Fears about 'running out' of oil are recurrent. At their strongest, they coincide with periods of high prices and tight supply-demand balance. The latest such period of 'peak oil' concerns became very evident from 2004, when strong oil demand ran up against capacity constraints. In contrast, IHS CERA's reference case for global liquid productive capacity shows growth through 2030 to around 115 million barrels per day (mbd) and finds no evidence of a peak in supply appearing before that time.
Hydrocarbon liquids - crude oil, condensate, extra heavy oil, and natural gas liquids- are a finite resource; but based on recent trends in exploration and appraisal activity, there should be more than an adequate inventory of physical resources available to increase supply to meet anticipated levels of demand in this time frame. Post-2030 supply may well struggle to meet demand, but an undulating plateau rather than a dramatic peak will likely unfold. Moreover, if the 'peak demand' now evident in the OECD countries is a precursor of later developments in the emerging markets, world demand itself could eventually move on to a different course.
At the crossroads
In the short term the industry is at another crossroads following the precipitous fall in demand in 2008-09 in response to the onset of the recession. The oil price has roughly halved from its peak of $147 per barrel in July 2008, OPEC has recently cut production, OPEC spare capacity has nearly tripled to 6.4 mbd, and the industry has slowed its pace of expansion. Early in 2009 IHS CERA estimated that as much as 7.5mbd of new productive capacity could be at risk by 2014 if costs remained high and oil prices hovered just below the cost of the marginal barrel for two years. Since then the oil price has recovered strongly to around $70-$80 per barrel, and some confidence has returned. Even in these unpredictable times the industry has continued to invest and to build new productive capacity; indeed, Saudi Arabia recently brought onstream the giant Khurais field, which at plateau is expected to produce 1.2mbd. With sustained investment, a healthy cushion of spare capacity, and slow to moderate post-recession economic growth, supply should not present major problems, at least in terms of availability, in the short term.
Of course looking further ahead, it is important to recognize that oil is a finite resource and that at some stage supply could fail to meet demand on a consistent basis. It is impossible to be precise about the timing of this event, but given the pace at which demand has increased in the past decade a pivot point may well be reached before the middle of this century. Much depends on key factors such as global economic growth, the capability of the upstream industry, costs, government policies on access and taxation, the evolution of renewable and alternative energy sources - particularly for transportation - and the effect of climate change issues on policies and regulations concerning the use of fossil fuels. However, there is time to prepare and to make rational decisions to avoid being forced into short-term approaches that may not resolve longer-term problems.
Many studies of future oil supply examine subsurface issues and focus in particular on the scale of the resource while giving limited consideration to technology, economics, and geopolitics. Though belowground factors are critical, it is aboveground factors that will dictate the ultimate shape of the supply curve. This IHS CERA Report presents the main points in our current productive capacity outlook to 2030 and discusses the architecture of future conventional and unconventional oil supply. In order to provide a framework, the methodology and foundations of the outlook are reviewed and the results of supporting studies on decline rates and giant fields are included.
In so doing, this report addresses the debate over 'peak oil'. There is much emotion involved in that debate. In our view much would be gained by lowering the emotional level and instead shifting to a more objective dialogue, based on a comparative view of data, methodology, and analyses. Our hope is that this paper can contribute to such a discussion and exchange. Our hope is that out of such a dialogue will come a deeper understanding of the world's oil supply in the decades ahead -a question crucial to the world's overall future.
There are many areas of overlap between IHS CERA's view of future oil supply and other outlooks. Oil is a finite resource, and at some stage supply will begin to fall short of meeting demand on a consistent basis if there is no break in the connection between economic growth and oil demand. The basic differences in opinion appear to center on when this will happen and on what happens after the inflection point. The view that oil supply will plummet after the inflection point and oil will run out, like the gasoline in an automobile, is misleading for the layperson.
IHS CERA believes that this inflection point will herald the beginning of an undulating plateau of supply that will last for perhaps two decades before a long, slow decline sets in. It represents a transition period when traditional market forces and government policy will be unable to adjust supply to meet growing demand and limits are reached. Of course the path of demand will exert a controlling influence on the future supply curve. Peak demand is an equally important concept that may well be viewed in hindsight, from the perspective of a half century from now, as the main driver of peak supply.
But one further important point: Though a peak of global oil production is not imminent, there are major hurdles above ground to negotiate.
Productive capacity is defined as the maximum sustainable level at which liquids can be produced and delivered to market. Productive capacity estimates account for routine maintenance, but not for general operational inefficiency, temporary interruptions such as weather or labor strikes, nor for dramatic swings in political and economic factors. For example, a field may have a productive capacity of 140000 barrels per day (bd) but in reality produce 130000 bd on average over a year because of unforeseen maintenance issues, regulatory inspections, rig movements, and tie-ins.
At the core of IHS CERA's methodology is recent production history, which is considered the most reliable data available on which to base a supply projection. We can measure the barrels arriving at the surface over time. Future production trends are extrapolated using a comprehensive framework of decline rates and knowledge of operational plans for individual projects and fields. Remaining reserve data are an important constraint on the future supply profiles but - given the uncertainties in reserves estimation - can be used only as a broad guideline of future supply.
Four key components of supply are included in the outlook: fields in production (FIP); fields under development (FUD); fields under appraisal (FUA); yet-to-find (YTF) resources.
IHS CERA has fully incorporated the data from the IHS International Field and Well Data database so that there are approximately 24 000 fields and discoveries underpinning the outlook. In addition, we have conducted detailed analysis of field production characteristics, especially decline rates, which have been incorporated at the field and project levels.
A detailed database of approximately 450 OPEC and non-OPEC FUD provides a clear insight into the immediate plans of the industry to execute new projects ranging individually up to 1.2mbd at production plateau. YTF resources are estimated by extrapolating historical activity and success rate data and making assumptions about future levels of activity in key countries. We have recently compiled historical exploration data from the IHS International Field and Well Data database on well count, success rate, and discovery sizes for each country, which has improved the YTF analysis.
In this activity-based model we take account of project efficiency, costs, timing, hardware availability, and our detailed oil price outlook. We adopt a holistic portfolio perspective to evaluate global productive capacity. Although it is clear that some giant fields such as Mexico's Canterell are now strongly in decline following a successful secondary production program, and many countries are past their 'peak', the sum of the parts as we currently see them show that global productive capacity should be able to grow for at least the next two decades.
The long and complex debate about the future of global oil supply is characterised by two overriding characteristics: the very large range of potential outcomes projected and sustained disagreement about 'the answer'.
Production volumes are closely related to reserves, rock physics, and investment. Publicly available data tend to be limited and of variable quality. A wide range of methodologies have been applied to the problem, from those encompassing systematic analysis and careful assumptions to less robust techniques such as Hubbert's method, which can provide a good approximation in certain circumstances but fall down especially where government policy constrains production. Importantly, Hubbert's approach, developed in the 1950s when technology was stagnating, also fails to account for fluctuations in demand, technology advances, and the discovery of new hydrocarbon plays. Additionally different studies are based on variable views on reserves/resources, field production performance, future exploration, technology, and commercial issues. Few have attempted to incorporate the impact of aboveground factors such as demand and geopolitics.
Some models are based on a very pessimistic view of the future, which is not borne out by scrutiny of recent trends in exploration and production. For example, frequent claims - that 'half of global oil reserves have been produced', 'global reserves are not being replaced on an annual basis', and 'deepwater exploration is essentially exhausted' - are questionable. The recent discoveries of 10 giant oil fields below a thick salt layer in the Santos Basin, Brazil, may have boosted global resources by at least 25 billion barrels. Further assertions that giant oil fields are past their prime simply are not borne out in a recent detailed study of 548 giant oil fields in the IHS CERA Private Report Giant Fields: Providing the Foundation for Oil Supply Now and in the Future? This study demonstrates these fields' continuing strong contribution to global supply and that some 76 giant fields, representing 84 billion barrels, remain undeveloped.
Peter Jackson, Senior Director, IHS Cambridge Energy Research Associates, Cambridge, Mass, USA. www.cera.com. IHS CERA delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. The complete report is available for download