Coming oil production surge, led by US, risks price collapse

[OilFinder2]

Abundance aplenty.

Initial read
Highlight:

Oil production capacity is surging in the United States and several other countries at such a fast pace that global oil output capacity is likely to grow by nearly 20 percent by 2020, which could prompt a plunge or even a collapse in oil prices, according to a new study by a researcher at the Harvard Kennedy School.

The findings by Leonardo Maugeri, a former oil industry executive who is now a fellow in the Geopolitics of Energy Project in the Kennedy School’s Belfer Center for Science and International Affairs, are based on an original field-by-field analysis of the world’s major oil formations and exploration projects.

Contrary to some predictions that world oil production has peaked or will soon do so, Maugeri projects that output should grow from the current 93 million barrels per day to 110 million barrels per day by 2020, the biggest jump in any decade since the 1980s. What’s more, this increase represents less than 40 percent of the new oil production under development globally: more than 60 percent of the new production will likely reach the market after 2020.

Link to the Harvard Study is here, and the complete PDF document can be found here.

The future is now.

[Plantagenet]

Thanks OF2.----Very interesting and thanks for posting with info on this new report.



You win the prize for most prestigious link ----i.e. the Harvard Kennedy School site.

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The report claims that production from EXISTING oil fields will INCREASE over the next decade by using frakking. But most existing oil fields don't have the low permeability issues that frakking is useful in correcting.

Do you know of any large oil fields that are being reworked using frakking, with dramatic increases in production occuring as result? Is this actually going to happen?

[OilFinder2]

The report claims that production from EXISTING oil fields will INCREASE over the next decade by using frakking. But most existing oil fields don't have the low permeability issues that frakking is useful in correcting.

Not sure where you read that? The press release says:

Maugeri’s analysis finds that the gross additional production from current exploration and development projects in the world could produce an additional 49 million barrels per day by 2020, an increase equivalent to more than half the world’s current 93 million bpd. After adjusting that gross output increase for political and technical risk factors as well as the offsetting depletion rates of current fields, the analysis projects the net increase by 2020 to be about 17.5 bpd.

It says "current exploration and development projects," but that doesn't necessarily mean "current/existing oil fields." In fact, mostly it's not going to be those, I would think.

But, I haven't read the whole thing yet, maybe you saw something I haven't gotten to in the document?

[OilFinder2]

Ah, I think I found what you were referring to. From pg. 16:

What’s more, the application of shale extraction key-technologies (horizontal drilling and hydraulic fracturing) to conventional oilfield could dramatically increase world’s oil production.

IIRC the Saudis have been using some horizontal drilling and(??) frakking in some of their conventional fields. Maybe some of these are 'tighter' conventional fields and/or immediately surrounded by their source rocks?

There can be a pretty fuzzy line between conventional and non-conventional fields.

[ralfy]

A "surge" will require at least a 40 pct increase for the next two decades, as energy demand has to increase by around 2 pct per annum to maintain global economic growth, or according to the IEA, the equivalent of one Saudi Arabia every seven years.

Global oil demand will slow down because of lower birth rates for developed countries and more prosperity leading to the same for developing countries. In which case, the "surge" will be brought about partly by lower demand.

But lower birth rates were due to increased use of oil many times above what was saved through lower birth rates. At the same time, lower oil demand may mean not greater efficiency but a weakening global economy, as any surplus (or resource in general) is utilized for greater profits. Finally, one should also look at per capita oil production since population increase is raised, and that peaked in 1979.

If so, then we should expect financial speculation in non-conventional sources of energy, with the hope that higher prices will lead to profits to investors. However, if an economic slowdown leads to lower prices and demand destruction, then these energy producers will lose financially. That is, lower demand due to economic problems will affect the drive for increased production.

The report also looks at economic rates of return but not energy returns, e.g., the energy return of oil from Manifa compared to that from Ghawar. Given that, one can also look at the IEA assessment, which states a 9 pct increase rather than 20. (The catch is that it assumes lower depletion rates, such that conventional oil production flattens out.)

[ralfy]

Finally, in relation to the thread:

"Comments on Scientific American's 'Squeezing more oil from the ground'"

http://europe.theoildrum.com/node/5865

[Keith_McClary]

Will the marginal cost also collapse?

CIBC

[seahorse3]

Interesting article. I've only started perusing the main paper. It states the forecast is subject to considerable risks, one of which is recession. Economically, I tend to agree with the economists forecasting a recession or even a depression ad measured in credit availability. The paper notes $70 a barrel in current prices is needed to bring the new oils online. This gets to a concern I have that a depression, if the uber deflationists are right, according to this paper new production wood cease leaving the world to survive on existing fields declining at about 6% per year, meaning the economy and oil production decline in tandem.

[Pops]

The guy has a pretty impressive resumé – according to Wiki. As head of PR for Eni the big Italian oil co, he's been saying 'don't worry, keep driving' for years, this being the most recent installment.

Your kinda guty OF2, the more things change, the more his story stays the same.

[TheAntiDoomer]

Hey Pops, what's it like when your go outside and the sky is always dark grey?

[Pops]

Actually I enjoy whatever type of weather because I try to prepare for the good and bad. The difference between you and me is I carry an umbrella understanding that sometimes it rains, whereas you have an expectation it will always be sunny.

[pstarr]

The guy has a pretty impressive resumé – according to Wiki. As head of PR for Eni the big Italian oil co, he's been saying 'don't worry, keep driving' for years, this being the most recent installment.

Your kinda guty OF2, the more things change, the more his story stays the same.

Yeah, he has been pumping "endless petroleum" since before the oil crash. ("Oil, Never Cry Wolf: Why the Petroleum Age Is Far from Over" in 2004)

This is merely the latest chapter in the industry's tight-shale play book. It started with natural gas, continues with liquid petroleum, and who knows where it will end. Wanna buy sand? That play book was written in the casino. Pull in this investment suckers, fleece their deep pockets at $8 million/well drilling cost, tack on "expenses", and lead them out to the street for some freshing up. Rinse and repeat. Meanwhile the market is flooded with non-amortized oil, market prices declines, non-hyperbolic decline rate sets in, well-head cost inflate, cash flow dries up, and low-and-behold . . . so does drilling credit.

[rockdoc123]

Will the marginal cost also collapse?

at some point you would think it has to but probably not as fast or as far as price. In the past what we saw was the a price collapse resulted in a short order response from rig companies to lower their day rates, after a year or so the price on steel dropped somewhat. But through those periods salaries never decreased...yes there was a bunch of cutting to improve efficiency (doing less work you need fewer people) but manpower costs which are big part of the equation relating to marginal cost never came down on a per unit cost basis. Also I think that most of the competitive shale companies are at the bleeding edge of cost reduction already. Their business is all about managing costs and that is why they have been successful to date, so I suspect this time around you will see less drop in marginal cost.

This is why this particular price drop worries me. It seems clear that the US industrial economy and the consumer economy can't seem to function at $100/bbl and it might be they can't function at the cost of supply either. So when oil both becomes too expensive to get out of the ground at the same time it is too expensive to buy we have a big problem.

[Plantagenet]

The report claims that production from EXISTING oil fields will INCREASE over the next decade by using frakking. But most existing oil fields don't have the low permeability issues that frakking is useful in correcting.

But, I haven't read the whole thing yet, maybe you saw something I haven't gotten to in the document?

I'm still reading through it too. He mentions frakking older fields in the start where he is talking about different recovery rates in different countries, and his country-by-country review shows every single country on earth but 4 INCREASING oil production, including countries like Kuwait and UAE that don't have any new fields or shale-oil to frak.

I think he's counting on it, but after mentioning it in passing he doesn't elaborate this component of what he believes will be increased oil production from every country on earth (except four).

[OilFinder2]

^
Pretty much every nation that has had conventional oil production is going to have source rocks they can tap Bakken-esque. Maybe some smaller ones like Kuwait won't have enough land area for any source rock frakking to make much difference.

Having read over a little more of the document, he might be over-estimating the maximum production the Bakken can reach, but there are also a lot of plays I know of (including some I've started threads on here) that he's omitting. So those probably balance out.

There are also source rocks in other nations he seemed to minimize or omitted (such as the one in Siberia I started a thread on recently) that will almost certainly eventually see a lot of action. There's even one in Australia I'd been reporting on a couple years ago here, and I know of ones in Brazil, Argentina and parts of Africa that will probably some day see production. As I said, wherever there's at least some small conventional fields, there are source rocks that can be tapped. Of course some will be of better quality than others, but the sheer volume of these things will pretty much insure that large quantities of future production will come from these, and not just in the US and Canada.

[Lore]

^
Of course some will be of better quality than others, but the sheer volume of these things will pretty much insure that large quantities of future production will come from these, and not just in the US and Canada.

Yes, but will it be enough to offset conventional oil depletion and at what price? Not likely, since the cost and effort continues to increase over the return benifit.

[OilFinder2]

In the US, it is already beginning to offset conventional oil production.

Yes it's more expensive, but if you read through the report the guy does a reasonable job of explaining his position. Essentially, he's saying shale oil could do to the price of oil what shale gas did to the price of natural gas in the US. The important part is the timing. For reasons he explains, if a Big Price Crash occurs after about 2015, it won't be a big deal. If it occurs before that, it could crimp investment.

FWIW, I'm personally not sure about his time frame, but he could be right.

[Lore]

My personal bias aside, having worked for the Italians for more the 25 years of my career, I found they usually carry two sets of books. So, forgive me if I find another petroleum toady, let alone an Italian one, having much to be believed. Don't we get one of these MS articles about once a month now? Yet, when you look, the global oil production statistics still remain relatively flat.

My take is the 'gold rush' to fracking, at least here in the US, will last a few more years. Once the cheap leases are gone, the easy wells fracked and production starts to heavily decline from preexisting wells, another jolt of reality will shake the country as we gallop in circles to plug the depleation deficit right along with the rest of the planet.

[SeaGypsy]

It would be nothing short of a miracle if the USA can revert to 1970 and provide it's own oil needs, for any amount of time. The likelihood of going beyond that (to become "Second only to Saudi Arabia by 2020") is ludicrous, not to mention the complete lack of ELM forsight.

[meemoe_uk]

I concluded at least a year ago the market price of oil will likely see a collapse around 2015-2020. It only took this Harvard guy more than a year to catch up. Heck, it might have been one of my PO posts that set him off researching. Any mention of meemoe_uk in his references?

I Like the title ...
" The unprecendented upsurge of oil production capacity and what it means for the world "
Note the crucial word ' capacity '
Peakers don't like this word. The mention of capacity prompts the question " was the 2004 - 2010 plateau caused by industrial capacity or geological limit? ", the former answer being true, the later being the conclusion peakers want.

And his speculations are right. An axe hangs over all the 'alternate oil' industry. When market prices fall after the setup in the middle east is complete, they'll need help surviving.
One hope for such companies is if the world economic growth is fast enough, maybe it'll be worth keeping alternate energy source companies operating on 'standby' even while the new middle east oil satisfies the bulk of new world oil consumption.