Saturday Oil Report -- June 9, 2012

Oil prices continued to fall in the two weeks since my previous report. Brent is down about 7 dollars a barrel and Nymex WTI is down about 6 dollars.

Price charts from oil-price.net

I'm lowering the alarm level. There's no oil price shock in the offing. Maybe for years.

Oil Alarm Level — Yellow

There's no mystery as to why commodity prices have declined so dramatically—the global economy is crashing again. I wrote about that earlier this week in Here Comes Your 19th Nervous Breakdown, and I'm not going to cover it again here. I have found it amusing that many commentators have been quick to dismiss the general role of speculation in price setting now that oil prices have fallen. What they fail to notice is that it could not possibly be supply & demand fundamentals alone which pushed prices down so quickly over the last month (charts above). Speculative money is fleeing the commodity markets as the global economy stalls, so prices have fallen faster than they might have if only fundamentals were in play. Moreover, prices should never have been as high as they were back in March and April. Case closed.

Today I want to talk a bit about the upstream global oil industry. This story, which I've taken from the Oil & Gas Journal, is called Decisions due in 2013 on Wafra steamflood (subscription only).

Investment and technical decisions are due next year for what would be the world’s largest steamflood—in old Wafra heavy oil field in the Divided Zone between Kuwait and Saudi Arabia.

The decisions are expected to be made about July 2013 on whether to proceed with the project and what technology to employ, according to Hashim Al-Rifaal, chairman of Kuwait Gulf Oil Co., which manages Kuwaiti interests in Divided Zone production shared by Kuwait and Saudi Arabia.

Wafra has produced crude heavier than 22º gravity since the 1950s. Primary production has achieved a recovery factor of about 10%.

KGOC and Chevron Corp., which manages Saudi Divided Zone interests, conducted a cyclic-steam test in 1990, a 5-spot thermal-recovery pilot in 2005, and a 49-well pilot in 2009, Rifaal told the EOR & Heavy Oil Conference in Abu Dhabi.

A project complication is high salt content of the crude, he said.

In Colombia, heavy oil figures prominently in plans to raise oil production to 1 million b/d by 2015 and 1.3 million b/d by 2020 from 914,000 b/d in 2011, according to another speaker.

Adriano Lobo Alvarez, oil field manager of Ecopetrol, said heavy oil now accounts for about 40% of Colombian production. The state-controlled company produced about 720,000 b/d last year.

The heavy oil share will increase as total production grows, Lobo said, naming Chichimene, Rubiales, and Castilla as the main fields producing low-gravity oil.

Ecopetrol plans capital investments totaling $80 billion in 2012-20, he said. Of that, 87% will be for upstream projects as the company tries to boost oil and gas reserves by 6.2 billion boe. The total spending includes upgrades to help Colombian refineries process heavy crudes.

Arnaud Breuillac, president, Middle East, of Total, estimated recoverable heavy oil at 450 billion bbl worldwide, including 170 billion bbl in Canada. He called heavy oil potential in the Middle East “under-evaluated.”

He said Total estimates the 2010 breakeven price with internal rate of return exceeding 10% at $60-80/bbl, calling the upper figure the “floor for heavy oil.”

We can glean several insights into the future of oil from this short report, to wit—

• Producers are being forced into "heavy" oil projects as the world runs low on light, sweet crude. Heavy oil flows (measured in barrels-per-day) are much lower than those achieved in producing lighter crudes (measured by api gravity).


• Although Columbia has achieved a remarkable turnaround, they are more and more forced to produce heavy oil to keep production rates up. Their current target is 1.3 million b/d (barrels-per-day) by 2020, but they are producing 0.914 million b/d now. Thus it will take 8 years and an estimated 80 billion dollars to squeeze out another 400,000 daily barrels.


• Estimated global reserves for heavy oils are put at about 450 billion barrels, which sounds like a lot until you remove the tar sands sludge (170 billion), which isn't actually oil, and doesn't flow at all unless you bake it in situ, and wind up with 280 billion barrels, which amounts to about 10 years of global consumption for all types of oil.


• Total estimates the breakeven price (in 2010 at an IRR of 10%) for producing all types of crude oil is $60-80, and the upper figure ($80) is the floor for heavy oil.


• Steamfloods of older heavy oil fields like Wafra on the Saudi/Kuwaiti border are very expensive to carry out but do not achieve high recovery factors (10% of the original oil in place in this case.) Therefore it is hard to determine whether to actually go forward with such projects at this time.

One day in the perhaps not-so-distant future global deepwater oil production will peak and start to decline (graph below).

From Deepwater crude oil output: How large will the uptick be? (2010)

When offshore deepwater production peaks, total offshore production will decline, perhaps precipitously. Offshore production is already flat due to the decline of shallow water oil. Most crude oil produced in the deepwater is good oil, i.e. light, sweet crude. That oil will have to be replaced by heavy oils which do not support good flow rates and are expensive to produce. I think it is safe to conclude that the long-term future does not look bright oil-wise.

Well, that's my 2 cents for today. What will the price of crude oil be in 2 weeks? Prices appear to have already overshot to the downside, but who knows? The global economy is sinking like a stone. I have no idea where prices will be in 2 weeks.

Comments

[The Practician]

Just curious, Is there an inflection point when your "Oil Alarm Level" starts going up again if the price gets really low?

[Mike Roberts]

I recently managed to find prices of various grades via Bloomberg, and most are kept up to date. I haven't yet figured out how to collect that information in an easily accessible form but here is the link to the Tapis crude, which is at $106:

http://www.bloomberg.com/quote/APCRTAPI:IND/chart

[adam]

Your oil report has been really excellent. This particular situation now, with the falling prices and slow motion implosion of the Euro, makes me wonder if there is a hard ceiling on oil prices at some point. $200 oil seems less and less likely. The only thing about that, is that it means that a lot of "technically recoverable" oil and schemes like gas-to-liquids are almost certainly not going to fly, either. Peak liquids will come sooner if this stuff doesn't work. Oil sands, on the other hand, seem to be doing fine.

I really wonder how many steps down we can take before there is a fall. Or will it just be a gradual, year on year "things getting worse"?