Last month the International Energy Agency (IEA) released its annual long-term forecast, the World Energy Outlook (WEO). Its projection that US oil output would exceed that of Saudi Arabia within five years was featured in numerous headlines, although some of the report's other findings look equally consequential. That includes the continued strong growth of energy demand in China, India and other Asian countries, and the linkages between that growth and a dramatic expansion of Iraqi oil production. The agency also set a cautionary tone concerning the increase in global greenhouse gas emissions accompanying all this growth.
In the IEA's primary "New Policies" scenario, the US overtakes Saudi Arabia in oil production by 2017, adding 4 million barrels per day (MBD) of unconventional output, mainly from shale (tight oil) deposits such as the Bakken in North Dakota. US oil imports decline significantly, due in roughly equal measure to higher production and the implementation of strict vehicle fuel economy regulations. As a consequence, the need for imports from the Middle East approaches zero within 10 years. When this change is combined with the growth in oil demand in Asia, where China alone accounts for half the forecasted global growth in oil consumption in this period, the IEA envisions Asia becoming the recipient of 90% of Middle East oil exports by 2035.
The detailed assumptions behind the IEA's conclusions weren't provided in the public release. These include crucial questions such as the assumed status of US rules barring most crude oil exports. As noted in a Reuters op-ed at the time, maximizing the potential of US unconventional resources may depend on allowing higher quality unconventional oil to seek global markets, while continuing to import oil from Latin America and the Middle East into Gulf Coast refineries geared to these heavier, higher-sulfur feedstocks. The op-ed's author also reminded us that the natural gas liquids included in the headline comparison with Saudi production are useful but quite different from crude oil, yielding little gasoline and diesel fuel.
The expected growth of energy demand in China remains extraordinary, even with the country's economic growth slowing from the levels seen a few years ago. To put this in context, when Dr. Fatih Birol, Chief Economist of the IEA, presented the new WEO to the media in London on November 12th, he suggested that China's electricity demand would grow by the equivalent of "one US and one Japan of today" by 2035. Much of that additional electricity generation is projected to come from renewables, nuclear power and domestic gas. Nevertheless, and in spite of significant increases in China's unconventional gas production, the IEA forecasts that import dependence will grow from about 15% for gas and 50% for oil today, to 40% for gas and over 80% for oil by 2035. That increase in imports would equate to additional hundreds of millions of dollars per year of outflows for energy.
In the view of the IEA, much of the extra oil demanded in Asia will be supplied by Iraq, which they project will increase its output from around 3 MBD today to 6.1 MBD in 2020 and 8.3 MBD in 2035, in the process becoming the world's second-largest oil exporter, after Russia. Since the reserves to support that growth have already been identified, with much lower production costs than many other basins, the uncertainties involved are mainly political and structural. Resolution of the current standoff with Iran over its nuclear program would provide even more Middle East oil for Asian markets.
As in its earlier "Golden Age of Gas" scenario, the IEA expects large increases in global natural gas consumption. Unconventional sources, mainly in the US, China and Australia, would contribute around half the additional production required to meet expanded demand. However, at the launch presentation in London Dr. Birol also stressed that unconventional oil and gas are still at an early stage, with significant uncertainties about the eventual magnitude of their resources. This seemed to be a particular issue for the agency's post-2020 forecast of oil production in the US and gas production in China.
Despite the rigorous analysis and level of detail involved in producing the IEA's World Energy Outlook, long-term energy forecasting should always be taken with a grain of salt. Yet whether or not the highlighted trends mature precisely in line with these projections, the shifts that the IEA identified are significant and already becoming evident in current data for energy production, consumption and trade. Even if North America failed to become a net oil exporter--which many equate with energy independence--by 2030, the movement of the center of gravity of global energy trade towards Asia is essentially pre-determined: baked in by differences in economic growth rates and resource opportunities. The economic, geopolitical and environmental consequences of that shift are just starting to take shape.
A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.
Showing posts with label saudi. Show all posts
Showing posts with label saudi. Show all posts
Thursday, December 06, 2012
Thursday, September 06, 2012
What If Saudi Arabia Became an Oil Importer?
I've seen numerous references in the last several days to a Citgroup analysis suggesting that Saudi Arabia might become a net oil importer by 2030. The premise behind this startling conclusion seems to be that economic growth and demographic trends would continue pushing up domestic Saudi demand for petroleum products and electricity--generated to a large extent from petroleum--until it consumed all of that country's oil export capacity within about 20 years. Even if this trend didn't proceed to conclusion, its continued progression could significantly alter both global oil markets and the context for the current debate about the desirability of achieving North American energy independence.
I'd be a lot more comfortable discussing this news item if I had access to the report on which it's based. Unfortunately, none of the dozens of references to it that I found on the web included a link to the source, which is probably on one of Citi's client-only sites. The Bloomberg and Daily Telegraph articles seemed to be the most complete, with the latter including a couple of charts from the report. As best I can tell, the analysis falls into the category of "If this goes on" scenarios--extrapolations of currently observable trends to some logical conclusion. That doesn't make it simplistic, because I'm sure the author sifted through volumes of data to flesh it out. The fact that many oil-producing countries have gone through a similar cycle lends it further credibility. For that matter, the US was once an important oil-exporting country, until the growth of our economy overwhelmed the productivity of US oil fields early in the last century. The gradual conversion of the remaining oil exporters to net oil consumers is a basic plank of the Peak Oil meme.
This presents a real conundrum, both for the Saudis and for us, because although many of the means by which this result could be averted are obvious, they aren't all feasible within the current political situation in Saudi Arabia, or indeed many other producing countries. Start with per-capita energy consumption, which a chart in the Telegraph article shows to be higher than in the US. Consumption is also high relative to GDP. Energy efficiency opportunities should be ample, but it's hard to make those a priority when retail energy is heavily subsidized and thus cheap. The Citigroup report apparently suggests reducing energy subsidy levels, but that might lead to the same kind of unrest that we've seen in other countries that have cut subsidies. That seems to leave mainly investment-based options for substituting other energy sources for oil, to preserve oil for exports. The Kingdom has already embarked on some of these, including nuclear and solar power. When combined with additional natural gas development, the Saudis certainly have the means and the motivation to shift the current trend of rising internal oil consumption, along with the cash to fund the infrastructure investment involved.
This leaves us with important strategic questions: To what extent should our own energy policy rely on Saudi Arabia succeeding in preserving its oil export capacity by means of substitution or efficiency gains? And if internal Saudi consumption removed just another 2-3 million barrels per day of exports from the market, how would that affect oil prices and the functioning of the global oil market, in which Saudi Arabia has often acted as a moderating force within OPEC? Considering that a narrowing between demand and available supply of about that magnitude was a key factor in the oil-price run-up of 2006-8, this should cause us serious concern.
That brings us to US energy independence, a tired mantra that has been proclaimed by a long succession of US Presidents, despite most experts for the last several decades having regarded it as unrealistic. To be clear, when Americans speak of energy independence, we are referring to oil, because as a practical matter that's the only form of energy we import to any significant degree, if you don't count natural gas from Canada. Yet suddenly energy independence no longer looks like a pipe dream, because of the combination of resurgent domestic oil production and improvements in vehicle fuel efficiency. An earlier report from Citigroup sketched the outline of potential future North American energy independence based mainly on those elements. It's hardly guaranteed, but it's not a fantasy, either.
Despite the risks of a much more unsettled oil market in the future, I continue to see a great deal of misunderstanding about what energy independence could mean for the US. Although it wouldn't cut us off from the global oil market--perish the thought--it would give us a much more flexible and influential role within it, while taking advantage of the benefits of continued trade. No longer being a net oil importer wouldn't insulate us from future oil price movements--it's still a global commodity--but oil prices would be lower than otherwise as a direct result of the substantial additions to supply required to shrink US oil imports to near zero. Prices would be weaker even if OPEC slashed output to compensate, because the resulting increase in spare production capacity would still reduce market volatility. Moreover, while US energy independence would not preclude the possibility of future oil price spikes, the consequences of those would be very different. For starters, they wouldn't entail weakening our economy by transferring tens or hundreds of billions of dollars offshore. Most of the extra oil revenue would stay in the US, and a large slice of it would be captured by state and federal taxes and royalties. Contrast that with what happened in 2008, and is still ongoing to a lesser degree.
The Saudi analysis from Citigroup proposed a fascinating scenario, with many interesting implications, although I'd argue that it's also subject to the simple advice of Herb Stein that "If something cannot go on forever, it will stop." By coincidence, it's also relevant to the energy debate underway between the US presidential campaigns. Although it's highly uncertain that Saudi Arabia's oil exports will dry up by 2030, we shouldn't assume such an outcome to be impossible, any more than we should base US energy policy on the outdated assumption that it's impossible for us to come close to eliminating the need for oil imports from outside North America. It might be uncertain whether we have sufficient resources accessible with the latest technology to reach that goal, but it is essentially certain that the growing but still tiny contribution of renewable energy and the eventual conversion of the US vehicle fleet to electricity couldn't get us there for multiple decades.
I'd be a lot more comfortable discussing this news item if I had access to the report on which it's based. Unfortunately, none of the dozens of references to it that I found on the web included a link to the source, which is probably on one of Citi's client-only sites. The Bloomberg and Daily Telegraph articles seemed to be the most complete, with the latter including a couple of charts from the report. As best I can tell, the analysis falls into the category of "If this goes on" scenarios--extrapolations of currently observable trends to some logical conclusion. That doesn't make it simplistic, because I'm sure the author sifted through volumes of data to flesh it out. The fact that many oil-producing countries have gone through a similar cycle lends it further credibility. For that matter, the US was once an important oil-exporting country, until the growth of our economy overwhelmed the productivity of US oil fields early in the last century. The gradual conversion of the remaining oil exporters to net oil consumers is a basic plank of the Peak Oil meme.
This presents a real conundrum, both for the Saudis and for us, because although many of the means by which this result could be averted are obvious, they aren't all feasible within the current political situation in Saudi Arabia, or indeed many other producing countries. Start with per-capita energy consumption, which a chart in the Telegraph article shows to be higher than in the US. Consumption is also high relative to GDP. Energy efficiency opportunities should be ample, but it's hard to make those a priority when retail energy is heavily subsidized and thus cheap. The Citigroup report apparently suggests reducing energy subsidy levels, but that might lead to the same kind of unrest that we've seen in other countries that have cut subsidies. That seems to leave mainly investment-based options for substituting other energy sources for oil, to preserve oil for exports. The Kingdom has already embarked on some of these, including nuclear and solar power. When combined with additional natural gas development, the Saudis certainly have the means and the motivation to shift the current trend of rising internal oil consumption, along with the cash to fund the infrastructure investment involved.
This leaves us with important strategic questions: To what extent should our own energy policy rely on Saudi Arabia succeeding in preserving its oil export capacity by means of substitution or efficiency gains? And if internal Saudi consumption removed just another 2-3 million barrels per day of exports from the market, how would that affect oil prices and the functioning of the global oil market, in which Saudi Arabia has often acted as a moderating force within OPEC? Considering that a narrowing between demand and available supply of about that magnitude was a key factor in the oil-price run-up of 2006-8, this should cause us serious concern.
That brings us to US energy independence, a tired mantra that has been proclaimed by a long succession of US Presidents, despite most experts for the last several decades having regarded it as unrealistic. To be clear, when Americans speak of energy independence, we are referring to oil, because as a practical matter that's the only form of energy we import to any significant degree, if you don't count natural gas from Canada. Yet suddenly energy independence no longer looks like a pipe dream, because of the combination of resurgent domestic oil production and improvements in vehicle fuel efficiency. An earlier report from Citigroup sketched the outline of potential future North American energy independence based mainly on those elements. It's hardly guaranteed, but it's not a fantasy, either.
Despite the risks of a much more unsettled oil market in the future, I continue to see a great deal of misunderstanding about what energy independence could mean for the US. Although it wouldn't cut us off from the global oil market--perish the thought--it would give us a much more flexible and influential role within it, while taking advantage of the benefits of continued trade. No longer being a net oil importer wouldn't insulate us from future oil price movements--it's still a global commodity--but oil prices would be lower than otherwise as a direct result of the substantial additions to supply required to shrink US oil imports to near zero. Prices would be weaker even if OPEC slashed output to compensate, because the resulting increase in spare production capacity would still reduce market volatility. Moreover, while US energy independence would not preclude the possibility of future oil price spikes, the consequences of those would be very different. For starters, they wouldn't entail weakening our economy by transferring tens or hundreds of billions of dollars offshore. Most of the extra oil revenue would stay in the US, and a large slice of it would be captured by state and federal taxes and royalties. Contrast that with what happened in 2008, and is still ongoing to a lesser degree.
The Saudi analysis from Citigroup proposed a fascinating scenario, with many interesting implications, although I'd argue that it's also subject to the simple advice of Herb Stein that "If something cannot go on forever, it will stop." By coincidence, it's also relevant to the energy debate underway between the US presidential campaigns. Although it's highly uncertain that Saudi Arabia's oil exports will dry up by 2030, we shouldn't assume such an outcome to be impossible, any more than we should base US energy policy on the outdated assumption that it's impossible for us to come close to eliminating the need for oil imports from outside North America. It might be uncertain whether we have sufficient resources accessible with the latest technology to reach that goal, but it is essentially certain that the growing but still tiny contribution of renewable energy and the eventual conversion of the US vehicle fleet to electricity couldn't get us there for multiple decades.
Wednesday, April 11, 2012
Could Solar Power Boost Saudi Oil Exports?
How often have we heard that installing renewable energy sources like wind and solar power will improve US energy security and reduce oil imports? There are other reasons for promoting these technologies, but this one has little substance, because we generate less than 1% of our electricity from oil. Ironically, this logic looks much more relevant to the part of the world with the largest oil reserves and that accounts for the lion's share of global oil exports, the Middle East. This week's Economist reports that Saudi Arabia generates 65% of its power from oil, and the impact on its oil exports could grow dramatically as the country's population and economy expand. Other Gulf producers have similar profiles. The Saudi government's strategy to increase its use of nuclear and renewable energy could pay big dividends in preserving oil for exports, though the volumes freed up by such means wouldn't be cheap.
Saudi Arabia has set a goal of deriving 10% of its electricity from renewable sources by 2020. Solar power looks like the leading option, and a Saudi company recently announced a deal to build a plant to produce polysilicon, the raw material for many of today's photovoltaic (PV)cells. (Its output would likely be exported for some time, until the downstream value chain developed.) Saudi Arabia has tremendous solar potential, with much of the country receiving more than 6 hours per day of peak sunlight, on average. Based on recent electricity demand of around 200 billion kilowatt-hours (kWh) per year, it would take roughly 9,000 MW of PV capacity to achieve their goal. How much oil would that save, and at what effective cost?
With average Saudi power generation operating at 31% efficiency, according to a report by ABB, saving the oil used to generate 20 billion kWh would free up roughly 100,000 bbl/day for other uses, including exports. That doesn't sound like a lot for a country that's currently producing 10 million bbl/day, but it's the equivalent of a medium-to-large offshore oil platform. However, the more interesting aspect of this strategy is its cost, both in aggregate terms and in the effective cost of the oil it would release.
A recent report from Lawrence Berkeley National Laboratory estimated the installed cost of utility-scale solar power in the US last year at around $4 per Watt. Assuming current costs are 10% lower--module costs have fallen by more, but balance-of-system costs typically fall more slowly--that would result in a required investment of $32 billion at today's prices. That's about what ExxonMobil spent on its entire global oil & gas development program last year, which will presumably yield a lot more than 100,000 bbl/day of future production. Moreover, using NREL's simplified model for calculating levelized electricity costs from different technologies, the output of PV in Saudi Arabia at $3.60/W installed would cost around $0.13/kWh without subsidies. Using that same 31% efficiency factor for oil-fired power generation yields an effective cost for each barrel saved by solar power of $70. That looks cheap compared to current oil prices, but it's almost an order of magnitude higher than what many assume it costs the Kingdom to produce a barrel of oil today. Even if we assumed installed PV costs fell to $2/W before they're done, that's still around $40/bbl. If that looks attractive to them, what does it say about their other opportunities?
One way to address that without getting into thorny questions about peak oil is to consider the alternative of using gas-fired generation to displace oil from Saudi Arabia's power sector. The Kingdom has the world's fifth-largest natural gas reserves. At 264 trillion cubic feet they appear more than ample for the purpose, if developed. Even if gas from new fields cost $5 per million BTUs, the effective cost of the oil freed up by switching to efficient gas-fired combined cycle power generation would be about $25/bbl. And with recent trends showing the energy intensity of the Saudi economy getting worse, not better, the scale of the efficiency opportunity there indicates that the cheapest displaced barrels might be from investments in improving energy efficiency, rather than new generation of any kind.
I'm not suggesting that solar power has no place in Saudi Arabia's energy mix. If the technology makes sense anywhere, it is in sunny countries like this that rely on expensive fuels for most of their current generation. Yet as clever and appealing as the idea of using abundant solar energy to free up Middle East oil for export might sound, from both an environmental and oil-consumer perspective, the numbers suggest that it's probably not even their second- or third-best option for that purpose.
Saudi Arabia has set a goal of deriving 10% of its electricity from renewable sources by 2020. Solar power looks like the leading option, and a Saudi company recently announced a deal to build a plant to produce polysilicon, the raw material for many of today's photovoltaic (PV)cells. (Its output would likely be exported for some time, until the downstream value chain developed.) Saudi Arabia has tremendous solar potential, with much of the country receiving more than 6 hours per day of peak sunlight, on average. Based on recent electricity demand of around 200 billion kilowatt-hours (kWh) per year, it would take roughly 9,000 MW of PV capacity to achieve their goal. How much oil would that save, and at what effective cost?
With average Saudi power generation operating at 31% efficiency, according to a report by ABB, saving the oil used to generate 20 billion kWh would free up roughly 100,000 bbl/day for other uses, including exports. That doesn't sound like a lot for a country that's currently producing 10 million bbl/day, but it's the equivalent of a medium-to-large offshore oil platform. However, the more interesting aspect of this strategy is its cost, both in aggregate terms and in the effective cost of the oil it would release.
A recent report from Lawrence Berkeley National Laboratory estimated the installed cost of utility-scale solar power in the US last year at around $4 per Watt. Assuming current costs are 10% lower--module costs have fallen by more, but balance-of-system costs typically fall more slowly--that would result in a required investment of $32 billion at today's prices. That's about what ExxonMobil spent on its entire global oil & gas development program last year, which will presumably yield a lot more than 100,000 bbl/day of future production. Moreover, using NREL's simplified model for calculating levelized electricity costs from different technologies, the output of PV in Saudi Arabia at $3.60/W installed would cost around $0.13/kWh without subsidies. Using that same 31% efficiency factor for oil-fired power generation yields an effective cost for each barrel saved by solar power of $70. That looks cheap compared to current oil prices, but it's almost an order of magnitude higher than what many assume it costs the Kingdom to produce a barrel of oil today. Even if we assumed installed PV costs fell to $2/W before they're done, that's still around $40/bbl. If that looks attractive to them, what does it say about their other opportunities?
One way to address that without getting into thorny questions about peak oil is to consider the alternative of using gas-fired generation to displace oil from Saudi Arabia's power sector. The Kingdom has the world's fifth-largest natural gas reserves. At 264 trillion cubic feet they appear more than ample for the purpose, if developed. Even if gas from new fields cost $5 per million BTUs, the effective cost of the oil freed up by switching to efficient gas-fired combined cycle power generation would be about $25/bbl. And with recent trends showing the energy intensity of the Saudi economy getting worse, not better, the scale of the efficiency opportunity there indicates that the cheapest displaced barrels might be from investments in improving energy efficiency, rather than new generation of any kind.
I'm not suggesting that solar power has no place in Saudi Arabia's energy mix. If the technology makes sense anywhere, it is in sunny countries like this that rely on expensive fuels for most of their current generation. Yet as clever and appealing as the idea of using abundant solar energy to free up Middle East oil for export might sound, from both an environmental and oil-consumer perspective, the numbers suggest that it's probably not even their second- or third-best option for that purpose.
Tuesday, January 17, 2012
More Long-Term Pressure on Oil Prices
A pair of items in today's Financial Times could signal a longer run of high oil prices, even if Europe were to slip into recession and economic growth elsewhere slow. The first article (registration required) reported that Saudi Arabia has raised its target oil price to $100 per barrel, up from the $75 level that King Abdullah had previously endorsed as "fair." Meanwhile, Venezuela has announced that it would withdraw from a World Bank body for arbitrating contractual disputes, preferring them to be resolved within its own judicial system. That can't be welcome news for companies that had been considering new investments in the country's oil and gas sector. Taken together, these stories suggest both less future supply and a greater likelihood that OPEC would respond to any significant weakness in oil prices by restricting output.
With markets currently tense over the prospect that Iran might make good on its threat to close the Strait of Hormuz, the prospect of Saudi Arabia boosting output if necessary to keep prices from going much beyond $100/bbl must seem welcome, at least in the short term. But as the FT explains, the choice of that figure, rather than a lower one, reflects the fiscal realities of a broad group of Middle East producers. The Saudis, Iran, Iraq, and the UAE all require oil prices north of $80/bbl in order to balance national budgetary requirements. Considering that the cost of producing much of this oil is likely still in either the single digits or low double-digits, that is an extraordinary commentary on just how much these countries depend on oil revenues to fund the social expenditures that maintain their respective domestic status quos. So while Saudi oil minister al-Naimi may have intended his comment to convey a comforting price ceiling, it probably said as much about his government's view of where the floor should be. With UK Brent crude currently trading at roughly the same $111/bbl level that set a full-year price record last year, I'm not sure how many of us would find that reassuring.
The decision by Venezuela's dictator to exit the World Bank arbitration mechanism shouldn't have come as a surprise, with an estimated $40 billion in international claims outstanding for his past actions in nationalizing assets and arbitrarily altering contractual terms in a variety of industries. The recent ruling by the International Chamber of Commerce in favor of an ExxonMobil claim might just have been the final trigger. Yet despite the obvious expediency of such an exit, it seems grossly counterproductive in the context of a producing country that depends increasingly on foreign investment to stem a long-term decline in output. Since President Chavez punished his nation's oil industry by firing its most capable managers and engineers following a strike in 2002-3, Venezuelan oil production has fallen by at least 15%, and it only avoided a larger drop due to the contribution of the big Orinoco production and upgrading projects built by foreign firms such as ExxonMobil, Chevron, ConocoPhillips and Total--some of which are now seeking compensation for expropriation of assets and other grievances.
Requiring disputes to be resolved within a court system that has been stacked with Chavez loyalists hardly seems like the recipe for reducing political risk and reassuring companies that have already seen past investments turn sour. While companies that have too much at stake to leave will try to make the best of this, others would be well-advised to steer clear. However this turns out for the industry, the likely outcome for Venezuela is lower production in the future and even greater support for hawkish price policies within OPEC, to prop up the oil revenues upon which Chavez's redistribution policies depend.
Of course none of this guarantees high oil prices in perpetuity. After all, OPEC was unable to prevent prices collapsing to below $40/bbl in late 2008, though it did restrain output enough to get them back to around $80 within a year. However, both stories should remind us that in a world in which oil prices are set to suit producers better than consumers, our primary focus should be on actions and policies that enhance our energy security. That means substituting plentiful natural gas for oil and its products where we can, promoting conservation and efficiency, pursuing cost-effective renewables, and ensuring that we have access to as much oil from domestic and trusted international sources as possible. Rejecting the Keystone XL Pipeline, instead of committing to find a way to make it work while addressing reasonable concerns about it, would be nothing less than a gift to OPEC.
Disclosure: My portfolio includes investment in Chevron, which is mentioned above and owns projects and facilities that could be affected by these events.
With markets currently tense over the prospect that Iran might make good on its threat to close the Strait of Hormuz, the prospect of Saudi Arabia boosting output if necessary to keep prices from going much beyond $100/bbl must seem welcome, at least in the short term. But as the FT explains, the choice of that figure, rather than a lower one, reflects the fiscal realities of a broad group of Middle East producers. The Saudis, Iran, Iraq, and the UAE all require oil prices north of $80/bbl in order to balance national budgetary requirements. Considering that the cost of producing much of this oil is likely still in either the single digits or low double-digits, that is an extraordinary commentary on just how much these countries depend on oil revenues to fund the social expenditures that maintain their respective domestic status quos. So while Saudi oil minister al-Naimi may have intended his comment to convey a comforting price ceiling, it probably said as much about his government's view of where the floor should be. With UK Brent crude currently trading at roughly the same $111/bbl level that set a full-year price record last year, I'm not sure how many of us would find that reassuring.
The decision by Venezuela's dictator to exit the World Bank arbitration mechanism shouldn't have come as a surprise, with an estimated $40 billion in international claims outstanding for his past actions in nationalizing assets and arbitrarily altering contractual terms in a variety of industries. The recent ruling by the International Chamber of Commerce in favor of an ExxonMobil claim might just have been the final trigger. Yet despite the obvious expediency of such an exit, it seems grossly counterproductive in the context of a producing country that depends increasingly on foreign investment to stem a long-term decline in output. Since President Chavez punished his nation's oil industry by firing its most capable managers and engineers following a strike in 2002-3, Venezuelan oil production has fallen by at least 15%, and it only avoided a larger drop due to the contribution of the big Orinoco production and upgrading projects built by foreign firms such as ExxonMobil, Chevron, ConocoPhillips and Total--some of which are now seeking compensation for expropriation of assets and other grievances.
Requiring disputes to be resolved within a court system that has been stacked with Chavez loyalists hardly seems like the recipe for reducing political risk and reassuring companies that have already seen past investments turn sour. While companies that have too much at stake to leave will try to make the best of this, others would be well-advised to steer clear. However this turns out for the industry, the likely outcome for Venezuela is lower production in the future and even greater support for hawkish price policies within OPEC, to prop up the oil revenues upon which Chavez's redistribution policies depend.
Of course none of this guarantees high oil prices in perpetuity. After all, OPEC was unable to prevent prices collapsing to below $40/bbl in late 2008, though it did restrain output enough to get them back to around $80 within a year. However, both stories should remind us that in a world in which oil prices are set to suit producers better than consumers, our primary focus should be on actions and policies that enhance our energy security. That means substituting plentiful natural gas for oil and its products where we can, promoting conservation and efficiency, pursuing cost-effective renewables, and ensuring that we have access to as much oil from domestic and trusted international sources as possible. Rejecting the Keystone XL Pipeline, instead of committing to find a way to make it work while addressing reasonable concerns about it, would be nothing less than a gift to OPEC.
Disclosure: My portfolio includes investment in Chevron, which is mentioned above and owns projects and facilities that could be affected by these events.
Thursday, June 09, 2011
Do OPEC Meetings Matter?
Yesterday's meeting of OPEC in Vienna attracted extra attention because of disagreements between Saudi Arabia and Iran that extend well beyond the oil fields. The resulting impasse over increasing production to stem high oil prices and support a weakening global economy produced a much-quoted assessment from the Saudi Oil minister, Ali Naimi, who described it as "one of the worst meetings we ever had in OPEC." Yet while the events in the Middle East were at the forefront for most commentators, the outcome of the meeting seems understandable purely in the context of OPEC's own history and the current fundamentals of the market. I'm not sure why so many people appeared to expect OPEC to boost output in anticipation of demand that might not materialize.
I have followed OPEC meetings for nearly 30 years, though not always as closely as when I was trading oil and its products, the prices of which stood to rise or fall depending on what was decided in Vienna. My interest in this meeting went up significantly when I received a call inviting me to participate in a panel discussion about it on the Voice of Russia radio network yesterday afternoon. An hour or two of research revealed a global oil market that is currently well-supplied, with inventories in most developed countries running at fairly typical levels and inventories in the US actually on the high side of normal for this time of the year. That's pretty much the argument that OPEC's price hawks took into yesterday's session.
However, the Saudis and others arguing for higher quotas were looking ahead to the effects of summer demand, especially in rapidly growing Asia, and the buildup of inventories for the fall and winter heating fuel season. They--along with the IEA--anticipated demand growing faster than supply, particularly when the impact of the curtailments from Libya and Yemen are factored in. Such events are important because of the quality difference between the oil that's been shut in in those countries and the spare capacity elsewhere that's available to make up for it.
OPEC's main problem is that the outlook for the global economy has weakened in the last few weeks, and not just because oil has risen to above $115 per barrel, compared to its average of $80 or so last year. The stakes for them look even higher when you factor in a history that includes boosting production in the late 1990s to meet roaring demand in Asia-Pacific, only to see the Asian Economic Crisis slam demand growth in the region into reverse, sending crude prices tumbling from the $20s to single digits by the end of 1998. The doves within OPEC were focused on keeping prices below the level at which large chunks of demand were destroyed in 2008, while the hawks seemed willing to risk that outcome to avert a future price collapse and preserve the revenue they need to fund their national agendas.
The potential consequences for individual OPEC members are substantial. Consider Algeria, which exports about 1.8 million barrels per day. The difference between the current price and what they realized last year equates to more than $20 billion annually. That might sound small in the context of the current debate over trillion-dollar US deficits, but it's nearly 15% of Algeria's GDP. It's no wonder that smaller producers and others with limited capacity to increase output--and thus revenue--would drag their feet on agreeing to raise quotas for countries with spare capacity.
If it sounds like I'm rationalizing cartel behavior that would be illegal in the US, that's not my intent. It's clear to me that oil prices are significantly higher than they would be, because OPEC has chosen to produce around 2 million barrels per day less than it did in 2008. In part they've had to do that to accommodate higher non-OPEC production--think Brazil and Russia--along with rising biofuel production, without weakening prices. The consequences for US consumers are equally clear: Gasoline prices are still more than $1 per gallon higher than a year ago, and even ignoring the impact on diesel or jet fuel that translates into an additional drain of $100-150 billion per year that can't be spent on other goods and services that would contribute more to the recovery.
OPEC meetings do matter, because as long as OPEC possesses both spare production capacity and the discipline to withhold it from the market, it retains the power to control oil prices. If we want to understand the decision process of this group of countries that is always struggling to reconcile its own often-competing, but still broadly aligned self-interests, our assessment should focus on their issues more than ours, however much we are affected by the outcome. Yesterday we saw the price hawks stymie the efforts of those producers who are worried that if they squeeze consumers too hard, demand will fall back to the lows of 2009, costing them hundreds of billions of dollars per year in revenue. But if demand continues to grow, that was surely not the last word, and this debate must be revisited within a few months.
I have followed OPEC meetings for nearly 30 years, though not always as closely as when I was trading oil and its products, the prices of which stood to rise or fall depending on what was decided in Vienna. My interest in this meeting went up significantly when I received a call inviting me to participate in a panel discussion about it on the Voice of Russia radio network yesterday afternoon. An hour or two of research revealed a global oil market that is currently well-supplied, with inventories in most developed countries running at fairly typical levels and inventories in the US actually on the high side of normal for this time of the year. That's pretty much the argument that OPEC's price hawks took into yesterday's session.
However, the Saudis and others arguing for higher quotas were looking ahead to the effects of summer demand, especially in rapidly growing Asia, and the buildup of inventories for the fall and winter heating fuel season. They--along with the IEA--anticipated demand growing faster than supply, particularly when the impact of the curtailments from Libya and Yemen are factored in. Such events are important because of the quality difference between the oil that's been shut in in those countries and the spare capacity elsewhere that's available to make up for it.
OPEC's main problem is that the outlook for the global economy has weakened in the last few weeks, and not just because oil has risen to above $115 per barrel, compared to its average of $80 or so last year. The stakes for them look even higher when you factor in a history that includes boosting production in the late 1990s to meet roaring demand in Asia-Pacific, only to see the Asian Economic Crisis slam demand growth in the region into reverse, sending crude prices tumbling from the $20s to single digits by the end of 1998. The doves within OPEC were focused on keeping prices below the level at which large chunks of demand were destroyed in 2008, while the hawks seemed willing to risk that outcome to avert a future price collapse and preserve the revenue they need to fund their national agendas.
The potential consequences for individual OPEC members are substantial. Consider Algeria, which exports about 1.8 million barrels per day. The difference between the current price and what they realized last year equates to more than $20 billion annually. That might sound small in the context of the current debate over trillion-dollar US deficits, but it's nearly 15% of Algeria's GDP. It's no wonder that smaller producers and others with limited capacity to increase output--and thus revenue--would drag their feet on agreeing to raise quotas for countries with spare capacity.
If it sounds like I'm rationalizing cartel behavior that would be illegal in the US, that's not my intent. It's clear to me that oil prices are significantly higher than they would be, because OPEC has chosen to produce around 2 million barrels per day less than it did in 2008. In part they've had to do that to accommodate higher non-OPEC production--think Brazil and Russia--along with rising biofuel production, without weakening prices. The consequences for US consumers are equally clear: Gasoline prices are still more than $1 per gallon higher than a year ago, and even ignoring the impact on diesel or jet fuel that translates into an additional drain of $100-150 billion per year that can't be spent on other goods and services that would contribute more to the recovery.
OPEC meetings do matter, because as long as OPEC possesses both spare production capacity and the discipline to withhold it from the market, it retains the power to control oil prices. If we want to understand the decision process of this group of countries that is always struggling to reconcile its own often-competing, but still broadly aligned self-interests, our assessment should focus on their issues more than ours, however much we are affected by the outcome. Yesterday we saw the price hawks stymie the efforts of those producers who are worried that if they squeeze consumers too hard, demand will fall back to the lows of 2009, costing them hundreds of billions of dollars per year in revenue. But if demand continues to grow, that was surely not the last word, and this debate must be revisited within a few months.
Tuesday, April 12, 2011
What's the Alternative to Oil Sands?
I can recall when technologies like oil sands and coal gasification were commonly referred to as alternative energy, with the same high-tech aura now attached to solar power and advanced biofuels. Much has changed since then, not least our perspective on climate change and the greenhouse gases that contribute to it. It's no longer possible to consider Canada's oil sands production and the means of transporting it without a serious examination of the environmental consequences, both at the source and along its journey to market. However, while I understand that perspective, the reaction to the proposed Keystone XL pipeline seems disconnected from the reality that crucial supplies of Middle Eastern oil suddenly look much riskier than they did. We should certainly weigh the costs and benefits of oil sands carefully, but the missing element from this conversation is the question of what the alternative would be if we ruled out more oil sands imports.
This train of thought began with a sobering analysis of the energy implications of the unrest in the Middle East by Amy Myers Jaffe of the Baker Institute at Rice University in Houston. The challenge she highlights is much subtler than the risk of exports from countries like Libya being disrupted for a few months or even a few years. Existing spare capacity in other producing countries can cope with some of that, although a portion of that capacity is in other countries that could be just another domino or two down the road, while the rest is in Saudi Arabia, which might not be immune, either. Yet if the worst case is the disruption of exports, we have a substantial Strategic Petroleum Reserve to fall back on. Prices might rise significantly, but the prospect of no fuel at your local gas station at any price remains remote for now.
However, as Ms. Jaffe demonstrates, much of the incremental oil production capacity on which forecasters have been relying to meet additional oil demand over the next two decades, and to backstop declining production in non-OPEC countries, must come from the same region that is now in turmoil. And as the charts in her presentation show, revolutions--democratic or otherwise--rarely result in higher oil output. If new governments or chastened existing governments don't invest in developing that extra capacity, then Peak Oil won't just be a theoretical construct in geology; it will be a very real outcome in geopolitics, and one that strategic inventories like the SPR would be unable to mitigate.
We have had a tendency to view Canada as the Saudi Arabia of the north. Considering that we now receive more oil from there than from all the countries of the Persian Gulf combined, and that our NAFTA partner's proved reserves of 178 billion barrels are second only to those of the Kingdom, that's not unreasonable. As recently as 2002, though, Canada's oil reserves were under 6 billion barrels, before the oil sands could be booked as reserves in large quantities. Without its oil sands, Canada would be just another mature oil province with declining conventional output. The question of how rapidly to develop those resources, and whether to export their output outside North America to any significant degree, is currently a hot topic in Canadian politics. The pipeline to transport this oil to Kitimat, British Columbia for export to Asia seems to be subject to a similar debate to the one we're having in this country concerning the Keystone XL line from Alberta to the Gulf Coast. But what if these projects didn't go forward? A world without oil sands might have a little less in the way of greenhouse gas emissions, but it would also have much higher oil prices, and those prices would be more volatile.
So what are the alternatives to these "dirty tar sands", as environmentalists now invariably refer to them? Well, if you're been reading my blog for a while, you know that wind and solar power don't enter into this discussion, because very little electricity is used for transportation and very little oil is used for generating electricity, outside of the developing world and now post-Tohoku Quake Japan. If we don't have access to oil sands imports, then the only other near-to-medium term options for reducing our oil imports from less stable suppliers involve more domestic oil production, more efficient vehicles, and more biofuels production.
Unfortunately the latest Department of Energy forecast incorporating all of those options still leaves us importing nearly 9 million barrels per day of oil in 2025. Without a significant portion of it coming from Canadian oil sands, we will still be forced to rely on imports from places like Venezuela and the Middle East, some of which aren't much more environmentally sound than the oil sands production. And that assumes that all the domestic production in these plans actually materializes. Turning up our noses at both offshore drilling and oil sands is pretty much mutually exclusive. (Or for that matter, shale gas and oil sands, even though these are different forms of energy.)
As for biofuels, we've already got just about as much corn ethanol as we can handle for many reasons, and the more advanced variety has not been especially cooperative in turning up on schedule. Replacing the oil sands capacity that the proposed Keystone XL pipeline could deliver would require more than 23 billion additional gallons per year of ethanol, or 180% of last year's US ethanol output. That figure exceeds the entire 2022 cellulosic and advanced biofuel target under the federal Renewable Fuels Standard. Biofuels are an important part of our energy mix, but the time when they could make oil sands crude unnecessary is still a long way off.
Americans are conflicted. We complain about $4 gasoline, and we're uneasy about another military intervention in the oil patch of the Middle East and North Africa, but then we throw obstacle after obstacle in the path of one of the few options that can provide us with a larger supply of reliable fuel from North America. No matter how sympathetic I am with communities that don't want the new pipeline to pass through or near them, or with concerns about the 17% increase in lifecycle greenhouse gas emissions that oil sands represent, compared to conventional oil, closing our border to additional imports of oil sands crude can only undermine US energy security, at the worst possible time.
This train of thought began with a sobering analysis of the energy implications of the unrest in the Middle East by Amy Myers Jaffe of the Baker Institute at Rice University in Houston. The challenge she highlights is much subtler than the risk of exports from countries like Libya being disrupted for a few months or even a few years. Existing spare capacity in other producing countries can cope with some of that, although a portion of that capacity is in other countries that could be just another domino or two down the road, while the rest is in Saudi Arabia, which might not be immune, either. Yet if the worst case is the disruption of exports, we have a substantial Strategic Petroleum Reserve to fall back on. Prices might rise significantly, but the prospect of no fuel at your local gas station at any price remains remote for now.
However, as Ms. Jaffe demonstrates, much of the incremental oil production capacity on which forecasters have been relying to meet additional oil demand over the next two decades, and to backstop declining production in non-OPEC countries, must come from the same region that is now in turmoil. And as the charts in her presentation show, revolutions--democratic or otherwise--rarely result in higher oil output. If new governments or chastened existing governments don't invest in developing that extra capacity, then Peak Oil won't just be a theoretical construct in geology; it will be a very real outcome in geopolitics, and one that strategic inventories like the SPR would be unable to mitigate.
We have had a tendency to view Canada as the Saudi Arabia of the north. Considering that we now receive more oil from there than from all the countries of the Persian Gulf combined, and that our NAFTA partner's proved reserves of 178 billion barrels are second only to those of the Kingdom, that's not unreasonable. As recently as 2002, though, Canada's oil reserves were under 6 billion barrels, before the oil sands could be booked as reserves in large quantities. Without its oil sands, Canada would be just another mature oil province with declining conventional output. The question of how rapidly to develop those resources, and whether to export their output outside North America to any significant degree, is currently a hot topic in Canadian politics. The pipeline to transport this oil to Kitimat, British Columbia for export to Asia seems to be subject to a similar debate to the one we're having in this country concerning the Keystone XL line from Alberta to the Gulf Coast. But what if these projects didn't go forward? A world without oil sands might have a little less in the way of greenhouse gas emissions, but it would also have much higher oil prices, and those prices would be more volatile.
So what are the alternatives to these "dirty tar sands", as environmentalists now invariably refer to them? Well, if you're been reading my blog for a while, you know that wind and solar power don't enter into this discussion, because very little electricity is used for transportation and very little oil is used for generating electricity, outside of the developing world and now post-Tohoku Quake Japan. If we don't have access to oil sands imports, then the only other near-to-medium term options for reducing our oil imports from less stable suppliers involve more domestic oil production, more efficient vehicles, and more biofuels production.
Unfortunately the latest Department of Energy forecast incorporating all of those options still leaves us importing nearly 9 million barrels per day of oil in 2025. Without a significant portion of it coming from Canadian oil sands, we will still be forced to rely on imports from places like Venezuela and the Middle East, some of which aren't much more environmentally sound than the oil sands production. And that assumes that all the domestic production in these plans actually materializes. Turning up our noses at both offshore drilling and oil sands is pretty much mutually exclusive. (Or for that matter, shale gas and oil sands, even though these are different forms of energy.)
As for biofuels, we've already got just about as much corn ethanol as we can handle for many reasons, and the more advanced variety has not been especially cooperative in turning up on schedule. Replacing the oil sands capacity that the proposed Keystone XL pipeline could deliver would require more than 23 billion additional gallons per year of ethanol, or 180% of last year's US ethanol output. That figure exceeds the entire 2022 cellulosic and advanced biofuel target under the federal Renewable Fuels Standard. Biofuels are an important part of our energy mix, but the time when they could make oil sands crude unnecessary is still a long way off.
Americans are conflicted. We complain about $4 gasoline, and we're uneasy about another military intervention in the oil patch of the Middle East and North Africa, but then we throw obstacle after obstacle in the path of one of the few options that can provide us with a larger supply of reliable fuel from North America. No matter how sympathetic I am with communities that don't want the new pipeline to pass through or near them, or with concerns about the 17% increase in lifecycle greenhouse gas emissions that oil sands represent, compared to conventional oil, closing our border to additional imports of oil sands crude can only undermine US energy security, at the worst possible time.
Friday, July 18, 2008
Farewell to $4?
The price of oil on the New York Mercantile Exchange has dropped $15 per barrel in less than a week, bringing us the first closing price under $130 since June 5. It is premature to suggest that this marks the start of a major correction back to sub-$100 territory, but it's noteworthy that this appears to be happening largely due to the weakening of demand, particularly in the US, where gasoline sales are now down around 3% compared to the same time last year--even more if we adjust for the additional ethanol being blended in under this year's higher Renewable Fuel Standard target. If the oil price stabilized here and refining margins remained weak, the national average retail price of gasoline would shortly drop back below $4.00/gallon. Although that wouldn't mean we'd never again experience prices that high, it would be very interesting to see how a return to the mid-to-high $3 per gallon range would affect consumer psychology.
At the very least, this week's drop should deflate some of the recent oil market hysteria, which was making $200 oil and $6 or $7 gasoline seem like an immediate inevitability, on the strength of little more than self-fulfilling prophesies and jitters about a possible conflict with Iran--something that has had the market on edge since oil was under $50. But while that other mainstay of expensive oil, demand growth in the developing economies, continues apace, the market cannot for long ignore a 3% aggregate drop in petroleum demand from a country that still accounts for nearly a quarter of the world's oil imports. Small fractions of large numbers can have a big impact.
Refiners remain caught in the middle, as they have been for most of the last year. With demand responding to high prices and the soft US economy, refiners are making very little money turning oil into gasoline. Weak demand has forced them to absorb a large chunk of the recent increase in oil prices. Nor does it seem likely they will be able to hang onto more of the margin as oil prices drop, because US gasoline inventories are building at the rate of roughly 2 million barrels per week, despite refiners shifting their operations to produce record quantities of diesel, partly at the expense of gasoline output. Refiners have room to increase crude runs, but at these margins, they are probably better off maximizing distillate and purchasing any gasoline shortfall abroad. But while these conditions have benefited consumers in the short run, they could set the stage for higher product prices in the longer term, by making the economics of refinery expansions less attractive.
After Hurricanes Katrina and Rita, there was a spate of concern about the nation's refining system. No new refineries had been built since the 1970s, and too many were concentrated along the Gulf Coast. All that talk came to nothing, but the exceptional margins that existing refineries were earning for several years kicked off some significant refinery expansions, including the Motiva and Marathon projects in the Gulf Coast that will effectively add the equivalent of a brand new refinery inside the boundaries of two existing facilities--a model currently under consideration by some nuclear plant operators.
Now, this might seem like an odd time to build more refining capacity, with demand falling and over a third of the country convinced that we'll get most of our energy from renewable sources within a few years, according to a new API/Harris Interactive survey. But even if we don't end up using more oil in the future, the kind of oil US refineries can process matters greatly in the global market. Although some analysts are skeptical that Saudi Arabia can deliver on the sustained output increases they have promised, one of the main reasons the market has largely yawned at the prospect of another 2 million barrels per day of Saudi crude is that much of the incremental oil will be of low quality--just the kind that these refinery projects are designed to handle. If refining margins don't recover soon, projects like this could be slowed down or deferred, and additional heavy, sour crude oil production will have less impact on the global price of oil--and that would affect us all at the gas pump.
In the meantime, no one should become complacent, even if average gasoline prices soon fall below $4 for a while--though probably not in California. Global supply and demand remain pretty tightly balanced, and we're now never more than one or two events away from a big spike in oil prices or refining margins. While we might soon spend a bit less at the gas pump, we'd be better off pocketing any savings, rather than turning them into a rebound in fuel demand.
At the very least, this week's drop should deflate some of the recent oil market hysteria, which was making $200 oil and $6 or $7 gasoline seem like an immediate inevitability, on the strength of little more than self-fulfilling prophesies and jitters about a possible conflict with Iran--something that has had the market on edge since oil was under $50. But while that other mainstay of expensive oil, demand growth in the developing economies, continues apace, the market cannot for long ignore a 3% aggregate drop in petroleum demand from a country that still accounts for nearly a quarter of the world's oil imports. Small fractions of large numbers can have a big impact.
Refiners remain caught in the middle, as they have been for most of the last year. With demand responding to high prices and the soft US economy, refiners are making very little money turning oil into gasoline. Weak demand has forced them to absorb a large chunk of the recent increase in oil prices. Nor does it seem likely they will be able to hang onto more of the margin as oil prices drop, because US gasoline inventories are building at the rate of roughly 2 million barrels per week, despite refiners shifting their operations to produce record quantities of diesel, partly at the expense of gasoline output. Refiners have room to increase crude runs, but at these margins, they are probably better off maximizing distillate and purchasing any gasoline shortfall abroad. But while these conditions have benefited consumers in the short run, they could set the stage for higher product prices in the longer term, by making the economics of refinery expansions less attractive.
After Hurricanes Katrina and Rita, there was a spate of concern about the nation's refining system. No new refineries had been built since the 1970s, and too many were concentrated along the Gulf Coast. All that talk came to nothing, but the exceptional margins that existing refineries were earning for several years kicked off some significant refinery expansions, including the Motiva and Marathon projects in the Gulf Coast that will effectively add the equivalent of a brand new refinery inside the boundaries of two existing facilities--a model currently under consideration by some nuclear plant operators.
Now, this might seem like an odd time to build more refining capacity, with demand falling and over a third of the country convinced that we'll get most of our energy from renewable sources within a few years, according to a new API/Harris Interactive survey. But even if we don't end up using more oil in the future, the kind of oil US refineries can process matters greatly in the global market. Although some analysts are skeptical that Saudi Arabia can deliver on the sustained output increases they have promised, one of the main reasons the market has largely yawned at the prospect of another 2 million barrels per day of Saudi crude is that much of the incremental oil will be of low quality--just the kind that these refinery projects are designed to handle. If refining margins don't recover soon, projects like this could be slowed down or deferred, and additional heavy, sour crude oil production will have less impact on the global price of oil--and that would affect us all at the gas pump.
In the meantime, no one should become complacent, even if average gasoline prices soon fall below $4 for a while--though probably not in California. Global supply and demand remain pretty tightly balanced, and we're now never more than one or two events away from a big spike in oil prices or refining margins. While we might soon spend a bit less at the gas pump, we'd be better off pocketing any savings, rather than turning them into a rebound in fuel demand.
Subscribe to:
Posts (Atom)