# Presentation: 216422

## Global Supply Through 2010: Complacency Before The Storm? 

- Presentation to EIA Energy Outlook And Modeling Conference
- By Jamal Qureshi, Lead Analyst
- Oil Markets Group
- March 27, 2006

## Supply Through 2010

**The deepwater and Central Asian “bulge” is upon us**
**2004-2005 was inflection point heading into better quality slate**
**Danger these trends induce policy complacency**
**More countries maturing, declining**
**Exploration trends not encouraging**
**Company strategies unlikely to change macro picture much**
**At $30+ WTI, IOCs going all out but are opportunity-constrained**
**NOCs face varied constraints; little production upside, some downside**

## PFC Energy’s Supply Methodology

**For each country ****reserve**** additions (field by field) have been documented along with production history**
**A decline is modeled for the ****producing base**** using current withdrawal rates and remaining reserve estimates for fields in the existing production base (an additional 15-20% volume has been added to the current estimates of P1+P2 to account for possible higher recoveries).**
**All ****new discoveries with a development plan**** are documented and probabilistically modeled to add to the producing base (P90, P50, and P10 reserves are used).**
**All ****undeveloped discoveries without a development plan**** are modeled using country average peak rates, decline rates, development concepts, etc. and added to the producing base (The range of recoverable reserves modeled is +/- 20% of reported P1 and P2.**
**Probabilistic expected value exploration models**** are built which assume that average field size discoveries, success rates, etc. (documented since 1990) continue over the next two decades; volumes from these EVA model resource discoveries (with appropriate development delays and production profiles) are added to base production.**

## 2006 Marks Start Of Supply Surge

**2006 Marks Start Of Supply Surge**

**Growth this year good at 1.4 million b/d (including OPEC NGLs)**
**Follows very weak 2005 of 320,000 b/d**
**Rest of decade expected to see growth average 1.4 mmb/d as well – 60% higher than the growth of the previous 10 years!**

**Annual Supply Growth, Non-OPEC Liquids & OPEC NGLs**

**mmb/d**

## Components Of Growth Changing

**Components Of Growth Changing**

**Russia no longer the driver**
**Deepwater has displaced Russia as key growth driver**
**Central Asia poised to become key driver as well**

**Annual Supply Growth, Non-OPEC Liquids & OPEC NGLs**

**mmb/d**

## 2005-2010 Growth Versus Decline Regions

**Western Europe**
**-1 mmb/d**

**Sub-Saharan Africa (incl. Nigeria)**
**+2 mmb/d**

**Western Hemisphere**
**Deepwater & Unconventionals:**
**+2.1 mmb/d**
**Rest Of Region Conventionals:**
**-0.7 kb/d**

**FSU**
**+2.2 mmb/d**

**Asia-Pacific**
**+0.1 mmb/d**

**Non-OPEC Mideast/North  Africa**
**-0.4 mmb/d**

**GLOBAL NON-OPEC CRUDE**
**+3.6 mmb/d**

**GLOBAL NGL & OTHER LIQUIDS**
**+2.7 mmb/d**

## Capex Matches Production Growth Regions

**Capex Matches Production Growth Regions**

## Big Players All Involved

***Note: Minimum $1 Billion in total operated capex***

**Big Players All Involved**

## Capex Matches Production Growth Types

**Capex Matches Production Growth Types**

**Deepwater**

**Central Asia**

**Unconventionals**

## Quality Improvement Has Begun

**In the next five years the global crude slate is going to grow:**
**Lighter**
**Sweeter**
**More acidic (one worse trend)**
**After 2010, trends expected to begin reversing**

**Global Crude Slate By Gravity, Sulfur, Acidity**

## The Long-Term Context

**Conventionals:**** Deepwater and Central Asia are coming into their own now, temporarily overwhelming the impact of declining mature basins.**
**Unconventionals:**** Development speeding up, will keep Non-OPEC supply growth going beyond likely conventional peak early next decade.**

**Conventional Supply**

**NGL and Unconventional Heavy Supply**

**The Long-Term Context**

## The Problem - The Expected Growing Gap Between Global Demand and Global Non-OPEC Supply in the Next Decade

**35 – 38 mmb/d**

**40 – 52 mmb/d**

**Forecast of Non-OPEC crude and all global NGL, Condensate, and Oil Sands**

**Call on OPEC Crude**

**OPEC Crude**

**29 – 31 mmb/d**

## Many Non-OPEC Producers have Either Gone into Decline or Reached Plateau Since the Mid - 1990s

**Many Non-OPEC Producers have Either Gone into Decline or Reached Plateau Since the Mid - 1990s**

**The above bars show the onset and duration of documented production peaks or plateaus –**** *****tracking country life cycle shows an acceleration of the number of countries passing from peak to decline***

**Countries in the decline phase**

**Countries in the plateau phase**

**Onset of Plateau**

**Duration of Plateau**

**Onset of Decline**

## The Base Decline Underlying New Production is Higher than Generally Assumed

**The Base Decline Underlying New Production is Higher than Generally Assumed**

**The above points show the decline rate in base production**** *****(defined as fields onstream before 2000)*****, calculated by netting “****new field” production from the gross production profile**

**Weighted Average Base Production Decline Rate estimated at ~7%**

## Non OPEC Annual Crude Oil Production Balance

**Global Non-OPEC crude production is currently exceeding reserves additions by as much as 8 billion barrels per year – *****this continuing depletion of the reserve base will ultimately lead to the inability to continue growing production rate***

**Impact of Kashagan discovery in Kazakhstan**

***Note:  Excludes North America and Canadian Oil Sands***

## OPEC Historical Annual Crude Production Balance

**Global OPEC crude production is also exceeding reserves additions by ~8 billion barrels per year; here, the challenge lies in accelerated expansion of production capacity.**

**Impact of Asdagan discovery in Iran**

## Decline in Reserves Additions + Growth in Demand => Consuming Global Liquids Inventory

**Decline in Reserves Additions + Growth in Demand => Consuming Global Liquids Inventory**

**1.7% Growth - Annual Volumes Required 2005-2020**

**To stabilize depletion of Non – OPEC reserves => offset every barrel produced with a new barrel found (either through discovery or enhanced recovery); based on current and projected levels of consumption => need to return to success levels typical of the period prior to 1980**

**Reserves Discovered Outside of North America**

## IOCs Don’t Have Access To The Big Reserves 

**NOC Oil Reserves **
**(Equity Access)**

**Full IOC **
**Access**

**Oil Reserves Held by New Russian Companies**

**NOC Oil Reserves**
**(No Equity Access)**

**<25% of Oil Accessible**

**WW Proven Oil Reserves:****1,148 bill. bbl**

**NOCs control the big reserves...**
**As a result IOCs are rule takers and price takers**

- Source: PFC Energy

## IOC Attention Will Expand to Unconventionals

**Shortage of conventional opportunities in Non-OPEC for IOCs**
**Most projects at $60 WTI are viable at $30 as well, so supply outlook varies little**
**With OPEC reserves largely unavailable, capital beyond conventional opportunities flows in greater amounts to gas and unconventionals**
**These are “thin margin” barrels relative to conventional oil and gas; renewed “resource nationalism” will further erode the returns to the contractor (oil company)**

**Plenty Of IOC**
**Capital To Spend**

**Non-OPEC**
**Conventional**
**Opportunities**

**Unconventional**
**Opportunities**

**Gas**
**& Related**
**Liquids**

**OPEC Reserve Access Constrained**

## NOCs Not Financially Constrained, But Technical Resource Constrained

**Resources**
**(domestic)**

**Technology**

**NOCs Not Financially Constrained, But Technical Resource Constrained**

## Important Messages – 1

**Non-OPEC**** countries are ****not**** running out of oil or other liquids.**
**But there are going to be significant challenges to ****growing conventional Non-OPEC**** liquids production beyond 55 mmb/d and ****total Non-OPEC ****production beyond 62 mmb/d in the early part of the next decade, without a dramatic improvement in reserve additions through exploration.**
***NOTE*****:  “Re-discovery” of the entire global deepwater resource play (some 52 billion barrels to date) would offset only **_**3 years**_** of current deficit between global liquids consumption and global reserves additions**
**Under average/moderate demand growth projections, ****OPEC**** will be challenged to expand production capacity fast enough to address the gap between demand growth and Non-OPEC supply.**

## Important Messages – 2

**If new supply sources are not found => demand will have to adjust,**** either abruptly/painfully, or pre-emptively/more smoothly**
**Medium-term supply outlook presents a serious energy policy challenge:**
**Supply growth will be robust**
**If demand is moderate => see spare capacity build-ups throughout the industry**
**Combination results in (temporary) downward pressure on crude and product prices *****but***** with little in the “development hopper” once the deepwater production peak has been worked through**
_**Result**_**:  Policymakers grow more complacent about the problems emerging next decade, rather than taking advantage of this “window” to accelerate initiatives (demand-side management, alternative fuels, bio-fuels, renewables, etc.)**

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