International Energy Agency (IEA) executive director Fatih Birol speaks on July 12, 2017 at the IEA- OPEC dialogue session during the 22nd World Petroleum Congress in Istanbul. / AFP PHOTO / OZAN KOSE (Photo credit should read OZAN KOSE/AFP via Getty Images)
AFP via Getty Images
A new report from the IEA describes how higher decline rates for unconventional oil means that the amount of oil production that needs to be replaced annually has grown from 3.9 mb/d per year in 2010 to 5.5 mb/d per year now. As long-time director Fatih Birol said, “The situation means that the industry has to run much faster just to stand still.” Oil and gas groups spend $500bn a year ‘to stand still’ as fields decline, says IEA Does this presage a new price spike or even a global peak in oil production? Not necessarily.
Many in the industry are hailing this as a reversal from the IEA’s earlier position that, in its NetZeroEmissions 2050 (NZE2050) scenario, no new fossil fuel mine and field developments were needed. (Investment in existing fields and deposits were still necessary, the IEA said, something many overlooked.) But it’s not clear this is any more than an acknowledgement of the difference between real-world trends and the aspirational NZE2050 scenario.
Still, this new study has set off alarm bells for some and especially peak oil advocates who are treating it a sign of an impending peak in production. Peak Oil for Gen Z: Seven Questions and Answers for a New Generation – resilience More cautious investment analysts see it as heralding a new spike in oil prices. Shrinking surplus capacity in OPEC+ and lower investment in non-OPEC production implies a tighter market in the medium-term, all else being equal (which it never is). But there are three aspects of the responses to study that require clarification: the conditionality, the historical perception of decline rates and the historical context of the estimates. All suggest a degree of skepticism about the impact of the findings.
Frist, the conditional nature of the findings is glossed over by casual observers. Specifically, higher decline rates are one input to production trends; actual production also depends on investment, so the report’s biggest takeaway is that investment levels needed to maintain production have increased, not that production cannot continue growing. Indeed, I made a similar point in my 2021 EPRINC report which noted that the investment cessation would likely not be honored by OPEC companies, leading to a major shift in market share. “Shifting Oil Industry Structure and Energy Security Under Investment Phase-Outs” by Michael Lynch – EPRINC
Some will find the report alarming because they consider it to be describing a novel phenomenon, reflecting their own inexperience. These analysts fail to recognize either the history of decline rates or the history of worries about decline rates, For example, the president of the Association for the Study of Peak Oil writing in 2014 stated that “In around 2008 the IEA and others began to discuss the decline in production from existing oilfields.” 200 billion barrels of new oil production is needed by 2030. [emphasis added] Another peak oil advocate claimed a colleague coined the term “Red Queen” in 2012. Peak Oil, Ponzi Pyramids, and Planetary Boundaries – resilience
Others merely repeated concerns without being aware of their provenance. Joseph Romm criticized my anti-peak oil views in 2009, repeating Merrill Lynch’s comment that “Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years” Michael Lynch, Wrong on Oil Prices for Over a Decade, is Wrong About Peak Oil | HuffPost Latest News [emphasis added]
The truth: Not only had many discussed oil field depletion long before 2008, but the worries about field decline were not new. Read for example Jimmy Carter’s 1977 speech when he said we needed a new Saudi Arabia every three years, adding “Obviously, this cannot continue.” Address to the Nation on Energy | The American Presidency Project M.I.T.’s M. A. Adelman, the most prominent American petroleum economist (and my mentor) wrote the equations demonstrating the impact of depletion on production and cost, as later described in his collected papers, The Economics of Petroleum Supply (M.I.T. Press 1993).
Thus at the height of the peak oil debate in the 2000s, advocates regularly pointed to oil field decline as the ‘Red Queen’ challenge. As one put it, “The trouble with conventional oil is that companies are always on a tread mill which is running faster and faster. Eventually it runs too fast and they begin to fall off it. It’s the old ‘Red Queen’ effect.” The Oil Drum | Drumbeat: September 8, 2012 The term is from Through the Looking Glass, where the Red Queen tells Alice, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
The Red Queen Challenge
Ted Sanderson and the author
This concern was typically accompanied by graphs like the figure below, produced by the IEA and similar to many others, breaking down future investment needs to show the amount of future capacity additions required just to offset depletion. This led the president of the Association for the Study of Peak Oil to remark in 2014 that, “new production equivalent to 50 Mb/d is needed by 2030 just to keep overall production constant. For the period 2013 to 2030, this is according to Chevron equivalent to approximately 200 billion barrels of oil.” 200 billion barrels of new oil production is needed by 2030 He felt this implied a near-term, irreversible peak in global oil supply.
Theoretical Impact of Oil Decline
The author.
Fears about rising decline rates were also common in the 2000s, especially but not only, among peak oil advocates. For one thing, deepwater fields have higher decline rates than shallow and onshore fields and new methods like horizontal drilling accelerated the production from given reserves. Some referred to so-called ‘superstraw’ technologies, arguing that they were not increasing recovery of oil but accelerating it, meaning a production collapse was that much nearer. The Oil Drum | Well, could we linearize this, then? And FULLTEXT01.pdf
The other historical shortcoming stems from the absence in the above graph of past capacity additions that offset field decline. By not including that data, it appears as if the need to offset depletion has only now arisen when in fact it has been a standard element of the industry since its first days: all wells decline over time and increasing production has always meant first replacing capacity lost to decline.
The figure below uses the IEA’s estimate of capacity loss to depletion in 2010 and 2024 and using linear interpolation to show the annual trend (which is only a rough approximation), combined with the annual change in production shows the gross additions to capacity over the past decade and a half. They have been increasing over time, as the IEA notes, but showing the historical additions makes it clear that the problem is more evolutionary than revolutionary.
Estimated Capacity Additions, Net and Gross
The author from IEA data.
Given the caveat that past claims about the impact of decline rates have proven overblown, what does the new report tell us? The important takeaway is not that oil field decline rates have accelerated and require ever-increasing amounts of investment to offset, but that the rise of shale oil production with its high decline rates has increased the weighted average decline rate. This does mean that more investment is required to offset depletion, again, all else being equal. But how much investment is needed, and whether it can be deployed in time to prevent an oil price spike in the next few years, is an entirely different question.
The fact is that the IEA and many in the industry have long warned that upstream investment was inadequate to meet expected demand. Indeed, until recently, the IEA constantly lobbied OPEC countries to increase investment and add capacity. Famously, James Schlesinger went to Saudi Arabia in 1978 and told them the world had a dire need for additional oil from Saudi Arabia because, as the EIA predicted, production had peaked outside the Middle East and indeed in non-Middle East OPEC like Venezuela.
But those expectations proved wildly wrong, in part because the Iranian Oil Crisis (1979-80) depressed demand, but also production outside the Middle East area repeatedly outperformed the experts’ predictions. The EIA would regularly calculate the needed amount of oil from Saudi Arabia, as a calculation based on world oil demand minus non-Saudi supply, as shown in the Figure below. As I have argued extensively elsewhere, a psychology of resource pessimism has often driven oil supply forecasts, far more than detailed analysis. What Ever Happened To Peak Oil?
EIA Assumed Saudi Capacity by Year of Forecast (mb/d)
The author from EIA data.
Again, the new IEA report does not indicate a sudden acceleration in depletion generally, but an increase in the average rate as the role of shale oil production rose. During that time, despite the increased depletion rates, the industry has nonetheless managed to offset them and meet rising demand. When the IEA says 5.5 mb/d of new capacity is needed yearly to offset depletion, they are also saying that they have been adding 5.5 mb/d of capacity yearly, plus the addition amounts needed to meet higher demand without higher prices as shown above. Whether they can do so in the future will depend on a number of factors.
First and foremost, both the level of investment and the location of activity matter. If money moves from the oil shales to deepwater production, for example, there would be a period of lower capacity additions before new supply kicks in. New field developments have long lead times and are thus fairly visible, and capacity additions appear likely to taper off in the next few years after current projects are completed.
On the other hand, a few countries, most notably Iraq and Saudi Arabia, could theoretically add large amounts of capacity quickly and with much less investment than in other areas. That doesn’t mean they will, of course. Additional production from Iran, Russia and Venezuela could come on line with the end of sanctions, but as of this writing, those sanctions are in place. Even when removed, there will be a lag of years before large-scale additions to supply occur. Note that production in all of those countries is generally noticeable cheaper than U.S. shale oil, meaning less investment is required.
And while the industry often talks of ‘elephants,’ or giant oil fields, new capacity is regularly added in existing fields on a regular basis, activity that tends to fly below the radar. A $10 billion deepwater oil field development is very visible, but adding water injection, gas lift or just undertaking infill drilling in an existing field does not make headlines. This type of activity also appears to be more price responsive, meaning an uptick in prices could see an increase in such investment, bringing significant amounts of capacity on-line fairly quickly.
The table below indicates how changes in capacity have occurred during different periods and the important takeaway is that in periods of high prices, few countries see declining production so that gross additions to capacity can increase net supply more strongly. From 1980 to 1998, outside of the U.S., countries with declining production totaled a mere 500 tb/d, whereas from 1998 to 2014, after a period of low oil prices, production in nations that were in decline (excluding the U.S.) was about 8 mb/d.
Capacity Changes by Period (tb/d)
The author from Energy Institute data
There is a very strong lesson that should be applied to the current series of warnings about oil supply tightness creating a price spike, and future columns will go into more detail. The fact that past forecasts have tended to be too pessimistic and relying on many of the same rationales as are currently being touted should be a cause for skepticism. A few months of poor production performance can be very misleading and industry complaints about poor economics are often seized upon a little too eagerly by supply pessimists.
The anticipated near-term supply glut may prove to be overstated, but the market balance beyond the next year or two is going to be heavily dependent on the status of sanctions against the big three (Iran, Russia and Venezuela), the willingness of resource-rich countries to add capacity (Iraq, Saudi Arabia and the U.A.E.), and the extent to which higher prices restore production growth in the shale fields. To quote the American poet James Morrison, “The future’s uncertain, the end is always near.
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