Hurdles ahead for growth in non-OPEC liquids output

Nov. 8, 2004
Hurdles ahead for growth in non-OPEC liquids output During the last 40 years, the world has experienced almost uninterrupted crude oil demand and production growth.

During the last 40 years, the world has experienced almost uninterrupted crude oil demand and production growth. With a few exceptions, large discoveries from 1960 to 1980, as well as sizable reserves surpluses, allowed for sustained crude market equilibrium, to which much of the world grew accustomed. However, as demand has grown and as exploration has matured in the majority of the world's basins, production levels have begun to exceed additions of new reserves by 12-15 billion bbl/year. For each of the last 20 years, the world has been producing and consuming twice as much oil as it has been finding.

To assess the long-term consequences of this trend, PFC Energy conducted a detailed analysis of historical reserves growth, production, demand growth, and recent discovery trends. The study consists of a comprehensive, rigorous, and probabilistic set of crude oil and liquids forecasts to 2020. We examined every country and broke out each country's production into two segments: reserves already discovered (the existing base with projected decline rates, identified development projects, and reserves with no current development plans) and reserves yet to be discovered.

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Our findings suggest that the world's ability to increase liquids production outside members of the Organization of Petroleum Exporting Countries could run into difficulties in the early part of the next decade and beyond unless there are significant shifts in oil recovery factors or improved results from exploration (Fig. 1).

In addition, as demand continues to grow beyond 2010 and non-OPEC production peaks or goes into long-term decline, the burden will fall on OPEC to make up the difference. When this occurs, OPEC production capacity and reserves will be strained, and some of PFC Energy's models suggest that OPEC will struggle to fill the differential between non-OPEC supply and global demand as early as 2015-20.

Reserves additions

The starting point for the analysis was the world's cumulative reserves-addition history, which has been documented from the first discoveries through today, for all basins and counties. In addition, the production and depletion history has been documented, as well as field size trends over time. This phase of the analysis assessed whether there were any consistent trends—at either the country or region level—in the relationship of production levels, depletion levels, and the onset of production declines.

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There are now at least 20 non-OPEC countries that have clearly passed peak production and are in decline (Fig. 2). Furthermore, 80% of these declining countries went into decline during the 1990s.

A careful analysis of historical depletion levels shows that once a country has produced 50-60% of its reserves base, it almost always makes the transition from production peak or plateau to decline. This relationship seems to hold up very well for those countries where the pace of exploration and development has largely been driven by commercial considerations.

In other words, unless production is deliberately constrained for policy reasons, the production cycle will follow a natural course. Production grows over a period of years to a peak or plateau, which can last for one or many years, then starts to decline once a country has produced anywhere from 50% to 60% of its proved and probable reserves base.

Several important regional producers are in plateau and may have reached peak production, such as China, Mexico, India, and Malaysia. Based on this analysis, it would seem likely that barring a dramatic change in their recent discovery volumes, these countries are likely to go into decline during this decade as their depletion levels advance beyond 60%. In fact, Petroleos Mexicanos (Pemex) officials have been openly discussing the likely onset of declines in Mexico by 2006.

The challenge

During the past few years, many industry analysts expected that the slate of new projects coming on stream would result in the short-term increase of non-OPEC, non-Former Soviet Union (FSU) production, but this never happened.

Since 1998, non-OPEC, non-FSU production has essentially been flat. In part, protracted project delays in key regions such as West Africa are to blame; however, another part of the non-OPEC, non-FSU production equation is the decline rate in mature basins–a rate that proved sharper than expected by many forecasters. Many of the new developments served only to offset aggregate production losses in the mature basins as opposed to actually increase total country production levels. Therefore, global, non-OPEC production growth was mostly driven by production growth in the FSU, primarily Russia.

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Since the late 1980s, aggregate production volumes for non-OPEC, non-FSU countries (excluding the US and Canada) have typically exceeded reserves added through exploration activity by 5-6 billion bbl/year of crude oil (Fig. 3). From the late 1970s to the present, OPEC countries have also been producing more crude than they have discovered.

In recent years aggregate production has exceeded reserves additions from exploration by 6-8 billion bbl/year. The net result is that each year the world produces and consumes roughly 30 billion bbl of crude oil but struggles even in good years to replace half of that volume.

In effect, the world's crude oil supply is still largely dependent on legacy assets discovered during the exploration heydays.

Key conclusions

To assess in detail the potential for constraints to production capacity, PFC Energy broke out the reserves base of each country into several categories: 1) the producing base, comprising those fields producing before the year 2000; 2) new source production, representing fields with definite development plans; 3) discovered fields, which are fields known to exist but currently have no development plans; and 4) reserves from future exploration.

The future-exploration reserves were based on models that assume exploration drilling levels, success rates, field size distributions, and other factors typical of the period from 1990 to the present. Each reserves category was modeled with basin-typical peak rates, decline curves, announced field production profiles, remaining reserves volumes, and current withdrawal rates. Probability distributions were determined for each reserves category and combined to create a probabilistic production model for each country. Country models were then combined to build production models for different geographic regions.

Several important conclusions emerge from this analysis. Without great improvement in recovery factors or reserve additions through exploration:

Crude oil production from countries outside of OPEC and the FSU is likely to remain relatively flat through the end of this decade. Production from these countries has been flat since 1998, and nothing in this analysis suggests a significant deviation from this trend. From 2010 to 2020, production from this group would begin to decline as depletion levels begin to increase beyond critical levels.

Crude oil production from the FSU has been increasing in a trend expected to continue through much of this decade due to additional production growth in Russia and several large new developments in the Caspian region.

Taking into account the above two categories, as well as expected growth in unconventional oil production, condensate production growth, and natural gas liquids, PFC Energy estimates that non-OPEC liquids production could continue to grow from current levels of about 48 million b/d to about 53 million b/d from 2010 to 2014. However, beyond this period it is extremely difficult to increase production because of the increasing depletion level of the non-OPEC reserve base.

As for PFC Energy's OPEC production analysis, to date there has been about 1 trillion bbl of oil discovered in OPEC countries. The depletion level in all of OPEC, except Indonesia, is below the critical range of 50-60%. Indonesia's depletion level is about 70%, and its production, as expected, is in decline.

PFC Energy estimates that about 40% of the reserves discovered within OPEC has been produced, with depletion levels increasing at slightly less than one percentage point per year. As noted, OPEC's current production levels exceed reserve additions through exploration by 6-8 billion bbl/year.

There is a perception that exploration has not been taking place in OPEC countries. However, about 950 discoveries have been documented since 1980. Fifty percent of these discoveries are less than 8 million bbl each, and only 10% are larger than 130 million bbl each. The additional call on OPEC reserves, particularly after 2010, will ultimately result in higher depletion levels within this reserve base. It is conceivable that as OPEC increases production to make up for flat or declining non-OPEC production in the later part of the next decade, depletion levels will reach levels that will also prevent production growth from this block of reserves.

Demand growth

Part of the impetus of the study was to provide an alternative to global crude oil supply-demand models that are driven mainly by the demand side and consequently have a tendency to match supply with forecasted demand.

Crude oil demand growth over the last 20 years has varied from a low of 0.9%/year to a high of 3.5%/year. The average growth rate over this period is roughly 1.7%/year. As this demand growth continues into the next decade, and as non-OPEC production growth becomes limited, the world will be increasingly dependent on OPEC's ability to develop its inventory of undeveloped or underdeveloped oil fields.

The conclusions of this analysis are not considered an inevitable outcome. Instead, they point to some significant implications for consumers, producers, and policymakers. In a world of growing demand and falling reserves growth due to a drop in average field sizes, OPEC will be providing a greater share of the world's oil production. Ultimately, however, even OPEC capacity will be approaching full utilization.

The author

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Mike Rodgers is senior director of the E&P Portfolio and Business Development Unit with the Upstream Group at PFC Energy. He has expertise in geotechnical and economic risk assessment in numerous basins of South America, Africa, the Middle East, the Indian Subcontinent, and Southeast Asia. At PFC his focus is commercial risk assessment, expected value analysis, project economics, and portfolio analysis. In addition, he directs the Global Deepwater Competition Service. Rodgers has a BS and an MS in geology from the University of Pittsburgh and completed additional studies in geology at Princeton University and in business at the University of Indiana.