What's new in production

	Vol. 225 No. 9
ROBERT E. SNYDER, EXECUTIVE ENGINEERING EDITOR

A 50/50 oil market. Consumers around the world are now facing a “50/50 oil market,” according to Daniel Yergin, Chairman of Cambridge Energy Research Associates (CERA). “There is now a 50/50 probability that the price of oil will reach $50/bbl within the next 50 days,” he said.

A price spike to $50 would be likely to occur if one or more supply disruptions removes 500,000 to 750,000 bopd from the market for several weeks. This is possible because, “The world has one of the smallest cushions ever for absorbing a loss of supply, while demand growth is the strongest in a generation. These conditions mean the world oil market is even tighter now than it was during the 1973 oil crisis.

“While spare capacity is at about the same level today as it was then – 1.5 MMbpd – on a percentage basis, the oil market is actually tighter now than in 1973. Because of the growth in output since then, 1.5 MMbopd equals less than 2% of world production, whereas in 1973, it equaled 3%,” Yergin said.

James Burkhard, CERA's Director for Global Oil analysis, observed, “Demand growth in 2004 is more than double the average of the preceding six years. Total world oil demand is now 81 MMbpd, and spare capacity – the shock absorber for the world economy – is running very thin. Concerns about the possible disruption of production of the Russian oil company Yukos are reflected in the price because the present level of spare capacity is less than the output of Yukos alone.”

Factors in this outlook include: Potential disruptions; Demand growth; Speculation; and Strategic reserves. Violence and political turmoil in Iraq, Nigeria or Venezuela could lead to significant production disruptions. While the Yukos affair has not yet negatively affected Russian oil production, this could change if government efforts to seize core Yukos assets leads to chaos. The oil market's attention in Venezuela recently saw two sides engaged in a political struggle. And fears of terrorism also hang over the market.

The last time prices were in the upper $30s to low $40s was in 1980, during the Iran-Iraq war; then, demand fell 2.6 MMbpd during the second oil price shock. But this year, demand is on track for the largest annual gain in a generation, at least 2.2 MMbpd, to an annual average of 81.3 MMbpd. Yergin said, if the global economy avoids a significant downturn, prices could remain at the higher end of the spectrum. Recent disappointing GDP and employment numbers are a “clear reminder of the effects on the economy when prices spike, i.e., $50 oil would stifle world oil demand growth.”

Speculators on the NYMEX crude oil futures position can affect oil prices. If they decide to reestablish a large net long position, prices could quickly rise to new highs. Conversely, should product margins slip and fundamentals weaken, speculators could quickly move into a large net short position, weakening prices. And, in all but the most dire supply disruptions, a large release of government-controlled strategic reserves in the industrial world could prevent oil prices from exceeding the $50 to $60 range.

Burkhard says, “A mix of three factors would be required to bring prices down. These include a slowing of the present stellar world economy, a relaxation of political tensions and the buildup of additional supplies. New supply will be coming to the market later this year and significantly building up over the next two to three years, but that will have little immediate effect.

Two storms interrupt GOM drilling/ production. US Gulf of Mexico operators got a double reminder, during the second week of August, that the relatively quiet hurricane season so far this year could still threaten their drilling and production operations. Several operators evacuated non-essential workers from platforms in the Central and Eastern GOM as tropical storms Bonnie and Charley threatened oil/gas fields offshore Louisiana, Mississippi and Alabama. As the Gulf of Mexico Newsletter reported, Bonnie later weakened and came ashore on the Florida Panhandle with little damage. Conversely, Charley reached hurricane status, and moved across Florida on the 13th, on a northeasterly path, doing billions of dollars damage, plus loss of life of up to 19 people.

Gulf operators “erred on the side of caution” by evacuating workers and shutting-in oil/gas production as the storms approached the Gulf. Later in the week, some operators began returning workers to rigs and platforms and ramping production back up as the storm danger subsided. Kerr-McGee evacuated its Neptune platform in the Eastern Gulf, but sent the workers back on August 13.

Shell planned to return the 535 workers evacuated from its rigs and platforms throughout the Gulf over the weekend, when it restarted subsea well production and planned to continue ramping up production. Shell had shut-in 76,000 bopd and 175 MMcfd gas from subsea wells at Princess and Crosby fields.

ExxonMobil and Unocal also began returning rig crews, contractors and other employees to Gulf rigs late in the week. Other operators that evacuated people and temporarily shut-in production included Anadarko, Marathon, ChevronTexaco, Apache and BP. Anadarko had shut-in 28,000 bopd and 22 MMcfd gas. ChevronTexaco shut-in 48,000 bopd and 72 MMcfd gas. BP evacuated some 1,200 employees.

Major pipelines that transport oil/gas to US onshore markets were shut-in, in preparation for the incoming storms. Williams shut in 300 MMcfd and 200 MMcfd of gas on the Transco and Gulfstream pipeline systems. El Paso shut in gas production on the Southern Natural Gas system and also the Tennessee Gas Pipeline. Production flow was returned to normal levels later.

Despite the flurry of shut-ins, evacuations and pipeline shut downs, it had relatively light impact on drilling and production activities. According to the MMS, workers were evacuated from 154 platforms and 32 rigs in the Gulf as of Aug. 12; but, by Friday the 13th, only 48 platforms and 23 rigs were still evacuated. The level of evacuations as of the 13th, in terms of personnel working offshore was equivalent to 6.28% of the 764 manned platforms in the Gulf and 19.67% of the 117 rigs operating.

Shut-in oil production totaled nearly 313,664 bopd, shut-in gas 910.3 MMcfd. Shut-in oil was about 18.45% of daily oil production in the Gulf, while shut-in gas equaled 7.4% of daily Gulf production of 12.3 Bcfd. With potential hurricanes, it's obviously better to be safe than sorry.