Non-OPEC Oil Production
Toni Johnson, Staff Writer
October 19, 2007
Council on Foreign Relations
Introduction
Oil producers operating outside the Organization of Petroleum Exporting Countries (OPEC) are responsible for producing 60 percent of the world’s oil and face increasing production hurdles. Experts say many of the non-OPEC producers have older, less productive wells, rising costs for new projects, and in some cases rising demand at home that may cut into exports. OPEC in 2007 announced it would boost production for the first time in two years to ease price pressure over concerns that producers outside the cartel were unable to meet demand. But OPEC’s promise to bring supplies up by five hundred thousand barrels per day (bpd) did not have much impact on oil prices, which remained above eighty dollars per barrel. A recent study by the National Petroleum Council corroborates projections by a number of experts that the world is entering a period of growing demand amidst tightening supplies. At the same time, higher prices have made difficult oil projects more lucrative, leading to increases in unconventional oil production.
Non-OPEC Production
The U.S. Energy Department’s Energy Information Agency (EIA) says seven of the world’s fifteen largest oil producers are outside of OPEC. As of 2006, those countries were Russia, the United States, China, Mexico, Canada, Norway, and Brazil. Britain had been on the EIA’s list as of 2004, but production has continued to decline significantly in the North Sea, says EIA energy analyst Matthew Cline. Overall in 2006, non-OPEC nations produced roughly 47.5 million bpd, comprising nearly 60 percent (PDF) of total production for the year.
Many non-OPEC producers are faced with wells that are quickly depleting. Some major producers, such as the United States, Mexico, and Norway, have experienced a decline in production in recent years. However, overall numbers for non-OPEC producers are bolstered by the significant increases in production from Brazil, Canada, Russia, and a few other former Soviet states. A June 2007 BP report on world energy shows that production among the Organization for Economic Cooperation and Development nations, which include four top independent producers—Canada, Norway, the United States, and Mexico—dropped by about two million bpd in the last decade. Meanwhile, the former Soviet states increased production by more than 40 percent over that same time period.
Although there has been some new exploration and cultivation of oil sources, it takes time before such projects are ready for production. Cline says one of the biggest challenges for producers is skyrocketing costs for labor and steel, noting that costs for “everything that you need to build a modern oil project are rising very fast.” In addition, some new projects lack infrastructure, such as pipelines, which help bring new oil to market quickly and cheaply. Landlocked projects in Kazakhstan, for example, face extremely high transportation costs.
Declines in Production
Once one of the fifteen-largest oil producers, Britain experienced a production decline of 10 percent in 2005, the largest (Independent) of any oil producer for the year. Although production will be bolstered by new wells in the North Sea’s Buzzard Field, Britain’s overall production is expected to continue to decline, experts say. Overall production in the North Sea, which includes that of Norway, also is expected to decline in coming years. Norwegian production fell by about 570,000 bpd from 2000 to 2006. Mexico, a major exporter to the United States, experienced about a 300,000 bpd decrease in production during the same time period. The percentage of exports out of Mexico's oil production rose slightly from 41 percent in 2000 to 45 percent in 2006, but there are doubts Mexico can sustain the current level of exports much longer.
D. Barry McKennitt, executive director of the U.S. National Association of Petroleum Investment Analysts, questions Mexico’s ability to continue to export, noting that with domestic consumption going up and production going down, “They may not be able to export to anyone in five years.” For the period of 2000 through 2006, the EIA puts U.S. production declines at about 700,000 bpd; the BP report (PDF) estimates those declines to be closer to 900,000 bpd. The EIA includes gains in refining volume while the BP report does not.
Expectations for New Production
In total, non-OPEC production is expected to increase by 1.5 million bpd from 2006 through 2008. OPEC, according to the EIA, is expected to raise production by 1.2 million bpd over the same time period. Global consumption is expected to keep pace with such increases, rising by 2.5 million bpd (PDF) from 2006 through 2008. World reserves are estimated at 1.2 trillion barrels, according to BP, with 75 percent of those reserves in OPEC countries. This figure only includes proven reserves where development is taking place. There is no independent verification of OPEC reserve figures, which has led some to question whether Saudi oil reserves might be overstated.
China, a net importer of oil and gas, has made slight increases in domestic production in recent years but the EIA’s Cline describes China’s outlook for future production as “relatively flat.” He says the biggest gains are expected in the United States, Canada, Brazil, Russia, and the former Soviet states of Azerbaijan and Kazakhstan. Of these, Russia, Azerbaijan, and Kazakhstan are expected to be most significant. Azerbaijan’s production grew by 45 percent from 2005 to 2006 and is expected to grow another 30 percent between 2006 and 2007. Russia added about 3 million bpd in new production over the period between 2000 and 2006 and is projected to add another 350,000 bpd in production by the end of 2008. Of the more than 9.6 million bpd produced in the country in 2006, slightly less than 70 percent was exported to other countries.
There are concerns about Russia’s growth in domestic demand, especially in the natural-gas sector. BP’s report shows the country has increased consumption by about one million bpd in the last decade. Experts also expressed concern about the expansion of nationalized oil. “Russia doesn’t think it requires foreign investment,” Edward Chow an energy analyst for the Center for Strategic and International Studies, says. “The question is whether they will do a better job than the Soviets.”
Kazakhstan is considered to have one of the most promising oil fields found in the last decade and highlights both the opportunities and troubles for non-OPEC producers. Even though it is not ranked among the top oil producers, in 2006 it was ranked by the EIA as one of the largest oil exporters, just above Canada. Between 2000 and 2006 the country nearly doubled its oil production, going from about 740,000 bpd to over 1.4 million bpd. Experts said Kazakhstan’s production has run into some trouble due to mismanagement and the complexity of extraction for deep oil sources. Kazakhstan’s government has used cost overruns and delays at oil fields run by international oil companies to press for a bigger share of oil revenues.
Unconventional Sources
New production also will come from sources once deemed uneconomical. “New unexplored areas are opening up for the first time because of oil prices,” Cline says. New Brazilian and Gulf of Mexico projects are being drilled in extremely deep water (WSJ), for example. Canada’s oil sands, once deemed too expensive to distill, are currently extracted from in growing quantities. Canada increased production by over 430,000 bpd between 2000 and 2006, and is expected to add another 300,000 bpd by 2008. According to BP’s report, Brazil added about 600,000 barrels in increased daily production during the same time period and also is expected to add another 300,000 bpd by 2008. Brazil’s national oil company, Petrobras, has been deemed (WSJ) by some analysts a “rare success story among state-owned oil companies.” Overall, the EIA projects Brazil will become a “net exporter” in 2007, exporting about 100,000 bpd more than it imports.
There are still hurdles to unconventional projects. Some experts recently expressed concerns that Canada would follow through on calls to raise oil royalties, worried that such a step may dissuade investment in Alberta oil-sands projects. McKennitt of the U.S. National Association of Petroleum Investment Analysts points out that the energy-intensive process for extracting oil from tar sands has cut into natural gas exports to the United States because so much gas is being used in the extraction process. “So if we want the oil we don’t get the gas,” he said.
A large portion of new production by the United States is predicted to occur in the Gulf, including from some deep-sea wells. Some analysts are concerned about the increasing concentration of U.S. oil in the Gulf and the area’s vulnerability to hurricanes. In 2005, Hurricane Katrina reduced production capacity by 8 percent. McKennitt says Gulf infrastructure remains vulnerable to another Katrina-type storm, and recommends that the United States open up other areas of drilling offshore. The United States has a moratorium on new offshore drilling except in the Gulf, but some lawmakers continue to push to lift the drilling ban. Another source of new production from the United States will be corn-based ethanol: Cline predicts the United States will add about 250,000 bpd in 2008, 40 percent of which he expects to be ethanol production.
As long as oil prices remain high, there will be an incentive to expand unconventional oil projects. Chow says some experts still wonder whether oil prices are high because of a paradigm shift on energy demand or if they are following a historical cycle. If the latter, prices would eventually fall, and some of the more expensive unconventional projects now under way would face losing money.
U.S. Demand and the Ethanol Factor
Some experts say that countries, especially the United States, need to work on limiting consumption to help ease world demand instead of focusing on new production. The United States, the top net importer in the world, consumed 21 million barrels of oil per day in 2006 and accounts for a quarter of the world’s oil consumption. The next largest single country consumer was China, one of the fastest-growing energy consumers in the world. It, along with other large emerging economies, has added to the global strain on oil and gas supplies.
Chow asserts that higher U.S. gasoline prices, perhaps via a gas tax, already used throughout Europe, could help curtail U.S. demand. He notes that China has less flexibility on consumption since its demand is more closely tied to its manufacturing. The U.S. Congress has long resisted such a step given the heavy reliance by Americans on gas-powered cars. A CFR Task Force report mentions the need for considering a gasoline tax amid a range of options, including expanding alternatives fuels, and it encourages the expansion of domestic oil production to improve energy security while the United States plots changes to strategy.
Many experts doubt U.S. ethanol production can help ease supply concerns. They argue that the use of corn-based ethanol is uneconomical since the market has been bolstered by subsidies and issues with distribution have not been ironed out. But others remain hopeful that non-corn-based ethanol, such as the sugar-based variety produced by Brazil and the still experimental cellulosic ethanol (derived from things such as grass and wood chips), will prove to be less expensive alternatives.
