Mexican Production/Cantarell Update

From Oil & Gas Journal, July 28, 2008:

• Total Mexican production, June 2008: 2.9 MMBO/D
• June 2007: 3.21 MMBO/D
• Average, first 6 months of 2008: 2.86 MMBO/D, decline of 9.7% from year earlier
• Cantarell production, June 2008: 1.05 MMBO/D (MP note: See the February 2008 post on this blog - included is a production schedule which was "reverse engineered" from Pemex's statements at that time. Based on this Feb 2008 schedule, the rate wouldn't be down to 1.05 MMBO/D until the end of 2009. And, if declines continue as they are, production may well finish 2008 at the rates projected for the end of 2010! And this projection was done only 6 months ago. This is indicative of the overwhelming and surprisingly large declines experienced late in the "life" of a depletion drive oil field.)
  
• "producing more gas at Cantarell, where gas is moving into wells that formerly produced oil" (MP note: not good in an oil field)
  

Update on Mexican Production, Exports

The May 5, 2008 issue of the Oil & Gas Journal included the following articles:

Mexico imports more gasoline as oil production drops

• Gasoline imports rose to 367,000 bbls per day in March 2008 (6.5 % increase from February).
• Oil production declined in the first quarter of 2008 to 2.91 MMBO/D.
• And this shocker: "Mexico's premier Cantarell field produced 1.15 MMBO/D in March 2008 ..." Note that this is below the year end rate we projected in our last post, shown below.

Mexico to reduce oil exports to US in 2008

(Didn't take long for our March "prophecy" to be manifest.)

• "Mexico will reduce its crude exports to the US by an average of 184,000 BO/D throughout 2008, a situation that could continue for 2 years longer ..." The latter, quite an understatement!
  
• "... original plan for exports in 2008 envisioned some 1.678 MMBO/D ..."
• "... US EIA earlier this month predicted a 13.2 % shortfall of imports from Mexico during the current fiscal year. According to EIA figures, Mexico exported 1.533 MMBO/D to the US in 2007."
• "Based on its December 2007 Short-Term Energy Outlook, EIA forecast Mexico would produce 3.52 MMBO/D in 2007 and 3.32 MMBO/D in 2008." It looks like the EIA's forecast for 2008, done in December 2007, is off by some 410,000 BO/D - for the first quarter of 2008! You'd think they could get a little closer than that!

To refresh your memory, Mexico nationalized oil in 1938. A Constitutional provision was created that prohibited ownership of oil and gas reserves by anyone other than the Mexican government. Mexico and Mexicans take great pride in their nationalism regarding their oil resources. Pemex is the national oil company which are operates Mexico's oil and gas projects.

Unfortunately, some of Mexico's largest remaining reserves likely exist in a "deepwater" (water depths greater than 1300') area in the Gulf of Mexico. And despite the fact that Pemex employs some very intelligent folks, they don't have the years of experience in research, development, engineering and construction of deepwater drilling and production projects.

Previously, it was believed that Pemex could rely on the world's largest, most capable service companies - Schlumberger and Halliburton - in order to provide everything needed for deepwater exploration and production. However, Schlumberger and Halliburton cannot even do this. Deepwater exploration and production is the realm of Shell Offshore, ExxonMobil, ChevronTexaco, BP and just a few others. To give one an idea of what is required, a deepwater project can cost several billion dollars, and each well can cost $20 - $50 million. And ExxonMobil invests $200 million dollars per year in just researching deepwater technologies.

Now, none of the the companies listed above desire to risk billions of dollars if they don't get a share of the oil and gas that might be found. Their shareholders insist on this! But the current Mexican Constitution won't allow it. Talks have been held, followed by intense protests, led by the former mayor of Mexico City and defeated Presidential candidate, Andres Manuel Lopez Obrador. It doesn't look good for the development of Mexican deepwater areas - but anything could happen.

On the other hand, to give you an idea of the scope of the problem with the dwindling giant oilfields like Cantarell, take a look at Shell's Perdido project, which was in the news in early June. Perdido will be anchored not far from Mexican deepwater areas, in 8000' of water. It is costing billions, has taken years to construct and when in place, it will produce 130,000 barrels of oil per day.

That is about one-third of what Cantarell LOST in only 3 months, from December 2007 through March 2008! Getting the picture about Peak Oil?

Mexican Oil Exports: Start Saying Adios!

Most folks are surprised to learn that the world’s second largest oil field is not located in Saudi Arabia. Nor even in the Middle East. In fact, it is located offshore Mexico, in the Bay of Campeche, Gulf of Mexico. This “giant” field, with an ultimate recovery which may reach 20 billion barrels, was discovered in 1976 by Rudesindo Cantarell. Sr. Cantarell was not a geologist, nor a geophysicist, but rather ... a fisherman. It seems that the natural oil seeps were playing havoc with his nets! PEMEX, the national oil company of Mexico, finally investigated it and the rest, as they say, is history.

Cantarell Field, as it turns out, is a real freak of geology. The porosity - or holes in the rock where the oil is located - is believed to be the result of a rubble pile from an asteroid strike which took place some 65 million years ago! And not just any asteroid strike: The asteroid which caused what has become known as the Chicxulub Crater, on the Yucatan Peninsula, is thought to have been 6 miles in diameter, and many scientists attribute this particular asteroid strike as being the “extinction event” that took out the dinosaurs! The impact energy from that strike is believed to have been some 2 million times that of the largest man-made explosion, that of the Tsar Bomba, a 50 megaton hydrogen device set off by Russia in 1961. Interesting stuff!

Cantarell was put on production in 1979. Production was 1.16 million barrels per day (1.16 MMBO/D) in 1981, and in 1995 production was still 1 MMBO/D. In 2000, PEMEX installed the world’s largest nitrogen injection project on Cantarell. In this process, nitrogen is stripped from air and injected into the upper parts of the reservoir in order to maintain reservoir pressure, and thus to increase or maintain production. Production increased to 1.6 MMBO/D in 2001, then to 1.9 MMBO/D in 2002, and then to 2.1 MMBO/D in 2003. By the end of 2005, however, production had returned to 1.9 MMBO/D. In January, 2006, a PEMEX press release unveiled their conclusion that Cantarell had peaked, and would decline down to a rate between 1.5 MMBO/D and 0.5 MMBO/D by the end of 2008. The attentive folks at the Wall Street Journal must have sensed the significance of this event, as they first ran this story on 2/9/06, and they published an update in August of 2006. Since this time it appears they have been revisiting the story about every February, with stories on 1/27/07, and most recently on 2/15/08.

As of the end of 2007, Cantarell was said to be producing 1.4 MMBO/D, or down some 600,000 BO/D (or 29 %) from its peak rate in 2004!

Why is this important? Well, Mexico is the 3^rd largest exporter of oil to the United States. Out of about 20 MMBO/D of total consumption (maybe closer to 21 MMBO/D now), we import some 60 %, or around 12 MMBO/D. Mexico makes up some 1.4 MMBO/D of that 12 MMBO/D, or about 10 % of our total imports.

So, if Mexico can’t supply that oil - just get it somewhere else, right? Well it appears that there is little or no “spare” capacity in oil production RATE, worldwide. So, if we need 1.4 MMBO/D from Mexico but they can’t supply it, we either have to get that oil instead of someone else, or do without. The oil pricing or geopolitical implications of this scenario should speak for themselves.

To put the ultimate loss of 1.5 MMBO/D out of Cantarell into perspective, consider the massive tar sands in Canada. Even though these tar sand RESERVES are huge, their production RATE is limited by the QUALITY of these deposits. Namely, one has to shovel, melt or dissolve this tar out of the ground. Today’s total production RATE from these tar sands, after huge efforts and investments of billions of dollars, only totals about 1.1 MMBO/D. And, with billions more invested, by 2015 they believe the rate can be increased by an additional 1.9 MMBO/D. So, if there weren’t any other RATE declines going on around the world, and if demand was not increasing, then the Canadian tar sands might be able to compensate for the loss of Cantarell.

Put another way, if other declines ARE present around the world, and if there are not many provinces where the RATE is significantly increasing (such as with the Canadian tar sands), and if the increases from the tar sands can barely make up for Cantarell declines, then what significant capacity increases are available to make up for the other declines?

So, Cantarell Field is a "poster child" for Peak Oil concerns.

Most recently we wondered, “If Cantarell is down significantly, and other Mexican production is up some, but not enough to compensate, what must be making up the balance?” Namely, if production is down and Mexican domestic consumption is flat or up (as is normal in a developing country), then imports must go up, or exports must go down, in order to compensate. In other words, something’s got to give.

After a little investigation, we were troubled by the conclusions.

First, using a decline profile we derived from the Oil and Gas Journal/El Financero/Sener data, we projected Cantarell to be down to 1.204 MMBO/D by the end of 2008.

Next, we arrived at the projected 2008 oil production by adjusting the 2007 figure of 2.925 MMBO/D (average of 11/2007 & 12/2007, from Reuter’s, 1/21/08, UPDATE 3-Mexico oil output, exports wane in 2007) for the projected 2008 Cantarell decline. (In doing so, we are assuming little if any increase in production from other Mexican fields for 2008. Since 2004, those other fields have only been able to increase production and make up for about 100,000 BO/D of the 600,000 BO/D drop in Cantarell production.)

We are still using the Mexican oil import number (that is, imports of oil into Mexico) of 309,000 BO/D, from the world factbook estimate from 2004. It seems likely that imports of oil into Mexico over that period have dropped, as imports elsewhere typically have done.

Additionally, for 2008 we use the Mexican domestic consumption figure of 2.078 MMBO/D (also from the 2004 world factbook estimate). This seems too conservative, and unlikely. Namely, oil consumption increased in most developing countries over the 2004 – 2008 timeframe.

As to exports, the world factbook shows 2.268 MMBO/D was exported from Mexico in 2004. And the Reuter’s article lists 1.684 MMBO/D as the amount exported on an average basis, in 2007. That’s a drop of 584,000 BO/D, from 2004 though 2007! Where was this oil going, and what are those folks doing to replace about 600,000 BO/D over that interval?

In summary, the projected 2008 Mexican oil balance of -730,000 BO/D doesn’t appear to be too far out of line with past “balances” shown by our rough calculations, but the concerns are:

• One would think that consumption in Mexico would be up, over the last 4 years.
• It is unlikely Mexico is still importing as much oil as in 2004.
• Exports show to be down 26 % since 2004! This is a significant trend!
• The “balance item” is substantial enough in relation to US imports of Mexican oil that it could materially impact that US import figure.

Once again - conservation, alternative energy efforts and domestic exploration all must be significantly increased as it appears that the days are numbered as to getting a significant amount of oil from Mexico. More specific recommendations to follow in the next report.

Footnotes for chart:

1. Prior to 2005, Cantarell produced at a flat rate of 2 MMBO/D for a short period of time. During this time the field was being injected with huge volumes of nitrogen for pressure maintenance.
2. Mexican oil production has been widely quoted as 3.4 MMBO/D in 2004 – 2005, same figure also recently used in a Wall Street Journal (2-15-08) article.
3. The Sener study, referenced in the recent El Financero newspaper article, in turn quoted by Oil and Gas Journal (2-7-08), listed specific declines for Cantarell for 2005, 2006, 2007.
4. Cantarell 2008 ending rate based on the production projection derived based on decline rates quoted in El Financero article.
5. Declines from Cantarell applied to total, initial rate in 2005, so we are assuming the other production in Mexico remains flat.
6. same
7. Imports from world factbook page, assumed flat.
8. Exports from world factbook page, assumed flat until new data for 2007.
9. Consumption from world factbook page, assumed flat. But usually consumption increases over time.
10. Balance should be zero, represents errors in one or more estimates.
11. Imports from Mexico into the US, from EIA page.
12. Same as (11), but average for 11 months in 2007.
13. From Reuter’s (1/21/08), “UPDATE 3 – Mexico oil output, exports wane in 2007”.

US Oil Imports, By Country

Although easily found on the Energy Information Administration's (EIA's) website, here for convenience are the monthly volumes of oil imported into the US from the top 20 suppliers, sorted from greatest to lowest monthly volume. We have also calculated the average daily rate of oil imported in December 2007, as well as each country's percentage of the total US imports during that month.

Note that in December 2007, Mexico fell behind Venezula and became the 4th largest exporter of oil to the US, rather than the 3rd largest. Watch the next post for more details.

Remember, the US imports about 60 % of the liquid hydrocarbons/petroleum that it consumes.

Global Warming: Clovis Man could have used help.

Clovis Man lived about 13,000 years ago, when the sea levels were about 250 feet lower than they are today. Where were the coal plant protesters, the "cap and trade carbon credits" and the Kyoto Treaty when he needed them?

Source: http://en.wikipedia.org/wiki/Image:Post-Glacial_Sea_Level.png

According to the above link, this figure was prepared by Robert A. Rohde from published data, and is incorporated into the Global Warming Art project. It is used here under the GNU Free Documentation License or other permission.

Cantarell Update & Production Projection

On February 7, 2008 the respected oil and gas industry trade magazine Oil and Gas Journal published an update on the production from Mexico's largest oil fields. Ironically, this comes two years and a day from the original Wall Street Journal article (2/6/06) heralding the pending decline of the world's second largest oil field - Cantarell, located in Mexico.

The data for the Oil and Gas Journal article was reportedly sourced from El Financero newspaper. Although the discussion in the article hops back and forth between big Mexican oil fields, the bottom-line is that the article contains many useful "numbers", including some new information on the expected decline characteristics of Cantarell.

Quoting the article, "According to Sener, the 2007 - 16 Crude Oil Market Outlook prepared by the Energy Information System of the Energy Secretariat, in any scenario - high or low - Cantarell's production will average 917,000 - 921,000 b/d during 2006-16, with an average annual decline of 14.1 %."

This is the first I've seen of a quoted, long-term decline rate estimate for Cantarell, and given the initial production rate, one can use that decline rate to derive a production projection. I was encouraged to do so given the quoted "average rate" for an 11 year period (an average rate being non-sensical in this case, and thus a tip off for further study needed). Also, just yesterday I gave one of my sons the classic book, "How to Lie with Statistics" (for defensive purposes only, I might add), so the dangers in "averages" were fresh on my mind.

So, given the quoted 14.1% annual decline rate and using an initial production rate of 1.9 million barrels per day going into 2006, the following production projection was derived:

Cantarell Field - Mexico
Initial Rate (BO/D, beginning of 2006):		1900000	Note 1
Decline Rate:		14.1%	Note 2
Avg Production Rate, 2006 - 2016:		923,026	Note 2
	Oil Flowrate	Oil Flowrate	Oil Production
YEAR	(beginning of year)	(end of year)	(annual)
	(BO/D)	(BO/D)	(BO)
2006	1,900,000	1,632,100	643,440,753
2007	1,632,100	1,401,974	552,715,607
2008	1,401,974	1,204,296	474,782,706
2009	1,204,296	1,034,490	407,838,345
2010	1,034,490	888,627	350,333,138
2011	888,627	763,330	300,936,166
2012	763,330	655,701	258,504,166
2013	655,701	563,247	222,055,079
2014	563,247	483,829	190,745,313
2015	483,829	415,609	163,850,224
2016	415,609	357,008	140,747,342
Note 1: Cantarell said to be producing "about 2 MMBO/D" at EOY
2005; later production said to have declined by 100,000 BO/D
in 2005. Cantarell had been limited for years at rate of
2 MMBO/D (by the production facilities) so a 1.9 MMBO/D
initial rate going into 2006 appears to make sense, and when the
quoted decline rate is applied, the stated "average" is obtained.
Note 2: Decline rate (14.1 %) and avg. of "917 - 921,000 BO/D from
2006 - 2016" obtained from OGJ 2/7/08 article, in turn
quoting Sener & El Financero newspaper.

A couple of observations:

1. The production projection appears valid as it tends to agree (within reason) with the quoted "average" production rate from 2006 - 2016 of 917,000 - 921,000, namely the cumulative production over that time, divided by eleven years and by 365 days per year - yields 923,026 BO/D. As previously mentioned, an "average" is a fairly useless statistic in this case, except for validation purposes.
2. Note that by the end of 2009, the production rate is down to HALF of what it was in the beginning of 2005! This is not abnormal; it is simply the effect of continuous production decline, which is common in all oil fields, eventually.
3. Apparently Cantarell's production will only be about 350,000 barrels per day by the end of 2016, thus it will have dropped 1,650,000 barrels per day from 2005 (an overall 82.5 % decline). This is the kind of decline that has some of us concerned about Peak Oil, and how quickly we need to initiate conservation efforts and develop alternatives, while we continue to wisely and rapidly develop fossil hydrocarbon and nuclear resources.
   

Peak Oil: Why is it so difficult to explain/understand?

After several years of partial success in explaining the physics-based phenomenon sometimes known as “Peak Oil”, this author has come to one conclusion: Peak Oil is difficult to explain, and it is difficult for most people to understand.

Now, some folks make the conscious choice to avoid considering a concept like Peak Oil because it might imply future hardship or a change in lifestyle, and they’d rather dwell on “positive” matters. Others would consider the acceptance of Peak Oil to be defeatist – ie, a surrender of man’s great ingenuity and/or his ability control his own destiny. Make no mistake about it, this author has a high regard for the power of positive thinking, for man’s ingenuity and for his ability to help influence his destiny.

For others, the difficulty with Peak Oil might be a subconscious one. Theories such as “cognitive dissonance” and “consensus trance” have been advanced, and these are likely manifestations of what is sometimes referred to as “crowd behavior”.

But for this exercise, let’s set aside these willful and subconscious roadblocks.

So, why do rational, intelligent, objective people have a hard time with this concept?

Well, a good guess might be that we are barraged - on a daily basis - with volumes of commentaries, data and unintelligible statistics:

• “Oil inventories are down this week.”
• “OPEC is increasing production by 500,000 barrels per day.”
• “There are trillions of barrels of tar sands around the world.”
• “They just found a new, 8 billion barrel field in Brazil.”

Who has the necessary time to sort through it all, and have any chance of understanding? Who has the time to continually determine what's good data, what's bad data, or what's skewed data? Or, what's "big" (important) and what's "little" (not important) in terms of scale? What's the maximum rate that can be produced from a new discovery? How long will it take to drill all the wells and get the infrastructure in place? Then how quickly can the field be depleted?

Without continuous study, it all becomes a fog. And sometimes even WITH continuous study, it is still foggy! As a result, most of us resort to: “Just tell me the answer! And tell me something good!”

The term “Peak Oil” is really a shorthand. It is an abbreviation for “peak production rate” or “maximum worldwide production rate”. Peak Oil is a manifestation of the physics of the depletion of a finite resource. And physics indicates that over the life of a group of all the fields in a country - or in the world - there is a maximum rate that can be achieved, and that rate occurs when roughly half of the RESERVES are depleted.

Currently, the average rate of oil consumption/production is around 85 million barrels per day, and many believe that there is little current "surplus capacity". Some believe that Peak Oil may be 80 – 85 million barrels per day, ie we are “already there”. Others believe that the world may be able to achieve 100 million barrels per day by 2011 or so. And the IEA has forecasts that indicate that it will be possible to produce as much as 120 million barrels per day in 2030!

But what if the world population grows, developing nations develop, and 2.4 billion Chinese and Indians just want to use a little more oil? Well, if the demand is 110 million barrels per day, and the world can only produce 100 million barrels per day, then the price will go up until the demand abates. And if worldwide economic growth is proportional to the rate of growth in energy consumption (as it has been since the beginning of the Industrial Revolution), then if we can’t grow energy consumption, we’ve got a problem with growing the economy!

To make matters worse, after the maximum oil production rate (Peak Oil) is reached, then the rate begins to decline - at least within a few years! (Hirsch's recent work with respect to "plateaus" is not encouraging.) So, post-Peak Oil, the economy not only can't continue to grow, but it must contract – IF economic growth is proportional to growth in energy usage (as it has been in the past).

So far we’ve talked about production RATE. Now let’s cover one other concept: RESERVES. RESERVES are "how much oil that there is left in the ground, which can be gotten out".

Once again, understanding RATE and RESERVES are the keys to understanding Peak Oil:

• RATE (in our context) is the maximum rate of oil production for a group of fields, or for the world.
• RESERVES are how much oil that is in the ground that can be ultimately be produced (for this analysis we won’t even differentiate between oil types, ie tar sands v. light oil, or different categories of reserves, based on risk).

So, many folks believe that the world was endowed with around 2 trillion barrels of conventional, recoverable oil. So the RESERVES for the world were 2 trillion barrels before any oil was produced. Most folks think we have produced about 1 trillion barrels of oil. So, that would leave current RESERVES of 1 trillion barrels.

Now, that’s a lot of oil! Why all the fuss? Well, here’s the punchline, and it has as much to do with the lack of cognition of Peak Oil as anything:

The maximum production RATE for a given field or group of fields in not arbitrary! In other words, it can’t just be anything you want it to be! For instance, if a field has RESERVES of say 10 million barrels, the maximum RATE might be several thousand barrels per day, but it could never be 1 million barrels per day.

Why? OK, here is the key take-away:

Due to the physics of the flow of oil through rock, a field’s (or a country’s, or the world’s) maximum oil production RATE is not arbitrary but is dependent on the RESERVES’:

• SIZE (how big is the field in terms of area and thickness?)
• AGE (is the field newly discovered/produced, or is has it been producing for 40 years?)
• QUALITY (how well does the oil flow through the rock?)

Examples:

• All of the world’s largest oil fields – Ghawar, Cantarell, Burgan and Daquing - have excellent SIZE and excellent QUALITY ... but their AGE is old! Hence, all of these (except possibly Ghawar) are in decline (their RATE is declining each day).
• The Athabasca tar sands, on the other hand, have excellent SIZE, they are essentially “new” in AGE (relatively little compared to the RESERVES has been produced so far), but they have the very poorest QUALITY – the oil is so thick it won’t flow and must be melted with heat, dissolved with solvents or mined.

Most who take the “no Peak Oil” (or no Peak Oil until 2030 and then an “undulating plateau”) side of the debate speak of RESERVES. They don’t often address the difficult topic of trying to explain where the RATE will come from.

Recently this author attended a trade conference concerning “unconventional resources”. “Unconventional resources” is another way of saying “difficult to produce at a high rate, but prevalent in a given area”. For the most part, it’s what we’re left with, especially in the United States. So, a representative from IHS (who owns CERA) gave a talk and presented, among other things, maps showing trillions of barrels – worldwide – of bitumen, tar sands and heavy oil. Afterwards he smugly said, “WELL, I guess there are no supporters of PEAK OIL in this room!”

With respect to oil production RATE (which is what Peak Oil is all about), he may as well have been showing a map of coal resources.

What he didn’t explain was the fact that Canada, despite having huge tar sands RESERVES of 188 billion barrels (or call it a trillion barrels, it really doesn’t matter), is currently producing oil from those tar sands at a RATE of about 1.1 million barrels per day. And this after a Herculean effort and tens of billions of dollars invested!

The Canadian tar sands producers have a roadmap for increasing the production RATE from those huge RESERVES to a total of ... 3 million barrels per day, by 2015! That’s an increase of only another 1.9 million barrels per day, but over 7 years, and with additional tens of billions of dollars injected!

So, that huge amount of RESERVES is limited in RATE because it is of the poorest QUALITY.

To put this in perspective and show why it is important - why Peak Oil is important - take a look at the second largest field in the world, Cantarell, in Mexico. In early 2006, PEMEX announced that Cantarell Field was about to go into decline, for the first time ever. In fact, they projected that this field that produced 2 million barrels per day of Mexico’s total 3.4 million barrels per day (end of 2005) would be down to between 1.5 and 0.5 million barrels per day by the end of 2008! Now, at the end of 2007, it is already down to 1.3 – 1.5 million barrel per day! So, if it finishes 2008 at 800,000 barrels per day, that is a loss of 1.2 million barrels per day, over just 2 years.

Compare this with the Canadian tar sands production increase of only 1.9 million barrels per day over 7 years - after a huge incremental effort. Factor in the depletion going on in most every field around the world – and you have an idea of the problem at hand, and a better understanding of Peak Oil. Among other things, huge RESERVES of poor QUALITY oil are not going to be able to provide the RATE of production necessary to stem the declines from the giant high QUALITY fields that are now old in AGE, much less continue to increase our total RATE.

In summary, Peak Oil is about RATE. And RATE is dependent on the SIZE, AGE and QUALITY of the RESERVES.