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Sunday, December 17, 2017

Where will future oil come from?

Oil demand is generally forecast to increase annually by just under 2%, or 1.5 mbd, over the coming years. This means that a great deal more oil has to be squeezed out of current oil wells. 

 

Oil production in some major production areas such as Indonesia, North Sea and the U.S. has matured and is on the decline. Conversely, in North Africa and West Africa it is expanding. The average increase in African oil production over the last 10 years was 0.257 mbd and over the last 5 years was 0.419 mbd. In the above projection an increase of 0.300 mbd is assumed.

 

Looking at North Africa, while oil production in Egypt is declining, Algeria and Libya have become more positive to foreign investments and are both increasing production. In West Africa, Chad is a new oil producing country that started up in 2003; in Equatorial Guinea oil production has increased from virtually zero to 0.4 mbd in 2006; a similar development has been seen in Sudan. Except in 2006, Nigeria has also been increasing oil production despite a great many disruptions and controversies in the oil industry. The western Niger Delta, currently shuttered due partially to ethnic and political violence, is assumed to resume operations at 0.450 mbd of capacity in 2008. Angola sees capacity rising sharply from currently 1.5 to 2.0 mbd by mid-2008, then envisages a levelling-off in a 2.0-2.2 mbd range for the period through 2011.

 

Oil production in the Former Soviet Union has increased by some 6 mbd since 1996 and will probably pass 13 mbd this year, which was also the maximum in 1987 during the Soviet Union period. The average increase in production during the last ten years in this area was 0.534 mbd, the average over the last five years was 0.644, but that includes 2003 and 2004 when the increase in production was at the maximum level of almost one million barrels per day. It is assumed that the production increase will be somewhat less in the future and in the above graph an increase of 0.400 mbd is assumed.

 

Taking in addition to that forecasts of an annual increase of 0.175 mbd in South and Central America and 0.1 mbd in other areas, the Middle East is assumed to make up the balance of some 0.6 mbd annual increase. In 2000 the Middle East had already passed the previous maximum reached in 1977 of 22.5 mbd and production reached 25.4 mbd in 2006. A large part of this projected increase could possibly be made up by Iraq, which produced 2.6 mbd in 2000 and only 1.9 in 2006. However, with continued hostilities in the Middle East, Saudi Arabia may end up taking centre stage and will have to set a new production record every year as the world's oil producers work to supply an additional 6 mbd by 2011 compared to oil production in 2006.

 

If demand projections that the world will need an additional 1.5 mbd every year prove to be correct, oil and tanker shares still look a good investment. However new oil projects have turned out to be risky and as the world is entering into increasingly uncharted waters on the demand front, there may well be some surprises in store.

 

Contact: Erik Ranheim