Swing Producer Research Articles

On the role of demand and strategic uncertainty in capacity investment and disinvestment dynamics

Even mature industries seldom settle down into a long-run steady state. Fluctuations in demand disrupt the status quo and call for firms to adjust their capacities on an ongoing basis. We construct a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment decisions. In addition to uncertainty about the evolution of demand, a firm faces strategic uncertainty concerning the decisions of its rivals. We numerically solve the model for its Markov-perfect equilibria. For one set of parameter values, three equilibria exist, and while all of them have simple, intuitive structures, they exhibit widely varying patterns of response to demand shocks. At one extreme, one firm dominates the industry almost as a monopolist and changes its capacity to accommodate demand. At the other extreme, the larger firm keeps its capacity nearly constant while the smaller firm acts as the swing producer.

Comments: Iraq's Potential

Editor's column Iraq may eventually alter the global production landscape, but the initial steps taken last year and in early 2010 to revive its oil sector have been cautious. Questions about infrastructure, security, export ability, and contract terms continue to hold back any change of a quick recovery. Iraq contains the world’s third-largest proven reserves of conventional oil and eventually could rival Saudi Arabia as OPEC’s top producer, but the oil industry is so far skeptical of the country’s plans to boost production from the current 2.5 million BOPD to 6–7 million BOPD in 6 years. Some analysts say that number could be higher. James Burkhard, director of oil research for energy consultants IHS-CERA, believes that Iraq’s untapped oil fields could add almost 10 million BOPD within 10 years, changing the dynamics of OPEC. That may be too much to ask a country hampered by years of war, sanctions, post-war violence, and messy politics. But even if it met half its goal, the impact would be huge. Saudi Arabia, long OPEC’s swing producer with the ability to affect oil prices by raising or curtailing production, currently produces 8 million BOPD but has a capacity of at least 12 million BOPD. Iraq has held two international bid rounds to try to attract investor interest in reviving its E&P with mixed results, although the globe’s largest operators appear to be key to fixing and reviving the energy landscape there. In January, Iraq awarded the last of 10 international licenses to develop fields during the two rounds, just half of the 21 fields on offer. Fifteen firms won the rights to develop fields under 20-year contracts, the first outside company access to Iraq since foreign firms were banned in the 1970s. The country apparently remains one of the few regions in the world that has vast reserves that have not been well-exploited. There are already some optimistic signs. One of the country’s largest fields, Rumaila, is scheduled to begin producing an additional 100,000 BOPD in July. BP and CNPC won the rights to that field in the first auction last June. The field is estimated to contain 15% of Iraq’s total reserves. Among the January winners were Shell and Petronas, which won the rights to develop Majnoon, one of the largest unexploited fields; CNPC, Petronas, and Total, which won the rights to the Halfaya field; and Lukoil and Statoil, which were the high bidders on perhaps the most valued property, West Qurna-2. Other winners were Eni for the Zubair field and ExxonMobil and Shell for West Qurna-1. Elections scheduled for this month could be critical for Iraq’s future oil development. Nonviolent elections that lead to a more stable political and business environment will go a long way to attracting the type of investment needed to develop its vast potential. Of particular need is an oil law that will protect the rights of foreign oil investors.

The Gulf oil and gas sector: potential and constraints

predominance of oil as the world's main source of energy, coupled with the recent phenomenal growth of the natural gas industry spurred by environmental considerations, ensure that the Gulf's energy sector will continue to play a pivotal role in the global market. With world demand projected to reach unprecedented levels, led by Asian economic powers such as China and India, oil production peaking in key areas and geopolitical crises fuelling greater uncertainty, issues of global supply security have come to the fore. All these factors have led to a steep rise in petroleum prices, filling the coffers of the oil producers but threatening to paralyse the global economy and imposing a heavy burden on the ultimate consumers. In this energy scenario, where does the Gulf oil and gas sector stand? How can it meet its long-term strategic requirements while satisfying the energy needs of the global economy? This is the main focus of The Gulf Oil and Gas Sector in which leading energy experts examine both the possibilities and the problems of the Gulf energy sector in the wider global context. Important energy issues covered include the future prospects of OPEC, the impact of world oil prices on global growth, the strategic objectives of the Gulf energy sector, the influence of markets and technology on regional reserves, the emerging partnerships between national and international oil companies, the imperatives for attracting Gulf energy investment and new developments in gas technology and regional gas trade. Regional case studies outline possible scenarios for the future of Iraqi oil, highlight policy options for Saudi Arabia as a swing producer and focus on the Norwegian experience of economic diversification.

New Oil in an Old Reservoir: Prize From a Comprehensive, Multidisciplinary Reservoir-Management Approach

This article, written by Technology Editor Dennis Denney, contains highlights of paper SPE 93547, "New Oil in an Old Reservoir: Prize From a Comprehensive, Multidisciplinary Reservoir-Management Approach in Sabiriyah Lower Burgan Reservoir in North Kuwait," by M.F. Al-Ajmi, H.B. Chetri, SPE, A.N. Khan, SPE, and E. Al-Anzi, Kuwait Oil Co., prepared for the 2005 SPE Middle East Oil and Gas Show and Conference, Manama, Bahrain, 12-15 March. Before 2001, the overall potential and viability of long-term development of the lower Burgan sandstone (LBS) reservoir in the Sabiriyah field in northern Kuwait were uncertain. Earlier evaluations often compromised production and potential by focusing on other waterflooded reservoirs and treating this one as a swing producer. It lacked a proper reservoir definition before commitment as a swing producer with no infill opportunities. It is important to develop an accurate reservoir description, a realistic and flexible development plan, and comprehensive management through the joint efforts of the geologists and engineers. Introduction Discovered in 1957, first commercial oil production from the multilayered LBS reservoir was in 1964. With active bottom- and edgewater drive, the well spacing varied, with close well spacing in the crestal area and wider spacing in the southern area. This reservoir is the largest contributor, yielding 40% of the Sabiriyah daily oil production. Lower Burgan oil is the highest-API-gravity crude in the field, helping to meet the crude-quality export requirement for the only gathering center in the field. A significant amount of LBS production has come from the lower part of the reservoir, where the pattern of water influx is very well understood. Most of the production and most of the remaining reserves are in the upper part of the reservoir, where the pressure support and water influx are relatively well understood. Reservoir Background The Sabiriyah field, on the crest of the Kuwait arch in northern Kuwait, is an elongated, north-trending, faulted anticline. The fault throws vary from less than 30 to more than 100 ft. Integration of recently acquired seismic data with well data shows that faults dip 45 to 60°, but the sealing/non-sealing nature of faults is not yet understood. Some faults, particularly in the central and northern part of the field, appear to be nonsealing, but the fluid-flow effects are not known. At the lower Burgan horizon, the Sabiriyah structure has a closure of approximately 350 ft. On the basis of sedimentalogical and pressure studies, the reservoir was subdivided into the massive (M) sand, which produces through vertical aquifer support, and the layered (L) sand, which experiences largely lateral edgewater sweep. The M member, which forms the lower unit of the reservoir, is high-quality sand, and it has produced most of its reserves. The overlying L member has sand quality that ranges from very good to relatively poor, and it contains most of the remaining producible reserves. A significant fieldwide pressure barrier, called the SID4 layer, separates the M and L layers. The lower Burgan reservoir is divided into 13 layers/flow units on the basis of reservoir pressure and flow behavior.

The Myth of Sustainable Development: Personal Reflections on Energy, its Relation to Neoclassical Economics, and Stanley Jevons

The Myth of Sustainable Development: Personal Reflections on Energy, its Relation to Neoclassical Economics, and Stanley Jevons

Gas reserves and reservoir trends in The Netherlands

The Netherlands is one of the largest gas producers in Europe with about 71.2 Bcm (2.51 Tcf) of gas produced during the year 2002, half of which is exported, supplying Europe with about 20% of its total consumption. Significant gas production in The Netherlands started in 1965, reached a peak during 1976 with 101 Bcm (3 Tcf) and by year end 2002, a total of 2622 Bcm (92.6 Tcf) had been extracted. Currently the government limits yearly gas production to 80 Bcm, although the rate in the past four years has been well under this limit. Early exploration was started before the Second World War by a precursor of NAM (the 50/50 Shell-Exxon joint venture active in The Netherlands) and in 1943 the Schoonebeek oil field was found followed by Coevorden gas field in 1951. In 1959, the giant Groningen gas field was discovered by NAM, changing the face of exploration in The Netherlands. Since that time NAM has retained its dominant position as operator controlling about three quarters of annual gas production and reserves. Public domain access of data on gas and oil fields in The Netherlands is scarce, with pre-2003 legislation allowing operators to hold tight all information on onshore wells. Since most onshore concessions are large, held over long periods of time (several in perpetuity), and have no relinquishment obligations, many fields have been found and are in production without any data entering the public arena. Offshore, pre-2003 legislation required operators to release well data after 10 years. Offshore concessions are relatively large and many contain several producing fields for which no or little data is in the public domain. Following the new legislation in force since 1 January 2003 detailed production data and all on- and offshore wells and seismic data older than 5 years have to be released. However, reserve figures of fields are not in the public domain. Reserve data submitted by the operators remain confidential for a period of 10 years and in the absence of any legal requirement operators use this advantage. On a yearly basis, the government publishes general estimates on reserves, but not for individual fields. Data on the current reserve distribution for fields, reservoir trends and for licence holders are not easily ascertained. This paper attempts to fill this information gap by reviewing reserves whether these are in developed or undeveloped fields. Reserves are oil or gas volumes that can be commercially recovered at current economic conditions, industry practices and government regulations. Developed reserves are those being produced today while undeveloped fields are not yet on stream. Remaining reserves are those left in a producing field. Initial (or ultimate) reserves of a field are the cumulative production plus the remaining reserves. Because the technical data of the fields are not available, the different reserves categories are used here informally and without strict definitions. In this paper a difference has been made between the giant Groningen gas field and the other fields that are collectively called the ‘Small fields’. This term is used in a comparative sense with the Groningen field as the measuring stick, and is applied due to the Small Field Policy in The Netherlands, which allows operators priority to bring small gas fields immediately on stream in lieu of production from the Groningen field. Exploration for and production from small fields is therefore not constrained by demand for gas. Moreover because the Groningen field acts as a swing producer, small fields can produce with high load factors. The Small Field Policy sets production constraints on the Groningen field. In addition the gas price is kept relatively high because it is linked to a basket of oil product prices. Without these production constraints and the linkage of the gas price to that for oil, the low production costs and high production capacity of the Groningen field would result in low gas prices for Western Europe and most small fields in The Netherlands and surrounding countries would have been uneconomic during much of the lifetime of the Groningen field.

The political state and the management of mineral rents in capital-surplus economies: Botswana and Saudi Arabia

In recent decades, the rate of economic growth in the developing countries has been inversely related to the share of rents in GDP. The resource-poor countries out-performed the resource-abundant ones and among the latter the small mineral economies performed least well and the oil-exporters worst of all. This outcome is counter-intuitive because mineral rents can boost investment while mineral exports can expand import capacity. One explanation is that Dutch Disease effects from mineral booms trigger trade policy closure that distorts the economy. But most high-rent capital-surplus oil economies like Saudi Arabia eschewed trade policy closure and still experienced a growth collapse. A second explanation lies in the political economy: resource-rich countries have been less likely than resource-poor countries to spawn developmental political states. The latter have two key features: first, sufficient autonomy to pursue a coherent economic policy; and second, the aim of raising social welfare. This paper compares Botswana, a rare case of a resource-rich country with a developmental political state, with Saudi Arabia, which had less autonomy in policy formulation due to its role as swing producer in OPEC and cultural pressures for a paternalistic deployment of the oil rents. It argues that although Botswana experienced more success than Saudi Arabia in deploying its mineral rents, this may owe much to its more stable rent stream rather than to its political state alone. Moreover, it is still premature to judge Botswana wholly successful.

96/01348 Nigeria's oil production behavior: Tests of alternative hypotheses

The sudden quadrupling of world oil prices in 1973-1974 marked the beginning of several formal inquiries by economists into the production behavior of members of the Organization of the Petroleum Exporting Countries (OPEC). Interest in the organization was further heightened in 1979 when nominal oil prices further doubled. However, oil market analysts have differed in their evaluation of OPEC`s role in the determination of world oil prices. Most energy economists have modeled OPEC as a cartel. Morris Adelman has suggested that OPEC`s true nature lies somewhere between two polar cases of a dominant-firm industry and an imperfect, market-sharing cartel. In the former case, one large, dominant firm (i.e., Saudi Arabia) serves as the {open_quotes}swing producer,{close_quotes} allowing other cartel members and non-OPEC oil producers to produce whatever they wished, controlling the market price by itself through its own output adjustments. The latter case of an imperfect market-sharing cartel is a loose collusive arrangement in which all members agree on an acceptable price level and individual output shares for each producer. Adelman believes that OPEC wobbles between these two cases, depending upon market conditions.

THE 1985‐86 OIL PRICE COLLAPSE AND AFTERWARDS: WHAT DOES GAME THEORY ADD?

This paper focuses on the strategies used by OPEC to generate cartel profits over the period 1983‐90. The evidence supports the hypothesis that OPEC adopted a swing producer strategy from 1983 to 1985. But when Saudi Arabia's profits fell below the level of Coumot profits in the summer of 1985, it abandoned the role of swing producer, driving prices to the Cournot level. Subsequently, Saudi Arabia appears to have adopted a tit‐for‐tat strategy designed to punish excessive cheating by other OPEC members. Based on these findings, the strengths and limitations of game theory are assessed.

Target revenue theory and Saudi Arabian oil policy

Shifts in Saudi Arabian oil policy are explained by using data covering public revenues and expenditures plus the balance of payments. It is concluded that, according to the target revenue theory, Saudi Arabia only for a very short time after the first and second oil crises was on the backward sloping part of the supply curve. Perhaps Saud Arabia cut oil production during the two oil crises because it wanted big oil price increases to prevent budget cuts. In any case, it started to increase oil production in the middle of 1985 when its economy was in great imbalance. Furthermore, calculations for the period 1989–2000 reveal that Saudi Arabia will probably face economic problems in the 1990s so that it will not again be OPEC's swing producer. On the contrary, Saudi Arabia will probably increase its share of OPEC's oil production in the 1990s.

The Political Economy of Crude Oil Cartelization in the United States, 1933–1972

This article examines a government-sponsored cartel that fixed domestic crude oil prices in interstate markets from 1933 through 1972. Although the cartel raised and stabilized nominal oil prices beyond earlier private efforts, it also resulted in politically driven constraints on price, output levels, and cartel rent distribution. Political factors molded quota assignments, diverted production from low- to high-cost producers, and raised production costs. Political pressures prevented Texas from acting as a residual or swing producer. Instead, the interstate oil cartel members maintained nominal prices and spread the political costs of output adjustments.

OPEC stability: An empirical assessment

We develop some elementary measures of cartel stability, using OPEC as a case study, to evaluate whether behaviour in a market can be characterized as cooperative or competitive. Common views among economists are that OPEC is either not a viable cooperative organization or that Saudi Arabia is the swing producer holding OPEC together. We apply the concept of ‘reserve sacrifice’ and ‘capacity sacrifice’ ratios and also use the variability of production to analyse OPEC behaviour. The analysis is based on annual data for the 10 most important OPEC countries from 1973–85. Our empirical tests indicate that cooperation among the principal OPEC nations has been fairly great over the entire period.

Investment Opportunities In The Canadian Oil And Gas Industry

Abstract The Canadian oil and gas industry offers attractive opportunities for new investments. Continuing fiscal and regulatory adjustments since the oil price collapse of 1986 have substantially restored after-tax returns from oil exploration and development and further improvements are anticipated. The large hydrocarbon resource base provides the potential for significant new reserve additions. In most countries real oil prices have returned to near those levels prevailing before the large price increases of the 1970s. The lower prices are expected to stimulate demand for oil and cause a reduction in non-OPEC supplies. Consequently the consensus expectations of oil prices remaining in the mid-teens may be too low. Prices moderately higher than the consensus forecast offer upside potential for Canadian oil and gas exploration and production. Introduction Investment opportunities in the Canadian oil and gas industry must be examined within the context of the recent sharp oil price decreases and within the framework of the Canada-United States producing and marketing sectors. Interlinked petroleum and natural gas product transportation and distribution systems between Canada and the United States together with common interests and significant common ownership require this perspective. Figure 1 shows the similarity in the patterns of oil and gas activity as measured directly by the number of wells drilled in each country. Differences between the patterns are caused by different regulatory and fiscal regimes as well as differences in exploration and development results. Economic Trends and Outlook Canadian oil markets and natural gas markets are similar, but have specific differences since oil supplies and markets are world-wide while gas markets and supplies are largely restricted to North America. The economic factors affecting crude oil and natural gas are discussed separately. World Oil Markets The two oil price shocks of the 1970s created powerful economic incentives for energy conservation, substitution away from crude oil, and development of additional non-OPEC oil supplies. From 1979 to 1985 world oil demand decreased by 8.8 million bbl/day while non-OPEC supply increased by 6.1 million bbl/day(1). The lowest cost supplier, Saudi Arabia, reduced its market share by two-thirds and adopted a swing producer role. When Saudi Arabia undertook actions to regain market share, oil prices collapsed. In most countries, real oil prices have nearly returned to the pre price-shock levels of the 1970s. This price reduction should materially affect the supply and demand for crude oil. OECD group aggregate data supports the view that the rate of conservation had been slowing even before the recent large price reduction. In many industrial, developing, and centrally planned economies, energy demand per unit of economic output has stabilized or increased in recent years. It is reasonable to expect that future world energy requirements will resume a close relationship with real economic output. The market share of various energy sources is largely price-related and since crude oil has been re-established as a price-competitive source of energy a moderate rate of growth in oil demand is expected. During the 1970s when massive investment was directed toward the exploration and development of new oil, the world's reserves remained stable and, in fact, peaked in 1975(2).

Hedging a Commodity Power Rate

Many of the aluminium smelters in the Pacific Northwest served by the Bonneville Power Administration (BPA) have become non‐competitive and operate in the role of swing producer in the US and world markets. To avoid these cyclical swings in power demand, BPA is presently studying methods designed to link the price of power charged to smelters with the market price of aluminium. A linked‐rate system tends to stabilize incomes to smelters, but increases fluctuations to the utility. These, in turn, could be stabilized by a hedging operation on the London Metals Exchange.

The impact of the Iran-Iraq war on the world oil market

The Iran-Iraq war has been one of the main factors contributing to the world oil market's volatility in the last three years. Furthermore, it has helped to undermine OPEC's cohesiveness and market control, resulting in the $5 per barrel (/b) price cut in March 1983. Analysts are now divided on the future course of this war and its probable impact on world oil markets. Some believe that the war will escalate and interrupt the flow of oil from the Persian Gulf. Others believe that if the war came to an end, the increased supply from Iran and Iraq would lead to the collapse of OPEC. These are extreme positions. First, we may have already witnessed the peak in escalation of the war. A peace, de facto or formal, is very likely before the end of 1986. Second, Saudi Arabia and certain other OPEC members are expected to cut back enough of their production to accommodate the 1.0 to 2.0 million barrels per day (MMb/d) increase anticipated from postwar Iran and Iraq. In the process, however, the Saudis may lose their current swing producer role. To preserve OPEC in the face of sharp and unforeseen declines in the demand for oil, a group of member countries may collectively assume the role of swing producers.

WORLD OUTLOOK

The world recovery, now three years old, has proved more resilient than many expected and will be sustained in 1986 by lower oil prices. Fears that the early‐1985 slowdown would turn into renewed recession have proved unfounded, as output in both the United States and Europe picked up in the second half of the year. The improvement stemmed from lower interest rates, falling inflation and weak commodity prices and was further helped by the sharp correction to the value of the dollar following September's G5 agreement. To these factors, which will remain supportive this year, is now added a lower oil price. The recovery in world output has not produced an increase in oil demand and, as the oil price rise of 1979‐80 gave a further boost to supply from non‐OPEC sources, a severe imbalance has emerged in the oil market. To maintain a £26 marker price (itself cut from £29 last July) has required a cutback in production of ever‐increasing magnitude from Saudi Arabia in its role as OPEC's swing producer. Now that Saudi Arabia has abandoned this role in favour of stabilising its market share, oil prices have fallen sharply. We assume that the oil price will fall to £20 by the end of this year, a fall in real terms of 30 per cent. As a result the world recovery is given renewed impetus and output accelerates over the next twelve months. A cyclical peak in activity emerges in 1987, after which output growth settles at 2%‐3 per cent and inflation at 4–5 per cent.

Prospects for the World Oil Market

This essay recapitulates a recent review article on world oil pricing. It also summarizes my own thinking and writing about oil problems over the last decade. In brief, I maintain that the first price jump (of 1973-1974), from about $3 to $12 per barrel, represents the "correct" adjustment from the point of view of the "core" producing countries (Saudi Arabia, Kuwait, and the United Arabs Emirates), whose objective it should be to maximize profits over time. (I agree with Erickson and other analysts that Saudi Arabia, Kuwait, and the UAE are the swing producers that set the price.)