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THE WALL STREET JOURNAL: New Fields May Offset Oil Drop

Wall Street Journal Graphic

By NEIL KING JR.
January 17, 2008; Page A4

Output from the world’s existing oil fields is declining at a rate of about 4.5% annually, a new study concludes, depriving the world of the same amount of oil that No. 4 producer Iran supplies in a year.

Yet the study’s authors, Boston-based Cambridge Energy Research Associates, argue that their assessment supports a generally rosy view of the industry’s future, given that new projects in the works will make up for the decline.

Set for release today, the study, based on data from 811 fields around the world, takes aim at a growing school of thought that the world’s oil production may soon hit its peak just as demand is surging in Asia and the Middle East.

“This study supports a view that there is no impending short-term peak in global oil production,” the paper concludes. CERA, led by oil historian Daniel Yergin, is a prominent adviser to oil companies.

Oil-field depletion rates are a key barometer of the health of the world’s oil market, and thus are hotly debated among factions feuding over the relative stability of future supply. That debate is made all the more intense because analysts have limited access to reliable data on field-by-field production rates from key suppliers such as Saudi Arabia, Iran, Venezuela and Russia.

Decline rates are also closely watched because the world remains heavily reliant on output from regions and individual fields that have been producing for decades. Some of the biggest fields in the North Sea, Alaska and the Gulf of Mexico are declining at rates approaching 18% a year.
 
WSJ’s Neil King discusses a study that says the productivity is sliding at the world’s existing oil fields, and whether oil productivity has peaked.

The CERA study, however, asserts that fewer than half of the fields scrutinized were in decline. The study also argues that decline rates overall aren’t accelerating, as some in the industry insist.

Mr. Yergin said that the huge number of projects under way in Brazil, Saudi Arabia, West Africa, the Caspian Sea and the Gulf of Mexico will more than make up for natural declines from fields now in production.

“This is a daily, hourly and minute-by-minute challenge for the world’s oil industry,” he said. “But for every Iran you are losing, you are gaining almost two Irans in return.”

Long-term concern over supplies has contributed to a surge in oil prices in the past four years. In New York yesterday, crude futures fell $1.06 a barrel, or 1.2%, to $90.84, but are up 74% in the past 52 weeks.

The study strikes a more optimistic tone than do many heavy hitters in the industry. Andrew Gould, the longtime chief executive of oil-services titan Schlumberger Ltd., has estimated that the industry’s average decline rate is closer to 8% a year and growing. Christophe de Margerie, the CEO of French oil company Total SA, warned in October that many existing oil fields are being depleted at rates that will do them lasting harm.

Veteran Houston-based energy banker Matthew Simmons says that few in the industry believe that the global oil-decline rate is below 5% a year, but the lack of clear data is a problem that haunts the industry.

“If we can get field-by-field data for the last five years for the top 250 oil fields, we could answer this once and for all,” says Mr. Simmons, who has argued the world faces a decline in oil production. “But the big producers in OPEC and Russia are not about to give those up.”
 
CERA has drawn fire among skeptics for being one of the most optimistic forecasters in the industry. The company predicted in June that world oil production, now at just above 85 million barrels a day, could hit 112 million barrels a day by 2017.

The task of reaching that mark appears daunting. According to CERA’s own rate of decline, the world’s existing fields by 2017 will be producing about 33 million fewer barrels a day than they are now. So hitting a production level of 112 million barrels a day within a decade would require adding 59 million barrels a day in new capacity — or more than six times today’s daily output from Saudi Arabia, the world’s largest oil exporter.

CERA argues that nearly half of that output will come from nonconventional sources such as biofuels and natural-gas liquids.

“However you spin it, a 4.5% decline rate is a very sobering fact,” says Thomas Petrie, a veteran Denver-based oil banker and Merrill Lynch & Co. vice president. “People are running hard to find new sources of oil, and that’s just to keep even. When was the last time we discovered another Iran?”

On top of making up for natural productivity declines, the International Energy Agency yesterday predicted that global demand for energy will jump 2.3% this year, to 87.8 million barrels a day. Asia alone, the IEA says, will require a million barrels a day more by the end of the year than it did in December 2007.

DOOMSDAY DEFERRED?
 
• What’s New: A study says the world’s oil fields have a depletion rate of about 4.5%, equaling a loss of nearly four million barrels a day this year.

• The Positive: But the study’s authors argue that new projects will offset the losses.

• The Question: Depletion rates are a key issue in the debate over whether the world is nearing peak oil production.

Write to Neil King Jr. at neil.king@wsj.com

2 Comments on “THE WALL STREET JOURNAL: New Fields May Offset Oil Drop”

  1. #1 Freddy Hutter
    on Jan 23rd, 2008 at 19:56

    Mea culpa, CERA. Each January, energy analysts are deluged with year ending and previous years’ revision data. With the present controversy over Underlying Decline Rates (UDR), for several days i’ve been running the 2007Q4, 2007 & the impressive 2006/2005/2004 upward revisions thru our model (’til the wee hours).

    There are two camps in UDR study circles. One low & another that sees an 8-9% trend. The latter follows what i am deeming a misguided anomoly that extrapolates to the hgher figure.

    With respect to the folks at Schlumberger, methinx when they see the new data they will agree that CERA is accurate in downplaying the UDR. Thru most of 2007, i had been committed to a 3.6% global UDR & 2.3% for Saudi Arabial. After a brief detour, my research is again leaning towards the conventional lower version.

    The Underlying Decline Rate, which was below 1% in 1999, seems to be rising at about 19% per annum and will consume about 3.9% of 2008 production or just over 3-mbd of the present 87-mbd rate. The Saudi Rate will be 3% (and rising).

    The Industry will have to match that growing component each year with new capacity to hold a plateau. And of course larger capital projects (than UDR) will allow Producers to attain new annual highs. On the contrary, failing to be diligent with new capacity builds in any year will see the production rate recede.

    My apologies to Daniel Yergin. He was ahead of the curve…

  2. #2 Freddy Hutter
    on Jan 17th, 2008 at 19:36

    CERA’s 4.5% estimate of the Underlying Decline Rate (UDR) is substantially more than last year’s Int’l Enegy Ageny’s announced 3.6% UDR. Both indicate that almost 4-mbd of new capacity is required to maintain today’s extraction rate of 87-mbd and avoid the inherent decline caused by mature and closed fields

    But it gets worse. In Dec 2004, Regular Conventional Oil (the easy lift petroleum that makes up 64% of the oft quoted All Liquids annual production) Peaked as a subcategory and is declining at 5%. Added to the natural decline mentioned, we calculate the Underlying Decline Rate to be an alarming 9% in 2008. Both IEA & CERA are chasing a moving target.

    Thus this year’s industry-announced 7-mbd new capacity will fall short of the 7.6-mbd fallout from the UDR; with the result that the shortfall will be drawn from global inventories, as was the case in 2007. Oil companies already have 7-mbd in new capacity being commissioned for the 2009 season. It is an unrelenting and awesome project to keep the marketplace supplied.

    That fine margin of capacity chasing decline helps to inspire the $88/barrel price of oil. We calculate it is about an $11/barrel factor in January pricing. Added to the industry average production cost/margin of $20, other price components are $18 for geopolitical fears, $2 depletion fear & a hefty $37 for market speculation. Total: $88. A chart reflecting these premiums over the past ten years is available for view at our website: http://trendlines.ca/monthlyreport.htm

    The world is not running out of oil. The 21 recognized estimates of Ultimate Recoverable Resource (URR) average 3.7 trillion barrels available for the future. And we only use 31 billion barrels per year! The challenge is growing the annual production amid ever increasing environmental, NIMBY & BANANA2 (build absolutely nothing anywhere near anyone or anything) realities.

    There may be years where extraction is down from the year prior. It has happened 8 times in the last three decades. And there will be gasoline for your antique Mustang for hundreds of years… albeit expensive!

    At TrendLines Research, we track the 23 recognized Estimates of future oil production for the Century and beyond. The Average of the forecast practitioners is for a Peak in 2017 @ 93-mbd. The latest update of this chart can be also be viewed free online at http://trendlines.ca/scenarios.htm

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