Five minute optimism on oil supply

Data on which to predict when oil supply and demand will cross is not that easy to get or, when found, to be credible. Consider the case of Venezuelan oil. Venezuela is the fifth largest producer of oil, at around 3 mbd. But the actual number varies with the report.

President Chavez recently announced that Venezuela is currently running about 120,000 bd below the quota (which is 3.154 mbd) but will raise production to quota levels by the end of the year. Which would be a considerable help in the supply:demand balance, if these numbers could be believed. Unfortunately there is a body of opinion that suggests that their production is some 500 to 600,000 barrels a day below the limit at this time.

However if that 0.5 mbd could be recovered and the increased production from the deepwater Gulf of Mexico, Canadian oil sands, Brazil and Angola, which ESAI project to increase non-OPEC supplies by 1.4 mbd next year, then lo our total would closely approximate the growth in demand. There would, with the additional production from the Middle Eastern partners of OPEC, be enough oil to meet next year's growth in demand, with just a little demand destruction where poorer countries cannot continue to maintain their oil subsidies. There might be no energy problem until 2007.

Sorry, but you now have to wake up.

Most of the reserves, including those from Saudi Arabia, are in the heavy oils. ConocoPhilips just announced a $3 billion program to upgrade its refineries to handle that oil, but won't start spending the money until next year, and its impact will likely start only two years out from then. In regard to production from the deep waters of the Gulf, as an example Statoil just purchased EnCana's assets there including a recent discovery. They do not see a significant production gain from those fields until 2008.

Venezuela will now increase the taxes on oil companies and potentially make it retroactive. This may well lead to the same problems that Russia encountered in doing the same, and have a further negative impact on production. And given that they are also going to look into other possible irregularities the likelihood of ongoing litigation and the negative impacts on production should not be understated.

And of course, when we add up all the potential increases in production, we are neglecting the decreasing production from existing fields. And Venezuela, as an example, has been in a declining production mode now for some time.

It does not take much of a web search, following optimistic news reports, to find oneself, if anything, more pessimistic than ever.
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If one reads "Failed Crusade" by Stephen F. Cohen, one understands why Putin has done to Yukos what was done. Similarly, Chavez in Venezuela is trying to put thye income from oil sales to work for the WHOLE country, not just its elite as was the case in the past. This is also true in relation to what else is going on south-of-the-border. For essential background there, read "Inevitable Revolutions" by Walter LaFeber.

Things are likely to get worse as both Canada and Mexico realize they must pull out of NAFTA to keep their hydrocarbon resources for domestic use. We should remember why Wilson invaded Mexico during its Revolution: to protect US oil interests from damage/expropriation; we should also recall that FDR had to say NO to big oil's demand that he re-invade Mexico when Cardenas finally invoked the new Mexican Constitution's sub-soil minerals ownership clause and nationalized oil. The pre-election coup attempt through the desafuero device, as reported by, should be seen as a similar attempt to maintain control of Mexico's resource base, what I call the Open Door in action.

At last year's SolFest (RealGoods alternative enegy and lifestyle fair in Hopland, CA) I had the opportunity to talk with Julian Darlan and Richard Heinberg. We agreed that the first crisis to hit would be the natural gas shortage, which might by itself be enough to trigger the implosion of our debt bubble. The only items seen in the corporate media are the human interest stories in response to rising rates that never mention supply depletion. I've emailed authors of such items to tell them why rates are rising and ask them why they didn't inform their readers of this easilly found fact; I almost never get a reply.

So, when Indonesia and the UK venture forth on the world market looking for imports as China recently has, where does that fit into the calculus? When Mexico has to follow suit? Tar and shale? Remember folks, it's all about the rate of extraction not the size of the deposits. I don't see us slipping this noose.

Oil depletion is one noose that will not be slipped.

Fresh water is another we cannot slip without population reduction.

It is too late to avoid the economy's eventual retrenchment from our dearth of savings, federal and personal debt loads, our housing bubble, corporate corruption, trade deficit, etc. (When have so many things ever been so wrong in an economy?)

Other resources like silver, cement, platinum, iron, etc. have also risen in price not just due to increasing transport expenses, but due to their relative scarcity on the world market.

If it isn't oil, then we will consume our way to another crisis unless we change to another way of living, another set of values.

There has been some speculation that other NOC's are eyeing US oil companies for acquisition. Whatever the case, my industry is expecting further consolidation, as it is far less risky to buy existing production than to wildcat for new oil and gas. And every company seems to have a lot of cash right now.

But with each consolidation, more of our depleted work force are let go, which might best be put off from the larger POV.

As contracts are made and supplies tied up for increasingly longer terms, our country will be in jeopardy much sooner than many others. Our belligerent attitude, military adventurism and conspicuous consumption have made much of the world regard us as a dreadful business partner.

I've worked on a few basin projects in Venezuela over the last couple years. Foreign companies are actively pursuing gas prospects within their leases but not oil because of the tax structure. If they find oil they will produce it, but they are drilling for gas. Maybe high oil prices will change their minds or maybe the tax structure will keep changing.

Also -- the national oil company is now filled with unexperienced folks at the research level. They have quite a bit of catching up to be at the top of their game.

Do you know what the main market is for the natural gas? Local power, petrochemical plants, exports . . .