Ibrahim A. H. Ismail
Organization of Petroleum Exporting Countries
Vienna
Oil production from the Organization of Petroleum Exporting Countries and non-OPEC regions has undergone four major phases of change in relation to oil price since 1960. Patterns visible in those phases offer an indication of worldwide production trends in the future.
The first phase, from the early 1960s to the early 1970s, was characterized by very low but stable oil prices, a sharp rise in world oil requirements, and steep increases in production from both OPEC and non-OPEC areas.
The second phase, from the early 1970s to the late 1970s, witnessed a major turning point, with a sharp rise in the oil price which led to a slowdown in the demand for oil caused by efficiency improvements and fuel substitution away from oil. As a consequence, OPEC production stagnated during this period, while non-OPEC production continued its upward trend.
The third period, from the late 1970s to mid-1980s, was marked by a steep fall in oil prices, including the crash of 1986. During this period, demand for oil substantially declined due to worldwide recession. OPEC production steeply declined, but production outside OPEC continued its steady increase.
The last phase, from the second half of the 1980s until the present, is characterized by a modest rise in oil prices, though in most cases highly unstable and fluctuating. The demand for oil during this period reversed its trend and began to rise, production from regions outside OPEC stagnated and even declined for the first time, and consequently OPEC production started its path to a clear recovery.
Overall, demand for oil during 1960-93 has increased from around 20 million b/d in 1960 to as high as 65 million b/d in 1993. The consensus among energy analysts and forecasters is that this demand growth will continue.
This will encourage OPEC and nonOPEC producers to invest in the oil industry to meet future demand growth.
However, since the resource base is larger in OPEC than in non-OPEC areas, and since the cost of developing these resources is lower in OPEC than outside OPEC, the future call on OPEC oil to meet growth in demand will undoubtedly be substantiated as Production from the non-OPEC region diminishes or at best stagnates.
OPEC PRODUCTION TRENDS
Fig. 1 traces the evolution of OPEC production and OPEC market share in relation to oil prices and worldwide oil demand during 1960-93.
It is interesting to note that during the first phase, 1960-73, OPEC added as much as 22 million b/d, or 254%, to its production-from 8.69 million b/d to 30.78 million b/d (Table 1).
This production increase did not result from any stimulation by prices, which remained at $2-3/bbl throughout the period. Rather, it resulted from the steep growth in demand for oil as the world economy expanded. During this period, production and development of oil activities in most OPEC countries were controlled by major oil companies, which were fully integrated in both the upstream and downstream sectors. The majors had final say about price, production, development, and other oil activities.
At the end of this period, almost all OPEC member countries nationalized their oil industries and established direct state control for the first time.
During 1973-79, oil prices rose from about $3/bbl to $17/bbl, and OPEC production stagnated at the 1973 level, with only Saudi Arabia and Iraq adding appreciably to output. Iran, Venezuela, Kuwait, and others had major declines.
Growth of the world economy receded during the first few years of this period, which reduced the demand for oil. This reduction, compounded by efficiency improvement and fuel substitution, as well as the steady rise in non-OPEC supplies led to the stagnation in OPEC production.
During 1979-85, prices rose sharply for 3 years then fell, eventually crashing at the end of the period. OPEC production is estimated to have fallen by more than 15 million b/d during this period, with cuts coming in all of the OPEC countries as economic activity diminished worldwide, non-OPEC supplies continued to grow, and efficiencies and fuel substitution further eroded demand for oil.
In the last period, 1985-93, oil prices recovered, demand grew for energy in general and oil in particular, and nonOPEC production stagnated and even declined, mainly because of the collapse in production of the Former Soviet Union (FSU). Except for Iraq, whose oil has been embargoed since August 1990, all other OPEC member countries raised their oil production during this period.
NON-OPEC PRODUCTION
Non-OPEC additions in crude oil production during 1960-73 amounted to more than 12 million b/d. Of this total, members of the Organization for Economic Cooperation and Development (OECD) added about 4 million b/d, developing countries (DCs) 2 million b/d, and former centrally planned economies (CPEs) 6 million b/d (Table 2).
Non-OPEC producers added 7.74 million b/d of crude oil output during the second period, 1973-79. In the OECD, declines in the U.S. and Canada were more than offset by gains in the U.K. and Norwegian sectors of the North Sea. Among DCs, Mexico, Egypt, Brunei, Peru, and India reported major production increases in this period, as did both the FSU and China.
During 1979-85, the non-OPEC region added another major increment to production: 5.56 million b/d. Of that, about 2 million b/d came from the OECD region and more than 3 million from DCs. CPEs added only about 500,000 b/d during this period.
The latest period, 1985-93, was the first time non-OPEC crude oil production fell appreciably-by about 2.45 million b/d.
The biggest declines came in the U.S. (about 2 million b/d) and the then-collapsing FSU (more than 4 million b/d).
The DCs alone outside of OPEC added to production during this period, more than 2 million b/d. Major additions came from Syria, Oman, Angola, Colombia, Yemen, Malaysia, Papua New Guinea, Viet Nam, and others.
NATURAL GAS LIQUIDS
Production of natural gas liquids (NGL) from both OPEC and nonOPEC regions grew tremendously during 1960-93. From OPEC members, production expanded from just 30,000 b/d in 1960 to as much 2.3 million b/d in 1993.
Non-OPEC production of NGL increased from around 1 million b/d in 1960 to as high as 3.2 million b/d in 1993.
Fig. 2 shows how NGL production has grown from both regions during the period. Table 3 shows how NGL production has affected incremental supplies outside of OPEC.
RESOURCE POTENTIAL
The world's proven, recoverable crude oil reserves currently exceed 1 trillion bbl, with an additional undiscovered potential of around 500 billion bbl. At current production levels, worldwide reserves could last for at least another 40 years.
OPEC's share of the world's proven, recoverable crude oil reserves is more than 75%, or 750 billion bbl. This means that OPEC oil could last for more than 90 more years at current production levels, as compared to only 15 years for non-OPEC oil.
During 1960-73, OPEC added 203 billion bbl of crude oil reserves, compared with 87 billion bbl from nonOPEC regions. That is, OPEC's share of the world's incremental reserves for the period was 70% (Table 4).
The period 1973-79 witnessed unusual growth in non-OPEC reserves, basically due to discoveries in the North Sea. Non-OPEC reserves additions during this period accounted for 70% of the total.
The incremental reserves shares shifted in 1979-85, with OPEC accounting for 81% of total additions.
Reserves additions were huge in 1985-93-284 billion bbl, of which OPEC's share was 88%.
Fig. 3 summarizes the evolution of OPEC and non-OPEC production and reserves.
FUTURE PRODUCTION SCENARIOS
Future oil demand and production will be a strong function of the price of crude oil. Projections here will be based on three scenarios: $14/bbl, $17/bbl, and $21/bbl (1994 dollars) for the OPEC basket of seven crudes.
The reference scenario is $17/bbl, under these assumptions:
- The price doesn't change in real terms through 2000, and inflation averages 4.5%/year. Beyond 2000, the real price increases by 3.5%/year.
- Existing taxes on products to end users remain at current levels in real terms, and any changes in real product prices come through changes in crude prices.
- Energy consumption efficiency improves by 1-2%/year during the forecast period. The improvement results from technological changes and conservation policies and programs, none of it induced by prices.
- Global gross domestic product grows at around 3%/year. GDP growth averages 2.5%/year in the OECD, 4.2%/year among DCs, 2.5%/year in Eastern Europe and the FSU, and 6% /year in China.
According to this scenario and the OPEC World Energy Model (OWEM), total world oil demand will grow from around 66 million b/d in 1994 to 73 million b/d in 2000, 80 million b/d in 2010, and 86 million b/d in 2020.
Non-OPEC production, including NGL, will decline from 38.3 million b/d in 1994 to 37.2 million b/d in 2000, 37 million b/d in 2010, and 35.8 million b/d in 2020.
OPEC supplies, including NGL, will grow from 28 million b/d in 1994 to 36 million b/d in 2000, 43 million b/d in 2010, and 50 million b/d in 2020.
The low price scenario ($14/bbl) projects that total world oil demand could reach 75 million b /d by 2000, 82 million b/d by 2010, and 88 million b/d by 2020.
The rate of decline in non-OPEC supplies will be greater in this scenario than in the reference scenario, mainly due to the abandonment of high-cost oil regions and deferment of development in others. Non-OPEC supplies are projected to slide to 36.1 million b/d by 2000,35.4 million b/d by 2010, and 34.0 million b/d by 2020.
In order to meet the world's oil requirements and balance the market under the low price scenario, OPEC supplies will expand to 39 million b/d by 2000,47 million b/d by 2010, and 54 million b/d by 2020.
The high price scenario ($21/bbl) forecasts that total world oil demand will be relatively lower: 71 million b/d in 2000, 77 million b/d in 2010, and 83 million b/d in 2020.
Non-OPEC supplies according to this scenario will be almost stable at 38.5-39 million b/d through 2010. Beyond 2010, non-OPEC production starts to decline and could reach 37.8 million b/d by 2020.
OPEC production growth will be slower under the high price scenario. Group output will be 32 million b/d in 2000, 38 million b/d in 2010, and 46 million b/d in 2020.
Under all of the scenarios, OPEC production must increase to meet future demand, and non-OPEC production either stagnates, decreases, or slightly improves through 2010, falling under all scenarios after that (Fig. 4).
If current low oil price trends continue through the rest of the 1990s, planned OPEC capacity expansion programs will be reviewed, and some are likely to be deferred. As a consequence, the oil market at the beginning of the 21st century could encounter supply shortage, with oil prices rising sharply during a short period.
High oil prices will encourage investment in OPEC and non-OPEC regions; consequently, the market becomes gradually well-supplied to oversupplied, and oil prices will start to fall again. These cyclic events in oil prices will lead to future price shocks.
FUTURE ROLE
No matter what price scenario is assumed, world oil demand will grow, and OPEC must increase its production to meet it. Under the reference scenario, OPEC's share of the oil market increases from 42% in 1994 to 49% in 2000, 54% in 2010, and 58% in 2020.
OPEC members in the reference scenario must increase total production volumes from 1994 levels by 30% in 2000, 55% in 2010, and more than 80% in 2020, when their output will have to be 50 million b/d.
To provide a 10% cushion of spare capacity, OPEC production in this scenario would have to increase even further: to 40 million b/d in 2000, 47 million b/d in 2010, and 55 million b/d in 2020.
The investments required for this expansion are huge. Just to expand OPEC production capacity to the 2000 level of 40 million b/d is estimated to require outlays totaling more than $1 00 billion.
FUTURE CONSTRAINTS
OPEC's ability to meet the demand it expects for its crude oil faces two main constraints: investment requirements and environmental measures.
The required worldwide upstream investment during the rest of the 1990s could amount to more than $300 billion, with more than $100 billion to be invested in OPEC countries and $200 billion in non-OPEC regions.
The non-OPEC investment is essential mainly to sustain output of just under 40 million b/d, which is stagnated or slightly declining, and to expand production from marginal oil fields in some producing and mature oil provinces.
For example, in Russia substantial investment is required to stabilize or reduce the rate of decline in production. It is estimated that in order to stabilize output by the end of the decade at the 1992 level would require some $25 billion of investment, and lifting output to the 1991 level would cost about $50 billion.
For Kazakhstan, the second largest oil producer in the FSU after Russia, a total of $10 billion will be required by the end of the decade to develop only two major fields, the Tengiz oil field and Karachaganak gas/condensate field.
For OPEC, future investment of more than $100 billion cannot be generated from within member countries alone; foreign capital and technology are essential for future capacity expansion. Therefore, the availability of such huge capital is critical for both OPEC and non-OPEC if future production capacity expansion programs are to materialize. Shortage of capital could lead to serious supply bottlenecks.
Environmental constraints might result from recent concerns and measures regarding global warming and greenhouse gas emissions, particularly carbon dioxide. These could lead to restrictions on use of fossil fuels, oil in particular.
The effect on oil demand would of course depend on how stringent the controls are. Such mandatory reductions in oil demand would be a setback to OPEC member countries and other producers that invested in capacity expansion. That is why OPEC has always sought security of demand for its future capacity expansion programs in order to ensure a stable future market for its members' oil.
The last of the four periods traced here indicates a change in the pattern for the preceding three.
In the first three periods, OPEC production-after an initial rise during the 1960s, stagnated during the 1970s and fell during the first half of the 1980s. Non-OPEC production, by contract, increased steeply and steadily during the whole period, unaffected by price changes and other factors that affected OPEC output.
Only after the oil price crash of 1986 did OPEC production start to recover and non-OPEC production to slow down and then decline, mainly due to the collapse of production from the FSU. This pattern emerged despite the imbalance between OPEC and nonOPEC reserves.
It is that imbalance that will extend the production trends of the last of the four periods: increases in OPEC, stagnation at best elsewhere.
Open questions are where investment capital will come from to expand production capacity as needed and how risky those investments may be in view of consuming nation efforts to reduce consumption.
BIBLIOGRAPHY
Ismail, I.A.H., "Oil Supplies' Outlook in OPEC and Non-OPEC Regions," paper presented to the Second OPEC/Alaska Conference on Energy, University of Alaska, Anchorage, May 1994.
Ismail, I.A.H., "Untapped Reserves, World Demand Spur Production Expansion," Part 1, OGJ, May 2, 1994, P. 95.
Ismail, I.A.H, "Capital Limits, Environmental Movements May Interfere with Expansion Plans," Part 2, OGJ, May 9, 1994, p. 60.
Ismail, I.A.H., "OPEC Production Capacity: The Need for Expansion," OPEC Review, Autumn 1991.
Miremadi, A., and Ismail, I.A.H., "Middle East Due Even Greater Role in Worldwide Oil Supply," OGJ, June 21, 1993, P. 61.
Stauffer, T.R., "Trends in Oil Production Costs in the Middle East, Elsewhere," OGJ, Mar. 21, 1994, P. 105.
OPEC World Energy Model (OWEM), December 1993, OPEC Secretariat, Vienna.
Ghanem, Sh., "The Paradox of Capacity," paper presented to the Second OPEC/Alaska Conference on Energy, University of Alaska, Anchorage, May 1994.
International Energy Agency (IEA), World Energy Outlook, 1994 edition.
International Energy Outlook, 1994, U.S. DOE/Energy Information Administration, July 1994.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
Issue date: 12/26/94
