----- Original Message ----- From: Sven Buttler To: [EMAIL PROTECTED] Sent: Monday, June 12, 2000 10:40 AM Subject: MLL: World Oil Markets 2of3 Eastern Europe and the Former Soviet Union As a result of political and economic turmoil in the FSU, oil consumption in 1996 was 55 percent below its 1987 level (Figure 39). In 1997, however, there was an increase of 0.2 million barrels per day over 1996. Oil use in the FSU is expected to remain at about the 1997 level through 2000 and then rise through the rest of the forecast period. The reference case projection for 2020 is 7.6 million barrels per day, still below the peak level of 9.1 million barrels per day for the FSU in 1982. Petroleum consumption also declined in the early 1990s in Eastern Europe but has been rising slowly since 1995. A trend of slow growth is expected to continue, with petroleum consumption rising to 1.8 million barrels per day by 2020, the same level as 1989. In contrast to the FSU, all the increase in Eastern Europe is projected for the transportation sector. Petroleum consumption in other sectors declines slightly in the projections as natural gas is substituted for oil. Figure 39. EE/FSU Oil Consumption by Region, 1970-2020 [Sources] World Oil Price The near-term price trajectory in the IEO2000 reference case is considerably different from that in last year's International Energy Outlook (IEO99). In IEO99, the rebound from the plummeting oil prices of 1998 and early 1999 was expected to occur gradually out to 2005, based on a recent series of unsuccessful attempts by OPEC member nations to adhere to announced production cutbacks. The IEO2000 reference case incorporates the dramatic 1999 price increases that have followed the latest, so far successful, pledges by OPEC and some non-OPEC producers. In both outlooks, the reference case price trajectory beyond 2005 shows a gradual increase of about 0.4 percent per year out to 2010, reaching $21.00 per barrel (in constant 1998 U.S. dollars) in 2010 and $22.04 in 2020. Three possible long-term price paths are shown in Figure 40. Figure 40. World Oil Prices in Three Cases, 1970-2020 [Sources] Oil demand rises significantly over the projection period in all three IEO2000 price scenarios. In the high and low world oil price cases, the increases are 34 million barrels per day and 44 million barrels per day, respectively. The assumed size of proven worldwide reserves (more than 1 trillion barrels) and U.S. Geological Survey estimates of ultimately recoverable oil imply that resources are not a key constraint on world oil demand to 2020. More important are the political, economic, and environmental circumstances that could shape developments in oil supply and demand. The Composition of World Oil Supply The IEO2000 reference case projects an increase in world oil supply of almost 40 million barrels per day over the projection period. Gains in production are expected for both OPEC and non-OPEC producers; however, less than one-third of the production rise is expected to come from non-OPEC areas. Over the past two decades, the growth in non-OPEC oil supply has resulted in an OPEC market share of 41 percent, substantially under its historic high of 52 percent in 1973. New exploration and production technologies, aggressive cost-reduction programs by industry, and attractive fiscal terms to producers by governments all contribute to the outlook for continued growth in non-OPEC oil production. While the long-term outlook for non-OPEC supply remains optimistic, the low oil price environment of 1998 and early 1999 had a definite impact on exploration and development activity. By the end of 1998, North American drilling activity had fallen by more than 25 percent from its level a year earlier. Worldwide, only the Middle East region registered no decline in drilling activity during 1998. In general, onshore drilling had fallen more sharply than offshore. Worldwide, offshore rig utilization rates were generally sustained at levels better than 80 percent of capacity [5]. The reference case projection indicates that more than two-thirds of the increase in demand over the next two decades will be met by increases in production by members of OPEC rather than by non-OPEC suppliers. OPEC production in 2020 is projected to be more than 25 million barrels per day higher than it was in 1998 (Figure 41). The IEO2000 estimates of OPEC production capacity out to 2005 are slightly less than those projected in IEO99, reflecting a shift toward non-OPEC supply projects in the current high price environment. Some analysts suggest that OPEC might pursue significant price escalation through conservative capacity expansion decisions rather than undertake ambitious production expansion programs. This outlook discounts such suggestions, in light of the generous return on investment that OPEC producers (especially those in the Persian Gulf region) receive even in a relatively low world oil price environment. Figure 41. World Oil Production in the Reference Case by Region, 1970-2020 [Sources] Expansion of OPEC Production Capacity It is generally acknowledged that OPEC members with large reserves and relatively low costs for expanding production capacity can accommodate sizable increases in petroleum demand. In the IEO2000 reference case, the production call on OPEC suppliers grows at a robust annual rate of 3.1 percent (Table 11 and Figure 42). OPEC capacity utilization is expected to increase sharply after 2000, reaching 95 percent by 2015 and remaining there for the duration of the projection period. Table 11. OPEC Oil Production, 1990-2020 Figure 42. OPEC Oil Production in Three Oil Price Cases, 1970-2020 [Sources] Iraq's role in OPEC will be particularly interesting to observe over the next half-dozen years. During 1999, Iraq expanded its production capacity to 2.8 million barrels per day in order to reach the slightly more than $5.2 billion in oil exports allowed by United Nations Security Council resolutions. Such expansion was required in the low price environment of early 1999. For the purposes of the IEO2000 reference case, Iraq is assumed to maintain its current oil production capacity of 2.8 million barrels per day into the year 2000 and to export an average of 1.5 to 1.7 million barrels per day. The Security Council resolutions are assumed to remain in place through 2001. Iraq has indicated a desire to expand its production capacity aggressively, to about 6 million barrels per day, once U.N. sanctions are lifted. Preliminary discussions with potential outside investors (including France, Russia, and China) about exploration projects have already taken place. Such a significant increase in Iraqi oil exports would offset a significant portion of the price stimulus associated with current OPEC production cutbacks. Given the requirements for OPEC production capacity expansion implied by the IEO2000 estimates, much attention has been focused on the oil development, production, and operating costs of individual OPEC producers. With Persian Gulf producers enjoying a reserve-to-production ratio in excess of 85 years, substantial capacity expansion is obviously feasible. Production costs in Persian Gulf OPEC nations are less than $1.50 per barrel, and the capital investment required to increase their production capacity by 1 barrel per day is less than $5,000 [6]. Assuming the IEO2000 low price trajectory, total development and operating costs over the entire projection period, expressed as a percentage of gross oil revenues, would be less than 18 percent. Thus, Persian Gulf OPEC producers can expand capacity at a cost that is a relatively small percentage of projected gross revenues. For OPEC producers outside the Persian Gulf, the cost to expand production capacity by 1 barrel per day is considerably greater, exceeding $10,000 in some member nations. Yet even those producers can still expect margins in excess of 32 percent on investments to expand production capacity in the low price case over the long term [7]. Venezuela has the greatest potential for capacity expansion and has aggressive plans to increase its production capacity to 4.6 million barrels per day by 2005 from the current level of 3.4 million barrels per day. It is unclear, however, whether the current political climate will support the outside investment required for any substantial expansion of production capacity. Tables D1-D10 in Appendix D show the ranges of production potential for both OPEC and non-OPEC producers. The reference case projection implies aggressive efforts by OPEC member nations to apply or attract investment capital to implement a wide range of production capacity expansion projects. If those projects are not undertaken, world oil prices could escalate; however, the combination of potential profitability and the threat of competition from non-OPEC suppliers argues for the pursuit of an aggressive expansion strategy for OPEC. In IEO2000, OPEC members outside the Persian Gulf are expected to continue increasing their production. The outlook for Nigeria's offshore production potential is optimistic, although development of production capacity there is unlikely before 2005. In addition, increased optimism about production potential in Algeria, Indonesia, and Venezuela supports the possibility of reducing the Persian Gulf share of OPEC oil exports Non-OPEC Supply Growing non-OPEC oil supplies played a significant role in the erosion of OPEC's market share over the past two decades, as non-OPEC supply became increasingly diverse. North America dominated non-OPEC supply in the early 1970s, the North Sea and Mexico evolved as major producers into the 1980s, and much of the new production in the 1990s has come from the developing countries of Latin America, the non-OPEC Middle East, and China. In the IEO2000 reference case, non-OPEC supply from proven reserves is expected to increase steadily, from 44.5 million barrels per day in 1998 to 56.6 million barrels per day in 2020 (Table 12). Table 12. Non-OPEC Oil Production, 1990-2020 There are several important differences between the IEO2000 production profiles and those published in IEO99: The U.S. production decline is slightly less severe in the IEO2000 projections as a result of higher near-term oil prices, technological advances, and lower costs for deep exploration and production in the Gulf of Mexico. The rebound in near-term oil prices coupled with enhanced subsea and recovery technologies delays the IEO99 estimated peak for North Sea production by a year to the 2004-2005 time period and slightly tempers the production decline out to 2020. Resource development in the Caspian Basin region was significantly delayed in the IEO99 projection in view of the prospects for a prolonged low price environment. In IEO2000, Caspian output rises to almost 2.5 million barrels per day by 2005 and increases by about 7.1 percent annually through 2020. There still remains a great deal of uncertainty regarding export routes from the Caspian Basin region. IEO99 anticipated significant delays in the exploration and development activities for deepwater projects worldwide. Although there remained considerable optimism about deepwater prospects, significant output from such projects was not anticipated until oil prices returned to a range of $18 to $20 per barrel. With the current rebound in prices, output from deepwater projects in the U.S. Texas Gulf, the North Sea, West Africa, the South China Sea, Colombia, and the Caspian Basin is accelerated in IEO2000 by 1 to 3 years. In the IEO2000 reference case, North Sea production peaks in 2004 at more than 7.2 million barrels per day. Production from Norway, Western Europe's largest producer, is expected to peak at about 3.7 million barrels per day in 2003 and then gradually decline to about 2.9 million barrels per day by the end of the forecast period with the maturing of some of its larger and older fields. The United Kingdom sector is expected to produce about 3.1 million barrels per day by 2005, followed by a decline to 2.6 million barrels per day by 2020. Two non-OPEC Middle East producers are expected to increase output gradually through 2005. Enhanced recovery techniques are expected to increase current output in Oman by more than 150,000 barrels per day, with only a gradual production decline anticipated after 2005. Current oil production in Yemen could increase by at least 100,000 barrels per day within the next couple of years, and those levels would show little decline throughout the forecast period. Syria is expected to hold its production flat through the first half of the decade, but with little in the way of new resource potential, its production declines by about one-third from 2005 to 2020. Oil producers in the Pacific Rim are expected to increase production significantly with the use of enhanced exploration and extraction technologies. Deepwater fields offshore from the Philippines have improved the reserve picture there, and production is expected to reach almost 250,000 barrels per day by 2005. Vietnam's long-term production potential also is still viewed with considerable optimism, although exploration activity has been slower than originally anticipated. Output levels from Vietnamese fields are expected to exceed 500,000 barrels per day by 2020. Australia has significantly added to its proven reserves recently, and it is likely that Australia will become a million barrel per day producer by 2005. Papua New Guinea also continues to add to its reserve posture and is expected to achieve production volumes approaching 200,000 barrels per day by 2005, followed by only a modest decline over the rest of the forecast. India, too, is expected to show some modest production increase early in the decade and only a modest decline in output thereafter. Malaysia shows little potential for any significant new finds, and its output is expected to peak at around 825,000 barrels per day in the early 2000s, followed by a gradual decline to about 625,000 barrels per day by 2020. Exploration and test-well activity have pointed to some production potential for Bangladesh and Mongolia, but significant output is not expected before 2005. Oil producers in Central and South America have significant potential for increasing output over the next decade. Brazil has just recently become a million barrel per day producer and has considerable production potential waiting to be tapped. Its production is expected to rise throughout the forecast period, topping 1.7 million barrels per day by 2020. Colombia's current economic downturn has delayed its bid to join the relatively short list of million barrel per day producers, but it is expected to top 1.2 million barrels per day within 5 years and show little decline through 2020. The oil sectors in both countries would benefit significantly from a more favorable climate for attracting foreign investment. Argentina is expected to increase its production volumes by at least 100,000 barrels per day over the next 2 years, and by 2005 it is also likely to become a million barrel per day producer. Although the current political situation in Ecuador is in transition, there is still optimism that Ecuador will increase production by more than 100,000 barrels per day within the next few years. Several West African producers (Angola, Cameroon, Chad, Congo, Gabon, Ivory Coast) are expected to reap the benefits of substantial exploration activity, especially considering the recent rebound in oil prices. Angola is expected to become a million barrel per day producer within 5 years. Given the excellent exploration results, Angola could produce volumes of up to 1.8 million barrels per day well into the later years of the forecast period. The other West African producers with offshore tracts are expected to increase output by up to 300,000 barrels per day for the duration of the forecast period. North African producers Egypt and Tunisia produce mainly from mature fields and show little promise of adding to their reserve posture, and their production volumes are expected to fall gradually throughout the forecast. Sudan and Equatorial Guinea, which have dramatically increased their production recently, are expected to be producing moderate volumes by 2005 and Eritrea, Somalia, and South Africa after 2005.
