Oil prices will rebound to $105 per barrel by 2012 due to the upcoming tightening of supply, a new study has found.

Oil prices will rebound to $105 per barrel by 2012 due to the upcoming tightening of supply, a new study has found.

According to a Morgan Stanley report, most of the scheduled incremental oil capacity from 2009 to 2015 is highly ambitious and unlikely to be achieved due to technical, financial and political setbacks.

This will result in tight spare capacity, one of the major reasons for price increases in 2005 until oil prices peaked last year.

Energy economists believe price rises in the past years revealed an oil market that has lost a great deal of its flexibility and capacity to deal with supply disruptions or large unexpected increases in global demand.

Spare capacity – or extra crude oil stored for emergency cases – is said to have helped offset large demand and supply shocks in the 1980s and 1990s. But this has dipped to record lows in recent years.

Current spare capacity is estimated at 6.7 million barrels per day (mbpd). Due to the slump in demand, this is enough to keep the market calm for the time being. However, Morgan Stanley estimates that by 2012, demand will increase by 2.7 mbpd during which time global production capacity will have fallen by 700,000 bpd. This will take the spare capacity down to 3.3 mbpd or less than four per cent of global oil demand.

"We see global spare production capacity staying ample through end-2010, before declining in 2011 and reaching 2007-2008 tightness by 2012," it said.

"While the high prices of 2004-2008 prompted a flurry of exploration and production activity, the payback for this activity is mostly lagged to 2012 and beyond."

The report, "Crude Oil: Balances to tighten again by 2012", said oil demand has dropped by two million barrels per day (bpd) this year but it will rebound by one million bpd next year and then grow by one per cent.

Even at this marginal demand growth level, it will still create a tight market due to a string of delays in oil producing states incremental output plans.

The bulk of the expansion projects are either expensive such as the Canadian oil sands; or technically extraordinarily challenging such as the Tupi in Brazil; or face geopolitical challenges, as in the case of Iraq, Venezuela, Nigeria and Kuwait.

If a significant portion of these supplies fails to materialise, global spare production capacity would be drastically reduced, it said.

"As inventories cannot be drawn on indefinitely, this scenario would entail prices moving markedly higher to ration demand," it added.


Saudi Arabia

Much of the incremental capacity and existing spare capacity comes from Saudi Arabia. Its spare capacity stands at 4.5 mbpd or nearly 70 per cent of the 6.7 mbpd of estimated global spare capacity.

Saudi, Opec's largest oil producer is the world's largest net oil exporter and second largest producer behind Russia. The kingdom, whose current Opec quota is 8.05 mbpd, is the only country in the Middle East that is poised to increase its capacity to 12.2 mbpd by end of next year, as per its target.

This relates largely to the ramp-up of new production at the massive Khurais (1.2 mbpd) and Shaybah (250,000 bpd) fields.

Morgan Stanley said a third of the new Saudi capacity in 2009 is likely to remain idled initially, although the Saudis have noted that production from these facilities could reach capacity within as little as 30 days if needed. It has now started commissioning its new fields with priority given to the small Arabian super-light field of Nuayyim. Although the field will only produce 100,000 bpd, it has a high gas-to-oil ratio of 800 cubic feet per barrel of crude – a welcome stream during peak gas demand in summer.


UAE

Abu Dhabi, which holds more than 94 per cent of oil reserves in the UAE is facing production challenges. The UAE's foreign partners, including Total, Shell, BP and ExxonMobil, are reluctant to invest in further idle capacity expansion at a time when they cannot sell what they produce (owing to production quotas) and are facing an uncertain outlook regarding the renewal of their concession agreements.

The cost and complexity of adding additional production from the UAE's maturing fields and diminishing reserves base, while sustaining high levels of resource recovery are also "discouraging", the report said.

Abu Dhabi National Oil Company (Adnoc) had originally announced plans to phase the increase of capacity from 2.85 mbpd to 3.5 mbpd by 2010, with follow-up expansions to raise production to 4 mbpd by 2015. The 3.5 mbpd deadline was later pushed back to 2012 and has now been delayed to an unspecified date, said Morgan Stanley.

Major incremental developments such as the Thamama G and Habshan 2 reservoirs in the Bab field and the Huwaila Field development totalling together approximately 390,000 barrels per day have now slipped beyond 2012.

A detailed Exxon study of the complexity of the Zakum reservoirs also calls into question whether production can be lifted by 200,000 bpd, while maintaining high levels of oil recovery and overcoming declines from the lower reservoir zones.

Adco, the UAE's offshore joint venture company with Shell, BP, ExxonMobil, Total and Portugal's Partex, had plans to increase the output of the Upper Zakum reservoirs in the Zakum field.

This development project had aimed to increase Zakum's output from 550,000 to 750,000 bpd. The Zakum Field reservoirs are carbonate rocks with shale separations and reefal developments. The complexity of the project and increases in cost estimates since its approval in early-2006 have now delayed completion from 2010 to beyond 2013.

"Such reservoir complexities are typical of UAE oil fields and put in doubt Adnoc's ability to increase production capacity without intense technical participation by the major international oil companies," the report said.

Other delayed projects include the offshore Hail and Bui Tini field developments, which were scheduled to deliver 50,000 bpd, the Quarriers Field (40,000 bpd) and the Bina Al Qumran Field (20,000 bpd).


Kuwait

Kuwait's original plans to invest up to $40 billion (Dh146.8bn) over the next 15 years to rehabilitate its oil sector and boost upstream capacity from 2.65 mbpd to four mbpd over the next 15 years also appear "unlikely".

Kuwait is aiming to produce 50,000 bpd of heavy oil by 2011 and 250,000 bpd by 2015 as part of plans to boost its total oil output to four mbpd by 2020. It has in 2007 struck a deal with Exxon Mobil Corp to produce heavy oil in the north of the Gulf state and aims to boost production to 900,000 barrels per day by 2020.

At the outset, the country appears to be on track with its projects. Industry data shows that Kuwait is also pursuing upstream projects. Investments in this sector have soared by seven per cent from $31.3bn in 2008 to $33.6bn in Jan 2009.

There would have been more investments if the country would open up to more participation from global oil firms but Kuwait, due to pressures from the parliament, remains unable to do so. "We would not stop any of our oil and gas projects, in fact all Kuwait Oil Company's (KOC) gas plans are on target," Mohammed Hussain, Deputy Chairman and Managing Director at KOC told Emirates Business earlier. "We are going to continue with these projects. And we are going to make ensure the security of oil."

However, the Kuwait State Audit reported in July 2009 that the government-owned KOC would not be able to achieve its strategic production increase owing to numerous delays in the implementation of specific projects in the northern oil fields and the construction of supporting infrastructure.

KOC now plans to increase its rig activity from 25 drilling rigs to 60 before 2011 but the concurrent increase in production remains undefined.

This, according to Morgan Stanley, is largely the result of the closure in early-2009 of technical service agreements with all major international oil companies. "KOC on its own will be hard-pressed to establish technical and organisational resources required to manage the major expansion programme," it said.

In recent months, KOC has focused on its large Burgan oilfield, where production challenges include severe water requirement, reservoir pressure declines, infill drilling requirements and remedial work-overs for older oil wells. "In order to sustain Burgan's capacity of nearly 1.43 mbpd and due to manpower limitations, KOC has had to defer other expansion in both the north and west of Kuwait," it said.

The absence of technical service contracts with the global oil companies has only served to compound these challenges, it added.


Iraq

Iraq's plan to increase production capacity by two mbpd to almost 4.5 mbpd within six years likewise appears "unachievable", says the report. The combined impact of the disappointing round one bidding process and the lack of centralised plans and supporting infrastructure for round two fields does not portend to a rapid increase in Iraq's production capabilities, it said.

Given ongoing declines within its mature reservoirs, the absence of investments over the past three decades, and continued domestic turmoil and tensions, any significant change in Iraq's production capacity is unlikely to materialise until 2014 and beyond.

The future development of Iraq's vast oil sector requires detailed and thoroughly integrated processes and capacity plans along with a supervising organisation that can address common issues and requirements.

Such a plan would provide the common infrastructure necessary to physically link current and future installations in one integrated value chain.

The establishment of a national oil company to fulfill such a role remains under consideration pending the election of a new parliament. In the meantime, issues such as the availability of critical support resources (massive supplies of processed seawater or compressed gas for reservoir pressure maintenance) remain on hold.


Iran

The report dubs Iran's expansion plans are "ambitious" too. Its target to achieve production capacity of 4.5 mbpd within the next four years and 5.3 mbpd by 2013-2014 has run into a variety of technical, financial and political problems.

The National Iranian Oil Company (NIOC) has, in the past, been confident it could achieve its objectives through in-fill drilling and work-overs of existing wells as well as the development of new fields such as Azadegan and Yadavaran. Smaller fields such as Paranj, Jufeir, Khesht, Mansourabad and West Paydar were also scheduled to supplement such capacity expansions.

Azadegan has more than five billion barrels of mostly heavy oil reserves across four reservoirs. Its expansion from 20,000 bpd to 260,000 languished for years owing to a reluctance of Japanese partner Inpex to violate US sanctions.

NIOC and CNPC have now signed a deal to increase Azadegan's capacity in two phases by 2013. These plans are slow to evolve owing to the extreme reservoir complexity and low commerciality of the heavy crude, which was originally to be shipped to a super heavy crude refinery in Khuzestan.

CNPC signed an agreement with NIOC in 2007 to develop the extensive Yadavaran field reported to have more than 17 billion barrels of heavy oil. This field also has technology issues and the targeted production capacity of 300,000 bpd may slip beyond 2012.

http://www.business24-7.ae/Articles/2009/9/Pages/15092009/09162009_675dc95d6a504a4883024898448a2282.aspx

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