(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, Sept 15 "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," the Red Queen told
Alice in Lewis Carroll's novel "Through the Looking-Glass".
Oil companies have to invest heavily simply to offset the
impact of natural decline rates on their existing fields, and
even more if they want actually to increase production.
The need for continued investment and drilling to maintain
output as a result of the rapid decline rates on shale wells has
been widely discussed.
But decline rates on conventional oil fields are even more
important because they account for more than 90 percent of
Decline rates on conventional fields will play a critical
part rebalancing the oil market and determining where oil prices
settle in the longer term.
Decline rates will cut output by several million barrels per
day each year in 2016 and 2017 unless oil producers invest to
maintain production levels from existing fields and develop
But with oil prices below $50 per barrel, almost all
companies, from the super-majors to national oil companies and
independents, are slashing exploration and production budgets
hard to conserve cash.
Cuts will hit sustaining expenditure on existing fields as
well as frontier exploration. In a typical example, Iraq's oil
ministry wrote to contractors on September 6 warning it will cut
exploration and field development spending next year ("Iraq
warns oil companies of spending cuts" Sep 14).
"Because of the drop in oil-sales revenues, the Iraqi
government has sharply reduced the funds available to the
Ministry of Oil," the ministry told operators. "This will reduce
the funds available for the reimbursement of petroleum costs to
Some of the cuts in spending reflect a successful efficiency
drive and efforts to squeeze the costs of supplies and oilfield
services. But there are also real cuts in exploration and
development programmes which will have a direct impact on the
replacement of declining output.
"Spending curbs are accelerating decline rates," the
International Energy Agency (IEA) cautioned in a recent
editorial ("Oil Market Report" Sep 2015).
The agency predicts non-OPEC oil supply could decline as
much as 500,000 barrels per day (bpd) in 2016 because of the
capital strike, which would be the biggest annual fall in 24
Production from a conventional field follows a well-defined
pattern, ramping up quickly, then stabilising near the peak for
a few years, before entering a long slow decline.
Output rises initially as the field is developed from a
single well to a full array of producing holes deployed to drain
the reservoir efficiently.
But as the oil, gas and water contained in the producing
formations is depleted, pressure falls and the reservoir's
natural energy declines.
Eventually, production starts to fall as the wells flow more
slowly and produce a higher proportion of water rather than oil.
Field operators employ a variety of strategies to prolong
production as long as possible and delay the onset of natural
decline or at least reduce the decline rate.
Associated gas brought to the surface with the oil can be
re-injected to help maintain field pressure or gas can be pumped
in from other sources.
Fields can be placed on artificial lift with the
installation of surface beam pumps (the famous nodding donkeys)
or more commonly these days the installation of downhole
electric submersible pumps (ESPs).
And water, natural gas, carbon dioxide or special polymers
can be injected into the fringes of the field to drive the
remaining oil towards the producing wells ("Enhanced oil
recovery: field case studies" 2013).
Field management plans can increase the ultimate amount of
oil recovered significantly, but eventually the fate of all
wells and fields is the same: they produce mostly water and are
eventually shut down.
The operating costs of running the pumps and injecting
water, gas or other materials eventually become greater than the
value of the oil and the field becomes marginal and is
Based on an analysis of the production history of more than
1,600 conventional fields between 1950 and 2012, the IEA has
estimated decline rates for a range of fields.
For fields which have passed their peak, observed output
declined on average by 6.2 percent per year, according to the
IEA ("World Energy Outlook 2013").
Decline rates for offshore wells, especially in deepwater,
are faster than for onshore fields because the greater upfront
cost of drilling them encourages operators to develop them more
aggressively to earn their money back.
Decline rates on smaller fields tend to be faster than those
for larger ones, where different sections of the field can be
developed over time.
And decline rates on non-OPEC fields tend to be faster than
for OPEC fields, mostly because of the different mix of fields.
OPEC members in the Middle East and North Africa produce
mostly from very large onshore fields which they have developed
slowly to maximise and long-term revenues.
Non-OPEC production contains a much larger share of small
and offshore fields which are depleted relatively quickly for
Most of the fields within the IEA database have received
some investment to offset the impact of natural decline rates.
The agency estimates this sustaining capital investment has
typically reduced the decline rate by around 2.5 percent per
Without investment, the production from a mature oil field
would decline by around 9 percent per year on average according
to the IEA.
RED QUEEN'S RACE
The precise impact of decline rates on the 90 million
barrels per day global oil industry is hard to calculate because
some fields are still ramping up, while others are declining at
different rates depending on age and type and the amount of
In its 2013 World Energy Outlook, the IEA assumed an actual
decline rate of 2 percent per year across all current
conventional fields, rising to 4 percent per year in the 2020s.
But that projection was produced when oil prices were
averaging well above $100 per barrel and expected to remain at
that level throughout the second half of the current decade and
into the 2020s.
In a world where oil prices are expected to average just
$50-$70 per barrel over the next few years, actual decline rates
could easily reach 3 percent or even 4 percent per year.
Under a range of plausible assumptions, decline rates could
easily cut between 1.4 million and 3.6 million bpd from the
output of existing fields in 2016 and again in 2017.
Some of that will be replaced by new fields discovered and
given the go-ahead for development during the years of high
prices and are scheduled to come into production in 2016 and
Beyond 2017, however, the pipeline of new fields scheduled
to come onstream will remain very thin unless oil prices rise
In the meantime, oil companies must be induced to invest
enough in existing fields to stem the impact of the remorseless
decline from current wells.
But with oil prices stuck at less than $50 per barrel, and
almost all companies cutting capital expenditure plans for 2016,
it looks like decline rates will take over in 2016.
Unless prices recover, non-OPEC output is set to fall in
2016, and the IEA's forecast 500,000 bpd cut could end up
(Editing by William Hardy)