Reserves and Consumption

World Petroleum Reserves and Consumption

(This page is based on various presentations given by Chris Kendall and freely quotes data from information assembled by the Energy Information Administration of the DOE, (http://eia.doe.gov/) and the Wall Street Journal).

WHERE DOES IT COME FROM?
Petroleum (crude oil), like gas and coal, is a fossil fuel, so called since it formed in the geologic past. Petroleum, as with the other fossil fuels, is a finite resource. It is formed from the accumulation of pelagic plants and aquatic organisms in the oceans and in large lakes prior to and during continental break up. This organic matter cracks and forms petroleum after being buried and subjected to the elevated temperatures and pressure of the interior of the earth. The petroleum then migrates through the adjacent rocks and becomes trapped between sand and/or shells. Petroleum, like the energy sources of natural gas and coal, is a non-renewable resource.

WHERE IS PETROLEUM CURRENTLY LOCATED?
According to EIA on March 3, 2009 world-wide proven Reserves were estimated to be over 1,238.892 bbls of Crude Oil; 755.325 bbls of these Reserves are located in Middle East (mostly Arabian Gulf countries) and the remaining third or so of these Reserves are located on and around Africa, N and S America, Europe and the Far East. If the current rate of oil consumption (approx 87.1 mbls a day in 2010) is maintained then there are only 39 years of Reserves of cheap hydrocarbons left within the earth's crust. However if these Reserve estimates are extended beyond the more cheaply exploited sources of Crude Oil and Natural Gas, and include “Tight Oil” and "Tight Gas" ( produced as a result of hydraulic fracturing (fracking)) along with coal, Tar Sands, Oil shales and Methane Hydrate then it should be noted that that the use of these exploitable resources, though more costly to access than conventional crude and natural gas, may extend well into the next century. By how much remains to be seen but for sure world-wide proven Reserves are currently underestimated.

HOW BIG IS A BARREL?
Throughout the remaining portions of this page the word barrel is frequently used. This term is considered by some to be a confusing unit of measure. As the DOE indicate a barrel's capacity is often determined by those who use the term, and by what it contains.

For example:

1 barrel (bbl) of petroleum or related products represents 42 gallons.

1 barrel of beer (US, liquid) represents 31.5 (36 in Britain) gallons.

When a barrel is called a "drum" this is referring to a container that holds 55 gallons!

DOE suggest 1 barrel going over Niagara Falls is big enough to carry a man!

A Vital Statistic
(1,239 Million = 1.2 Billion) How long will the current world reserves last?
The numbers related to the expected rate of draw down of reserves given below are based on a current world consumption of 87 mb/day and an US consumption of  18.7 mb/day (2009). Thus since the current consumption of petroleum is rising by an estimated 3% per annum the figures are underestimated.

CLICK FOR CURRENT PRICE OF A BARREL OF OIL

Region

Estimated Reserves (billion)

Duration for consumption

Arctic National Wildlife Refuge (ANWAR)

15.6

834 days or 2.3 years (US)

Nigeria

37.2

5.4 years (US)

USA

21

3 years (US)

Exxon's prediction for expected discoveries for offshore west Africa

100

15 years (US)

Azerbaijan & Kazakstan of the Caspian regions

7

Just under a year!!US

Current estimated world proven reserves

1,239

39 years (World)

CRISIS WITH RESPECT TO CHEAP ENERGY FOR TRANSPORTATION AND HEATING

ENERGY OVERVIEW FOR THE USA

How is oil being used?

Percentage

Usage

43%

Gasoline

25%

Other Oil

19%

Distillate

9%

Jet Oil

4%

Residual Fuel

Major U.S. Oil Companies
ExxonMobil
ChevronTexaco
BP Amoco
RoyalDutchShell
USX
Phillips
Conoco

These companies handle such enormous capital that they now are forced to behave like conservative banks when it comes to risking their capital. Consequently they would rather purchase existing reserves than indulge in wildcat drilling for large oil fields. Similarly as these giants take over other companies and downsize, they release personnel essential for the labor-intensive environment associated with hydrocarbon discovery and its efficient production. This reduces their capability to make rational decisions on hydrocarbon prospects, fewer people to handle larger amounts of data.

It is an unfortunate fact that it takes from 7 to 20 years to see a return on the upfront investments required for hydrocarbon exploration. There is13 to 1 success ratio for a "wildcat" well and a 3 to 1 return on ones investment over 20 years; if very very lucky this may increase to 6 to 1.

CRISIS OF CONFIDENCE AND CRISIS OF ATTITUDE
While large companies become very conservative it is recognized to find large oil fields the risk envelope needs to be pushed; however the risks have become too big to do this!!! One probably would make a better investment in an insurance company where the return is instantaneous and up front, or a mom and pop grocery store?

Costs in 2000  (These have obviously risen)

Region

Cost/day

Total Cost

Comments

North Sea

$400k-$500k

$100m-$400m

Bad weather and seas

Gulf of Mexico

$100k

$50m-$100m

Good weather and seas

Onshore (<10,000 feet deep)


$1m

Add $600k for Xmas tree and piping for production to bring on line

Onshore (up to 20,000 feet deep)


$3m

Add $600,000 for Xmas tree and piping for production to bring on line

Too big to fail companies make decisions that have huge economic impact. So if they make a mistake the impact of any mistake is greater and since few people are involved in the decision-making it is easier to cover up this mistakes with the result a poor situation may be worsened. However if companies are smaller, there are more of them, and with the resulting more diverse attitude to exploration they spread the risk!! Let the mavericks go for it!!

Interestingly in 2007 HE Ali I Naimi Minister of Petroleum and Mineral Resources of Saudi Arabia indicated that the all-inclusive cost of production in Saudi Arabia was less than $1.50/b, while the global average cost was about $5/b and in some areas more than $10/b. Thus he noted that the costs for Saudi Arabia less than 10 cents per barrel to discover new reserves, while the cost in some other areas of the world can be as high as $4!!!!

HISTORY OF PETROLEUM EXPLORATION

Early exploration for hydrocarbons quickly developed monopolies (Rockefeller and his control of production and transportation of petroleum). Later at the turn of the century there was uncontrolled exploration and discovery of petroleum that lead to a free enterprise system which enabled the grand expansion of the USA industrialization and the demise of the railroad and the use of cheap transport and the motor vehicle. Today there is now a return to monopolies and the potential for stagnation.

The age of free enterprise associated with Petroleum exploration began at the start of the 20th Century in the USA when on January 10th 1901 Spindletop was drilled close to Beaumont Texas. The 1st three wells were capable of flowing 68 million barrels a year or 185,000 daily, the total Russian production. Spindletop produced more in a day than the rest of world combined. Exxon, Texaco, Shell, Gulf, Magnolia were founded as a direct result of the discoveries at Spindletop and Rockefellers grip was broken. Banking still tried to control the operation but they were unable to lease the complete acreage over Spindletop, with the result that wells were even drilled on the streets in blocks a few feet across. Uncontrolled free enterprise was precipitated and an every person for himself or herself attitude. This drove industrialization of the USA (cars became the mode of transport etc. etc).

Oil became the commodity for military success. Germany in the Second World War controlled the oil of Romania and had hoped to acquire Baku in Russia and the Persian Gulf (then in the control of the British Empire).

BP, an important agent of the British Empire, was active in the ME and retained control of the PG till the USA maneuvered themselves into Saudi Arabia. In 1933 Chevron acquired a lease to explore in the area and in 1938 Steineke found oil at the Dammam dome. In 1939 Chevron had production and exported the first oil, beginning the golden age of US involvement with foreign exploration for cheap oil.

OPEC countries
The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, in September 1960, to unify and coordinate members' petroleum policies. OPEC members' national oil ministers meet regularly to discuss prices and, since 1982, to set crude oil production quotas. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were members of OPEC, but Ecuador withdrew in December 1992, and Gabon followed suit in January 1995. EIA estimates the current eleven OPEC members account for roughly 40% of world oil production and about 77% of the world's proven oil reserves. Currently the Organization of Petroleum Exporting Countries (OPEC) is composed of the member countries of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Earlier in 2001 OPEC set a floor of $22 a barrel. The OPEC 10 was proactive in making production quota cuts in anticipation of market conditions that could weaken prices for its oil, particularly weakening oil demand. OPEC revised its projections of world oil demand growth downwards on concerns that global economies, led by the U.S., are weakening. EIA also lowered its projection for world oil demand growth to 1 million barrels per day in 2001, down from 1.2 million barrels per day in the previous Outlook, because of lowered expectations for world economic growth in 2001.

Not a single instance in 2001 that the price of the closed as low as $22 per barrel - the floor of OPEC's target. The OPEC 10 (OPEC minus Iraq) took the unusual step of agreeing to a 1 million barrel per day (b/d) quota reduction and Mexico would cut its oil exports by 70,000 b/d. OPEC has encouraged other non-member producers such as Russia, Norway, Oman, Angola and Kazakhstan to join its price support moves, but none has agreed to cut production!

However, now in 2012, EIA reports that now Saudi Arabia has new estimates that they need oil at $75/barrel just to balance the budget. The country’s oil minister wishes to stabilize prices at the $100/barrel level. Saudi Arabia has traditionally held the role of OPEC moderate while Iran and Venezuela have been hawks who favor higher oil prices. Saudi Arabia has always balanced its need for oil revenues with the knowledge that if left unchecked, high oil prices have tended to precede recessions.

Non-OPEC countries
Produced 60% of the world's oil in 2000. Of the top ten oil producers in the world in 2000, only three (Saudi Arabia, Iran, and Venezuela) were OPEC members. Non-OPEC oil production has been increasing steadily since 1993, with the United States, Russia, Mexico, China, Canada and North Sea countries Norway and the United Kingdom as the most prolific producers. Non-OPEC countries also possess most of the world's capacity for refining crude oil into petroleum products such as gasoline and heating oil.

Despite this wide diversity of world oil suppliers, OPEC does retain the majority of the world's proven oil reserves and controls a significant portion of world oil trade. Despite new sources of petroleum from the advent of access to tight oil and tight from fracking, still today about 80% of the world's proven oil reserves were held by OPEC countries. Many major non-OPEC oil producers are also very large consumers, resulting in very low exports (or, in the case of the United States, despite fracking, requires further imports to satisfy over 50% of domestic consumption). OPEC holds the vast majority of the world's excess oil production capacity, with total non-OPEC spare production capacity estimated at 500,000 bbl/d, most of which is attributed to down-time for maintenance. OPEC, especially Arabian Gulf OPEC members, has the world's lowest oil finding and lifting costs.

Non OPEC oil is liable to price collapse e.g. the ex Soviet Union is particularly vulnerable to this etc Never the less consumption grows 3% annually

Current causes of rising oil prices
Shortages related to increased consumption (China and India's increased energy needs and industrialization of third world)
Shortage related to lack of capacity to produce more (Saudi Arabia basic production rates at max, Russia's production rates falling, Nigeria's unofficial civil war, Iraq's continued instability despite the US's military withdrawal (expressed by pipe line breakage), the embargo against Iran, and a lack of refining capacity
Inflation of oil prices related to collapse of dollar's value (Fed interest rates, tie of the local currency of the Gulf States and that of Saudi Arabia to the value of the US dollar, inflated costs of drilling new wells, inflated costs of new drilling platforms)
Speculation on the future price of oil is affected by both US's concern for Iranian nuclear threats, Iranian naval small boats perceived to be interfering with shipping in the Gulf region, pipeline severance in Iraq and Nigeria and Columbia and Bolivia, Saudi Arabian storage of future production in ground rather than in holding tanks.

Alternatives to Cheap Crude Oil
Tight oil and tight gas (large capital expenditure) whose price of production is now competitive to oil
Tar sands and oil shales (large capital expenditure) whose price of production is now competitive to oil
Biofuels (large capital expenditure and maintenance) requires heavy government subsidies to maintain
Nuclear (cheap and efficient but carries negative baggage related to potential radioactive pollution as with the recent Japanese tsunami and in the past at Winscale (Selafield) in Britain, and the byproducts of nuclear weaponry associated with such countries as Israel, Pakistan and India) but price now competitive to oil
Hydro (cheap and efficient) but though price now competitive to oil but not enough capacity
Wind (large capital expenditure and maintenance) requires heavy government subsidies to maintain
Solar (large capital expenditure and maintenance) requires heavy government subsidies to maintain
Thermal energy from earth’s interior (large capital expenditure and maintenance) requires heavy government subsidies to maintain

CHOKEPOINTS

Over 30 million barrels/day pass through the relatively narrow shipping lanes and pipelines discussed below. These routes are known as chokepoints due to their potential for closure. Disruption of oil flows through any of these export routes could have a significant impact on world oil prices.

Chokepoint

Location

Oil Flow(mbd)

Strait of Hormuz (Persian Gulf)

Oman/Iran: connects the Persian Gulf with the Gulf of Oman and the Arabian Sea

15.4

Strait of Malacca

Malaysia/Singapore: connects the Indian Ocean with the South China Sea and the Pacific Ocean

9.4

Bab el-Mandab

Djibouti/Eritrea/Yemen; connects the Red Sea with the Gulf of Aden and the Arabian Sea Oil Flows

3.3

Suez Canal and Sumed Pipeline

Egypt: connects the Red Sea and Gulf of Suez with the Mediterranean Sea. The Sumed Pipeline transports crude oil northbound from Saudi Arabia and Iran.

3.1
Sumed: 2.2
Canal: 0.7

Bosporus/Turkish Straits

Turkey; this 17-mile long waterway divides Asia from Europe and connects the Black Sea with the Mediterranean Sea Oil Flows

1.7; 0.2 eastbound

>Russian Oil and Gas Export Pipelines/Ports

Eg Druzhba

1.25

Panama Canal and Trans-Panama Pipeline

Panama: connects the Pacific Ocean with the Caribbean Sea and Atlantic Ocean Oil Flows

0.6

These choke points point to the need for the major consumer of petroleum, the USA, to maintain some sort of military presence close to these areas.

And still we only have 1,239 billion of reserves that at 87 million/day, suggests there could only be some 39 years of production remaining. There are still substantial reserves of gas and coal but the age of cheap transportation driven by cheap oil are numbered!!!

Monday, April 22, 2013
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