E. John P. Browne
Managing Director and Chief Executive Officer
BP Exploration
London
Adapted from an address to the Society of Exploration Geophysicists annual meeting in San Francisco.
My main subjects are the world oil supply/demand balance, the role of the world's largest fields in securing the balance, and the need for the industry to extend exploration into areas of difficulty.
However, the immediate world situation cannot be ignored.
Some 4 million b/d of production has been lost from Iraq and Kuwait. Instability is likely to persist for months-perhaps longer-in an area crucial to the supply of oil to world markets.
The situation should not distract from longer term issues that face the industry, especially the long lead times indigenous to the upstream sector.
For the last 4 years the industry has had to plan against a background of very weak oil prices. Now it is having to plan and invest against more instability.
PROBLEMS BEYOND POLITICS
One real danger in the present crisis lies in the perception that the only problem we face is the political problem.
During the past 4 years, some people have become so accustomed to ready supplies, surpluses, and low prices they believe instinctively that if the gulf crisis were resolved the long term price would revert to pre-August less than $20/bbl.
There is a perception that the oil market has become like any other commodity market: volatile but beset by a degree of oversupply that swamps any upward trend. Capacity exceeds demand, and there is insufficient consensus among producers to control supply.
Demand grows but is readily matched by supply. Crises occur, but other producers eagerly step in and raise output sufficiently to dampen prices.
Some define this as the market functioning efficiently.
Does this mean we have reached the end of oil crises? I think not.
DEMAND'S VAGARIES
World energy demand has grown more than 3%/year on average since the early 1980s. Oil demand, static for a decade, rose an average 1.8%/year during 1983-89 and by slightly more than 2%/year during 1986-89.
Energy and oil demand growth have been uneven. Oil demand grew 0.6%/year the last 6 years in western Europe and about 2%/year in Japan and the U.S.
In Southeast Asia's newly industrializing countries, oil demand has grown about 7%/year, doubling in 10 years. Consumption per capita there is only 1/10 the level in the U.S. Demand could be pushed on by population growth, which at more than 1.5%/year is three times higher than in western Europe or the U.S.
During 1980 through 1984, nuclear power met 42% of world incremental energy supply, and oil's share of supply fell. But oil demand grew again in absolute terms during 1985-89.
Oil demand is rising with disproportionate speed in areas where economic activity and overall energy demand are rising the fastest.
Forces are too complex to make specific demand forecasts worthwhile, but world growth of 2%/year would add more than 12 million b/d to present demand by 2000.
Sizing up supply Our best estimate is that OPEC production in the runup to Aug. 2 was nearly 25 million b/d of crude oil and natural gas liquids.
We estimate that OPEC's September production will show that more than 2 million b/d of the shortfall has already been made up.
The balance can be made up with little difficulty during the next 12 months by demothballing and a limited program of new investment, and with that a new equilibrium could be achieved.
The flaw is that the analysis assumes all additions are incremental to existing production levels. That is not the case.
Fields in OPEC, the North Sea, Africa, and elsewhere reach a plateau and then decline. Not even the largest fields can sustain plateau production indefinitely.
It is the decline of the largest fields that will have the most serious impact on the world market.
LARGEST FIELDS
About 80% of the world's original oil reserves were, in 350 very large fields with more than 500 million bbl of reserves.
And 40% of its original oil lies in just 25 fields, each with more than 10 billion bbl.
Worldwide, 30 fields provided one third of 1980s production and accounted for almost all of variance in responding to fluctuating demand.
Those fields produced much the same in 1989 as they did in 1975, but there is clear evidence showing that a number of the fields are in decline.
Prudhoe Bay field in Alaska, Samotlor in the Soviet Union, and the developed part of Ghawar field in Saudi Arabia have begun to decline.
Some Iranian fields have severe problems with gas handling and water breakthrough.
In each case, sophisticated techniques can temper but not halt decline.
WORLD DECLINE
Experience shows that fields maintain a fairly constant reserves to production ratio during their decline.
Applied to the 350 large fields, this analysis makes it clear that the "world oil field" is at or close to its peak and will inevitably come off plateau soon.
Increased short term capacity is available through overproduction and bringing fields out of mothballs, but long term capacity can be achieved only by heavy investment that brings on major new fields and by finding new supergiants.
The return to full production of Iraqi and Kuwaiti fields shifts the time scale but does not alter the fundamental truth.
Maintaining or increasing production is a matter of finding replacements for giant fields.
REPLACING WORLD PRODUCTION
The world replaced production during the 1970s, but since 1980 the gap has been opening severely.
Production during the most recent period for which full figures are available has been about 90 million b/d of oil equivalent, including 60 million b/d of oil and 30 million b/d oil equivalent of gas.
That means 110 billion bbl of oil and 50 billion equivalent bbl of gas were produced in 5 years. Yet in those 5 years only 50 billion bbl of oil and 33 billion equivalent bbl of gas were found, a replacement rate of barely 50%.
Alaska and the North Sea are the only really new provinces discovered in the last 20 years.
The reason for this underperformance lies in the level-and more importantly the location-of exploration activity.
The number of exploratory wells doubled from the mid-1970s to the mid-1980s, but the number of discoveries was halved. Exploration was concentrated in mature areas.
Only two companies have replaced 100% of production, excluding acquisitions.
The short term market's smooth operation during the last few years has therefore been concealing and indeed helping to worsen a long term problem.
1990S PROSPECTS
The 1990s are not doomed to be a decade of oil crises.
The production profile of the world oil field can be extended at its current plateau for a good while yet.
Tremendous reserves and resources remain. At least 1.5 trillion bbl of oil equivalent of proved and probable reserves of oil and gas remain, including a substantial volume of unbooked resources such as remote gas supplies-for instance, in Alaska-and small accumulations stranded away from infrastructure.
Developing as much as possible of that huge potential reserve base must now be a priority for the industry.
Beyond that there is a further substantial volume of oil and gas that remains to be found. Our best estimate is that there are some 850 billion bbl of oil equivalent, including perhaps 375 billion bbl of oil, worldwide.
Of the 1,300 recognized sedimentary basins, about 350 remain to be seriously explored. Historic success rates suggest that one in 12 will contain a field with reserves of more than 1 billion bbl, one in five a field of more than 250 million bbl.
EXPLORING DIFFICULT AREAS
The first difficulty is winning access.
Many of the 350 unexplored basins have been politically rather than technically inaccessible, but it may now be possible to win access on acceptable terms to areas that only 12 months ago seemed completely impenetrable.
The main changes have come, of course, from the Communist bloc. Patience is crucial, and the race for access may be the one in which the tortoise beats the hare.
Political change is affecting other areas and institutions as well. The very sharp barrier between the oil majors and the private industry generally on the one hand and the OPEC states and other producers with their national oil companies on the other is beginning to break down.
While national interests are still important and must be respected, national oil companies wish to develop, to use their skills beyond their own national boundaries, and to win international markets for their products.
THE STRATEGIC ALLIANCE
There is great hope for strategic alliances" that foster cooperation across that increasingly artificial boundary between the public and private sectors. A strategic alliance is a combination of the skills and resources of two companies for a common gain.
I am not thinking of any sort of cartel that limits competition and seeks to control a particular segment of the market in the interests of a very small number of players.
Such an alliance is about opening possibilities, not closing them, and about adding to competition by creating new, stronger players in areas where competition can be restricted by barriers to entry.
In this industry an alliance might:
- Combine the skills of one party in some particular technical area with the access of another party to areas where those particular skills were needed.
- Match resources capable of development with the funds to finance that development.
- Allow two parties to share the risk of a project that for reasons of scale or difficulty would be too much for either to contemplate on their own.
- Take in all those elements, going well beyond a joint venture to a series of mutually beneficial deals.
ENVIRONMENT, TECHNOLOGY
Many aspects of the political environment are moving in a positive direction, but other aspects are becoming more complex.
On environmental matters there is limited differentiation between one company and another in the mind of the public and legislators.
This is not just a lobbying issue, it is a technical and commercial challenge.
Technology can make exploration and development possible even in areas of real environmental sensitivity.
Airborne and satellite remote sensing reduces drilling requirements to a minimum. Horizontal drilling allows fields to be developed from fewer platforms than previously and allows drilling to take place at a distance from the most environmentally sensitive and vulnerable areas.
Technology also can help reduce costs of meeting environmental regulation. In Alaska the industry has found ways of grinding the cuttings from drilling, which eliminates the need for expensive reserve pits.
Improved technology in directional and horizontal drilling has allowed us to reduce the size of well drilling pads. This means less gravel, lower costs, and less impact on wetland habitats. Slim hole drilling reduces the volume of cuttings and oil base mud discharges.
OTHER DIFFICULTIES
The third area of difficulty lies in technical problems themselves, such as how to explore and develop resources in more than 2,500 ft of water, cope with shifting ice, identify in advance of drilling the potential in remote onshore areas or seismically difficult terrain.
The short term price of oil at $30/bbl may make some solutions to particular problems look more viable than they did 3-6 months ago, but no one can confidently invest in projects that are viable only if prices remain at current levels.
Oil from difficult terrain, remote areas, or very deep water that requires state of the art technology may still have to compete on a world market with oil that can be produced at less than $5/bbl. Action by some producers keeps the world price above that level, but we should never forget that is the baseline.
The role of technology is to reduce costs and make exploration and development viable and commercial.
Remote sensing is doing that by bringing down the costs of exploration, cutting out the requirement for wildcatting in new provinces. It is allowing us to target limited exploration budgets on areas of high potential.
The 1990s has to be a decade when difficulties are faced and overcome. Difficult is a word that simply defines something we have not yet achieved.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.