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VK2AAB > FUEL 08.09.09 00:45l 169 Lines 8762 Bytes #999 (0) @ WW
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Subj: A Touch of Reality BP Find
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Sent: 090907/2213Z @:VK2AAB.#SYD.NSW.AUS.OC #:5279 [SYDNEY] FBB7.00i $:5279_VK2
From: VK2AAB@VK2AAB.#SYD.NSW.AUS.OC
To : FUEL@WW
Many of you will have seen the announcement of the large new
oil field find in the Gulf of Mexico.
The article below will put it in context.
The graph accompanying the article is a simple copy.
Generally graphs in this type of article are so comples that it is
impossible to reproduce in DOS.
73 Barry VK2AAB
You can find the article at;
http://seekingalpha.com/article/160282-tiber-oilfield-spells-major-upside-for-prices
On September 2, London-based Super Oil BP Plc (London: BP; NYSE:
BP) announced the discovery of a large oilfield, dubbed Tiber,
located in the deepwater Gulf of Mexico.
The field is 62 percent owned and operated by BP, while Brazil's
Petrobras(NYSE: PBR) and ConocoPhillips (NYSE: COP) own 20 and 18
percent of the find, respectively.
The technical challenges BP encountered in drilling this prospect
have been immense. The field is located in waters more than 4,000
feet (1,220 meters) deep, and the total length of the well itself
is more than 35,000 feet (10,685 meters)--more than 6.5 miles
long from the bottom of the drilling rig to the bottom of the
well.
The pressures and temperatures encountered at such depths tested
the physical limits of drilling materials and technology. In
fact, just a few years ago most producers and industry pundits
felt drilling such a long well in deepwater was technically
impossible.
For BP, Tiber is an important find and further demonstrated the
company's competence in the deepwater. In the deepwater Gulf of
Mexico, BP is the largest leaseholder, has the largest remaining
reserves and is the largest producer, pumping 400,000 barrels of
oil equivalent per day.
The company suggested that Tiber will be bigger than another
recent discovery made in the region, the so-called Kaskida find.
Since Kaskida is estimated at around 3 billion barrels, this
implies that Tiber could be one of the largest oilfields
discovered anywhere in the world in the past two decades. Tiber
could rival in size some of the major deepwater discoveries
offshore Brazil over the past three years such as Tupi.
Not surprisingly, soon after BP announced its discovery headlines
screamed about a giant new oilfield with reserves equal in size
to an entire year's worth of Saudi Arabian oil production.
Some pundits predicted that this surge of new supply would put
downward pressure on oil prices, the huge reserves in the Gulf of
Mexico seeming proof that global oil production can rise fast
enough to meet long-term growth in demand.
As impressive as the Tiber discovery is, the latter argument just
doesn't hold water; take great care when absorbing sensationalist
headlines about new discoveries. The basic problem is that many
confuse oil reserves with oil production and reserves can be a
misleading concept.
The reserve estimates you often hear quoted in the news are for
estimates of original oil in place (OOIP), the total amount of
oil contained in the reservoir. But oil and gas aren't found in
giant underground caves or lakes. These substances are actually
trapped in the pores of rocks.
Some of this Tiber oil is stranded in sections of the field where
the rock is impermeable--the oil can't flow into the well. And
some will simply be left behind during production; there's no way
to "pump" it out as if it were in storage.
Typically, a producer won't recover anything close to 50 percent
of the OOIP even after many decades of production. In the case of
Tiber, it's likely that even if OOIP is more than 3 billion
barrels producers will only extract 500 million to 1 billion
barrels of oil, a recovery rate of as high as a third.
And this production will come over decades. Don't make the
mistake of assuming that 500 million barrels of recoverable oil
means producers can extract 1.35 million barrels a day over a
one-year period.
The reality is that the Tiber field won't go into commercial
production until the latter part of the coming decade. And
current estimates are that BP's new deepwater discoveries will
allow the firm to boost output from the current 400,000 barrels a
day to more than 600,000 by 2020.
Thus, the real impact is an incremental 200,000 barrels a day of
production, a nice boost for BP but barely a drop in the bucket
when you consider global oil consumption of more than 80 million
barrels of oil per day.
But 200,000 barrels a day of incremental production 11 years from
now just doesn't sound as exciting as more than 3 billion barrels
of oil in 65 million year-old rocks under the seafloor; that
reality doesn't get much media attention.
This brings me to another common misconception about the oft-used
term "peak oil." Many investors I speak to appear to be of the
impression "peak oil" means that the world is literally running
out of oil. That's not the case. "Peak" refers not to the amount
of oil in the ground but to the rate at which it can be produced.
In other words, the world consumes more than 80 million barrels
of oil per day, and demand is likely to grow long-term due mainly
to increased consumption from developing countries.
The real question isn't how big global oil reserves are or how
much can ultimately be recovered. The question is how quickly
they can be produced. If the world demand grows to 90 million
barrels per day over the next five years, one of two things must
change: Either prices will need to rise enough to choke back
demand, or producers will need to ramp up capacity to 90 million
barrels a day.
But new production from fields like Tiber in the Gulf and Tupi
offshore Brazil is counterbalanced by declining production from
existing, older fields.
Consider the following chart of oil production from the UK and
Norway, the two main producers in the North Sea.
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1965 1975 1985 1995 2005
Source: BP Statistical Review
Production of oil from these two countries approximates North Sea
production. The UK's two major fields, Brent and Forties, went
into production in 1975 and 1977, respectively. Norway's major
fields started going into production in the early 1970s and
underwent major rehabilitation programs to boost production in
the '80s.
At any rate, the chart shows that not long after these giant
fields entered production, North Sea oil production began to
soar. The initial growth in production was rapid; the North Sea
finally entered a sort of plateau period in 1995. Production
peaked early this decade and has since fallen precipitously.
Although these fields will still be yielding oil (and gas) for
many years to come, the production rate will continue to fall.
That's despite the fact that some estimate that many North Sea
oilfields still contain 70 percent of their OOIP.
Most fields follow some version of this "bell curve" production
profile. In other words, production ramps up quickly when a field
is first produced because underground pressures are high; natural
geologic forces drive production.
But at some point, as pressures fall, production hits a plateau.
This occurs long before all the OOIP is recovered. At this point,
the producer can use certain techniques to stabilize pressures
and increase production. However, these factors are unlikely to
do much more than simply stabilize production at relatively high
levels.
The biggest beneficiaries of these trends: the oil services
industry, including companies like Schlumberger (NYSE: SLB).
As production from existing oilfields decline, producers will
need to drill more aggressively and use more sophisticated
production techniques to stem decline rates. And as production
from easy-to-produce fields wanes, producers will be forced to
target ever more complex fields such as those in the deepwater.
The oil services industry is the main purveyor of that
sophisticated technical know-how both to big international
producers like BP and to state-owned oil companies like Saudi
Aramco.
The other implication: To make such spending and development
cost-effective, oil prices will need to remain elevated.
Ironically, the discovery of giant new fields like Tiber
foreshadows far higher, not lower, oil prices in years to come.
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