Crude demand to increase, feed-quality changes in store

Dec. 6, 2010
World crude oil demand will exceed 87 million b/d by 2025, consistent with an outlook for a return to normal economic and petroleum-demand growth.

Geoff Houlton
Purvin & Gertz Inc.
Houston

World crude oil demand will exceed 87 million b/d by 2025, consistent with an outlook for a return to normal economic and petroleum-demand growth. Increases in global crude oil supplies will be required to meet this anticipated increase in demand.

Supply needs will be met by a combination of new upstream developments with strong contributions both from countries outside the Organization of Petroleum Exporting Countries and from OPEC-member countries.

The supply analysis in Purvin & Gertz's annual Global Crude Oil Market Outlook suggests a sufficient backlog of new developments will be well positioned to meet much of the near-term incremental increases in oil demand. Total production capacity from these new developments will likely exceed 15 million b/d by 2015 and can increase to as much as 25 million b/d by 2025.

These changes in global crude supply, however, will affect refining operations globally and test traditional trading patterns.

Decline in existing fields

Oil production from existing fields is currently near 73 million b/d. Although there are some anticipated near-term increases in existing production, most analyses expect overall global production from existing developments to decline. The rate of decline is specific to each field or petroleum system modeled. The net decline rate for the world's existing production, however, averages near 4.5%/year in aggregate, according to Purvin & Gertz estimates.

Near-term (2010-15) decline rates will likely be slightly lower than the long-term average in most regions, as projects to increase recovery rates either through small capacity expansions or application of enhanced oil recovery techniques are taken into account. More mature production regions, such as the North Sea or onshore US will decline more rapidly than other regions. Total North Sea production has declined at an overall rate of nearly 6%/year during the last 10 years, despite some recent new development in the area.

The outlook for US oil production decline is heavily predicated on activity in deepwater Gulf of Mexico, now that the drilling moratorium there has been lifted. The fallout from the Macondo incident is likely to result in longer lead times for permits and project approvals and potentially higher development costs for some producers. Other actions by regulatory bodies, such as instituting extensive procedural or liability requirements, could affect future development in the region.

Concerns for additional production declines from Mexico and Venezuela will also play into the balance of future oil supplies. Total oil output from Mexico reached nearly 3.4 million b/d in 2004, according to monthly petroleum statistics from Pemex, but the country now struggles to maintain current production near 2.6 million b/d. Pemex has focused heavily on stemming Cantarell field declines and has been successful in increasing production on neighboring Ku-Maloob-Zaap (KMZ) fields.

Adding to the country's oil output problems, other new projects have failed to hit expected production targets and mitigate declines from other basins. Given the current situation, the country faces major obstacles to finding more oil reserves and must explore uncharted territory (i.e., deepwater Gulf of Mexico) if it is to improve its long-term outlook for production.

Although there is considerable debate over the absolute volume produced, it is generally accepted that Venezuela's overall production has declined during the last several years. This has been attributed to a combination of factors, including operational issues in Orinoco heavy oil upgrading projects, increasing maturity of the country's conventional oil fields, and lack of investment necessary to maintain production.

The majority of Venezuela's oil production comes from either mature resource basins (such as Maracaibo) or extra-heavy crude in the Orinoco belt. Both types of fields require heavy investment just to maintain production capacity. There appear to be no near-term changes in investment strategy for the country.

It should be noted that efforts have been made recently to attract foreign investment to Venezuela, and despite the potential investment risks the latest rounds of bidding for Orinoco belt heavy oil projects (i.e., Carabobo and Junin blocks) appear to have been well received by industry and could provide the necessary investment and technology to reverse production declines over the long term. Agreements signed to date suggest the potential for an additional 2.0 million b/d of production capacity from the country in the next 5-6 years.

Several logistical and operational hurdles, however, could result in the projects' not meeting their expected commissioning dates. One such hurdle would include the remoteness of the proposed area for the projects, which will likely require significant upgrades to infrastructure to support the size of investments planned in the region.

New from non-OPEC, OPEC

Despite an outlook for decreasing oil supply from certain regions, Purvin & Gertz's analysis suggests major investment in new developments that will exceed declines from existing fields in addition to meeting near-term incremental increases in oil demand. The largest sources of new developments are in countries experiencing rapid growth in exploration and production. These include Brazil, West Africa, Iraq, Canada, and countries of the Commonwealth of Independent States (notably Kazakhstan and Russia; Fig. 1).

• Brazil has increased crude oil output by nearly 1 million b/d since 2000, while the number of identified new developments and discoveries continues to increase. At this pace, the country could very well become the largest producer of crude oil in Latin America by 2015, ahead of Mexico and Venezuela.

Much of this expected oil supply increase is from offshore success, both post and pre-salt, in the Campos and Santos basins. These areas will be the focus of much of this new development. Projects in Campos basin, such as Frade, Papa Terra, and Peregrino, are already producing or set to come on stream soon and the momentum will continue when larger projects from the Santos basin, including Tupi, Iara, and Guara, reach full scale.

• In Canada, crude oil production will increase steeply as the rapid rise in developments from oil sands (bitumen and synthetic crude oil) more than offset the decline in conventional crude oil. The ability to turn this potential into new developments will likely depend more on oil prices, project development costs, environmental uncertainties, availability of financing, and logistical constraints than other resources in the world.

With an expectation of a mostly favorable market environment, however, and a return to normal demand growth for crude oil, the outlook is for a gradual increase in production from new developments in Canada exceeding 1 million b/d in the next 5 years.

• Iraq has embarked on an ambitious plan to increase production from the country's vast oil resources. The government has publicly expressed its desire to expand production capacity of several existing oil fields and has aggressively secured licensing for several to this end.

Whether Iraq can successfully exploit its oil production potential to its fullest has yet to be demonstrated, but we expect that, despite major strides in oil output, production will grow too slowly to reach the government's planned 12.0 million b/d of capacity. Security concerns, constraints in logistics and export capacity, lack of skilled workers, and potential pressure from other OPEC members will likely combine to restrain output below the country's stated goals.

• In Nigeria and Angola, a proliferation of offshore production projects and new developments has fueled expectations of near-term production growth from these countries. Concentrating higher levels of production offshore may mitigate the effects of militant attacks on oil output over the long term.

Many announced new projects are in various stages of development in both countries. Ultimate development schedules will depend on maintaining operational security and how these increases in production may affect other OPEC members. Given the current pipeline of new developments for both countries, however, the combined oil supply capacity increases from them could exceed 1.0 million b/d in the next 5 years.

• In Russia, although oil output has leveled off during the last few years, the outlook is for continued steady gains in overall production.

Much of this incremental supply is likely to come from new frontiers in the country, notably Timan-Pechora and Eastern Siberia. Many of these new developments are coming about as a result of the Eastern Siberia Pacific Ocean pipeline, which will provide an outlet to market crude oil produced in the region, thus further stimulating developments from Eastern Siberia over the long term.

• Kazakhstan will be one of the largest sources of incremental non-OPEC oil supply in coming years and an important factor in overall world output. Only Canada has an outlook for larger non-OPEC supply growth than Kazakhstan.

The potential for new developments centers on three primary fields: Tengiz, Karachaganak, and Kashagan. New developments from the country will push overall output to nearly 2.5 million b/d by 2020. Prospects for continued development depend on ample export routes and pipeline capacity for the country's crude oil production.

Evolving quality

Based on the outlook for crude oil supply growth and the quality of those barrels relative to existing production, global crude oil quality is set to become slightly heavier and more sour over the next several years. The current global average quality of crude oil is about 32.2° API and 1.2% sulfur, Purvin & Gertz data show. By late this decade, the average crude oil produced in the world will be about 0.5° API heavier and contain nearly 0.05% more sulfur than current supply.

These changes are largely due to incremental crude oil supply being of lower gravity and containing more sulfur. Fig. 2 illustrates the current quality of crude oil marketed from each major world region. The size of the bubble is a relative indication of the amount of crude oil produced from each region.

The Middle East and Latin America are the two regions that have average crude qualities that are more sour than the world average. Significantly sweeter production from Africa, Asia, and the North Sea offset these crude oils.

Fig. 3 illustrates the expected evolution in world crude oil qualities as a result of incremental crude oil production from each region. With the exception of the CIS, incremental crude oil production will result in heavier crude supplies from each region, as indicated by the symbols in the negative API gravity change range (lower quadrants). There is a wider distribution in terms of sweet or sour crude oil by region.

The analysis indicates that the Middle East, Europe, and North America will see crude oil quality becoming progressively higher in sulfur, while Latin America, Africa, and CIS crude oils become sweeter. Expected crude oil qualities from developments in the Campos basin are heavy (i.e., <25° API) but with sulfur concentrations generally lower than more traditional supplies from Mexico or Venezuela. This results in the region shifting to heavier, yet sweeter crude oil supplies.

The largest net change in crude oil quality during the next 10 years will be in North America with a shift of 1.5° API gravity and nearly 0.2% higher sulfur content. This is due to the ramp-up in Canadian oil production, which is primarily heavy sour, displacing traditionally sweeter crude oil from the US.

Global impact

The global refining industry will continue to add considerable conversion capacity in the coming years, with world conversion capacity additions increasing by more than 25% from 2005 to 2015 in response to tighter conversion balances during the last decade (Fig. 4).

The additional capacity has contributed to poor global refining margins as a result of the precipitous drop in light-product demand worldwide. The gradual anticipated shift in heavy crude oil supplies will be a welcome relief to a market that has been requiring additional supplies of heavy oil.

The outlook for heavy sour crude oil supply is for consistent supply increases throughout the forecast period at an average of about 400,000 b/d/year. Initial production from new developments in Brazil and continued strong growth in Colombian output will compensate for declines from traditional Latin American heavy sour producers.

Canada will increase heavy sour production by more than 1.0 million b/d in the next 10 years as part of its oil sands developments. The Middle East will also contribute to heavy sour supplies with new development projects anticipated in Iraq, the Neutral Zone, and Saudi Arabia (Fig. 5).

High total-acid-number crude oil supplies, which are included in the estimates of total heavy crude oil, will see a near-term surge as new projects come on stream. Much of this increase will be from Africa.

Angola is poised to bring on new projects in Blocks 14 and 17, which are likely to be heavy and high TAN in quality. Sudan is also likely to continue increasing production of Dar Blend. Production increases from Brazil and China will also contribute to high TAN output increasing during the next several years.

These anticipated changes in incremental crude oil supply origination and quality volumes will affect trade flows throughout the world.

Declining onshore US crude production is being replaced by increasing supplies of heavy bitumen from Canada. This will result in a significant shift in crude quality for refiners, particularly in the US Midwest. Future uncertainty surrounding oil output from Mexico, Venezuela, and the Gulf of Mexico could leave many US Gulf Coast refiners searching for alternative supplies of oil. Projected developments in Brazil and other Latin America producers may fill this void, but other regions are also interested in acquiring new sources of heavier crude oil.

Developments along the new ESPO pipeline could strengthen Russia's importance in the growing Asian refining market. Contingent upon further stimulation and development of the East Siberia resource base and full expansion of the pipeline, the project is capable of being a important new source of crude oil supply for the region.

In addition, the project provides diversification for Russian oil producers from their primary domestic and European markets. The full utilization of the ESPO pipeline, however, will likely affect the availability of crude volumes to fill pipeline capacity heading west, bringing into question the sustainability of maintaining Russian volumes originating from Novorossiysk, Primorsk, or the Druzhba systems.

Crude oil output from other CIS countries could fill the potential shortfall in availability from Russia but will depend on how pipeline and other logistic constraints are addressed in the long term. Output from both Kazakhstan and Azerbaijan will increase rapidly in the coming years and be well positioned to backfill expected declining sources of crude supply for Europe, including the North Sea. The quality of these barrels, however, may limit their processing potential in the region.

China National Petroleum Corp. has been very active in the region, however, and in recent years has acquired operating interests in both Aktobe and Kumkol fields in Kazakhstan. Expansions to the Kazakhstan-China pipeline are under way to move more Kazakh crude oil to China. Further expansions or new pipeline projects could emerge that would diversify Caspian Sea exports to the east, providing additional crude supply to China's increasing appetite for crude oil.

Increased supply capacity from OPEC will remain strong in the coming years from the anticipated developments in Iraq, Nigeria, and Angola. The potential output from these projects is substantial and will likely depend on the strength of demand recovery as well as other OPEC members' reaction to any impending impact on their own output.

With an outlook for a growing surplus of crude oil in the Atlantic Basin, additional oil supply from these countries could be directed towards an increasingly competitive Asian market. Increases in trade flow from the Middle East and West Africa to Asia would potentially affect net crude oil flows eastward and corresponding East-West pricing differentials.

Future increments of additional crude oil supply will affect refiners globally as both quality and trade will be involved. How these trends evolve will be of major importance to refineries around the world, as these projected quality changes and shifts in trade patterns may affect operations, feedstock pricing, and future investments.

The author

Geoff Houlton (gahoulton @purvingertz.com) is a managing consultant in the Houston offices of Purvin & Gertz Inc. and leads the company's Global Crude Oil Market Outlook service. He joined the company in 1998 and has worked in Purvin & Gertz's Houston, Long Beach, and Singapore offices. He began his career in 1992 at Exxon's Baytown, Tex., refinery after receiving his BS in chemical engineering and petroleum refining from Colorado School of Mines.

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