[Graeme]

Commentary: A 10-Year Oil Supply Retrospective Shows Unwarranted Optimism

Ten years ago this month the Oil & Gas Journal published a story from CERAWeek—an annual elite conference for the oil industry put on by Cambridge Energy Research Associates—that bears revisiting.

Why go back? Three reasons. First, CERA arguably has maintained the highest profile of any oil industry analytical shop since at least the turn of the century, thanks in large part to founder Daniel Yergin’s reputation. Every time there is a surprise in world oil supply, he’s the media’s go-to guru. When the National Petroleum Council convenes a world oil study, you can bet the ranch that CERA will play a lead role. When the US Senate or House convenes a committee hearing on oil, CERA often sits on the panel; they also deliver some of their key research papers free of charge to all US lawmakers. Their policy-oriented footprint is large and their strategic media outreach effective.

Second, at the time CERA’s 2004 forecast of seven years of history-breaking sustained growth in world oil production capacity struck many players as being an unreasonably if not outrageously optimistic headline. How does it look 10 years later? Way off base.

Third, if CERA’s oil forecast was that off base a decade ago, should we believe the current abundant-oil storyline that CERA jump-started in the fall of 2011 and that has been embraced by the press and policy makers alike? So let’s look back.



First and foremost, CERA underestimated decline rates from existing oil fields. About the time of its 2004 conference, an oil industry analyst who knew Daniel Yergin asked him, during an elevator discussion, what decline rate for producing fields CERA used when calculating growth in world oil supply in their major studies. Mr. Yergin replied, “oh, in the 1% to 2% range.”

Chalk that up as a fatal flaw. Over seven years, a decline rate of 1.5% would mean having to replace only 8+ million b/d of production capacity. It’s ironic that by late 2007, in what CERA called a ground-breaking study, they calculated the actual decline rate from 811 of the world’s major oil fields at 4.5 percent per year. Over those same 7 years, using their 4.5 percent decline rate would require 23 million b/d of capacity just to keep production flat. IEA estimates for decline rates rank even higher than CERA’s.

resilience

[Plantagenet]

Thanks Graeme. Good find.

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The argument seems to be over at the big oilcos. After launching a very expensive effort to boost their reserves over the last five years, the oilcos are giving up. They are cutting their exploration budgets back and pretty much admitting they can't find the oil they need to keep their production from falling.


There just ain't no more big oilfields out there.

[rollin]

Very nice photo Plant. The sun setting on the oilfields. Perfect.

When the reality sets in with the general public, the amount of finger-pointing, gnashing of teeth, and writhing in the dirt will keep the MSM presses rolling for quite awhile. In the meantime the politicians can get hopping about telling everyone to get working on alternatives. I figure the real hopping will be post 2020. If they wait much longer it will be lifeboat time, not mitigation time.

[Subjectivist]

You know this is reminding me of the djia crash in 2008, all kinds of warning signs are showing up but the media keeps trumpeting the endless growth paradime as if it can never end.

[ROCKMAN]

I'll point out again the relative meaningless of any forecast if it doesn't include the pricing assumption that forecast is based upon. One can debate the decline rate of existing fields until the cows come home. But that decline doesn’t determine how many new wells are drilled. No one drills a well just to replace declining reserves. They drill wells to replace declining reserves if the economics justify the drilling. And that depends upon the price of oil. It should be obvious to everyone that if oil were still $30/bbl we would not have had the surge in US oil production. And if that isn’t obvious to them then IMHO you should stop discussing such a complex issue with someone who is so clueless. LOL.

CERA et al can project any future production curve they might want. How one judges the validity of such a forecast should depend on how they view the validity of the future pricing those projections are based upon. If one doesn’t know that pricing forecast then they are wasting time IMHO.

IOW did CERA base their past projection on $100/bbl oil or $60/bbl oil? Are they basing future oil production rates based upon $90/bbl oil or $140/bbl oil? Don’t know? Then why would one try to cast judgment on their numbers or anyone else’s?

[rollin]

Assuming a decline rate in production from existing fields of 4.5% and pricing not allowing much EOR, existing fields will be at 63% output in 10 years. That will mean about 40 million bpd additional production must be brought on line in the next ten years to keep up with current consumption.

How can this be done when we currently can only increase production by a few percent in a decade? During that time the price has risen by almost 500% with the effect of increasing total production rate by less than 10%. The effectiveness of price increase is 1/50, thus eliminating price as a major factor in oil production increases. Overall, price increases have mostly maintained production levels.

Using our 4.5% decrease rate, a 500% increase in price allowed a 37% replacement of lost production and an increase of about 8% giving a total of 45% new production. That gives an effective (replacement+gain)/cost of 9/100 or 9 percent.

So the economy is working 10 times harder for a small gain in production. Sounds like a case of limits to growth in the oil field.

The question everyone should ask themselves, is it worth a 500 percent increase in price or even a one hundred percent increase in price to attempt to hold oil production at it's constant level or a slight increase? Everyone I read believes that an increase to $200 per barrel would crash the world economy, so it's an academic point.
We are then destined for descent in oil production in the very near future.

[ROCKMAN]

pstarr - This might surprise folk but the oil patch tends to take a very consistent approach to predicting future demand, prices and drilling activity.

Demand: consumers will demand what they can afford to buy. We assume future prices will be what they are today so demand will stay the same. We don’t know that and few really believe it long term. But we don’t let that change our plans.

Prices: most companies (despite what the PR machines put out) typically use current prices with little or no inflation. In fact, many tend to give current prices a little bit of a haircut in the economic analysis. Does that mean we expect prices to stay static? No…it means we accept we can’t predict future prices but it’s very easy to know what prices are today. Someone trying to sell me a deal and might use a significant future price increase. We simply take his production projection and use our lower price platform.

Drilling activity: Easy – We take what we have in inventory to drill and assume the economics used to justify projects will hold and divide that into the budget monies given us and… Shazam!...that’s how many wells we’ll drill. But that doesn’t work worth a damn when the economics change. Like it did for Devon when NG prices crashed back in late ’08. They had budgeted for 18 rigs continuously drilling the shales in east Texas. And then prices crashed and they paid $40 million in cancellation penalties to drop 14 of those 18 rigs. But there wasn’t any problem coming up with money in the budget to pay those penalties: lots of capex left over in the budget from those 100’s of $millions of wells that weren’t going to be drilled based on the new economics.

Bottom line in that potion of the oil patch that actually makes drilling decisions: we pretty sure we know what we don’t know and don’t try to pretend otherwise. We’ll make assumptions that we know we can really make with a great deal of accuracy and then just wait to see how close (or not) we come to the model.

[BobInget]

Summary of Weekly Petroleum Data for the Week Ending February 7, 2014
U.S. crude oil refinery inputs averaged over 15.2 million barrels per day during the week ending February 7, 2014, 166 thousand barrels per day more than the previous week’s average. Refineries operated at 87.1% of their operable capacity last week. Gasoline production increased last week, averaging about 8.9 million barrels per day. Distillate fuel production increased slightly last week, averaging 4.6 million barrels per day.
U.S. crude oil imports averaged over 7.9 million barrels per day last week, up by over 1.0 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, 1.5% below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 350 thousand barrels per day. Distillate fuel imports averaged 269 thousand barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.3 million barrels from the previous week. At 361.4 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories decreased by 1.9 million barrels last week, but are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories decreased by 0.7 million barrels last week and are well below the lower limit of the average range for this time of year. Propane/propylene inventories fell 2.9 million barrels last week and are below the lower limit of the average range. Total commercial petroleum inventories increased by 2.0 million barrels last week.
Total products supplied over the last four-week period averaged about 19.2 million barrels per day, up by 3.0% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged about 8.4 million barrels per day, down by 1.0% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels per day over the last four weeks, up by 8.6% from the same period last year. Jet fuel product supplied is down 0.1% compared to the same four-week period last year.

[BobInget]

With all this talk about exporting our way out of the huge oil glut, here are a few interesting facts.

the SPR is currently 241 million barrels 'underfunded'.
Full capacity 727 MB, Today's inventory 696 MB.
Last action; withdraw (to Marathon) Sept, 2012
No deposits or withdraws since.
Average price paid for SPR oil $29.70 per barrel.
energy.gov/fe/services/petroleum-reserves/strategic-petroleum-reserve/spr-quick-facts-and-faqs

What do I know but if we needed to relax this "glut" why not replenish SPR?
Fact is, importing OVER eight million barrels pd including finished products disproves any glut myth.

When spring finally arrives we are certain to see OVER 20 million B p/d (projected +6% over 2013)

[Newfie]

Wouldn't it make sense to merge this topic with the VERY SCARY GRAPHIC thread?

I mean, we are talking about where we SHOULD be reinvesting profits.

But the other thread talks about where we ARE reinvesting profits.

The juncture is where Fantasy meets Reality?