IEEJ: July 2013 All Right Reserved

GLOBAL OIL SUPPLY OUTLOOKIEEJ TOKYO JULY 2013
Michael C. Lynch
lynch@energyseer.com
http://www.forbes.com/sites/michaellynch/

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IEEJ: July 2013 All Right ReservedISSUES SUPPLY SEEMS TO HAVE SLOWED BUT PEAK OIL IS PSEUDOSCIENCE ‘EASY’ OIL IS GONE
 ‘CHEAP’ OIL IS GONE
 $100 IS NEW FLOOR, DUE TO HIGH COSTS
 RESOURCE NATIONALISM HUGE OBSTACLE2IEEJ: July 2013 All Right Reserved

LESSONS FROM PASTFORECASTING
 MANY BAD MODELS USED HUBBERT, CREAMING CURVES PESSIMISTIC AFTER 1979
 EVERYONE BUT MIDDLE EAST AT A PEAK PEAK KEEPS MOVING OUT

 OPTIMISM APPEARS LATE 1990S
 JUST AS PRICES COLLAPSE MAJOR CHANGES/TURNING POINTS NOTEXPECTED3IEEJ: July 2013 All Right Reserved

US DOE FORECASTS LDCSUPPLY(1980-2000)

4EARLY FORECASTS TOO LOW, LATER TOO HIGH.

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IEA FORECAST OIL SUPPLYCHANGE
2011-2030 IN MB/DSHOWS PROJECTED CHANGE IN NON-OPEC OIL SUPPLY FROM 2011-2030.
5IEEJ: July 2013 All Right Reserved…AND COMPARISON WITH 2010WEO6SHOWS PROJECTED CHANGE IN NON-OPEC OIL SUPPLY FROM2011-2030.

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SUPPLY WEAKNESSNON-OPEC LDCS

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OIL RIG COUNTNON-OPEC, NON-OECD, NON-FSU

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WHY ARE PRICES HIGH?

DISRUPTED OIL SUPPLY9IEEJ: July 2013 All Right Reserved

POLITICS MASSIVELYIMPORTANT MEXICO: BUDGET PROCESS LEADS TODELAYS RUSSIA: GOVERNMENT CREATESUNCERTAINTY, DELAYS ARGENTINA, COLOMBIA, INDIA, ETC.
 GOVERNMENT POLICIES FLUCTUATE US, CANADA: PIPELINES, OFFSHOREDRILLING, GHG POLICY UNCERTAINTY10IEEJ: July 2013 All Right Reserved

OPEC’S CONTRIBUTION
 IRAQ MODERATE GROWTH IRAN/VENEZUELA/NIGERIA COULD RETURN

WITH POLITICAL REFORM (DATEUNCERTAIN) ANGOLA/UAE SOME GROWTH POTENTIAL FOR POLITICAL DIFFICULTIESSTILL SIGNIFICANT WILL SAUDI MAKE ROOM FOR IRAQ?

11IEEJ: July 2013 All Right ReservedTHE COST ISSUE
 DEFINITELY HIGHER, BUT WHY?
 ESTIMATES OFTEN IMPRECISE, INCORRECT INCLUDING TAXES OVERSTATES COSTS HIGHEST COST NOT NECESSARILY

REPRESENTATIVE
 COST INFLATION: THREE FACTORS DEPLETION (EASY OIL IS GONE)
 GENERAL INFLATION: 1970S
 CYCLICAL INFLATION: 1970S, LATE 1990S,NOW?
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FINDING COSTSIEEJ: July 2013 All Right Reserved

UPSTREAM COSTS

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Global Oil Supply Costs
16.00
US Stripper
Wells

14.00

US Gulfof Mexico

12.00

Indonesia
Eastern Canada

10.00
2000
Doll ar sperBarr elof Oil
Equival ent

BrazilCMOAngola

Kazakhstan

8.00

Algeria
Oman
Nigeria
Alaska6.00

NorthSea

Venezuela
Kuwait

4.00

2.00
Iraq

Saudi
Arabi aIran

0.00
010203040Li qui d Pr oductive Capacit y15

Source: Fagan, 2001

(Mbd, Cumulative)

50

6070

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US WELLS AND COSTS

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DO COSTS DRIVE PRICES?
 IN THEORY, ONLY OVER THE LONG-TERM
 MARGINAL COSTS VERY LOW IN SHORT-TERM
 PRICES DEFINITELY DRIVE COSTS
 1998 PRICE DROP DRILLING CUTBACK NON-OPEC WEAKNESS HIGHER PRICES BUT THIS IS MORE LIKE 1986
 PRICES AT ELEVATED LEVELS COSTS LIKELY TO DROP17IEEJ: July 2013 All Right Reserved

FUTURE SUPPLIES RETURN OF OLD WINE
 IRAQ IRAN, VENEZUELA SOMEDAY?

 NEW WINE IN OLD BOTTLES ENHANCED RECOVERY SMALL PRODUCERS NEW WINE IN NEW BOTTLES
 BRAZIL, EAST AFRICA NEW WINE FROM BOXES SHALE OIL
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SMALL PLAYERS19IEEJ: July 2013 All Right ReservedBRAZIL PRE-SALT HAS 60-100 BBOE POTENTIAL GREATER THAN NORTH SEA

 TUPI ALONE IS 6-8 BLN BBLS.
 SERIOUS TECHNICAL CHALLENGES FIRST DEVELOPMENT PROBABLY LATE, OVERBUDGET
 THEN IT GETS EASIER, CHEAPER

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OTHER DEEPWATER US, MEXICO, WEST AFRICA NOT AS GOOD AS BRAZIL PRE-SALT
 FIELDS ABOUT 1 BLN BBLS EACH
 ULTIMATE 1-2 MB/D INDONESIA, CENTRAL AMERICA, OTHERAREAS
 EARLY DAYS YET
 COULD CONTRIBUTE AFTE 2020
 PROBABLY MODEST AMOUNTS21IEEJ: July 2013 All Right ReservedHEAVY OIL TO BOOM?
 OIL SANDS SHOULD SLOW OVERLOADED INFRASTRUCTURE
 RISING OPPOSITION (NATIVE, NIMBY) ECONOMICS IMPROVED QUALITY DIFFERENTIAL NOT AS IMPORTANTAT $100
 NEW METHODS LIKE THAI MANY NEGLECTED DEPOSITS COLOMBIA, BRAZIL, KUWAIT, RUSSIA22IEEJ: July 2013 All Right Reserved

SHALE LIQUIDS HUGE RESOURCE STILL LARGELY UNIDENTIFIED/ESTIMATED
 VERY LOW RECOVERY RATE BUT RISING 1% FIVE YEARS AGO, NOW 4-6% (BAKKEN) DELIVERY COMPLEX
 MEDIUM COST
 WELL PRODUCTIVITY LOWER THAN MIDDLEEAST, DEEPWATER: 1 TB/D QUICK DROP: 50% IN FIRST YEAR23

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Latest shale evaluation

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OOPS, WE DID IT AGAIN
NEW ARI/DOE REPORT25

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LATEST ESTIMATES BY REGIONBILLION BARRELS

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TRR IS TECHNICALLY RECOVERABLE RESERVES.
ABOUT 3% RECOVERY FACTORIEEJ: July 2013 All Right Reserved

IS US UNIQUE?
 PRIVATE OWNERSHIP OF MINERALS INFRASTRUCTURE
 MANY INDEPENDENT COMPANIES HUGE SERVICE INDUSTRY BUT: SOVIET UNION HAD NONE OF THOSE,STILL WAS LARGEST OIL PRODUCER IN THEWORLD NONE ARE INSURMOUNTABLE27

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SCENARIO FOR SHALE US BOOMING: AT LEAST 500 TB/D INCREASEEACH YEAR CANADA LESS SUPPLY BUT STARTING NOW
 COLOMBIA, ARGENTINA IN 2-3 YEARS RUSSIA, BRAZIL, MAYBE CHINA AND
AUSTRALIA AFTER 5-6 YEARS LATER: NORTH AFRICA, CASPIAN, ETC.
 FRANCE???
 BY 2018, SHOULD BE AT LEAST 1 MB/D OF
NEW SUPPLY EACH YEAR28IEEJ: July 2013 All Right Reserved

NEW MODEL OF SUPPLYFORECASTINGFOR SMALL PRODUCERS GOVERNMENT ATTRACTS INVESTMENT SUPPLY RISES GOVERNMENT BECOMES COMPLACENT INVESTMENT TAPERS OFF SUPPLY PLATEAUS OR DECLINES GOVERNMENT ATTRACTS NEW INVESTMENT MEXICO AS CASE STUDY29

IEEJ: July 2013 All Right ReservedMISINTERPRETATION OF SUPPLYCURVES NOT TIME FUNCTION SHOULD BE DYNAMIC
 DIFFERENT REGIONS/TYPES OF OIL WITHDIFFERENT DRIVERS
 DEPLETION INFRASTRUCTURE
 TECHNOLOGY30IEEJ: July 2013 All Right Reserved

SUPPLY CURVE: STANDARD

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WRONG INTERPRETATIONTNT132IEEJ: July 2013 All Right Reserved

SUGGESTED MODEL ONLY PRIVATE SECTOR PRICE DRIVES REVENUE NON-LINEAR

 REVENUE DRIVES INVESTMENT NON-LINEAR TO LEFT INVESTMENT DRIVES ACTIVITY NON-LINEAR TO LEFT REGIONAL RESULTS

33Contact: report@tky.ieej.or.jp