VOL. XLVI

No 51/52

22/29-December-2003

How And For How Long It is Possible To Secure A Sustainable Growth Of Oil Supply

By Leif Magne Meling

The following paper by Leif Magne Meling, Statoil ASA, was delivered at the World Petroleum Congress 2^nd Regional Meeting, in Doha, 8-11 December. The paper was published with the permission of Statoil.

Abstract

Oil has been the most important transportation fuel for almost 100 years. However, resources are finite and ultimately new technologies and new fuels have to be developed. The uncertainty relates to how and for how long it is possible to secure a sustainable growth of oil supply at a reasonable cost.

This paper presents a pragmatic evaluation of possible future production. All major oil-producing countries are evaluated and summarized to a world oil production assessment. We evaluate the past and the present, and discuss the main future challenges: 1) future oil demand, 2) new field developments, 3) production efficiency, 4) exploration additions and 5) improved oil recovery. A simulation model that includes these challenges has been developed. The model distinguishes between OPEC and non-OPEC countries by imposing different production and field development strategies.

The paper predicts a future that is very different from the present situation. At present undeveloped oil reserves are at the same level as in the late 1950s. New giant field discoveries are rare and exploration, with the exception of 1991, has not been able to replace production since the mid 1980s.

Within the next decade there will be a major shift in supply from non-OPEC to oil rich Middle East OPEC countries. The only major exception will be Russia. A large proportion, up to 60%, of future production additions will have to come from increased production efficiency and improved oil recovery. Production additions due to exploration additions will not be of major importance before post 2010 due to the time lag between discovery and development.

Introduction

Depletion of oil resources has been a controversial issue since the modern oil industry was born in the early 2000 century. From time to time individuals¹ and organizations claim a coming oil crunch with escalating oil price, others have promoted a more optimistic view². We do not intend to let this paper be another addition to the “right belief”. We have used a pragmatic approach to evaluate how and for how long it is possible to secure a sustainable growth of oil supply. No such evaluation is completely objective, and predictions of this kind will always include some undisputed facts, some knowledge and some belief.

IHS field database and historical production records have been our main source of raw data. It includes some 24,000 fields worldwide, but no specific field data for US and Canada. For these countries aggregated figures were taken from IHS. Alternative data sources may alter predictions for some countries, but the main conclusions should not differ much.

The author takes the full responsibility for the evaluations and the conclusions presented in this paper and Statoil ASA does not necessarily support them.

Demand growth

The historical records of oil demand growth are the fingerprints of economic and political development. Important political and economic development such as introduction of mechanized transportation, the economical collapse of the Weimar Republic, the black Monday in 1929, the second world war, the blooming 60s, the post industrial development and oil crises are all preserved in the records of oil demand growth, just like tree growth rings.

A major change occurred between 1970 and the mid 1980s. In the 1960s, oil demand increased steadily at some 7% annually. Disruptions of supply in the 1970s and 1980s and price increases reduced the oil demand significantly. From the mid 1980s the oil demand growth has been relatively stable at a growth rate of 1.6% annually. Extrapolating this trend indicates a demand of some 85mn b/d in 2010 and close to 100mn b/d in 2020. In 2002 the production was 73.2mn b/d.

Since 1980 the oil consumption has been remarkably constant at some 4.3 barrels/capita, while the oil consumption per world GDP has declined significantly since the early 1970s. A continued growth of 1.6% annually will only marginally increase the oil consumption per capita, implying that an improved development for developing countries can only be obtained by a reduced consumption in developed countries.

Exploration

For two decades, the liquid exploration additions have not counterbalanced production. Most international oil companies (IOC) have only been able to replace reserves by upgrading existing discoveries. This is not a result of decreasing technical exploration success, because for oil this has been stable around 20% for the last 20 years.

Oil resources added through exploration additions reached a peak in the 1960s. In this period major discoveries were made in Western Siberia, Libya, Algeria, Middle East, Alaska, Nigeria, China, Indonesia and Venezuela. Later smaller peaks are related to opening up of other prolific basins. For most basins, giant and major oil fields are discovered in the early exploration phase. This holds for basins explored in the 1930s and also today.

The proportion of gas relative to oil has increased. Developments of new drilling technology have made it possible to drill deeper. By nature, deeper high temperature source rocks generate more gas and less liquid. Currently the percentage of oil discovered relative to total hydrocarbon volume is less than 50%. In periods it has been as low as 40% in periods before opening up of new oil prolific basins.

The number of new oil discoveries is more or less a direct function of new wildcat wells drilled. However, the average size of new discoveries has been reduced by a factor of 10; from some 100–400mn barrels in the mid 1960s to 20–75mn barrels in the 1990s. In recent years the average field size has increased due to successful exploration in Western Africa, Kazakhstan and Iran.

The declining exploration additions are strongly related to reduction of average field size. Since yearly numbers of wildcat wells are not constant, we have correlated yearly average well volumes with cumulative drilled wells. This relationship is exponential. The peak of yearly-discovered oil volumes was obtained at approximate 20,000 wildcats (1964). Extrapolation indicates an exploration potential of some 200bn barrels. Since this estimate does not include frontier basins, we have added some 100bn barrels. This adds up to a worldwide exploration potential of some 300bn barrels. The remaining discovered liquid reserves are some 1,180bn barrels. We may expect a total of 1,480bn barrels including the exploration potential and the ultimate worldwide resources are estimated at some 2,450bn barrels.

New Field Developments And Undeveloped Fields

In the early days of the oil industry, fields were put on production as soon as they where discovered. In the late 1920s this practice led to a world oil glut. This was resolved by the "As-Is”³ agreement between major oil companies (at Achnacarry Castle) in 1928. Each company was allocated a quota in various markets according to their percentage share of sales in 1928. From that year discovered fields remained undeveloped until the companies needed additional oil to supply their markets.

Outside North America, the number of undeveloped fields containing liquids has increased steadily and today equals more than 5,100. The same cannot be said about undeveloped liquid volume. It reached a peak around 1980 at some 350bn barrels and has since then declined to 180bn barrel in 2002, the same level as in 1950s.  Adding optimistic volumes for North America bring the total to around 200bn barrels.

The Middle East contains more than 50% of all undeveloped liquids, while 25% is located in Russia, Kazakhstan, Angola and Nigeria

Maximizing profit implies early development of the most prolific oil fields. The oil industry has done so from the very beginning. The remaining undeveloped fields are to a large degree smaller, technically more challenging and contain oil of lesser quality. Today the average undeveloped field is around 30mn barrels compared to 1bn barrels in the late 1940s.

Development of new fields was earlier the main contribution to production growth. A major change occurred in the late 1960s where increased production from developed fields started to contribute more to production additions. From the early 1990s, less oil has been developed than produced and from this point, remaining developed reserves have been declining. The development activity has been high, some 200 fields has been developed yearly outside North America, but the average developed field size has been declining, to below 100mn barrels. However the Asian financial crises in 1997 and the resulting low oil price significantly reduced the number of new oil field developments, and the activity has not yet recovered. In 2002, less than 100 fields were developed, a level similar to the mid 1950s.

Since the early 1970s the oil industry has never developed more than 10% of undeveloped liquid reserves annually (assuming a five years time lag from discovery to production) and there is no sign that this will change. Future production additions due to new field development will be important, but cannot be expected to be the main contributor to increased production.

Production Efficiency

Production efficiency (PE) is a measure of the yearly percentage of liquids produced of remaining developed reserves. By definition, the PE is the decline rate of exponential-decline-rate-analysis4. The inverse of the PE is Reserve/Production ratio (R/P ratio). The R/P ratio is however most often correlated to total not developed reserves.

Evaluation of PE and comparing different countries needs a careful analysis⁴. High productive fields and fast recovery mechanisms leads to high PE. The best examples are North Sea Jurassic reservoirs, capable of a yearly delivery of more than 15% of remaining recoverable reserves. Other types of reservoirs, such as slow gravity drainage fractured reservoirs in the Zagros Basin, may yield maximum 4-5%. Increased PE has been a major contributor to additional oil production. Today the average worldwide PE is approximate 3%. On average, the PE has increased 40% over the last 30 years. This has been achieved by investments in new production wells, utilizing horizontal wells and adding process capacity for oil, gas and water in developed fields.

OPEC countries produce at PE’s below 2%. A major proportion of their future production additions will mainly be a result of a significant increase in PE. Western countries, such as UK, Norway, US and Canada, produce at PE’s in the range 10-15% and have limited potential for improvement.

The present growth of production efficiency is some 2.4% annually, slightly above the demand growth of some 1.6%. The difference has allowed the oil industry to develop less oil than produced. To predict future production additions from increased PE, we have used an optimistic PE growth rate of 3%. This growth rate will significantly add future production.

For a more detailed analysis we have included variation between individual countries. The maximum production efficiency has been set for individual countries based on their present status and field potential.

Table 1

Summary of Input Data