World oil prices and production trends in AEO2010
In AEO2010, the price of light, low-sulfur (or “sweet”) crude oil delivered
at Cushing, Oklahoma, is tracked to represent movements in world oil prices.
EIA makes projections of future supply and demand for “total liquids,”
which includes conventional petroleum liquids—such as conventional crude
oil, natural gas plant liquids, and refinery gain—in addition to unconventional
liquids, which include biofuels, bitumen, coal-to-liquids (CTL), gas-to-liquids
(GTL), extra-heavy oils, and shale oil.
World oil prices can be influenced by a multitude of factors. Some tend
to be short term, such as movements in exchange rates, financial markets,
and weather, and some are longer term, such as expectations concerning
future demand and production decisions by the Organization of the Petroleum
Exporting Countries (OPEC). In 2009, the interaction of market factors
led prompt month contracts (contracts for the nearest traded month) for
crude oil to rise relatively steadily from a January average of $41.68
per barrel to a December average of $74.47 per barrel [38].
Changes in the world oil market over the course of 2009 served to highlight
the myriad factors driving future liquids demand and supply and how a change
in these factors can reverberate through the world liquids market. Over
the long term, world oil prices in EIA’s outlook are determined by four
broad factors: non-OPEC conventional liquids supply, OPEC investment and
production decisions, unconventional liquids supply, and world liquids
demand. Uncertainty in long-term projections of world oil prices can be
explained largely by uncertainty about one or more of these four broad
factors.
Recent market trends
In 2009, world oil prices were especially sensitive to demand expectations,
with producers, consumers, and traders constantly looking for any indication
of a possible recovery in the world’s economy and a likely corresponding
increase in oil demand.
On the supply side, OPEC demonstrated greater dedication to supporting
prices in 2009 than it had in other recent periods where it adopted restraints
on production. From February to June 2008, OPEC maintained 70 percent or
greater compliance as measured by the actual aggregate production cuts
achieved by quota-restricted members as a percentage of the group’s agreed-upon
production cut, before falling to average levels of just above 60 percent
after September [39]. The above-average compliance increased the group’s
spare capacity to roughly 5 million barrels per day in December 2009, and
helped boost prices to a range of $70 to $80 per barrel [40].
Since June 2009, Iraq has held two rounds of bidding for development of
its oil resources. The sum of the targeted production increase from the
awarded fields is about 9.5 million barrels per day, or almost four times
the country’s current production. Although most industry analysts do not
expect Iraq to achieve those production targets in full, the likely increase
may cause changes in OPEC quota allocations and long-term production decisions.
There were also significant developments for non-OPEC supply in 2009, some
with potentially long-lasting implications. Although oil prices rose throughout
2009, many of the projects delayed during the price slump that started
in August 2008 have not yet been revived. The time required for project
development creates a lag between investment decisions and increased oil
deliveries, indicating that medium-term supply growth may be constrained
if delayed projects are not restarted in the short term.
A related trend, which began in 2008 and continued in 2009, was a decline
in factor input costs—i.e., the costs of the materials, labor, and equipment
necessary to develop liquids projects. The decline in construction material
costs and rig rates may have encouraged the delay of some projects, as
investors played a wait-and-see game in order to secure contracts at the
lowest possible cost. That trend appears to have bottomed out at the end
of 2009, however, after producing only a slight overall reduction in costs
[41]. Before the recent reduction in production costs, an industry research
group estimated that costs had approximately doubled since 2000 [42].
Severe problems in the global credit market that began in 2008 and continued
through 2009 have made it difficult to finance some exploration and production
(E&P) projects. The full effect of limits on credit availability for oil
supply projects will not be realized for some time, as the projects stalled
due to a lack of financing, particularly exploration projects, would not
have brought supply to the market for several years. In addition to its
impact on individual E&P projects, the recent credit crisis may also have
led to an overall and possibly lasting change in risk tolerance on the
part of both lenders and investors. Still, while credit terms were being
tightened and financial risk was being trimmed, ongoing exploration efforts
in Africa resulted in a wave of discoveries and new hope for unexplored
and under-explored non-OPEC resources.
Long-term prospects
Developments in 2008 and 2009 have demonstrated the range of the uncertainties
that underlie the four broad factors underlying long-term world oil prices,
as described above. It remains unclear how the world’s economy and the
demand for liquids will recover, what non-OPEC resources will be brought
to market, what production targets OPEC will set or meet, and whether or
when individual unconventional liquids projects will come online. The price
path assumptions in AEO2010 encompass a broad range of possible production
levels and world oil price paths, with a range of $160 per barrel (in real
terms) between the High Oil Price and Low Oil Price cases in 2035 (Figure
16). Consideration of Low and High Oil Price cases allows EIA and others
to analyze a variety of future oil and energy market conditions in comparison
with the Reference case.
Reference case oil prices
The global oil market projections in the AEO2010 Reference case are based
on the assumption that current practices, politics, and levels of access
will continue in the near to mid-term, whereas long-term developments will
be determined largely by economics. The Reference case assumes that the
world economy— and liquids demand—experience significant recovery in 2010,
with total liquids consumption returning to the 2008 level of just under
86 million barrels per day.
Satisfying the growing world demand for liquids in the next decade will
require accessing higher cost supplies, particularly from non-OPEC producers.
In the Reference case, the higher cost of non-OPEC supply supports average
annual increases in real world oil prices of approximately 0.7 percent
from 2008 to 2020 and 1.4 percent from 2020 to 2035. Oil prices, in real
terms, rebound following the global recession, to $95 per barrel in 2015
and $133 per barrel in 2035 (real 2008 dollars). Although increases in
OPEC production will meet a portion of the growing world demand, the Reference
case assumes that OPEC’s limits on production growth will maintain its share of
total world liquids supply at approximately 40 percent, where it has roughly
been over the past 15 years.
Growth in non-OPEC production will come primarily from high-cost conventional
projects in regions with unstable fiscal or political regimes and from relatively
expensive unconventional liquids projects. The return to higher price levels
in the Reference case results from limited access to prospective areas
for foreign investors, less attractive fiscal terms, and higher exploration
and production costs than have been seen in the past.
Low Oil Price case
The AEO2010 Low Oil Price case assumes that greater competition and international
cooperation will guide the development of political and fiscal regimes
in both consuming and producing nations, facilitating coordination and cooperation
among them. Non-OPEC producing countries are assumed to develop fiscal
policies and investment regimes that encourage private-sector participation
in the development of their domestic resources; and OPEC is assumed to
increase its production levels, providing 50 percent of the world’s liquids
supply by 2035. The availability of low-cost resources in both non-OPEC
and OPEC countries allows for prices to stabilize at relatively low levels,
$51 per barrel in real 2008 dollars, thereby reducing the incentive for
consuming nations to invest in unconventional liquids production as heavily
as they do in the Reference case.
High Oil Price case
The AEO2010 High Oil Price case assumes not only a rebound in world oil prices with the return of world economic growth, but also a continued rapid escala-tion in prices as a result of long-term restrictions on conventional liquids production. The restrictions re-sult from both political decisions and resource charac-teristics: the major OPEC and non-OPEC producing countries use quotas, fiscal regimes, and varying de-grees of nationalization to further increase revenues from oil production, and the consuming countries turn to domestic production of high-cost unconven-tional liquids to satisfy demand. As a result, in the High Oil Price case, world oil prices rise throughout the projection period, to $210 per barrel in 2035. Liquids demand is dampened by the high prices, but is overshadowed by the severity of limitations on access to and availability of lower cost conventional resources. OPEC’s share of production falls to 35 percent.
Components of liquid fuels supply
In the AEO2010 Reference case, total world liquid fuels consumption in 2035 is 112 million barrels per day, or 26 million barrels per day higher than in 2008, with production increases from OPEC and non- OPEC conventional sources totaling 15.5 million bar-rels per day. As a result, the conventional liquids share of world liquids supply drops from 95 percent in 2008 to 87 percent in 2035.
Production of unconventional crude oils in the AEO- 2010 Reference case is 4.0 million barrels per day higher in 2035 than in 2008 and represents 5.6 per-cent of global liquid fuels supply in 2035. Production increases from Venezuela’s Orinoco belt and Can-ada’s oil sands are limited by access restrictions inVenezuela and environmental concerns in Canada. The relatively high world oil prices in the Reference case encourage U.S. production of oil shale, with vol-umes reaching 0.4 million barrels per day in 2035. Relatively high prices also encourage growth in global CTL, GTL, and biofuel production, from a combined total of 1.8 million barrels per day in 2008 to 8.4 mil-lion barrels per day in 2035, or 8 percent of total liq-uids supplied.
In the AEO2010 Low Oil Price case, oil prices are on average more than 50 percent lower than in the Ref-erence case from 2015 to 2035. In this case, conven-tional crude oil accounts for the largest share of total liquids production in any of the three price cases in 2035, at about 90 percent. Production of conventional crude oil totals 100.5 million barrels per day in 2035, higher than the total for all conventional liquids in the Reference case. Total conventional liquids pro-duction reaches 114.8 million barrels per day, and total liquids production reaches 127 million barrels per day, in the Low Oil Price case in 2035.
Despite their generally higher costs, production of unconventional crude oils is also higher in the Low Oil Price case than in the Reference case, as a result of changes in economic access to resources. In the Low Oil Price case, Venezuela’s production of extra-heavy oil in 2035 increases from the Reference case projec-tion of 1.3 million barrels per day to 3.4 million bar-rels per day—a 160-percent increase that more than compensates for lower production of Canada’s oil sands (0.6 million barrels per day in 2035) due to reduced profitability. Total production of unconven-tional crude oil in the Low Oil Price case is 1.0 million barrels per day higher in 2035 than projected in the Reference case. Production of other unconventional liquids (CTL, GTL, and biofuels) in 2035, primarily in the United States, China, and Brazil, is 3.2 million barrels per day lower than projected in the Reference case, again due to reduced profitability.
In the High Oil Price case, oil prices from 2015 to 2035 are on average 66 percent higher than in the Reference case. The higher prices are caused by restrictions on economic access to non-OPEC con-ventional resources in countries such as Russia, Kazakhstan, and Brazil, combined with reductions in OPEC production. Conventional liquids production in the High Oil Price case totals 71.8 million barrels per day in 2035, 9.8 million barrels per day lower than the 2008 total; total liquids production reaches only 91 million barrels per day in 2035.
Access restrictions also limit the production of Vene-zuela’s extra-heavy oil from the Orinoco belt, which totals 0.8 million barrels per day in 2035, as compared with 1.3 million barrels per day in the Reference case. Higher world oil prices support increased pro-duction from Canada’s oil sands, which totals 5.5 million barrels per day in 2035, as compared with 4.5 million barrels per day in the Reference case. Produc-tion of shale oil, predominantly in the United States, does not change appreciably from the Reference case level in the High Oil Price case, because the projects are economically viable in the Reference case, and even a 66-percent increase in prices does not stimu-late additional production growth. With the increase in oil sands production outweighing the decrease in extra-heavy oil production through 2035, production of unconventional crude oil from all sources is higher in the High Oil Price case than in the Reference case.
Production of liquids from other unconventional sources, including CTL, GTL, and biofuels, is almost 50 percent (3.9 million barrels per day) higher in the High Oil Price case than in the Reference case in 2035. The increase results primarily from higher CTL production in China (approximately 1.3 million bar-rels per day above the Reference case projection in 2035) and higher biofuels production in the United States (0.9 million barrels per day above the Refer-ence case in 2035). U.S. GTL production in the High Oil Price case is notably different from the Reference case projection, with production beginning in 2017 and reaching 0.5 million barrels per day in 2035.
Footnotes:
38. U.S. Energy Information Administration, “Table 2. U.S. Energy Nominal Prices” (March 9, 2010), EIA STEO Table Browser, web site http://tonto.eia.doe. gov/cfapps/STEO_Query/steotables.cfm.
39. PFC Energy, “OPEC Output and Quotas—December 2009” (December 7, 2009).
40. “Oil Tops Obama’s Saudi Agenda,” UpstreamOnline (June 3, 2009); “Venezuelan President: Hugo Chavez Chavez Sets Sights on $80 Oil,” UpstreamOnline (May 27, 2009); “OPEC ‘Waiting on G20 Move’” UpstreamOnline (March 17, 2009) (subscription site).
41. “Upstream Costs Bottoming Out,” UpstreamOnline (December 8, 2009) (subscription site).
42. “Upstream Players Face More Costs Pain,” UpstreamOnline (May 14, 2008) (subscription site). |
