Monday 28 October 2013

A couple of news stories that caught my eye...

Russia - China Import/Export Math (WSJ):

Last week China and Russia announced a JV deal between CNPC and Rosneft to expand E&P in Eastern Siberia. But the volume of supply deals is outlined here:
The two countries have signed agreements that would increase the amount of oil flowing from Russia to China by around 700,000 barrels a day from 300,000 barrels a day currently, prompting oil watchers to ask where the additional supply will come from.
Most of the oil fields in Russia’s biggest production center, Western Siberia, which accounts for around two-thirds of its output, are more than three decades old and in decline.
And the prognosis isn’t promising. Mr. Khaziev noted that no new giant fields have been discovered in Russia since the 1980s, and unless there are such discoveries, “it will be very difficult to replace the declines in production.” The country’s crude-oil output will peak in 2018-2019, by his estimate.
Another option is to reallocate. According to the IEA, Russia exported around 4.8 million barrels a day of crude oil in 2011, with nearly four-fifths destined for Europe and around one-sixth for Asia.

So a few dynamics at work here. In a sense oil consumption has always been zero sum, in that oil consumed by one country can no longer be consumed by another. However, the markets didn't really function that way. If one country saw an increase in domestic consumption, it could be purchased on the market (at fairly stable prices) without materially impacting other purchasers. With the oil price run up of the 2000's (indicating a tighter supply), the declining giants of Western Siberia, and the Chinese taking significant quantity of Russian oil off the market, European refineries and their consumers could be in for an increasingly difficult time.

The next story is a lead indicator at best, but the Saudi Arabia story is a curiosity for me. If we accept that Russia's maturing giants are in decline and/or America's resurgence has the potential to head for a "Run with the Red Queen", then the production of KSA is elevated to even greater importance.

Oil Service Boom in KSA (Reuters):
Industry sources in the Gulf said at least 160 rigs are currently deployed in Saudi territory and that the world's top oil exporter plans to raise its rig count to 210 by the end of 2014. Aramco declined to comment.
Sources said earlier this year that Aramco was planning a sharp rise in rig use to look for unconventional gas, while increasing oil drilling to help keep its spare production capacity at comfortable levels.
Now, it does seem plausible that the oil activity will be used to maintain a 2 million bopd spare capacity that the article cites. However, are these statements (from the article) consistent with what we've seen in the past decade?
The size of that capacity cushion, which helps dampen price volatility, is a frequent subject of speculation in the global oil market.
Saudi government officials fear that very high oil prices could destroy long-term demand for their biggest export product. Saudi Oil Minister Ali al-Naimi reiterated last month that the kingdom has an oil production capacity of 12.5 million bpd.
Production behavior as prices ran up from the historic bands (and KSA price targets) would suggest that a). the vaunted spare capacity is not as significant as suggested, b). KSA changed strategies in the mid 2000's, or c). KSA has wielded it's spare capacity/price stabilizer role to gain political clout.

My gut feeling is option b, while at some level option a is lurking. A drilling program aimed at expanding Natural Gas production for electricity generation is a logical move to offset rising domestic oil consumption. But the more interesting question is: what is the strategy of their new, more aggressive, oil development program?

Are they undergoing a full EOR program to maintain Ghawar production? Are they fully developing existing and producing fields? Are they exploiting new and/or shut in secondary fields? Are they doing all of the above? Will they actually shut in production after record breaking rig utilization? Could they be on a "Run with the Red Queen" and be using all of this activity to maintain current production levels?

The total production numbers, the amount of NG substitution for electrical power generation, and the ability of KSA to absorb future supply disruptions (ie. price stabilizing behaviors) will help us answer a few of these questions as KSA ramps up domestic E&P activity.

No comments:

Post a Comment