World oil and liquids production could grow by 25%, says CERA

“This capacity growth would accommodate rising world oil demand so long as there are no major disruptions in the actual flow of oil, for political or other reasons,” says Daniel Yergin, chairman of CERA.

That could be a major “if,” say several oil industry analysts, who cite overriding geopolitical concerns in oil-producing regions such as the Middle East that could keep production down and prices up. One analyst believes as much as $20 of the price of oil can be attributed directly to political tensions that could impact supply.

Yergin says the current worldwide aggregate disruption in production is about 2.3 million barrels/day (mb/d), or about 2.5% of total world capacity.

“In this very high oil price environment, companies are diversifying into unconventional assets,” he says. “These unconventional liquids will loom increasingly large in the world’s oil supply - going from less than 25% today to almost 40% by 2015.”

CERA’s examination covered 250 new non-OPEC and 110 new OPEC development projects expected to start production by 2010. The analysis points to global productive capacity rising from 88.7 mb/d in 2006 to 110 mb/d in 2015.

“These levels of growth depend on continuing high rates of investment,” writes Peter M. Jackson, CERA’s director of oil industry activity, and Robert W. Esser, director of global oil and gas resources for CERA, in the report, titled “Expansion Set to Continue, Global Liquids Capacity to 2015.”

“The reference case includes assessments of the 10-year consequences of current disruptions and assumes that disruptions over the next 10 years will average more or less the same magnitude as the current level with similar impact,” Jackson and Esser explain. “Our focus is on physical capacity - not actual production, which can fluctuate for political, economic, or technical reasons.”

Despite the aggregate disruption of 2.3 mb/d of production because of disruptions in the Gulf of Mexico, Nigeria, Venezuela, Iraq, and on the North Slope of Alaska, total productive capacity continues to grow, according to the report.

“The ability of E&P companies to collectively grow production capacity at a rate allowing a comfortable supply-demand buffer that will absorb supply disruptions and manage these risks will be a critical factor in ensuring global energy security,” Jackson and Esser observe.

The aggregate disruption - and its impact on capacity as well as production - has been factored into the current CERA projections, along with the more rapid capacity increases registered in, for example, Angola, China, and Equatorial Guinea, and new gas-to-liquids (GTL) capacity.

“During 2000, unconventional liquids represented 16% of global capacity, and by 2006 this had grown to 24% of the total,” says the CERA report. “We expect this strong growth to continue to over one-third of total global capacity (38%) by 2015, especially if E&P companies believe that oil prices will remain high.”

Based on the report’s field-by-field analysis, Jackson and Esser conclude that the data reinforce CERA’s view that the specter of “peak oil” is not imminent, nor is the start of an “undulating plateau” pattern of supply capacity.

Contrary to common belief, the overall proportion of lighter liquids is expanding faster than heavy and extra-heavy crudes, according to the CERA report. Although the market seems to be very focused on heavy and extra-heavy crudes, there is a strong trend toward an expanding stream of light crude, condensates, and natural gas liquids (NGLs).

Jackson and Esser’s analysis indicates that extra-heavy oil productive capacity will more than double from about 1.9 mb/d in 2006 to 4.7 mb/d in 2015. However, this increase is dwarfed by the 4-times-larger rise in gas-related liquids capacity, from 15 mb/d to 26 mb/d during the same period.

Russia appears ready to shut out US firms

In a show of anger over President Bush’s failure to support Russia’s entry into the World Trade Organization, Russian President Vladimir Putin is expected to reject bids by US oil majors Chevron Corp. and ConocoPhillips to participate in a lucrative gas field development in the Barents Sea, near the Arctic Circle.

Putin’s snub of US oil companies is the latest sign of a deteriorating relationship between Washington and Moscow. It came after Bush decided to hold Putin’s feet to the fire over trade issues and alleged human rights abuses in Russia. Putin fired back at the US, claiming its human rights record is less than stellar.

The Russia leader is expected to favor Norwegian companies Norsk Hydro and Statoil over the American firms. Putin publicly praised the Norwegian firms that are competing with the US to develop the huge Shtokman gas field.

“You have probably heard that we are holding talks with several countries on the development of different fields, but companies from Norway are among the first on this list,” Putin remarked at a press conference during the G8 conference in St. Petersburg in mid-July.

He added, “They don’t go around with their noses in the air. They work objectively, very professionally.”

A final decision on awarding the contracts in partnership with Gazprom, the Russia’s state-controlled energy company, has been postponed for several months. The French company Total is also among those being considered to partner with Gazprom in the deal.

One analyst said that US chances of winning the bid now are “zilch.”

Wood Mackenzie forecasts $25 billion in planned drilling investments in Rockies

The Rocky Mountains will play an increasingly important role as a domestic resource for natural gas in the next five years, says Andrew Strachan, head of onshore US upstream research for Wood Mackenzie.

Speaking at the Colorado Oil and Gas Association’s annual Rocky Mountain Natural Gas Strategy Conference & Investment Forum in Denver on Aug. 8, Strachan said the Rocky Mountain region has played an ever-increasing role over the past decade as a key resource in offsetting the overall supply declines in other Lower 48 gas basins.

“Barring potential challenges, such as escalating recovery costs and rig availability, we forecast continued growth for this important region, including some 43,000 wells to be drilled from 2006-2010, totaling capital expenditures of nearly $25 billion,” said Strachan.

According to Wood Mackenzie research data, over the past 30 years, Rocky Mountain gas reserves have grown from 19 tcf to more than 57 tcf. Currently, the Rockies region accounts for more than 31% of the total Lower 48 proved gas reserves. It is considered a relatively stable and well-understood region with a low risk profile.

“The region has a compelling story to tell,” says Strachan. “Just 10 years ago, the Rockies area was not really on the industry’s radar. Conventional onshore gas production and offshore deepwater development in the Gulf of Mexico were assumed to be the key contributors to the future growth of US production.”

“In contrast,” he says, “our own forecasts show a substantially higher expectation for the Rockies over the next 10 years, primarily from unconventional resources.”

Strachan says the large resource potential is luring investment from companies looking to participate or increase their presence in a region characterized by impressive recovery rates and longer production life.

“One potentially limiting factor to bear in mind, however, is that as an increasing amount of Rocky Mountain gas supply is attributable to unconventional plays, the cost of supply is also increasing,” he notes. “Unconventional plays typically are deeper and tighter, requiring more advanced drilling and production technologies compared to conventional plays. Persistent cost escalations and lack of drillings rigs and crews could constrain producers from developing the Rocky Mountains’ full supply growth potential.”

He added, “In addition, the volume and pace of supply growth will largely be dependent on continued commodity prices staying above $5.00/mmbtu in the region - sustained long-term prices below this level will likely prompt a graduation reduction in investments.”

Wood Mackenzie believes, if historical trends continue, the region’s reserves could exceed more than 130 tcf by 2030. The firm forecasts that some 43,000 wells will be drilled between 2006 and 2010 by the largest 34 companies operating in the region. This averages somewhere between 8,000 and 9,000 wells per year for the next 5 years.

Analysts consider short-and long-term impact of Alaska pipeline closure

BP’s announcement Aug. 7 that it would be forced to shut down about 8% of America’s domestic oil production due to severe corrosion in large-diameter pipelines originating in Alaska’s Prudhoe Bay oil fields was met with concern by industry analysts, many of whom believe the shutdown could push gasoline prices to record highs. So far, that hasn’t happened.

Part of the reason is that BP, which operates the pipeline for a group that includes Houston-based ConocoPhillips and Dallas-based Exxon Mobil Corp., now says it won’t have to shut down crude oil flow completely while it fixes the corrosion problem. However, it will probably be months before the repairs are complete and full flow restored.

The US government moved quickly to intervene. US Energy Secretary Samuel Bodman immediately said his department will consider lending emergency supplies of crude oil to refiners caught short of supply following the shutdown.

OPEC also responded by saying its spare production capacity is more than adequate to take care of the shortfall resulting from the shutdown. “The organization will study the situation and react as appropriate,” said an OPEC spokesman.

Sreekanth Venkataraman, an energy analyst with Frost and Sullivan, told Oil & Gas Financial Journal that he believes the pipeline shutdown, combined with an uneasy truce in the Middle East, may cause the price of oil to jump to more than $80 a barrel in the next few weeks. He adds, however, that the incremental impact of the pipeline shutdown on oil prices will probably be minimal.

The long-term impact is another matter, says Venkataraman. As long as the US is able to meet its needs through the Strategic Reserve, the impact will not be significant. However, if environmental regulations are made stricter as a result of the pipeline leaks, potential investment in the Alaska region could be affected.

As far as the companies themselves are concerned, Venkataraman says to expect a slight drop in stock prices for BP, ExxonMobil, and ConocoPhillips, although this is unlikely to be long-lasting. Since BP has a recent history of similar problems, it will feel the greatest impact, he adds.

Finally, as the state legislature in Alaska debates an overhaul of state taxes on the oil and gas industry, the proposed $20 billion natural gas pipeline from Alaska to the continental US may come under increased scrutiny.

To date, BP has given no estimate as to how long the pipeline will remain partially closed.