“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable….environmentally, economically, socially.” – IEA, World Energy Outlook 2008 Edition
“Once the economy recovers and the demand bounces back, we think about 2010, 2011, we may be caught by surprise and this will be a nasty surprise, which would mean that we can see prices which may be even higher than what we have seen last summer” – Dr Fatih Birol, IEA Chief Economist, November 2008
The International Energy Agency [IEA] released their annual and much anticipated World Energy Outlook this week. The reason for much of the anticipation was the inclusion in this years report of a depletion analysis of the world’s 800 operating oil fields. The reason this depletion analysis is so important, is that it gives the world a clear picture of just how much new oil needs to discovered and brought on line just to maintain production at current levels. The news is not encouraging.
The IEA estimates “that the average production-weighted observed decline rate worldwide is currently 6.7% for fields that have passed their production peak.” This decline rate is predicated on substantial investment in Enhanced Oil Recovery techniques to mitigate a “natural decline rate estimated at 9.1% for post peak fields”. To put this into perspective, using the 6.7% figure, about 5.025 million barrels per day of production would have to be brought on line every year just to equal current declines in production. That’s the equivalent of one new Saudi Arabia every two years!
Incredibly, the IEA thinks that not only can we keep up with current decline rates, but that we can grow production by an average of 1% per year to the year 2030. They base this assertion on a projected oil and gas exploration and development investment of $8.4-Trillion between now and the year 2030.
However, this is where IEA’s confidence in a stable future oil supply begins to erode. The bulk of this investment would have to be made in the 13 member states of OPEC where the IEA thinks most of reserves will be found. Aside from the possibility that those reserves may not exist, given the growing forces of “Resource Nationalism” and “saving reserves for future generations”, this investment is doubtful. In addition, because some 30 million barrels per day of new capacity is needed by 2015, substantial new investment needs to be made NOW to avoid an oil supply crisis after 2010. This investment must be made in the face of falling oil prices and a global economic meltdown. The current and inconvenient reality is that exploration and development projects are being postponed and cancelled rather than initiated, setting us up for Dr. Birol’s nasty surprise sometime after 2010.