Oil industry running faster just to keep up?:John Kemp

--John Kemp is a Reuters columnist. The views expressed are his own--

By John Kemp

LONDON (Reuters) - Like a hamster trapped on a wheel, the International Energy Agency (IEA)'s 2008 World Energy Outlook (WEO) paints a depressing picture of an oil industry having to run faster and faster just to keep pace with burgeoning oil demand over the next 20 years.

WEO2008 estimates the industry will need to find 64 million barrels per day (bpd) of new oil production capacity to meet the expected growth in demand by 21 million bpd by 2030 and offset 43 million bpd of expected declines from existing fields. The total cost is put at around $5 trillion at today's prices.

The gross capacity required is equivalent to more than three quarters of the world's current oil production (82 million bpd) and the capital expenditure exceeds the total annual output of Japan, Germany or China.

WEO2008 strongly implies herculean efforts will be required to bring all this new oil onstream, and the industry has no more than a moderate prospect of succeeding. Only a structural upward shift in prices can generate the incentives and resources to make this investment program possible. Oil consumers should accustom themselves to much more expensive oil throughout the forecasting horizon.

But projections over such a long period are notoriously sensitive to very small changes in the assumptions made. In particular, the WEO projections are highly dependent on assumptions made about the feedback between oil prices and long-term demand, and the cyclical relationships between prices, costs and supply.

FIELD DECLINE RATES

Based on detailed data for the world's 580 largest oilfields and an extrapolation to the remaining 70,000 smaller fields, WEO2008 estimates output from existing and future fields will decline by 6.7-8.6 percent a year.

The field study reaches some interesting conclusions:

(a) Observed output declines are much slower for super-giant fields (>5 billion barrels of initial proven and probable reserves) than for giant fields (>500 million barrels) and large fields (>100 million barrels). Decline rates are just 3.4 percent per year for super-giants, rising to 6.5 percent for giants and an alarming 10.4 percent for large fields.

(b) Decline rates are much slower in the Middle East (2.7 percent) than for the world as whole (5.1 percent) and for OPEC (3.1 percent) than non-OPEC (7.1 percent).

(c) For the same field, decline rates accelerate from the post-peak period (5.1 percent) to the post-plateau period when production drops below 85 percent of peak (5.8 percent).

(d) Surprisingly, given accelerated declines over time within the same field, decline rates tend to be lower for the oldest pre-1970 fields (3.9 percent) than fields which entered production in the 1980s (7.9 percent) or the 2000s (12.6 percent).

(e) Finally, decline rates are slower for onshore fields (4.3 percent) and much faster for offshore shelf fields (6.6 percent) and super-accelerated for deepwater (13.3 percent).

MANAGEMENT AND GEOLOGY What explains these differences? Decline rates are field specific and depend on natural pressure loss as the field is produced and water penetration, as well as oil viscosity and the permeability of the reservoir.