To the controversy over how much oil and gas remain to be produced, the International Energy Agency has made a valuable contribution. Its new study, Resources to Reserves, estimates availability of technically recoverable resources of various types as a function of oil price (OGJ, Oct. 17, 2005, p. 18). The conclusion is both assuring and challenging.
It’s assuring because it suggests that strong progress toward meeting the projected need of 1.5 trillion boe of oil and gas through 2030 can come from oil resources likely to become economic to develop with crude prices near $30/bbl. The conclusion is challenging, however, because it assumes development of the necessary technology and investment of at least $5 trillion.
Technological progress
In technological development, there’s no reason to lack confidence. The marvelous progress of the past in knowledge about the subsurface, in geophysical methods, and in drilling, completion, and production technology will not cease. The larger question is the one about money.
There, too, confidence is in order under the right conditions, all having to do with profitability of the long-term investments required by oil exploration, development, and production. A major factor of profitability, of course, is the price of oil. So a major factor of expected profitability, which drives investment, is the expected oil price.
Appropriately, the IEA report highlights the expected price as a crucial variable in future oil supply. While emphasizing the great volumes of technically recoverable oil with potential to become economically recoverable at a price around $30/bbl, it notes that most large oil and gas companies now base investment decisions on assumed oil prices of $20-25/bbl.
That small variation in dollars makes a large difference in barrels of oil. In the IEA analysis, a world of $20/bbl oil is one largely dependent on whatever is left to produce from conventional resources. A world of $25-30/bbl oil is one with significant contributions to supply from deep water, arctic sources, superdeep formations, enhanced recovery, heavy oil and bitumen, and even some oil shale. Obviously, the potential supply from unconventional sources escalates as the price of oil rises beyond $30/bbl.
Oil and gas companies, however, are wary about future oil prices. They have good reasons to be this way: surprise price slumps of the past. They obviously don’t think $50-60/bbl oil prices will last. Even before prices reached that range, companies weren’t increasing exploration and production budgets nearly as fast as oil prices were rising. A key point of the IEA report, though, is that companies don’t have to believe in the durability of $60/bbl; half that level-just $5-10/bbl above currently prevalent assumptions-unlocks the door, already ajar, to the rich but technically challenging promise of unconventional petroleum resources.
Companies will adjust their price assumptions when and if they feel reasonably sure that prices have taken another secular step up and are not just cycling through an exaggerated upswing in advance of another devastating plunge. Talk about their conservatism notwithstanding, it wouldn’t be the first time they’ve raised the oil-price hurdle. Not so long ago, many of them based investment decisions on $15/bbl oil.
Price strength
Analysts, meanwhile, increasingly see a degree of permanency in current price strength, if not in current price levels. In a study published this month on Asian markets, J.Y. Lim of FACTS Inc., Honolulu, notes that when adjusted for inflation current crude prices remain “way below the peak seen in the late 1970s” and thus have room to rise. An analysis in the study of trends in price changes “may indicate that prices have moved towards a higher level on a permanent basis,” Lim says.
If oil companies see what Lim sees in recent price trends, and if the IEA’s projections are reasonable, the outlook for future hydrocarbon supply might be on the verge of important change with a positive sign. Volumes of oil and gas in nature, including assumptions about them underlying the IEA report, will remain subject to controversy, of course. What’s important is that the possibly imminent change in supply prospects noted here results not so much from volume estimates but in thinking about investments. The petroleum resource is indeed finite. But how much it yields depends mainly, at this point, on money risked on its development.✦
