Mexico, China, And Beyond

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Includes: CNY, CYB, DBMX, EWW, FXCH, HEWW, MXE, MXF, QMEX, SMK, UMX
by: Ron Patterson

By David Archibald

Note: The opinions expressed in this guest post do not necessarily represent those of Dennis Coyne or Ron Patterson.

Ron Patterson's post asking if China's oil production has peaked reminded me of Mexico, which also produces mainly from supergiant fields. Mexico's oil production peaked in 2004 and has averaged a 3.5% per annum decline rate since, with a peak yearly decline rate of 9% in 2008. China's oil production has fallen 10% from its peak in 2015. Part of that is oil price-related as the Daqing oil field has an operating cost of $46 per barrel and could reverse as the oil price rises. The comparison of China and Mexico with a projection to 2023 is shown in the following figure:

The production histories tracked each other from 1965 until they parted ways in 2005. The mainstay of Mexican production had been the Cantarell field as shown by this graph from The Economist, with data up to 2011:

Cantarell production had been pumped up with nitrogen injection until sudden collapse in 2005. Part of the decline from Cantarell was offset by increased production from Ku-Maloob-Zaap. Mexico is now producing slightly more oil than it consumes. In the absence of successful privately funded oil exploration from here, Mexico will become an importer of both oil and food.

A good description of the Chinese oil production industry is provided by a paper by Aleklett, from the University of Uppsala, et al. from 2010 using data up to 2007. One field, Daqing discovered in 1959, had been producing about a million barrels per day for close to 30 years:

Table 2 from that paper is reproduced following. It shows that only one of the Chinese giant oilfields would not have entered decline by 2015:

In our modelling, we have assumed that Chinese oil production will decline by 4% per annum from 2016. That will help tighten the market, but the big question is what will US shale oil production do? An outlook for the Bakken is provided in Figure 4 below:

This figure ignores the wells drilled prior to 2009 and is based on production that started from January in the following year and thus has a lower peak production than a chart using monthly data. It is an attempt to develop a projection using a correct decline curve for the Bakken. The data for 2016 and beyond assumes that 600 wells are drilled each year. This is also about the rate that would keep production nearly flat until well locations run out. Figure 5 shows what the whole U.S. shale oil industry looks like:

The methodology is the same as for Figure 4. The data for 2016 and beyond assumes that 4,000 wells are drilled each year. This rate of drilling would keep U.S. shale oil production flat on the proviso that well quality does not deteriorate.

U.S. conventional oil production has been declining at about 2% per annum for decades as shown by Figure 6. Presently, that decline rate is just over 100,000 barrels per day per year. If U.S. shale oil production stabilizes due to drilling of about 4,000 wells per year, total production will still decline.

If China has now tipped over into a decline emulating Mexico, the three biggest sources of oil production decline are now lower U.S. oil shale drilling, ongoing Mexican decline, and Chinese decline. On top of all that is the damage done to the upstream oil industry around the world over the last two years due to low oil prices. The ability of the U.S. shale oil industry to come roaring back may be determined by the quantity and number of drilling locations at various oil prices. Civil wars in a number of Middle Eastern countries is another hard-to-quantify factor, though positive.