By Yaser Anwar, CSC of Equity Investment Ideas
This is a first in a two part series pertaining to The Oil Outlook. This week we look at the supply side issues, and join me next Monday for the demand side issues. Thanks in advance for reading.
Analyzing the future outlook of O&G Supply/Demand is laden with difficulties. Assumptions about growth in demand, reserve base, technology and politics have to be made in order for any prediction to have a chance to be accurate.
The problem stems from the inaccuracy of data on production & demand from the past, as well as predictions in the short to medium term, which require conflicting events to be reconciled.
Supply Talk
- The US Geological Survey (USGS) made a thorough estimate of worldwide oil supply. Concluding that that there was a 95% certainty that the total resource available when we started pumping oil was 2 trillion barrels. The estimate includes the OPEC, where published reserves are somewhat inaccurate for political reasons but where significant new discoveries could be expected if the international oil companies were allowed entry to explore.
- We have already produced approximately 1 trillion barrels, which brings us about 10 years from the famous ‘King Hubbert peak’, which occurs when about half of all possible reserves have been produced.
- The USGS survey also assumes that 2.7 trillion barrels, the upper end of the range, is inclusive of increases in discoveries in the future. Furthermore, USGS estimates show that a King Hubbert peak for gas could be reached in the 2020 to 2030.
- Investors should keep in mind that 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.
- According to Colin J. Campbell (Geologist), (a) Discovery Rate – we now find one barrel of conventional oil for every four we consume & (b) Extraction Rate is controlled by the physics of the reservoir.
- The number and the size of recent discoveries have been surprisingly low, suggesting that the industry is struggling to find new drilling opportunities. Historically, new supply has been slow to come online. From 1973 to 1978, the annual growth of non-OPEC oil production peaked at 2 million barrels/day.
- Due to exploration and development problems, which are extremely capital intensive and require long lead times (not to forget good hurdle rates), the post-1978 response was even more lackluster.
- Most of the spare capacity that exists today is under the control of OPEC, with new supply coming from equally sensitive countries such as: Latin America, Russia & West Africa.
- Even though production is expanding in regions such as Canada & Gulf of Mexico (deepwater fields), the growth is offset by declines in mature US & North Sea oil fields.
Source: World Oil Outlook, IEA
- Right now OPEC is afraid that significant output increases under present conditions can cause serious oversupplies in the next low-demand season, when the global economies began to slowdown at a more rapid pace.
Next week I’ll discuss the ‘Demand Side’. Thanks for reading.
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