Outlook for 2006

As we start the new year with oil prices 25% higher than this time last year, what are the pundits, trade, journals, and so called experts saying about what to expect in 2006 and beyond for worldwide oil supply?  

By almost all accounts a lot of major projects should be coming on stream in 2006 (or started up in late 2005).  Those include Bonga, Thunder Horse, Erha, Adar Yale, White Rose, ACG Mega-structure, Sakhalin I and II, etc.  At least a couple of those projects, I have some personal knowledge of and fully expect them to produce as planned in 2006.  On the other hand, a number of these projects have been delayed for 6 months to years, and lots of oil that was expected to be on in Iraq and the GOM remains shut in due to war/insurgency/natural disaster.  What does all that mean for 2006 overall liquids production?  Could we actually have peaked in 2005?

Here are some "expert" predictions for crude supply throughout 2006 (in millions of barrels of total liquid unless otherwise indicated).

Total world
CERA                                       2005 - 85.07      2006 - 87.85
(Jan 06, total liq. supply capacity)

Non  - OPEC supply capacity only

Petrol. Intell. Weekly                2006 - 51.08
(Jan 2, 2006)

IEA                                            2006 - 51.61
(Oil market report, Dec 13, 2005)

OPEC                                           2006 - 51.60
(Monthly oil market report, Dec 05)

CERA                                      2006 - 51.09 (Jan, 06)

Needless to say, all these forecasts are using the same assumptions, and the forecasters belong to the same club, eat lunch together, and their families go on vacations together.  

The problem with these forecasts is that they imply far more precision than truly exists in the forecasts.  I am not even sure that we know historical worldwide capacity for even a month in 2005 within +- 200 to 300 thousand barrels.  I would guess that the error in these forecasts for non-OPEC supply to be on the order of  +- 1 million barrels per day.  They, of course, are highly dependent upon 1) the rate of recovery from Katrina and Rita damage, 2) any supply disruptions from 2006 natural disasters, 3) further delay of projects like were seen at Thunder Horse, Bonga, Albacora Leste, etc, 4) the tight rig market worldwide and especially in the GOM, 5) political unrest in Russia, other FSU countries, Venezuela, Brazil, etc., 6) lack of experienced staff, 7) man-made disasters such as plant or platform fires, AND of course 8) the natural decline of the underlying fields.  

So what else

Nearly all pundits, including CERA, are entering 2006 forecasting around $60/bbl for 2006.  If you have read my posts previously, you know that I put very little stock in these forecasts.  I suspect that long term price forecasts used by companies to justify their exploration and development programs will remain well below this level at about $30 to $45 per barrel.   This may seem very low, but it is a major change from where these companies were in their thinking in 2004 and 2005.

Of course the price that oil is sold at is dependent upon the available supply capacity, the quality of the average barrel of crude compared to the refinery capacity for that crude, and the overall demand for crude.  Demand of course is dependent on worldwide economic activity and price so we pretty much have a Catch 22 here.  Stuart's prediction of $65/bbl +/- $20 is pretty much my thoughts, although my error bars would be slightly narrower.

Some other predictions

Dr. A. F. Alhajji, writing in World Oil claims

Despite record oil prices, Middle Eastern oil producers have not, and will not, witness a boom similar to that of the 1970s. This result will have a significant impact on the future of world oil markets. These countries will not invest enough capital to expand production capacity to meet growing demand over the next 25 years. The oil producing counties will not be able to meet the predictions of IEA and EIA. If world demand projections by IEA and EIA are correct, then we should expect a world energy crisis - not because of a lack of oil resources, but because of a lack of investment in the major oil producing countries.  

And in the same publication, Dr. D. Nathan Meehan, President, CMG Petroleum Consulting Ltd., Houston writes something you might have heard me say in the past:

Easy pickings are gone. Field studies that my colleagues and I have completed in the last few years are yielding somewhat different results as we reevaluate mature fields. We routinely integrate 3D seismic, integrated petrophysics, fracture and fault modeling, well testing, reservoir simulation, etc., to identify ways to increase recovery and production rates in mature fields. These studies are our bread and butter, and the forecasts we used to make generally had increased oil and gas rates in our look ahead, as we recommended additional drilling, pattern realignment, expanded flooding, etc.

More and more, our forecasts show only decreased decline rates and "dragging out the tail," as increasingly detailed analyses integrate real-time monitoring, intelligent wells and other advanced technology in place in the fields. The easy pickings are long past, and almost all of what once were marginal projects have been completed. We are helping not only independents, but majors and NOCs, pursue projects with ever-climbing costs per barrel and increased risks.

I guess the ultimate question is whether we peaked in 2005?  My answer to that is I doubt it, but as many smarter people than me have articulated, we won't know until after it has happened and we can see the peak in the rear view mirror.

"...we won't know until after it has happened and we can see the peak in the rear view mirror."

Even then we might not know, because war might interrupt supplies in such a way as to obscure peak. In light of what's lining up around Iran, and their probable response, this is a very possible complication.

Is there a chance they might call this a "technical" peak? The analogy being a TKO versus the regular knock-out.  In that case it will forever carry an asterisk.
According to The Australian on 16 Jan, quoting the Financial Times, Sakhalin 2 is $10 billion over budget. Although they don't explicitly say so it must be behind schedule as well.

See http://tinyurl.com/9t7l9

May be we should concentrate more on "depletion watch" than new projects watch. The peak means that depletion will overtake new production coming online. There are important producers that are about to peak or second peak very soon, for instance Russia and China.
I am not even sure that we know historical worldwide capacity for even a month in 2005 within +- 200 to 300 thousand barrels.  I would guess that the error in these forecasts for non-OPEC supply to be on the order of  +- 1 million barrels per day.

I've been working on a solution to this for the last two days. Almost done. I'll post it here first. You can tell me if you think I'm within 2-300 barrels. That's my goal.

I guess the ultimate question is whether we peaked in 2005?  My answer to that is I doubt it

That depends of what you're talking about:

  1. Light Sweet Crude has peaked before 2005;

  2. Regular Oil to 500m deepwater peaked in 2004 or 2005 (depending of the source);

  3. All Regular Oil (including > 500m deepwater) has probably peaked in 2005 - at least is on a plateau since June 2004;

  4. Non-OPEC all liquids is also flat since mid-2004, the likely outcome of this is a peak in 2005, we'll get sure by the end of 2006.

There are a lot of 'peaks' going on right now.

But we have not even dented tar shale and that is now just economically feasible and coming on line.

Nor are we including the potential for exploiting coal as a syn-fuel - a refinery for this is being build in Pennsylvania as we write.

Do you have any idea how slow the ramp-up in production of non-conventional sources is? We are talking about 10's of thousands of barrels per day (at best). What we are discussing here is the need for between 1 and 3 million barrels-per-day of new production - every year.
We are just talking about oil. Battery cars and synfuels aren't oil.
Cheap oil is a low capital and investment cost way to make things like gasoline. Now we have to switch to high capital and investment cost ways to make things like gasoline. That and accept the kind of performance limitations of battery cars. Think of battery cars as being the equivalent of reducing gasoline consumption of your car by 90% at the cost of doubling the price. You have to buy two cars. The battery car for most of the time, and the regular car for when you have to drive farther than the battery will let you.
And by the way, the kind of thick steel needed for synfuel plants is also in short supply, in the form of iron ore, coking coal, steel blast furnace capacity, and tube and rolling mill capacity. Not to mention large valve forging capacity, large pump and motor capacity, and engineering, construction, and infrastructure capacity in general.
I expect that OLED wallscreen telecommuting will kick in around 2010 as resolution goes up high enough to overcome the psychological barrier to virtual environments and we progressively reduce commuting. This will probably be more important as a way of coping with peak oil than synfuels and battery cars combined.

  You probably have not had a chance to read Bubba's article on oil shale.  I don't think oil shale, or one CTL plant will save us.


Thanks for pointing me there. There has been progress made on this front. Yes, it is a high energy user (and the French have suggested Nukes to get the oil out). But my reading suggests that if oil is over $35 a barrel than you can make a profit on it. Canada is ramping up on the production from oil shales/sands.

But the points you guys made about scale is valid. And anyway, it needs to address greenhouse gases at some point as well.

We will have a lot of pissed off rednecks in this country if they can not put fuel in their Mustangs.

Jack, don't you understand physics....you need an energy supply to make shale into gas.  And the best source is natural gas....now that we are in a decline in natural gas...it becomes too expensive each year gas becomes more rare...so shale and tar sands will not be the miracle people are looking for in the future....because....within a few years...the natural gas that is used to produce this energy source will be 5-10 times the price.  

Maybe if we built nuclear reactor plants by these shale and tar sands, can they be produced...but that would take 10 years.  People need to stop this wishful thinking.


This is why I love the Oil Drum, as I can learn from it. And Physics is definitely not my long suit.

I am reminded of Germany and even Italy in World War II. Both built syfuel refineries and very quickly. Did it solve their fuel problems, no, but if Italy, the least of the Great Powers, could get a plant up by 1942, it should not take ten years to get more than a couple of plants going.

But the point is valid that for the immediate future it will take more effort, and of course we are not even talking about greenhouse gases.

How much oil was that plant producing in 1942?
I do not know and checked around for Italy. Pirelli had the plant.

Germany started in 1938 to push sythetic fuel production. In 1939 it produced 2.2 metric tons.
1940 - 3.3
1941 - 4.1
1942 - 4.9
1943 - 5.7 and than a decline after that.

Remember this was a Germany that used 600,000 horses for its army when it invaded the Soviet Union in 1941.

Standard Oil helped get this working back in 1938 with German industry.

Opps, the German figures are correct but the Italian synthetic plant was for rubber and for Pirelli to build it makes good sense.
roger that
I am not one who buys into segregating types of oil and then saying "we peaked on X type oil".  Liquid hydrocarbons that can easily be converted into transportation fuel and brought to market are what matters.  Oil has always come from many sources.  Deepwater production is only an extension of offshore production that started many years ago (I am not sure right now when, but I think it was before the '50's).  Part of what is produced in the Canadian Oil Sands is conventional production, part needs to be assisted by reducing the viscosity of the fluid (through heating) and part needs to be mined.  In nature their is a continuum between these types of oil under the ground.  I don't believe in segregating them for accounting sake.
We may have a better sense in a few days and another statistically dense post by Stuart, whether April or November 2005 will serve as a peak. Given that crude oil prices are holding up around $64/bbl, notwithstanding the remarkably mild winter in Northeast and Midwestern North America, I suspect the 2006 average of $65/bbl may be marginally too low. More like $70/bbl; with less demand destruction than one might surmise given the greater inelasticity of oil use than we currently realize.

(For what it's worth: I may be one of the few non scientific types/non-economists posting here - I am an attorney in Downeast Maine, (wearing a flame retardent asbestos suit),fascinated by the subject, and burning copious amount of heating oil and gasoline.)

I've been wondering why crude oil prices have continued to climb even as nat gas prices have come down. I don't think heating oil is that big a factor.

Today I am reading that the markets are nervous about Iran. With them re-starting their nuclear program and the possibility of UN sanctions, it could lead to a reduction or even embargo of Iranian oil exports. That would cause major shortages.

The odd thing is that the recent run-up in oil prices started a good two or three weeks ago which I think was well before the Iranian situation got as serious as it has. I wonder if this reflects insider knowledge of the upcoming political crisis. Markets are supposed to be good at eliciting that kind of inside information and putting it out for public view in the form of price changes, but I don't know how often it really happens.

On a BTU basis, natural gas accounts for 5 times the amount of home heating in the US as does heating oil.
I am guessing that trends account for the increase. If you follow the price trends last year, they increased, possibly for slightly different reasons. I think that winter demand started the increase in oil price and then Gazprom etc carried on and increased the trend. I am wondering if the oil market will follow the trends of the past couple of years and increase in price 'till around May time, fall a bit, then pick up from June onwards till Octoberish, then fall 'til late December. I am sure better predictors than me reading this site will comment on this.

There was an article in the Sunday Times about a psychological analyst. He said to concentrate on a couple of relevant facts. You can have too much information; increasing information leads to overconfidence rather than increasing accuracy. Also ignore forecasts, as they tend to be wrong.

I totally agree with your psychology comment.

With regards to home heating, there is switching ability from nat gas or oil to electric or wood but not much in the way of nat gas to oil or vice versa, unless someone chooses to buy a whole new furnace.
Nat gas has been roughly 5 out of 7 quadrillion BTUs for past 5 or 6 years with oil being 1 quad and the balance being electricity and wood. (so actually NG is more than 5 quads as there is more electricity created from NG than oil.

My prediction for non OPEC supply in 2006 is  50.75. Given that OPEC think or have been told that Norway's oil production will increase, Mexico's stays the same and the UK's decreases a little, I bet that my figures will be nearer the true figure than the so-called experts. The wild card will be how hard the Gulf of Mexico is hit this year, given that the hurricane season will almost certainly be worse this year than last year.
Norway themselves have said oil output would decline by 5% in 2006. I think I'll trust the Norwegian Petroleum Directorate over OPEC.


Norway: Oil Production Predicted To Decline
January 12, 2006 20 03  GMT

Norway's oil production is predicted to decline 5 percent in 2006, the Norwegian Petroleum Directorate said Jan. 12. Norway, the world's third-largest oil exporter, expects to produce roughly 2.43 million barrels per day this year, down from 2.56 million in 2005. However the government reported an increase in natural gas exports for 2005, at record flows of 35.3 trillion cubic feet, up 8 percent over 2004 totals. Investments in developing offshore fields also increased to 12.57 billion in 2005, an increase of 23 percent from 2004.

Can you expand on how you think Mexico will stay the same?

Isn't Canterell now in decline?

Can you break down for me the new production, which will offset the decline?

I don't think Mexico's oil production will stay the same, but OPEC certainly seems to think so. OPEC's monthly report has been optimistic for the past year or two and seems to refuse to believe in production decreases can occur for any country. I guess depletion doesn't exist in their dictionary. It will be interesting to see how they cope and explain the production figures that will occur in the next couple of years. I guess there will be a lot more "production difficulties" occurring for many more nations.
Bubba, how did you come up with oil prices being 25% higher than last year. The way I see it, depending on how you calculate, they are about 35-40% higher.
You are right.  I was going by memory (because I lost a bet on this last year and thought I remembered the numbers), and thought that the price going into the new year was much closer to $50/bbl than it actually was. I guess I better check my facts a little better in the future.
1/23/06 Issue of Fortune:  "Cloudy with a chance of chaos"

For some reason, Fortune Magazine doesn't appear to have this story (taken from a new book on rapid climate change) on their website, but it is in the hard copy of the magazine.   A very big wild card for 2006 could be the weather.  In the article, they discuss the tremendous effects that weather disasters are already having on insurance rates, e.g., insurance rates on offshore rigs are already up 400% or so.   The article also noted that a lot of ocean front property, and near ocean front property may become effectively uninsurable as time goes on.

In my opinion, this article has to be the most apocalyptic thing that I have ever seen in a U.S. business publication.  I'm sure that there are similar articles in a lot of environmental magazines, but Fortune?  They are basically presenting the possibility of mass starvation around the globe.  They are posing the question that what if the recent good weather since the end of the Little Ice Age was just an interlude between violent weather extremes?  

I believe that each of the Cat 5 Hurricanes--Katrina; Rita and Wilma--reached Cat 5 status faster as the season progressed.  If multiple Cat 5 hurricanes are a regular occurrence going forward, how long before the oil industry effectively gives up on deep water exploration in the GOM?  Also, will the industry rebuild even "moderately" priced production infrastructure that keeps getting hammered in Cat 5 hurricanes?

My guess for the hurricane nightmare scenarion is that the oil industry will be back in 10-20 years with completely submersible "submarine" equipment and add the deep water oil in hurricane areas to the peak oil tail production.
Yeah, I heard that Halliburton is already training the dolphins to man them.
Also notice in that same issue of Fortune, Chevron has an ad saying "The world consumes two barrels of oil for every barrel discovered."
Lots in the news to concern countries that depend on imports of energy.

Sanctions on Iran may be impossible and a change of leader in Kuwait could herald difficulties.

The SysAdmin force envisaged by TPM Barnett will have its work cut out.    

More problems from Nigeria:


"Royal Dutch Shell has evacuated four oil facilities in Nigeria in response to a sudden intensification in the militia violence which plagues the western delta.

The withdrawal of 326 staff and contract workers from the remote flow stations in the swampy region comes after the centres were shut down following a bomb attack on the pipeline linking them to the main export terminal last week."

Thanks for the forecast numbers, Bubba. As you note, a lot has to go right above the ground for 51+ from non-OPEC supply. Taking the two CERA numbers, it appears that they expect 33.98/mbpd (all liquids) from OPEC in 2006 to make their overall number.

Is this OPEC assumption realistic?
The fact that tar sands are being processed using expensive natural gas, deep water exploration is being pushed into ever deeper seas, and Haliburton is working oil fields and pipelines in a war zone all indicate desperation and weakness, not innovation and strength. If this is the year of Saudi Arabia's coming steep declines in conventional oil recovery it only bodes for higher prices, shortages, and more conflicts in 2006.
 This just in on the Jan 17th IEA Oil Market report summary:                

"Global oil supply reached 85.0 mb/d in December, up by 0.6 mb/d from November. Non-OPEC supply for 2005 is revised down by 90 kb/d on weak OECD output to 50.1 mb/d, unchanged from                     2004."

Strangely, while they say Global supply is up by 600,000 b/d from Nov to Dec, they also say OPEC supply declined 280,000 b/d over the same period. Not sure who is supposed to have made up the difference.

In the Dec report, they said November supply was 85.0, now evidently revising down Nov to 84.4. April/May 2005 are still highest ever. Also now saying flat non-OPEC from 2004 to 2005. Waiting for the final, revised Dec and 2005 numbers next month.