Global Net Oil Exports in Decline 9 comments
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Much has been written recently about the “Export Land Model” [ELM] of Jeffrey Brown, most of it by Mr. Brown himself. The model hypothesizes a country that has declining oil production and increasing oil consumption. It’s graphic representation is:
The model is one way to analyze global oil flows and is useful to the extent that it dramatizes the very real fact that since oil exporters’ economies are growing rapidly with their new riches, they are using an increasing amount of their own oil internally. If their oil production also happens to be in decline, then their exports will decline even more rapidly. We have discussed this phenomenon extensively in regard to Mexico, which presents a stark challenge to U.S. oil supplies in particular over the next few years.
What the ELM fails to consider is the exports by countries that are increasing their oil production sufficiently so that they are also increasing their exports. Moreover, the model tends to cover up the fact that much of the growth in global oil demand (in fact, about half of it presently) is from oil exporting countries like Russia and the Middle East. Therefore only the demand for oil from countries that do not export oil is required to be supplied from net exports, and that excludes a good deal of global demand.
The chart reproduced below is from a recent post by Mr. Brown on The Oil Drum. It covers the whole field - those countries with growing as well as declining exports. Here it is:
At first blush the information is alarming, showing a decline of about 1 mb/d in net oil exports in both 2006 and 2007. On closer analysis, however, the chart is less chilling. Here’s why:
1. Over half the decline is from Saudi Arabia. The Saudi’s are swing producers in the world and they claim that they could produce more oil if the markets required it. Some suspect the Saudi’s are unable to produce more but the true facts are unknown. What seems clear is that they do have the capacity to produce a good deal more (1 - 2 mb/d) of heavy sour crude oil on a sustained basis but there is not currently market demand for it due to lack of refining capacity for that type of oil. The Saudi’s are well along the road to constructing substantial new refining capacity, as are both the Chinese and the Indians, which will be able to use heavy sour inputs. In fairly short order - 2009 or 2010 - there will be substantially more global capacity to refine the heavy sour crude that is in increasing surplus supply in the world, particularly from the Saudis.
2. Iraq, Libya, and Angola are all poised to increase their net exports substantially in the near term.
3. Brazil is not on this list but is also expected to become a substantial net oil exporter in short order.
4. Nigerian exports have been declining due to violence, not an inability to produce and export a great deal more oil. It is impossible to predict if that situation will get better or worse but, regardless, the Nigerian export declines do not fit the ELM model of a country with naturally (geologically necessary) declining oil production.
4. The Wikipedia megaprojects analysis suggests a substantial surge in oil production will occur in 2008 and the immediately following years. Although I believe this data needs to be adjusted for slippage, ramp-up, and optimism - since it is based on public relations press releases - it is nonetheless logical that after several years of much higher oil prices and vastly expanded expenditures for oil exploration and development there is likely to be a substantial surge in new oil projects coming on stream.
In sum, I believe Mr. Brown’s model makes a substantial contribution to our understanding of Peak Oil. But it is only one way to analyze it and it tends to disguise other important insights into the issue.
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Stockaccumul
atorJun 03 10:55 AMGood article, but a far better buy today would be PBR during this brief rare, mini-pullback in PBR...Read the below carefully researched article from "The street.com on Petroleo Brasileiro:
" (PBR - Cramer's Take - Stockpickr) shareholders have earned a 172% return on their investment over the last 52 weeks.
"If last week's positive earnings announcement is any indication, this Brazilian oil company has a lot more going for it than just good-looking charts (though the charts look good, too.)
PetroBras Returns Continue to Beat Oil and Brazil Investment Benchmarks
PetroBras boasts nearly a $300 billion market capitalization (its market cap just passed that of Microsoft(MSFT - Cramer's Take - Stockpickr)).
In fact, it now claims to be the third-largest publicly traded company in the Americas, behind Exxon Mobil(XOM - Cramer's Take - Stockpickr) and General Electric(GE - Cramer's Take - Stockpickr).
With a presence like that, it's clearly a bellwether stock both for the Latin American region and in the oil sector.
PetroBras does a lot: It explores for and produces oil and natural gas. It sells surplus production in Brazil and foreign markets. PetroBras operates oil tankers, distribution pipelines, marine, river and lake terminals, thermal power plants, fertilizer plants and petrochemical units. It is also building new pipelines for ethanol distribution and recently set up a separate operation to manage all its ethanol activities.
Here are three reasons I like PetroBras.
1. The recent oil and gas announcements are real.
In the last six months, PetroBras has discovered three super-giant oil fields in Brazil's offshore Santos Basin. The company also confirmed in January a major natural gas and condensate deposit in the Jupiter area.
If estimates of 33 billion barrels in reserve from another field (Carioca-Sugar Loaf) prove correct, then this ranks as the third-largest oil field in the world after Saudi Arabia's Ghawar (66 billion barrels) and Kuwait's Greater Burgan (46 billion barrels). "
Rudy Martin the writer ot this is the former director of research for TheStreet.com Ratings. Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master's degree in finance from Kellogg Northwestern University and is also a Chartered Life Underwriter. "
It is expected that PBR will have a huge number for this coming quarter's earnings announcement very shortly. Never has there been such a huge expected net profit number from any oil company, and due to the April and May record price of crude. The graphs show the accumulation going into and through each earnings announcement to be far more inpressive than STO... One will have to wait to long to make money with STO. PBR will make you money next week/month, and expect $140 by next year this time for PBR... todays $70 is a brief temporary bargain... in a week or so PBR will be back to its all time high of $78... this is a rare opportunity... research it, look at the graphs... amazing for such a large well established company that is perhaps the microsoft of oil...
I may buy 20,000 more shares of PBR today or early tommorrow...
Warmest regards... the STOCK ACCUMULATOR
He is very, very good during down markets. But net, net? Please notice that Mad Money never publishes the overall Pick/Pan stats or What the Net "charitable trust" return has been since he came on the air.
Oil consumed by the exporters is just not used very efficiently to help the world economy to grow.
As for your other point that not sufficient account is taken of those producers that are growing or are likely to grow in output, this is indeed allowed for in the models.
It is just that there are far more areas and countries where production is dropping, and although the occasional large field may be discovered most are much smaller than in the past, and more difficult to get oil from.
In reality, new discoveries have been far smaller than consumption for many years, and that shows no sign of changing.
I pretty much agree with your comments about ELM. Overall the ELM will prove to be correct, it is just a question of timing. Jeff and Khebab have done a good job with this model because it has raised awareness of the issue. You mentioned the production coming online in 2008 form the megaprojects website, you have to concede probably 40% of supposed production gets delayed. What is scary about the megaprojects website is there is not much coming on line after 2011. Should you value energy assets to production levels out 3 years?
As far as I understand, this model applies to countries having reached their peak and having a decrease in production (the blue line with a depletion rate of 5%), so if a country is able to increase its oil production this means that it is pre-peak and the ELM does not apply to it.
What I see in this model is very simple: "if a country has reached its peak of production, has an average depletion rate of 5%/y and an average increase of internal consumption of 2.5%/y, THEN its exports drop to nothing after 10 years".
If you want to apply it to the world, you must assume that it has reached the production peak, and this is still arguable as you point it.
Our middle case is that they collectively approach zero net oil exports around 2031. While some smaller net oil exporters such as Angola are showing some increases, they are largely offset by sharp declines from exporters like Mexico and Venezuela. Note the Texas/Saudi graph was prepared prior to the 2006 and 2007 declines in Saudi production.
In any case, my guess is that total net oil exports worldwide in 2031 will be down by at least 75% from their 2005 peak.
As for PBR, I am looking for its RSI to break past 53 by close on friday in order for it to be a buy.
Back in 2004, Skrebowski's Megaproject analysis warned that 2008 would be Peak Year. Today's analysis of future producer activity illustrates that 2012 is Peak Year. The date keeps being pushed out. This is an inherant flaw of bottom-up studies.
Another red herring discussed by Brown is what i call the Underlying Decline Rate (UDR) caused by maturing and retired fields. Brown, CIBC & Simmons would have folks believe this is some kind of new phenom. It clearly isn't. It is the depletion nature of petroleum provinces. Albeit rising slightly each year, it has increased to only 3.6% of All Liquids supply since 1999. If the Industry can bring on 3 or 4-mbd of new capacity each year, it can withstand the losses due to UDR.
On that factor, Producers have a 4.5-mbd/yr record (8-yr avg) of new flows coming to the market. This includes 7-mbd in 2008 & 6 next year.
In short, exports are down 'cuz OPEC sliced 2-mbd from the 2006 high in a response to record OECD inventories. It was an stock balance correction ... not a sign of Peak Oil.
Crude supply set four new quarterly/monthly records in the last seven months. It will Peak some day, but the avg of 21 recognized estimates of Ultimate Recoverable Resource (URR) reveals that the Post Peak decline will be less than 1% annually. Dire predictions of $100-trillion in needed infrastructure by 2015 are similarly misguided.
In 1989, Colin Campbell became the first pundit to declare that "this year is The Peak" of crude. 2008 marks the 20th consecutive year of these annual proclamations by the McPeaksters. Perusal of their websites and literature often reveals an underlying motive of social engineering with foundations in the zero-population growth fraternity.
They simply don't like cars, airlines, suburbs or lotsa people. But like Al Gore's prognostications, we are finding that "scary" doesn't work unless it has its foundations in good science. The oceans will rise only 4mm this year and Oil will set another annual record in 2008.