Excerpts from Energy Economics Weekly
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Weekly updates of Petroleum production and heating oil inventory during the winter season (Sample)

Energy Economics News, Analysis & Links.  Published 2-3 times per week.(Sample December 7, 2000)

Graphs and tables of drilling activity updated weekly.

International Drilling Statistics ( 48 graphs )
North American Rig Count ( 42 graphs ) Note the dominance of gas drilling.
Workover Rig Counts
Analysis and commentary  The following is an excerpt from our analysis after the November OPEC Meeting:
November OPEC Meeting
The OPEC meeting had the expected result in terms of quotas ( no change ) and a not so expected appointment of Ali Rodriguez as Secretary General of OPEC. He replaces Nigeria's Rilwanu Lukman. Lukman has been an excellent and careful leader. 

The choice of a Secretary General who is not Saudi or Iranian was not a surprise. Our only concern in the appointment of Rodriguez is that he is more prone to comment than Lukman. The comments of the OPEC Secretary General carry considerable weight in the market and a leader must be extremely measured in his remarks or run the risk of inducing uncertainty and therefore price volatility into the market.

The next meeting has been scheduled for January 17, 2001. This may be a little early to assess the full impact of Winter demand on the market. 

The price band mechanism appears to be on hold for the remainder of the year, but a few phone calls could reinstate it if necessary.  Of course, Saudi Arabia can always act unilaterally if prices get out of hand. It has already hinted but only hinted at that possibility.

The focus of this meeting was to avoid a decline in prices this spring when seasonally lower consumption will place downward pressure on prices. Those fears are well founded. 

Excess Production Capacity
There is little excess production capacity in the world and prices are high. The normal reaction to this is a significant increase in oil exploration activity. The level of activity is normally sufficient to raise total non-OPEC production and usually reverse the decline in U.S. oil production for a short period. 
Excess capacity is at or near a 30 year low if we exclude the Persian Gulf conflict. The following graph and table are from the Energy Information Administration. The last data point is a 4th quarter estimate. On an annual basis the excess capacity for 2000 would have been higher.
The above graph is based upon the EIA estimates for excess world capacity.  OPEC current capacity and production estimates are shown in the table below.
OPEC Crude Oil Production1
(Thousand barrels per day)
 
3Q 2000 
Production
10/31/00
Quota2,3
4Q 2000
Surplus
Capacity4
4Q 2000
Production*
Algeria
827
853
60
840
Indonesia
1,310
1,385
40
1,310
Iran
3,715
3,917
35
3,715
Kuwait5
2,172
2,141
30
2,170
Libya
1,425
1,431
20
1,430
Nigeria
2,040
2,198
100
2,000
Qatar
720
692
30
720
Saudi Arabia5
8,767
8,674
1,190
9,310
UAE6
2,296
2,333
250
2,350
Venezuela
2,933
3,077
100
2,950
OPEC 10 Crude Oil Total
26,205
26,700
1,855
26,795
Iraq7
2,802
N/A
150
2,950
OPEC Crude Oil Total
29,008
N/A
2,005
29,745
Other Liquids8
2,641
   
2,641
Total OPEC Production
31,649
   
32,386
NA: Not Applicable
* EIA estimate
1Crude oil does not include lease condensate or natural gas liquids.
2Quotas are based on crude oil production only. 
3OPEC's new quotas were put in effect after the OPEC basket remained above OPEC's target range or price band for 20 consecutive trading days after the previous OPEC quotas took effect on October 1. The informal rule prompting the quota increase is referred to as OPEC's price band mechanism. 
4Maximum sustainable production capacity, defined as the maximum amount of production that: 1) could be brought online within a period of 30 days; and 2) sustained for at least 90 days. 
5Kuwaiti and Saudi Arabian figures each include half of the production from the Neutral Zone between the two countries. Saudi Arabian production also includes oil produced from its offshore Abu Safa field on behalf of Bahrain.
6The UAE is a federation of seven emirates. The quota applies only to the emirate of Abu Dhabi, which controls the vast majority of the UAE's economic and resource wealth.
7 Iraqi oil production is constrained by the United Nations and as such has not been a part of any recent OPEC agreements. United Nations' Resolution 986 (April 1995) limits the sale of Iraqi crude oil over six-month periods to specified dollar amounts. 
8Other liquids include lease condensate, natural gas liquids, and other liquids including volume gains from refinery processing.
The graphs and table confirm what we already know. The world is currently producing at about 96 percent of total capacity and almost all of the excess capacity is within OPEC. Capacity numbers are always a little suspect, but there is little evidence that they are significantly different from EIA estimates. 

Within OPEC indonesia, Iran and Nigeria have quotas higher than current production capacity. All other OPEC countries with the exception of Saudi Arabia and the United Arab Emirates at or very near capacity.


Drilling Activity

International Drilling Activity

Drilling activity is a precursor to oil production. Any increase in capacity must come from new wells or secondary and tertiary recovery programs. International drilling activity normally lags oil price changes by at least a year. The time it takes offshore drilling to respond to higher crude prices is longer than the response time for onshore drilling. This can be verified by an examination of the graphs below.

During the past year international drilling activity targeted for oil had a 27 percent increase compared to 38 percent for natural gas.  The normal reponse of oil drilling to higher prices has been delayed by increased interest in natural gas for environmental reasons. 

International Rotary Rig Count
       
Change
Percent Change
 
Oct-00
Sep-00
Oct-99
Monthly
Annual
Monthly
Annual
INTERNATIONAL
Oil 527 515 414 12 113 2.3% 27.3%
Gas 175 174 127 1 48 0.6% 37.8%
Misc 25 25 24 0 1 0.0% 4.2%
Total 727 714 565 13 162 1.8% 28.7%
EUROPE
Oil 61 61 37 0 24 0.0% 64.9%
Gas 32 31 26 1 6 3.2% 23.1%
Misc 3 3 3 0 0 0.0% 0.0%
Total 96 95 66 1 30 1.1% 45.5%
MIDDLE EAST
Oil 128 127 111 1 17 0.8% 15.3%
Gas 34 31 22 3 12 9.7% 54.5%
Misc 0 0 1 0 -1
N.M.
-100.0%
Total 162 158 134 4 28 2.5% 20.9%
AFRICA
Oil 31 28 21 3 10 10.7% 47.6%
Gas 0 0 0 0 0
N.M.
N.M.
Misc 19 19 17 0 2
0.0%
11.8%
Total 50 47 38 3 12 6.4% 31.6%
LATIN AMERICA
Oil 195 187 144 8 51 4.3% 35.4%
Gas 70 72 51 -2 19 -2.8% 37.3%
Misc 0 0 0 0 0
N.M.
N.M.
Total 265 259 195 6 70 2.3% 35.9%
ASIA PACIFIC
Oil 112 112 101 0 11 0.0% 10.9%
Gas 39 40 28 -1 11 -2.5% 39.3%
Misc 3 3 3 0 0 0.0% 0.0%
Total 154 155 132 -1 22 -0.6% 16.7%
U.S. Drilling Activity

U.S. drilling activity which averaged 1067 for the first three weeks of November has not been this high since 1990.  Despite this level of activity U.S. petroleum production will continue to decline.  The reason for continued decline is obvious. Only a 21 percent of U.S. drilling activity is targeted for oil and workover activity on existing wells has not recovered to levels necessary to maintain current production. U.S. petroleum production is 13 percent lower than in January, 1998. The United States is currently importing 61 percent of its crude oil requirements of 15 million barrels per day and 56 percent of it's total petroleum consumption which includes natural gas liquids. 

A quick examination of the graph below shows that we are at about half the level of activity to sustain oil production at current levels. Oil drilling activity has doubled since the beginning of the year but far below the level of activity that would have the possibility of stopping or reversing the decline in domestic production.

Oil drilling activity both in the U.S. and internationally has suffered from growing interest in natural gas. There are three factors behind the emphasis on gas. 
  1. Pollution: Concerns about pollution and global warming make natural gas more attractive as a fuel.
  2. Lower price risk: Natural gas tends to be produced and consumed in the same region of the world.  This results in some insulation for natural gas prices from the extreme fluctuations in the internationally determined crude oil price. This will be less the case in the future as NGL trade increases.
  3. Lower maintenance costs: Gas wells are less costly to maintain than oil wells.
In addition to drilling activity, oil production is influenced by the level of workover rig activity. Workover rigs might are used in servicing a pump, replacing tubing or rod strings, frac jobs, and in the development of water or CO2 floods in secondary and tertiary enhanced oil recovery projects.  Last year's historically low workover rig count and a slow recovery has also contributed to declining U.S. crude production.
Despite attractive natural gas prices and the uncertainty in oil prices some of the delay in increased drilling and workover activity must be attributed to the high level of merger activity in the petroleum industry. During the period following a merger employees are necessarily uncertain about the direction and desires of the new company.  This uncertainty and the normal risk averse behavior of employees that follows a merger have contributed to a smaller and slower than normal response to high crude prices.


Seasonal Variation in Consumption

We will limit our discussion to the OECD countries as world consumption numbers are not very reliable.  OECD data covers 60 percent of world demand. 
The difference in average daily consumption from the December high to the May low can exceed 7 million barrels per day. On a quarterly basis between the fourth quarter high and the second quarter low the difference is over 3 million barrels per day. 

The graph below illustrates the swing in seasonal consumption patterns on a quarterly basis.