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THE GLOBE AND MAIL: Report on Business
Oil market tightness is likely long term
By JEFFREY RUBIN
Monday, March 15, 2004
The Globe and Mail
( www.globeandmail.com )
If the depletionists are right, global production of
conventional crude oil should be peaking within the next
couple of years, at somewhere in the neighbourhood of
65 million barrels a day.
Recent production estimates from the International Energy
Agency show global oil production in January is already
well through that mark at 82 million barrels. But the
IEA numbers include eight million barrels a day of non-conventional
production such as oil sands and deep-water oil, and
another eight million to nine million barrels of liquefied
Strip out unconventional sources of supply, and crude
production is hovering around 65 million barrels, where
it has been for the past four years. Has the world already
seen the peak in conventional crude production?
Not only has conventional production not grown over
the past four years, but there is virtually no spare
capacity left among producers belonging to the Organization
of Petroleum Exporting Countries. Excluding the brief
period when Kuwaiti and Iraqi oil wells were ablaze during
the Persian Gulf war, OPEC has not operated with such
spare capacity -- 2.7 million barrels a day at present
-- in nearly 30 years.
You can call it just-in-time inventories or you can
call it what it really is -- Saudi Arabia running out
of reserves. In fact, some commentators such as Matt
Simmons of Simmons Associates believes the giant Ghawar
field, home to one-eighth of the world's known oil supply,
may be 80 per cent to 90 per cent depleted. Moreover,
Mr. Simmons notes that depletion from Ghawar, whose production
has already slowed despite massive injections of salt
water to maintain well pressure, is far exceeding the
discovery of replacement oil elsewhere in the kingdom.
The tightness in today's crude market is unlikely to
change unless there are major supply discoveries. Production
in most of the world's major oil fields has already peaked
and is now declining. For example, the United States,
which is still the third-largest crude producer in the
world, pumps out 25 per cent less oil than it did 30
years ago. And even the remaining reserves in the Middle
East may be substantially smaller than currently believed.
Just last month, Royal Dutch/Shell, the world's third-largest
oil company, cut its estimate of its global proven reserves
by a whopping 20 per cent.
Of course there is always the chance of finding another
Ghawar, and billions of dollars of investment go chasing
it every year. Considering that half of the world's oil
supply comes from the 100 largest fields, the challenge
of discovery is in the words of one geologist "a chase
for elephants, not squirrels." But it is more than disconcerting
that all 35 of the one-billion-barrel-plus oil fields
in Iran and Iraq were found between 1906-1979.
New discoveries are made, but newly found sources of
supply are trivial compared with the major finds made
60 or 70 years ago. For example, the much-anticipated
Arctic gas reserves are no more than the equivalent of
a medium-sized oil field. There have been no giant oil
field discoveries since the late 1960s and early seventies,
when the North Sea and Prudhoe Bay in Alaska were found.
Both are now well past their production peaks.
Economists will argue that higher prices will elicit
greater supply, but they are only partly right. Higher
prices cannot bring forth greater supply, if the supply
of cheap available oil no longer exists as it once did.
But economists are right to believe that as oil prices
rise, previously uneconomic sources of oil supply will
suddenly become economic to exploit. And if the depletionists
are right about a pending production peak for conventional
supply, it will be precisely the growth of non-conventional
oil production that will meet future energy demand.
It already has, having risen from just 2 per cent of
global crude production a decade ago to 11 per cent.
Nowhere has that growth been more dramatic than in Canada's
oil patch. Crude extraction from the Athabasca and Cold
Lake oil sands already accounts for one-third of Canada's
total crude production, and will soon account for more
than half. Similarly, the tar sands in the Orinoco basin
in Venezuela currently yield 400,000 barrels a day in
production. Since Venezuela's conventional crude production
has already peaked, tar sands represent a growing share
of that country's oil production as well.
However, non-conventional supply does not flow cheaply,
as the recent $2.1-billion cost overrun in the Syncrude
oil sands project attests. It requires steadily rising
energy prices to make its problematic economics work.
All the same, Syncrude's cost overruns are a lot easier
to swallow if conventional crude production begins turning
south. Based on the production numbers of the past half
decade, there is a good chance of that starting to happen
right about now.
Next week's column: How high will
energy prices and energy stocks rise?
Jeffrey Rubin is chief economist and chief strategist
at CIBC World Markets Inc.