Notes From “Oil Supply And Demand Symposium
Where the wallstreet suits look at Peak Oil without using the phrase (click here for conference web site). They are looking mainly at the next five years, but also out to the end of the decade.
QUICK SUMMARY: A quite valuable set of empirical data and expert opinion which mostly seems to be sincerely intended to bring a valid perspective. Very high density of valuable info to time spent. A good place to find the best expert advice, if you can afford it. I expect I will attend the next event sponsored by this event’s sponsors. I expect I will pay up for the conference proceedings.
The consensus outlook (with one outlier) is for liquid fuel production to plateau to the end of the decade. This will constrain economic growth, particularly in the OECD as the OECD sheds liquid fuel consumption to allow consumption growth in the Chindia and oil-exporter developing world. Unconventional oil (deep-water, arctic, tight-shale) all have significant geologic/geographical limits. They can be expected to support a limited duration liquid fuel plateau but are not big enough or can be brought online soon enough to support increasing production. Saudi Arabia needs $80/bbl to support its committed government spending and has stated that $100/bbl is the “fair” price they expect. This should support, apart from short term financial crisis-type demand drops, the price of oil.
The one outlier’s (Edward Morse, Citibank) bearish outlook on the price of oil is based on an assumption that nothing has changed and that recent high prices are due to industry underinvestment not due to limitations on available high energy return on energy invested available resources. This seems clearly incorrect from my perspective.
BUSINESS MODEL: This conference is sponsored by (with most of the speakers coming from) oil industry analysis consulting businesses. As such, I expected and got, I believe, their very best big-picture outlooks as they are trying to impress potential clients. I did not get (and did not expect) the proprietary detailed empirical data and opinion on special situations that are only available via much more expensive consulting arrangements.
MY NOTES IN-ORDER:
This is going to be good because Dr. Jeffrey Brown, originator of the Land Export Model is here, not as a speaker but as an attendee. I guy like this would only attend if there he expected something of value not available elsewhere.
I’m going cover the highlights of each speaker and whether they seem like someone worth following. I am paraphrasing and may not be completely accurate as I’m typing as fast as I can.
Edward Morse, Citibank – the short and long-term outlooks are bearish.
- North America is where production is growing fastest. Expects production increases to continue (no backup). Expects Mexico to starting growing based on deep-water (no backup). Without Mexico, expects North America to be a net exporter.
- Claims Chinese slow-down is substantial and will affect demand growth.Global recession could also impact demand.
- Claims in 2013, the US will stop importing light sweet crude. Land-locked Candian crude will be part of the difference.
- Sees long-tterm oil prices (end of decade) at $80 to $90.
- Dr. Brown is sceptical of Morse’s outlook.
- Fundamentally, Morse believes that the oil situation is cyclical and that a period of underinvestment is over. As investment goes up, production will go up. This is different from the Peak Oil thesis.
My overall impression: Lots of opinion with no data to back it up. Would like to read Morse’s his detailed material. Don’t forget, this guy is from one of the too-big-to-fails (can’t trust anything he says).
Mark Lewis, Deutsche Bank -
- Subsidies – very significant in OPEC countries. Also other exporters. E.g. Subsidies are something like 200B$ out of something like 3.5T$ total crude sales.
- OECD oil demand is falling. Developing is growing 40% per decade.
- Turn-down in OECD demand occurred after prices rose (i.e. after 2005).
- Exporters with subsidies have by far the highest per-capita consumption increase (Saudi, Russia, UAE, Venezuela).
- More and more of total production are Natural Gas Liquids (which have less BTU density), so growth of liquid fuel energy has not been growing as fast as you’d think just looking at volumes. There’s been almost no increase in petroleum liquids energy from 2005 on.
- Exports: 2000-2005 production increases were significant. 2006-2010 production fell while consumption grew. Crude oil (no NGLs) exports have been falling since 2005.
Overall impression – lots of backwards looking data. Not much forward looking. Seems more pro-Peak Oil than you would expect from a Too-Big-To-Fail bank.
Ray Leonard, Hyperdynamics:
Overall Impression: Seems like a guy worth following.
Tancred Lidderdale, EIA: Short-Term Energy Outlook
- Price forecast seems highly correlated to the difference between oil supply percentage growth and world GDP percentage growth.
Bill Knight: Shale/Tight Oil In The US And Abroad
- This started in 2002. Geology is important. Its a new kind of source rock.
- Bill Knight evaluates oil wells all over the world for acquisitions.
- Claims the US is unique as far as Shale Oil/Gas is concerned.
- There’s a big unknown about what happens after 6-8 years of depletion because the wells have not be around long enough to know. The evidence Bill has seen is that the sceptics are too sceptical and optimists are too optimistic.
- The price dictates how far apart the wells are which dramatically affects how much is produced.
- 70 to 80% of all oil in the world is in this kind of rock. Can technology get it out?
- With the rapid depletion of Shale Oil, you should get your money back in 3 years or don’t do a project.
- Internationally there have been only 40 shale wells drilled with no production. USA has 40K wells. NOTE: Exxon pulled the plug on Poland. Russian plays seem closest to the US.
Jason Stevens, Morningstar: Tight Oil
- Thinks US production Shale-Oil production grows to around 3.0 mbpd/year to 2015.
- Sees total US oil growing to almost 7 mbpd/year by 2020.
- NOTE: A pipeline is only built when producers will make a 10 year commitment.
Adam Bedard, Bentek: NGLs Supply Overview
- NG as an oil / NGL bypass is around 50% of US supply. Will this suppress NG prices indefinitely.
- NGL production is growing. They are not easily entirely convertible to liquid fuels, but rather are mainly used for petrochemical production. Expect a natural gas type price collapse for Natural Gas Liquids similar to what has happened for Natural Gas.
Jim Hamilton, academic with Federal reserve connections, Oil and the Economy:
- We have prior examples of a 5% oil production decline (oil embargo, Iranian revolution, Iran/Iraq war). The result was a recession in the USA.
- Also 2004 thru 2009 – flat production, rising prices. You would have expected increased production during this time. Production was short 10 mbpd relative to trend. 2008 recession contributed to by price rise.
- There have been 11 recessions post-ww2 with oil spike of some kind shortly before 10.
- Interestingly we lose much more in lost GDP output than the value of the lost oil. Puzzling for economists.
- If folks keep gas consumption steady, they cut back other spending. One economic model says the overall spending is delayed by 6 months and ends up being double the increased spending cost. In particular, consumer durables (especially cars) get crushed. ACTION: Consider shorting autos on an gas price spike.
- Actually, light cars were what got crushed in 2008 during the oil price spike. Lighter imports were ok.
- Consumer sentiment is most affected when new highs in gas prices are achieved (not going back to previous highs). E.g. not a big effect 2012 Q1.
- Summary: Thinks its the spike, not the absolute level that affects oil prices.
My impression: Typical economist who doesn’t get it, especially energy return on energy invested and the role of “spare energy” being needed to economic growth (increases in system complexity).
Steven Kopits, Douglas Westwood (consulting) – Arctic And Deeps Water
- Three periods of oil consumption. 1960 to 1970 – Motorization in the west. (2) 2nd oil shock (79-83) production capacity grew but consumption fell. While that extra capacity was used up (to 2005) we had the great moderation. (3) 2005 – motorization of the east, but crude oil is not really growing. We now see flat supply and increasing demand.
- No one (not even China) can afford the new price of oil (demand is steady or falling). The US can’t stand more than 95$ brent. China can afford $115 brent.
- So, OECD oil consumption is going to non-OECD. Non-OECD has locked out the US. Its non-OECD consumers (real-people) who are using the oil get more value from an incremental barrel of oil than an OECD consumer. .
- We don’t know what the price will be, but we know what it will do. It will move oil imports from OECD elsewhere.
- We can expect US economy to be fuel starved. 1.5% oil consumption fall per year to allow Chindia, etc. to have oil consumption growth. Economy should lag but can adapt to less oil consumption.
- Oil price can rise based on global GDP growth + inflation + efficiency increases. That’s around 7%/yr.
- Now to deep water. Gulf of Mexico deep water growth should be back on track by end of 2012. But planned projects do not increase production until at least 2020.
- Brazil wants to go 2 to 3 mbpd by 2015, but current production is falling. They are forecasting 10% growth but have never achieved that. Profits are down even after best oil price year ever.
- West Africa, good potential, but political issues.
- East Africa, lots of natural gas. Will result in liquefied natural gas exports.
- Makes the case that high oil prices will reval natural gas higher. ACTION: Get longer NG.
- Arctic – mostly gas. Norwegians are doing Arctic first. Nice finds, but not huge.
- Expects $105 /bbl support and global economy is supply-constrained. ACTION: Get longer oil now.
- Overall impression: Humorous, smart, insightful. Try to follow.
Javier Bias, Reporter Financial Times:
- OPEC is alive and well.
- (1) Moderates – $100 oil, Saudi, Kuwait, UAE.
- (2) Hawks – Iran, Venezuela
- OPEC countries need high prices to sustain current government expenses. Iran, Algeria are on the bubble. Saudi needs $80/bbl.
- Claims Saudi Arabia sets price and want $100/bbl now.
- Javier believes Saudi Arabia could do 12 mbbl/yr.
Mark Lewis, Deutsche Bank – Saudi and Opec Consumption
- OPEC consumption grew 4 times faster than rest of world (population growth was part of this). Saudi 28bbl/capita, US 23bbl/capita, Europe 10bbl/capita. NOTE: About 25% of Saudi consumption is industrial producing refined petroleum and petrochemical products for export.
- What’s driving Saudi demand? Its very hot, but there’s lots of green and sprinklers in Riyad. Oil is producing electricity for desalinization and air-conditioning. Population growth is really fast 20 to 33m from 2000 to 2020. Electricity production is 60% oil and 40% Natural Gas. Should stay about the same. Saudi Arabia doesn’t produce much gas. Additional Saudi Gas is high-sulphur and hard to reach.
- Lewis pretty much agrees with Javier Bias on how much money OPEC needs to break even. Russian and Nigeria need more, over $100/bbl.
Ray Leonard, Hyperdynamics: Russia
- Was VP of Yukos until it was destroyed by Putin.
- Ray saw the actual Yukos reserves estimates which were 119 Bbbl almost entirely in West Siberia.
- Secondary and tertiary recover could add another 83 mbbl in reserves.
- Still maintaining current production of oil seems feasible, although taxes leave partners un-interested.
- Shale oil could be a factor later on.
- There will be a need for significant investment from 2012 on.
James Henderson, Oxford Academic:
- Russian oil production has risen every year except on since 1998.
- Currently transitioning to harder to access oils.
- 400 to 500 B$ investment needed to maintain current production.
- There will have to be some tax breaks to maintain current production.
- The export tax is an impediment on new investment because there is no allowance for investment.
- Tax changes are negotiated ad-hoc, e.g. arctic different than east siberia.
- Oil is 64% of export revenues, 25% of GDP, big part of government revenues.
Trevor Houser, China Oil and Gas (Rhodium Group) – member of council on foreign relations (globalist elite)
- China demand increases are about half of non-OECD demand increases.
- 10% of oil goes to automobiles. The rest is for industrial including electricity production.
- Heavy industrial production oil consumption is falling from 25% growth year over year before the 2008 crisis and is trending down and is now around +10% yoy.
Hope you found this coverage useful. If you are interested, leave me a comment and I may find the time to put down my synthesized thinking on what this all means to me and others like me (USA baby boomers).