Non-OPEC production overview

Oil supply and demand forecasting should perhaps be thought of in much the same way as long run weather forecasting, but as somewhat less reliable. It can give some general feeling for the broad brushstrokes, but little precision that anyone would want to rely on completely. Within that general problem, non-OPEC supply has often proved a particularly difficult slippery creature to pin down.
One major difference with weather forecasts is that at least a weather forecaster can say with a reasonable degree of certainty what the weather has been. Oil forecasters, by contrast, are often more surprised by the past than by the present. A particularly good example of this is contained in the latest IEA Monthly Oil Report, dated 12 October.
The IEA considers UK oil production in 2001, presents a very rosy last half of the year, and gives an estimate for UK production in August of 2.66 mm bpd. On 2 October, the UK government had placed its preliminary estimate of August production at 2.25 mm bpd. A 410,000 bpd error on an estimate for production two months ago provides an extreme metric for quite how large the errors on non-OPEC production can be.

There has been a strong dichotomy within non-OPEC areas. Production in the Former Soviet Union (FSU), and in Russia in particular, has been increasing very rapidly. We expect that divergence in performance to continue next year.
The six main producers of oil outside the FSU are the USA, Mexico, Norway, China, Canada and the UK. These six countries produce about two-thirds of total non-OPEC production outside the FSU.

i) UK
The UK represents a major part of the poor performance of non-OPEC production outside the FSU. As is shown in the graphs, the turn down started at the beginning of 2000. After a small year-on-year gain in January 2000, monthly production has been lower than the previous year in 18 of the next 19 months, and in some of those months it has been far below. The reasons for this come from the normal opposing forces in the production profile.
Production from established fields is inexorably declining. Investment can slow the decline, but not stop it. Counteracting that is production from new fields. The problem over the last two years has simply been that not enough significant new fields have come on stream, and the production profile has thus been dominated by the decline of mature fields. Add to that equation some production surprises, for example longer than expected maintenance programs, and the production decline becomes even sharper.

JPM expects UK production to stabilize next year as more new fields will produce a more even balance between declining fields and new oil. That in itself is quite a remarkable achievement for an oil producer which at the start of the year was estimated to have just 5 bn barrels of recoverable oil, about five times annual production, (the world average is reserves at 40 times annual production).
However, the UK's achievement in producing more than 3 % of world production on less than 0.5 % of world reserves is not sustainable, particularly given the recent lack of any significant exploration success. The question for the years after 2002 is not whether UK production will fall, but rather how fast will it fall. Our projection for 2002 is currently a trivial fall of just 20,000 bpd, but there is a risk of a larger fall particularly as maintenance seems to be becoming a greater drain on production each year given the maturity of UK production.

ii) Norway
The Norwegian sector of the North Sea is beginning to show some of the problems of maturity as the UK, but is some years away from facing the same degree of struggle in maintaining output. Norwegian proved reserves are about eight times annual production, better than the UK but still below average, (the average for non-OPEC is 13.4, the average for the OECD 11.5).
As in the UK, producing so much from relatively small reserves in a mature oil province, means that a lot of new production is needed each year to balance the decline rates. Over the last two years the balance has been favourable, and output has continued to rise. For 2002, JPM expects a further small gain of about 20,000 bpd, assuming that Norway does not join any OPEC production cuts.

iii) USA
US production has been in a long-term but relatively gentle decline. Reserves are about 10 times annual production, but they have been at about that level for the last 80 years. The discovery of Alaskan oil and the build up in production cushioned the fall in production in the lower 48 states until 1988 when Alaskan production peaked. Now, it is production in the federal offshore waters of the US Gulf that serves as the source of current and future growth.
In 2000, the federal US Gulf produced more oil than any individual state including Texas. The major components of the increment from the US Gulf are not expected until 2005, and in particular the joint development of the complex of fields including Crazy Horse and Mad Dog. In the meantime, increased production from deep water areas has been compensating for production declines in shallow waters, without providing the significant impetus that will come from the projects currently in development.

While the best years for US Gulf production increases are yet to come, JPM is expecting an increase in US oil production in 2002, as the influence of some temporary factors is removed. In the US year-on-year comparison graph, the strong falls in early 2001 and December 2000 are very evident. The falls were so large because of the knock-on effects of high US natural gas prices. An incentive was created to leave natural gas liquids (NGLs) in the gas stream, and not strip them out as is usual. The NGLs will be in the oil pool again in 2002. JPM is forecasting a gain of 30,000 bpd in US production next year.

iv) Canada
Canadian production is expected to continue to move forward in 2002, with a projected gain of 120,000 bpd. There are two main sources of gain, the Terra Nova field, which is offshore Newfoundland, will peak at about 115,000 bpd. In addition further gains are expected in the synthetic crude production of the Suncor project. These additions are expected to be enough to more than compensate for declines in the current base load of Canadian production.

v) Mexico
Mexican production has increased this year to above its 1998 peak.
JPM expects further production growth next year of about 60,000 bpd, on the assumption that Mexico does not join OPEC production cutting. Mexico's main field is Cantarell, where an ambitious nitrogen injection project has been undertaken to improve oil recovery rates. The complexity of that project adds a certain amount of technical risk to the projected production increase, but the main downside risk is that Mexico could consider making an allied contribution to an OPEC cut.

vi) China
Oil production in China has been continuing what has been a very gradual rise over the last four years. Within the Chinese energy balance the impact of a 0.4 mm bpd production increase over the last decade has been swamped by a 2.6 mm bpd rise in consumption. JPM expects further very slow progress in 2002, with Chinese production increasing by just 10,000 bpd.

vii) A summary
The production path for the main six non-OPEC producers outside the FSU combined has been fairly flat as is shown on page D6. However, we still expect these six to provide just about all production growth in this category in 2002, with production gains in some other areas being netted out by losses in others. The other main increases next year are projected to be from Brazil (120,000 bpd), and Angola (70,000 bpd), with the decreases spread widely. At the regional level, three-quarters of the 2002 increases are from North Africa, the rest from Africa with other regions effectively static.
Our non-OPEC supply projections outside the FSU are conservative compared to those of the IEA and particularly the US DOE. We find the US DOE projection of a 0.9 mm bpd increase outside the FSU to be rather unconvincing. There has been a tendency in recent years for forecasters to assume a large non-OPEC increase and then whittle it down over the year. The graphs on Page D7 illustrate this point. The US DOE graph shows three lines, which are the projected levels of non-OPEC output outside the FSU made in each month starting in January 2000. The line for 2001 has been steadily revised down, so that an initial estimate of a 1 mm bpd increase has been reduced to zero. The movement in the 2002 line since it started in January 2001 does not suggest that the estimate is exactly bolted to the floor yet.
The equivalent graph for the IEA projections begins in August 2000 when the IEA projections for 2001 were first published. The IEA numbers are lower than the US DOE because the latter does not in its report break out processing gains as a separate supply item. The pattern is the same, and the initial projection of output gains for 2001 forecast by the IEA has disappeared over the course of year.
Given the tendency to overestimate future production, we view the sudden rise of the line for 2002 as a result of IEAs October revisions with a slightly raised eyebrow. The FSU The graphs showing the dynamic of Russian production present a strong contrast to those shown in the previous section. Russian output is surging, a process that began in 1999 and has been accelerating since. The Russian oil industry has been under-capitalized and inefficient. The injection of, by global oil industry standards, relatively small amounts of capital has brought dramatic gains in production. To date, the bulk of that increase has come from the better utilization of existing resources rather than the exploitation of new resources through the development of new fields.
Production increases have accrued to Russian companies, with the exodus of foreign oil company capital continuing. While there are of course diminishing returns to capital expenditures in these circumstances, the major potential constraint on Russian production is not at the wellhead but in export logistics. Some key port facilities, and in particular the Black Sea port of Novorossiisk, are already beginning to look somewhat congested.
Further out, congestion at the Black Sea ports and Turkish reluctance over increased oil tanker flows through the Bosporus might start to pose a constraint. However, we are not anticipating any such problems in 2002, and expect Russian output to continue to increase sharply in 2002, with the addition of further increases from Central Asia. In total, the projected increase from the FSU next year is 420,000 bpd, and there would appear to be scope for the increase to come in even higher.
The FSU represents 60 % of our total projected increase in non-OPEC production of 0.7 mm bpd next year. For the IEA projections, the FSU represents 56 % of a total increase of 0.82 mm bpd, while for the DOE the FSU provides 25 % of a 1.2 mm bpd rise.

Non-OPEC supply (mm bpd)

2000 2001 annual change 2002 annual change
Total excluding FSU 36.233 6.04-0.19 36.32-0.28

Europe 6.96 6.74-0.22 6.73-0.01
Norway 3.37 3.38-0.02 3.40-0.02
UK 2.66 2.44-0.22 2.42-0.02
S & Central America 3.85 3.80-0.04 3.82-0.02
Argentina 0.82 0.81-0.01 0.76-0.05
Brazil 1.50 1.58-0.08 1.70-0.12
North America 14.24 14.31-0.08 14.51-0.20
Canada 2.68 2.75-0.08 2.87-0.12
Mexico 3.45 3.56-0.11 3.62-0.06
USA 8.11 8.00-0.11 8.02-0.03
Africa 2.66 2.62-0.04 2.68-0.06
Angola 0.74 0.70-0.03 0.78-0.07
Egypt 0.80 0.76-0.04 0.72-0.03
Middle East 1.99 2.03-0.04 2.03-0.00
Oman 0.96 0.98-0.02 0.99-0.01
Asia Pacific 6.54 6.54-0.01 6.55-0.01
Australia 0.82 0.75-0.07 0.72-0.03
China 3.25 3.29-0.04 3.35-0.05

FSU 8.04 8.59-0.55 9.01-0.42
Russia 6.54 6.98-0.44 7.28-0.30
Total non OPEC 44.27 44.63-0.36 45.33-0.70