It’s all about the oil

by Dave Schuler on August 7, 2006

The news on oil production is not particularly good. Here’s a cheery item:

ANCHORAGE, Alaska — In a sudden blow to the nation’s oil supply, half the production on Alaska’s North Slope was being shut down Sunday after BP Exploration Alaska, Inc. discovered severe corrosion in a Prudhoe Bay oil transit line.

BP officials said they didn’t know how long the Prudhoe Bay field would be off line. “I don’t even know how long it’s going to take to shut it down,” said Tom Williams, BP’s senior tax and royalty counsel.

Once the field is shut down, in a process expected to take days, BP said oil production will be reduced by 400,000 barrels a day. That’s close to 8 percent of U.S. oil production as of May 2006 or about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.

The shutdown comes at an already worrisome time for the oil industry, with supply concerns stemming both from the hurricane season and instability in the Middle East.

Hat tip: Outside the Beltway

Mexico is having problems, too:

MEXICO CITY — Output at Mexico’s most important oil field has fallen steeply this year, raising fears that wells there that generate 60% of the country’s petroleum are in the throes of a major decline.

Production at Cantarell, the world’s second-largest oil complex, in the shallow gulf waters off the shore of Mexico’s southern Campeche state, averaged just over 1.8 million barrels a day in May, according to the most recent government figures. That’s a 7% drop from the first of the year and the lowest monthly output since July 2005, when Hurricane Emily forced the evacuation of thousands of oil workers from the region.

Though analysts have long forecast the withering of this mature field, a rapid demise would pose serious challenges for the world’s No. 5 oil producer. The oil field has supplied the bulk of Mexico’s oil riches for the last quarter of a century, and petroleum revenue funds more than a third of federal spending.

“Cantarell is going to fall a lot, and quickly,” said independent consultant Guillermo Cruz Dominguez Vargas, a former executive with Mexico’s state-owned oil monopoly, Petroleos Mexicanos, known as Pemex. “I can’t imagine the strain on this society if there is nothing to replace it.”

I asked oil economist James Hamilton of Econbrowser what the straight skinny on this was. Here’s his reply:

Dave, I don’t have any first-hand information, and have just read the same things that you probably have. There doesn’t seem to be much question that Cantarell is in rapid decline, though so far Mexico seems to have succeeded in making up for the losses with other production. Mexico’s May production (and Jan-May 2006 average) of 3.3-3.4 mbd is still right where it’s been for the last two years.Another item on my “to-do” list is to try to look into this some more, and if I find anything useful, I’ll try to include it in a subsequent post.
So, we’ve got instability in the Middle East and the oil-producing areas of Africa, the damage from hurricanes Katrina and Rita left over from last year that took Gulf oil rigs out of production, Mexico’s production likely to decline, and Alaska’s production slowed and likely to decline.Fasten your seatbelts, everybody. We’re in for a bumpy ride.

UPDATE

James Hamilton has weighed in on the Alaska situation:

Will the lost Alaskan crude be made up elsewhere? I wouldn’t look for it to come from Saudi Arabia, where the most recent data continue to confirm further drops in production. A survey by Bloomberg of oil producers anticipates another 70,000 barrel/day cut in Saudi production to 9.15 mbd for July, while Petrologistics said it might be as low as 9 mbd. Such numbers imply that the Saudis are currently producing 400,000 to 500,000 fewer barrels/day than what they did last year.

There’s an extensive discussion of the situation going on over at The Oil Drum.

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