Royal Dutch Shell, Exxon Mobil, others will have the oil but we have to wait

Implications: Jad Mouawad in New York and Martin Fackler in Geoje, South Korea reported in the June 19 issue of the International Herald Tribune that a shortage of offshore drilling ships will impede a fast turn around in oil exploration. Slow growth of supply in the face of soaring demand has sent the price of crude oil from $68/bbl a year ago to $135/bbl today. Drill ships are booked solid for the next five years. The great demand for equipment causes shipyards to work overtime to meet the inflow of orders. Oil companies are constrained in their exploration programs by lack of equipment. Sixteen new drill ships are scheduled for delivery this year, double the number built in the last six years. Between 2008 and 2010, 75 ultra-deep-water rigs will be delivered. Petrobras is driving much of the market growth. Seven months after announcing huge discoveries, Petrobras still needs rigs for development. Oil companies also must cope with a doubling of costs across the industry in the last five years.

Analysis:  Besides the long construction times for the equipment and the longer development time from discovery to production, a third factor limits production from deep water. The offshore Floating, Production, Storage and Offloading Platforms (FPSO) have a built in limit as to the amount of production that can be processed. A typical unit will be sized at 100,000 bbl/day. But larger units exist. Chevron will use a 250,000 bbl/day for its development of the Agbami field offshore Nigeria. Quite a few tanker conversions are in use or underway with a capacity of 80,000 bbl/day. Unlike a huge oil field on land, the oil company can only develop the field in increments. The Tupi field of which Petrobras is so proud, with its possible 5-8 billion barrels of reserve will have to be developed one FPSO at a time. If Tupi were onshore, Petrobras would move 20 land rigs in and develop a million bbl/day in 12 to 18 months. The same constraints apply to Athabasca oil sand production. Oil companies in Canada have over seventy projects planned or under construction that will produce 50,000 bbl/day or less. The end result is that black crude oil production is in a tight balance with demand and slowly declining. The Oil & Gas Journal recently published a list revealing 47 countries that will peak out in 2008 and the following four years. The U.S, the U.K., Mexico, Venezuela and the Netherlands are already beyond peak Most of the Persian Gulf producers have peaked out or will do so in the next decade or sooner. Even Russia has difficulty holding rate which is one reason the western oil companies are important to them. So ladies and gentlemen, voters, taxpayers, juveniles, rock stars, feather merchants, tamale hawkers, Bible bangers and of course that graying global warmer, Al Gore, listen up and dig deeper into your pockets when you fill up your tanks. Expect crude oil prices to keep right on climbing at about 15%/year come rain, come shine or Hallelujah! Judgment Day.