IEA: Oil supply decline much worse than previous estimates

[J]

Yahoo news

Watchdog warns on declining oilfield output
Wednesday, October 29 01:08 am
Reuters

Output from the world's oilfields is declining faster than previously thought, the Financial Times reported on Wednesday, quoting from a draft International Energy Agency report it had obtained.

The newspaper said the watchdog's annual World Energy Outlook report, which studied the biggest fields, showed that without extra investment to raise production, the natural annual rate of output decline was 9.1 percent.

The findings suggested the world would struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and to meet long-term demand, said the Financial Times.

It said the issue would become even more acute as prices fell and investment decisions were delayed.

The International Energy Agency (IEA) acts as policy adviser to 28 member countries, including the United States, Japan, Canada and leading European nations.

The IEA forecast China, India and other developing countries' demand would require investments of $360 billion (224.5 billion pounds) each year until 2030, said the newspaper.

"The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand," the IEA was quoted as saying.

The watchdog said the world needed to make a "significant increase in future investments just to maintain the current level of production."

The battle to replace mature oilfields' output could even offset the decline in demand growth, which had given the industry a reprieve in the past few months, it said.

The Financial Times said the IEA predicted in its report, due to be published next month, that demand would be damped, "reflecting the impact of much higher oil prices and slightly slower economic growth."

The IEA expected oil consumption in 2030 to reach 106.4 million barrels a day, down from last year's forecast of 116.3 million, said the newspaper.

It said the projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.

(Reporting by Ralph Gowling, editing by Bernard Orr)

Previous forecasts have placed annual declines at 4-5% once peak is reached, the new forecast is twice as bad. Now that oil prices have collapsed it may become even worse since quite a few of the new oil fields and rework & redrilling of mature oil fields isn't profitable if prices fall much further, and with credit in short supply those projects are at risk of being cancelled or postponed indefinitely. Which means yet more supply taken off the market.

My thoughts: enjoy the cheap(er) gas while it lasts. If or when demand picks up again, we are going to get a repeat of the past year's price spikes, likely worse.

[Surlethe]

My guess is that the expectation among oil companies is that the price will stay down while the financial crisis and recession works through the world markets, and will start rising again in several years when growth resumes. Therefore, I would bet that, as long as capital is available, oil companies will continue to invest in at least infrastructure to make sure that they can continue drilling when the price starts rising again. You're also looking at the world collectively (and the US in particular) starting to transition heavily to alternative energy, and making long-run decisions that affect consumption levels. That will mean the decline in production probably won't be as bad as the IEA predicts, and its economic effects will be cushioned by the change in behavior that started this summer.

[J]

Therefore, I would bet that, as long as capital is available, oil companies will continue to invest in at least infrastructure to make sure that they can continue drilling when the price starts rising again.

That, I think is going to be the big problem. With all the inept government meddling going on in the markets it's going to be challenging for companies to secure the capital needed for infrastructure, exploration, and all the other stuff they do. ExxonMobil, Halliburton, Schlumberger and the other big boys will be fine, but key sectors such as the drilling rig leasing & rental companies which don't have the capital cushions of the majors could find themselves in deep trouble without ready access to credit.

We tend to think of the oil industry as one big rich entity which is flush with money, reality isn't quite like that. There's a fair number of specialist companies such as seismic survey companies, drill rig operators, and others which run on fairly thin margins and don't have the resources to survive a credit market shutdown.

[Uraniun235]

Couldn't the big oil companies buy the specialist companies? I mean yeah there's anti-trust shit but I doubt any government's going to seriously throw any roadblocks up in the way of getting at more oil.

[Admiral Valdemar]

I was holding off posting this until 12.11 when the official report comes out. Then we can see how they spin this leak. You'll notice that they don't flat out state the figures are wrong. No, they say they're misleading in that context or something equally vacuous.

These, by the way, put the more dire predictions by ASPO in the "optimistic" category. Six percent is unmitigated hell. Nine? That's total disaster. If the timeline for these declines is from now, then kiss any mitigation effort goodbye. Is anyone seriously gullible enough to think that, not only can we convert global economies to non-oil based sources in a decade or less, we can do this during a depression that could make '29 look like a minor correction one week? Good luck.

Nine percent decline means half the global supply is available in around eight years IGNORING export cuts and other factors like politics and costs getting in the way.

[Surlethe]

Valdemar, that nine percent number is not a result of geological constraints; it is a result of underinvestment. If the supply declines fast enough, it will force expected prices back up and increase investment, which will slow the decline. So a 9% decline should be considered a lower limit.

[Admiral Valdemar]

Valdemar, that nine percent number is not a result of geological constraints; it is a result of underinvestment. If the supply declines fast enough, it will force expected prices back up and increase investment, which will slow the decline. So a 9% decline should be considered a lower limit.

The natural global decline rate is nine percent or so, but with investment it could be six. However, current financial conditions mean nine percent is most likely now, again, without factoring in non-natural effects.

Thus it's clear we have major issues to contend with. Projects that were on track just a month ago are being cancelled due to lack of investment.

[Sikon]

The newspaper said the watchdog's annual World Energy Outlook report, which studied the biggest fields, showed that without extra investment to raise production, the natural annual rate of output decline was 9.1 percent.

The findings suggested the world would struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and to meet long-term demand, said the Financial Times.

That refers to what the result would be if not for investment, as opposed to observed rates, and it is taken out of context by this news reporter. However, such is similar to what the IEA discussed last year too:

Aggregate levels mask much sharper declines in a 15-20% per annum range for mature producing areas and for many recent deepwater developments. [...]

Net oilfield decline rates average 4.6% annually for non-OPEC and 3.2% per year for OPEC crude. [...]

Non-OPEC growth is driven initially by OPEC gas liquids and biofuels, but with substantial increases from crude supplies out of the US GOM, Canadian oil sands, the FSU, Brazil and sub-Saharan Africa. These offset sharp declines expected elsewhere in the US and Canada, and from Mexico, the North Sea, and parts of Asia and the Middle East.

Page 27.

What has been going on for many years is that old established fields have been declining at commonly a few percent a year. At the same time, other investment has made total production of oil plus oil-equivalents maintained or increased due to gains elsewhere. One part of that is help from NGLs (natural-gas-to-liquids), coal-to-liquids, plus other ways of producing gasoline and more, other than crude oil itself alone. To such, add unconventional sources such as oil sands. A report of three weeks ago shows that average daily OPEC natural gas to liquids production has been about 8% more in this third quarter of this year than in 2007; biofuels were small but up 39% in non-OPEC production for 3Q 2008 compared to 2007; etc. However, a bigger part meanwhile has been new conventional oil extraction still being opened to some degree while production in old fields often declines.

Total production of oil-equivalents and oil has changed as illustrated below (click to visit IEA website):

[Surlethe]

Valdemar, that nine percent number is not a result of geological constraints; it is a result of underinvestment. If the supply declines fast enough, it will force expected prices back up and increase investment, which will slow the decline. So a 9% decline should be considered a lower limit.

The natural global decline rate is nine percent or so, but with investment it could be six. However, current financial conditions mean nine percent is most likely now, again, without factoring in non-natural effects.

Again, a supply decline that is not offset by a demand decline will force expected price back up, which will increase investment, which will mitigate the supply decline. You can't project the financial crisis forever into the future; it's not like all investment is going to cease indefinitely, especially investments like oil that promise huge returns if they're successful.

Thus it's clear we have major issues to contend with. Projects that were on track just a month ago are being cancelled due to lack of investment.

That's because the price oil has been dropping like an anvil. When price starts trending back upward, the investment will return.

[Admiral Valdemar]

Again, a supply decline that is not offset by a demand decline will force expected price back up, which will increase investment, which will mitigate the supply decline. You can't project the financial crisis forever into the future; it's not like all investment is going to cease indefinitely, especially investments like oil that promise huge returns if they're successful.

They're not, though. The new projects that are being cancelled have horrible returns. And you mistakenly assume this will do anything to help. No projects out to 2012 and beyond will do anything to help stop a decline at such rates. And we're taking national oil companies here and export land. If you think this economic problem will go away in a couple of years, you're sorely mistaken. Investment requires solvent investors.

For example, look at Chevron's Frade oil project in South America. Deep water, like most all fields left for Big Oil, this will cost at least $3 billion and deliver around 270 million barrels of oil over 18 years if it continues getting funded. That's three days world supply at 2k8 levels.

That's because the price oil has been dropping like an anvil. When price starts trending back upward, the investment will return.

Or, rather, demand destruction will kick in even more. What do you think caused this recession to appear with such suddeness now? We couldn't afford $150 oil before this credit crunch took firm hold. You think we'll magically get over it next year? Where's this money coming from? Answer that and I'll be more optimistic. We need oil now, but that money isn't coming in because no one can dare loan the cash in this environment. That is not changing any time soon and a 6-9% decline manifests big problems pretty damn quick. That will act as a positive feedback loop for this economic crash. You might trim the easy fat now with oil demand dropping, but if that decline rate is true and investment stays as it is thanks to the collapsing economies, then soon the fall in oil output acts as the limiting factor instead, and the economy contracts at 6 to 9 percent because even with a reinvigorated market, the investment is too little, too late to stem the decline and so any hope of coming out of such a depression vanishes from purely natural limits being hit.

[Surlethe]

Again, a supply decline that is not offset by a demand decline will force expected price back up, which will increase investment, which will mitigate the supply decline. You can't project the financial crisis forever into the future; it's not like all investment is going to cease indefinitely, especially investments like oil that promise huge returns if they're successful.

They're not, though. The new projects that are being cancelled have horrible returns.

Evidence?

And you mistakenly assume this will do anything to help. No projects out to 2012 and beyond will do anything to help stop a decline at such rates.

Why? Because you say so?

And we're taking national oil companies here and export land.

No, we're not talking oil imports or national oil companies; we're talking about total world production.

If you think this economic problem will go away in a couple of years, you're sorely mistaken. Investment requires solvent investors.

That's a rather black-and-white claim, saying that the financial crisis has ended all investment. And I'm not sure how you got the impression that I think our economic problems will go away; I'm arguing against the absurd notion that the 9% decline is guaranteed to happen since investment in oil has ended because of the financial crisis.

For example, look at Chevron's Frade oil project in South America. Deep water, like most all fields left for Big Oil, this will cost at least $3 billion and deliver around 270 million barrels of oil over 18 years if it continues getting funded. That's three days world supply at 2k8 levels.

So? Chevron will continue funding it if they expect the average price of oil over the next 18 years to be more than $11.11. How does this do anything to rebut my point that 9% decline is unrealistic because it assumes no more investment?

That's because the price oil has been dropping like an anvil. When price starts trending back upward, the investment will return.

Or, rather, demand destruction will kick in even more. What do you think caused this recession to appear with such suddeness now? We couldn't afford $150 oil before this credit crunch took firm hold. You think we'll magically get over it next year?

What does this have to do with what I'm saying? You think that a contraction will end all investment?

Where's this money coming from? Answer that and I'll be more optimistic. We need oil now, but that money isn't coming in because no one can dare loan the cash in this environment.

And you think that will persist forever? The reason nobody is loaning right now is because nobody is sure that they'll be paid back, and they got burnt by the mortgage crisis; when another oil supply crunch pushes prices back up and they keep trending upward, that will all but guarantee a return on the investment.

That is not changing any time soon and a 6-9% decline manifests big problems pretty damn quick. That will act as a positive feedback loop for this economic crash.

Again, you presume that economic hard times will forestall all investment without justifying this.

[Admiral Valdemar]

Evidence?

Can't currently post any links, you'll have to wait until I get home next Wednesday. It shouldn't be hard to accept financial crisis = less investment. Which is exactly how it's unfolding.

Why? Because you say so?

Yes. And the oil and gas journals. This decline rate makes new projects keep up where we are, barely.

No, we're not talking oil imports or national oil companies; we're talking about total world production.

Which is the same thing. National oil companies not being able to export oil causes the same problems as Western oil companies being unable to access fields. Check the oil mega projects listings and you'll see that there is hardly anything to keep us going long, and what is there is minuscule to say the least.

That's a rather black-and-white claim, saying that the financial crisis has ended all investment. And I'm not sure how you got the impression that I think our economic problems will go away; I'm arguing against the absurd notion that the 9% decline is guaranteed to happen since investment in oil has ended because of the financial crisis.

Doesn't matter. Six percent WITH investment is worse than any bad case rate calculation in the past. And that assumes ideal investment conditions prior to the Credit Crunch.

So? Chevron will continue funding it if they expect the average price of oil over the next 18 years to be more than $11.11. How does this do anything to rebut my point that 9% decline is unrealistic because it assumes no more investment?

Wasn't meant to rebut that at all. It was an illustration showing how futile it is to try and keep production on an even footing, to say nothing of growing it much beyond what we'll need soon.

What does this have to do with what I'm saying? You think that a contraction will end all investment?

I said nothing of the sort. I said it means nothing. Like pissing on a forest fire. Yeah, you're still doing something. I'll be damned if it'll do anything. The oil left requires $100 oil or more. The economy cannot survive with such costs. Chaos ensues.

And you think that will persist forever? The reason nobody is loaning right now is because nobody is sure that they'll be paid back, and they got burnt by the mortgage crisis; when another oil supply crunch pushes prices back up and they keep trending upward, that will all but guarantee a return on the investment.

Of course it won't last forever. It doesn't have to. Just a decade, or rather, to 2012 even. More than likely.

Again, you presume that economic hard times will forestall all investment without justifying this.

See above. Investment does not mean the problem goes away. Care to explain where we'll be finding all there extra Saudi Arabias to keep things going? Six percent. That rate means the world has half the oil it had in a decade. Nine means less than a decade. There's no physical way to replace that much oil, and it'd take ten years minimum to get the US weened off that stuff to any real extent at the cost of trillions. Not happening, sorry.

[Surlethe]

It shouldn't be hard to accept financial crisis = less investment. Which is exactly how it's unfolding.

You're ignoring that decrease in oil prices = less investment, too; it's absurd to pin the decline in investment entirely on the financial crisis.

I said nothing of the sort. I said it means nothing. Like pissing on a forest fire. Yeah, you're still doing something. I'll be damned if it'll do anything. The oil left requires $100 oil or more. The economy cannot survive with such costs. Chaos ensues.

You're not making sense. The OP article even said that the 9% decline assumes no investment occurs. I'm not trying to say that a 6% decline won't be painful, but saying that a 9% decline is assured is bullshit. 6% is far more reasonable when you accept that investment will continue to occur.

Of course it won't last forever. It doesn't have to. Just a decade, or rather, to 2012 even. More than likely.

That's a rather pessimistic projection, given the history of financial crises. The one that spurred the Great Depression was over in a few years, for example. And even then, you've not rebutted the notion that investment in oil, when expected prices rise, will somehow cease because of the credit crunch; if prices rise, oil is an almost surefire return on investment.

[Admiral Valdemar]

You're ignoring that decrease in oil prices = less investment, too; it's absurd to pin the decline in investment entirely on the financial crisis.

Of course, but the current situation is partly down to commodity prices igniting a raft of financial problems that have been stewing for a while. At least if we get this over now, it may be less painful than later.

You're not making sense. The OP article even said that the 9% decline assumes no investment occurs. I'm not trying to say that a 6% decline won't be painful, but saying that a 9% decline is assured is bullshit. 6% is far more reasonable when you accept that investment will continue to occur.

Until I see the full report and how much spin is in it thanks to this leak, I question both figures. However, six is more likely, but my point was that six is bad enough. Nine is game over.

That's a rather pessimistic projection, given the history of financial crises. The one that spurred the Great Depression was over in a few years, for example. And even then, you've not rebutted the notion that investment in oil, when expected prices rise, will somehow cease because of the credit crunch; if prices rise, oil is an almost surefire return on investment.

This crisis is one we've not encountered before, so past comparisons are somewhat specious for the most part, though the 1873 depression is more analogous.

Anyway, like I say, this recession need only affect oil investment for a few years to put already belated projects even further back. You saw what happened when we're on a plateaux, imagine the fallout from supply declining at one, two, six or even nine percent. We can't wait for the world to be able to stomach such costs again, because he we don't get it done now, we'll be constantly on the edge of the abyss. The lead times are a major problem, and everything we intend to pump with that new money will only get us five years more of staying around where we are now. Growth is needed for any economic recovery, and I'm of the impression that the lack of any substantial finds (a long term trend) will cause this situation to perpetuate.

Pessimistic? Yes. I like to er on the side of caution, unlike politicians, and try to avoid Mad Max. After all, I haven't turbo charged my V8 Interceptor yet.

[Surlethe]

Of course, but the current situation is partly down to commodity prices igniting a raft of financial problems that have been stewing for a while. At least if we get this over now, it may be less painful than later.

Agreed to the latter, but IIRC the hiccups in the financial system started when the housing market started stagnating last year, well before commodity prices got out of hand this past summer.

Until I see the full report and how much spin is in it thanks to this leak, I question both figures. However, six is more likely, but my point was that six is bad enough. Nine is game over.

I agree that six is bad, but I still maintain that nine is unrealistic.

This crisis is one we've not encountered before, so past comparisons are somewhat specious for the most part, though the 1873 depression is more analogous.

Anyway, like I say, this recession need only affect oil investment for a few years to put already belated projects even further back. You saw what happened when we're on a plateaux, imagine the fallout from supply declining at one, two, six or even nine percent. We can't wait for the world to be able to stomach such costs again, because he we don't get it done now, we'll be constantly on the edge of the abyss. The lead times are a major problem, and everything we intend to pump with that new money will only get us five years more of staying around where we are now. Growth is needed for any economic recovery, and I'm of the impression that the lack of any substantial finds (a long term trend) will cause this situation to perpetuate.

Do remember that the change in long-run expectations is causing substitution away from oil already, even though the price of oil has dropped substantially; as price rises, the decrease in demand will be caused by both substitution and income decreases brought about by the high energy price shocks, but the substitution itself will spur growth. Enough to offset contraction caused by high oil? Probably not, but this isn't going to be the end of civilization, either. Meanwhile, belated projects that stall and then get picked up again as the price skyrockets are going to cushion the blow as we come down.