World Oil Price:
The near-term price trajectory in the IEO2000 reference case is considerably different from that in last year’s International Energy Outlook (IEO99). In IEO99, the rebound from the plummeting oil prices of 1998 and early 1999 was expected to occur gradually out to 2005, based on a recent series of unsuccessful attempts by OPEC member nations to adhere to announced production cutbacks.
The IEO2000 reference case incorporates the dramatic 1999 price increases that have followed the latest, so far successful, pledges by OPEC and some non-OPEC producers.
In both outlooks, the reference case price trajectory beyond 2005 shows a gradual increase of about 0.4 percent per year out to 2010, reaching $21.00 per barrel (in constant 1998 U.S. dollars) in 2010 and $22.04 in 2020. Three possible long-term price paths are shown in Figure 40.
Oil demand rises significantly over the projection period in all three IEO2000 price scenarios. In the high and low world oil price cases, the increases are 34 million barrels per day and 44 million barrels per day, respectively.
The assumed size of proven worldwide reserves (more than 1 trillion barrels) and U.S. Geological Survey estimates of ultimately recoverable oil imply that resources are not a key constraint on world oil demand to 2020. More important are the political, economic, and environmental circumstances that could shape developments in oil supply and demand.
The Composition of World Oil Supply:
The IEO2000 reference case projects an increase in world oil supply of almost 40 million barrels per day over the projection period. Gains in production are expected for both OPEC and non-OPEC producers; however, less than one-third of the production rise is expected to come from non-OPEC areas.
Over the past two decades, the growth in non-OPEC oil supply has resulted in an OPEC market share of 41 percent, substantially under its historic high of 52 percent in 1973.
New exploration and production technologies, aggressive cost-reduction programs by industry, and attractive fiscal terms to producers by governments all contribute to the outlook for continued growth in non-OPEC oil production.
While the long-term outlook for non-OPEC supply remains optimistic, the low oil price environment of 1998 and early 1999 had a definite impact on exploration and development activity. By the end of 1998, North American drilling activity had fallen by more than 25 percent from its level a year earlier.
Worldwide, only the Middle East region registered no decline in drilling activity during 1998. In general, onshore drilling had fallen more sharply than offshore. Worldwide, offshore rig utilization rates were generally sustained at levels better than 80 percent of capacity.
The reference case projection indicates that more than two-thirds of the increase in demand over the next two decades will be met by increases in production by members of OPEC rather than by non-OPEC suppliers.
OPEC production in 2020 is projected to be more than 25 million barrels per day higher than it was in 1998 . The IEO2000 estimates of OPEC production capacity out to 2005 are slightly less than those projected in IEO99, reflecting a shift toward non-OPEC supply projects in the current high price environment.
Some analysts suggest that OPEC might pursue significant price escalation through conservative capacity expansion decisions rather than undertake ambitious production expansion programs. This outlook discounts such suggestions, in light of the generous return on investment that OPEC producers (especially those in the Persian Gulf region) receive even in a relatively low world oil price environment.
Expansion of OPEC Production Capacity:
It is generally acknowledged that OPEC members with large reserves and relatively low costs for expanding production capacity can accommodate sizable increases in petroleum demand. In the IEO2000 reference case, the production call on OPEC suppliers grows at a robust annual rate of 3.1 percent.
OPEC capacity utilization is expected to increase sharply after 2000, reaching 95 percent by 2015 and remaining there for the duration of the projection period.
Iraq’s role in OPEC will be particularly interesting to observe over the next half-dozen years. During 1999, Iraq expanded its production capacity to 2.8 million barrels per day in order to reach the slightly more than $5.2 billion in oil exports allowed by United Nations Security Council resolutions. Such expansion was required in the low price environment of early 1999.
For the purposes of the IEO2000 reference case, Iraq is assumed to maintain its current oil production capacity of 2.8 million barrels per day into the year 2000 and to export an average of 1.5 to 1.7 million barrels per day. The Security Council resolutions are assumed to remain in place through 2001.
Iraq has indicated a desire to expand its production capacity aggressively, to about 6 million barrels per day, once U.N. sanctions are lifted. Preliminary discussions with potential outside investors (including France, Russia, and China) about exploration projects have already taken place.
Such a significant increase in Iraqi oil exports would offset a significant portion of the price stimulus associated with current OPEC production cutbacks.
Given the requirements for OPEC production capacity expansion implied by the IEO2000 estimates, much attention has been focused on the oil development, production, and operating costs of individual OPEC producers.
With Persian Gulf producers enjoying a reserve-to-production ratio in excess of 85 years, substantial capacity expansion is obviously feasible.Production costs in Persian Gulf OPEC nations are less than $1.50 per barrel, and the capital investment required to increase their production capacity by 1 barrel per day is less than $5,000.
Assuming the IEO2000 low price trajectory, total development and operating costs over the entire projection period, expressed as a percentage of gross oil revenues, would be less than 18 percent. Thus, Persian Gulf OPEC producers can expand capacity at a cost that is a relatively small percentage of projected gross revenues.
For OPEC producers outside the Persian Gulf, the cost to expand production capacity by 1 barrel per day is considerably greater, exceeding $10,000 in some member nations.
Yet even those producers can still expect margins in excess of 32 percent on investments to expand production capacity in the low price case over the long term.
Venezuela has the greatest potential for capacity expansion and has aggressive plans to increase its production capacity to 4.6 million barrels per day by 2005 from the current level of 3.4 million barrels per day.
It is unclear, however, whether the current political climate will support the outside investment required for any substantial expansion of production capacity. Tables D1-D10 in Appendix D show the ranges of production potential for both OPEC and non-OPEC producers.
The reference case projection implies aggressive efforts by OPEC member nations to apply or attract investment capital to implement a wide range of production capacity expansion projects.
If those projects are not undertaken, world oil prices could escalate; however, the combination of potential profitability and the threat of competition from non-OPEC suppliers argues for the pursuit of an aggressive expansion strategy for OPEC.
In IEO2000, OPEC members outside the Persian Gulf are expected to continue increasing their production. The outlook for Nigeria’s offshore production potential is optimistic, although development of production capacity there is unlikely before 2005.
In addition, increased optimism about production potential in Algeria, Indonesia, and Venezuela supports the possibility of reducing the Persian Gulf share of OPEC oil exports
Non-OPEC Supply:
Growing non-OPEC oil supplies played a significant role in the erosion of OPEC’s market share over the past two decades, as non-OPEC supply became increasingly diverse.
North America dominated non-OPEC supply in the early 1970s, the North Sea and Mexico evolved as major producers into the 1980s, and much of the new production in the 1990s has come from the developing countries of Latin America, the non-OPEC Middle East, and China.
In the IEO2000 reference case, non-OPEC supply from proven reserves is expected to increase steadily, from 44.5 million barrels per day in 1998 to 56.6 million barrels per day in 2020.
There are several important differences between the IEO2000 production profiles and those published in IEO99:
The U.S. production decline is slightly less severe in the IEO2000 projections as a result of higher near-term oil prices, technological advances, and lower costs for deep exploration and production in the Gulf of Mexico.
The rebound in near-term oil prices coupled with enhanced subsea and recovery technologies delays the IEO99 estimated peak for North Sea production by a year to the 2004-2005 time period and slightly tempers the production decline out to 2020.
Resource development in the Caspian Basin region was significantly delayed in the IEO99 projection in view of the prospects for a prolonged low price environment. In IEO2000, Caspian output rises to almost 2.5 million barrels per day by 2005 and increases by about 7.1 percent annually through 2020.
There still remains a great deal of uncertainty regarding export routes from the Caspian Basin region.
IEO99 anticipated significant delays in the exploration and development activities for deepwater projects worldwide. Although there remained considerable optimism about deepwater prospects, significant output from such projects was not anticipated until oil prices returned to a range of $18 to $20 per barrel.
With the current rebound in prices, output from deepwater projects in the U.S. Texas Gulf, the North Sea, West Africa, the South China Sea, Colombia, and the Caspian Basin is accelerated in IEO2000 by 1 to 3 years.
In the IEO2000 reference case, North Sea production peaks in 2004 at more than 7.2 million barrels per day. Production from Norway, Western Europe’s largest producer, is expected to peak at about 3.7 million barrels per day in 2003 and then gradually decline to about 2.9 million barrels per day by the end of the forecast period with the maturing of some of its larger and older fields.
The United Kingdom sector is expected to produce about 3.1 million barrels per day by 2005, followed by a decline to 2.6 million barrels per day by 2020.
Two non-OPEC Middle East producers are expected to increase output gradually through 2005.
Enhanced recovery techniques are expected to increase current output in Oman by more than 150,000 barrels per day, with only a gradual production decline anticipated after 2005.
Current oil production in Yemen could increase by at least 100,000 barrels per day within the next couple of years, and those levels would show little decline throughout the forecast period. Syria is expected to hold its production flat through the first half of the decade, but with little in the way of new resource potential, its production declines by about one-third from 2005 to 2020.
Oil producers in the Pacific Rim are expected to increase production significantly with the use of enhanced exploration and extraction technologies. Deepwater fields offshore from the Philippines have improved the reserve picture there, and production is expected to reach almost 250,000 barrels per day by 2005.
Vietnam'slong-term production potential also is still viewed with considerable optimism, although exploration activity has been slower than originally anticipated. Output levels from Vietnamese fields are expected to exceed 500,000 barrels per day by 2020.
Australia has significantly added to its proven reserves recently, and it is likely that Australia will become a million barrel per day producer by 2005. Papua New Guinea also continues to add to its reserve posture and is expected to achieve production volumes approaching 200,000 barrels per day by 2005, followed by only a modest decline over the rest of the forecast.
India, too, is expected to show some modest production increase early in the decade and only a modest decline in output thereafter. Malaysia shows little potential for any significant new finds, and its output is expected to peak at around 825,000 barrels per day in the early 2000s, followed by a gradual decline to about 625,000 barrels per day by 2020.
Exploration and test-well activity have pointed to some production potential for Bangladesh and Mongolia, but significant output is not expected before 2005.
Oil producers in Central and South America have significant potential for increasing output over the next decade. Brazil has just recently become a million barrel per day producer and has considerable production potential waiting to be tapped.
Its production is expected to rise throughout the forecast period, topping 1.7 million barrels per day by 2020. Colombia’s current economic downturn has delayed its bid to join the relatively short list of million barrel per day producers, but it is expected to top 1.2 million barrels per day within 5 years and show little decline through 2020.
The oil sectors in both countries would benefit significantly from a more favorable climate for attracting foreign investment.
Argentina is expected to increase its production volumes by at least 100,000 barrels per day over the next 2 years, and by 2005 it is also likely to become a million barrel per day producer. Although the current political situation in Ecuador is in transition, there is still optimism that Ecuador will increase production by more than 100,000 barrels per day within the next few years.
Several West African producers (Angola, Cameroon, Chad, Congo, Gabon, Ivory Coast) are expected to reap the benefits of substantial exploration activity, especially considering the recent rebound in oil prices. Angola is expected to become a million barrel per day producer within 5 years.
Given the excellent exploration results, Angola could produce volumes of up to 1.8 million barrels per day well into the later years of the forecast period. The other West African producers with offshore tracts are expected to increase output by up to 300,000 barrels per day for the duration of the forecast period.
North African producers Egypt and Tunisia produce mainly from mature fields and show little promise of adding to their reserve posture, and their production volumes are expected to fall gradually throughout the forecast. Sudan and Equatorial Guinea, which have dramatically increased their production recently, are expected to be producing moderate volumes by 2005 and Eritrea, Somalia, and South Africa after 2005.
In North America, falling U.S. output is expected to be more than offset by production increases in Canada and Mexico. Canada’s output is projected to increase by about 200,000 barrels per day over the next 2 years, mainly from Newfoundland’s Hibernia oil project, which could produce more than 150,000 barrels per day at its peak sometime in the next several years.
After 2001, Canada is expected to gradually add an additional 600,000 barrels per day in output from a combination of frontier area offshore projects and oil from tar sands. Higher near-term prices, technological advances, and lower costs for deepwater exploration and production in the Gulf of Mexico temper the projected decline in U.S. production.
Mexico is expected to adopt energy policies that encourage the efficient development of its vast resource base, and production volumes approaching 4 million barrels per day are projected from 2010 through 2020.
With the rebound in near-term oil prices, oil production in the FSU is expected to reach 7.6 million barrels per day by 2005—a level that could be significantly higher if the outlook for investment in Russia were not so pessimistic.
The long-term production potential for the FSU is still regarded with considerable optimism, especially for the resource-rich Caspian Basin region. Oil production in the region is projected to exceed 13.1 million barrels per day by 2020 in the IEO2000 reference case, implying export volumes in excess of 7.5 million barrels per day.
In China, oil production is expected to increase gradually to 3.6 million barrels per day by 2020, but China’s import requirements will be as large as its domestic production by 2010 and will continue to grow as its petroleum consumption increases.
The estimates for non-OPEC production potential presented in this outlook are based on such parameters as numbers of exploration wells, finding rates, reserve-to-production ratios, advances in both exploration and extraction technologies, and the sensitivity to changes in the world oil price.
A critical component of the forecasting methodology is the constraint placed on the exploration and development of undiscovered resources. For the purpose of the three IEO2000 world oil price cases, no more than 15 percent of the mean United States Geological Survey estimate of undiscovered oil was allowed to be developed over the forecast period. Tables D1-D10 in Appendix D show the ranges of production potential for both OPEC and non-OPEC producers.
The expectation in the late 1980s and early 1990s was that non-OPEC production in the longer term would be stagnant or decline gradually in response to resource constraints.
The relatively insignificant cost of developing oil resources in OPEC countries (especially those in the Persian Gulf region) was considered such an overwhelming advantage that non-OPEC production potential was viewed with pessimism.
In actuality, however, despite a relatively low price environment, non-OPEC production has risen every year since 1993, adding almost 4 million barrels per day between 1993 and 1997. It is expected that non-OPEC producers will continue to increase output, producing an additional 7 million barrels per day by 2010.
Three factors are generally given credit for the impressive resiliency of non-OPEC production: development of new exploration and production technologies, efforts by the oil industry to reduce costs, and efforts by producer governments to promote exploration and development by encouraging outside investors with attractive fiscal terms.
Alternative Non-OPEC Supply Cases:
The only variable affecting the estimates of non-OPEC production potential in the three IEO2000 world oil price cases is the world oil price assumption. As a result, the range in non-OPEC supply is modest, varying by slightly less than 4.3 million barrels per day at the end of the forecast period.
In fact, however, improved technology and a better understanding of the underlying resource potential have been major factors sustaining non-OPEC supply in the recent past.
To examine the effects of those factors, two additional cases—the high and low non-OPEC supply cases—were developed for IEO2000.
Both non-OPEC supply cases are based on the reference case world oil price assumption, and are considered feasible alternatives to the projections of non-OPEC supply in the reference case.
The high non-OPEC supply projections would, of course, be more likely if oil prices were higher, and the projections in the low case would be more likely if prices were lower. The alternative cases used reference case assumptions except for the following departures.
High Non-OPEC Supply Case::
Due to increased optimism regarding the offshore production potential in the FSU, Latin America, West Africa, and the South China Sea, undiscovered oil in those regions is assumed to be 15 percent greater than the estimates in the reference case by 2020.
One-third of the world’s (non-OPEC, non-U.S.) undiscovered oil is considered economical to develop over the forecast period—almost 65 billion barrels more than in the reference case.
Technology improvements over the forecast period are assumed to be transferrable worldwide. In the reference case, there is an assumed 5-year lag for technology transfer to nonindustrialized countries.
A reserve-to-production ratio of 10 years (slightly less than the current non-OPEC ratio) is used as a lower bound for production estimates, as compared with 15 years in the reference case.
Low Non-OPEC Supply Case:
The amount of oil production from undiscovered reserves in deepwater areas is assumed to be 25 percent less than the reference case estimate as a result of persistent low oil prices and the finding of more natural gas deposits than oil deposits.
Only one-fifth of the undiscovered oil in non-OPEC areas is considered economical to develop over the forecast period.
There are assumed to be no significant technology improvements over the forecast period, and worldwide oil recovery rates are assumed to average only 35 percent. The reference case assumes a gradual increase in worldwide recovery rates to 45 percent by 2020.
Russia’s oil production is assumed to be one-third of that estimated in the reference case. The high non-OPEC supply case assumptions result in 1.6-percent annual growth in non-OPEC production over the forecast period, as compared with a 1.2-percent growth rate in the reference case.
Non-OPEC oil production reaches a peak of 62.1 million barrels per day in the high case in 2020, compared with a peak of 56.6 million barrels per day in the reference case.
In the reference case, OPEC production peaks at 55.9 million barrels per day, and the OPEC share of worldwide production reaches almost 50 percent by 2020. In the high non-OPEC supply case, OPEC production peaks at 50.4 million barrels per day and never assumes a market share above 45 percent.
The low non-OPEC supply case projects only modest 0.2-percent annual growth in non-OPEC production over the forecast period. Non-OPEC production peaks in 2015 at 46.7 million barrels per day. OPEC production reaches 66.4 million barrels per day in 2020, with about a 59-percent share of the world market.
Worldwide Petroleum Trade in the Reference Case:
In 1997, industrialized countries imported 16.5 million barrels of oil per day from OPEC producers. Of that total, 10.3 million barrels per day came from the Persian Gulf region. Oil movements to industrialized countries represented almost two-thirds of the total petroleum exported by OPEC member nations and more than 63 percent of all Persian Gulf exports.
By the end of the forecast period, OPEC exports to industrialized countries are estimated to be about 5.3 million barrels per day higher than their 1997 level, and more than half the increase is expected to come from the Persian Gulf region.
Despite such a substantial increase, the projected share of total petroleum exports in 2020 that goes to the industrialized nations is considerably lower than their 1997 share, at almost 56 percent. Their share of all Persian Gulf exports falls even more dramatically, to almost 37 percent.
The significant shift in the balance of OPEC export shares between the industrialized and non-industrialized nations is a direct result of the robust economic growth anticipated for the developing nations of the world, especially those of Asia.
OPEC petroleum exports to developing countries are expected to increase by almost 16 million barrels per day over the forecast period, with more than half the increase going to the developing countries of Asia.
China, alone, will most likely import about 5.3 million barrels per day from OPEC by 2020, virtually all of which is expected to come from Persian Gulf producers.
North America’s petroleum imports from the Persian Gulf are expected to more than double over the forecast period. At the same time, more than half of North America’s imports in 2020 are expected to be from Atlantic Basin producers and refiners, with significant increases in crude oil imports anticipated from Latin American producers, including Venezuela, Brazil, Colombia, and Mexico.
West African producers, including Nigeria and Angola, are also expected to increase their export volumes to North America. Caribbean Basin refiners are expected to account for most of the increase in North American imports of refined products.
With a moderate decline in North Sea production, Western Europe is expected to import increasing amounts from Persian Gulf producers and from OPEC member nations in both northern and western Africa. Substantial imports from the Caspian Basin are also expected.
Industrialized Asian nations are expected to increase their already heavy dependency on Persian Gulf oil. The developing countries of the Pacific Rim are expected to increase their total petroleum imports between 1995 and 2020 by almost 43 percent.
Worldwide crude oil distillation refining capacity was about 80.3 million barrels per day at the beginning of 1999. To meet the projected growth in international oil demand in the reference case, worldwide refining capacity would have to increase by more than 40 million barrels per day by 2020.
Substantial growth in distillation capacity is expected in the Middle East, Central and South America, and especially in the Asia Pacific region. Refiners in North America and Europe, while making only modest additions to their distillation capacity, are expected to continue improving product quality and enhancing the usefulness of the heavier portion of the barrel through investment in downstream capacity.
Future investments by developing countries are also expected to include more advanced configurations designed to meet the anticipated increase in demand for lighter products, especially transportation fuels.
Other Views of Prices and Production:
Several oil market analysis groups produce world oil price and production forecasts. Table 14 compares the IEO2000 world oil price projections with similar forecasts from Standard & Poor’s Platt’s (DRI), the International Energy Agency (IEA), Petroleum Economics, Ltd. (PEL), Petroleum Industry Research Associates (PIRA), the Gas Research Institute (GRI), National Resources Canada (NRCan), WEFA Energy (WEFA), and Deutsche Banc Alex.Brown (DBAB).
The collection of forecasts includes a wide range of price projections. The volatility of world oil prices in the late 1990s has helped to define this wide range with differing views about whether oil prices will sustain the higher levels achieved in 1999 with the recovery of many southeast Asian economies and the production quotas achieved by the OPEC member countries.
Prices for 2005 range from DRI’s $15.70 per barrel (constant 1998 U.S. dollars) to NRCan’s $20.97 per barrel. NRCan released its last world oil price projections in 1997 but revisited oil prices in a December 1999 publication, Canada’s Emissions Outlook: An Update, and decided that the forecasts were valid without revision.
The IEA forecast, which is closest to IEO2000 ($20.47 vs. $20.49), was also released some time ago, in November 1998 in the IEA’s World Energy Outlook 1998—the last Outlook released with oil prices.
IEO2000 expects oil prices higher than those in most of the other forecasts, in the range of $20 to $21 per barrel through 2005, as does PIRA at $19.75 per barrel in 2005. Recent forecasts from DRI, DBAB, and GRI all show lower prices, in the range of $16 to $18 per barrel in 2005.
PEL (in 2010) and IEA (after 2010) may be considered outliers among the sets of projections. PEL’s price projection is slightly lower than the IEO2000 low price path in 2010, when the PEL time series ends ($14.78 from PEL compared with $14.90 in the IEO2000 low world oil price case).
Similarly, after 2010, IEA price expectations exceed the IEO2000 high price path by about $2 per barrel. With the exceptions of NRCan in 2005 and IEA after 2010, however, the IEO2000 prices are higher than those in the other forecasts over the 2005-2020 period.
Oil price forecasts are influenced by differing views of the projected composition of world oil production. Two factors are of particular importance: (1) expansion of OPEC oil production and (2) the timing of a recovery in EE/FSU oil production. All the forecasters agree that recovery in the EE/FSU will be fairly slow.
The share of EE/FSU production does not grow above 12 percent in any of the forecasts included in this comparison. DRI is the least optimistic about recovery in the region, and its projection never exceeds 8 percent.
Indeed, DRI’s forecast of Russia’s share of world oil production (oil production estimates for the entire region are not available from DRI) falls to 7 percent in 2010 and to 6 percent in 2020. All the other forecasts expect production in the EE/FSU to make up about 11 percent of the world total by 2010.
Both IEO2000 and DBAB project a 12-percent share for EE/FSU production by 2015, which is maintained through 2020, whereas IEA projects 11 percent in 2010 and 10 percent in 2020.
The forecasts that provide projections through 2020 (IEO2000, DRI, DBAB, and IEA) all expect OPEC production in 2020 to be between 20 and 30 million barrels per day higher than it was in 1997. There is more variation in expectations among the four forecasts for non-OPEC suppliers.
DRI expects a substantial increase of 17 million barrels per day of supply from other suppliers, whereas IEA expects a decrease of 5 million barrels per day. IEA projects that the “other” share of world oil production will fall to 35 percent by 2020, while the OPEC share increases to 55 percent.
(The IEA estimate for the OPEC share is actually understated, because IEA does not publish oil production forecasts for the entire OPEC membership but only for “Middle East” OPEC. With non-Persian Gulf members supplying about 35 percent of OPEC’s current production, it can be assumed that the total OPEC share of world oil production is even higher in 2020 than the 55 percent IEO2000 and DBAB expect more moderate growth from “other,” non-OPEC supply totaling about 5 to 6 million barrels per day between 1997 and 2020.
Source: United States Energy Information Administration
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