Monday, October 15, 2012

Manifa: Saudi Arabia’s last giant, a confirmation of commodity constraints on global growth.


            The Manifa field in Saudi Arabia is estimated to hold about 12 billion barrels in proven reserves, and the project that is currently in progress will add 900,000 barrels per day of extra production to the claimed capacity of 12.5 mb/d that the Saudi’s claim to have but never actually produced.  The project will likely be completed by around 2015, although some suggestions were made that it will be done a lot sooner.  This is Saudi Arabia’s last giant field waiting to be fully developed.  Production expansion may proceed at other giant fields in the future, but increases will be modest at best, and most likely, most projects will actually be meant to keep production from declining.  The Saudi kingdom still has many smaller fields, which can be brought online, but most of them will have a very short lifespan, and none of them will produce significant enough volumes to greatly affect Saudi Arabia’s overall production volume.  At best, they will help mask the decline in many of the Kingdom’s aging giant fields.  It is safe to say therefore that with the completion of Manifa, we will most likely reach the maximum point of Saudi production capacity this decade, and there will only be one direction from then on, and that is down.

Why this should not worry us for the short run:

            The most common response to this sort of news is to try to deny the facts.  Saudi Aramco, will make empty statements about how they could keep increasing their production rate for many decades to come.  Western analysts will back those claims, or point to the US as the next Saudi Arabia, given that fracking has greatly increased oil production rates at the Bakken and Eagle Ford shale oil projects.  Then there are also those who say that it does not matter, because we have plenty of other resources, such as natural gas, coal, and of course renewables such as bio-fuels, wind, solar and so on.  Technology in conjunction with guidance from the market is also making us ever more efficient.  Thanks to these factors, taken individually, or together we will prevent our society from suffering through the much feared super spike in global oil prices, which many who believe in the peak oil event claim that is upon us

            Those are all great stories, but the real story, which should give us reason not to worry for the immediate future, is the slowdown in the global economy since the last oil price spike in 2008.  China, which was the engine of demand last decade, has slowed down significantly in the past year, and this may have become the new normal.  Dow Chemical’s CEO, recently stated in an interview on CNN that he believes that China’s economy is only growing at the low rate of 2-3%, as opposed to last decade’s trend of 10%, despite China’s current claim that they are growing at 6-7% annually.  The rest of the emerging world is also in slowdown mode, and will probably be so for a while.  Europe is a big mess, the US will likely have to deal with that 8% of GDP deficit eventually, and they cannot hope to grow out of it.  Spending cuts, and increases in tax collection will have to be implemented, and that will lead to a further slowdown in growth in the world’s largest economy.  The only place where we should expect continued sustained increases in demand is the same place where the oil exports come from, such as the Middle East, South America, a few places in Africa and Canada.

            Considering all this, it is safe to say that we no longer have to fear a price spike, unless a sequence of unforeseen events will cause a large chunk of total global production capacity to go offline for a considerable amount of time.  The only thing I can think of at this moment, which would fit the description, would be a regional war in the Middle East, involving most oil producers, including Saudi Arabia and Iran.  Aside from that, the price of oil should remain in the $100 to $140 range for the Brent benchmark for the rest of this decade, and probably next.  There is in fact more of a chance that the lower end of the trading range will be breached than the higher end.  Even if total global liquid fuel production will stagnate, in the next few years, it is still not enough to warrant a breach of the upper end of the price range for a sustained period.  The weak economy will react to the price by undergoing demand destruction.  So all the advice out there for people to expect great increases in the price of oil and adapt accordingly are in fact misleading those who believe this to be the case.

Implications for the long term:

            My prediction that there is very little chance that there will be another super-spike in oil prices may sound like good news, except as I already pointed out, the reason for us not to expect a super price spike very soon is the struggling global economy.  For the longer term, what this means is that Saudi oil exports will decline by possibly significant volumes, depending on how well they will perform in their effort to constrain domestic demand, which has been running at over 5% growth per year on average, for the past five years now.  If they can dampen that growth rate to maybe 3% per year, perhaps we will lose only about a million barrels per day of global net exports per decade, assuming that Saudi Arabia will continue to produce at current levels for many decades to come.  There will likely be an increase of perhaps two or three million barrels per day from Iraq in the next few decades, which should make up for that (if all will go well).

            On the demand for oil imports front, I think it is important to recognize that the EU, the US, and Japan, will likely continue to decrease their reliance on oil imports, due to varying factors, the most important of which is the stagnated economy in these countries and regions.  Increased production from US unconventional sources will also play a role, although we have to keep in mind the continuing decline in the North Sea region, as well as the coming decline in Gulf of Mexico production, which will decline at a similar pace that US unconventional oil will come online.  I believe it is reasonable to expect that demand for oil imports from these countries will decline by 2030, by about 3 million barrels per day.  In this assessment, I expect the economy of these countries to grow collectively at an average of 1% per year, while efficiency gains will amount to 1.5% per year, giving us an average net decline of .5% per year.  Currently, these countries and regions consume collectively about 35 million barrels per day, out of a total of 88 million barrels per day consumed worldwide according to EIA data.

            Increased demand for imports will mainly come from Asia, but it is important to recognize the slowing trend happening there.  Economic growth in Asia, excluding Japan should continue at a pace of about 4% per year, and if we are to adjust for 1.5% in efficiency gains there as well, we get average growth of 2.5% per year for oil imports until 2030.  Current consumption in the region is about 24 mb/d, excluding Japan.  So, by 2030, they should in the absence of a total global economic meltdown consume about 37 mb/d.  That increase of 13 mb/d, will in part be offset by declines in demand for imports from the US, EU and Japan of 3 mb/d.  It is possible that South America, Africa, Canada, as well as possibly Central Asia, could collectively bridge the gap of the 10 mb/d extra imports that Asia will have to source.  After 2030 however, I doubt that things will be so simple, because we are running out of places where there is still potential for production growth.

            So as important as the story of Saudi oil production is, it is important to remember to draw the right conclusions.  Manifa is a piece of the puzzle which gives us reinforcement for the view I expressed in my book as well as in my blog. For reasons that no longer have anything to do with the size of government, or tax cuts, we are faced with a growth rate ceiling that is gradually moving lower (Read my March article on maximum potential GDP growth to 2030 Here for further clarification on the situation.  The most recent IMF growth outlook, seems to confirm my views).  With the US, EU, and Japan collectively growing at the painfully slow pace of 1% per year on average, while Asia will have to slow to 4%, from about 6% in previous years, we are looking at a painful future. Politicians in the west try to convince us that government spending and taxation are important, mainly because these are the only factors they have the ability to talk about and control, given their ideological constraints.  Unfortunately, it is becoming more and more evident that as far as our long-term economic trajectory, these issues are becoming more and more irrelevant.  The fact that Manifa is Saudi Arabia’s last giant field in their portfolio, yet to be fully developed is a far more important factor for the future than Romney’s tax cuts, Obama’s “Obamacare” and a host of other hotly debated issues.  This is something to consider, especially for the American electorate, which has been bombarded with a media blitz on these issues for months now, despite the fact that there are more important but unfortunately complex issues we need to deal with.

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