abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Oil

Outlook to 2013-14

Alan Copeland

In 2008, oil prices in West Texas Intermediate terms averaged around US$100 a barrel, an increase of 37 per cent from 2007. During the year, oil prices exhibited unprecedented volatility, peaking in July at US$145 a barrel and then falling to below US$40 a barrel by the end of 2008. The sharp decline in oil prices was largely attributable to falling world oil demand, as a result of firstly higher prices during the first half of 2008 and secondly because of the slowdown in economic growth associated with the effects of the global financial crisis.

In 2009, oil prices are forecast to average around US$45 a barrel, a decrease of 55 per cent from 2008. Significantly weaker economic growth in 2009 is expected to result in falling world oil demand. OECD oil demand has fallen sharply since late 2007 and this allowed total stocks to increase, equivalent to 90 days of consumption at the end of 2008. In particular, OECD industry stocks were equivalent to 57 days of consumption at the of 2008, levels not seen since early 2002.

OPEC spare capacity increased significantly towards the end of 2008 reflecting its decision to cut production quotas from November. At the end of 2008, OPEC effective spare capacity was estimated to be around 4.4 million barrels, an increase of 160 per cent from June 2008. This figure is expected to continue increasing throughout the first quarter of 2009 because OPEC agreed to reduce production quotas again, taking effect in January 2009.

In 2010, oil prices are forecast to increase by 16 per cent to US$51 a barrel as oil consumption increases by 0.2 per cent as world economic growth increases. The moderate forecast increase in oil prices reflects OPEC’s ability to increase production through a reduction in its spare capacity and increased production from non-OPEC producers. The large levels of stocks in OECD economies that are expected to be maintained throughout 2009 could also limit significant price increases.

Between 2011 and 2014, oil prices are expected to increase from US$60 a barrel to US$80 a barrel in nominal terms. The increase in oil price is projected to be supported by increasing oil consumption and uncertainty over growth in crude oil production.

In the period 2011 to 2014, world oil consumption is projected to increase at an average annual rate of 1.7 per cent (compared with 0.1 per cent in 2009-10), associated with stronger economic growth. During this period, upward pressure on oil prices is expected to come from a return to relatively strong growth in consumption. OPEC spare capacity is expected to decline gradually as growth in oil consumption recovers and increased production will need to be sourced from investment to expand current world production capacity.

Uncertainty surrounds future investment

The extent to which oil prices will increase over the outlook period, in part, depends on the growth of world oil production. Over the medium term significant capital will need to be invested to increase production capacity, not only to meet anticipated increases in world demand, but also to replace declining production from mature oil fields.

International Energy Agency estimated that up to US$1.8 trillion would need to be spent on investment between 2007 and 2015 to ensure adequate oil production under its reference case scenario.

The oil price volatility witnessed over the past 18 months, could hinder investment in some projects as companies take a more cautious approach when assessing projects. In general, price volatility increases the level of risk associated with investment in oil projects, particularly complex projects such as those in deepwater, oil sands and coal and gas to liquids. In additions there is uncertainty about the direction of global and regional climate change policies. Higher risk raises the rate of return required to induce investment in particular projects.

Insights into future levels of industry investment are clouded by recent company announcements regarding capital expenditure for 2009. A number of major oil companies have indicated their intentions to maintain or even increase capital expenditure in 2009, despite oil prices being significantly lower than a year ago. For example, ExxonMobil indicated that its capital expenditure in 2009 would be 20 per cent higher than in 2008, while Shell and Chevron have announced that 2009 capital expenditure would be in line with 2008 levels. In contrast, ConocoPhillips announced that it would reduce its exploration and development expenditure for 2009 by 22 per cent to US$12.5 billion.

The increasing or maintaining high levels of planned capital expenditure by some multinational oil companies over the next 12 months may reflect the development of projects that are currently under construction. Companies are often hesitant to halt construction activities because it is costly as contracts are in place for suppliers. There is a possibility that capital expenditure could be lower in 2010, as projects that are currently under construction are completed, but not replaced by projects that are being planned and awaiting a final investment decision. Oil price movements at that time could also have an effect on the investment decisions.

One indicator of falling investment in the oil industry is the level of activity in the drilling sector. In January 2009, the Baker Hughes worldwide drilling rig count was below 3000. This compares with 3300 a year earlier and 3550 in the middle of 2008 when oil prices were at their peak. The decreasing rig count is representative of falling activity across the oil services industry and this has been reinforced by recent announcements from two prominent oil services companies – Baker Hughes and Schlumberger (North America) – cutting their work forces by 4 and 5 per cent, respectively.

Increases in oil efficiency to continue

In 2005, OECD oil consumption peaked at 49.6 million barrels a day and since then has fallen every year, averaging 47.5 million barrels a day in 2008. The increase in oil prices during the period from 2005 to mid-2008 is one of the reasons for the fall in oil consumption. Higher prices have encouraged consumers and governments to increase the efficiency of oil consumption and this trend is expected to continue during and beyond the outlook period, unaffected by the recent fall in oil prices.

In the US, a target has been set for the nation’s vehicle fleet to have an average fuel consumption rate of 31.6 miles per gallon, by 2015. This compares to the previous target of 25 miles per gallon. Some states in the US have sought federal government approval to increase the fleet wide fuel efficiency above national levels. For example California is seeking to implement a rule requiring fleet wide efficiency of 34.5 miles per gallon in 2015.

The impetus for increasing the fuel efficiency of the US vehicle fleet has come from a number of sources, including the desire for increased energy security, environmental considerations and the need to restructure the US auto manufacturing industry given its loss of competitiveness against imported vehicles.

World oil demand to fall in 2009

In 2008, world oil consumption was estimated to have averaged around 85.7 million barrels a day, 0.5 per cent lower than in 2007. Oil consumption in 2009, is forecast to fall by 1.4 per cent to an average of 84.5 million barrels a day. It has been 25 years since world oil consumption has fallen in consecutive years. Reflecting the weak economic outlook, oil consumption in the OECD is expected to fall significantly, while in non-OECD economies, growth in oil consumption is expected to be weak. Growth in world oil consumption is expected to resume in 2010, increasing to 1.5 per cent over the second half of the outlook period to average around 92 million barrels a day in 2014.

OECD consumption projected to remain flat

Over the outlook period, OECD oil consumption is projected to remain flat. Projected oil consumption of 47 million barrels a day in 2014, is well below the peak consumption of
49.6 million barrels a day in 2005.

North American oil consumption in 2009 is forecast to fall by 3 per cent to 23.6 million barrels a day, reflecting lower economic growth across the region. Beyond 2009, oil consumption growth is projected to average below 1 per cent a year. This is expected to be underpinned by an improved economic outlook being counter balanced by the likelihood of increased vehicle fuel efficiency standards in the United States. In 2014, North American oil consumption is projected to average 24 million barrels a day.

Over the course of the outlook period, oil demand in Europe is expected to fall. In 2009, lower economic output across the region is expected to lead to oil consumption decreasing by 3 per cent to 14.7 million barrels a day. Beyond 2009, decreasing oil consumption in OECD Europe is not expected to be uniform. In key consuming countries such as Germany, France and Italy, substitution of natural gas for oil in electricity generation will reduce oil consumption. Falling oil consumption in western Europe is expected to be partially offset by increases in oil consumption in economies such as Hungary, Poland and Turkey, associated with increased demand in the transport sector as these economies develop.

OECD Asia consumption is projected to fall moderately from 8.1 million barrels a day in 2008 to 7.8 million barrels a day in 2014. Projected consumption growth in the Republic of Korea, Australia and New Zealand is expected to be offset by a reduction in demand from Japan. Korea’s growth in oil demand over the outlook period will be driven by increased consumption of naphtha which is used in its rapidly expanding petrochemical industry. In Japan, reduced oil consumption from the transport and electricity generation sectors is projected to be an important driver of overall oil demand. Demand for oil for electricity generation has been steadily decreasing and this trend is expected to continue, as increased quantities of gas and nuclear power are used. Over the past 18 months, oil consumption has been supported by reduced availability of nuclear power. Hence the availability of nuclear power over the outlook period represents an upside risk to Japan’s oil consumption.

Non-OECD demand to drive world growth

Non-OECD countries, including China, India and those in south east Asia, Latin America and the Middle East are projected to be important drivers of increased global oil consumption. In 2009, growth in oil consumption is expected to be considerably weaker than the average over the past five years because of sharply lower economic growth. Weaker commodity prices will limit the fiscal expansion of economies in the Middle East and Latin America to support economic activity in the short term.

Beyond 2009, stronger growth in most non-OECD economies will result in increased oil demand. In China, per capita incomes are projected to continue rising strongly throughout the outlook period, which will lead to increases in vehicle sales and air travel. China’s oil consumption will also be supported by a growing petrochemical industry and the manufacture of ethylene and propylene. In 2014, China’s oil consumption is projected to average around 10 million barrels a day compared to 7.9 million barrels a day in 2008.

In the Middle East, growth in oil consumption is projected to be underpinned by growth in the transport sector and petrochemical production. In a number of countries, such as Iran and Saudi Arabia increasing quantities of electricity is being generated using fuel oil. This trend is expected to continue, contributing to the growth of oil consumption at an average annual rate of 4 per cent a year to 8.8 million barrels a day in 2014.

World oil production to fall in 2009

In 2008, world oil production (including biofuels) averaged 86.5 million barrels a day, a 1 per cent increase from 2007. In 2009, world oil production is forecast to fall by 2 per cent, in line with consumption patterns. Growth in oil production is forecast to resume in 2010 and projected to reach 92 million barrels a day in 2014. Non OPEC production is projected to remain relatively flat at around 50.6 million barrels a day, while OPEC production is projected to grow at an average annual rate of 3 per cent.

Its all about OPEC

In 2009, OPEC crude oil production is forecast to fall by 6 per cent to 28 million barrels a day. The fall in OPEC supply reflects cuts to production quotas during the last quarter of 2008. It is also assumed that OPEC will again cut output at its March meeting given previous reductions have not had the desired effect on prices. The decrease in output quotas has resulted in OPEC spare production increasing to 4.4 million barrels a day during January and is expected to continue rising throughout 2009. Beyond 2009, OPEC production is expected to increase as it meets higher world demand.

The largest share of increased OPEC output will come from Saudi Arabia, where production capacity could reach 12.5 million barrels a day by 2014. New projects that will support increased capacity include Khurais (1.2 million barrels a day, commencing production in 2009), Shaybah (0.25 million barrels a day, 2009), Nuayim (0.1 million barrels a day, 2009) and Manifa (1.0 million barrels a day, 2012). In addition, the AFK (0.5 million barrels a day), Hawiayah (0.3 million barrels a day) and Khursaniyah (0.5 million barrels a day) projects commenced production during 2008 and will increase production towards capacity during 2009 and 2010.

In Iraq, there is potential for strong growth over the outlook period following an improvement in security and contracts being signed for new field developments and expansion of existing fields. This has allowed Iraq’s oil production to average 2.4 million barrels a day during 2008, an increase of 11 per cent from a year earlier. During 2008, a number of technical service agreements were signed with foreign oil companies and this could result in increased production of around 500 000 barrels a day before the end of the outlook period.

While the outlook for Iraq’s oil production has improved, further increases in output will depend on continued improvement in security, the availability of electricity and the enactment of the hydrocarbon law, which will allow foreign oil companies to enter into production sharing agreements.

There is considerable uncertainty about the outlook for growth in oil production in some other OPEC countries associated with sovereign and security risks. In Venezuela, high oil prices have encouraged the government to nationalise the oil industry, resulting in large write downs in assets for a number of multinational oil companies. With oil revenues expected to fall, in line with lower prices, the Venezuelan government is now encouraging foreign oil companies to re-invest in the development of its substantial heavy oil reserves. However multinational oil companies may now be reluctant to invest in Venezuela given the high level of sovereign risk associated with the government’s behaviour.

In Nigeria, there are plans to expand oil production capacity, however the industry remains prone to attacks from insurgents and field reliability. As much as 900 000 barrels a day of capacity (including natural gas liquids and condensate) could be developed during the outlook period. This would require an improvement in the current security situation, where the oil industry is often attacked by anti government forces.

Non-OPEC production

In 2009, non-OPEC production is forecast to average 51 million barrels a day, a one per cent increase from 2008. Increased oil production in the United States, Brazil and Caspian Republics will be offset by lower output from Mexico and the North Sea. The increase in non-OPEC production also reflects Indonesia’s suspension of its OPEC membership. From the beginning of 2009, Indonesia’s production will count towards total non-OPEC supply. Over the outlook period, non-OPEC production is forecast to increase at an average annual rate of 0.7 per cent a year to average 51.6 million barrels a day in 2014.

In the OECD, oil production is projected to decline over the medium term as field decline in Mexico and the North Sea offset production increases in the United States and Canada.

Growth in the US and Canada…

In the United States, growth in oil production is expected to come mainly from the Gulf of Mexico. A number of projects have been recently completed (Atlantis, Neptune and Thunder Horse), while Tahiti and Blind Faith are scheduled for completion in 2009. Increases in oil production in the second half of the outlook period will, in part, depend on the success of exploration and development of the sub salt resources in the Gulf of Mexico which are located in deep water.

The production of oil from Canada’s oil sands industry will be an important source of non-OPEC oil supply over the short and medium term. Canada’s oil sands reserves are estimated to contain the equivalent of 163 billion barrels of oil. Only Saudi Arabia has larger oil reserves, estimated by BP at around 264 billion barrels. Production from Canada’s oil sands could increase from around 1.3 million barrels a day in 2008 to 2.5 million barrels a day in 2014. The growth in output from Canada’s oil sands is important because Canada has low levels of sovereign and security risks.

There are a number of risks to the rapid growth of Canada’s oil sands production. Plans to increase production have expanded over the past two years, encouraged by high oil prices. However the International Energy Agency estimates that new production would require a crude oil price of US$80 a barrel to be economically viable. With oil prices having fallen significantly below this level, it is likely that the development of some projects will be delayed. In addition, oil sands production is greenhouse gas emissions intensive. As a Kyoto signatory, Canada is expected to sign on to binding targets at the next round of climate change negotiations in Copenhagen in late 2009. If Canada does impose binding targets, this would have implications for the oil sands industry.

…and Brazil and the Caspian Republics

Non-OECD oil production is projected to be an important source of non-OPEC production during the outlook period. Development of oil fields in Brazil, Kazakhstan and Azerbaijan are expected to underpin this growth.

In 2008, Brazil’s oil production (including ethanol) was around 2.3 million barrels a day. This is projected to increase by 2014 at an average annual rate of 6 per cent to 3.4 million barrels a day. In the first half of the outlook period, increased production will be underpinned by the completion of projects located offshore in the Campos Basin. These include projects due for completion in 2009 such as Jabuti (annual production capacity of 100 000 barrels a day), Marlim Sul 2 (150 000 barrels a day) and Frade (80 000 barrels a day) and in 2010 such as Chinook (100 000 barrels a day) and BC 10 (100 000 barrels a day).

In the second half of the outlook period, further expansion of production is anticipated, underpinned by the doubling of capacity in 2011 at the Marlim and Jabuti fields and first production from the Tupi field in 2013. The Tupi field is one of the most significant oil field discoveries in the last 20 years. It is estimated to contain 5-8 billion barrels and could ultimately support production of one million barrels a day. Developing the field will be challenging because it is located 7000 metres below the surface of the Atlantic Ocean including a 2000 metre thick salt layer.

Production from the Caspian region was an estimated 2.8 million barrels a day in 2008. The two main producing countries are Kazakhstan (1.5 million barrels a day) and Azerbaijan (0.9 million barrels a day). Over the outlook period, production in these two countries is projected to increase to 1.9 million barrels a day and 1.4 million barrels a day, respectively. There are two significant oil fields in the region; the Azeri, Guneshli and Chirag, (AGC) fields in Azerbaijan and the Kashagan oil field in Kazakhstan.

Production at the AGC fields commenced in 2007 and have the potential to collectively produce one million barrels a day of crude oil. In 2008 production was around 0.75 million barrels a day, but this could increase to full capacity in 2009 and be maintained throughout the outlook period.

The Kashagan project has been subject to considerable delays — initially scheduled to commence production in 2005, it is now scheduled for first production after 2012. At its peak production rate, the field could produce 1.5 million barrels a day, although this is expected to occur after 2014. The Kashagan field is assumed to produce at a rate of around 0.4 million barrels by the end of the outlook period.

Australian production and exports

In 2008-09, Australia’s crude oil production is forecast to total 27.9 gigalitres (465 000 barrels a day). The increased production reflects the start up of new projects in late 2008 such as the Vincent (annual capacity 100 000 barrels a day) and Angel (50 000 barrels a day) oil fields. Increased production also reflects improved production rates at a number of existing fields following technical difficulties during 2007-08.

In 2009-10, Australia’s oil production is forecast to decline by around 6 per cent to around 26.4 gigalitres. The only significant addition to production is expected to come from the Pyrenees oil field, which is scheduled to be completed during the first quarter of 2010. Despite the Pyrenees field being large by Australian standards (peak production of
96 000 barrels a day), production is expected to be offset by natural decline from mature fields. Australian crude oil and condensate production is forecast to increase by 8 per cent in 2010-11 to 28.4 gigalitres and by 2 per cent in 2011-12 to 29.0 gigalitres before declining moderately to 25.1 gigalitres in 2013-14. Contributing to increased oil production in the second half of the outlook period will be the development of new oil fields such as Pyrenees, Kipper, Crux and Turrum and expansions at existing oil fields such as Basker Manta and Gummy and the tie in of the Conniston field to infrastructure at the Van Gogh field.

Australia’s oil exports over the outlook period are projected to follow a similar profile to production. Exports are forecast to increase 8 per cent to 17.2 gigalitres in 2008-09 reflecting increased production in the Carnarvon and Bonaparte basins off the north west coast of Australia. Reflecting increased production in these basins over the outlook period, Australia’s oil exports are projected to peak in 2011-12 at 18.0 gigalitres before declining moderately to 15.8 gigalitres in 2013-14. It is assumed that a significant proportion of production from fields in the Bonaparte and Carnarvon Basins will be exported given their proximity to Asian refining markets.

The value of Australia’s crude oil and condensate exports is projected to increase to $9.9 billion in 2011-12 (in 2008-09 dollars) and then fall to $79.5 billion in 2013-14.

Oil fields in Australia

field

basin

capacity
(barrels a day)

start up

Skua/swift

Bonaparte

35 000

2009

Van Gogh / Coniston

Carnarvon

60 000

2009

Crux

Bonaparte

40 000

2010

Pyrenees

Carnarvon

96 000

2010

Basker/Manter

Gippsland

20 000

2011

Kipper

Gippsland

10 000

2011

Turrum

Gippsland

11 000

2011