Iraq Production, Conservation Could Keep Oil Price in Check for Years

Iraqi oil production was about 2.5 mb/d before the U.S. invaded. It dropped to about 1.4 mb/d and is now back up to just under the starting point. Iraq’s claimed reserves of some 115 billion barrels (second only to those of Saudi Arabia) are sufficient for it to achieve their new goal of producing 6 mb/d (2.2 billion barrels per year), even if actual reserves are a good deal less than what they claim.

It’s not clear that Iraq can achieve this new production objective in 4 - 5 years. The primary impediment seems to be the threat of continued violence, particularly in the face of the withdrawal of U.S. troops scheduled for 2009 - 2010. There may also be problems with its neighbors, Iran and Kuwait, who’s borders the Iraqi fields straddle. Absent political impediments, the production goal would seem plausible enough given that Iraqi oil is fairly easy to find and extract and there is a lot of drilling capacity now available to do the job.

I’ve always said that the apparent peaking of the global oil supply at about 86 mb/d that was seen during 2006 - 2008 in the face of rising demand was only partly due to the Peak Oil concept of rapid decline rates in old fields and the eventual inability of new fields coming on stream to overcome that. The other important constraint to growing the oil supply was above-ground issues of war and violence, primarily in Iraq and Nigeria. I’ve always maintained that if either or both of these countries manages to turn on their oil spigots as rapidly as nature would allow, the global oil supply could grow substantially from here and Peak Oil would be pushed off for some years.

Therefore, I think the recent movement toward full exploitation of Iraqi oil is significant. Iraq could mitigate some of the constraints on oil production that will come about from the recent cancellation of many production projects due to the great price decline of late 2008. Adding to the Iraqi impact on oil supply is the fact that major Saudi production projects scheduled for 2009 - 2011 may well be delayed and could be re-activated fairly quickly when more demand emerges. Obviously the voluntary restraints of various OPEC members can also be quickly turned around.

All of this suggests to me that when global growth resumes the price of oil will have some immediate rise but it is not likely to be a robust and rapid increase to and beyond $100 for some time. The exact time will depend on when global growth resumes. If we are lucky and that happens in 2010, then perhaps we will see the oil price reach and exceed 2008 heights around 2014 - 2016.

Of course, two other macro-trends will also come into play, continuing and probably increasing decline rates in old fields and the possibility of a secular reduction in demand due to production and dissemination of far more efficient cars. Decline rates and increased efficiency are offsetting to each other, but the former is baked in while the latter is hard to quantify at this point. In sum, it seems to me that the next few years and even possibly the next five years may not see new record oil prices unless we experience a new rapid growth rate in the global economy.

Comments

[Greg Pinelli:]

The rapid depletion of the world's great fields isn't a "concept".....it's a reality. Simply look south to Mexico if you want the poster child for future oil production. In two years Mexico may well not be exporting ANY oil. As for Iraq and Nigeria...do you follow geopolitical events at all? It's unlikely either will ever reach their former output highs ever.
What the recent fall in oil precises has done is put exploration and production off a few years..by 2010 that 86 mBd will look like a fond wish...not an attainable reality.
Are you really suggesting that decline rates (which EVEN the IEA says are 6-8%!!) are going to be matched by that % in efficiency and conservation worldwide? An amazing piece of analysis.
I have no idea what your background is..but even an oil novice knows that projects in oil/gas (and mining) are years in the rebooting to production stage..especially given that ALL (as in EVERY single one of them) will be focusing on difficult to get and to transport and enormously expensive to maintain product.

Jan 04 01:06 PM

[VSD:]

You are not taking into account increasing demand for energy that we are likely to see given the unprecented availability of capital because of liquidity in the system. If everybody in the world only drives 1mile/day more, we consume all excess oil in the system.

Jan 04 01:47 PM

[Sober Realist:]

Interesting article and the first 2 comments very insightful. I remember a Newspaper/TV reporter, who has ties to people in the oil industry, telling me this past summer that "if they [oil producers] do everything right from this day forward, we will hit a brick wall for oil around 2015. Oil at $250 and gas at $8-10.”

I asked him exactly what did he mean when he said, “…if they do everything right from this day forward…” ?
He responded with this:

"Meaning that every new oil field they work on has to hit. And production rates can’t fall off at existing wells. Sadly, everyone knew this day has been coming since early 2001. You can read “Strategic Energy Challenges for the 21st Century” from the James A. Baker Institution and it’s an eye opener.
Moreover, the oil guys were all in on that think tank paper and the only thing on their lips was Iraq, Iraq, Iraq. Only because everyone knows they have 115-240 billion barrels of oil, the world’s last great major oil fields not exploited, and as the report said, “Like it or not, Iraq remains our only option to enhanced oil recovery.”
The game changer is that by 2015 demand will exceed supply. (I’ve wrote about that years ago in the ST) Which has been talked about now as the reason for the high price of oil, but it hasn’t been true. Now in 2004 it came close, maybe an 800K barrel daily buffer. But now you know why I say I’m not against drilling or anything else that extends our supplies.
Now, as of today at my website I put up a map of our offshore areas and how much recoverable oil is believed to be there. It’s not that encouraging with the exception of California and even if Washington says to go after it, California has the right to say no. Which they will. At least until the day they too are paying $10 a gallon. Then they’ll put a bounty on surfers instead."

Jan 04 02:06 PM

[John Polomny:]

The comments here are correct in that an increase in Iraqi production will be more then overwhelemed by depletion elsewhere. However I think there are some excellent speculations available with respect to some of the oil juniors operating in Kurdisan especially. Niko Resources is of particular interest.

Jan 04 02:38 PM

[polishlogician:]

I think oil supply problems are exaggerated for speculative profit, I believe that Big Oil purposely capped Iraq at 1.5MM/bbl in line with OPEC quotas and on par with Iran's quotas, as well. We won't see increased production (6MM) nor any need for increased production, the price of crude may rise dramatically, but it won't be for lack of supply.

Jan 04 02:57 PM

[Saildog:]

I am not so sure a distinction between "in ground" and above ground factors is relevant or even appropriate. "Above ground factors" are almost certain reinforcing feedbacks from the "in ground" reality that production has peaked.

Iraq, the major topic of the piece is itself the prime example of such a feedback. The US does not invade China over its aggression in Tibet, or Zimbabwe because Mugabe is a a worse despot than Saddam. The US invaded Iraq because of oil. It's own oil of course, but also because Iraq sits neatly between Saudi and Iran, both odious and unstable but oil rich regimes.

The American mistake was to assume that stability could be quickly and easily imposed.

Jan 04 04:17 PM

[1977°C:]

I disagree, sorry, not because I am expert on Crude Oil production just the opposite, and it gives me a right to disagree.
OPEC is made of ,now take a deep breath and hoppa, OPEC is made,yeah, traders that simple.
What you think that because they wear different clothes than you and look darker they can not be traders?Middle East has long history of trading commodities and first futures were found by Socrates to meet the supply/demand long term agreements between Olive Oil producers and wholesale buyers to stablize the prices and secure delivery as Olive Oil producer was afraid demand will suddenly evaporate and kill it's profits etc. and buyer was afraid of losing access to stable deliveries in times of expected future rising demand and shortage of Olive Oil elswhere.
Since then (2500-3000 years ago?) the relationship between producer/consumer were not easy as sometimes when prices crashed seller made stable profits and at other times seller lost as prices rose and he had to deliver at below prices.
So who is more important in the OPEC/consumer relationship?
I think that both sides are important as we need OPEC for it's Olive Oil, sorry, for it Crude Oil and OPEC needs us for the same reason to sell us it's Oil and make money whatever the price will be, producer just can't shut it's Oil well and go somwhere else do something else as Oil is all he have and it is in their interest keep it running,developing it,selling it and pocketing the profit.

Jan 04 05:12 PM

[NOWHEREMAN:]

Good Article Jim.

The estimates provided by the IEA where based on a period of time prior to 2006. Included in their 25 year projections, was one very important assumption.

This was that the oil fields would be fully operational. This is not the case now as decreases in demand are prompting production reductions.

If it remains in the ground, the depletion rate decreases.

The old projection is no longer valid. But this is common sense applied to a 25 year projection which was bound to be incorrect just because of the longevity involved.

Realsit: "and production rates can't fall off at existing wells". What if they already have, big time considering the big reduction in refinery utilization.

I am not saying that oil depletion has stopped, all I'm saying is that it has slowed and will continue to slow as economies worldwide continue to slow. The demand side continues to decline.

IMHO

Jan 04 05:27 PM

[Greg Pinelli:]

So..if oil sits in the ground is doesn't deplete..Brilliant! Depletion refers to rates of decline in performing wells..If you don't drill a well or expand a field you can't have a depletion rate..got that?? You haven't..obviously read IEAs latest report..depletion rates for existing wells of a certain size (largest) is 6-8%..IEAs projection are updated every year..nothing they out out is 20 something years old....


On Jan 04 05:27 PM NOWHEREMAN wrote:

> Good Article Jim.
>
> The estimates provided by the IEA where based on a period of time
> prior to 2006. Included in their 25 year projections, was one very
> important assumption.
>
> This was that the oil fields would be fully operational. This is
> not the case now as decreases in demand are prompting production
> reductions.
>
> If it remains in the ground, the depletion rate decreases.
>
> The old projection is no longer valid. But this is common sense applied
> to a 25 year projection which was bound to be incorrect just because
> of the longevity involved.
>
> Realsit: "and production rates can't fall off at existing wells".
> What if they already have, big time considering the big reduction
> in refinery utilization.
>
> I am not saying that oil depletion has stopped, all I'm saying is
> that it has slowed and will continue to slow as economies worldwide
> continue to slow. The demand side continues to decline.
>
> IMHO

Jan 04 07:17 PM

[silverwood:]

"Iraq Production, Conservation Could Keep Oil Price in Check for Years"
The operative word in the above statement is COULD. The price of oil has another variable that the author has failed to mention. I agree with the author on some of his analysis of oil fundamentals, but he fails to mention the $US role in the equation. Oil is priced in $US globally. The strength of the dollar will have an influence on the oil price. Just overlay a chart of USO with USDX and you will se what I'm getting at.

Jan 04 08:46 PM

[Sober Realist:]

Pinelli nails it on the head. The tremedous drop in the oil price has been accompanied by the cobweb cycle of oil exploration and production projects coming to a complete stop. Look at a few projects recently reported to have been scaled back or mothballed:

Nov. 6 - Canadian Natural Resources Ltd (CNQ.TO: Quote, Profile,
Research, Stock Buzz) slows spending on second phase of Horizon oil
sands project for 2009 after first phase costs rise to C$9.7 billion,
up 42 percent from 2004 estimate. Company, citing low oil prices and
high costs, also scraps timelines for phase 2, which would lift output
to 250,000 bpd from 110,000.


Nov. 6 - ConocoPhillips (COP.N: Quote, Profile, Research, Stock Buzz)
and Saudi Aramco halt bidding on the construction of a 400,000 barrel
per day joint- venture Yanbu refinery in Saudi Arabia, citing
uncertainties in the financial and contracting markets. Saudi Aramco
previously sought to renegotiate contracts for equipment for Yanbu, as
well as for a refinery joint venture with France's Total SA(TOTF.PA:
Quote, Profile, Research, Stock Buzz).


Nov. 5 - Saudi Arabia may renegotiate contracts for long- term oil and
gas field projects, an oil official told the International Oil Daily.
The giant Moneefa oilfield expansion and the Karan gas scheme had been put out to bid when the cost of labor and materials were soaring.


Nov. 5 - Sunoco Inc (SUN.N: Quote, Profile, Research, Stock Buzz) to
save $375 million by scrapping upgrade of refinery in Tulsa, Oklahoma;
still looking to sell the refinery, which accounts for just under a
tenth of the U.S. company's 910,000 barrels per day capacity.


Oct. 30 - Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research,
Stock Buzz) said it would delay its investment decision on a second
expansion of its Athabasca oil sands project.


Oct. 29 - Thai refiner and petrochemical company IRPC IRPC.BK reviews a $1.5 billion investment plan. Has delayed a refinery expansion to 260,000 barrels per day and cut its run rate by 10,000 barrels per day to about 160,000-170,000.


Oct. 23 - Suncor Energy Inc (SU.TO: Quote, Profile, Research, Stock
Buzz) delays construction of oil sands upgrader for C$20.6 billion
Voyageur expansion by one year to 2013. Expansion boosts production
from Suncor's oil sands operations near Fort McMurray, Alberta, to
550,000 bpd from 350,000.


Oct. 23 - Petro-Canada (PCA.TO: Quote, Profile, Research, Stock Buzz)
mulls deferring upgrader for proposed C$21 billion Fort Hills oil
sands project to save up to C$10 billion. Move would mean partners
build mine and extraction plant and sell as much as 160,000 barrels a
day raw bitumen into the open market starting 2011. Decision before
year-end.


Oct. 23 - Nexen Inc (NXY.TO: Quote, Profile, Research, Stock Buzz) and
Opti Canada Inc (OPC.TO: Quote, Profile, Research, Stock Buzz) delay
decision on second phase of Long Lake oil sands project to some time
in 2009. Expansion would double production of synthetic crude to
120,000 barrels a day. First phase cost C$6.1 billion and is now just
starting up.


Oct. 23 - Value Creation Group construction of C$4 billion Heartland
upgrader near Edmonton, Alberta, reported halted. First phase would
have processed 77,500 barrels a day of bitumen into synthetic crude.
Privately held company has regulatory approval for plant with 260,000
bpd capacity.


Oct. 22 - Baker Hughes Inc (BHI.N: Quote, Profile, Research, Stock
Buzz) expects about 200 oil and gas drilling rigs in North America
would be idled during the fourth quarter because of the tighter credit
markets and the declines in oil and gas prices. (Writing by Braden
Redall; Editing by Walter Bagley and Andre Grenon)


Do you hear the sound of the passing tumbleweed across the desolate plains? No energy investment now means no flow of oil to market when it will inevitably be needed and demanded in the future. Unless, of course, the economy never recovers and continues to contract and all the world's people of the emerging economies agree to forego the western standard of living. Accompany this with the natural oil depletion that is occuring and you have a big problem. Oil is now a yoke on all future economic activity.

Jan 04 09:40 PM

[scotty1560:]

Realsit - you have a point. Might take a few years to realize...but
5-10 years will fly by and this will influence everything from food
production to travel, yachts, transportation, food, healthcare...

New projects and alternative energy need government backing...
why wait till we are paying $6-$8 a gallon. The process will expedite
in a few years time..

Can't imagine Iraq will have smooth sailing in the future...one of the most
unstable areas in the world..Iran could be back in the picture at any time..
watch what that does for oil prices..

Jan 05 12:15 AM

[NOWHEREMAN:]

Do the Opec cuts in production mean anything to you?
They are cutting output. They are leaving the oil in the ground. IT IS not coming out. Cut means less Production.

So why don't you put all of your smarts together and explain to the poor simpleton how Oil which is no longer coming out of the ground is depleted?

The IEA report issued in Nov.,2008, was forecasting for a period of 25 years. 2006-2030 and projecting demand increases of 1.6% a year at the time. The current projections call for a decline in demand for 2009.

The same report, "the worldwide decline rate for existing production is 6.7% increasing to 8.6% in 2030".

Existing production. Go to Kingsfield site for the report.

Jan 05 01:19 AM

[Half Empty:]

<i>"So why don't you put all of your smarts together and explain to the poor simpleton how Oil which is no longer coming out of the ground is depleted?"</i>

It's a question of looking at the right thing through the right end of the telescope...

Let's do the math. Say total oil production is 86mbd and producers cut back by 2mbd.

You'd still have 84mbd of ongoing production depleting at, say, 6%. After one year the supply from existing wells would be down by 5mbd.

If we generously apply a "negative depletion rate" of 6% to the 'saved' oil left in the ground, that would give us an 'extra' 120,000 barrels rescued from depletion. Big deal, as they say.

As Jim says, depletion is baked-in while supply and demand countermeasures are largely conjectural. My own view is that, in the really big picture, we are already tipping into an irreversible decline in net energy that will subvert all efforts to maintain the long term economic patterns of the last 200 years. Except in nominal terms, oil prices may _never_ go as high as they did in 2008 again.

Oil will become steadily more valuable but it will become ever harder for anyone in the so-called advanced economies to profit from its rising value, due to their slow asphyxiation by the draining-away of net energy.

Jan 05 09:31 AM

[isaac the t...:]

We should all be praying for the emergence of global oil shortages, because there is only one scenario in which demand won't outstrip supply within 3-5 years. That scenario is a prolonged global depression, and everyone loses in that scenario, except cementary and prison services.

Jan 05 11:57 AM

[scotty1560:]

imo US has a problem...China is securing much of the Middle East oil with
the exception of the Saudi's....South America does not help...we really have
a problem down the road...just my opinion of course..

The oil we will procure will cost dramatically more...poor strategies in the
Middle East will come back to haunt us...imperative for this country to
continue on new sources and hybrid-alternative vehicles.

If I'm wrong ok- cheaper to fill my car and my cost of living stays sustainable..... If I'm right ok...my USO shares will pay for that 100 acres I'm itching to secure... win win strategy...now for a food strategy

Jan 06 01:41 AM

[Ferdinand E...:]

'Turning on oil spigots as fast as nature will allow'. Hmm. It's economics and not nature that determines how much oil spigots are adjusted/turned. Ask the people in the executive suites at Exxon and Shell. They know about things like that, although I'm afraid that a few of my academic colleagues are a little vague about that point.

Jan 06 07:28 AM

[slay:]

let's review some basic arithmetic: oil price in check for years eh? fast forward just 1 year. bring on iraqs 100 billion barrels. about 3 years global supply at current consumption, big woop. now say oil consumption has an average increase of just meager 3% a year going forward, that's DOUBLE today's consumption in 23 years. don't even need to go beyond that. say Non-opec faces fairly aggressive production depletion just 6%, not so unreasonable--many independent sources say they've already peaked as a group ie mexico today announcing TEN % production decline year over year, yes TEN-- that leaves a halving of production from the majority suppliers to the world in ELEVEN years. no wonder obama wants us off this stuff. think about consumption now annually ~30 BILLION, 1-2mb/d in demand decline or a fantastic new discovery of 1 billion barrels is really nothing in just the next decade based on these current and unsustainable numbers.

Feb 25 12:17 AM