It is very difficult to extract the crude, aging existing facilities lead to higher production costs .
One image sums up the situation: the price of a barrel of crude in early April 2011, illustrating the upward trend established since July 2010.
Forecasts for 2011 expect prices above $ 100 a barrel for the second half of 2011 (Goldman Sachs 14/12/2010)
Besides the unstable geopolitical situation in the Middle East, rising demand from Japan (because of Fukushima), several combined factors explain the new surge in crude
-A demand in continued growth
The demand has regained its 2008 pre-crisis levels and may exceed them in 2011 (88.1 million bbl / day based Wood Mackenzie Ltd.). This demand is strongly pushed by the emerging countries like China and India
Production and consumption - China & India
-Oil field discoveries down
The new discoveries are in sharp decline for several years and the situation is not reversed despite the enormous technological efforts.
The decline in discoveries since 1964
Production costs up
Exploitation of resources is becoming more expensive and requires investment of billion dollars per farm, two examples: the deep offshore and new production facilities in Saudi Arabia
1 - Deep Offshore
The consequences of the explosion of the Deepwater Horizon oil platform in the Gulf of Mexico in April 2010 are involving the implementation of security measures that affect the whole industry. The U.S. commission charged to investigate the causes of the disaster asked on January 11th, 2011 for the creation of an independent agency responsible for the safety of offshore operations.
"The immediate causes of the explosion can be found in a series of identifiable errors from BP, Halliburton and Transocean, which reveals such shortcomings in risk management that there is much doubt about the safety culture of the entire industry. "
File of 380 pages for download here:
The Gulf Oil Disaster and the Future of Offshore Drilling - Report to the President - National Commission On The BP Deepwater Horizon
2 - The new production facilities in Saudi Arabia
Before when it was light and abundant to produce, oil derricks or pumps like the ones on the images below were needed:
Now, including Saudi Arabia, the world's largest producer, which holds the largest reserves. New production units, such as those located on Khurais’s oil field have to inject hundreds of thousands of cubic meters of water under pressure per day, this technique is required by the tank structure.
So, a pipeline brings water from the sea, 160 km into the desert to extract the oil.
Here is how an oil field looks like today: Khurais Saudi Arabia - put into production in 2009 - 1.2 million of bbl per day.
This is a Pharaonic site on km2, whose scale is comparable with the excavation in the oil sands of Alberta Canada. To produce this field must be under constant pressure and generates high production costs, implying a much higher selling price than in the past.
Aging facilities and age structure of staff
Another factor, rarely explained, also affects the investment needed to continue to produce oil: the aging of existing facilities and the age structure of personnel currently involved in the industry.
Matthew R. Simmons, who died on August 8th, 2010 was president and chief executive of one of the most important oil investment bank's in the world, Simmons & Company International.
During its last conference he raised a crucial point: the system of production and oil transport is sick. It is affected by aging employees and a decline of refining and transportation touched by rust.
Both factors make necessary investments hardly conceivable because it is essential, according to Matthew Simmons, gradually replacing 80% of existing facilities: « Replacing even 80% of global delivery system of oil will be more costly and complex than fighting WWII or Marshall Plan.Total cost might exceed $100 trillion. »
If we consider all this information pointing to an upward barrel of crude oil, price projection for the next two years, leads us to new heights of energy prices.
The trend is clear and supported as shown in the chart below.
Photos © Saudi-Aramco