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Who decides the oil reserves?

- Basic Energy Informatics -

Cat: ENE
Pub: 2014
#: 2099

Noboru Iwase (岩瀬昇)

Who decides the oil reserves? 石油の埋蔵量は誰が決めるのか?
  1. Introduction:
  2. Why Japan imports so expentive gas?:
  3. Developping the Shale Revolution:
  4. Mysteries of reserves:
  5. From strategic materials to commodities:
  6. Energy problem once again:
  7. Japanese energy policy:
  1. 序文:
  2. 日本の輸入ガスはなぜ高いか?:
  3. 進化するシェール革命:
  4. 埋蔵量のナゾ:
  5. 戦略物資から商品へ:
  6. もう一度エネルギー問題を考える:
  7. 日本のエネルギー政策:
; 1859 Drake; Future market; IPE; Kerogen; NYMEX; OPEC; Pipeline network; Point forward; R/P ratio; Seven sisters; Take or pay; Third Party Access; Unit conversion; ; ; ;

>Top 0. Introduction:

  • Global energy situation is in turmoil:
    • Russian pipeline via Ukraine, Proven but not yet developed oil reserves in Iraq, US LNG export, Oil & gas development in Siberia, and Japanese energy demand, etc.

0. 序:

  • エネルギーが揺れている。

>Top 1. Why Japan imports so expensive gas?

  • In 2013, Japanese trade deficit surged to about ¥11.5T; which had been surplus until 2010, but became in deficit ¥2.6T in 2011, and deficit ¥6.9T in 2012.
    • In 2011/3/11 this deficit is caused by disaster of the Fukushima nuclear plants, consequently stopped all nuclear plants in Japan which contributed 30% of power generation in Japan.
    • Electric utilities were forced to purchase mostly spot cargo of LNG.
  • Japan usually purchase LNG by long-term contract of 20 years.
    • Spot contract is to be agreed reflected then supply-demand situation.
    • LNG is liquefied at -162ºC, with its volume becomes 1/600 of gaseous gas.
  • Feasibility of LNG project: (10M ton project per annum; total $7-10B)
    • 2☓LNG plants (production capacity each 5M ton)
    • 7☓LNG tankers (140K ton)
    • in addition; LNG receiving tank, LGN vaporizer are needed.
    • the above is Asian LNG base; NE LNG base need more tankers.
    • In 2013, Japan imports LNG from Australia (18.06M ton), Qatar (16.13M ton), and Malaysia (15.02M ton)
    • >Top Finance of $10B needs banking syndicate, who checks F/S in detail from LNG reserves, producer's experience, long-term consumer based on 'take or pay' contract with destination contract.
  • Statistics of LNG (2013 worldwide):
    • Production of LNG (2013 worldwide): 3,391B sq.m (=3,060M ton oil)
      • 30% traded: 1,036B sq.m (=935M ton oil)
        • 69% via pipeline:
        • 31% LNG: 321B sq.m
      • 70% consumed domestically: 2,355B sq.m (=2,125M ton oil)
    • Japan imports LNG (2013): 119B sq.m (=88M ton oil); 37% of traded LNG
    • World natural gas producing reason: 1) North America, 2) Europe-Russia-N.Africa, and 3) Asia-Oceania
    • Gas price is determined at NYMEX (NY Mercantile Exchange) at the Hery Hub, Lousiana pipeline terminal.
      • Japanese import price of LNG is linked to that of oil.
      • Japan imports very expensive LNG (>Fig.)
      • US LNG cost is around $4-5/M Btu gas =$24-30/bbl oil
        (Gas price ☓6 =equivalent Btu oil)
    • Unit Conversion of Oil, Natural gas, and LNG: (>Fig.)
  • LNG projects inn US participated by Japan:
    • Project LNG
      (M ton/y)
      Freeport, Texas 13.2M ton 2.2M ton Chubu Electric, Osaka Gas
      Cove Point, Maryland 7.8M ton 2.3M ton Sumisho, Tokyo Gas
      Camelon, Louisiana 12.0M ton 4.0M ton MBK, MSK
      Freeport, Texas 13.2M ton 2.2M ton Toshiba
  • LNG Spot Cargo:
    • Not long-term contract, without destination clause (resalable).
  • Marginal Supply Capability (7-8%)=(Peak supply capacity - Estimated max power consumption) / (Estimated max power consumption)
    • If the marginal supply capacity became less than 3%, the planned power outrage would be done.

2. 日本の輸入ガスがなぜ高いか?:

P. Generation FY2010 % FY2013 %
Coal 23.0 30.3
Oil 7.5 14.9
Natural Gas 29.3 43.2
Nuclear 29.6 1.0
Hydro 8.5 8.5
Renewable 1.1 2.2
  • Trend of Natural Gas Price:



>Top 2. Developing the Shale Revolution

  • Discovery of oil reserves in US:
    • In 1859 in Pennsylvania, then in 1921 in Los Angeles.
  • >Top Pipeline network:
    • ExxonMobil is developing Sahalin-I project, hoping to install pipeline between Hokkaido.
    • But Japanese electric utilities opposed this plan.
    • In US 500K km pipeline network is installed, but in Japan only 3K (from Niigata to Sendai and to Tokyo)
      • In US, any third party can utilized the pipeline (the Third Party Access)
    • Japanese electric and gas utility companies have 28 LNG depots near their power plants using gas imported by LNG vessels.
  • Engineer resources for oil development:
    • In US (9.6M sq.km, 25times of Japan; 316M population, 2.5 times of Japan), with long history of oil development and geologic data, have affluent water needed for digging; US universities have many specialists courses for geology, mining technology.
    • Subcontractors: service companies (legal and technical consulting, leasing and operation of mining machines; who don't require ownership of the reserves unlike major oil companies.
      • Major oil field service companies: Hulliburton, Schlumberger, Baker Oil Tool
  • Oil Production in US (>Fig.)
    • Since 1948, US became oil importing country.
    • Since 1970s Oil shock, excess tax for oil profit was induced, subsiding to promote shales oil & gas.
    • new hydraulic method; using water plus proppant
      • length of departure (horizontal drilling): 12,376 m in Sakhlin-1 project drilled by ExxonMobil.
      • In Japan, the longest length of departure is 3,881 m in Iwaki gas field.
    • Production cost of shale oil is more expensive than shale gas, due to high viscosity.
      • Shale oil: $40-70/bbl
    • Micro seismic method: requiring craftsmanship
      • Analyzing micro seismic waves and estimate structure of the reserves.
  • Technically minable resources (not economical reserves): as of 2013
    • Shale Oil resources (B bbl) Shale Gas resources (T sq.ft)
      1 Russia 75 1 China 1,115
      2 US 58 2 Argentine 802
      3 China 32 3 Algeria 707
      4 Argentine 27 4 US 665
      5 Libya 26 5 Canada 573
        World 1,679   World 7,299
    • Russian gas: replacing depleting oil production in Western Siberia, the technology to develop gas reserves will be problem.
    • Chinese gas: Major gas reserves are located in western part of China (Sìchuān shěng, Shǎnxī shěng, and Xīngjiāng Uighur), and are located very deep (4000-6000m underground), while US gas reserves 1000-3000m, Russian 3000m underground.
      • China has 50,000m length of pipeline infrastructure, which are owned by PetroChina, and are not usable for the third party; also water supply needed for drilling is not enough in the region.
    • Argentine gas: YPF (Yaciminetos Petroliferos Fiscales) nationalized company from an affiliate of Spanish oil & gas company Repsol.
      • US Chevron got 50% of YPF's mining right, and is jointly promoting gas development; which is located in the oil field having basic infrastructure.
    • EU gas: EU's shale development is just started, which is located in highly populated areas, and has environmental difficulty to develop by hydraulic fracturing method.

2. 進化するシェール革命:

  • hydraulic fracturing: 水圧破砕法
  • proppant: プロパント
  • fracting liquid: フラッキング水
  • horizontal drilling: 水平掘削
  • >Top Unit Conversion of Oil, Natural gas, & LNG:
Oil Natural Gas LNG
1kL=6.29bbl 1cf=1000 Btu  
1 ton=7.4bbl 1B sq.m
=600K ton LNG
1 ton =8.8bbl oil
=1400sq.m gas
=53M Btu
1 bbl=600cf gas 1M cf/d
=700K ton/y LNG
  • Historic Oil Production:
1000bbl/d US World Ratio %
1859 0.006 0.016 37.5
1880 72.0 82.2 87.6
1920 1,214 1,887 64.3
1945 4,695 7,109 66.0
1973 10,946 58,460 18.7
1993 8,583 65,978 13.0
2013 10,003 86,808 11.5

>Top 3. Mysteries of reserves:

  • Resources and Reserves:
    • Resources are technically (not necessarily economically) minable resources, including unidentified resource, estimated resource, and in-place resource.
    • while Reserves are technically and economically minable reserves, including proved reserve (1P; 90%>), probable reserve (2P; 50%>), and possible reserve (3P; 10%>)
      • In narrow meaning of reserves means proved reserve.
    • Public-listed oil companies in US are obliged to report its proves reserves to SEC (Security and Exchange Commission).
      • Royal Dutch Shell which reported its proved reserves of 19.5B bbl in 2013, but was downward revised by SEC to 4.5B bbl and its top three executives were resigned. (Cf: Japanese annual consumption is about 1.7B bbl in 2013)
      • Oil sand and heavy oil reserves were initially not counted as a reserves, but which are now counted as a reserve.
  • Minable Years:
    • R/P ratio (Reserve/Production)
      • Due to raise of prices and technological development R/P ratio upward.
      • Also improve of recovery ratio contribute to increase R/P ratio.
        • If the recovery ratio improved from 20% to 40%, the reserves will increase double.
      • There is no universal definition of reserves; in US there are SEC standard and SPE (Society of Petroleum Engineers) standard.
    • Origin of oil & gas:
      • Oil and gas are made from Kerogen;
        which is solid and insoluble organic matter in sedimentary rocks.
        • Upon heating kerogen converts to liquid and gaseous hydrocarbons.
      • Essential elements: 1) source rock, 2) shift, 3) reservoir rock, 4) trap, and 5) cap rock
        • oil reserves are calculated the multiplication of possibilities of the above 5 elements.
          Eg.: 90%☓80%☓80%☓70%☓30% =12%
      • Oil drilling cost: $5M to 100M per drilling (all or nothing)
    • Severn Sisters:
      • In 1973, owned 64% of world oil reserve, but in 1873, owned 35%.
      • Nationalization: NOC (National Oil Company) vs. IOC (International Oil Company)
      • NOC owns 65% of world oil & gas reserves, 49% of those production;
        while IOC owns 7% of world oil & gas reserves, 16% of those productions.
      • IOC now focuses to develop deep ocean, arctic ocean, pre-salt (under rock salt), and shale formation using new digging technology.
    • Development Import of mineral resources:
      • More than decade business: Survey, Mining right negotiation, Development negotiation, J/V establishment, procurement & development, Logistics; Withdrawal strategy
      • Oil; commodity in peace time, but changes into strategy material in war time.

3. 埋蔵量のナゾ:

  • Minable years: 可採年数
  • kerogen: complex fossilized organic material
  • diagenesis: physical & chemical changes occurring during the conversion of sediment to sedimentary rock. 続成作用
  • Generation of oil and gas:

  • Types of Kerogen:

>Top 4. From strategic materials to commodities:

  • Strategic materials:
    • Oil had been considered as a strategic material after the Oil Shock, particularly the supply volume had been controlled by OPEC.
    • The future market has started from latter half of 1980s; oil became a commodity no less than wheat or sugar, or other metal resources.
    • Oil is a commodity in peace time, but it changes to a strategic material in war time.
  • Oil became a strategic material:
    • 1903; the first flight by Wright brothers.
    • In 1914, WWI provoked airplanes as a military force, changing drastically fighting scenes.
      • French prime minister Georges Clemenceau said, 'A drop of oil is a drop of blood.'
    • German general Lommel was defeated at the battle in north Africa due to lack of oil.
    • Japan was defeated in the continual batters in WWII due to lack of oil.
  • History of oil development & usage:
    • >Top In 1859, Edwin Drake firstly succeeded to dig oil in Pennsylvania.
    • In 1911, UK Churchill, then UK navy minister, changed fuel for warship from coal to oil, drastically decreased supply staff.
    • in 1940, US shares 63% of world oil production, and won WWII by oil.
    • In 1950s-70s, Seven Sisters {Exxon (Standard Oil NJ), Mobil (Standard Oil NY), Chevron (Standard Oil Cal.), Taxaco, Gulf, BP (Anglo Persia), Royal Dutch Shell}
      • Seven Sisters shares 65% of world oil reserves, 55% of oil production, and 57% of refined oil.; except US and USSR, whose shares 92% of world oil reserves, 88% of oil production, and 77% of refined oil.
  • Conflict of oil producing countries and Seven Sisters:
    • Oil producing countries and Seven Sisters agreed to halve the profit of oil; but the latter had the risk of price fluctuations.
      • Discovery of new oil deposits in ME and increase of oil supply from USSR affected to decline the price of oil declined below the declared price.
      • Seven Sisters tried to pulling down the declared price, which oil producing countries resisted.
  • >Top In 1960/9, OPEC was organized by Saudi Arabia, Kuwait, Iraq, Iran, and Venezuela.
    • In 1973/10, Arab-Israel War IV;
    • In 1973: the Oil Shock-I; oil price jumped from $3.01/bbl to $5.12/bbl, then to $11.65/bbl (4 times in 3 months)
    • In 1979: the Oil Shock-II; oil price became around $30/bbl
      • Reverse Oil Shock: due to failure of production adjustment, oil price became less than $10/bbl.
      • Price control shifted from OPEC to the market.
  • >Top Oil Future Market:
      • Oil price had been decided by 1) Seven Sisters, then 2) OPEC, now has been by 3) market
        • There is no 'what it should be price' of oil.
      • 1983/5: NYMEX (NY Mercantile Exchange) oil transaction based on WTI (West Texas Intermediate) oil; unit 1000 bbl, $ base; trade volume in 2010; 463M bbl/d
      • 1988: IPE (International Petroleum Exchange; now ICE Futures, Intercontinental) in London, unit 1000 bbl, $ base; trade volume 274M bbl/d
      • 2001, TCE (Tokyo Commodity Exchange for Industry); unit KL (=315 bbl), ¥ base; trade volume 0.81M bbl/d
      • 2007: DME (Dubai Mercantile Exchange); unit 1000 bbl, $ base; trade volume 0.85M bbl/d
    • Oil Broker of future (2-3months) transactions: online brokerage determining 1) delivery month & price, 2) quantity, 3) quality, 4) delivery place, 5) payment condition, etc.
  • OPEC, Saudi Arabia:
    • In 1976, Aramco (Exxon, Mobil, Texaco, Chevron) assigned its share to Saudi Arabia.
    • In 1989, Saudi Aramco 100% owned.
    • In 1974, OECD established IEA (International Energy Agency) as a sub-organization to respond in emergent cases. (stockpile and emergent supply of oil)
  • Time lag in oil development:
    • It usually takes 5-10 years from discovery to development of oil & gas.
    • If the market is observed as over supply, not only operating oil production could to be easily stopped but also development projects could not be easily stopped.
    • >Top 'Point Forward' thinking: neglect the sunk cost.
      • <Case>:
      • $5B had spent to acquire the mining right and F/S estimated the total investment of $10B, the total profit will be $30B.
      • During the process, further $10B (totally $15B) of investment will be needed, and the total profit will be downward revised to $12B. What should you do?
        • The revised F/R will be $12B return against $15B investment ($5B is already sunk cost), compared to the original $30B return against $10B investment.
        • Point Forward thinking:
          $12 return against $10B more investment looks better than simple $5B sunk cost.
  • Oil Trading:
    • Precondition: Monthly production 20K bbl/d =600K bbl/m; 1cargo=600K bbl
      • Selling 21 cargos, and buying back 20 cargos in a certain month.
      • Liquidity and a certain kind of incentives (saving tax, settlement of differences) are essential in the future market.
  • Japanese oil industry:
    • is weak in upper stream, concentration downstream (refinery, logistics, and sales)
    • in 1961, JPDA (Japan Petroleum Development Association) was established by four companies (Arabian Oil, Teikoku Oil, JAPEX, and NPDO)
    • In 1967, Japan Petroleum Development Corp. (now JOGMEC) was established.
  • Japanese Primary Energy share:
  • Share % Oil Gas Coal Nuclear Hydro Renewable
    2010 40.2 17.0 24.7 13.2 3.9 1.0
    2014 44.1 22.2 27.1 0.7 3.9 2.0
    World av. 32.9 23.7 30.1 4.4 6.7 2.2
    • Gas: world production 3.39T sq.m (=3.06B ton oil equivalent);
      • about 30% of which is exported: 70% transported by pipeline, 30% by LGN
    • Gas is not a product easily and quickly transported material:
      • IEA enforces member countries to have 90 days stockpile, but no instruction about Gas stockpile.
    • Oil is considered as a strategic resource:
      • 45% of crude oil or 64% of refined oil is transported to foreign countries;
      • and 43% of oil production or 56% of oil reserves is located in politically unstable ME and Africa.

4. 戦略物質から商品へ:

  • 1969; Import of LNG started:
  • melting point: -162ºC; volume 1/600 of its liquid; 87M ton.
  • if it evapolate gas above -113ºC, the density will be lighter than air, and spread out.

>Top 5. Energy problem once again:

5. もう一度エネルギー問題を考える:

>Top 6. Japanese Energy Policy:

6. 日本のエネルギー政策:

  • The Japanese Energy Policy: followings are the urgent issues of destructions.
    • Part with dependence on Nuclear power plants.
    • Active promotion of sustainable energy and its supporting grid.
    • Proliferation of EV and charging points infrastructure.
    • Energy saving technologies and education for smart society.
    • ...
  • 日本のエネルギー政策: 以下が緊急課題
    • 原発依存からの脱却
    • 再生可能エネルギーの推進とグリッド改善
    • EVと充電インフラの普及
    • 省電技術とスマート社会教育
    • ...

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