UK oil output drops 16% in a year

The Telegraph reports:

Britain's oil production from the North Sea has fallen by 16pc since last year in a drastic drop that will cost the Treasury millions of pounds in lost taxes. Officials from the Department for Energy and Climate Change put the unexpectedly large fall down to "maintenance and other production issues" on top of the long-term trend of declining output.
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The Health and Safety Executive has warned that only one in 30 of the UK's North Sea oil rigs is in a good condition. A number of large platforms have closed for major maintenance this year. Full story

So on top of a declining natural resource, we've got a creaking and rusting and infrastructure... Doesn't bode well for energy security, or for the UK balance of payments...

Mike

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Peak Oil and Economics - Chris Skrebowski

Just received a great article in this week's ODAC newsletter, written by Chris Skrebowski. In it he argues that we are now reaching the point where the cost of new oil supplies is more than most countries' economies can afford.

The reason is that new oil supplies are invariably in difficult to access places, as we (naturally) took the easy stuff first. But every economy has a price point at which growth grinds to a halt. We saw this happen in 2007-8, and we've seen it start to happen again in 2011. The price is higher in some countries than others - it comes down to how dependent the existing infrastructure is on oil, what the benefit of using more oil brings, and how quickly the infrastructure can be changed to adapt. On all of these counts countries like China and India do better than the USA or Europe.

Skrebowski sums his article up by saying:

Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices. These have the effect of shifting consumption from incumbent consumers - the advanced economies - to the new consumers in the developing economies.

This is exactly what happened in the last recession when between the start of the recession in January 2007 and its effective end in 1Q 2011 demand rose by 4.3 million b/d in the non-OECD area and fell by 4 million b/d in the OECD area.

You can read the full article at ODAC.

Mike

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Why UK oil and gas production will keep falling fast

In this post I'm going to show you a few graphs from a UK government department, and explain what they mean for future UK oil and gas production.

The Department of Energy and Climate Change has recently published the 2011 Digest of UK Energy Statistics (DUKES), which is a fairly lengthy document. Of particular interest is the 'internet booklet' version, which includes the graphs I'll show you in a moment. A bit of background first...

When an oil or gas field is discovered and developed, production initially rises, then reaches a peak, and finally falls away. The rate at which production falls tends to drop over time, so you end up with a 'long tail' of low production that can carry on for many years - or until the field's owner decides it is no longer generating enough income to be worth maintaining. However, this pattern has changed in the past couple of decades, as explained by this quote from the DUKES internet booklet:

It can be seen from the production chart that during the 2000s the amount of oil produced from older established fields was in general decline. It is also noticeable that the decline in post 1994 developments is greater than in earlier developments. This is because later technology meant crude oil could be extracted at a relatively greater rate leading to a quicker exhaustion of the reserves. In 2010, these newer (post 1994) fields accounted for 69 per cent of the UK’s oil production.

Here's the chart it is referring to, showing oil production, with fields grouped by the year they started production (all charts can be clicked to view a larger version):

The older fields had new technology applied as it became available, maintaining steady but lower production over longer periods of time, but the newer fields have had all the advanced technology applied very quickly (to make money faster), and as a result the production rises quickly, but also falls quickly once peak production is passed. This has allowed the rather small oil fields discovered in the past couple of decades to offset the slow decline from the much larger, older fields, but now that some of them are declining, and declining fast, there is really nowhere left to turn other than importing oil (the UK has been a net importer since 2005). The following chart shows the same data, but as percentage share of total production:

As you can see, the majority of our oil production is now from recently developed smaller fields, which experience shows us will decline quickly - so we've got quite a long way to fall before we bottom out on the 'long tail' of oil production which we can reasonably count on for a longer period.

And just to complete the picture, here's the same graphs for gas fields (bear in mind that in 2010 over 40% of our electricity was generated by burning gas...):

Ever played a game of Snakes and Ladders? I think the UK is half way down a snake...

Mike

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How much oil will Saudi Arabia have spare to export?

For a long time the Export Land Model has been used to argue that as a country's internal oil consumption rises, less is available for it to export. This makes sense, and as long as oil prices rise, the exporting country may continue to earn sufficient income from its reduced exports. Normally we think of this increased domestic oil demand as coming from greater economic activity, resulting in more cars and trucks driving around, or more oil being used in industry. In Saudi Arabia however there are two other significant sources of demand...

The first is air conditioning, which needs electricity. Most countries avoid burning oil or oil-derived fuels to generate electricity as they are too expensive, but Saudi Arabia burns crude oil in some of its power plants, so more air conditioning results in more domestic oil use.

The second is desalination. Saudi Arabia has very little water, and oil-fired desalination plants are used to produce the water needed for agricultural, industrial and domestic use.

A recent article from Reuters said:

The International Energy Agency and analysts at HSBC bank estimated Saudi Arabia's rate of direct crude burning more than doubled from 2008 to 2010 because of a rapid rise in power demand and a shortage of natural gas. How much of that went to desalination is not known but experts believe it is significant.

Of course, the ideal would be that water is used more carefully, but if this doesn't happen, and demand for aircon keeps rising, the rate of oil exports from Saudi Arabia could be falling pretty quickly before too long...

Mike

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