Providing coverage of Alaska and northern Canada's oil and gas industry
January 2007

Vol. 12, No. 4 Week of January 28, 2007

Herrera: Oil price drop temporary

Alaska-based energy consultant sees oil price average in 2007 similar to 2006 with gradual annual increase in years to come; conservation, oil sands won't fill gap as oil output declines

Kay Cashman

Petroleum News

In June 2006, Petroleum News asked its favorite oil price guru, energy consultant Roger Herrera, if crude oil would plummet to $40 a barrel in the foreseeable future as predicted by BP’s CEO Lord John Browne.

“That’s quite a reasonable proposition,” Herrera said two weeks after Browne’s comments were published in a June 12 report by German weekly Der Spiegel.

“But if price pressures ease and oil drops to $40 a barrel, it will be a short-term aberration. I have a hard time believing that it will last for any length of time. Months? Fine. But years? No way,” Herrera said.

His position hasn’t changed.

In a Jan. 23 interview with Petroleum News, Anchorage-based Herrera said his crystal ball for the “next 12 months is murky,” but that he expects the price of oil to fall no lower than $40 for any significant amount of time and then to “inch back up” to “above the $80 level it reached last year,” with the 2007 average price of crude “about the same” as it was in 2006.

“I have a hard time seeing the price of oil significantly reducing from its present level. The only reason it might do so would be spare capacity — if world supply would increase by millions of barrels per day and there is certainly nothing to suggest that might happen,” even though “at the present time there is extra capacity in the world despite roaring economies.”

“One can explain the present surplus by simple things such as milder-than-expected weather in the Lower 48 states and so on. But it’s not something you can rely on for the next 12 months,” he said.

Thirty years since last big discovery

In fact, over time, Herrera believes the average price of crude oil will slowly increase from year to year as the commodity becomes more scarce, and thus more valuable.

He bases that assumption on three primary factors: one, supply and demand, which he hopes will always be the major factor; two, politics of the world, which he hopes will improve, and; three, supply of oil, which he thinks might have reached its peak.

“It has been 30 years since a field capable of producing 1 million barrels per day was discovered,” he noted, referring to Mexico’s Cantarell oil field, which was discovered in 1976. (Cantarell, which holds approximately 17.5 billion barrels of recoverable oil, reached its peak in April 1981 when it produced 1.1 million barrels per day.)

“It’s been 10 years since the last 1 billion barrel oil field was discovered,” Herrera said.

“The ones we’re getting excited about — deep oil in the Gulf of Mexico and offshore Brazil and West Africa — are very, very expensive to develop compared to typical oil fields. They are not the sort of fields that are going to measurably affect the world’s supply of oil,” he said.

“All oil fields that originally contained 1 billion or more barrels of recoverable oil are now past their peak production rates, many producing lots of water,” Herrera said, pointing out that 80 percent of the world’s oil is owned by state-controlled companies, and that most of the world’s governments are “overly optimistic” in their predictions of future oil supplies.

“But inevitably reality will come crashing in,” he said. “Hubbard’s peak oil theory — a favorite topic of mine — is clearly something that should be in everybody’s mind when they start forecasting the world oil situation.”

Herrera, and a worldwide contingency of scientists, believe oil production is already in permanent decline or, if not, will shortly be. (The Hubbard curve was accurate in predicting the peak in U.S. domestic production.)

Nonconventional oil won’t cut it

“The effects of peak oil might have already begun, and are perhaps being moderated and made somewhat invisible by alternative oil sources — unconventional oil — such as liquids from natural gas which have hugely increased in importance, and tar sand oil,” he said, referring to western Canada’s massive oil sands deposits.

Nonconventional sources may be masking the effect of peak oil, but will they measurably impact the world’s supply of oil?

“No,” Herrera said.

“I think they will simply moderate the concerns of those that think conventional oil might be reaching its peak. To expect unconventional sources of crude such as heavy oil to fill the gap is unrealistic. … You just can’t churn it out very quickly, and it’s not very energy efficient. … All in all it’s very difficult and expensive stuff to produce compared to conventional oil. It sort of muddies the figures in regard to if peak oil production has already occurred,” he said.

“The likelihood is that with all the unforecastable influences out there — two-thirds of the world’s oil in Islamic countries, America’s love of the automobile, expected seasonal increases, and so forth — all suggest there will not be any spare capacity lying around in the near future.”

Conservation could play a role

The interview with Herrera was done several hours before U.S. President George Bush gave his state of the union speech touting the potential of conservation.

Herrera did point out, however, what he considered an encouraging and surprising conservation fact: “The use of oil in the United States declined about 1 percent in the past year of high oil prices.”

But, he said, “conservation can’t be relied upon to be much of a factor in mitigating future oil prices in a country whose whole economy was brought up on cheap oil prices. … But there is clearly room for us to be much, much more efficient in the future,” he said. “

And, he said, a “very strong movement in this country toward conservation” could throw off prices.

But Herrera believes that scenario is unlikely, and that the average price of oil will gradually increase in coming years.

“I don’t think that’s necessarily good news for the world. While the discovery and production of unconventional petroleum allows economic growth for the world to continue like gangbusters, it does not force governments to plan for much higher prices in the future. We’re not going to get a meaningful energy policy.”

“We’re living in a bit of a fools’ paradise at the present time,” Herrera said. “I suppose we should all enjoy it, because I don’t think it’s going to last too much longer.”

Bad news for United States from Mexico

Following Petroleum News interview with Roger Herrera (see adjacent article), Mexico’s state-owned oil company Pemex released estimates showing crude exports from Mexico dropping 13 percent over the next six years as the country’s proven reserves continue shrinking.

Sixty percent of Mexico’s reserves are in the aging Cantarell field. Pemex said it expects production from Cantarell to fall by an average of 14 percent a year between now and 2015.

Another report in the Mexican edition of The Herald said Calderón administration documents acquired by El Universal indicate Pemex will be forced to cut back on exports to the United States from the present 1.5 million barrels per day to as low as 1 million barrels per day in the final two years of the Calderón administration.

The Herald said analysts contacted by El Universal agreed that Pemex’s inability to increase production was due to waning reserves.

Pemex has already canceled shipments of crude to the Deer Park, Texas, refinery that it owns along with Shell for the next 12 months, the article said.

Raúl Muñoz Leos, a former Pemex director, said the primary problem lies in the rapid decline of Cantarell reserves and the failure to develop other fields.

Muñoz said production levels rose steadily from 2002 to 2004, encouraging company directors to predict a continuation of this trend, the Herald reported.

“We established a production goal of 4 million barrels a day by 2006, but by mid-2005 production levels began to decline,” he said.

Although Pemex’s exploration budget was boosted to US$4 billion last year, the investment has yet to bear fruit, the news report said.

George Baker, an oil industry consultant, told El Universal the situation is further complicated by the fact that the price for Mexico’s basket of crude — which is heavy oil and therefore less attractive on world markets — is so low.

“The first symptoms of a genuine oil crisis are becoming more and more evident,” The Herald reported.

—Kay Cashman

Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
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