Pay Attention to Oil Decline Rates

We commonly hear that the reason oil prices have risen is rapid demand growth in developing countries, particularly China and India.  But the decline of mature oil fields throughout the world is a much greater source of demand for new oil supplies than the growth of end user demand.  It has been estimated by CERA that declining fields lose 4.5% of total oil production per year thus requiring about 3.9 mb/d of new oil each year for the global oil supply to stay the same.  The growth in end user demand, on the other hand, varies from only the currently estimated 800 kb/d this year to about 1.5 mb/d in recent years, much less than the estimated 3.9 mb/d per year of declines.   (Frankly, I’m not certain either the decline or the demand number is accurately known; I take all oil statistics as estimates at best.)

Decline rates is a subject of great interest and debate to oil investors because the total potential swing in oil production is so large.  Optimists point to new technologies for oil recovery, particularly of late horizontal drilling, and greater investment in oil recovery caused by higher prices as reasons to think oil supplies will not decline rapidly, if at all.  Pessimists point out that fields to which extraordinary recovery techniques have been applied (as so many have at this point) decline at much higher rates once their decline begins, just as offshore fields decline more rapidly than land fields.  For those reasons and also because all the world’s fields get one year older every year, they say, decline rates will increase in future years.

Statistics put out by the IEA and published by the Oil & Gas Journal (4/7/08)  indicate that non-OPEC decline rates averaged 7.7% for the period 2000 - 2007.  The IEA also said that the decline rates over that period did not “accelerate markedly” which suggest some growth but not much - at least to me.  That covers fields with consistent declines for at least 12 - 18 months.  For all non-OPEC fields - those in decline and those not - the IEA estimates a decline rate of 4% - 5%.  Interestingly, that is a fairly large range amounting to 860 kb/d, or equal to all the growth in new demand that is projected for 2008. 

The IEA published graphs of the decline rates from 2000 - 2007 for groups of countries as well as certain individual countries.  They make the point that OECD decline rates are much greater than non-OECD.  What stood out in my reading of these charts was the steady increase in decline rates of one particular group of countries:  The Middle East.  They were about 3% in 2000 and had risen to about 13% last year.  Since that’s where a lot of oil comes from, this graph seems to be a bit disconcerting. 

What everyone in oil-world wants to know is what sort of decline rates are being experienced at Ghawar, the giant Saudi field.  The Saudis are not saying, other than to report that total production of Ghawar remains steady at about 5 mb/d.  But we know that there has been a huge increase in the number of drill rigs working to extract Ghawar’s oil in order to keep production stable (if it is).  So it seems to be undeniable that some sections of Ghawar are in decline while others are being boosted to make up for them.   When the field as a whole goes into decline, as it must some day, it will be the beginning of the end of the oil age, given Ghawar’s size.  Stay tuned.

Comments

[User 161473]

Jim,

Another good article!

When we talk about technology in the oil business it usually revolves around technology to get the oil out of the ground faster. We have gotten much better at bringing production up from new wells quickly. Additionally, much of the technology is involved in keeping production from declining. I think most people are under estimating the decline rates by a wide margin. This issue has the potential to catch people off gaurd. Look at Cantrell and the North Sea. As you mentioned Saudia Arabia has gone from 3% to 13%....what happens when you get to 20%-30%.

Thanks,
Don

[User 217089]

Jim, not sure of your background, but nice to see someone outside the O&G industry "get it".

On another note, on the ANWR and offshore drilling, your stance? I heard that Obama said it would not reduce the cost of oil. He may or may not be right (I personally think it has to help a little), but, I thought I remember learining in 7th grade that the allies cut off the Germans supply to fuel to ultimately beat them (trucks/artillery were idled). Can not Obamoa at least support the drilling for our national defense? It this supply things really gets ugly, it will not be about price, it will be about survival/getting it at all. As a very worst case scenario, our enemies in the future could either refuse to export to us or block exports into the country like we did to Germany.

Obama et al, will you rethink this thing? I agree we need to develop other fuel alternatives, but in the meantime, we do need to secure our oil supply.

[Karl F.]

The observation, that the production of maturing fields tends to decline is a platitude, true since 1860. The question is, how much new capacity is beeing added.
If you quote Cera or others, you shouldn't quote out of context.
Here is the Cera comment on the peak oil nonsense:

www.cera.com/aspx/cda/...

[User 201843]

A lot of people forget that if oil and gas reserves are in our sphere of influence (in the ground or in the Gulf of Mexico) and has not been taped it becomes as secure as you can find and much less subject to an outside attack.
Yes it will take 5 years to get it on line and but then it is still there and will be able to be developed at a time that will be most important.

Remember "OPM" = other peoples money.... now it will always be better and cheaper to use "OPO" other peoples oil.

[Brian Pursley]

Ah yes. Hubbert's Cliff: peakoildebunked.blogsp...

"The cliffer argument ignores an important fact: Small or even fairly large areas collapsing at high rates have very little effect on the world. If Yibal (at 250kbd) collapses in one year, for a decline rate of 100%, the world only drops by 0.3%. Even if Ghawar collapses at 12% a year, that will only shave 0.7% per year off the world total.

Let's look at some individual countries to see how this works.

EIA C&C stats for Mexico after its peak in 2004 look like this:

2004: 3383kbd
2005: 3334
2006: 3256
2007: 3126 (9-month average)

That's an annual decline rate of 2.8%, not 12%. Even Mexico (during the collapse of Cantarell!) doesn't collapse like Cantarell."

[jjhman]

Let's add Jeffery Brown's ELM model to the discussion: If exporting countries are depleting AT ALL and are experiencing increased petroleum use, because of increased wealth due to higher prices, their net exports will be dropping much faster than their production decline rate.

Approximately 20% of the world's production comes from only 14 super giant oil fields. Virtually all of those fields are over 25 years old, some over 50 years old. When those super giants are gone, and we are relying on fields like Tupi in 6,000 feet of water, there won't be any cheap oil. And industrial civilization doesn't just depend on oil, it depends on cheap oil.

[Freddy Hutter]

At TrendLines Research, we track the 20 recognized forecasts of future crude production. Based on the group's Average, our June Update projects that Peak Oil will occur in 2028 @ 95-mbd (compared to 86-mbd in 2008).

Our own model, the Scenario-2300, is based on Underlying Decline Rates (UDR) of 4.2% in the USA, 2.5% in Saudia Arabia and 3.8% on the global scale. UDR became significant in 1999 and our analysis reveals that it is increasing world wide by 0.35-mbd/yr.

During these past 10 years, the Industry has brought aboard 26-mbd of new capacity. 10-mbd has increased the production rate & 16-mbd has been lost to addressing the Underlying Decline factor.

As the UDR continues to grow towards 8%, it will be increasing more difficult for the Industry to exceed the Supply undercut in mature and retired fields. My own model predicts that the crossover will occur in 2029 when flow will Peak @ 94-mbd.

Our oil production, reserves & price charts may be viewed at www.trendlines.ca

[john s. gordon]

we will need liquid transportation fuels from all sources including switchgrass ethanol and syncrude from domestic (hooray!) coal.
> jack

[worthy]

Great article, Jim. I agree with you that getting accurate information as to actual rates of decline is somewhat difficult, but the main point that I think many people know, but ignore, is that all fields decline. Duh! Right? What is so problematic is not just replacing that production lost to decline, but adding enough more production to accomodate additional demand. 87mm bbls a day say losing 5% is 4.35 mm bbls lost each year. If we need an additional 1.5 mm bbls for increased demand, we need to find just short of 6 mm bbls per year. Very simple math. Regrettably, those who would deny drilling rights for the OCS, ANWAR, and other areas, just plain do not "get it". Actually, they probably do "get it", but need to get re-elected this fall...

[Elliot Miller]

Worthy:
You were right the first time. Politicians don't get it. Our Congress is replete with economic ignoramuses.

[Jimbo]

I have read that President Obama plans to develop fuels from liquid moonlight and pixie dust...free from Carbon of course.

[rbblum]

When the field as a whole goes into decline, as it must some day, it will be the beginning of the end of the oil age, given Ghawar’s size. Stay tuned . . .

The case could be made 'today' (imho) that we have already passed the threshold of the oil age decline as evidenced by global oil price
having migrated to a maximum equilibrium level. Thus, necessitating the current transition into any and all available energy sources that hopefully will result in securing or developing an efficient, cheap, long-term energy source.