How and for how long it is possible to secure a sustainable growth of oil supply

Dec 29, 2003 01:00 AM

by Leif Magne Meling

The following paper by Leif Magne Meling, Statoil, was delivered at the World Petroleum Congress 2nd Regional Meeting, in Doha, 8-11 December.

Oil has been the most important transportation fuel for almost 100 years. However, resources are finite and ultimately new technologies and new fuels have to be developed. The uncertainty relates to how and for how long it is possible to secure a sustainable growth of oil supply at a reasonable cost.
This paper presents a pragmatic evaluation of possible future production. All major oil-producing countries are evaluated and summarized to a world oil production assessment. We evaluate the past and the present, and discuss the main future challenges:
1) future oil demand,
2) new field developments,
3) production efficiency,
4) exploration additions and
5) improved oil recovery. A simulation model that includes these challenges has been developed. The model distinguishes between OPEC and non-OPEC countries by imposing different production and field development strategies.

The paper predicts a future that is very different from the present situation. At present undeveloped oil reserves are at the same level as in the late 1950s. New giant field discoveries are rare and exploration, with the exception of 1991, has not been able to replace production since the mid 1980s.
Within the next decade there will be a major shift in supply from non-OPEC to oil rich Middle East OPEC countries. The only major exception will be Russia. A large proportion, up to 60 %, of future production additions will have to come from increased production efficiency and improved oil recovery. Production additions due to exploration additions will not be of major importance before post 2010 due to the time lag between discovery and development.

Depletion of oil resources has been a controversial issue since the modern oil industry was born in the early 2000 century. From time to time individuals 1 and organizations claim a coming oil crunch with escalating oil price, others have promoted a more optimistic view 2. We do not intend to let this paper be another addition to the "right belief".
We have used a pragmatic approach to evaluate how and for how long it is possible to secure a sustainable growth of oil supply. No such evaluation is completely objective, and predictions of this kind will always include some undisputed facts, some knowledge and some belief.
IHS field database and historical production records have been our main source of raw data. It includes some 24,000 fields worldwide, but no specific field data for US and Canada. For these countries aggregated figures were taken from IHS. Alternative data sources may alter predictions for some countries, but the main conclusions should not differ much. The author takes the full responsibility for the evaluations and the conclusions presented in this paper and Statoil does not necessarily support them.

Demand growth
The historical records of oil demand growth are the fingerprints of economic and political development. Important political and economic development such as introduction of mechanized transportation, the economical collapse of the Weimar Republic, the black in 1929, the second world war, the blooming 60s, the post industrial development and oil crises are all preserved in the records of oil demand growth, just like tree growth rings.
A major change occurred between 1970 and the mid 1980s. In the 1960s, oil demand increased steadily at some 7 % annually. Disruptions of supply in the 1970s and 1980s and price increases reduced the oil demand significantly. From the mid 1980s the oil demand growth has been relatively stable at a growth rate of 1.6 % annually. Extrapolating this trend indicates a demand of some 85 mm bpd in 2010 and close to 100 mm bpd in 2020. In 2002 the production was 73.2 mm bpd.
Since 1980 the oil consumption has been remarkably constant at some 4.3 barrels/capita, while the oil consumption per world GDP has declined significantly since the early 1970s. A continued growth of 1.6 % annually will only marginally increase the oil consumption per capita, implying that an improved development for developing countries can only be obtained by a reduced consumption in developed countries.

For two decades, the liquid exploration additions have not counterbalanced production. Most international oil companies (IOC) have only been able to replace reserves by upgrading existing discoveries. This is not a result of decreasing technical exploration success, because for oil this has been stable around 20 % for the last 20 years.
Oil resources added through exploration additions reached a peak in the 1960s. In this period major discoveries were made in Western Siberia, Libya, Algeria, Middle East, Alaska, Nigeria, China, Indonesia and Venezuela. Later smaller peaks are related to opening up of other prolific basins. For most basins, giant and major oil fields are discovered in the early exploration phase. This holds for basins explored in the 1930s and also today.

The proportion of gas relative to oil has increased. Developments of new drilling technology have made it possible to drill deeper. By nature, deeper high temperature source rocks generate more gas and less liquid. Currently the percentage of oil discovered relative to total hydrocarbon volume is less than 50 %. In periods it has been as low as 40 % in periods before opening up of new oil prolific basins.
The number of new oil discoveries is more or less a direct function of new wildcat wells drilled. However, the average size of new discoveries has been reduced by a factor of 10; from some 100-400 mm barrels in the mid 1960s to 20-75 mm barrels in the 1990s. In recent years the average field size has increased due to successful exploration in Western Africa, Kazakhstan and Iran.

The declining exploration additions are strongly related to reduction of average field size. Since yearly numbers of wildcat wells are not constant, we have correlated yearly average well volumes with cumulative drilled wells. This relationship is exponential. The peak of yearly-discovered oil volumes was obtained at approximate 20,000 wildcats (1964). Extrapolation indicates an exploration potential of some 200 bn barrels.
Since this estimate does not include frontier basins, we have added some 100 bn barrels. This adds up to a worldwide exploration potential of some 300 bn barrels. The remaining discovered liquid reserves are some 1,180 bn barrels. We may expect a total of 1,480 bn barrels including the exploration potential and the ultimate worldwide resources are estimated at some 2,450 bn barrels.

New field developments and undeveloped fields
In the early days of the oil industry, fields were put on production as soon as they where discovered. In the late 1920s this practice led to a world oil glut. This was resolved by the "As-Is"3 agreement between major oil companies (at Achnacarry Castle) in 1928. Each company was allocated aquota in various markets according to their percentage share of sales in 1928. From that year discovered fields remained undeveloped until the companies needed additional oil to supply their markets.
Outside North America, the number of undeveloped fields containing liquids has increased steadily and today equals more than 5,100. The same cannot be said about undeveloped liquid volume. It reached a peak around 1980 at some 350 bn barrels and has since then declined to 180 bn barrel in 2002, the same level as in 1950s. Adding optimistic volumes for North America bring the total to around 200 bn barrels.

The Middle East contains more than 50 % of all undeveloped liquids, while 25 % is located in Russia, Kazakhstan, Angola and Nigeria
Maximizing profit implies early development of the most prolific oil fields. The oil industry has done so from the very beginning. The remaining undeveloped fields are to a large degree smaller, technically more challenging and contain oil of lesser quality. Today the average undeveloped field is around 30 mm barrels compared to 1 bn barrels in the late 1940s.
Development of new fields was earlier the main contribution to production growth. A major change occurred in the late 1960s where increased production from developed fields started to contribute more to production additions. From the early 1990s, less oil has been developed than produced and from this point, remaining developed reserves have been declining.

The development activity has been high, some 200 fields has been developed yearly outside North America, but the average developed field size has been declining, to below 100 mm barrels. However the Asian financial crises in 1997 and the resulting low oil price significantly reduced the number of new oil field developments, and the activity has not yet recovered. In 2002, less than 100 fields were developed, a level similar to the mid 1950s.
Since the early 1970s the oil industry has never developed more than 10 % of undeveloped liquid reserves annually(assuming a five years time lag from discovery to production) and there is no sign that this will change. Future production additions due to new field development will be important, but cannot be expected to be the main contributor to increased production.

Production efficiency
Production efficiency (PE) is a measure of the yearly percentage of liquids produced of remaining developed reserves. By definition, the PE is the decline rate of exponential-decline-rate-analysis4. The inverse of the PE is Reserve/Production ratio (R/P ratio). The R/P ratio is however most often correlated to total not developed reserves.
Evaluation of PE and comparing different countries needs a careful analysis4. High productive fields and fast recovery mechanisms leads to high PE. The best examples are North Sea Jurassic reservoirs, capable of a yearly delivery of more than 15 % of remaining recoverable reserves.
Other types of reservoirs, such as slow gravity drainage fractured reservoirs in the Zagros Basin, may yield maximum 4-5 %. Increased PE has been a major contributor to additional oil production. Today the average worldwide PE is approximate 3 %. On average, the PE has increased 40 % over the last 30 years. This has been achieved by investments in new production wells, utilizing horizontal wells and adding process capacity for oil, gas and water in developed fields.

OPEC countries produce at PE’s below 2 %. A major proportion of their future production additions will mainly be a result of a significant increase in PE. Western countries, such as UK, Norway, US and Canada, produce at PE’s in the range 10-15 % and have limited potential for improvement.
The present growth of production efficiency is some 2.4 % annually, slightly above the demand growth of some 1.6 %. The difference has allowed the oil industry to develop less oil than produced. To predict future production additions from increased PE, we have used an optimistic PE growth rate of 3 %. This growth rate will significantly add future production.
For a more detailed analysis we have included variation between individual countries. The maximum production efficiency has been set for individual countries based on their present status and field potential.

Improved oil recovery
The highest value creation is often through improved oil recovery (IOR). We do not believe that all additional oil reserves from producing fields are due to IOR, some companies notoriously under report reserves to allow for a continuous growth of oil reserves (impressive in annual reports), others book unrealistic high recovery factors and reserves.
The real additions due to IOR are increasing field recovery by implying secondary and tertiary recovery methods, drilling additional wells, artificial lifting, upgrading of surface facilities and/or reduced lifting costs. IOR has since added significant volumes of economical producible liquids and counterbalanced smaller exploration volumes and new field development projects.

It is an impossible task to makea worldwide IOR assessment by studying individual field examples5. Instead we have chosen to evaluate it by running a statistical analysis of some 8,600 oil field recovery factors (very limited data from North America). The reserve growth estimated by this method should be an estimate of what could be achieved by present technology.
The present "worldwide" average oil recovery factor is just above 29 %. Some countries are reporting significantly higher numbers, mainly due to large fields, light oil and generally excellent reservoir properties, other countries report lower values mainly due to large deposits of heavy crude. It is well known that recovery is a dependent of field size, reservoir permeability, pay thickness, viscosity, reservoir heterogeneity and time. Unfortunately we do not have sufficient data to make reliable correlations including all variables. We have used size and relative time only, as correlation variables.

The data uncover a peculiar fact, while smaller fields, containing less than 100 mm barrels in place, have a gradual increase in recovery versus field size. Larger fields, on average, stabilise at a recovery factor just above 30 %. This has puzzled us for some time.
The oil industry "grow reserves" over the lifetime of a field through reservoir management, additional wells, secondary recovery methods and increased process capacities. We evaluated the trend by plotting recovery factor versus relative volume produced (oil produced divided by oil recoverable) for individual fields. The relationship within each field size class seems to be linear. Larger fields increase more over the lifetime than smaller. This analysis has been done for several field size classes covering the whole field size range.

Additional recovery factors have been calculated for each class and used to estimate the future IOR additions worldwide. The volume weighted "final" recovery factor was estimated to some 38 %, an increase by approximate 9 % units. Converted to liquid volumes, this corresponds to approximate 700 bn barrels, more than twice the volume expected from exploration.
Introducing reserve growth, historical remaining developed reserves have to be reduced by using a reduced recovery factor in the past, and future reserves increased due to the opposite. This also effect calculated production efficiency and have to be taken into account to avoid double booking and optimistic results.

To our knowledge the oil industry has not developed prudent methodology for forecasting county, region or global production. For countries having a limited number of fields, individual field production forecasts can be added, but this method becomes impractical for countries having a vast number of fields.
The model presented in this paper is based on a modified decline curve analysis. The input data are historical volumes discovered, volumes developed, volumes produced and wildcat wells drilled each year. Undeveloped and remaining developed reserves are calculated by addition and subtraction. PE is calculated and adjusted for eventually spare production capacity.

Exploration additions are calculated by the methodology discussed earlier and added to discovered volumes (for some countries a more detailed and sophisticated method has been used, but a discussion is far beyond the scope of this paper). PE growth is estimated by extrapolating the historical record and setting a maximum PE for each country.
Countries producing at maximum production capacity (typically non-OPEC countries) are assumed to develop a constant percentage of their undeveloped reserve base each year. Maturation of new discoveries is taken into account by backdating undeveloped reserves by a predefined number of years (used five year maturation).

For each country production potential is calculated by multiplying production efficiency by remaining developed reserves. Production is set equal to production capacity for non-swing producers (non-OPEC). Production from countries with spare production capacity (OPEC) is handled differently. Production from non-swing producers is subtracted from the world demand. The delta production is allocated to swing producing countries proportional to their production potential.
For swing producing countries, reserves are developed to maintain present spare production capacity, but including the same maximum field development constraint as for non-swing producers. The calculation procedures are all done in linked iterative spreadsheets.

How, for how long and where
First we will discuss possible production scenarios by using a simplified model, where all countries are lumped together in one single model. Later we will discuss the impact of using a significant more detailed model.
We have assumed a base case, but excluded further growth in PE and IOR. With these assumptions it will not be possible to supply a demand growth of some 1.6 % beyond 2003, no matter how much exploration potential you add. The reason is the time lag from discovery to production and the limited volume of undeveloped reserves.
In such a scenario the spare production capacity will be the key. The 4 mm bpd spare production capacity support the expected demand growth for slightly more than one year. In all scenarios simulated, exploration adds to long-term production and will only have marginal impact before 2010.
Several possible production scenarios have been run at different PE growth rates and reserve growth values. Sustainable supply-demand balance is most affected by increased PE, but larger reserve growth volumes combined with high PE’s significantly prolong the period of sustainable growth. At a PE growth of 3 % and no reserve growth, the end of supply-demand balance may be around 2016. Including a substantial reserve growth (700 bn barrels), the period may be extended till 2023. Higher PE growth rates may be unrealistic. A 3.5 % growth seems to be very optimistic compared with historical data.

Future production is split into additions due to increased PE, IOR, new field development and exploration. We assume the same base case as earlier, a PE growth of 3 % and adding a reserve growth of 700 bn barrels. For such a scenario more than half of the production will be a result of increased PE and reserve growth. With time this will increase to more than two thirds.
Exploration additions will only marginally add production in this decade and will never add more than some 15 % of total additions. A more optimistic view of exploration potential will however give higher contribution. A doubling of exploration additions (600 bn barrels) will increase the maximum contribution to some 20 %.

As in politics, when individual countries are evaluated separately, they never add up to a simplified model. Constraints for individual countries are in conflict with goals and constraints on a global level. This is especially the case for PE growth. Countries producing at high PE deplete and their worldwide contribution decline. In general, more detailed models become more pessimistic. What is believed to be moderate adjustments may result in significant changes for individual countries. The detailed model includes 22 major production countries (Table 1) and aggregates of the remaining countries split in non-OPEC and OPEC producers.
The discussion and analysis earlier in this paper suggests that, on medium term, countries with large reserves, producing at low PE’s, less matured fields and have large volumes of undeveloped reserves are the countries that will contribute most to additional future production. Such countries are Saudi Arabia, Russia, Iraq, Kazakhstan, UAE (Abu Dhabi), Kuwait, Angola and Nigeria. At the other end, where production decline should be expected, are countries such as USA, Norway, UK, Canada (heavy crude not included) and Indonesia. These countries are producing at, or very close to, their maximum possible production efficiency.

Russia is expected to produce at least some 9 mm bpd (predicted 9.8 mm bpd in 2010) and will be the major contributor to future productionadditions outside OPEC. If their clamed reserves are correct, they may have the potential to produce up to 12-13 mm bpd. The additions will probably not be sufficient to counterbalance declining production from other non-OPEC countries. Exploration and reserve growth within non-OPEC countries will reduce decline, but cannot prevent it.
Evaluating different scenarios, including various realistic input data, it is difficult to foresee a major increase in production from countries outside OPEC. On average these countries produce at an average PE of some 8 % and are not expected to exceed 10 %. Russia is the main present and future contributor to increased PE and thereby production additions within non-OPEC. The maximum future production potential for non-OPEC countries may not exceed 45 mm bpd and may drop 1-2 mm bpd from 2002 till 2010. The main reason is very low potential for further increase in production efficiency.
The major production additions are expected from OPEC countries and especially from the Middle East. To meet a demand of some 85 mm bpd in 2010, OPEC may need to increase production by 13-14 mm bpd. The main contribution, as high as 80 %, may have to come from increased PE. All production additions are related to costs and have to be balanced by income. That has to be discussed in a later paper.

For two decades, the exploration liquid additions have not counterbalanced production. The declining exploration additions are strongly related to reduction of average field size. The reserve growth potential or IOR is probably twice as high as the exploration potential.
Some 60 % of additional oil production additions in 2010 will probably be a result of increased production efficiency and reserve growth and will be the most critical issue regarding sustainable oil supply. Without reserve growth, supply will be a challenge from 2010-15, including growth the challenge will be postponed to 2020-25.
Production additions due to exploration additions will not be of major importance before post 2010 due to the time lag from discovery to development. Within the decade there will be a major shift in supply from non-OPEC to oil rich Middle East OPEC countries. The only major exception will be Russia.

1. Campbell, Colin J. and Laherrere. Jean H. "The End of Cheap Oil", Scientific American, March 1998.
2. Wood, John H., Long, Garry R., Morehouse, David F. "World Conventional Oil Supply Expected to Peak in 21st Century", Offshore, April 2003.
3. Yergin, Daniel "The Prize", ISBN 0-671-71089-3, pp 260-265.
4. Arps, J.J. "Analysis of Decline Curves", Trans AIME (1945) 160, 228-247.
5. Morehouse, David F. "The Intricate Puzzle of Oil and Gas Reserves Growth", Energy Information Administration/Natural Gas Monthly, July 1997.

Source: Statoil
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