Kazakhstan: Why some reserves are going untapped

[Graeme]

Why some reserves are going untapped

Under the original optimistic plans, nearly half a million barrels a day of crude oil should now be flowing from Kazakhstan's Kashagan field, which contains the world's largest untapped reserves.

Despite record crude prices, however, not a single barrel has made it out of the ground. Rather than stimulate production, the rising price of oil has actually contributed to lengthy delays with the Kashagan project.

The problems facing the Kashagan project are increasingly common in today's global oil industry. Despite a six-year runup in crude prices, which hit a record $110 (U.S.) a barrel last week, oil companies – both publicly traded and state-owned – are having difficulty keeping up with rising world demand.

There are myriad reasons for the surprisingly weak supply response to high prices: a paucity of major discoveries in the past several decades; the more costly and complicated nature of developing resources from unconventional sources like oil sands and deep-water fields; the rise of nationalism in resource-rich countries; and the innate conservatism of oil industry executives, who have been burned by oil price collapses in the past.


The UBS team, led by London-based analyst Jon Rigby, compiled a roster of major projects – those with expected production of more than 100,000 barrels a day – due to come on stream through 2015.

But relying on major projects won't meet that target. In the current year, the UBS analysts estimate new supply sources will produce 4.4 million barrels a day, but that figure drops to 2.9 million in 2009 and a paltry 1.7 million in 2010.

That suggests prices could ease this year, as new additions in Saudi Arabia and the former Soviet Union provide a cushion in the face of demand weakened by the global economic slowdown.

Thereafter, the market will tighten again as new production is unable to keep up with demand growth.

Among OPEC members, only Saudi Arabia – and new members such as Angola – have a large slate of new crude oil projects coming on stream in the near future.

Canada is well represented in the UBS list, with some two-dozen oil sands projects forecast to add 2.3 million barrels a day by 2016.

“You just see some deeply ingrained conservatism in what oil price forecast you use when you are pursuing future projects,” Mr. Kirsch said. “And I don't see that culture changing over night.”

theglobeandmail

[darren]

I'd love to get my hands on a copy of that UBS report mentioned in the article.... if the roster of projects coming on line after 2008 is indeed pretty thin, then Oil-Finder's argument is in trouble.... deep trouble.

It's not about reserve size, it's about flow. Period.

[OilFinder2]

This UBS report sounds like the same thing as the oil megaprojects accounting.


source

The reason why there are few big projects shown after 2012 is because it takes several years to plan such a project. The projects which will come online this year and next were largely planned ~5 years ago. But before that, little or nothing was known about them - often even to the companies producing them. In other words, if someone had made this same chart 5 years ago, it would have shown a paucity of projects coming online after 2006 or 2007. But in the meantime, a lot of projects were planned, which have since started to show up on the megaprojects list, so we now see a big spike in added capacity planned for this year and next.

[funzone36]

^ Isn't that a little misleading?

EIA:

Non-OPEC Supply. About 0.7 million bbl/d of non-OPEC supply growth is projected in 2008, revised down by 0.2 million bbl/d from the last Outlook. This change represents a revision to expected project schedules as well as a re-evaluation of decline rates at existing fields. Brazil is expected to account for about half of the expected gain in non-OPEC supply in 2008. Azerbaijan, Sudan, and Russia are also expected to record net additions to capacity, while the United Kingdom, Mexico, and Norway are among countries expected to experience declines. The pace and timing of non-OPEC supply growth will continue to be subject to possible delays in key projects. EIA’s Outlook incorporates an expectation of some further delays. As a result, uncertainty about non-OPEC supply growth introduces both upside and downside risk to our price outlook.

OPEC Supply. EIA projects that OPEC crude oil production will average about 32.2 million bbl/d during the first quarter of 2008, or about 0.6 million bbl/d above fourth quarter 2007 levels. The increase mainly reflects higher production from Saudi Arabia, Angola, and the United Arab Emirates. Based on EIA projections of consumption and non-OPEC supply, OPEC crude production is expected to average slightly above first quarter levels for the remainder of the year. If consumption rises more slowly than expected and OECD inventories climb relative to the 5-year average, OPEC members would be likely to consider holding their output below our projected level. Based on country plans, EIA expects OPEC crude production capacity to rise in 2008 by 1.2 million bbl/d and by 0.8 million bbl/d in 2009. OPEC’s non-crude liquids production is also expected to increase by about 0.3 million bbl/d in 2008 and by 0.8 million bbl/d in 2009.

http://www.eia.doe.gov/emeu/steo/pub/contents.html

[Twilight]

The reason why there are few big projects shown after 2012 is because it takes several years to plan such a project. The projects which will come online this year and next were largely planned ~5 years ago. But before that, little or nothing was known about them - often even to the companies producing them. In other words, if someone had made this same chart 5 years ago, it would have shown a paucity of projects coming online after 2006 or 2007. But in the meantime, a lot of projects were planned, which have since started to show up on the megaprojects list, so we now see a big spike in added capacity planned for this year and next.

And this is the way critical national infrastructure is run.

Paycheck to paycheck. Not knowing when and where the next one is coming from.

No-one knows what anyone else is working on, what the situation is going to be in five years, what the plan is going to be, whether some vital prerequisite they assume will be taken care of by someone else will actually materialise, and what spanner the government is going to drop next.

One day we are going to have a moment like this:

Shit, I thought you were going to take care of that.
You mean you didn't?
No. You were supposed to.
Oh shit.

Then oops, a country breaks for a year while everyone rushes to throw together a quick fix. Because as illustrated above, we have no data visibility on which to base any kind of plan. No kidding, a five year horizon on this stuff is what we have. Of course, the market only has to come up empty-handed once, and it will not matter what cornucopia is scheduled for later.

[OilFinder2]

^
That's not what I was talking about.

Let me do an example. Let's say a discovery is announced this year, perhaps Petrobras's rumored Sugar Loaf field. Let's say Petrobras finishes the drilling and testing this year and makes an announcement about it with some preliminary production plans, perhaps starting in 2015. Let's also say these plans will initially start at, say, 200K bpd and ramp up to 1 million bpd by 2020.

Now, why isn't this showing up on the megaprojects database right now? Simple: Because Petrobras hasn't announced it yet! But once Petrobras announces it, you'll see an extra little bump for the year 2015 on the megaprojects chart, rising up to an even bigger one by 2020 (assuming the megaprojects folks do their job).

In other words, you can't plan for something 5 or 10 years ahead when you don't even know it exists yet.

[Twilight]

In other words, you can't plan for something 5 or 10 years ahead when you don't even know it exists yet.

But we assume it will exist, for the purposes of planning something else. As the cushion of past discovery is depleted, we are not updating our infrastructure planning philosophy to account for the possibility that there may at some point be a lengthy gap in such additions with less than five years' warning. We are constantly striving for higher efficiencies of course, and achieving them, but consumption continues to grow and resilience to shocks continues to weaken.

What if the hopes we pin on our LNG import infrastructure end up resembling a cargo cult? What if we build the facilities only to see the gas shipped elsewhere following who knows what change in priorities? The risk of that may be small, but is it small enough to justify as much as 60% reliance on natural gas for electricity generation and 90% reliance on imports in 2020?

I understand there are perfectly sensible structural reasons why this information cannot be available on demand, but in order for such risks to be addressed, this has to be recognised as a vulnerability. There is too much complacency. If a rolling five-year window is what we have, we have to act accordingly. Instead we see Dodge RAMs on the streets and 42" plasma screens glowing behind every living room window as if we will never see any surprises.

[OilFinder2]

In other words, you can't plan for something 5 or 10 years ahead when you don't even know it exists yet.

But we assume it will exist, for the purposes of planning something else. As the cushion of past discovery is depleted, we are not updating our infrastructure planning philosophy to account for the possibility that there may at some point be a lengthy gap in such additions with less than five years' warning.

*sigh*

You still don't get it. What do you expect oil company executives to do? Do you think they should say, "The gods have spoken to me, and they have told me we will make a major oil discovery with 10 billion barrels in Labrador in the year 2017, so therefore we should start planning ahead for that now, and start building infrastructure in Labrador for this discovery starting right now. And the people doing the megaprojects Wiki should add a million bpd to their database starting in 2025, because the gods have told me this is when we will be able to produce that much oil from this discovery."

I mean - DUH! For something like this it's basically impossible to plan that far ahead, which is why right now there seems to be a paucity of projects coming online after 2012. That doesn't mean there won't be a lot of new projects coming online after 2012, it's just that it's too early to be able to make plans for something after around that time.

[AirlinePilot]

I mean - DUH! For something like this it's basically impossible to plan that far ahead, which is why right now there seems to be a paucity of projects coming online after 2012. That doesn't mean there won't be a lot of new projects coming online after 2012, it's just that it's too early to be able to make plans for something after around that time.

Really starting to show your true colors here Oil. Let me ask you something. Have you looked at the worlds oil discovery curve lately?
Take a look at long term and what that means for production.....

Historic oil discovery

[OilFinder2]

AP that issue has been discussed extensively somewhat early in my "Catalog of Oil Discoveries" thread. Might want to read through that.

[AirlinePilot]

I'll check it out.

[Twilight]

*sigh*

You still don't get it. What do you expect oil company executives to do?

Nothing.

I expect the people counting on them to deliver year after year to count on them a little bit less and less as time passes.

Those oil executives can only see 5 years ahead, and in some interval they will fail to bring home the bacon. And then the big cheeses of the next link in the chain will scratch their heads and say "Gee, we never expected that to happen."

You see, when you know your foreknowledge is limited by factors outside of your control, you do not have to attempt the impossible and increase it at all, you can use that information to adjust your planning so lack of early warning in that area does not become a serious problem. Such is one of the fundamentals of planning. A sound energy policy sees the application of such principles to minimise risk and dependency. I wish I saw more convincing evidence of it. Unfortunately we do seem to be headed in a direction where we will have to resort to prayer.