oilvoice magazine | july 2013

7/28/2019 OilVoice Magazine | July 2013

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Is there a refinery in Batam's future?

Poland's shale gas future going up in smoke?

High oil prices are starting to affect China and India

Edition Sixteen July 2013


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2 OilVoice Magazine | JULY 2013

Contents

Featured Authors

Biographies of this months featured authors3

High oil prices are starting to affect China and Indiaby Gail Tverberg 5

Recent Company ProfilesThe most recent companies added to the OilVoice directory 15

Insight: The silent majority!by David Bamford 16

Results may vary: Beware of kaleidoscopic vision in the oil and gasindustryby Kurt Cobb

19

Is there a refinery in Batam's future?by Ken Anderberg 20

A futures market for North American LNG exports?by Keith Schaefer 25

Will Israel's rush to export natural gas turn out to be a mistake?by Kurt Cobb 30

Review: Kuwait - A mature industry stands at a junctureby Richie Ethrington 31

Additional Iranian oil sanctions may be counterproductiveby Gail Tverberg 34Poland's shale gas future going up in smoke?by Mark Young 42


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Featured Authors

Kurt Cobb

Resource Insights

Kurt Cobb is an author, speaker, and columnist focusing on energy and theenvironment. He is a regular contributor to the Energy Voices section of TheChristian Science Monitor and author of the peak-oil-themed novel Prelude.

Gail Tverberg

Our Finite World

Gail the Actuarys real name is Gail Tverberg. She has an M. S. from theUniversity of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty

Actuarial Society and a Member of the American Academy of Actuaries.

Ken Anderberg

AIM Communications

Vagabond international author Ken Anderberg has visited scores of countries

on four continents during his more-than-40-year career in journalism.

David Bamford

Finding Petroleum

David Bamford is 63. He is a non-executive director at Tullow Oil plc and hasvarious roles with Parkmead Group plc, PARAS Ltd and New EyesExploration Ltd, and runs his own consultancy.

Keith Schaefer

Oil & Gas Investments Bulletin

Keith Schaefe is editor and publisher of the Oil & Gas Investments Bulletin.
http://resourceinsights.blogspot.co.uk/http://resourceinsights.blogspot.co.uk/http://ourfiniteworld.com/http://ourfiniteworld.com/http://www.aimlink.com/http://www.aimlink.com/http://www.findingpetroleum.com/http://www.findingpetroleum.com/http://oilandgas-investments.com/http://oilandgas-investments.com/http://oilandgas-investments.com/http://www.findingpetroleum.com/http://www.aimlink.com/http://ourfiniteworld.com/http://resourceinsights.blogspot.co.uk/


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Richie Ethrington

Finding Petroleum

Richard Etherington, 24, works as a freelance journalist. Richard, a BA HonsPolitical Science graduate, is also a fully trained sub-editor and reporter. He isa former equities reporter and columnist, who specialised in small cap drillingand mining companies during which time he built up an impressive portfolioof industry contacts.

Mark Young

Evaluate Energy

Mark is an Energy Analyst at Evaluate Energy.
http://www.findingpetroleum.com/http://www.findingpetroleum.com/http://www.evaluateenergy.com/http://www.evaluateenergy.com/http://www.lunarsafari.co.uk/http://www.evaluateenergy.com/http://www.findingpetroleum.com/


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High oil prices arestarting to affect Chinaand India

Written by Gail Tverberg fromOur Finite World

The US Energy Information Administration recentlyreleased its reportshowing oilconsumption by country updated through 2012. Based on this report, it appears thatat current high oil prices, demand in both China and India is being reduced. Thus, for

those who are wondering how high oil prices need to be, to be too high, the answeris, We are already there. In fact, continued high oil prices are a big reason behindthe recessionary forces we are now seeing around the world.

A big part of China and Indias problems is that they, like the United States and mostof Europe, are oil importers. In this post, I also explain why there is a big differencein the impact of high oil prices on oil importing countries compared to oil exportingcountries.

We can see from Figures 1 and 2 that at $100 per barrel prices, there is a definite

flattening in per capita consumption for both India and China. Per capitaconsumption is used in this analysis, because if total oil consumption is rising, but by

Figure 1. Liquids (including biofuel,etc) consumption for China, based ondata of US EIA, together with Brent oilprice in 2012 dollars, based on BPStatistical Review of World Energyupdated with EIA data.

Figure 2. Liquids (including biofuel,etc) consumption for India, basedon data of US EIA, together withBrent oil price in 2012 dollars,based on BP Statistical Review ofWorld Energy updated with EIAdata.
http://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=5&aid=2http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=5&aid=2http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=5&aid=2http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=5&pid=5&aid=2http://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspx


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less than population is increasing, consumption on average is falling.

Some Other Countries with Declining Consumption

There are many other importing countries with even sharper drops in consumption

than China and India. These declines started in the 2005 to 2007 period, as oil pricesrose, and continued as oil prices have remained high. One example is Greece:

In fact, all of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain, known for theirproblems with recession) have shown steep drops in oil consumption:

Europe in total shows a somewhat less steep drop in oil consumption than thePIIGS:

Figure 3. Liquids (includingbiofuel, etc) consumption ofGreece, based on data of US EIA,together with Brent oil price in2012 dollars, based on BPStatistical Review of World Energyupdated with EIA data.

Figure 4. Per capita oil(liquids) consumption forcountries known as PIIGS,based on EIA data.

Figure 5. Liquids (oil includingbiofuel, etc) consumption for

Europe, based on data of USEIA, together with Brent oilprice in 2012 dollars, based onBP Statistical Review of WorldEnergy updated with EIA data.


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The US shows a similar drop in consumption to Europe:

Where is per capita oil consumption rising?

Oil consumption is rising faster than population in many oil exporting countries. If welook at OPEC in total, we see a big upward jump in per capita oil consumption in2011 and 2012.

In fact, this pattern occurs both in Saudi Arabia, and for OPEC outside Saudi Arabia:

For Saudi Arabia, 2012 oil consumption per capita is more than five times as muchas that of Europe. Outside Saudi Arabia, there is a definite upward bump inconsumption, both during the 2008 price run-up and corresponding to the higherprice in 2011 and 2012.

Figure 6. Liquids (oil includingbiofuel, etc) consumption for

United States, based on data ofUS EIA, together with Brent oilprice in 2012 dollars, based on BPStatistical Review of World Energyupdated with EIA data.

Figure 7. Liquids (oil includingbiofuel, etc) consumption forOPEC, based on data of US EIA,together with Brent oil price in2012 dollars, based on BPStatistical Review of World Energyupdated with EIA data.

Figure 8Liquids (oil includingbiofuel, etc) consumption for SaudiArabia, based on data of US EIA,together with Brent oil price in 2012dollars, based on BP Statistical

Review of World Energy updated withEIA data.


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One reason why oil exporters show higher growth in oil consumption than othercountries is because oil is becoming more difficult to extract, and because theeasiest to extract oil was extracted first. There are often indirect needs for oil as well,such as desalinization to have sufficient water for a growing population, or a newrefinery for difficult-to-refine oil. I talk about these issues in my post,Our Investment

Sinkhole Problem.

A second reason why oil exporters often show higher growth in oil consumption isbecause exporters often provide subsidized prices on oil products, so their citizensdo not have to pay the full cost of the product. Thus, their citizens do not reallyexperience the high oil prices that most importers do.

A third reason why oil exporters show higher growth when oil high prices are highhas to do with all of the money these exporters receive when they sell high-priced oil.The Economist this week has an article Saudi Arabia risk: Alert The next propertybubble? It talks about the huge number of office buildings, schools, low-priced

homes, and other building projects underway, thanks to a combination of easy creditavailability and lots of oil money. The article indicates that citizens rarely put theirnew-found wealth into paper investments. Instead, a significant part of their wealthends up in building projects that require oil use.

Norway is an exporter that does not subsidize oil prices (in fact, it has quite a hightax on oil use in private vehicles). It shows higher per capita oil consumption in thepast two years, despite higher world oil prices.

Brazil is not an oil exporter, but it has been trying to ramp up its production. Its percapita consumption has been rising recently as well.

Figure 9Liquids (oil includingbiofuel, etc) consumption for OPECex Saudi Arabia, based on data ofUS EIA, together with Brent oilprice in 2012 dollars, based on BPStatistical Review of World Energyupdated with EIA data.

Figu re 10. Liquids (oil including

biofuel, etc) consumption forNorway, based on data of US EIA,together with Brent oil price in2012 dollars, based on BPStatistical Review of World Energyupdated with EIA data.
http://ourfiniteworld.com/2013/02/08/our-investment-sinkhole-problem/http://ourfiniteworld.com/2013/02/08/our-investment-sinkhole-problem/http://ourfiniteworld.com/2013/02/08/our-investment-sinkhole-problem/http://ourfiniteworld.com/2013/02/08/our-investment-sinkhole-problem/http://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://viewswire.eiu.com/index.asp?layout=RKPrintVW3&article_id=50580589&printer=printerhttp://ourfiniteworld.com/2013/02/08/our-investment-sinkhole-problem/http://ourfiniteworld.com/2013/02/08/our-investment-sinkhole-problem/


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In fact, Africa in total, Central and South America in total, and the Middle East intotal, all show oil consumption rising faster than population, in 2011 and 2012. Theseare areas that, in total, are oil exporters.

Some very low oil-use countries, such as Bangladesh, are showing rising per capita

oil consumption in 2011 and 2012, even with higher oil prices. This could indicatethat some manufacturing is shifting to even lower cost areas than China and India.

Australia is showing growing per capita oil consumption, perhaps because of oilsuse in resource extraction and transport.

Why would a drop in per capita oil consumption for oil importers matter?

A drop in per capita oil consumption is a likely sign that oil is becoming increasinglyunaffordable. We know that oil is used to make and transport goods. If less oil isused, or if oil use is growing less rapidly than in the past, there is a real chance that

an economy is slowing.

There are a number of reasons oil consumption may be down. Fewer goods for salemay be being transported, perhaps because European demand is down. Citizensmay be driving less in their free time. Or many young people may be unemployed,and be unable to afford to buy a car or motor scooter. Any of these changes couldmean a slowing economy.

Obviously, there are situations in which reduced oil consumption doesnt mean aslowing economy. A shift from manufacturing to a service economy could lead tolower oil consumption; a shift toward more fuel-efficient cars and trucks could lead to

lower oil consumption. But these changes tend to take place slowly over time, not allat once, when oil prices rise.

Figu re 11. Liquids (oil includingbiofuel, etc) consumption forBrazil, based on data of US EIA,together with Brent oil price in2012 dollars, based on BPStatistical Review of World Energyupdated with EIA data.

Figu re 12. World growth inenergy use, oil use, and GDP(three-year averages). Oil andenergy use based on BPs 2012Statistical Review of WorldEnergy. GDP growth based onUSDA Economic Research data.


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Another way oil consumption can be reduced is if a country has in the pastgenerated electricity using oil, and such generation is shifted to another fuel, such asnatural gas. This type of change is being made in Greece, but seems unlikely inChina and India. Similarly, if homes are heated with oil, sometimes an alternate fuelcan be used, reducing oil consumption. China and India arent areas where oil has

traditionally been used to heat homes, though.

In general, though, sharp reductions in oil consumption in a growing economies,such as China and India, are cause for concern, if one was expecting growth. Arehigh oil prices stressing the economy?

United States and European Oil Imports

The US oil consumption pattern looks very much like that of an oil importing nation,under stress from high oil prices. Recently, there has been a lot of publicity abouthigher US oil production, but this does not really change the situation. If we look at

US oil consumption and production (actually liquids production and consumptionsince all kinds of stuff including biofuels are included), we see that the US remainsan oil importer. In fact, it is still a long way from becoming an oil exporter. (And,importantly, oil prices arent down by much, and high oil prices are our real problem.)

The European oil import situation is worse than the United States liquids situation,and no doubt part of its current economic problems. A graph of its recent productionand consumption is as follows:

Difference Between Oil Importers and Exporters Additional thoughts

The cost of extraction varies widely by country and by field within country. In order to

Figure 13:US Liquids (oilincluding natural gas liquids,refinery expansion and biofuels)production and consumption,based on data of the EIA.

Figure 14:European Liquids

(oil including natural gasliquids, refinery expansionand biofuels) production andconsumption, based on data ofthe EIA.
http://ec.europa.eu/energy/energy_policy/doc/factsheets/mix/mix_el_en.pdfhttp://ec.europa.eu/energy/energy_policy/doc/factsheets/mix/mix_el_en.pdfhttp://ec.europa.eu/energy/energy_policy/doc/factsheets/mix/mix_el_en.pdf


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provide a large enough quantity of oil in total, the world price of oil has to be highenough to provide an adequate profit for the highest cost producer. Clearly, if everyoil company charged the price needed for the highest cost producer, many would becollecting far more than they need for future oil extraction and payment of dividends.Where does all of this extra money go?

To a significant extent, this money is latched onto by governments. In the case ofoil exporting countries, governments often own oil companies directly. But even ifthey dont, governments tax oil extraction at very high rates, to make certain that thegovernment gets the benefit of any extra revenue available. Sometimes ProductionSharing Agreementsare used. Achart by Barry Rodgers Oil and Gas consulting(Figure 15 below) shows that for many oil exporting countries, the government takeis 70% to 90% of operating income (that is, net of direct expenses of extraction).

Figu re 15.Chart showing government take as a percentage of operating incomebyBarry Rodgers Oil and Gas Consulting.

Even in the case of the United States, the government take is significant. BarryRodgers, in an article in the May issue of Oil & Gas Journal, calculates that for tightoil (such as oil from the Bakken), the average government take is $33.29 per barrel.This compares to $19.50 per barrel, for tight oil extracted in Canada. These amountsinclude payments to state governments as well as the federal government. Ifextraction costs are low, as in the case of Alaska, the state adjusts its taxaccordingly.
http://en.wikipedia.org/wiki/Production_sharing_agreementhttp://en.wikipedia.org/wiki/Production_sharing_agreementhttp://en.wikipedia.org/wiki/Production_sharing_agreementhttp://www.bgrodgers.com/world-fiscal-map/http://www.bgrodgers.com/world-fiscal-map/http://www.bgrodgers.com/world-fiscal-map/http://www.bgrodgers.com/world-fiscal-map/http://www.bgrodgers.com/world-fiscal-map/http://www.bgrodgers.com/world-fiscal-map/http://www.bgrodgers.com/world-fiscal-map/http://www.bgrodgers.com/world-fiscal-map/http://en.wikipedia.org/wiki/Production_sharing_agreementhttp://en.wikipedia.org/wiki/Production_sharing_agreement


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Oil importing countries would like the world to have a level playing field with respectto the price of oil. In the real world, this doesnt happen. Oil exporting countries gethuge benefits in the form of the tax they collect from the oil they sell abroad. Often,this tax revenue amounts to 70% or more of a countrys tax budget from all sources.If oil exporters have small populations, they can afford to offer oil at subsidized rates

to their own populations. (If they have large populations relative to exports, offering asubsidized price would soon eliminate all exports!)

Economists would like us to believe that many of the differences between oilexporters and oil importers will even out because money spent by oil exporters topurchase goods and services together with purchases of government bonds from oilimporters should mostly make their way back to oil importing countries. There areseveral differences though:

(a) Oil exporting countries can choose to charge their citizens a lower price oil, thusinsulating them from the high world oil price, and raising their demand for oil (that is,

the amount of oil they can afford). This higher demand allows these countries toincrease their oil consumption, even as other countries, subject to higher prices,reduce theirs. Evidence presented in this article suggests that this, in fact, ishappening at high prices.

(b) Oil exporting countries need not tax the income of individuals and businesses, orinstitute value added taxes, because their tax needs are mostly met by the taxesthey collect on oil that is exported. This gives them a competitive advantage inmaking goods from oil or natural gas for international trade.

(c) Since world oil supply is limited, the oil that the oil exporting countries are able topurchase at subsidized prices (even if to build unneeded office buildings in SaudiArabia) is removed from the world market, further driving up oil prices, and leavingless for other countries to consume.

(d) The money that is spent by oil exporters rarely makes it back to the salaries ofindividuals in oil importing nations who are faced with buying high-priced oilproducts. In fact, I have shown that in times of oil prices, Unites States salaries tendto stagnate:

Figur e 16. High oil prices are

associated with depressedwages. Oil price through 2011from BPs 2012 StatisticalReview of World Energy,updated to 2012 using EIAdata and CPI-Urban from BLS.Average wages calculated bydividing Private Industrywages from US BEA Table 2.1by US population, and bringingto 2012 cost level using CPI-

Urban.


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At best, the money makes it back to financial institutions and corporations sellingproducts such as exported grain. The higher demand for grain tends to raise foodprices, putting another stress on the economy.

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Recent Company Profiles

The OilVoice database has a diverse selection of company profiles, covering new

start-up companies through to multi-national groups. Each of these profiles featurekey data that allows users to focus on specific information or a full company reportthat can be accessed online or printed and reviewed later.Start your search today!

Alon USA EnergyRefiner

Alon is an independent refiner and marketer ofpetroleum products focused on growth andinnovation to meet both the energy andenvironmental needs of today. With refining,

asphalt and retail/branded marketingoperations across the western and south-central regions of the United States, there is aconcentrated effort to share best practices andexpertise across the Alon family of companies.

Alon USA Energy's OilVoice profile

SAExplorationService

SAExploration is a geophysical servicescompany offering seismic data acquisitionservices to the oil and gas industry in North

America, South America, and Southeast Asia.SAE provides a full range of services relatedto the acquisition of your 2D,3D and 3C (Multi-Component) seismic data project on land, intransition zones and in shallow water.

SAExploration's OilVoice profile

Platino EnergyOil & Gas

Platino Energy is a newly formed pure playexploration company focused on oil and gasopportunities in Colombia. The Company wasformed in connection with the acquisition ofC&C Energia Ltd. ("C&C") by Pacific RubialesEnergy Corp. ("Pacific Rubiales") which closedon December 31, 2012. In that transaction,Pacific Rubiales acquired C&C's Llanos basinassets in Colombia.

Platino Energy's OilVoice profile

Talon PetroleumOil & Gas

Talon Petroleum is a Texas and Gulf Coastfocused exploration and appraisal company.The company strategy is focused on low risk,liquids rich prospects in mature, well servicedareas. Talon expects to add value throughutilising modern drilling and fracturestimulation technologies. Talon already has adiversified portfolio of assets which include thenon-Eagle Ford shale Texon assets, with twoproducing wells and 3P reserves of 1.3MMbblsof oil.

Talon Petroleum's OilVoice profile

PostRock EnergyOil & Gas

With a solid, value-driven leadership team andemployee base, PostRock Energy ispositioned to create value for all of ourstakeholders in the years to come. Currently,we are the leading producer of natural gas inthe Cherokee Basin of southeast Kansas andnortheast Oklahoma. We also own andoperate over 400 oil and gas wells in

Appalachia, and 2,200 miles of gatheringsystem supporting our upstream operations.

PostRock Energys OilVoice profile
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Insight: The silentmajority!

Written by David Bamford fromFinding Petroleum

My observation remains that the last big innovation or disruptive breakthrough insubsurface interpretation was almost 20 years ago when Geoquest and Landmark'invented' the 3D seismic interpretation workstation.

My 'silent majority' are the folk who actually do the innovative work in oil & gascompanies who are not only ignored, but hamstrung, by the technology and the

purchasing policies of their companies!

Since then, improvements have been incremental and the systems have fallenincreasingly under the control of IT and supply chain managers who like low risk,competitively priced contracts with major suppliers that define a bundle or 'stack' ofhardware, operating systems, master software license agreements, and mostimportantly, applications, in turn leading to high prices, lock-in and an inability torespond to business needs with innovative new applications.

In the meantime, the amount and diversity of data available to sub-surfacespecialists has outpaced the ability of available systems and workflow processes tomanage, integrate and interpret it whilst what these specialists are trying to do -understand basins, define prospects, understand reservoirs, deliver reserves andproduction - is getting more difficult all the time i.e. requires more and moreinnovation.

For example in:

Exploration

1. Many basins are now assessed, and nearly all offshore wells are nowadays

drilled, on the basis of a 3D seismic survey which in its basic form allowssophisticated stratigraphic and structural interpretations, tied to available welllogs.

2. Beyond this, lithology and fluid prediction depends on a wide range ofderivative seismic attributes - near- and far-stacks, AVO gradients, elasticimpedance, phase etc etc.

3. Non-seismic geophysics has its place, especially when such data can beunderstood and interpreted (integrated with) the geological frameworkprovided by a seismic interpretation i.e. the output of 1. and 2. above. Electro-magnetic surveys and Full Tensor Gravity Gradiometry are especiallysignificant in this respect.
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Reservoir Management

1. Most fields will now have a static reservoir description based on all availablewell data (logs, cores) and a sophisticated interpretation of a 3D seismicsurvey (deliverables similar to 1. and 2. under Exploration above).

2. Reservoir dynamics are observed by wide-ranging production monitoring,from continuous downhole PLTs to regular 4D towed-streamer seismic to 'as-often-as-you-want' permanent seismic monitoring (either on the surface ordownhole).

3. These static and dynamic facts and interpretations have to be integrated into,and with, the reservoir engineers' simulators, sometimes 2D but most often(massively) 3D.

I have left out of these lists several things, for example passive seismic (which somewould say offers, via attenuation measurements, information on reservoirpermeability) and micro-seismic (the observation of seismic events associated with

'fracking'), also newer downhole methodologies such as cross-well seismic, micro-gravity etc.

The result is that a team of subsurface specialists - whether working on a basin, aprospect a discovery or a field - can in principle access very large amounts ofdifferent types of data, each requiring its own conditioning and analysis, beforeattempting to integrate these many strands into a coherent interpretation, certainly inthree dimensions and possibly four. I say 'in principle' and 'attempting' because inreality - as stated earlier - the amount and diversity of data available to sub-surfacespecialists has outpaced the ability of their systems and workflow processes tomanage, integrate and interpret it.

There is a lot missing!

Analysis and interpretation tends to depend either on a lowest-common-denominator (seismic interpretation) workstation or on specialist software operatedby specialists. For example, a Major oil & gas company will have several hundredfolk who can interpret a 3D seismic survey on a workstation (1. above), no more thana handful who can undertake the analysis to deliver any desired attribute (2. above).I can count on the fingers of one hand the folk I know who could undertake 1., 2. and3. above, in either Exploration or Reservoir Management. Of course, companies

surmount this problem by having a team of petrotechs working on any one project.However, any one project may be unique in terms of the data available and theanalyses undertaken, meaning that the work processes and software used will bechosen a la carte and - pursuing the restaurant analogue - with every dish cooked bya different chef to a secret recipe!

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Results may vary:Beware ofkaleidoscopic vision inthe oil and gas industry

Written by Kurt Cobb fromResource Insights

If you've ever looked at the elements that create the images in akaleidoscope, theyare unremarkable: pebbles, beads and bits of colored glass, all mixed together. Butwhen seen through the viewing end of the device, this mixture creates the illusion ofpleasing, colorful and multiple identical designs where, in fact, there are none. It'sdone with mirrors; and the illusion is convincing to the eye as it looks through thenarrow tube that connects it with the mirrors and the colored items on the other end.

Like children looking through a kaleidoscope who are unaware of its actual workings,the media and the public have been misled into believing that early productionresults in the shale natural gas and tight oil formations in the United States will berepeated again and again across the United States and the world. This has led to

exuberant forecasts of energy independence for the United States, an end to thedominance of OPEC in world oil supplies, and fossil fuel abundance for decades tocome.

Two important trends cast doubt on this naive view. First, in the United States, homeof the hydraulic fracturing "miracle,"domestic natural gas production has been flatsince January 2012. The shale gas revolution may well be over in the United Statesas the current production level becomes increasingly difficult to maintain in the faceof ferocious decline rates for shale gas wells--rates that range between79 to 95percent after just three years according to a comprehensive survey of 65,000 oil andgas wells in 31 U.S. shale plays. This means that at least 79 percent of all shale gas

production must be replaced every three years just to keep shale gas production flat!With shale gas making up more than 34 percent of all U.S. production in 2011,merely keeping overall domestic production stable will be a formidable task and,given these decline rates, one with no historical precedent.

Further undermining the abundance narrative,U.S. crude oil production has gonealmost flat since October 2012. This is not a long enough period to indicate anythingdefinitive about the trajectory of domestic crude production. But, it comes at a timewhenreports from newer tight oil plays in Ohio and Colorado have proved hugelydisappointing. Ohio pumped just 700,000 barrels of oil from its tight oil fields for all of2012, an amount being pumped daily from the same kind of fields in North Dakota. In

Colorado several years of development of tight oil have only been able to raiseproduction statewide by about 100,000 barrels per day.
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The U.S. Energy Information Administration recently fanned the flames ofexuberance once again with a recent reassessment of the potential for shale gasand tight oil production worldwide. Inattentive readers, however, might miss that thisreport referred to "technically recoverable" resources, ones that are thought to berecoverable using current technology, but not necessarily profitable to recover at

current prices. In addition, the EIA was careful to point out that its estimates arehighly uncertain and subject to change once actual drillbits provide better informationwhere little currently exists. Beyond this, it is important to remember that "resources"refer to sketchy estimates of what might be in the ground whereas "reserves" arewhat can be extracted profitably at today's prices from known fields using existingtechnology. "Reserves" are and always have been only a tiny fraction of "resources."Hapless journalists often fail to understand the differenceas they did in this case.

A discreetly placed disclaimer reading "result may vary" often appears in televisioncommercials showcasing people who've made millions following the investmentadvice being touted or who've lost scores of pounds using the exercise machine on

offer. A more conspicuous "results may vary" warning ought to come with every newpiece of information about the potential of this or that new shale gas or tight oil play.

If the U.S. experience is supposed to forecast the world, then the evidence so farsuggests a boomlet followed by frantic efforts just to keep production level. But insome cases,such as Poland, the results have been far worse as heavily toutedprospects have turned out to be duds.

View more quality content fromResource Insights

Is there a refinery inBatam's future?

Written by Ken Anderberg fromAIM Communications

The recent news that Azerbaijan, a major supplier of oil to Indonesia, is planning tobuild a US$4.8-billion oil refinery in Batam is just the latest in a string of similarannouncements that have been made in recent years - with little investment actuallyhappening. Two other partnerships also have laid out plans for Batam refineries,
http://www.eia.gov/analysis/studies/worldshalegas/http://www.eia.gov/analysis/studies/worldshalegas/http://www.eia.gov/analysis/studies/worldshalegas/http://www.eia.gov/analysis/studies/worldshalegas/http://www.oilgasdaily.com/reports/Shale_resources_add_47_to_global_gas_reserves_US_EIA_999.htmlhttp://www.oilgasdaily.com/reports/Shale_resources_add_47_to_global_gas_reserves_US_EIA_999.htmlhttp://www.oilgasdaily.com/reports/Shale_resources_add_47_to_global_gas_reserves_US_EIA_999.htmlhttp://www.warsawvoice.pl/WVpage/pages/article.php/24579/newshttp://www.warsawvoice.pl/WVpage/pages/article.php/24579/newshttp://www.warsawvoice.pl/WVpage/pages/article.php/24579/newshttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.oilvoice.com/description/AIM_Communications/74f2ef62.aspxhttp://www.oilvoice.com/description/AIM_Communications/74f2ef62.aspxhttp://www.oilvoice.com/description/AIM_Communications/74f2ef62.aspxhttp://www.oilvoice.com/description/AIM_Communications/74f2ef62.aspxhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.warsawvoice.pl/WVpage/pages/article.php/24579/newshttp://www.oilgasdaily.com/reports/Shale_resources_add_47_to_global_gas_reserves_US_EIA_999.htmlhttp://www.eia.gov/analysis/studies/worldshalegas/http://www.eia.gov/analysis/studies/worldshalegas/http://www.eia.gov/analysis/studies/worldshalegas/


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including a 300,000-barrel-per-day (bpd) facility at Tanjung Sauh.

In addition, China's Sinopec, Asia's top refiner, has begun work on an $850-millionoil storage terminal - Southeast Asia's largest - on 360 hectares of land in Batam'sFree Trade Zone. A refinery and petrochemical project are being considered in the

second phase of the development.

Given that similar announcements in the past never materialized, there is someskepticism that the current news will pan out.

'My cynicism may be tiresome, but I would not be getting too carried away with theseso-called plans,' says Gary Dean of Okusi Associates, a business consulting firmbased in Singapore, and with offices in Batam and Jakarta. 'I've lost count of thenumber of petrochemical plants that have been 'planned' by well-dressed gentlemenfrom third-tier countries who've jetted into Jakarta for a few days.'

The Batam activity is part of an apparent major effort by the Indonesian governmentto make the country self-sufficient in its energy production. According to Energy andMinerals Resources minister Jero Wacik, the government had plans to build two300,000 bpd refineries in East Kalimantan and a third in Palembang, South Sumatra.The East Kalimantan projects were expected to be completed by 2019, while a300,000 bpd refinery in Palembang was expected to start construction this year.

Two of those projects, however, have been bogged down as the result of failednegotiations between the Indonesian government and state oil and gas firmPertamina and two would-be investment partners, Saudi Aramco and KuwaitPetroleum. Those discussions apparently broke down because incentives requestedby the foreign investors could not be met.

Recently, Finance Ministry's fiscal agency chief Bambang Brodjonegoro said thegovernment will likely reject fiscal incentives proposed by those foreign investors,despite the lack of capacity of existing domestic refineries to process crude oil. Hesaid his office would recommend the government build its own refineries rather thanproviding unrealistically huge incentives for foreign firms to do so.

'We strongly deem the incentive package currently proposed is just too much,' hesaid.

Both Kuwait Petroleum and Saudi Aramco have reportedly demanded a tax holidayfor up to 30 years, in addition to an incentive of a price premium for the crude oilsupplied to the refineries. The Saudi and Kuwaiti companies also demandedexemption of import duty.

Pertamina chose Kuwait Petroleum as its partner to build a refinery with a fuelproduction capacity of 300,000 barrels per day (bpd), which would be built inBalongan, West Java, near Pertamina's existing refinery. The crude oil would beprovided by Kuwait Petroleum.

In addition, Pertamina selected Saudi Aramco to construct another fuel-processingplant with a production capacity of 300,000 bpd of fuel, which was projected to be


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located either in Tuban, East Java or in Bontang, East Kalimantan.

Those two refineries require a combined investment of around US$20 billion, andwere expected to begin operations in 2018.

Bambang said that his agency would not give the incentives the foreign firms hadbeen requesting and that 'if they do not change their position, then it will be difficultfor us to approve the request.'

He said their request for a 30-year tax holiday was unrealistically high, as theexisting tax breaks given by the government lasted only up to 10 years. 'Therefore,we are pushing to build our own refinery,' he said. 'It is better for us to build onerefinery instead of nothing.'

Evita Legowo, who is in charge of oil and gas exhanges at the ministry, agreed. Shesaid the government decided to build the new refinery itself because the demands of

investors, such as Saudi Aramco and Kuwait Petroleum, could not be met.

'Even though it is using our own capital, if there are any investors interested incontributing capital, they are welcome to do so, as long as they follow our rules,'Legowo said. She added that Rp 90 trillion was a huge sum and therefore theconstruction needed to take place in phases.

If the Kuwait Petroleum and Saudi Aramco offers are denied, however, thegovernment might be left with only a single refinery project, one that is entirelyfunded by the state budget. That project is set to begin in 2015, and the governmenthas allocated Rp 17 billion ($1.7 million) in this year's budget for a feasibility studyand another Rp 250 billion for preliminary design. Construction will cost Rp 90 trillionand would be completed in 2018.

The government acknowledges that the profitability of the project is the least of itspriorities, said Edi Hermantoro, the director general for oil and gas at the Energy andMineral Resources Ministry.

'The main idea [of refineries] projects is to meet domestic need,' Edi said.

Indonesia's crude oil resources have slowly been declining in the past 20 years. As

of 2011, the nation had 4 billion barrels of oil in reserves, compared to 5.1 billionbarrels in 2001 and 5.9 billion barrels in 1991, according to BP in its 2012 StatisticalReview of World Energy report.

Malaysia, by comparison, has been increasing its oil reserves, to 5.9 billion barrels in2011 from 3.7 billion barrels 20 years earlier.

Indonesia's average daily oil output last year was around 840,000 barrels, of whichPertamina's own production was 196,000 barrels per day. The government getsaround 85% of oil output produced by private firms, based on the production-sharingcontract scheme.

Susilo Siswoutomo, deputy energy and mineral resources minister, said that only


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650,000 barrels per day of crude oil can be processed into gasoline or diesel fueldomestically, and the country needs to import 400,000 barrels of gasoline and dieselto meet local demand.

While Indonesia's refining capacity remains stagnant, consumption has increased

significantly.

Part of the reason for the rise in fuel use has been the surge in demand for cars andmotorcycles of the past few years, as low borrowing costs and easy down paymentsmade vehicles more affordable to purchase. Car sales topped 1 million units for thefirst time last year.

About 9.6 million passenger cars were on the road in 2011, an almost threefoldincrease from 2001, while there were almost 69 million motorcycles, up 350% in thesame period.

Consumption in Indonesia climbed to 44 million metric tons of oil equivalent in 2011from 16.8 million tons in 2001, BP data show.

Imports of petroleum products, including fuel, amounted to $7.3 billion in the firstquarter of this year, which led to a current account deficit of $5.3 billion, according toCentral Statistics Agency data.

Despite the increase in domestic fuel use, t he last refinery built in Indonesia went online in 1994, a Pertamina facility in Balongan, West Java. Currently, Pertamina hassix refineries operating in Indonesia, producing up to 700,000 bpd of refined fuels.They are located in Balikpapan, East Kalimantan; Balongan, West Java; Cilacap,Central Java; Dumai, Riau; Kasim, West Papua; and Plaju, South Sumatra.

According to government sources, Indonesia needs at least three new oil refineriesin order to bolster the nation's fuel stockpile and ease pressure on the nationalbudget. The refineries will enable the country to cut fuel subsidy spending becausethe country will no longer need to import fuel.

Current Indonesian refinery production is unable to meet the country's gasolinedemand of 1.16 million bpd, resulting in the importing of gasoline to meet thecountry's needs. Enter Batam as a fertile location for new oil-processing facilities.

The government of Azerbaijan is just the latest entry into the Batam refinerysweepstakes.

'Our state oil company, SOCAR, is in negotiations with Indonesia's OSO Group tobuild a large oil refinery in Batam,' Azerbaijani Ambassador to Indonesia TamerlanKarayev recently told The Jakarta Post. 'There is no final decision yet on the project;it is being considered,' he added.

The project details were first unveiled by the OSO Group's CEO, Mariano Asril, inOctober. OSO would build the 600,000-bpd, $4.8-billion facility in a joint venture with

SOCAR, he said. Funding and crude oil would be provided by Azerbaijan, with theproject set for completion in 2017. OSO Group is expected to ask for incentives,


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however, perhaps killing the project before it gets off the ground.

Currently, Azerbaijan, an oil-rich nation in South Caucasus, exports around $2 billionworth of oil to Indonesia, $1.23 billion exported directly and the rest via Singaporeand other countries.

Meanwhile, Indonesia's Setdco Group and its partner PT Intan Megah have soughtpermission to build a 300,000-bpd refinery at Tanjung Sauh on Batam.

'The crude oil will be from the Middle East,' said Legowo. She added the governmentis still in the process of issuing a permit for the development of the planned refinery.

Previously, Gulf Petroleum Ltd., Qatar's largest oil company, announced plans tobuild a refinery on Batam. Gulf Petroleum was preparing documents needed to seekan investment license from the Indonesian government, but the project still has notmaterialized.

Gulf Petroleum president Abdul Aziz Abdulaimi and PT Batam Sentralindo presidentBang Hawana signed a memorandum of understanding on the project. The BatamFree Trade Zone also had agreed to provide a 250-hectare plot of land for therefinery project, which planned to sell its products in Indonesia and other SoutheastAsia nations.

None of the recent refinery announcements indicated how many people would beneeded to build the facilities, and only one estimated how many full-time workerswould be needed (30). In addition, there is no word as yet as to which companiescurrently operating in Batam might participate in the engineering and construction ofthe projects.

For comparison, a similar-sized refinery proposed for South Dakota in the U.S. wouldneed 4,500 construction workers for 4-5 years, and would create 1,800 high payingpermanent jobs. For each of those jobs created, economists anticipate that there willbe three jobs for each one of those jobs.

A Chevron refinery on 1,200 hectares in Richmond, California, employs more than1,200 workers. The refinery processes approximately 240,000 barrels of crude oil aday.

While skepticism may be the norm for many Indonesia experts regarding proposedprojects in Indonesia, the fact that Asia's top refiner, China's Sinopec, has alreadystarted work to build Southeast Asia's largest oil storage terminal at the Batam FreeTrade Zone cannot be overlooked; after all, it is an $850-million project.

Sinopec Kantons Holdings, a unit of the Sinopec Group, will hold a stake of 95% inthe PT West Point Terminal project covering the construction of storage for up to 16million barrels of crude and refined fuels, the company told the Hong KongExchange. This would be Sinopec's first facility of such a size near Singapore, Asia'soil trading hub, where the Chinese refiner has established its presence over the past

15 years.


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But Sinopec's Batam presence may not signal a refinery is coming to the island anytime soon.

'Sinopec has a trading presence in Singapore and I imagine having a storageterminal in Batam, bordering Singapore, would be used to support their trading

activity in the region,' said Victor Shum, managing director at IHS Purvin and Gertz inSingapore.

'For the moment, the immediate priority is to get the storage facility built, the refiningand petrochemical projects are not at the execution phase yet,' said a secondindustry official.

The project edges the Chinese oil major closer to domestic rival PetroChina, Asia'slargest producer of oil and gas, which has a stake of 35% in the 14-million-barrelUniversal Oil Terminal on Singapore's Jurong Island. The new storage facility is likelyto take between 18 and 24 months to build, industry sources said.

Whether Sinpac's presence signals that the latest round of refinery proposals willactually result in any deal being approved by the Indonesian government is anyone'sguess. There are many government and financing obstacles to overcome, andrecent history has not shown that the government is willing, or able, to provide theincentives necessary to make such huge investments viable for foreign firms. AsGary dean says, there is ample reason for cynicism.

View more quality content fromAIM Communications

A futures market for

North American LNGexports?

Written by Keith SchaeferfromOil & Gas Investments Bulletin

Japan spent US$75.4 billion on LNG last year, paying an average price of US$16.60

per million BTUwhile gas prices in the United States averaged just US$2.75. NoJapanese politician, economist, or grocer thinks that makes sense. So Asia is trying
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to lower prices for Liquefied Natural Gas (LNG) as fast as they can.

Basic supply-demand theory says the pending flood of new supply from around theglobe will push prices down over time. But lower prices arent just about supply-sidegrowth.

Theyre also about transparency.

LNG prices have long been linked to the price of oilwith gas priced at roughly 13%or 1/8th the price of Brent, with the details determined in confidential contractnegotiations. Asian consumers are tired of this linkage, especially since it has meantprices that are four times higher in Asia than in North America.

Its a fact that de-linking LNG prices from oil to Henry Hub makes a BIG differencefor Asian buyers. For example Cheniere agreed to sell 1.6 to 1.8 mtpa to KoreanGas for US$3 per MMBTU plus a 15% premium to Henry Hub prices.

Context: On April 30, 13% of Brent would equal $13.47/mcf. On the same day theCheniere deal would have Korean Gas paying ~$7.51/mcf. Thats a big difference!Cheniere has signed similar Henry Hub-indexed deals with three other buyers.

But Asia doesnt just want lower prices in individual deals. No, Asian buyers want themarket to determine how much LNG is worththey are convinced the market willpush LNG prices down fast with waves of new supply on the horizon.

They may or may not be right on this one.

Futures contracts are the way markets determine how much a commodity is worth.For LNG such a system would also improve the credibility of pricing information andact as a valuable hedging tool.

Japan is pushing for a futures market for LNGand the potential Canadian supplycould be the first to get priced this way.

Its not just talk. In March Japans Ministry of Economy, Trade, and Industry (METI)announced plans to launch the first LNG futures contract at the Tokyo CommodityExchange in two stages starting in 2014.

The first step would be a cash-settled contract, with settlements based on the spotprice on the last session of the month. These cash-settled futures could be sold up toone year forward and would be based in US dollars and metric tonnes.

When I heard this, I called Dan Dicker in New York, former floor trader and author ofOils Endless Bidthe best book I ever read about the financialization of commodityprices and what it means for retail consumers (it means higher prices and moremoney out of our pockets).

My overall question waswould a futures market lower prices? Or would the

financialization of LNG do what it did for oil: create endless bids and higher prices?The short answer on both was no.


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Creating a futures market wont help create a cheaper pricing mechanism, he toldme. Yes, its going to be less related to Brent and more to nat gasbut more tolocal/Asian nat gas, where prices are highnot North American natural gas. If I wastrading physical, thats how I would expect the new market to react.

Dicker is the kind of trader who would play in a LNG futures market and he thinksAsian prices would stay high.

The problem is that a commodity market needs a full complement of players.Producers, wanting high prices, are already long in an emerging futures market. Tocounter, LNG buyers are naturally on the short side. Then traders enter the scene,playing the difference and speculating on the actual supply-demand situation.

Dicker says it took years for this financialization of natural gas to take hold in the USand it was the investment banks who added enough outside players to make that

happen.

Japan may want free market LNG, but to financialize LNG it will need a biggerplaying field.

Japan has a natural market of LNG buyersthe countrys utilities. What Japandoesnt have is a natural market of sellersthey dont have a large homogeneousgroup of providers, like the United States has with its oil producers.

So the question is: Could financialization of LNG give rise to an endless bid cycle?

Might Japan be putting the cart before the horse?

Not only are the players lacking, but Japans proposal has some gaping holes. Forone, the futures LNG market it imagines would be for true physical delivery buyerswould actually want to take possession of LNG.

In the US, the futures almost never become physical which is the case with mostfutures markets. So theyHenry Hub and Japans LNG proposal are very differentmarkets. And theres little in the way of a blueprint for Japans version.

That doesnt mean we dont need a better pricing mechanism for LNG. The growingspot market desperately wants one.

The spot LNG market is growing, and fast. Spot trades grew from 10% of global LNGtrade in 2003 to 25% in 2011, and volumes continue to climb.

Theres a good reason the spot market is hopping buyers and sellers want moreoptions. A natural disaster here, a hurricane there LNG needs can change quicklyand so supply flexibility is an increasingly important concept in the LNG world.

For a spot market to hop, however, requires a recognized and reputable spot

pricesuch as a futures market.
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Its a chicken-or-egg scenario, for sure.

While Japans futures market could start next year, it will still take years for globalLNG prices to break free from oil indexes and secretive long-term contracts. Thenext wave of LNG supply to come online will be in Australia, in 2015and they have

sold their gas in long-term contracts at oil-indexed prices.

But the system will change, eventually, because LNG is outgrowing its pricing andtrade systems. Such is the cost of success.

It will be very interesting to see how it all pans out and how LNG proposals inCanada react.

View more quality content fromOil & Gas Investments Bulletin
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Exploring internationally for unconventional oil and gas.......finding the "sweet spots"

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Will Israel's rush toexport natural gas turnout to be a mistake?

Written by Kurt Cobb fromResource Insights

As the United States contemplates exporting natural gas to the rest of the world,previously energy-poor Israel seems about to jump on the export bandwagon.Thecurrent government is seeking approval to export about 40 percent of the production

from its newly discovered offshore natural gas fields.

In an era of high volatility in energy prices and supplies and in a country surroundedby unfriendly neighbors, one would think that Israel would want to keep this valuableenergy prize all to itself. Current estimates suggest that the remaining 60 percent ofproduction will allow Israel to supply all its needs for 25 years.

My question is: What will the country do after that? Presumably it will need naturalgas after 25 years. And, what if estimated reserves turn out to be too optimistic andthe supply doesn't last that long? No one really knows what's in a reservoir until it isactually produced.

What ifthe current steep rise in the rate of natural gas consumptioncontinues for anumber of years? Estimates stated in years of supply are usually based on thecurrent rate of consumption. But if the rate of natural gas consumption continues toaccelerate, the 25-year supply will shrink to a fraction of that number and theinevitable peak in production from these fields will occur even sooner. Moreover,additional supplies are unlikely to come--at least at favorable prices--from any ofIsrael's neighbors.

Wouldn't Israel benefit from maintaining a lower rate of natural gas production in linewith its domestic needs so as to stretch out supplies as long as possible? Of course,it would. The country's energy security would be greatly enhanced if its natural gassupply could be assured for, say, 40 years instead of 25 (though the period is likelyto be quite bit less if consumption continues to rise).

So, who benefits from overproducing natural gas for export? The private companiesinvolved in the drilling and extraction of the gas, of course. It is in their interest toproduce as much as they can as soon as they can in order to reward theirmanagement and stockholders. As if to put an exclamation point on thisinterpretation, Bloomberg reported thatone of the partners in the project, DelekGroup Ltd., is swimming in debt and desperately needs the extra sales that exports

represent to make its debt payments.
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Though the Israeli Parliament is expected to act on the proposal to export naturalgas, it could just as easily pass legislation that would restrict flow rates from thesereservoirs. For a country as sensitive about its security as Israel, it is surprising thatno apparent consideration has been given to this approach.

There aredissenting voices. But my guess is that the interests of the privatecompanies involved in natural gas exploration and production will be givenprecedence over the long-term security needs of Israel. And, I expect this to happenvery shortly.

View more quality content fromResource Insights

Review: Kuwait - A

mature industry standsat a juncture

Written by Richie Ethrington fromFinding Petroleum

The Gulf state of Kuwait has a history in the oil industry which dates back to 1938,when oil was first discovered in the country's Burgan field. Since then, a lot has

changed - except for the fact that 'Burgan No.1', the well which witnessed the birth ofthe industry in Kuwait, is still producing to this day. Over the years, Kuwait hasestablished itself as a permanent fixture near the top of the oil industry rankings interm of both reserves, production, and exports. Indeed, the country is home to theworld's sixth largest quantity of proven oil reserves (fourth in OPEC) and it is one ofthe ten largest exporters of total oil product. These factors combined help to make ita global heavyweight in the oil industry- albeit one which sits at a juncture in itsfuture outlook.

A look at the numbers shows us that as of January 2011, Kuwait was home to anestimated 101.5 billion barrels (bbl) of proven oil reserves, which equates to around

7% of the world's total - according to the Oil & Gas Journal. But that is not allThere are additional reserves located in the Partitioned Neutral Zone (or as it is more
http://www.haaretz.com/business/exporting-israel-s-natural-gas-bounty-could-thwart-bid-to-lower-fuel-prices.premium-1.472395?localLinksEnabled=falsehttp://www.haaretz.com/business/exporting-israel-s-natural-gas-bounty-could-thwart-bid-to-lower-fuel-prices.premium-1.472395?localLinksEnabled=falsehttp://www.haaretz.com/business/exporting-israel-s-natural-gas-bounty-could-thwart-bid-to-lower-fuel-prices.premium-1.472395?localLinksEnabled=falsehttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspxhttp://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspxhttp://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspxhttp://www.oilvoice.com/description/Finding_Petroleum/b84c9bc3.aspxhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.haaretz.com/business/exporting-israel-s-natural-gas-bounty-could-thwart-bid-to-lower-fuel-prices.premium-1.472395?localLinksEnabled=false


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commonly known, the Divided Zone), which sits between, and is controlled equallyby, Kuwait and Saudi Arabia. The Zone has proven oil reserves totalling 5bbl, whichbrings Kuwait's total oil reserves tally to just over 106bbl. But not everyone agreeswith these figures. At the more pessimistic end of the spectrum, some estimates putKuwait's total reserves at as low as 48bbl - less than half the official tally.

As of the end of 2010, the country's oil output totalled around 2.5 million barrels perday (bbl/d), including its share of approximately 250,000 bbl/d production from theDivided Zone. Of the country's 2010 production, the split was estimated to be 2.3million bbl/d crude oil and 200,000 bbl/d non-crude liquids. In terms of where theproduction was coming from, the lion's share came in 2010 came from the Southeastof the country where the Burgan field can be found. While production from the Northcontinues to increase, it still has come catching up to do with the South.

As a signed-up Organisation of Petroleum Exporting Countries (OPEC) memberstate, Kuwait's total production is constrained by the international group's production

targets. In 2010 this translated into the country maintaining around 320,000 bbl/d ofspare crude oil production capacity. In early 2011, as one of the few OPEC memberswith spare capacity, Kuwait has increased oil production to compensate for the lossof Libyan supplies. The country's peak capacity presently sits at around 3.1 millionbbl/d but that figure looks to be heading North over the coming years. Indeedaccording to reports by the KUNA news agency, citing a study by Kuwait-basedDiplomatic Centre for Strategic Studies (DCSS), Kuwait's oil production capacity isexpected to increase to nearly 3.6 million bbl/d by the end of 2022. How so? Througha focus on the development of unexploited heavy oil reserves and projects tomaintain output from existing and mature fields. The Northern region of the country isexpected to be an area of growing focus in the pursuit of this gain.

To fully understand the future development of the oil industry in Kuwait, we first needto understand its past. The most significant event in the formation of the modern dayKuwaiti oil sector came back in December 1975 when the industry was nationalised.Using the same model successfully applied by all of the other Arab oil-producingstates around it, Kuwait began negotiations at the start of the 1970s to restorecontrol over its own natural oil resources. Prior to this date, overseas players had amajor influence in the country under the first Kuwait Oil Concession Agreement,inked in 1934. Indeed, the powerful Kuwait Oil Company (KOC) was originallyformed by the combination of Gulf Oil Corporation (now Chevron Oil) and the Anglo-

Persian Oil Company (now British Petroleum). The State's shareholding in the firmwas progressively increased until full control was achieved. Later on in 1980, theKuwait Petroleum Corporation (KPC) was established in 1980 to bring together thefour state-owned companies responsible for Kuwait's oil production, processing andtransportation (which included KOC) under one umbrella company. Today, KPCoversees a fully integrated industry with operations spanning six continents, with thegovernment owning and controlling all development of the oil sector. Within this, theSupreme Petroleum Council (SPC) oversees Kuwait's oil sector and sets oil policy.The SPC is headed by the Prime Minister. The Ministry of Petroleum, meanwhile,supervises all aspects of policy implementation in the upstream and downstreamportions of both the oil and natural gas sectors.

Despite its long-history of strained relationships with overseas players, this is not to


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say that the government of Kuwait is not interested in attracting foreign firms to workwith in the country in the future. To the contrary, in order to boost production andmeet its bulging targets, the Gulf state has started to build relations with a number ofinternational oil companies which possesses the expertise and technical capabilitiesto raise output from mature fields through a process known as enhanced oil recovery

(EOR). Indeed as recently as June 2012, Sami a-Rushaid, Kuwait Oil Company(KOC)'s managing director, informed old attendees at a London conference that theywere in communication with a series of international firms. Among the namesmentioned were Western industry behemoths such as ExxonMobil, BP, Chevron,and Total.

Alike a number of its oil producing peers, Kuwait's economy is heavily dependent onoil revenues. Export revenues account for over half of its overall gross domesticproduct (GDP), 95% of total export earnings, and 95% of government revenues. Byunilaterally looking on one sector for such a large proportion of its revenues, Kuwaitis playing a dangerous game, with dependence on the black gold leading to high

volatility in the country's export revenues. With the consensus at the time of writingbeing that the global economic outlook remains uncertain, and a slowdown in growthwidely predicted for the 2013 full-year, further downside risks could materialise.These could in turn slow demand for Kuwait's oil exports. The state knows this betterthan anyone, of course, and is always looking to diversify its revenue streamsthrough the vehicle of its active sovereign-wealth fund, the Kuwait InvestmentAuthority, which oversees all state expenditures and international investments. Inaddition, Kuwait also allocates 10% percent of its state revenues into the ReserveFund for Future Generations (RFFG), for the day when oil income starts to decline.

Despite complete control over its oil industry, Kuwait has not prospered in the sameway as some of its oil-rich peers have. In an attempt to put this to right, Ministers inKuwait unveiled a plan in April 2013 to overhaul the nation's oil industry in a bid tobring its economic fortunes more into line with those of its neighbours, such as theUnited Arab Emirates (UAE), Saudi Arabia, and Qatar. While Kuwait's oil wealth hashelped transform the country, the rate of development has been slower thanelsewhere. This has left Kuwait in a position where it ranks as the least populardestination in the GCC (Gulf Cooperation Council) for foreign investment. It alsoscored lowest in the region on the World Bank's ease of doing business index for2012.

However, it is not all bad news for the oil sector in Kuwait. There are plenty ofopportunities for upside in the sector too - especially with sanctions on Iran's oil tradeset to continue for the remainder of 2013, and perhaps beyond. Kuwait sits wellplaced to take advantage of reduced availability of Iranian export volumes. What ismore, strengthening ties with oil-hungry China have seen Kuwait's crude oil exportsto Asia's largest economy increase at a rapid pace. According to Kuwait NewsAgency (KUNA) reports, total exports to China rose by 31.5% year-on-year to around207,000 bbl/d, or 847,000 tonnes as of the end of March 2013. Meanwhile from theopposite end of the trade agreement, Chinese General Administration of Customsdata shows that Kuwait's slice of the country's total crude oil pie rose to 3.7% in April2013 from 2.9% in April 2012.

While the improving export figures created by Iran's own diminished exports and


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Kuwait's increasingly important ties with China may prove to be the focus in the near-term, it seems the long-term future of the oil industry in Kuwait may hang on thehopes of the shale oil sub-sector. In the same way that the shale industry hasprovided the North American oil sector with a renewed energy over recent years, it ishoped it will have the same impact in Kuwait, where the issue of maturing fields and

subsequently long-term sustainability is becoming increasingly acute.

Pencilled in for release in early 2014 - at a time when energy producers in the regionare continuing to readdress their strategy - are the results for KOC's results from aplanned study of the country's shale oil potential by early 2014. With Kuwait targetingsharp production increases by 2022 and beyond, tapping into the country's shale oilprospects may become an attractive option if sizable resources are confirmed. In thelong-run, raising overall output will require gains that are sufficient to offset declineselsewhere. Indeed, new investment will be critical to ensuring reliable supplies, withthe majority of Kuwait's current production derived from mature fields discovered inthe 1930s and 1950s.

View more quality content fromFinding Petroleum

Additional Iranian oilsanctions may becounterproductive

Written by Gail Tverberg fromOur Finite World

A June 6, 2013, article fromReutersis titled, Lawmakers in new drive to slash Iransoil sales to a trickle. According to it,

U.S. lawmakers are embarking this summer on a campaign to deal a deeper blow toIrans diminishing oil exports, and while they are still working out the details, analystssay the ultimate goal could be a near total cut-off.

My concern is that the new sanctions, if they work, will put the United States and
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Europe in a worse financial position than they were before the sanctions, mostlybecause of a spike in oil prices.

How much reduction in oil exports are we talking about? According to both the EIAand BP, Iranian oil exports were in the 2.5 million barrels a day range, for most years

in the 1992 to 2011 period. In 2012, Irans oil exports dropped to 1.7 or 1.8 millionbarrels a day. Recent data from OPEC suggests Iranian oil exports (crude +products) have recently dropped to about 1.5 million barrels a day in May 2013.

If the ultimate goal is close to total cut-off, an obvious question we should be askingourselves is whether it makes sense to handicap world oil production by close to 2.5million barrels relative to 2011, or close to 1.5 million barrels relative to May 2013.Oil prices have spiked in the past when there has been an interruption in world oilsupply. Why wouldnt they this time? Furthermore, who are really handicapping:Ourselves or Iran?

Possible Alternative Sources of Oil Supply

I would argue that we do not have adequate sources of backup oil supply. We areoperating too close to the edge when it comes to world oil capacity.

Saudi Arabia likely has some spare capacity. If we go by how much Saudi Arabia inthe recent past has been able to increase its production, its short-term sparecapacity would appear to be about 600,000 barrels a daynot nearly enough to offsetthe decline in Irans oil exports. The 600,000 barrels a day is calculated bycomparing Saudi Arabias highest production for individual months of 2012 of 10.0

million barrels of oil a day with its actual production in May 2013 of 9.4 million barrelsa day, according to the OPECsMonthly Oil Market Report (MOMR). Saudi Arabiaclaims to have capacity of 12.5 million barrels a day, but its production in recentyears has never been anywhere near its claimed capacity, raising questions aboutthe truthfulness of the claim.

How about exports from Iraq? This is a graph of oil exports from Iraq, based on EIAdata.

Figure 1. Iranian oil exports,based on BP and on EIA data.
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Iraq is indeed adding a little bit to world oil exportsabout 326,000 barrels a day in oilexports were added in 2012. But the wild fluctuations dont provide confidence thetrend will continue. It is possible to get a rough idea of what future increases in oilexports might amount to. The International Energy Agency (IEA) is targeting 6 millionbarrels a day of oil extraction for Iraq by 2020. (Dave Summersalso known as

Heading Outisnt confident even this can be achieved.) Extraction at this levelwould mean oil exports of about 4.5 million barrels a day in 2020. The expectedannual growth in exports from todays 2.2 million barrels a day of oil exports wouldbe about 283,000 barrels a year, between now and 2020. Even if this rate ofincrease in oil exports is achieved, it wont handle the immediate need for close to1.5 million barrels a day of oil exports if Iranian exports are taken out of the worldsupply.

How about the supposedly miraculous growth in US oil supplies? If we look at theactual data, we see that the United States is still a major oil importer, even whensuch sources as biofuels are included in the total. (Imports are the gap between the

consumption and production lines.)

At the same time, Europe keeps falling behind farther, so it needs increasingamounts of imports.

Figure 2. Iraq oil exports,based on EIA production andconsumption data.

Figure 3:US Liquids (oilincluding natural gas liquids,refinery expansion andbiofuels) production andconsumption, based on data ofthe EIA.
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Thus, even if the US need for imports is declining, Europes need for imports isincreasing, as is the need for imports to Asia, including China and India. Losing partof the worlds oil supply makes it harder to get enough imports, without oil pricesspiking again.

If Oil Supply Cushion is Less

Suppose that we somehow, miraculously, take Iranian oil exports off-line and findenough substitute supply without oil prices spiking too badly. We know too well fromexperience that there is the distinct possibility that part of current oil supply will laterbe taken off-line, for some unplanned reason. This might be another Arab Springrevolution, or perhaps fighting may break out between two oil producers. Or theUnited States may have a bad hurricane season. So even if oil prices dont spikeimmediately, removing what little spare capacity there is, increases the likelihoodthat oil prices will spike in the future, from some unrelated cause.

Who gets hurt with an oil price spike?

The countries that are most hurt by high oil prices are the big oil importerstheUnited States, the European Union, and Japan. We can see this with recentexperience, shown in Figure 6 below. Oil prices have been high since 2005. Thesehigh oil prices have led to a cutback in consumption by oil importers, even as othercountries more-or-less sailed along. The countries with lower oil consumption since2005 are precisely the ones that have had problem with recession. See my post,Peak Oil Demand is Already a Huge Problem.

If oil prices rise, more money will be transferred from oil importers to oil exporters. Oilexporters, such as the members of OPEC, will benefit. Of course, Iran itself will not

Figure 4:European Liquids(oil including natural gasliquids, refinery expansionand biofuels) production andconsumption, based on data of

the EIA.

Figure 5. Oil consumptionbased on BPs 2013 StatisticalReview of World Energy.
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benefit. Oil importing countries that have been having trouble with their debt loadsare likely to have even more difficulty, because their citizens are made poorer byhigh oil prices.

How Badly Do Sanctions Really Hurt Iran?

The sanctions cause Iran to leave its oil in the ground until later. While this hurts theIranian economy now, the oil will still be there for extraction later. With the fieldsrested, Iranmay even be able to increase the amount that can be extracted later. Ifoil prices are higher later, Iran will get the benefit of the higher prices. The oilsupplies of other countries will also be more depleted then, so it will have more of anadvantage than it does now.

With all of the sanctions against Iran, the country has been encouraged to ramp upits natural gas production. It has also increased its fleet of natural gas-powered cars,so that it hasmore such cars than any other country in the world.Iran is alsorefining

more of its oil, making itself less dependent on gasoline imports. Making thesechanges now makes Iran more self-reliant in the long-run.

A person might think that all of the sanctions to date have significantly reduced thestandard of living of a typical Iranian. If this is true, it is not showing up much in thedata. Prior to 2012, the economy had grown consistently for two decades. Thesanctions led to an estimated decline in real GDP of -1.9% in 2012, according to theCIA World Fact Book. Irans per capita use of energy has been rising, and continuesto do so, even in 2012. Its per capita energy use is now higher than Italys.

There are obviously any number of other countries that Irans energy consumptioncould be compared to. If we compare Irans energy consumption to Israel, Irans percapita energy consumption is a little lower.

Figure 6. Per capita energyconsumption for Italy and Iran,based on BP total primary energyconsumption from 2013Statistical Review of WorldEnergy, and EIA population data.
http://www.reuters.com/article/2013/06/13/us-iran-oil-idUSBRE95C0JV20130613http://www.reuters.com/article/2013/06/13/us-iran-oil-idUSBRE95C0JV20130613http://www.reuters.com/article/2013/06/13/us-iran-oil-idUSBR

oilvoice magazine | july 2013

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