The world is not going to run out of oil. There is plenty of it. In fact, there is likely way more oil than we need, and much of it will have to remain in the ground. That means that the oil industry is in danger of vastly overspending to dig it all up.
A new report from Carbon Tracker looks at the common argument that high natural decline rates at oil fields necessitate high levels of spending on finding and developing new oil reserves. The report says that natural decline rates are often overstated or used in misleading ways.
Ultimately, the average decline rate could sit at about 4.4 percent through 2040 if the industry invests around $175 billion a year, according to Rystad Energy. Related: China Set To Miss Shale Gas Production Target By A Mile
So what? Why is this important? “The reason this matters is simply that the scale of the problem is considerably less than some would have us believe,” Carbon Tracker wrote.
Instead, the main focus should be on capital expenditures, not decline rates. “The conclusion is that existing levels of oil production can be sustained at relatively low levels of capex; it is the growth that is very capital intensive,” Carbon Tracker said.
OPEC and Russia can keep very high levels…
The world is not going to run out of oil. There is plenty of it. In fact, there is likely way more oil than we need, and much of it will have to remain in the ground. That means that the oil industry is in danger of vastly overspending to dig it all up.
A new report from Carbon Tracker looks at the common argument that high natural decline rates at oil fields necessitate high levels of spending on finding and developing new oil reserves. The report says that natural decline rates are often overstated or used in misleading ways.
For instance, many analysts and even oil companies themselves argue that enormous volumes of new reserves are needed to offset declining fields, and because of that, oil prices will need to remain high. But according to BP, total proved reserves are around 1,700 billion barrels, enough to last at least 50 years. “So decline rates need to be seen within this context. There is plenty of oil to extract. Some is cheap, some is expensive,” Carbon Tracker analysts Harry Benham and Kingsmill Bond wrote in their report.
Moreover, the industry has a variety of ways to control and mitigate decline, such as gas and water injections, new data techniques, and portfolio optimization. For evidence that production does not fall off a cliff when companies take their eye off the ball, witness what happened after the collapse of oil prices in 2014. There was a massive reduction in capital expenditures, but decline rates did not explode, as is often argued.
Ultimately, the average decline rate could sit at about 4.4 percent through 2040 if the industry invests around $175 billion a year, according to Rystad Energy. Related: China Set To Miss Shale Gas Production Target By A Mile
So what? Why is this important? “The reason this matters is simply that the scale of the problem is considerably less than some would have us believe,” Carbon Tracker wrote.
Instead, the main focus should be on capital expenditures, not decline rates. “The conclusion is that existing levels of oil production can be sustained at relatively low levels of capex; it is the growth that is very capital intensive,” Carbon Tracker said.
OPEC and Russia can keep very high levels of production online at every low cost. But growing production – the marginal barrel – is much more expensive. Because the marginal barrel tends to set prices, prices have climbed to extraordinary heights at different moments in time. One can construct upward sloping cost curves that visibly demonstrate how additional barrels need higher oil prices in order for it to make sense to develop them.
Carbon Tracker sketches out a rough cost curve to illustrate. OPEC+ can sustain roughly 48 million barrels per day at a cost of $7 per barrel. The rest of the world can sustain an additional 47 mb/d at an average cost of $15 per barrel. Then, notably, the last 10 mb/d needs $29 per barrel, a rather steep jump.
But high-cost marginal barrels only make sense when demand is rising. If demand is not rising, the marginal barrel will have to come from a lower point on the cost curve. And because the cost curve is pretty steep, if demand starts to fall, oil prices could fall quite a bit. And there’s the rub.
The bottom line, then, is that high-cost production is very much at risk if demand starts to falter. “The oil industry has become accustomed to the ceaseless opening up of new and expensive territories. This was necessary in an era of rising demand,” Carbon Tracker said. “However, in an era where demand is likely to peak and decline, it will be both possible and desirable to spend far less on capex.” Related: The Beginning Of The End For British Shale Gas
Through 2030, the difference in the spending needed to grow production by 1 percent from a scenario in which production is flat is $781 billion. “This surplus capex equals $65bn a year, which is about the same as the capex budgets of Exxon, BP, and Shell added together,” Carbon Tracker said. “If there is no growth in demand, this expensive capex will not be needed.”
And because OPEC+ can produce oil so cheaply, they can knock high-cost oil offline if they want. “The implication for the oil majors is clear – they should not be seduced by the belief that OPEC-Plus will support continuous production cuts at levels that will enable them to develop high-cost projects,” Carbon Tracker warned.
The world may simply not need some of the high-cost oil in the works.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
Moreover, the world is not going to run out of oil not because of lack of global demand or peak oil but because current technology gives us a global average recovery factor (R/F) of 35%. This means that oil wells are retired when 35% of their oil has been extracted at current technology leaving 65% of the oil behind. However, these wells will be revisited when technology improves the R/F by even 1% to 36%.
Of course there are a variety of ways to mitigate production decline. A case in point is Saudi Ghawar oilfield, the world’s largest onshore oilfield. Ghawar which has been producing oil for the last 70 years albeit at a declining rate, is being kept in production by the injection of billions of barrels of water, a massive infill drilling programme and horizontal drilling.
Compare this with US shale oil wells where the depletion rate ranges from 70%-90% in the first year of production. That is why the US shale oil industry has to drill almost 10,000 new wells annually at an estimated cost of $10 bn just to maintain production at current levels. That is also why the US shale oil industry will never be a profitable one now or in the future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London