Future Outlook of Oil & Gas Supply & Demand

Oil industry is a telling example of the dramatic impact of economic reforms on our industrial scene. Just two or three decades back, the scenario was entirely different. Any analysis of the future outlook of oil and gas supply and demand is fraught with difficulties. Assumptions about growth in demand, price of the commodity, reserve base, technology evolution and world politics have to be made in order for any prediction to have a chance to be correct within a reasonable confidence range.

The problem is that data on production a demand from the recent past, as well as predictions in the short to medium term, are either inaccurate or require a number of conflicting events to be reconciled.

The inaccuracies stem from the way the data is compiled, using estimates of Organization of the Petroleum Exporting countries (OPEC) production as well as commercial figures from other countries around the world. These figures are sometimes slanted for political or economic reasons. For instance, the most recent Oil Market Report of the International Energy Agency (IEA) shows 1.3 million barrels a day of ‘missing oil’, meaning that, in the third quarter of 2002, either demand was higher or supply was lower than the IEA’s own estimates by 1.3 million barrels a day.

For prediction of the future production demand, the uncertainty increases. In the near term, companies are constantly revising their production targets downwards, and, longer term, the published estimates of supply and demand show a large margin for error.

Recent analysis by ExxonMobil, for instance, indicates that, over the next 10 years, oil and gas demand will increase by around 2% a year, while current fields in production will deplete at an average of 3% to 5% per year.

The consequence is that the equivalent of half of current production rates will have to be added over the period, indicating a requirement for about US$1,000 billion of capital investment, the work of some 350,000 engineers and scientists and advances in technology at least as great as those of the last 30 years. These are pretty optimistic assumptions that are not going to be realized if oil prices drop below US$15 per barrel, as some economists predict, since, at these low prices, the cash flow of the industry is just not sufficient. Moreover, even assuming cash flow is sufficient, the oil and gas industry will need to recruit, train and retain large numbers of scientists and engineers in competition with other industries that have better reputations.

Since we have already produced a little more than one trillion barrels, it puts us about 10 years from the famous ‘King Hubbert peak’, which occurs when about half of all possible reserves have been produced. The 2.7 trillion high cases of the USGS assumes significant increases of discoveries in the future; ‘discoveries’ meaning not only new fields, but also additional recoveries of existing fields. Similar estimates can be produced for gas, although, here, the reserves figures available for analysis are even softer than those for oil. This is due to the fact that gas, when far away from markets and without a liquefied natural gas contract in place, cannot be assumed as proven or even probable. As a result, a lot of gas is still in the ‘possible’ category or even not considered at all. USGS type of estimates show that a King Hubbertpeak for gas could be reached in the 2020 to 2030 range. In the near term, there is no shortage of oil and gas, although the rate of discovery worldwide has been declining since 1982 and, more recently, a majority of oil companies have had to revise downward their expectation of oil and gas production growth, citing technical, personnel and weather issues. The reality is that the production targets were unrealistic and based on flawed statistics.

In summary, short-term past, near-term future and long-range forecasts of oil and gas supplies are so uncertain that they should not be used for planning purposes except in a scenario process. What this means is that the industry faces huge challenges to find and produce the hydrocarbons required over a 20-year horizon. Even if technical, financial, human resource and political issues can be resolved, there is no escaping the fact that the industry needs to think about and manage the transition period post-King Hubbert peak, when the hydrocarbon inventory is depleting fast whilst demand keeps on growing. In order to fill the gap that will increase at the same speed as the hydrocarbon demand grew in the past, the only realistic alternative for transport is hydrogen, which can be burned in combustion engines or used in fuel cells to produce electricity to drive the engines. Hydrogen is a high potential energy substance, and that energy has to come from somewhere. On a long-term basis, the energy can only be solar or nuclear.

DEVELOPMENTS IN OIL MARKETS IN WORLD

• The Organization of Petroleum Exporting Countries (OPEC) was formed during September 10-14, 1960 in Baghdad, Iraq by Venezuela, Saudi Arabia, Iran, Iraq and Kuwait to control the price fluctuations in crude oil.
• The other members of OPEC  are Qatar (1961), Indonesia (1962),  Libya, (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973–1992), Gabon (1975–1994) and Angola (2007).
• At present OPEC members include  Algeia, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, The United Arab Emirates & Venezuela.
• Ecuador withdrew in December 1992, and Gabon followed suit in January 1995. Although Iraq remains a member of OPEC, Iraqi production has not been a part of any OPEC quota agreements since March 1998.
• OPEC members' national oil ministers meet regularly to discuss prices and, since 1982, to set crude oil production quotas. Presently OPEC members account for about 40% of world oil production, and about 2/3 of the world's proven oil reserves.
• Except for the period 1956-57, oil price was in decline during 1950’s. 
• Price that was almost stable at $1.20 per barrel was raised up to $1.80 in 1970.
• In March 1971, the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC.
• In 1972 the price of crude oil was about $3.00 per barrel.
• The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973.
• By the end of 1974 the price of oil had quadrupled to over $12.00.

• From 1974 to 1978 world crude oil prices was relatively flat ranging from $12.21 per barrel to $13.55 per barrel.
• The effect of the Iranian revolution and the Iraq-Iran War resulted in crude oil prices increasing from $14 in 1978 to $35 per barrel in 1981.
• Between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.
• OPEC basket price averaged $27.60 per barrel in 2000, $23.12 per barrel in 2001, $24.36 per barrel in 2002, $28.10 per barrel in 2003, $36.05 per barrel in 2004, and $50.71 per barrel in 2005.
• Presently, the crude oil price has been above $80 during the last three weeks of September 2007, despite OPEC's agreement on September 11, 2007 to boost output by 500,000 barrels per day from November 2007.

                                                                                               

SOME BURNING ISSUES IN THE GLOBAL PETROLEUM SECTOR! ARE WE READY FOR HANDLING OF THESE ISSUES?

•          Intensification of Global Competition
•          Volatility of Oil Prices
•          Deintiegration
•          New Technology
•          Communications revolution
•          Political transformation and the breakdown of international frontiers
•          Growing Global Environmental Awareness
•          Ownership and Governance
•          Deregulation    

Some of the burning issues in the Indian petroleum sector are represented pictorially below:-

 

REFERENCES

1.       www.opec.org
2.       IEA monthly reports
3.       www.bp.com
4.    www.cairnsenergy.co.in
5.    www.petroleumministry.com
6.    www.instituteofpetroleum.com