LONDON, January 10 /PRNewswire/ --
- Modest Russian Production Growth to be Gobbled up by Domestic Demand
CIBC (CM: TSX; NYSE) - Consumers should brace for a 50 per cent jump in
oil prices in the near future as global oil supply will increasingly have
trouble keeping pace with demand, forecasts a new energy report from CIBC
World Markets.
The report predicts that surging demand in developing economies combined
with accelerated depletion of existing supply and widespread delays in
getting new oil fields up and running will see the global supply of oil fall
as much as eight million barrels a day below International Energy Agency
estimates by 2012.
"Those projections ignore two fundamental forces that have, in recent
years, brought global production to a virtual standstill," says Jeff Rubin,
Chief Strategist and Chief Economist at CIBC World Markets. "The first is
depletion. You have to run faster to stand still. Depletion from existing
fields has accelerated to over four per cent, a rate that currently cuts
nearly four million barrels per day out of each year's production.
"The second fundamental force blowing up supply forecasts is the huge
project delays and massive cost overruns associated with many of the world's
largest new oil mega-projects. From Kazakhstan to Nigeria's Delta region,
protracted delays in some of the world's largest energy mega-projects will
have huge impacts on actual supply growth over the next five years."
As part of its research, CIBC World Markets reviewed nearly 200 new oil
projects slated to start oil production over the next five years and found
that scheduled production timelines are far too optimistic, with project
delays the norm, not the exception, among the group.
It found that heavy reliance on increasingly high cost and technically
challenging fields like the Kashagan project in Kazakhstan, Russia's Sakhalin
II and Canadian and Venezuelan oil sands have left world supply growth
vulnerable to a seemingly never-ending series of project delays.
Mr. Rubin notes that delays in the latter two countries will shave over
700,000 barrels a day from earlier 2012 production forecasts. In some
nations, soaring development costs have resulted in complex and often tense
re- negotiations of royalty agreements with host countries. Some have even
led to either a temporary or indefinite suspension of operating licenses.
"Of course, stagnant conventional world oil production underlies the
recent problems associated with harvesting unconventional supply. Virtually
all of the increases in global oil production have occurred from deepwater
fields or oil sands, with conventional production seemingly stuck at 2005
levels of 67 million barrels per day."
These project delays are also happening at a time of accelerated global
depletion in existing fields. The rate has climbed to over four per cent,
which cuts nearly four million barrels per day out of each year's production.
The recent increases are in part, related to the growing importance of
offshore, and, in particular, deepwater fields, which have depletion rates
twice that of conventional fields.
"Cliff-like depletion rates have already been in evidence in the North
Sea and now the huge Cantarell field in Mexico," adds Mr. Rubin. "Since 2000,
offshore fields have been the single-largest source of new supply growth. As
their weight in total production increases, future depletion rates will
continue to rise. Even holding the current depletion rate constant over the
next five years, we must produce nearly 20 million barrels per day of new oil
just to offset what will be lost through depletion during this period."
Mr. Rubin notes that these major project delays and increasingly rapid
depletion will result in a supply increase of only about three million
barrels a day by 2012 - far below the 10 million barrels projected by the
International Energy Agency. With oil demand soaring in places like China,
India, Russia and in the world's largest oil-producing countries themselves,
a widening demand-supply gap will push crude oil prices to as high as US$150
a barrel by 2012.
"Soaring rates of car ownership in countries like Russia and China have
boosted fuel demand in both countries," says Mr. Rubin. "For example,
gasoline, a key driver of rising oil use, is growing at over six per cent in
both countries. But an even more important factor has been massive price
subsidization in OPEC countries which has spurred extraordinary near-double-
digit growth in oil demand.
"Not only is there virtually no price elasticity between OPEC's own oil
consumption and world oil prices but paradoxically, domestic consumption of
oil in those countries may actually increase with rising world oil prices
because higher crude prices boost incomes, which in turn, further boosts
demand for massively subsidized domestic gasoline."
The result of this unchecked soaring demand in most oil-producing nations
means they will not be able to add any additional exports to meet the surging
demand in developing countries. While Russian production is expected to grow
very modestly over the next five years, all of those production gains will be
gobbled up by domestic demand growth. Since crude demand in countries like
China and India is far more income-elastic than price-elastic, these
countries are likely to outbid OECD markets for increasingly scarce global
supply.
The OECD, the largest global oil market today, is much more price
sensitive and oil consumption, which has already fallen over the last two
years, will decline by nearly 10 per cent or almost four million barrels per
day over the next five years in response to steadily rising prices.
The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/occtrept65pdf.
CIBC World Markets is the wholesale and corporate banking arm of CIBC,
providing a range of integrated credit and capital markets products,
investment banking, and merchant banking to clients in key financial markets
in North America and around the world. We provide innovative capital
solutions and advisory expertise across a wide range of industries as well as
top-ranked research for our corporate, government and institutional clients.
CIBC World Markets; CIBC; Canadian Imperial Bank of Commerce
