OUTLOOK 2006: International
Worldwide oil production

Producers meet the growing demand challenge

Higher prices throughout 2005 eased the strain felt by producers by damping, but not entirely stopping, the growth in global demand. According to the US Department of Energy’s Energy Information Agency, world oil supply grew 0.9%, while demand paced that growth at 0.7%. World Oil’s production tally shows a similar growth pattern with a 1.2% expansion in production.

The price signal that was ignored in 2004 apparently took hold in 2005. Oil prices continue to rest at historically high levels above $50/bbl, slowing the pace of economic expansion in China and other developing countries, and forcing developed nations and their consumers to use oil more efficiently.

Oil in storage is at historically high levels as well, so there is no lack of hydrocarbons to meet anticipated demand. Some demand destruction was evident in the US as heating oil stocks rose above normal levels during the early days of winter. Warmer weather across North America has also helped to reduce demand. Consumers across the globe feel the price pinch and have modified their oil usage to compensate.

Several recent events continue to inject fear into the commodity markets and keep prices high. The Iraq conflict continues and clouds the region with instability, even as the newly elected government gains traction. Iran’s nuclear ambitions and threats add to the uncertainty. And most recently, Palestinian elections brought the hard-line Hamas party to the front of the political fray. The general belligerence in the Middle East portends continuing conflict, threatens oil security, and keeps the oil markets unsettled and prices high.

On the positive side, most countries in the Middle East expanded their output over the last year. The FSU countries continued their output expansion, especially Russia. Africa, even with turmoil in several countries, grew its production, as did the Far East and South Pacific regions.

World crude/ condensate production by countries, 2005 and 2004* Click image for enlarged view

NORTH AMERICA

Conventional crude and condensate production increased its downward momentum in 2005 by dropping 8.2%. The US had the largest production drop, with 348,000 bopd lost to the market. The North American region still produces over 10 million bopd and retains its number-three producer status. Of the other countries, only Cuba showed a small increase. All other countries had output reductions.

Canada. Conventional crude oil production fell 5.1% to 1.485 million bopd, while the number of producing wells fell 2,090 to 55,019 wells. Oil sands development continues, driven by high oil prices. Canada operates 68,500 oil wells, 43,400 (63.3%) of them in Alberta. Canada’s oil sands resource is estimated at 1.6 trillion bbl, of which 175 billion are recoverable, according to the Alberta Energy and Utilities Board. With continuing oil sands development, Alberta’s amount and proportion of oil output will likely rise. Offshore production in the Atlantic averaged 285,000 bopd.

Mexico. Oil production in Mexico dropped 12.3% to 3.354 million bopd. Most of this oil comes from offshore fields. The 2.771 million bopd from offshore represents 82.6% of the country’s production in 2005. Most of Mexico’s new drilling will be in onshore fields; 655 wells are planned onshore and 128 will be drilled offshore. Pemex will expand oil drilling in the Agua Fria, Amatitlan, and Ayin-Alux fields onshore, as well as offshore in San Manuel field. It also has an ongoing deepwater exploration program that has several years yet to run and is expected to yield new discoveries.

Other countries. The 1.7% increase in Cuba’s output lifted production to 61,200 bopd. This 1,700 bopd increase from last year shows the success of their field development/ rehabilitation program.

SOUTH AMERICA

This region’s production was off slightly in 2005, slipping 1.2% to 6.222 million bopd. Venezuela led the way with the largest decrease experienced, down 164,000 bopd. Peru gets bragging rights for the largest percentage gain, 20.5%, a 19,000-bopd increase.

Venezuela. Oil production dropped this past year to 2.55 million bopd, off 6% from 2004. This should be a temporary condition, since Petroleos de Venezuela recently announced the discovery of 132 million barrels at Tacata field in Anzoategui state and another 60 million barrels in Chaguaramal field in Monagas state. PDVSA plans to invest up to $5 billion this year in exploration and production.

Brazil. It was another good year for Brazil with oil output increasing to 1.629 million bopd, up 5.9%. New wells in Marlim Sul field offshore Rio de Janeiro added to the increase. Petrobras claims that its reserve base increased to 13.23 billion boe, rising by over 200 million barrels of recoverable reserves. The company declared several new fields commercial. Development drilling over the next few years should continue to increase both annual production and the country’s reserve base.

Argentina. Argentina continued its slide, dropping production 2.7% to 679,300 bopd. The country has 17,880 oil producing wells and should see 1,385 wells drilled in the coming year to help arrest the decline.

Columbia. Colombia slowed its production decline, which dropped only 0.4% to 525,500 bopd. This is the fifth year that Columbia has struggled to stop its production decline. In 2006, drillers will cut 190 holes in the search of new onshore reserves.

WESTERN EUROPE

With the exception of Italy, The Netherlands and Germany, Western Europe failed to reverse its declining production in 2005. The region was off 6.4%, dropping 349,500 bopd, but it still produced an average 5.113 million bopd throughout 2005. Italy added 6,000 bopd, a 5.9% increase; The Netherlands rose 7.2%, adding 3,500 bopd, and Germany improved its production by 2,000 bopd, a 2.9% bump.

Norway. The Norwegian Petroleum Directorate’s projection of 2.8 million bopd for 2005 proved accurate. Their North Sea sector averaged 2.85 million bopd this past year. The coming season will see 150 wells drilled, including 133 development wells. The extensive development program should help replace the declining production from Norway’s North Sea sector. Drilling began on Statoil’s 4,000-m Uranus project in January on block 7227/11.

United Kingdom. There is little good news from the UK North Sea this year. Production from the UK sector dropped 13%, almost triple the decline registered in 2004. The 1.605-million-bopd average produced is 240,500 bopd less than the year before. The number of wells slated to be drilled in 2006 will rise to 290; one can hope that it will slow or stop the increasing rate of decline. Changing tax policies, especially the introduction of a new tax surcharge, could dampen industry activity and inhibit the work needed to find and develop new reserves.

EASTERN EUROPE/ FSU

The Former Soviet Union extended its production expansion for the seventh straight year. FSU production rose to 11.519 million bopd and was divided almost equally between Russia and the Caspian states. Outside of the FSU, Hungary had a 4.5% increase of 1,100 bopd, while Bulgaria suffered a one-third drop in its production to roughly 600 bopd. Other Eastern European countries dropped from 1% to 9%, leaving them with a net reduction of 9,700 bopd.

Russia. During 2005, growth continued in Russia, but slowed to a 2.4% increase. This comes off last year’s strong 8.2% gain and represents a production increase of 221,500 bopd. The country hopes to continue growing its production by 1% to 2% per year, with the goal of eventually producing over 10 million bopd. This is predicated on continued investment funding for its oil and gas industry.

Other FSU countries. Outside of Russia, the other FSU countries expanded their output by 12.9%, raising production to 2.1 million bopd, from 1.9 million bopd. Azerbaijan raised it output over 40% to 435,000 bopd, and Kazakhstan increased its flow to 1.2 million bopd, an 8.4% increase. Much of Azerbaijan’s flow comes from increased production from Azeri-Chirag-Gunashli field.

AFRICA

In 2005, Africa had the largest percentage production increase, 6.3%, of any region, symbolized by this FPSO vessel utilized offshore Nigeria by ExxonMobil at Yoho field.

A solid 6.3% increase was posted by Africa’s oil industry, which raised its oil production to 9.431 million bopd. The percentage growth was led by Angola, Libya, Nigeria and Algeria. Only Egypt and Gabon had reductions.

Nigeria. Crude and condensate production averaged 2.62 million bopd, growing 4.4% over last year’s 2.5 million bopd figure. Continued unrest in the onshore oil fields of the Niger River delta slowed, but has not stopped production gains across the country. Much of the production comes from offshore fields that are separated from most of the unrest. Onshore facilities remain vulnerable.

Angola. African production jumped an additional 257,500 bopd from Angola’s 26% increase. Production averaged 1.248 million bopd for 2005. Major discoveries continue to be made off Angola.

Libya. With a production increase of 7.4%, Libya raised its daily output to 1.645 million bopd. A discovery last year in the J1-NC-186 well in the Murzuq basin close to the Niger border produced 4,650 bopd on test. International oil companies continue to return to the country: Exxon Mobil and the Oasis Group, comprised of Marathon, Amerada Hess and ConocoPhillips, re-entered in late 2005. Libya would like to raise production to 3 million bopd by 2015.

Other countries. Congo raised its output to 237,800 bopd from 224,400 bopd, a 6% increase over 2004. Sudan also increased its output to 295,000 bopd.

MIDDLE EAST

It was another stellar year for oil production in the Middle East. Overall output grew by 5% to 22.662 million bopd. Saudi Arabia, Iran, United Arab Emirates and Kuwait were the strongest producers.

Saudi Arabia. The strong demand in 2004 moderated some, but Saudi investment has longer-term production goals to stay ahead of world demand. In 2005, Saudi Aramco expanded production by 539,400 bopd, a truly mammoth effort that more than matches the previous year’s success. Saudi officials estimate that the kingdom has 1.2 trillion bbls of ultimate oil reserves. In 2006, they will substantially increase development work to support current production and future demand.

Iran. Production was up slightly in Iran this year, with a modest 1.5% increase in production to 3.99 million bopd. State firm NIOC has completed the second phase of studies for increasing oil recovery from Aghajari field. NIOC has special plans to boost output from this field, including potential use of gas injection.

Kuwait. Crude and condensate production averaged 2.235 million bopd in 2005. This was a 160,000 bopd increase of 7.7%. Nevertheless, Kuwait finds itself seeking advanced technology and managerial skills from foreign sources, to squeeze more oil from its aging fields.

Iraq. The good news from Iraq is that it is increasing the volume of crude produced. This year the nation advanced its output by 16.7%, raising its volume to 1.75 million bopd from 1.5 million bopd in 2004. The conflict still occasionally cuts pipelines, but work in the oil fields is bringing more production in spite of the challenges. The country reports that 223 producing oil wells are operating.

UAE. Both Abu Dhabi and Dubai enjoyed production expansions in 2005. The UAE, overall, has plans to raise oil production capacity to 3.0 million bpd from 2.4 million bpd by sometime in 2007. Projects worth $4 billion are at the FEED or EPC tendering stages.

FAR EAST

Production in the Far East is pacing world demand, growing 1.2% to 6.769 million bopd, up from 6.689 million bopd in 2004. China had the largest gain, while India, Indonesia, Malaysia and Brunei had net reductions. Most other countries had modest production gains, although Thailand was up 49.4%.

China. The expanding need for oil and gas, driven by China’s strong growth, has caused the national oil companies to increase their production efforts on the mainland. Those efforts were rewarded in 2005 with a 3.2% increase in output to 3.481 million bopd. This is double the world’s oil demand growth rate, but it is insufficient to meet China’s burgeoning economy. The Chinese response is to not only increase activity at home, but also to reach out to other parts of the world to explore and develop new oil fields. Chinese representatives are seeking oil and oil interests in all major oil theaters.

Indonesia. The role of Indonesia as an oil exporter is diminishing fast. The country’s production dropped another 2.3% in 2005, lowering its flow by 24,700 bopd to 1.07 million bopd. The country has tried several incentives to develop its deepwater potential and frontier regions, but those efforts have not yet turned around the production decline.

Malaysia. Production dropped a substantial 46,500 bopd. This 6.2% decrease lowered Malaysia’s production to 707,500 bopd. The country estimates reserves at 3 billion bbls in its main oil fields: Bekok, Bokor, Bunga Kekwa, Erb West, Guntong, Kepong, Kinabalu Pulai, Samarang, Seligi, Semangkok, Tapis, Temana and Tiong.

India. After 2004’s 8,000-bopd increase, India lost that gain and more, as production dropped 25,400 bopd (3.7%) to 652,000 bopd. Similar to China, India has a growing need for oil. Its consumption is expected to nearly double to 5 million bopd from 2.25 million bopd in five to seven years. This has sent ONGC and its overseas subsidiary, Videsh Ltd., to seek new resources outside the country. Videsh has taken a 20% interest in Russia’s Sakhalin 1 ($1.7 billion) project and is considering a further $3.5-billion investment in Sakhalin 3.

Other countries. Production jumped 49.4% for Thailand to 201,800 bopd, a 66,700-bopd increase. The country operates 334 oil wells, 83% of which are offshore. The Philippines raised its output 16.1%, to 14,400 bopd, a 2,000-bopd increase. Vietnam also reported an increase of 2,000 bopd to 355,000 bopd. In a similar increase, Myanmar lifted its production by 1,800 bopd to 22,100 bopd.

SOUTH PACIFIC

Last year’s production drop was arrested, thanks to increased production from Australia. The region added 9,700 bopd or 1.7%, to average 582,800 bopd. Yet, New Zealand and Papua New Guinea both had production drops in 2005.

Australia. The turnaround in Australia lifted its faltering production by 15,600 bopd to 525,000 bopd. This 3.1% increase overcame the 14.1% drop experienced in 2004. The other good news from Australia is the treaty signing with East Timor that settles the long-running dispute over oil revenues from the Zone of Cooperation in the Timor Sea. Australia and East Timor decided to split the upstream earnings from Greater Sunrise field equally. This clears the way for development of the field, which was shelved by Woodside Petroleum in 2004 because of the dispute. The treaty also places the jurisdiction claims and maritime boundaries between the two nations on hold for 50 years.