EIA Projections: Leaning on Thunderhorse

Includes: OIH, OIL, USO
by: Gregor Macdonald

Generally I don’t pay much attention to EIA Washington’s Short Term Energy Outlook, also known as STEO. It’s a forecasting product that comes out each month, and this decade both Washington and Paris (NASDAQ:IEA) have been worse than abysmal in their supply/demand analysis. But they got my attention yesterday when their 2009 forecast called for the first rise in US oil production since 1991. There are a couple of curious aspects to this forecast. Let’s go through them.

First, EIA trumpets that US production will rise 400 Kb/d in 2009 to 5.36 Mb/day. What’s surprising about that call is the starting point: 4.96 Mb/day. Below is the table for 2008 US oil production. Looking over the numbers, would you use 4.96 Mb/day as your starting point to compare supply, for 2009?

2008 US Crude Oil Production in Mb/day

5,093 January
5,113 February
5,139 March
5,162 April
5,166 May
5,109 June
5,110 July
4,895 August
3,960 September
4,645 October
4,938 November
5,123 December

2008 Average 4,955

OK. So you’re probably thinking EIA has indeed used the correct figure of 4.96 Mb/day from which to forecast 2009 supply. After all, that is the current average for 2008. Fair enough. But let’s be clear here. Supply analysis now is almost entirely concerned with how the world handled the price crash, after the price highs of July 2008. In the second half of 2008, not only did US production respond to falling prices, but there were some pretty big down months from hurricanes. What we’re concerned with in non-OPEC is how supply, starting with the production and price highs of June/July 2008, handled the price crash. Using the first half of 2008, we actually get an average US production of 5.130 Mb/day. Now recall the EIA forecast of 5.360 Mb/day for 2009, and we get a more useful comparison.

But will US oil production actually average that high, for the year? Why is the EIA forecasting any jump at all? The answer: the return of the giant offshore platform, Thunderhorse, which came back on stream in late December. No question, the return of Thunderhorse is great news for BP. However, I’m less convinced this will result in the sustained aggregate gains needed to raise production to the EIA’s target for the full calendar year.

US oil production peaked 36 years ago, and has been in a steady downtrend ever since. So, this is all a bunch of silliness. Only through the very high prices of 2005 through 2008 were many marginal wells brought back on stream. Remember the oil well in Beverly Hills that came back on stream? The country is dotted with these stripper wells that creak back to life when prices get very high. Moreover, there is a back story to the return of the mammoth Thunderhorse platform, and that is just about every hurricane in the Gulf since 2003 has wiped out aging, small production wells that simply don’t produce enough to be replaced. This winnowing process has been much discussed in the oil community. While giant platforms are excellent and very efficient for those who own them, the cost of pumping offshore oil in the Gulf has skyrocketed over these hurricane years, and the army of small wells that collectively produced a good quantity of oil continue to disappear.

So beyond Thunderhorse we have a ton of attrition in US production. Onshore it comes via price volatility. Offshore it comes via hurricanes. Based on my analysis of US production this decade and the current price crash, US production will be very lucky to average 4.9 Mb/day for 2009.