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SG-W:/ Fw: [energyresources] Oil market tightness is likely long term

     We are going to come down from the peak at a very high rate because
world consumption is way up.

                                    Kermit Schlansker
----- Original Message ----- 
From: "Coilin Nunan" <coilin.nunan@phonecoop.coop>
To: <energyresources@yahoogroups.com>
Sent: Monday, March 15, 2004 5:17 AM
Subject: [energyresources] Oil market tightness is likely long term


Oil market tightness is likely long term

Monday, March 15, 2004 - Page B4

If the depletionists are right, global production of conventional crude
oil should be peaking within the next couple of years, at somewhere in the
neighbourhood of 65 million barrels a day.

Recent production estimates from the International Energy Agency show
global oil production in January is already well through that mark at 82
million barrels. But the IEA numbers include eight million barrels a day
of non-conventional production such as oil sands and deep-water oil, and
another eight million to nine million barrels of liquefied natural gas.

Strip out unconventional sources of supply, and crude production is
hovering around 65 million barrels, where it has been for the past four
years. Has the world already seen the peak in conventional crude

Not only has conventional production not grown over the past four years,
but there is virtually no spare capacity left among producers belonging to
the Organization of Petroleum Exporting Countries. Excluding the brief
period when Kuwaiti and Iraqi oil wells were ablaze during the Persian
Gulf war, OPEC has not operated with such spare capacity -- 2.7 million
barrels a day at present -- in nearly 30 years.

You can call it just-in-time inventories or you can call it what it really
is -- Saudi Arabia running out of reserves. In fact, some commentators
such as Matt Simmons of Simmons Associates believes the giant Ghawar
field, home to one-eighth of the world's known oil supply, may be 80 per
cent to 90 per cent depleted. Moreover, Mr. Simmons notes that depletion
from Ghawar, whose production has already slowed despite massive
injections of salt water to maintain well pressure, is far exceeding the
discovery of replacement oil elsewhere in the kingdom.

The tightness in today's crude market is unlikely to change unless there
are major supply discoveries. Production in most of the world's major oil
fields has already peaked and is now declining. For example, the United
States, which is still the third-largest crude producer in the world,
pumps out 25 per cent less oil than it did 30 years ago. And even the
remaining reserves in the Middle East may be substantially smaller than
currently believed. Just last month, Royal Dutch/Shell, the world's
third-largest oil company, cut its estimate of its global proven reserves
by a whopping 20 per cent.

Of course there is always the chance of finding another Ghawar, and
billions of dollars of investment go chasing it every year. Considering
that half of the world's oil supply comes from the 100 largest fields, the
challenge of discovery is in the words of one geologist "a chase for
elephants, not squirrels." But it is more than disconcerting that all 35
of the one-billion-barrel-plus oil fields in Iran and Iraq were found
between 1906-1979.

New discoveries are made, but newly found sources of supply are trivial
compared with the major finds made 60 or 70 years ago. For example, the
much-anticipated Arctic gas reserves are no more than the equivalent of a
medium-sized oil field. There have been no giant oil field discoveries
since the late 1960s and early seventies, when the North Sea and Prudhoe
Bay in Alaska were found. Both are now well past their production peaks.

Economists will argue that higher prices will elicit greater supply, but
they are only partly right. Higher prices cannot bring forth greater
supply, if the supply of cheap available oil no longer exists as it once
did. But economists are right to believe that as oil prices rise,
previously uneconomic sources of oil supply will suddenly become economic
to exploit. And if the depletionists are right about a pending production
peak for conventional supply, it will be precisely the growth of
non-conventional oil production that will meet future energy demand.

It already has, having risen from just 2 per cent of global crude
production a decade ago to 11 per cent. Nowhere has that growth been more
dramatic than in Canada's oil patch. Crude extraction from the Athabasca
and Cold Lake oil sands already accounts for one-third of Canada's total
crude production, and will soon account for more than half. Similarly, the
tar sands in the Orinoco basin in Venezuela currently yield 400,000
barrels a day in production. Since Venezuela's conventional crude
production has already peaked, tar sands represent a growing share of that
country's oil production as well.

However, non-conventional supply does not flow cheaply, as the recent
$2.1-billion cost overrun in the Syncrude oil sands project attests. It
requires steadily rising energy prices to make its problematic economics
work. All the same, Syncrude's cost overruns are a lot easier to swallow
if conventional crude production begins turning south. Based on the
production numbers of the past half decade, there is a good chance of that
starting to happen right about now.

Next week's column: How high will energy prices and energy stocks rise?

Jeffrey Rubin is chief economist and chief strategist at CIBC World
Markets Inc.

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