Investment key to meeting oil demand

by Carola Hoyos and Javier Blas

As crude prices surged to an all-time high of almost $ 150 a barrel this summer, the warnings from those who believe the world is about to run out of oil reached fever pitch. Even members of the oil establishment began to agree with one of their main tenets: that the industry would have to invest huge amounts of money just to counter the steep production declines in existing oil fields.
In short, the industry had to run faster and faster just to stand still. The anxiety about rapidly falling production increased as key oil regions such as the North Sea, Mexico and Alaska suffered large and unexpected production falls late last year and early this year as their old fields matured.

It was in response to these concerns -- exacerbated by the fact that many OPEC and non-OPEC countries keep their decline rate data secret -- that the International Energy Agency (IEA), the world's oil watchdog, for the first time focused its flagship World Energy Outlook on the rate at which global oil output is declining. The findings are critical because, as the IEA says, "future [oil] supply is far more sensitive to [production] decline rates than to the rate of growth in oil demand".
The draft report has found that the planet is far from running out of oil, as some so-called "peak oil" theorists argued. But it also finds that output from the world's oil fields, some of them discovered more than 30 years ago, is declining much faster than previously thought. That means the oil industry will need to invest more than expected.

"A detailed field-by-field analysis of historical trends and the prospect of a shift in the sources of oil point to a significant increase in future investments just to maintain the current level of production," the IEA says.
The agency, using data for the 500 largest fields and extrapolating its findings to smaller fields, estimates the annual decline rate is 9.1 %, a figure that drops to 6.4 % when companies invest in more wells and techniques.
"More investment over the projection period [from 2007 to 2030] will be needed to offset the loss of capacity from existing fields as they mature," the report says.

For example, it says the UK's oil production from the North Sea will plunge from today's 1.7m bpd to just 500,000 by 2030. For that reason the IEA believes oil companies and oil-producing countries will need to invest a total of about $ 360 bn a year until 2030 to replace falling oil production and increase supply by enough to satisfy the demands of emerging countries such as China.
Investment decisions by OPEC will be critical, the study argues, adding that the share of world oil production from members of the cartel, particularly in the Middle East, will grow significantly, from 44 % in 2007 to 51 % in 2030.

"Saudi Arabia remains the world's largest oil producer throughout the projection period, its production climbing from 10.2 mm bpd in 2007 to 15.7 mm bpd in 2030," the report says. "Its willingness and ability to make timely investments in oil production capacity will be a key determinant of future oil price trends."
This is a stark assessment given that the kingdom has just agreed to cut its current production as part of the OPEC agreement to shore up prices.

Worldwide, conventional crude oil production alone barely increases, from 70.4 mm bpd in 2007 to 75.2 mm bpd in 2030, as almost all the additional capacity from new oilfields is offset by declines in output at existing fields, says the report. Non-conventional oil, such as that produced from Canada's oil sands or Venezuela's extra heavy oil, is expected to play "an important role in counterbalancing the decline in production from existing fields".
The global supply of non-conventional oil is projected to increase from 1.7 mm bpd in 2007 to 8.8 mm bpd in 2030. Canadian oil sands projects make by far the largest contribution, totalling 4 mm bpd.

But it is unclear how much of that increase in expensive non-conventional oil, particularly in Canada, will become reality, as the draft report was written before the worst of the financial crisis.
"There is considerable uncertainty about future cost, the level of oil prices to make a new investment attractive, changes in regulatory and fiscal regimes and the depletion policies of resource-rich countries to support new investments," it says.