Oil export - import model for the UK
Posted by Euan Mearns on September 20, 2006 - 12:00pm in The Oil Drum: Europe
Topic: Demand/Consumption
Tags: exports, imports, oil, united kingdom [list all tags]
This post follows up on the work of Khebab and Westexas on US oil imports and the recent discussion on TOD about declining oil exports from Export Lands. In the Export Land model, the focus is on oil exports as opposed to oil production. This recognises that the economies of many oil-exporting countries are booming, e.g. Russia and the UAE, resulting in sharply increased consumption of oil by those countries and this decreases their oil export capacity.
The UK provides an interesting Export Land example because since 1980, the UK has been a net oil exporter. However, following the production peak of 1999, production has been declining at an average rate of 7.56% / year and this year the UK will change from an oil Export Land to an oil Import Land.
UK oil production, consumption, exports and imports
The historic oil production and consumption data are taken from the 2006 BP statistical review. The historic import and export data (1965 - 2005) are calculated by subtracting the oil consumption from the oil production figures. This shows that the UK became a net exporter during 1980 and the data point to the UK becoming a net importer during 2006.
UK oil production peaked in 1999 and has since gone into steep decline. Click to enlarge.
The double peak in UK oil production has compound origins. Production decline in the mid 1980s was initiated by the oil price crash of 1986 that led to the postponement of several projects. Decline was compounded by the Piper Alpha explosion in 1988, which led to lost production from the Piper hub and deferment of production in many fields whilst sub-sea safety valves were installed in the wake of the disaster. During the early 1990s several large new fields were developed (e.g. Nelson, Scott, Bruce, Miller), and this combined with postponed and deferred "1980s" production coming back on line led to the second production peak in UK North Sea.
The situation today is very different. The only significant new field scheduled for production is Buzzard that will come on stream towards the end of 2006 at a planned rate of 200,000 to 300,000 barrels per day (bpd). Otherwise, most fields are operating at maximum and there is no spare capacity or deferred production waiting to be turned on. The decline that started in 1999, therefore, is forecast to continue.
The only area of UK waters that may contain significant, multi-billion barrel reserves that could likely arrest this decline is the deep water of the Atlantic Margin. The geological history of this area is rather different to the North Sea and it seems likely that known oil source rocks are now too deeply buried. Even if significant oil reserves were discovered here it would be many years before they could be developed. It is highly unlikely that any oil discoveries from the Atlantic Margin could arrest the decline in UK oil production within the time frame discussed here.
Production decline model
Production decline since 1999 has been rather uneven. 2002 was an anomalous good year, the result of the Elgin and Franklin fields coming on line during 2001. These fields produced at a combined rate up to 140,000 bpd during 2002 and this was sufficient to partly offset the relentless production decline seen in most other UK fields (note that DTI production figures are quoted in metres cubed per month)
2000 -8.32%2001 -7.16%
2002 -0.53%
2003 -8.36%
2004 -10.15%
2005 -10.86%
The Buzzard Field, coming on line late 2006 should also temporarily reduce the rate of decline seen in 2007. However, with production falling near everywhere else, including Elgin, Buzzard will provide only temporary respite.
I have modelled the future decline pattern using an annual decline rate of 7.56% per year, which is the average of the 2000 to 2005.
However, data published by the DTI for 2006 production, suggest that decline may be accelerating. In the period Jan-May 2006, the UK offshore fields produced crude oil at a rate of 1.53 million bpd compared with 1.76 million bpd in the same period of 2005. This represents a 13% production decline.
Given that decline in 2004 and 2005 was >10% per year and decline so far this year is around 13%, the decline figure used here may prove to be over cautious.
Consumption forecast model
The oil shocks of 1973 and 1979 led to a change in oil consumption patterns in the UK. The use of fuel oil in electricity generation and for industrial use went into sharp decline. These uses have now declined to virtually zero - and cannot decline much further. This decline was largely compensated by sharply increased use of oil in transportation - gasoline, diesel and aviation fuel. Use of diesel and aviation fuel is still rising.
UK oil consumption. Use of oil for transportation is rising while use of fuel oil in power generation and industry is falling. Click to enlarge.
These compensatory trends have resulted in UK oil consumption staying fairly constant in the period 1980 to the present day. The UK population is rising slowly at a rate of about 0.3% per year and per capita use of oil has been virtually flat since 1980 at around 10.9 bbls per capita per year.
UK population is rising slowly and per capita use of oil has been flat since 1980
It is envisaged that increased migration from Eastern Europe combined with increasing use of oil for transportation will apply upwards pressure on future oil consumption and that this may be balanced by downwards pressure caused by higher prices. This may be an over-simplification but this will be the subject of another article.
Thus the flat trend of oil consumption since 1980 is forecast to continue (unless there is a radical change in price and government policy) and the average consumption figure for the last 10 years of 1.74 million bpd is used in the consumption forecast model resulting in a slow decline in per capita consumption as the population rises.
Implications for oil imports / exports and the UK trade balance
The export / import model shows the UK becoming a significant net oil importer in the coming years. Five years ago (2000) the UK exported 970,000 bpd. In 5 years time (2010) the UK may be importing around 500,000 bpd - a swing of almost 1.5 million barrels per day in one decade.
The data plots showing the value of production, imports and exports use the annual average dated Brent spot prices given in the BP statistical review as denominated in 2004 $US. This may be an over simplified picture as not all oil will be traded against this benchmark. But the general conclusions will be valid.
The value of UK oil production peaked in the period 1978 to 1985 (based in 2004 $). Production values collapsed in 1986 as a result of sharply lower oil prices.
The $ value of UK oil production peaked in the early 1980s. Recent high prices have been largely compensated by falling production. Click to enlarge.
Declining production has to a large extent offset the high prices of recent years, though 2005 was the highest value year since the price collapse of 1986 (based in 2004 $).
In terms of export values, the UK has enjoyed a $ trade surplus from oil exports since 1981. By 2005, however, this surplus had all but disappeared and declining production in future, leading to oil imports will see a significant net trade deficit emerge from oil purchases. I have refrained from attempting to forecast the size of this deficit, as this will be dependent upon the future price of oil. However, for illustrative purposes only, assuming an oil price of $100 / barrel indicates an annual oil trade deficit of $25 billion by 2012 (the grey bar).
The $ value of UK oil exports had declined to near zero in 2005. Future oil imports will weigh on the UK trade balance. Click to enlarge.
Mitigation and UK fiscal policy
It is clear from looking at the import / export model from a UK economic perspective (as opposed to an environmental perspective) that everything should be done to incentivise off shore operating companies to produce more oil. This will not arrest the decline curve, but it may lower the rate of decline.
Prudence: UK Chacelor Gordon Brown has increased taxation on UK oil producers even when faced with plumetting North Sea oil production
UK Chancellor Gordon Brown increased taxation on profits from off shore production in 2002 and again in 2005. This is a clear disincentive for companies to invest in North Sea exploration and production.
Equally, serious policies need to be introduced to reduce oil consumption. The oil demand data potentially conceal a worrying trend. In the year 2000, oil used for transportation accounted for >95% of UK oil-fuel consumption and use of oil for transportation is still rising at an alarming rate. It is no longer possible to offset this rising oil consumption by reductions elsewhere. The UK government and the opposition parties are all too keen to flaunt their green credentials. And yet, no serious attempt has been made to reduce oil use in transportation. Indeed the road network and our major airports are still being expanded. Our government needs to act to redesign our transportation network, based on CO2 free electricity. If no action is taken, then future oil shortages will most likely cripple our oil based transportation system.
The sensitivity of the oil import forecast to varying decline rates and oil consumption will be discussed in a follow up post, together with an examination of options for reducing dependency upon crude oil for transportation.
It also does not seem particularly likely in undemocratic countries, because the rulers of those countries are primarily interested in one thing: cash. They will send their domestic oil to where it earns the most money, and in general that will be the international market.
Of course it is automatically true that a country's exports equal is production minus its internal consumption (neglecting any imports). The test of "export land" is whether the per capita consumption of major oil exporters is increasing significantly faster than other comparably wealthy countries around the world.
- they are mature economies, with fairly low energy consumption per unit of GDP anyway, and
- their prevailing ideology does not lend itself to protectionist economic policy.
But it's easy enough to demonstrate the truth of the model on a case by case basis with the major oil exporters (Russia, Saudi, Venezuela, etc...) where oil-product prices are indeed subsidised in order to promote economic growth.I'm not saying this is smart policy, but it's clear that it's happening.
Canada is bound by NAFTA treaty to supply the US on an equal basis to Canada-- the oil flows south from Alberta, not East to Toronto (largely: there are still some refineries in Sarnia, Ontario, near Detroit). Quebec and the Maritime Provinces import their oil.
The UK is, AFAIK, similarly bound to supply oil on equal terms to its EU trading partners, although in practice in 1973 and the oil embargo it was 'every man for himself'. But the price will be set by outside world prices-- no one imagines a UK government would be stupid enough to try to control the domestic price of oil.
PS
Interesting to learn that a plan to seize the Gulf Oil assets was going round Washington and Whitehall in 1973:
http://news.bbc.co.uk/1/hi/world/middle_east/3333995.stm
I agree with you in general, but want to add one qualifier. There is one thing autocratic regimes like more than cash, and that is staying in power.
Iraq had an enormous fuel subsidy when Saddam was still in power. That is changing now, and people are pissed off about it. In short, the rulers have to balance the desire for cash with the need to quell popular unrest, which threatens their regime.
A couple of scenarios are possible:
- despots in exporting countries will tolerate declining exports (rising internal consumption) since the declining oil remaining for export will push up oil prices enough to satisfy their greed.
- The need for cash will get the upper hand and they will back off on subsidies and try to control or suppress public unrest. This reaction would maintain the amount of oil available for export, or at least it wouldn't drop as fast as the Export Land model would predict
Which one should we expect? It obviously depends on what country you are talking about, the severity of any popular backlash to rising oil prices, and a million other factors. In short, it's anybody's guess.Demand destruction is going to occur primarily in the economies that do not benefit from higher energy prices because there will be a massive transfer of wealth from the importers to the exporters. However this only looks at it from a national perspective. The average Canadian is going to be hurting in the wallet just as much as an average Amererican. The big winners are going to be the oil companies and associated industries, their employees, their stock holders and the (Alberta) government.
While you raise some good points what evidence do you have to make the following statement?
"They will send their domestic oil to where it earns the most money, and in general that will be the international market" Does this really depend on the relative purchasing power of the domestic consumer (per capita GDP?)
Secondly exports and imports of oil will also be detrmined by the quality of the oil. Eg In Australia the oil is very light despite declining production much is exported as it is too light to refine into heavier products. So oil such as Tapis and Arab Crude is imported to make gas, diesel and bitumen products.
Thirdly there are long term contracts. Not everything is sold on the spot market to the highest bidder. They may well have to honour these contracts first they may be domestic customers on the other hand they could be export cutomers.
Fourthly distance from markets affects where crude is sourced and where it is sold. For example there are places in the world that it does not make sense to ship oil half way around the world when a local source is close at hand. Consumers rely on more local producers as transport costs impact on input cost.
As for your blanket generalisations about democracy, they are foolish.
An oil exporting country will be enjoying positive trade balance and a strong currency as a consequence. The result is that for the domestic consumption oil will remain relatively cheap even though the price may be rising for the oil importing countries.
The same thing is happening now with the US. Oil is realtively expensive for the US residents, but it is hardly felt outside of the US, because of the weakening dollar.
What is interesting in this article is that it shows exports decline (in the UK example) at consumption increase - production increase. Actually I suppose somewhat obvious.
Saudi Arabia's oil consumption increased by 11% in 2005 -- due to strong economic growth (+6.3%), a growing appitite for SUV's (SUV's are the most popular car in the middle east) and a growing petrochemical complex, and population growth (2.18%). So unless oil production increases 11% then oil exports will decline in the 11% range.
Russia's oil consumption increased 7% in 2005 driven by economic growth (6.0%) and increases in energy usage due to cold weather, and increases in car sales from very low levels.
So looking at the main exporters we are facing about 9% declines in oil exported unless Saudi and Russia slow dramatically and/or alter consumption behavior, or increase production, both of which appear unlikely. Without oil exported there is no secondary market for oil.
Note that Saudi production is down, through 6/06, by 5.2% from last year's level (EIA, crude + condensate). So, as predicted, net oil exports being squeezed from two directions--by falling production and by rising consumption.
- Saudi production down, consumption up, therefore exports way down
- China imports way up (15%?)
- world production flat
- no apparent shortage of oil on the market.
So there is, necessarily, major demand destruction going on. Where? Africa, India? Are the numbers emerging?Saudi Arabia has 20 million people, and GDP per head of c. $8,000.
US consumes 25 bl per person pa, I would bet the Saudis don't consume a quarter of that per person.
Figure 12 bl/per person/ per annum in Saudi: that equates to 240m bl pa or about 600,000 bl/day so less than 10% of total production.
The picture might be a bit more blurry than that because the domestic petrochemical industry soaks up crude (but exports refined products).
The Saudi birthrate is surely an anomaly in terms of classic income-per-capita demographics. It's a rather extreme illustration of the fact that demographic transition is mostly about the emancipation of women.
Income per capita has roughly fallen by 2/3rds since 1974 in Saudi Arabia (population has tripled, the real price of oil is no higher, there hasn't been enough other industry come in to fill the gap).
Saudi Arabia is also dependent on 'shadow water' (the term used to mean the water imported as part of food and other products)- -it doesn't have enough of its own resources.
The country is on the edge of very serious political and social trouble. The combination of widespread religious radicalism, a corrupt ruling class, the absence of any meaningful democracy, and poor prospects for the huge majority of the population under 21 is a lethal cocktail-- precisely what led to Algeria's civil war for example.
Right now, the current high price of oil (and high production) and the ruthlessness of the state security apparatus keeps the lid on. But there is no question the Royal Family has been shocked by the various terrorist attacks, and the incompetence of the Security Forces at defeating them. The security forces themselves are rumoured to be riddled with Islamicist sympathisers.
Whilst Abdhullah remains alive and in power, I don't expect change. He is seen as an honest man, and not personally corrupt. When some of his cousins get to power, the situation may be very different.
Osama bin Ladin may yet see the day when he is welcomed in his homeland as a hero.
India 2004 oil consumption 2,573,000 bpd
India 2005 oil consumption 2,485,000 bpd
One of the developing economies to show a fall in consuption last year. Note that France, Germany and Italy also show falls in crude oil consumption - in part related to de-indutrialisation, but maybe also through introduction of "alternatives"?
When you think about it, the easiest answers tend to be the same ones which make Germany the world's largest exporter - a tight focus on efficiency, a hard headed view of costs, and an awareness of the entire cycle of production, from acquiring raw materials to disposing of the waste at the end.
Oil costs Germany money, whereas wind turbines, for example, are planned as a future export product - and with a fully electric rail transport system, it is possible to substitute long haul trucking with rail, using renewable sources such as hydro, wind, solar - to a major extent, this is seen as an engineering problem, something Germans tend to feel very comfortable in dealing with. Not that Germans are blind believers in technology like Americans - merely that Germans believe technical problems can be solved with technical solutions - for example, if solar is only available during the day, then the freight train schedule will simply have to reflect that fact - in American eyes, that is not a solution, it is a failure.
And Germany has been quite rigorous in creating a bio-diesel framework for trucks and farm tractors. At this point, easily 50% of the long haul trucks seem to be using bio-diesel, from the smell they leave behind.
Germans have known that oil is a finite resource for more than a generation, which is one reason peak oil as handled here is not really a major theme, while consistent effots to conserve through higher efficiency and reduced use are seen as a necessity, not something which can be put off until the future.
But living between Frankfurt and Stuttgart, more or less along the flat and straight A5, which part of the direct route between Frankfurt Airport and the headquarters of Porsche and Mercedes, I expect this stretch of the autobahn to be one of the last unlimited speed routes in the world. Marketing is critical to selling overpriced vehicles.
Speaking very generally, trucks are only allowed 80 kph (50 mph) and up to maybe 90 kph is tolerated - 100kph is not. And those trucks are increasingly using bio-diesel.
This is not a defense of high speed driving - it is that simply the image of the autobahns is not really the same as the daily reality - most cars driven here are not even capable of 200 kph. But those that can go fast are often driven as fast as they can go - which certainly stands out for those not used to driving in such conditions.
After returning from the U.S., I would guess that the average speed of all traffic (not counting heavy rush hour) is at least as high as in Germany, mainly because of all the trucks doing 80 mph (130 kph).
I have noticed lately more trucks driving slower (55mph). I assume on orders to save fuel by the bosses.
It appears Schlumberger's "8%" decline rate is indeed a fact, and perhaps a very conservative one.
If Saudi Arabia and Kuwait follows this trajectory, you'd better be buckled in for a wild ride!
* * *
By the way, WestTexas, is SA production down 5.2%, or is that the decline rate for their Exports?
Based on EIA crude + condensate, highest KSA number last year was 9.6 mbpd. 6/06 was 9.1. 12/05 was 9.5 (9.6 to 9.1 is down 5.2%). Some Saudi ministers suggest about 9.0 for August, some suggest 9.2 range.
The annual production decline rate, based on 12/05 to 6/06, was 8.3%.
Based on the 12/05 to 6/06 EIA data, the top 10 net oil exporters, based on estimated consumption, showed about a 9.2% annual decline rate in net oil exports.
Any models of oil production should take into account that only exportable oil is traded. There is no way exportable oil is going up with Saudi Arabia and Russia growing like they are. I don't think anyone can pound the table hard enough on this point.
A quick calculation using average monthly all liquids production 2004->2005 shows a SA and Russian combined net exports increase of 364,000 bpd.
So yes, there is a way, and you can stop pounding the table.
Same method for Saudi Arabia: http://www.eia.doe.gov/emeu/cabs/saudi.html#oil However the EIA only presents Saudi domestic oil consumption in a graphical format. Therefore you have to eyeball the numbers and make a calculation of growth.