Energy Industry Trends Review

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Oil supply Key trend—Global oil supply continues to look strong, with total oil production for October 2011 running at around 89 million b/d. There was some recovery in the non- OPEC output and also a continued strong supply outlook for the Americas. OPEC supply rose by 95,000 b/d to 30 million b/d in October, with higher output from Libya, Saudi Arabia and Angola, partially offset by lower output from other members. The “call on OPEC crude and stock change” for 2011 is largely unchanged at 30.5 million b/d, while higher non-OPEC supply is expected to average around 30.4 million b/d in 2012. Effective OPEC spare capacity is estimated at 3.31 million b/d and OPEC has its next ministerial meeting in Vienna in December, during which it is likely to keep its production level unchanged. 20 Non-OPEC oil supply is estimated to have fallen by 300,000 b/d to 52.6 million b/d in September 2011, largely due to weather and maintenance related shut-ins in North America, maintenance in the North Sea, unplanned outages in the Middle East and outages and maintenance in Latin America. Continued mature field decline, slower than expected ramp-up of new production and unplanned outages have caused a reduction in the expectations for non-OPEC growth for the fourth quarter of 2011. Growth for the next quarter is expected to come from Latin America and Russia, but will be offset by declines in non-OPEC Asia such as Malaysia, China and Indonesia. This same trend in 2012 is expected to lead to an overall reduction in non-OPEC supply growth for the coming year by 180,000 b/d to around 900,000 b/d. 21 This quarter, US oil production fell by 57,000 b/d to an estimated 8 million b/d in August as production declined in the Gulf of Mexico and in the Lower 48 states, with US production expected to decline in coming months. News is more positive in the Gulf of Mexico, where a hurricane-free season allowed for the continuation of the post-Macondo recovery in production, with the pace of new well completion accelerating. The number of drilling permits issued to firms hoping to drill on their existing leases rose to 13 in October—nearly three times 6 the average seen so far this year—and is now approaching historical levels of 15 to 20 permits per month. Analysts continue to focus on the considerable potential of the US tight and shale oil plays, which have the potential to produce more than 1.4 million b/d by 2020—reducing US imports. 22 OPEC’s output is still running around 300,000 b/d below pre-Libyan crisis levels of 30.5 million b/d from January 2011, and was producing just over 30 million b/d in October 2011. Libya’s return to the global market looks set to rebalance production flows for several OPEC member countries that stepped in to fill the gap caused by most of Libya’s 1.6 million b/d production capacity being shut in. Libyan production is now expected to return to production levels of around 600,000 b/d by the end of 2011. Saudi Arabia has cut back its production by an estimated 200,000 b/d to 9.6 million b/d in September. Saudi Arabia also recently announced that it is unlikely now to implement plans to raise its oil output capacity to 15 million b/d, arguing that increased production and expansion projects elsewhere, such as in Iraq and Brazil, should be adequate to meet global demand. Iraqi output in September reached its highest level in almost 10 years of 2.74 million b/d. However, production fell in October, following attacks on pipelines in the south of the country. Production of around 650,000 b/d at the southern part of the Rumaila oilfield was initially shut following two bomb attacks (total production from the BP-China National Petroleum Corp. [CNPC] joint venture developing the Rumaila field had been running at around 1.24 million b/d prior to this). 23 Observation Libya’s return to the global market has contributed to a potentially more stable global supply outlook. Increasing supplies from Libya along with the rebound from unprecedented levels of unscheduled outages and maintenance, as well as growing production in Latin America, the Caspian, Russia, Australia and the United States should support supply growth in 2012. The picture starts to look less positive if a significant decline in demand occurs, leaving the market looking oversupplied and putting downward pressure on the oil price, although the increasing growth in US oil supply is likely to boost that economy as imports there continue to fall. There continue to be concerns on the supply side that security issues are continuing to affect oil production operations, notably in Iraq and Nigeria, but also potentially elsewhere in the Middle East and Africa as geopolitical unrest continues. In Iraq, the BP/CNPC consortium has been experiencing some production delays due to security issues, and there has also been a flare up of continuing troubles in Nigeria. Oil production in Nigeria fell in September to 2.18 million b/d, following a series of pipeline outages on the Bonny and Forcados network due to sabotage and oil theft. In October, Shell declared force majeure on its Forcados exports for October, November and December 2011 following the production shutdown due to sabotage on the Forcados pipeline. 24 This quarter, oilfield services company Schlumberger has been talking about the potential impact of security issues on operations, notably in Libya and Iraq. Many companies operating in these countries are trying to manage security issues so that they do not lead to project delays and impact significantly on operating costs. Schlumberger has stated that it would need to deploy about 100 security personnel in Libya to resume activities there this year, and was still employing around 400 security personnel in Iraq. 25 Other potential complications on the supply side include challenges in Iraq over relations with Kurdistan. More than a halfdozen projects are due to come onstream in Iraq up to 2013, which could add more than 6 million b/d to Iraq’s production (which when added to current production, could put Iraq producing around 9 million b/d). 26 However, not only are security challenges still an issue in the country, but now there are increasing concerns that oil companies that signed contracts with Iraq for fields in the center and south of the country might
lose these contracts if they continue to sign deals with Kurdistan. ExxonMobil has, this quarter, signed the first agreements with Kurdish Regional Government (KRG) in Kurdistan to explore for oil and gas in six blocks in the Kurdish region of Iraq. The company is already operating in Iraq, producing around 370,000 b/d of oil from the West Qurna field, under a service contract with the Baghdad government. The Baghdad government has previously excluded companies operating in the Kurdish region from oil contracts in the rest of the country and has warned that any deal with the KRG could result in the termination of contracts in Iraq. This could not only result in delays in bringing the Iraq fields to full production, but will also contribute to the general uncertainty around legal and regulatory issues in Iraq currently. 27 Oil demand Key trend—Global oil demand is expected to rise to 89.2 million b/d in 2011 (growth of around 1 million b/d year on year) and reach 90.5 million b/d (growth of 1.3 million b/d year on year) in 2012. Some of the demand growth is the result of some temporary factors in the market such as seasonal demand for heating oil; oil-fired power generation in Japan is providing some upside to demand as utilities there switch to using oil for power generation as well as gas as nuclear capacity is down. Overall, however, the demand picture remains very susceptible to continuing economic upsets and forecasts for a slowing economic growth outlook particularly in the OECD markets. This quarter saw stronger than anticipated OECD demand in August, which somewhat offset the effects of the worsening economic situation in the Eurozone. OECD demand forecasts for the fourth quarter of 2011 are not expected to change significantly, despite the northern hemisphere moving into winter, largely due to the economic situation. The third quarter of 2011 did show some stronger-than-expected demand from some product categories, making it possible that OECD demand might still show some growth for 2011 as a whole. However, there are continued pockets of real weakness, such as gasoline demand in 7 the United States, where demand has been falling month on month. However, the IEA’s current outlook still sees OECD demand as a whole declining by around 0.7 percent to 45.8 million b/d in 2011 and falling by 0.6 percent in 2012. 28 Non-OECD oil demand grew by 2.7 percent year-on-year (or around 1.2 million b/d) in August, down from 3.6 percent growth in July. The slowdown stemmed from relatively weaker demand growth in China and Saudi Arabia. China’s monthly apparent demand (calculated as refinery output plus net product imports) rose by 5.8 percent year on year in August as slower refinery runs outweighed higher product imports; strong demand growth in China was driven by higher demand for residual fuel oil, jet fuel and gasoil. With GDP growth in China forecast to be around 9 percent in 2012, the outlook in China looks robust if slightly slower. Total product demand in China is expected to reach over 10 million b/d in 2012 from around 9.5 million b/d in 2011. 29 Indian economic prospects are seen somewhat higher for 2011 and lower for 2012, with GDP growth now expected at 7.8 and 7.5 percent, respectively. Demand in Russia has shown little sign of slowing, growing by 10.4 percent year on year in August; the 2012 forecast is expected to increase slightly to 3.5 million b/d. In Brazil, demand is expected to grow at a robust pace, by 1.8 and 2.4 percent for 2011 and 2012, respectively, to reach 2.85 million b/d in 2012. 30 In Japan, oil demand growth was supported by the fact that the main utilities companies used 217,000 b/d of crude oil in October versus around 140,000 b/d a year earlier (according to the Federation of Electric Power Companies of Japan), as they continue to switch to oil and gas for power generation due to continued nuclear power plant outages. As a result, the consumption of fuel oil rose to 190,000 b/d from around 50,000 b/d in October 2010. Japan’s GDP forecast for 2012 is forecast to grow at 2.3 percent, and product demand generally is expected to continue to be strong in 2012. 31 Observation The outlook for oil demand remains little changed overall despite the continued financial market upsets. The IEA sees that global oil demand has grown at a “moderate, but stable pace” in recent months, suggesting that the impact of any economic downturn is either not yet being felt in global oil markets (and the worse might be yet to come) or that any declines in demand are being offset by growth elsewhere such as in Japan and China. It is perhaps surprising that analysts see the situation for GDP growth in Japan as so positive for 2012, given the impact of the earthquake and tsunami earlier this year. The IMF is forecasting that the Japanese economy will grow by around 2.3 percent in 2012, signaling that Japan is expected to recover from the current crisis more rapidly than anticipated. Japan is currently taking steps to make its oil supply chains more disaster-resistant, due to lessons learned from serious fuel shortages in the wake of the earthquake and tsunami when Japan’s domestic refining capacity at one point fell to about 2.7 million b/d (900,000 barrels short of daily demand). 32 With OECD demand growth only forecast at around 0.6 percent growth for 2012 (with possible further downward revisions if the Eurozone economic crisis becomes more severe), the impetus for strong market demand for oil and products will have to once again come from Asia and, primarily, China. While Chinese oil demand has been slower than in 2010, so far this year it has contributed to more than half of global incremental demand, and is likely to do so again next year. Markets can also take heart that even if there is a slowdown in China (which is unlikely) there is also strong demand for oil in other non-OECD economies; for example, gasoil demand in Russia is particularly strong and expected to reach over 690,000 b/d in 2011, compared to 634,000 b/d for the whole of 2010. 33
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Page 4 and 5: Economic Oil supply Oil price 4 Aug
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Page 20: About Accenture Accenture is a glob

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