The oil depletion balance sheet
Analysis in a flagship industry journal suggests the day demand for petroleum exceeds supply is not far off.
Every six months or so, a flagship oil industry trade journal, Petroleum Review, publishes an analysis of the oil industry's success rate in bringing new oil production to the market. The latest study appears in April's issue. Although you have to read between the lines to hear it, the whistle blows loud from the pages. The day that global demand for oil exceeds supply - the day when prices go through the roof and shockwaves reverberate through every market - does not seem to be far off.
The oil industry likes to boast when it finds oil. Boasting helps keep a company's share price up. By carefully studying the oil industry's boastful press releases, analysts like the editor of Petroleum Review, Chris Skrebowski, can chart the great majority of the oil that can be expected to enter the global market for well over a decade to come. This is because it takes an average of eight years, these days, from the moment you find oil to the moment it hits the refineries. Say you found a moderate-sized oilfield tomorrow. (That is not as easy to do as most people think.) Following industry norms, you would then boast about it as though you had found a new North Sea that would be filling gas tanks very soon. But the reality would be that your small contribution to world supply would not hit the market until around 2014.
This year, Petroleum Review's study counts all reported oil development projects of more than 50,000 barrels per day peak production capacity. Fifty thousand barrels a day of capacity amounts to a very tiny oilfield. Global demand today is 84m barrels a day. The bottom line in Petroleum Review's compilation is this: the industry will bring on stream an average of 3.4m barrels a day new capacity during 2006 from projects bigger than 50,000 barrels per day peak capacity. By 2010, assuming no slippage in the development projects in the pipeline - if you will forgive the pun - the industry will bring on stream about the same amount: 3.3m barrels a day. Is that good enough to meet rising demand and replace the oil lost by depletion? Not by a flying mile.
Consider the problem. Global demand will rise by 1.5m barrels per day during 2006, the industry estimates. According to the oil companies, global proved reserves are depleting at around 4m barrels per day of capacity each year. Let's be generous and assume that the companies compensate for around half that depletion with technological tricks to enhance recovery. Do the sums and you come up with 3.5m barrels per day as the amount of new capacity that would need to be brought on stream to meet demand-increase-plus-depletion during the year ahead.
The three-and-a-bit million barrels a day of new capacity that Petroleum Review sees coming in 2006 just about keeps the show on the road. But the 3.3m barrels per day by 2010? Forget it. A gap opens up between supply on the one hand and demand-increase-plus-depletion on the other, and gets bigger every year off into the future.
Of course, demand may fall. But tell that to the Chinese and Indians, whose rapid economic growth is fuelling much of the rising oil use. On the other hand, more hurricanes - literal and metaphorical - may descend on oil production facilities, impairing supply. Seventeen per cent of Gulf of Mexico oil production is still shut down in the wake of last year's most ferocious hurricanes, Katrina and Rita. That is more than a quarter of a million barrels per day of capacity. The new hurricane season begins June 1. Then consider slippage in bringing new oilfields on stream. Every time Petroleum Review has published its analysis, projects have slipped. The giant Kashagan oilfield in Kazakhstan, for example, was supposed to come on stream in 2005 when it was discovered in 2000. Today, it still hasn't produced any oil, and is not expected to until late 2008. Maybe. Global geopolitics permitting.
As for bombing Iran, and knocking out its 4m barrels a day contribution to global oil supply, that would tip the balance at a stroke.
Expect the markets to wake up to the crunch between rising demand and falling supply around 2008, says Chris Skrebowski. Press him and he will extend the bet to plus or minus two years. I agree with him
