Oil Production Declining

Jim Brown
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Deutsche Bank recently compiled production numbers from many of the recent earnings reports and the results are startling even for those of us that already believe we are reaching a point where demand will exceed supply.

Paul Sankey covers big oil for Deutsche Bank. His research showed oil production declines for the majority of the top 40 companies. In his comments he said, "The sudden loss of a major oil producing nation (Libya) is not a special item but a recurring theme in global oil production."

He pointed out that even the oil sands majors of Suncor Energy (SU) and Canadian Natural Resources (CNQ) both posted declines. Petrobras lowered their production forecasts amid declining production. Two of the three largest Russian oil producers declined. Pemex, no surprise here, also saw production decline.

In his list of the top declines there was some damage from Libya and also there was a drop due to asset sales from Conoco and BP. That production will go elsewhere but it is still significant that those companies could not replace it with projects in progress.

BP (BP) -11% (-254,000 bpd)
ENI (ENI) -19% (-187,000)
Total (TOT) -10% (-130,000)
Repsol (REPYY) -26% (-117,000)
Suncor (SU) -23% (-113,000)
Lukoil (LUKOY) -6% (-103,000)
Conoco (COP) -10% (-95,000) Sold to Lukoil
Canadian Natural (CNQ) -29% (-93,000)
Statoil (STO) -8% (-76,000)
Chevron (CVX) -2% (-44,000)
Murphy Oil (MUR) -29% (-38,000)
Hess (HES) -12% (-37,000)
Occidental (OXY) -6% (-33,000)
Sinopec (SHI) -2% (-16,000)
Woodside -26% (-16,000)

Total production decline in top 15 producers -1,352,000 bpd.

Some of that is lost Libyan production as in OXY, HES, MUR and ENI. However, the declines persist across the entire sector with the exception of the shale oil drillers in the USA. Production in oil shale should be up +75,000 bpd in 2011.

Sankey said higher oil prices should encourage production growth but non-OPEC production is not keeping pace with demand growth. (No surprise there) He reiterated that higher and more volatile oil prices will be a fact of life in future oil markets.

Deutsche Bank also found that demand destruction was clearly around $4 per gallon for gasoline. That equates to $120-$140 for Brent and $100-$120 for WTI.

Another factor in the decline in crude production is the lack of permits in the Gulf of Mexico. BP production in the Gulf has declined from 390,000 bpd to 250,000 because of a lack pf permits to drill additional production wells to offset declining production in existing wells. Offshore wells produce very fast and decline very fast so producers have to continually replace existing production with new wells.

Gulf production is not going to come back any time soon. I am going to detail on Monday the massive damage that has been done to future Gulf production by the two-year delay in permits. Currently producers are not expecting any surge in approved payments until after the next presidential election. More details on that tomorrow.

It is easy to say there are a lot of new projects in the pipeline. There are always new projects in the pipeline because that is the only way an oil company can stay in business. I think the point from the list above is that the new projects are not keeping up with the shrinking production from existing fields. When gasoline prices move back over $4 people will start to pay attention again but that attention span is very brief before the cares of the world overcome the worry over gasoline prices.

Jim Brown

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