OUTLOOK 2005: International
Worldwide Production

Global output struggles to meet demand

Last year’s global oil market, in terms of supply and demand, showed some of the most bizarre behavior in recent memory. Normally, oil demand and prices are inversely correlated. In other words, strong demand normally brings higher prices that in due time cause demand to slack off.

This was not the case in 2004. Instead, demand failed to respond to price signals. Much of this behavior can be traced to a dramatic increase in global economic activity (particularly in China), combined with low interest rates. This combination tended to overwhelm the negative impact of high oil prices, which in turn pushed demand even higher.

A number of unusual factors were part of last year’s equation. For instance, WTI crude on the NYMEX averaged $41.47/bbl, or 33% greater than the 2003 average and nearly 60% higher than 2002’s level, as global product demand raced ahead of supply. Industry and governments were surprised by the magnitude of demand growth, which surged ahead by 2.6 million bopd, or 3.3% during 2004. This was more than twice the rate anticipated at this time last year. This was the highest rate of demand growth since 1976, when demand soared by an astounding 3.3 million bopd.

Meanwhile, growth in new supply was disappointing. A series of late-year disruptions cut the annual gain in non-OPEC crude and liquids output to 1.4 million bpd, compared to a rate of 1.9 million bpd in 2003. Nevertheless, world oil production grew 3.4% last year, to 71.721 million bpd. Much of the gain came from reserve productive capacity that was brought online by OPEC nations in response to soaring demand.

The increase is somewhat remarkable, given that production declines were posted in three of the eight regions tabulated by World Oil, including North America. Not surprisingly, 1.55 million bpd of the 2.335 million bpd added last year came from the Middle East.

NORTH AMERICA
Conventional crude and condensate output was down a sharp 5.5%, to 10.586 million bpd. Losses were across the board, with the largest drop registered in Mexico. The continued loss in US production accelerated.

Canada. Conventional oil production fell 4.8%, to 1.573 million bpd. Nevertheless, total producing oil wells rose 2.1%, to 57,109. Conventional output continues to struggle in comparison to oil sands output that increasingly is a major component of Canadian output. Meanwhile, offshore output on the East Coast averaged 323,000 bopd, down from 336,200 bopd a year earlier.

Mexico. Oil production dropped 7.4%, averaging 3.508 million bopd. The share of total production contributed from offshore edged up to 83.6%, equal to 2.933 million bopd. Producing oil wells increased 3.7%, to 3,353. The portion of this total that is offshore remained at 12%. Once again, the gain in offshore production’s share reflects the multi-year investment that state firm Pemex continues to make in the Cantarell heavy oil complex in the Bay of Campeche.

Others. Preliminary data indicate that Cuba’s output leveled out last year, averaging 59,500 bopd. However, a resumption in production growth is likely for 2005, due to anticipated field development/ rehabilitation plans.

Guatemala’s oil production began to stabilize after a more pronounced drop in 2003. Output last year was off 4.8%, at 20,000 bpd.

SOUTH AMERICA
A four-year slide in output was halted in 2004, as South American production climbed 6.0% to 6.107 million bopd. Most of the comeback can be traced to a recovery in Venezuela’s output, combined with a significant addition in Ecuador, where new pipeline capacity became available. Yet, Colombia fell again, and Brazil was flat.

Venezuela. The debilitating effects of the 2003 strike by PDVSA workers were finally overcome last year, as oil output recovered 15.7%, to 2.58 million bpd. Nevertheless, this average was a far cry from the prediction made a year ago by PDVSA President Ali Rodriguez that Venezuelan output would average 3.4 million bopd in 2004. Also of note is the fact that the share of Venezuelan output contributed by foreign companies grew last year, now accounting for about 1.2 million bopd. For its part, PDVSA this past December brought two new, outstanding conventional wells onstream at Tomoporo field in the Lake Maracaibo region, adding another 16,000 bopd.

Brazil. The plateau in crude output at 1.5 million bpd that was reached during 2003 continued last year. Outages from the Campos basin, along with delays in new field start-ups, were the culprit. Output averaged 1.49 million bopd, for a slight decline under 1%. The share of output coming from offshore was 83%. There is some hope for an increase this year, given the development projects underway, as well as recent, new oil discoveries.

Argentina. The increase in production enjoyed during 2003 was short-lived. Output last year declined 10.6%, to 702,000 bopd. Paradoxically, the number of oil wells actively producing grew 6.1%, to 17,100. Of that number, about 98% were on artificial lift. Gas output averaged 5.16 Bcfd.

Colombia. For a fourth straight year, Colombian output declined, losing 2.1%, to 530,000 bopd. The dropoff reflects the cumulative effect of not enough exploration and development over the last several years. Security concerns are not helping the situation.

WESTERN EUROPE
With a couple of minor exceptions, it was another depressing year for the region’s oil production rate. The largest volume loss occurred in Norway, offsetting modest gains in Denmark and Italy. Output averaged 5.475 million bopd, down 5.5%.

Norway. Preliminary data indicate that Norwegian oil production declined 7.9%, to average 2.82 million bpd. The final average was a disappointment to the Norwegian Petroleum Directorate, which had expected output to average higher. NPD attributed the discrepancy to a lack of production from Snorre and Vigdis fields during December 2004. Two new fields, Skirne and Kvitebjørn, went onstream. For this year, two additional fields, Kristin and Urd, are expected to go into production. They may make up the difference. Nevertheless, for 2005, NPD anticipates somewhat lower output, at an even 2.8 million bopd.

United Kingdom. The good news from the UK sector of the North Sea is that the decline in British oil output was only half the decrease registered in 2003. The bad news is that output is still falling. Production last year averaged, 1.979 million bopd, a decline of 4.2%. Unfortunately, the outlook for 2005, as envisioned by the International Energy Agency (IEA), calls for a further decline offshore of 180,000 bopd, despite 10 new field start-ups or expansion projects coming to fruition by later this year. What further impact the government’s aggressive recruitment of new operators will have remains to be seen.

The Norwegian Petroleum Directorate has given its prestigious improved oil recovery (IOR) prize for 2004 to Statoil’s Gullfaks field in the North Sea. This award was presented to Statoil, together with its license partners, Hydro and Petoro, for extracting more oil and extending the producing life of the field.

EASTERN EUROPE/ FSU
Once again, the Former Soviet Union added to is remarkable restoration of oil output for a sixth consecutive year. FSU output was 8.1% higher, to 11.079 million bopd. Outside the FSU, in the smaller Eastern European countries, production fell 8.3%, to 198,500 bopd.

Russia. Operators added another 687,500 bpd back to Russian oil output, as last year’s average finished at 9.113 million bopd, up 8.2%. However, the growth in output was more pronounced in early 2004, tailing off in the latter part of the year. For 2005, IEA sees Russian production growth continuing to slow on an annual basis with another 430,000 bopd added, yielding an average 9.54 million bopd. Reasons for the slowing of growth include export capacity restraints and more modest expansion plans by several operators.

Other FSU countries. Outside Russia, the other FSU republics improved 8.1%, to 1.965 million bopd. Kazakhstan gained 15%, to 1.175 million bopd, while Azerbaijan produced 308,844 bopd, staying even with 2003’s level. Turkmenistan was up slightly at 208,764 bopd.

AFRICA
Another solid gain was posted by African oil production, which rose 7.7%, to 8.58 million bopd. In addition to increases registered by OPEC members Algeria, Nigeria and Libya, significant contributions were made by Equatorial Guinea, Chad and Sudan.

Nigeria. Output of crude and condensate grew 11% and averaged 2.42 million bpd. As before, more than a third was produced by the largest operator, Shell. This is despite civil unrest in Rivers State in southeastern Nigeria. Whether this latest pattern of violence experienced in late 2004 will repeat again at some point in 2005 is anyone’s guess, However, there is no doubt that last year’s production growth rate cannot be sustained if disruptions to onshore production facilities are allowed to continue.

Angola. Production took another major leap forward, gaining 110,000 bopd, to average 990,000 bopd. Several new wellstreams went into production last year, and this year has already seen ChevronTexaco’s Bomboco’s field produce its first oil. That complex was producing 30,000 bopd early in 2005, and by 2007, it will peak at 100,000 bopd. IEA predicts that Angolan output will rise 165,000 bpd during 2005.

Other countries. Sudan’s output grew 14%, to 284,000 bopd, as additional development wells came online. In Equatorial Guinea, production ramped up 33%, to 325,000 bopd. ExxonMobil’s development in southern Chad achieved its first year of significant operation, averaging 170,000 bopd, enroute to a rate approaching 250,000 bopd.

MIDDLE EAST
Yet another year of significant production increases was chalked up by the region’s OPEC members. However, Iraq continued to underperform expectations, due to disruptions caused by civil disobedience. Regional production averaged 22.5 million bopd, up 7.4%.

Saudi Arabia. Responding to market demand pressures, the kingdom pushed average output nearly 500,000 bopd higher, to 8.925 million bopd. This year, that rate should stay steady at well in excess of 9.0 million bopd. In December, there was formal inauguration of new facilities at Qatif and Abu Safah oil fields, representing 650,000 bpd of new production. The next major jump in productive capacity will occur by mid-2007, when work to “de-mothball” 500,000 bpd of output will be completed at Abu Hadriyah, Fadhili and Khursaniyah fields.

Iran. Production of crude and condensate rose 4.8%, to 3.96 million bopd. Capacity, according to IEA, has been maintained at 4.0 million bopd, despite Iranian claims of 4.2 million bopd. New production due onstream at the end of 2004 from Soroush and Nowruz fields has been delayed, although not for long.

UAE. Output was up another 5.4% in Abu Dhabi, averaging 2.029 million bopd. Production also improved in Dubai, to 270,000 bopd. Deputy Executive Chairman of Abu Dhabi National Oil Company, Abdullah bin Nasir Al Suwaidi, has said that ADNOC and its subsidiaries are planning mega projects to increase output in the near future. He said that UAE’s crude oil output currently stands at 2.5 million barrels per day (bpd). This will rise to 3 million bpd, said Suwaidi. Production capacity of Abu Dhabi Company for Onshore Oil Operations will rise from the current ceiling of 1.2 million bpd to 1.4 million bpd. Offshore oil output capacity will also be boosted by Abu Dhabi Marine Operating Co.

FAR EAST
Another minor rise in output was achieved by the region during 2004, as production averaged 6.591 million bopd, up 0.7%. This gain occurred despite another loss by Indonesia.

China. As detailed by the country’s three major national companies, miracles continue to occur in Chinese oil fields. That seems to be the explanation for official figures that say production inched up 1.6% to 3.255 million bopd, despite reports of diminished capacities at the largest oil fields. CNPC was up less than 1% at 2.197 million bopd, while Sinopec rose 1.2% to 757, 319 bopd. CNOOC chimed in with an 8.8% gain offshore, at 292,565 bopd. CNPC’s venerable Daqing oil field produced 936,600 bopd, or 44% of company output.

Indonesia. The slide in Indonesian crude production seems unstoppable. Output last year declined 3.1%, to 1.114 million bopd. This was despite ConocoPhillips’ start-up of Balanak field offshore, in the South Natuna Sea. The field went onstream at 20,000 bopd, a rate that should increase to 60,000 bopd later this year. Accordingly, government officials have been pressing state firm Pertamina to ensure timely development of the Cepu Block on Java.

India. Production rose 1.2%, to an estimated 667,609 bopd, said the country’s Directorate General of Hydrocarbons. Of that total, about three-quarters was produced by state firm ONGC. Within that amount, roughly two-thirds was offshore. Producing oil wells numbered 4,203, of which 833 were offshore. Crude oil reserves totaled 4.86 billion bbl at the end of 2004. Of that amount, 2.77 billion bbl, or 57%, were offshore.

SOUTH PACIFIC
A significant production loss occurred last year, and the outlook is not particularly encouraging for the new year. Regional output dropped 14.6%, to 620,200 bopd. Major production losses were sustained in all three of the area’s producing countries.

Australia. Production took a major tumble during 2004, falling 14.1% to an estimated 560,000 bopd. There is grave concern that unless the pace of discoveries and development picks up, the country’s output will be consigned to a sub-500,000-bopd level indefinitely. The situation has not been helped any by the ongoing dispute with East Timor over ownership rights to the vast oil and gas deposits in the Timor Sea. The dragging out of the dispute recently prompted Woodside Petroleum to shelve its $5-billion Sunrise LNG development in that area. Stating that it would not spend any more money on Sunrise during 2005, Woodside reassigned all involved staff to other projects.