. Low levels of spare capacity limit OPEC’s ability to provide the market with additional supplies in the event of unanticipated supply disruptions.

Over the past year, OPEC spare capacity has fallen and is now less than 2 million barrels a day. The recent fall in spare capacity reflects Saudi Arabia’s decision to increase its production rate during the second quarter of 2008. OPEC spare capacity is expected to increase gradually during the remainder of 2008, and there are a number of oil projects expected to be completed before the end of 2009.
However, spare capacity is expected to remain well below levels evident in the early 2000s. Consequently, OPEC’s ability to respond to unexpected significant increases in demand, or supply disruptions associated with increased geopolitical tensions, natural disasters and labour disputes will remain limited.
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Consumption growth to moderate…
In 2008 and 2009 world oil consumption is forecast to increase by around 1 per cent a year, compared with an average annual growth rate of 2 per cent a year from 2004 to 2007. The expected lower rate of consumption growth in the short term reflects increasing non-OECD demand being partially offset by falling OECD consumption.
…as OECD demand falls…
OECD oil consumption is forecast to decline by 1 per cent in both 2008 and 2009 to average 48.6 million barrels a day and 48.0 million barrels a day, respectively. The fall in oil consumption reflects weaker economic growth, particularly in the United States and western Europe, and consumers’ responses to higher oil prices.

US oil consumption is forecast to fall by 3 per cent in 2008 and 2 per cent in 2009. Consumption of gasoline and jet fuel kerosene in the first half of 2008 fell by 2 per cent and 3 per cent, respectively. The trend of falling consumption in the United States is expected to continue over the next
15 months.
…and non-OECD growth slows
Non-OECD oil consumption in 2008 and 2009 is forecast to increase by less than 4 per cent a year. This compares with average annual growth of 5 per cent over the past four years. The slower consumption growth forecast in the non-OECD region reflects weaker assumed rates of economic growth. In addition, retail gasoline prices in many emerging market economies have increased following government adjustments to fuel subsidies. For example, in June, China’s National Development and Reform Commission increased gasoline, diesel and jet fuel prices by 17 per cent, 18 per cent and 25 per cent, respectively. In Malaysia, retail gasoline prices were recently increased by 40 per cent while prices in Indonesia and India were increased by 30 per cent and 11 per cent, respectively.

In the Middle East, strong economic growth associated with rising revenues from higher oil prices is supporting rapid growth in oil consumption. Occasional shortages of gas in some Middle Eastern countries are also supporting growth in oil demand. The gas shortages have been experienced mainly in the electricity generation sector resulting in increased consumption of fuel oil. Middle East oil consumption is forecast to grow by 6 per cent in 2008 and by 5 per cent in 2009.
OPEC crude supply increases
In the first half of 2008, OPEC’s crude oil production averaged 32.3 million barrels a day, an increase of 6 per cent from the corresponding period in 2007. Almost 40 per cent of OPEC’s increased production was attributable to Saudi Arabia, while increased oil production in Iraq accounted for a further one-third. Throughout the first half of 2008, Saudi Arabia was able to draw down its spare production capacity to increase crude oil production. In Iraq, crude oil production in the first half of 2008 averaged 2.4 million barrels a day, an increase of 16 per cent from the same period in 2007. Increased production in Iraq reflects an improving security situation. For example, exports through the northern pipeline have averaged more than 400 000 barrels a day over recent months. Prior to the installation of a security zone around parts of the pipeline in mid-2007, exports were sporadic.

In contrast to the strong growth of Iraqi and Saudi Arabian production, Nigerian production fell by around 9 per cent in the first half of 2008 compared with a year earlier. Nigerian onshore and offshore oil production facilities have been repeatedly sabotaged since early 2008. As a result, capacity of up to 500 000 barrels a day remains offline and is unlikely to be restarted in the near future.

OPEC’s production capacity is forecast to increase during the remainder of 2008 and in 2009. Three projects in Saudi Arabia, which have a total production capacity of almost 2 million barrels a day, are scheduled to commence operation before the end of 2009. The Khursaniyah project (capacity of 500 000 barrels a day) is scheduled to commence operation in late 2008, while the Khurais (1.2 million barrels a day) and Hawiyah (300 000 barrels a day) projects are expected to enter production during 2009. Nigerian oil production is expected to be boosted later this year following the start up of the 250 000 barrel a day Agbami project.
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Oil and gas outlook
2006-07
2007-08
f
2008-09
f
% change
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World
Production
mbd
 85.6
 86.8
 87.7
 1.0
Consumption
mbd
 86.1
 86.8
 87.7
 1.0
Trade weighted crude oil
  price
US$/bbl
 68.31
 102.35
 93.05
– 9.1
West Texas Intermediate crude
  oil price
US$/bbl
 72.18
 107.11
 97.95
– 8.6
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2006-07
2007-08
s
2008-09
f
  
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Australia
 
       
Crude oil and condensate
Production
ML
28 555
25 537
26 732
 4.7
Exports
ML
15 965
15 971
16 306
 2.1
 – value
A$m
8 317
10 489
12 375
 18.0
Imports
ML
25 345
26 220
27 894
 6.4
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Natural gas
Production
Gm3
 43.6
 44.0
 48.5
 10.2
LNG exports
Mt
 15.20
 14.75
 16.90
 14.6
 – value
A$m
5 222
5 854
8 796
 50.3
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LPG
Production
ML
4 550
3 971
4 400
 10.8
Exports
ML
2 824
2 588
2 728
 5.4
 – value
A$m
1 038
1 181
1 430
 21.1
f ABARE forecast. s ABARE estimate.
New projects support non-OPEC supply
In the first half of 2008, non-OPEC supply averaged 49.7 million barrels a day, unchanged from the same period in 2007. In OECD countries, increased production in the United States was offset by falling production in Mexico and the North Sea. Non-OECD oil production increased by 1 per cent in the same period, reflecting higher crude oil production in Azerbaijan, Kazakhstan and Brazil.

Non-OPEC supply is forecast to increase in the remainder of 2008 and in 2009 as new developments are completed in the United States, Brazil, Azerbaijan and Australia. The expansion of production in these countries is expected to be offset by falling production in Mexico and the North Sea. Crude oil production capacity in the United States is expected to increase over the next 15 months with the completion of six projects with a combined capacity of 600 000 barrels a day. These fields include Neptune, Thunder Horse and Blind Faith (completed in 2008) and Thunder Hawk, Tahiti and Shenzi (in 2009).

The start of the Frade field in 2009 and higher output from a number of deepwater fields which commenced operation in early 2008 are expected to support production growth in Brazil of 9 per cent in 2009. In addition, Brazil’s ethanol production in 2009 is forecast to increase by around 15 per cent to 400 000 barrels a day. The rapid growth of Brazil’s ethanol production from sugar cane is supported by its low production costs associated with favourable growing conditions and government subsidies.

Mexico’s crude oil production is forecast to continue falling in the short term in line with declining production in the Cantarell field. Cantarell is one of the world’s largest producing oil fields and in 2007 accounted for almost half of Mexico’s annual production (3 million barrels a day). Production at a number of nearby fields is increasing, however this will not be sufficient to offset the annual decline of 20 per cent to 25 per cent of the Cantarell oil field.

Crude oil production in the Russian Federation is forecast to remain steady at around 10 million barrels a day in 2008 and 2009. A number of projects initially scheduled for completion in 2009, such as the Oduptu field, have been delayed, while production at existing operations has fallen because of insufficient capital expenditure on maintenance. The lack of investment in the Russian Federation’s upstream oil sector reflects partly the consequence of an unfavourable tax regime and uncertainty about the regulatory framework governing foreign investment. New laws designed to improve taxation arrangements and increase regulatory certainty are due to be enacted in 2009.
Australian oil production to rebound
In 2007-08, Australia’s crude oil and condensate production decreased by 13 per cent to 25.5 gigalitres. The fall in production was caused by technical difficulties at a number of fields, including Mutineer-Exeter and Lamarina-Corallina in the first quarter of 2008. Cyclones also disrupted production in a number of fields off the north-western Australian coast at the end of 2007.

In 2008-09, Australia’s crude oil and condensate production is forecast to total 26.7 gigalitres (average 460 000 barrels a day), an increase of 5 per cent from 2007-08. This forecast production increase is expected to be supported by the commencement of operation at the Angel, Skua/Swift and Vincent oil fields in late 2008. Increased production from the Stybarrow field is also expected in 2008-09, following its ramp up during the first half of 2008. In addition, the Apache Energy operated Van Gogh project is scheduled to be completed in early 2009.

Reflecting increased production in 2008-09, Australia’s crude oil and condensate exports are forecast to increase by 2 per cent to 16.3 gigalitres. It is assumed a significant proportion of production from fields in the Bonaparte and Carnarvon Basins will be exported given their proximity to Asian refining markets.

In 2008-09, the value of Australia’s crude oil exports is forecast to increase by 18 per cent to $12.4 billion. The forecast increase in export values reflects higher volume and prices, and the effects of an assumed lower Australian dollar against the US dollar.
Gas production to grow strongly
In 2008-09, Australia’s gas production is forecast to increase by 10 per cent to 48.5 billion cubic metres. This forecast increase reflects the start up of a number of gas fields in late 2008 and early 2009. In terms of production, the largest of these is the Angel gas field (annual production capacity of 8.3 billion cubic metres), where production is scheduled to commence in late 2008. Gas from the Angel field will be supplied to the North West Shelf’s fifth LNG train. Gas production at the Blacktip field in the Bonaparte Basin is scheduled to commence in early 2009. In accordance with the contract, the gas from these fields will be supplied to the Gas and Power Corporation of the Northern Territory. An initial volume of 650 million cubic metres of gas a year for 25 years will be supplied by the Blacktip field starting from 1 January 2009.

In south-east Australia, gas production from the Henry (300 million cubic metres) and Longtom (670 million cubic metres) fields is scheduled to commence in early 2009.
Increased gas supply during 2008-09 will be partially offset by production losses as a result of a fire at the Varanus Island gas plant in early June. The Varanus Island gas plant processes gas from the Harriet and John Brookes gas fields at a rate of 3.7 billion cubic metres a year (140 petajoules). Production stopped in early June and partially recommenced in early August. Full production is anticipated to resume in late 2008.

In 2008-09, Australia’s LNG exports are forecast to increase by 15 per cent to 16.9 million tonnes. The growth reflects increased capacity (4.2 million tonnes a year) at the North West Shelf from the addition of a fifth processing train. In addition, the Darwin LNG plant is expected to operate at full capacity in 2008-09, following a scheduled shutdown for maintenance in 2007-08.

Reflecting increased LNG prices (linked to oil prices) and higher export volumes, the value of Australia’s LNG exports in 2008-09 is forecast to increase by 50 per cent to $8.8 billion.