Pay Attention to Oil Decline Rates

Includes: DBO, OIL
by: Jim Kingsdale

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.