Tuesday, November 30, 2010

Trends in Saudi Arabia Petroleum Production and Consumption

The Kingdom of Saudi Arabia is the number four largest petroleum provider to the USA, the world’s largest producer and exporter of total petroleum liquids, and the world’s second largest crude oil producer behind Russia, according to Annual Energy Review for 2009  (see e.g., Fig. 5.4 and Table 5.4).  According to the EIA’s country analysis brief for Saudi Arabia, oil accounts for 90% of total Saudi Arabia’s export revenues, about half of total government revenues, and around 40% of total gross domestic product (GDP).

Overview of Saudi Arabia petroleum production, consumption and exports
Like Venezuela, petroleum production and exports in Saudi Arabia are under the control of a state-own company, Saudi Aramco. Saudi Arabia purportedly has the largest proven oil reverses in the world of about 264 billion barrels, although there is much skepticism in the validity of the number (see e.g., Matt Simmons, Twilight in the Desert, Cp 12).  In my opinion, it is likely that Saudi Arabia’s reserve is inflated in order to expand its own export quota under OPEC and thereby give it some flexibility as a swing producer in oil production to keep other OPEC members in line (see e.g., Saudi Arabia, Crude Oil Production and Pricing Policy).  

Saudi Arabia’s production is dominated by several giant oil fields, in particular, the super giant Ghawar field, the world's largest oil field, with an estimated remaining reserve of 70 bbs. However as pointed out by Hook et al., production from giant fields is declining, because the majority of them are over 50 years old, and fewer new giants have been discovered since the 1960s (Giant oil field decline rates and their influence on world oil production) For example, Ghawar was discovered in 1948 and put on stream in 1951.  As indicated by Hook:

These findings have large implications for the future, since the most important world oil production base – giant oilfields – will decline more rapidly. In the extreme, a potential 10% annual decline in Ghawar would be very challenging to compensate and would create severe problems for Saudi-Arabia and the world. The future behaviour of the remaining giants, especially in OPEC, will be a key factor in future oil supply.

Staniford has also suggested that Saudi Arabia's production declines are not voluntary  and since about 2004 it can no longer serve as an effective swing producer for OPEC.

In 2008, Saudi Arabia exported 8.4 mbd of petroleum and about 50% of its crude oil, refined petroleum product and NLG exports went to Asia (Japan, South Korea, China, and India) with Japan being the single largest importer in Asia.   For instance in 2008, Saudi Arabia exported 1.5 mbd of petroleum liquids to the United States and 1.3 mbd to Japan.

According to the EIA’s Energy profile Saudi Arabia’s exports to the USA as a percentage of net exports for the last five years of data availability (2004-2008) is equal to a very tight 17.7 ± 0.8 percent.  For the analysis to follow, I have assumed that Saudi Arabia’s exports to the USA will continue in this proportion (18%) going forward.   

Of course, Saudi Arabia (unlike Canada)  is under no specific obligation or agreement to maintain this 18% proportion of exports to the USA. However, I think that they will, for reasons explained in this CFR publication, Thicker than Oil: America’s Uneasy Partnership with Saudi Arabia:    

Traditionally the United States’ relationship with Saudi Arabia has been characterized as a basic bargain of “oil for security.” For its part, since the mid-1970s, Saudi Arabia has ensured the free flow of oil at reasonable prices. The kingdom’s ability to put oil on the market quickly during times of crisis is the most obvious benefit the United States gains from good relations. Immediately after September 11, for example, Saudi Arabia increased oil shipments to the United States in order to keep prices stable. It also augmented oil production just before Operation Iraqi Freedom commenced, a time when political strife in Venezuela and Nigeria threatened to elevate oil prices dramatically. In return for this, the United States extends to Saudi Arabia’s leadership a security umbrella, including a commitment to its territorial integrity. Since 1950 the United States has explicitly vowed to help defend the kingdom against external threats—including, over the years, the Soviet Union, Yemen, Egypt, Iran, and Iraq. Since the fall of the shah of Iran in 1979, this commitment has evolved into implicit support for the Saudi regime against internal challenges, including today’s al-Qaeda.

That is, Saudi Arabia is likely to continue to trade oil with the USA (I'm assuming at least 18% of its net exports to the USA) in exchange for dollars, security and defense as provided by the USA.  I think that this trend will continue as long as the USA can provide effective protection and as long as the Kingdom of Saudi Arabia remains a kingdom. 

Saudi Arabia has also been on a steady consumption up-swing, and is the largest oil consuming nation in the Middle East. According to the EIA country analysis brief, in 2008, Saudi Arabia consumed approximately 2.4 million bbl/d of oil, up 50 percent since 2000.  As the consumption data and my analysis below make clear, this has increasingly important considerations when assessing Saudi Arabia’s net oil export potential going forward. 

Non-linear least squares (NLLS) analysis of total petroleum production
Figure 1 shows total petroleum production for 1965-2009 as reported in the BP statistical review

After a local peak in production in 1979, a subsequent decline in production in the earlier 80s, production has increased through the late 80s, had a plateau from 1991-2002 and then increased again in 2003 and stayed at about this level, fluctuating at or slightly below 4 bbs/yr until the downturn in the last few years.  It is pretty tough to model this kind of production data with the Hubbert Equation or my modified equation 9 because, for the periods from 1985 to present production was likely managed by Saudi Aramco as part of its role as a swing producer. 

In the analysis to follow I have considered two possible production scenarios: one that assumes a production follow the NLLS best fit to the Hubbert equation to the 1985-2009 data as shown in figure 1 (best fit parameters: “a” = 0.101; Qo = 18.8; Q∞ = 151.8), and, one that assumes that production for the next twenty years stays at the average value of production from 2003 to 2009 (3.847 bbs/yr).  The later scenario is probably what Saudi Aramco would like the world to believe.  In my opinion, the former scenario is probably more likely to reflect future production, because as pointed out above, Saudi Arabia’s aging giant field have not being replaced by newly-discovered equally-sized oil fields.

Non-linear least squares (NLLS) analysis of total petroleum consumption
Figure 2 shows the best fit to Saudi Arabia’s petroleum consumption data (as reported in the BP statistical review). 

The red line in Figure 2 shows the best-fit of the Hubbert equation to the full data set 1965-2009 (“a” = 0.0444; Qo =2.78; Q∞ = 3032.).     

As the unrealistically high value of Q∞ suggests the NLLS best fit using the Hubbert equation blows up because the consumption data follows an exponential increase with no signs of rolling over.  I could have just as well as fit this to simple exponential equation, but the Hubbert equation fit does a pretty job of doing the same.  I have my doubts if Saudi Arabia’s could continue to increase its consumption for another 20 years at 4.4 %/yr but they certainly have enough oil to do it for a while.  Just how long will depend on a number of factor but one hard factor would be the shape of that production curve, shown in Figure 1, going forward.

Predicting future trends in Saudi Arabia's petroleum exports
Figure 3 shows the best fits obtained using the Hubbert equation analysis of the 1965-2009 time span of consumption data and the 1985-2009 time span of production data as well the scenario of continued flat production at 3.847 bbs/yr.

The predicted export curve (solid green line) is calculated based on the difference between the production curve (1985-2009 Hubbert equation best fit) and the consumption curves shown in the figure.  Additionally, I show the “measured” export data from 1985-2009 time period (i.e., the BP statistical review reported production minus reported consumption).

The extrapolated export trend predicts that if the Saudi Arabia’s production trend from 1985-2009 follows the Hubbert equation, then Saudi Arabia would have no net exports by 2023.  That’s just one year longer than the predicted cessation of net exports from Venezuela in my previous article, Trends in Venezuelan Petroleum Production and Consumption.

But what if the first production scenario is correct, and Saudi Arabia is able to maintain production at 3.847 bbs/yr (dashed blue line in Figure 3), indefinitely?  Well, then exports (dashed green line in Figure 3) would still decline, albeit at a slower rate, merely because of the exponentially increasing rate of domestic consumption.  Under this scenario, net exports are still predicted to end in 2044. 

Impact on USA
Figure 4 reproduces the USA production and consumption trends, plus Canadian, Mexican and Venezuelan petroleum measured and predicted future exports presented from the previous article, Trends in Venezuelan Petroleum Production and Consumption.
The purple line shows the addition of Saudi Arabia’s exportable petroleum to the USA, which equals the predicted total exports (i.e., the solid green line shown in Figure 3) multiplied by 0.18 (i.e., my estimate that 18% of Saudi Arabia’s total exported petroleum will continue to be sent to USA).  The purple circles show my estimate of Saudi Arabia’s measured exports to the USA (total measured production minus total consumption, purple circles in Figure 3, times 0.18).

Based on the predicted export trend, Saudi Arabia’s exports to the USA by 2015 will equal about 0.30 bbs/yr and only 0.12 bbs/yr by 2020.  That is 63% and 25%, respectively, of my estimate of Saudi Arabia’s measured total exports to the USA in 2009 (0.47 bbs/yr).

For 2010, I predict that Canada, Mexico, Venezuela, Saudi Arabia’s exports, together with USA’s domestic production, will provide about 60% of the USA’s predicted consumption.  But by 2015, with Mexican, Venezuelan and Saudi Arabian exports all down, USA domestic production and imports from these top four foreign providers will only amount about 50 percent of the USA’s predicted consumption.  And by 2020, again with nothing coming from Mexico and very little coming from Venezuela and Saudi Arabia, domestic production and imports amounts to about 45 percent of the USA’s predicted consumption—this is mostly from Canada and the USA.

Like Venezuela, Saudi Arabia’s export and government revenues are highly dependent on its exports, and so the cessation of exporting oil will have equally devastating effects on the country's infrastructure.  It will be interesting to see if the kingdom will continue when it's oil export revenues decline and/or domestic consumption is cut to sustain exports.

February 9, 2011

Here's an interesting piece from the Guardian concerning a wikileak that pertains to my, and many other's speculation that Saudi Arabia’s reserve estimates are over inflated:

The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.
The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.
According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil".

It went on: "In a presentation, Abdallah al-Saif, current Aramco senior vice-president for exploration, reported that Aramco has 716bn barrels of total reserves, of which 51% are recoverable, and that in 20 years Aramco will have 900bn barrels of reserves.

"Al-Husseini disagrees with this analysis, believing Aramco's reserves are overstated by as much as 300bn barrels. In his view once 50% of original proven reserves has been reached … a steady output in decline will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years followed by decreasing output."

Another wikileak pertains to Saudi Arabia’s inability to maintain oil exports in the face of
increased domestic consumption of electricity:

A fourth cable, in October 2009, claimed that escalating electricity demand by Saudi Arabia may further constrain Saudi oil exports. "Demand [for electricity] is expected to grow 10% a year over the next decade as a result of population and economic growth. As a result it will need to double its generation capacity to 68,000MW in 2018," it said.

If Al-Husseini is right, and the 715 bbs of reserves is overstated by 300 bbs, then the total reserves are 415 bbs.  Now, if 51% of that is recoverable, then the total recoveray of oil equals 211 bbs.  That's still higher than the Q∞ = 152 bbs I got from the Hubbert Equation fit to the production data, but not a whole lot higher.  My hunch is that even with Q∞ fixed to 211 bbs, the overall shape of the production curve, and impending decline, would not be that much different than depicted in Figure 1 above.

Sunday, November 28, 2010

Canada—Petroleum Superpower or Super-slave?

Our economy is anchored in the North American marketplace by our Free Trade Agreement with the United States and Mexico. It gives Canadians – and investors in the Canadian economy – secure access to the huge U.S. market. But again, our trading relationships are not quite as one dimensional as people tend to think. Our links to the Asia-Pacific region are growing, and we’re upgrading our West Coast port and highway infrastructure to make it the primary Gateway for Asia-Pacific trade with North America. As a share of our total trade, our commerce with the U.S. has actually declined nearly 10% since the turn of the century. During the same period our trade with other parts of the world, including the E.U., has been increasing. However, despite the growing diversity of our economy, it remains true that natural resources and the U.S. market are our strongest economic assets. Indeed, it is no exaggeration to call Canada an “emerging energy superpower” and a “global mining giant.”
from a speech by Steven Harper, PM of Canada June 2007 BERLIN

This is an addendum to my earlier article, Trends in Canadian Petroleum Production and Consumption, to explain why I have amended Figures 4 and 5 and corresponding discussion in that article to account for additional Canadian export obligations to the USA that I was not aware of when I originally published that article on November 7, 2010.

Canada’s obligation to the USA under NAFTA
What kind of bone-headed banana-republic politician would obligate their country, in perpetuity, to supply oil to another country, regardless of what that country’s own internal domestic oil consumption needs are?  Only in Canada you say?

Yes indeed, Canada, in signing the NAFTA agreement, obligated itself to never reduce its proportion of petroleum exports to the USA.  The specific provision is in Chapter 6, Article 605(a) reads in-part as follows:

Article 605: Other Export Measures
Subject to Annex 605, a Party may adopt or maintain a restriction otherwise justified under Article XI:2(a) or XX(g), (i) or (j) of the GATT with respect to the export of an energy or basic petrochemical good to the territory of another Party, only if:

(a) the restriction does not reduce the proportion of the total export shipments of the specific energy or basic petrochemical good made available to that other Party relative to the total supply of that good of the Party maintaining the restriction as compared to the proportion prevailing in the most recent 36-month period for which data are available prior to the imposition of the measure, or in such other representative period on which the Parties may agree;

That is, Canada can only restrict petroleum (or natural gas) exports to the extent “the restriction does not reduce the proportion .... as compared to the proportion prevailing in the most recent 36-month period for which data are available prior to the imposition of the measure.”  This basically means that Canada can never restrict its proportion of exports to the USA below the most recent 3-year average proportion. 

Interestingly, this provision was not agreed to by Mexico, nor did the USA agree to this with respect to Mexico.  

The Parkland Institute in Canada, who advocates ending this “proportionality clause” have noted that NAFTA Article 605 really has put Canada over a barrel

Proportionality is an obscure sounding clause which requires Canada to maintain its current share of energy exports to the United States, even if Canadians experience shortages. It effectively guarantees the U.S. access to Canada's energy resources in perpetuity, or until NAFTA and the FTA are renegotiated or ended, or the resources run out.

This clause is unique in all of the world’s treaties. Even Canada’s fellow NAFTA partner and major oil exporter, Mexico, is exempt.
Both conventional oil and gas have already peaked in Canada. Canada imports about 49% of its oil needs, with almost half its imports coming from very insecure sources ' OPEC countries. Unlike all other IEA member countries, Canada has no Strategic Petroleum Reserves.

Meanwhile, Canada is obligated by NAFTA's proportionality clause to make two-thirds of its domestic oil production and 60% of its current natural gas production available for export to the U.S., even if Canadians experience shortages.

Most Canadians assume that Canadian energy supplies will be there when they need them. It hasn't dawned on most Canadians that their governments have signed away their right to have first access to their own energy supplies.

At the time the NAFTA agreement was signed in 1994, Canada did have a terrible trade balance problem, which it eventually turned around quite nicely, as recently discussed by Mauldin. So maybe this didn’t seem like such a bone-headed thing to agree to, at the time.  Nevertheless, the result is that Canada is obligated to export major fractions (the majority) of its total oil and gas production to the USA—forever or until it runs out.  Wow.

One implication of this “proportionality clause” is that, although as shown in Trends in Canadian Petroleum Production and Consumption, Canada is a net petroleum exporter, it still has to import petroleum to cover the excess (i.e., the excess over net production minus domestic consumption) petroleum it sends to the USA.  Up till now, that had not been a problem, because importing petroleum from Europe, the Middle East and from the USA, has been cheaper than shipping oil from Western Canada (mostly Alberta and more recently Saskatchewan) to Eastern Canada (mostly Ontario, Quebec and the Maritime Provinces): 
Canadian energy imports, mostly crude oil, are widely dispersed geographically. After rising rapidly during the late 1990s, they declined, only to shoot up again in 2003. But at $20 billion they still account for just 6% of all imports in 2003. The import price of oil over this time period was very volatile, dropping 25% in 1998 before recovering. Canada exports three times the amount of energy it imports; at 15% of all exports, it was our fourth largest export last year.
Regionally, despite a recent dip, almost 40% of our energy imports originate in Western Europe, mostly Norway and the UK. The US has maintained a fairly steady share in the low 20s. Imports from the Middle East have fluctuated from 13% in 1993 to just 6% in the late 1990s, but have climbed back to 11% in recent years. Algeria dominates imports from Africa, with 72% of Africa’s energy exports to Canada in 2003, up from just 9% in 1990. South American imports have tapered off from their peak near 10% in the late 1990s (when they picked up the slack from the Middle East) to just 4% in 2003.
By country, our largest source of oil is the US at $4.7 billion, up from $1.9 billion in 1990. This is a reflection of the reason we import oil: despite our overall surplus in meeting domestic demand, refineries on the East Coast find it easier to import crude from the US and Europe than to have it piped from Western Canada. As well, refiners find the oil from some regions easier to process than others.

Table 1: Energy Imports in 2003

United States
Middle East
Latin America

Other sources in 2003 include Norway at $3.9 billion, Algeria at $2.4 billion and Iraq at $1.1 billion. Oil is virtually the only commodity these countries ship to Canada.
From: Canada’s Imports by Country, by C. Bloskie

But what will happen to Canada if (when) the oil from these foreign sources dries up?  It would seem that Eastern Canadians are just supposed to freeze in the dark because, by gosh, NAFTA says that the USA has to get its proportionate share of Canadian production.  The Council of Canadians has expressed this very concern:

Can Canada replace the oil it imports with resources from its own territory if our suppliers become unreliable, or if an oil crisis becomes a reality? The answer is a resounding NO! Under NAFTA, we must keep sending the same proportion of our oil to the United States no matter what happens on the world stage. Article 605 of NAFTA only allows us to reduce exports to the U.S. if we cut our domestic supplies by the same proportion. Furthermore, we can’t charge the U.S. a higher price than the one in Canada and we can’t disrupt or restrict the normal channels of supply. What are those normal channels? A huge network of 16,000 km of pipelines sends Canadian oil south, mainly to the American mid-west. At the moment, no pipeline takes Alberta’s oil to eastern Canada.

To be balanced, I should note that others, such as Michael Holden, do not interpret NAFTA Art. 605 as restricting Canada’s ability to export to the USA but rather to limit the government’s ability to enable export controls: 
Article 605 of NAFTA has been interpreted by some to mean that Canada is required to sell a certain percentage of its energy output to the United States, even in the face of a severe domestic shortage.  Moreover, they argue that NAFTA prevents this percentage from falling over time.
Neither of these statements is hue. Canadian producers are free to sell as much oil as they wish to whomever they wish, including, for example, overseas customers. As a result, the share of total output exported to the United States can rise or fall according to the normal forces of supply and demand.

The only condition that NAFTA imposes on Canadian energy products is that all buyers in North America must have equal rights to buy those products.

Article 605 does stipulate that energy exports to the United States as a percentage of total output cannot fall. However, this does not refer to the day-to-day, operation of the Canadian energy sector. It is valid only as a limitation on the extent to which the Canadian government can interfere in energy markets.

NAFTA prohibits the Canadian government from imposing (under normal conditions) any restriction that causes U.S. imports of Canadian energy to fall.  In essence, therefore, NAFTA does prevent the Canadian government from imposing a policy like the National Energy Program in the 1980s.

However, as even Holden had to admit Art. 605 stipulates that exports as a percentage cannot fall.  Moreover, Holden seems to be oblivious to the potential impact of peak oil, where oil could not be bought on the global market at any price, or at least at a much higher price than it would take to ship oil from western to eastern Canada. 

Estimating the proportion of petroleum shipped from Canada to the USA
Figure 1 shows a plot of the annual percentage of Canada’s total petroleum exports to the USA relative Canada’s total petroleum production from 1980 to 2008.  The data is from the EIA’s energy page for Canada  The historic data for total exports to the USA was particularly hard to extract: it only appears in a pop-window when the graph corresponding to “Total Oil Exports to the USA” is clicked, and I hover my mouse over each individual data points. 

It is not quite a straight line (r2=0.97; linear regression analysis of the slope) but the overall trend is for the proportion of petroleum from Canada to the USA to linearly increase by 1.66 percent per year.  This trend has slowed down to 1.15 %/yr over the last 9 years (regression slope from 2000-2008), but still, if this recent trend were to continue, then in about 21 years, Canada would be shipping all of its petroleum to the USA. 

For instance, for 2008, the last year with complete data, Canada shipped a whopping 75% of its total production (about 2.5 mbd) to the USA.  This is despite the fact that Canada’s net exports (production minus domestic consumption) was only about 1.1 mbd.  These numbers are fairly consistent with the EIA’s Country Report for Canada:

In 2008, Canada exported 2.5 million bbl/d of crude oil and refined products to the U.S., the single-largest source of U.S. oil imports and representing almost all of Canada’s total oil exports. The largest share of U.S.-bound Canadian oil exports go to the Midwest (PAD District II), followed by the Rocky Mountains (PAD District IV). The bulk of Canadian exports to the U.S. have traditionally gone to PAD Districts II and IV, because these areas are well connected to Alberta by oil pipelines and not well served by coastal import terminals.
Even though Canada is a net oil exporter, it imports sizable quantities of crude oil and refined products. According to the International Energy Agency (IEA), Canada imported around 1.2 million bbl/d of crude oil and refined products in 2008. Canada’s major population centers in the eastern part of the country are not well connected to its principle production facilities in the western interior, meaning that it is often easier to import oil along the coastlines rather than transport it domestically. Most oil imports come from Algeria (crude oil), Norway (crude oil) and the U.S. (refined products).

No mention of NAFTA Art 605 here! 

Application to Export-Land model Considerations
Based the data shown in Figure 1, the last three-year average of the proportion of Canada’s production shipped to the USA equals 73 percent.  We know from NAFTA Art. 605 that the proportion to the USA cannot be decreased below this number. 

Canada does make some of this back, because as shown in the above cited Table 1, about 23.5 percent (as of 2003) of its petroleum imports came from the USA.  Therefore of the 1.2 mbd that Canada imported in 2008, about 0.28 mbd came from the USA.  This corresponds to about 12% of Canada’s consumption in 2008.  Presumably the USA is also obligated not to reduce this percentage under the NAFTA “proportionality clause.”

Therefore, to account for this in my export analsysis, the net petroleum exports from Canada to the USA should equal total petroleum production (TPP) times 0.73, minus total petroleum consumption (TPC) times 0.12:

Canadian exports = TPP*0.73 – TPC*0.12

I have revised my previously published graphs showing Canada’s predicted future net exports to the USA in accordance with this formula as applied to the numbers extracted from the BP statistical review.

For instance, FIG. 4 in Trends in Canadian Petroleum Production and Consumption, is now revised from this:

 To this:

 And, FIG. 5 in Trends in Canadian Petroleum Production and Consumption, is now revised from this:

To this:

I have also applied these corrections to the final figures and pertinent discussion points in the two subsequent articles, Trends in Mexican Petroleum Production and Consumption, published Nov 20, 2010, and Trends in Venezuelan Petroleum Production and Consumption, published Nov.25, 2010.

Implications for the USA and Canada
As a result of these corrections the petroleum exported to the USA from Canada shown on the revised graph is more than double as compared to the original graph because Canada ships more than double of its net exports to the USA even after accounting for the petroleum products shipped back from the USA to Canada. 

Just how long would this agreement last if, for example, there was a global petroleum shortage, and Canada was no longer able to import petroleum to make up for the excess petroleum it sends to the USA that is over its net production over consumption?  If a situation arises where Canada is unable to import petroleum from the Middle East or Europe, then I think that it is safe to assume that the USA would also be unable to import from these locations as well.  Would Canada just keep its own oil just for its own use? 

This would appear to violate NAFTA article 605, but even if we were to set aside the NAFTA proportionality clause, Canada keeping its own oil for its own domestic use is probably not possible.  At present, there is no pipeline that goes from western to eastern Canada and plans to build such a pipeline is only the dream of a few (see e.g, Canada: an oil importer??   and Canada’s national pipeline dream ).  As such, Canada has no practical means to ship its oil, produced mostly in western Canada, to eastern Canada without using the pipelines that go to the USA.  Therefore if there was an oil crunch, Canada would seem to have no choice but to send its oil south to the USA, in exchange for the roughly order-of-magnitude lower amount of petroleum products that the USA ships back to Canada.

Thursday, November 25, 2010

Trends in Venezuelan Petroleum Production and Consumption

Venezuela is the third largest petroleum provider to the USA, according to EIA's Annual Energy Review for 2009  (see e.g., Fig. 5.4 and Table 5.4).  According to the EIA’s country analysis brief for Venezuela,  oil accounts for more than three-quarters of total Venezuelan export revenues, about half of total government revenues, and around one-third of total gross domestic product (GDP).

Overview of Venezuelan petroleum production and exports
Periods of Venezuelan petroleum production in the last decade has been influenced by politics and labor unrest.  For example according to the EIA country analysis brief, in 2002, half of the employees of Venezuela’s nationalized oil company, PdVSA, went on strike and subsequently many were fired. In 2009, President Chavez pushed for further nationalization of the oil sector which would result in a reduction in the amount of money paid to companies that actually do the work of supported oil production and processing.  Despite the great uncertainty in the validity of any contract made with Hugo Chavez in charge, there are still many bids from foreign national oil companies and private companies to be involved in the bilateral development of Venezuela’s future oil production and refining:

In October 2008, Venezuela launched the Carabobo bid round, the first held under President Chavez. ... PdVSA would take a majority stake in each project, ... Each project would require a total investment of about $20 billion. ... the blocks could contain at least 12.5 billion barrels of recoverable reserves, and the three projects could eventually produce a combined 1.2 million bbl/d of crude oil. In February 2010, the Venezuelan government announced the results of the bid round. A consortium headed by Repsol YPF [Spain] had secured Carabobo 1, while a consortium led by Chevron [USA] had secured Carabobo 3. The second project, Carabobo 2, went unawarded.

Venezuela has also embarked upon direct, bilateral deals for the development of some oil blocks. In December 2009, PdVSA and China’s CNOOC announced a memorandum of understanding (MOU) for the development of the Boyaca 3 block. The Junin area of the Orinoco has also been the subject of numerous bilateral deals, including with Petrovietnam (Junin 2), China’s CNPC (Junin 4), Italy’s Eni (Junin 5), a consortium of Russia companies (Junin 6). All of these plans are in the early stages of development, and it is unclear when oil production could begin from these areas.

I think it is safe to say that any oil produced from these deals is several years away from production.  And, once the production facilities are completed, it will be interesting to see if Chavez will come in and “change the deal”  to his further advantage, which in turn, will cause lower production rates and lower total production.    

According to the EIA, in 2008, of Venezuela’s total petroleum production of 2.6 mb/d, Venezuela exported about 1.9 mb/d and 63 percent of that (1.2 mb/d) went to the USA.  The EIA further noted that Venezuela is attempted to diversify its exports away from the USA:
Venezuela has prioritized the diversification of its petroleum export destinations away from the United States. One of the fastest growing destinations of Venezuelan crude oil exports has been China. In 2008, China imported about 120,000 bbl/d of crude oil from Venezuela, up from only 39,000 bbl/d in 2005. Venezuela also exports fuel oil and other refined products to China.

This amount, 0.12 mb/d to China in 2008, is only about 6 % of Venezuela’s total exports—but the number is probably going to be going up in the future.  Therefore, going forward, I would not expect that the percentage of Venezuela’s exports to the USA will be any higher than it present exports, and this percentage will probably diminish. 

The extent to which Venezuela’s exports to the USA would diminish would probably depend upon the extent to which Venezuela can find alternative countries able to refine its heavy oil.  According to the EIA’s country analysis brief, as of 2009, 0.96 mb/d of Venezuela’s oil was refined in the USA:

The USA’s refineries in the Gulf Coast are specifically configured to handle Venezuelan heavy crude oil varieties. That amount of 0.96 mb/d is about 50 percent of Venezuela’s total exports.    Therefore in the near-term (e.g. the next 5 years) I would expect that Venezuelan exports to the USA would not decrease below this amount. 

The Caribbean connection—additional indirect exports from Venezuela to the USA
Additionally, a large amount of Venezuela’s oil came to the USA via re-exports from the Caribbean refineries, which I also would not expect this to decline in the near-term.  According to the EIA country analysis brief for the Caribbean, the United States imported 471,000 bbl/d of petroleum products from the Caribbean

It seems to me that the EIA’s country report that 1.2 mb/d of Venezuela’s petroleum exports went to the USA underestimates the total amount of petroleum that end up in the USA by way of the Caribbean refineries.  That is, if 0.96 mb/d is refined in the USA and another 0.47 mb/d gets refined in the Caribbean and then shipped mostly to the USA, then the total of Venezuela’s petroleum exports to the USA is the sum of these two numbers 1.43 mb/d.  That would actually correspond to 75 percent of Venezuela’s total present exports making its way to the USA.  This would make Venezuela the second largest petroleum supplier to the USA, ahead of Mexico’s exports of 1.2 mb/d.

Indeed, another EIA country analsysis brief on the Caribbean confirms the Caribbean connection between the USA and Venezuela.  The Caribbean is a major refining and storage location for crude oil, mostly supplied by VenezuelaMost of the refined products are ultimately shipped to the USA.  For instance, according to the EIA country analysis brief, the Caribbean region has a combined 1.8 million bb/d of refining capacity.  One of the largest refineries in the world is the Hovensa facility in the U.S. Virgin Islands, with crude distillation capacity of about 500,000 bbl/d.  Hovensa is a joint venture of PdVSA and Amerada Hess, and sent most of its refined product output to the USA.  There a number of other large refineries in the Caribbean: Isla refinery in the Netherlands Antilles, operated by PdVSA (320,000-bbl/d capacity); San Nicolas in Aruba, operated by Valero (230,000 bbl/d capacity); Pointe-a-Pierre in Trinidad and Tobago (165,000-bbl/d capacity).  There are additional refineries in Cuba with a total capacity of about 100,000 bbl/d. Most of the refinery output from the U.S. Virgin Islands, Aruba and Trinidad and Tobago goes to the USA.  With the exception of Trinidad and Tobago, which produces a significant amount of oil (165,420 bbl/d produced and 124,000 bbl/d exported in 2008), these refineries import their oil mostly from Venzuela.         

Venezuela’s plans to diversify its exports away from the USA
To cost-effectively export to countries other than the USA or the Caribbean, the alternative destination country would have to have a similar capacity and capability of refining Venezuela’s oil.  The two likely candidates targeted by Venezuela appear to be Brazil and China:

In late 2009, the Chinese government approved initial plans for a joint venture refinery between PdVSA and CNPC to be built in Guangdong province. The two were expected to begin a formal feasibility study for the 400,000-bbl/d project. In November 2009, PdVSA and Brazil’s Petrobras reached an agreement over the ownership structure of their joint venture refinery in northern Brazil: under the terms of the deal, PdVSA would hold a 40 percent stake in the operating company, and each country would provide half of the crude oil feedstock for the 230,000-bbl/d facility. EIA country analysis brief

Of course such projects are years away, and rather speculative at the moment.  For instance, it would seem that the refining capacity presently in place in the Caribbean could handle all of the crude oil from Venezuela presently refined in the USA, in addition to what is being refined now.   But this is probably still too close to the USA’s sphere of influence for Chavez’s tastes.

However, if or when these refineries are completed, they could take about 0.5 mb/d of Venezuela’s exports.   Therefore over the longer term (e.g., 5-10 years) if this petroleum gots diverted away from the USA or the Caribbean and, was used internally by Brazil or China, then Venezuela’s exports to the USA could decrease by about 0.5 mb/d.  This, in turn, would accelerate the time when exports to the USA from Venezuela cease altogether as I will show below.

Non-linear least squares (NLLS) analysis of total petroleum production
Figure 1 shows total petroleum production for 1965-2009 as reported in the BP statistical review:

It is apparent the Venezuela’s peak in production occurred in 1970, the same year that the USA’s production peaked.  The subsequent sharp downturn in production through the 1970 and early 1980’s I think had as much to do with OPEC embargoes and the nationalization of the Venezuela oil industry and the exit of international oil companies as the decline in conventional oil sources.

I have focused my analysis on the more recent trend from 1985 to the present.

The solid blue line is the NLLS best fit to the 1985-2009 portion of data set using the Hubbert equation with the parameters “a,” Qo and Q∞ allowed to vary to minimize the sum of the residual sums of squares (Srss).  The best fit (“a” = 0.120; Qo = 5.47; Q∞ = 38.64) looks like looks like a pretty good fit except for the down-turn in production in 2002-2003, probably due to the above-mentioned strikes and firings of the national oil company, PdVSA.  Reanalysis of this time span, but with the 2002-2003 data excluded (dashed blue line in figure 1, barely visible at the peak) had a negligible affect on the best fit parameters (“a” = 0.120; Qo = 5.40; Q∞ = 39.08) or on the shape of the predicted production curve.   For the remainder of this analysis I used the best fit to the full 1985-2009 data set.

The down trend in Venezuela’s petroleum production following the local peak in 1998, is similar to the down trend in Mexico’s production in 2004, although it is not as steep.  However, if the trend continues, the predicted production by 2015 will be about 0.55 bbs/yr, and by 2020, about 0.34 bbs/yr.

Non-linear least squares (NLLS) analysis of total petroleum consumption
Figure 2 shows the best fit to Venezuelan petroleum consumption data (as reported in the BP statistical review). 

The red line in Figure 3 shows the best-fit of the Hubbert equation to the full data set 1965-2009 (“a” = 0.0322; Qo =2.63;  Q∞ = 37.81). 

The best fit to the consumption data suggests that the rate of consumption is a long way off from peaking and will continue to increase at about 3.2 %/yr for the next 20 years.    

Predicting future trends in Venezuelan petroleum exports
Figure 3 shows the best fits obtained using the Hubbert equation analysis of the 1965-2009 time span of consumption data and the 1985-2009 time span of production data. 

The predicted export curve (green line) is calculated based on the difference between the production and consumption curves shown in the figure.  Additionally, I show the actual “measured” export data from 1985-2009 (i.e., the BP statistical review reported production minus reported consumption).

The extrapolated export trend predicts that if the Venezuelan’s production trend from 1985-2009 continues, then Venezuelan would have no net exports by 2022.  If Venezuelan’s consumption trend from 1965-2009 were to continue then Venezuelan would have import oil after 2022 to meet the predicted increasing domestic demand.

--Updated Nov 28, 2010: as explained in Canada—Petroleum Superpower or Super-slave? --

Impact on USA
Figure 4 reproduces the USA production and consumption trends, plus Canadian and Mexican exportable petroleum from the previous article, “Trends in Mexican Petroleum Production and Consumption.” 

The light blue line shows the addition of Venezuelan’s exportable petroleum to the USA, which equals the predicted total exports (i.e., the green line shown in Figure 3) multiplied by  0.77 (i.e., my estimate that 75% of Venezuelan’s total exported petroleum ends up in the USA directly, or indirectly from the Caribbean connection as discussed above).  The figure also shows the measured export data for 1991-2009 for Mexico (open green circles), Canada (open brown circles) and for Venezuela (light blue circles; total measured exports multiplied by 0.75).

The predicted export trend suggests that Venezuela’s exports to the USA by 2015, are predicted to be about 0.23 bbs/yr and only 0.061 bbs/yr by 2020.  That is 45% and 12%, respectively, of  my estimate of the measured total exports to the USA in 2009 (0.50 bbs/yr).

Similar to Mexico, Venezuela, which was once a major exporter of petroleum to the USA, is predicted to become a minor supply source in less than a decade, and cease exporting altogether by 2022.

Exports to the USA could cease earlier than 2022 if Venezuela shifted some of its exports preferentially to China and Brazil.  For instance, if as discussed above, Venezuela agreed to preferentially deliver petroleum to China and Brazil totaling 0.5 mb/d, (equal to about 0.18 bbs/yr), then the available exports the USA would be predicted to cease in 2017.  And exports to China and Brazil would still be predicted to cease in 2022. Would it really make sense for China or Brazil to invest in manufacture of refineries if the sources of oil to those refineries ceased in 2022?

For 2010, I predict that Canada, Mexico and Venezuela exports together with USA’s domestic production will provide about 54 percent of the USA’s predicted consumption.  But by 2015, with no Mexican exports and Venezuela’s exports down almost 50% from 2009 levels, the USA’s production plus Canadian and Venezuela  exports are predicted to provide 46 percent of the USA’s consumption needs, with nothing from Mexico.  By 2020, USA production and Canadian exports plus a very small export from Venezuela is predicted to provide 44 percent of USA’s consumption needs.

Impact on Venezuela
Finally, a note about the implications that the cessation of being an oil exporting county in 2022, would have on Venezuela.  I expect that this will be an even worse disaster for Venezuela than it will be for Mexico in 2015, because according to the EIA country report, 75% of total Venezuelan export revenues and half of total government revenues, comes from the export of oil.