IEA: WEO 2008 - Comments on the Oil Field Decline Analysis

2008-11-14 14:56:23 -

EnergyComment, the new German expert site for oil markets and oil politics, comments on the oil field analysis, the centerpiece of the oil-related results of the WEO 2008.

1. General Remarks
Its results are crucial for the estimate of investment budgets und the size of the future oil supply. It is a great step forward for the global oil debate that the IEA report focuses on supply issues and does not derive oil supply from demand needs as in earlier WEOs.

The IEA estimate of a 6.7% annual production decline in post-peak oil fields is considerably higher than older estimates. It represents an enormous challenge for the investment efforts of private and, in particular, national oil companies. Low oil prices and a global credit crunch are not helpful in this respect.

A decline rate appraisal is an ambitious task which encounters a number of difficulties ranging from data availability to critical production profile assumptions. It is clear that any number can only be a rough estimate. In fact, the result of the IEA field sample was 5,1%; 6.7% is a rough projection for all fields. This does not diminish its relevance.

2. Critical Issues
However, there remain a number of critical issues which need to be addressed in future analyses:

a) Just a snapshot?
The report shows (p242) that the speed of decline has varied strongly over the last three decades. Major events such as the Iranian crisis (1980), the Gulf War (1991) or the investment slump (end 90s) have caused clear spikes in the decline rate statistics.

After 2000 the situation has improved, mainly due to higher investment levels. Today the decline, as shown in the report, is even on the best level since decades. This surprising fact somehow contradicts the gloomy outlook of the report which forecasts a deterioration.

b) Political distortions
The report derives its estimates and forecasts from the historic production profiles of 580 oil fields. The impact of technical problems or political crises was not eliminated. It is clear, however, that OPEC quota decisions, hurricanes in the Gulf of Mexico, or fights in Nigeria have nothing to do with the geological or technical potential of oil fields. Insofar, the overall estimate of 6,7% cannot mirror the oil supply potential of the world´s post-peak fields.

According to the IEA definition a field is counted 'post-peak' when the production in one of the past years has been higher than today´s. It could be that a number of heavy-weighted super-giants in Iraq, Iran or Saudi-Arabia are defined 'post-peak' just for volatile policy reasons.

The IEA Oil Market Report of March 2008 apparently tried to eliminate these distortions, though just for non-OPEC fields, and arrived at a non-OPEC decline rate of 7.7%. Moreover, the decline rate appeared to be stable (1999-2007). The corresponding WEO 2008 number is in the region of 10%. This difference would need further explanation.

c) Natural decline rate remains opaque
In order to eliminate distortions we should focus on the natural decline rate, i.e. what happens, if we restrict our investment efforts to maintenance or repair. The IEA report actually addresses this extremely thorny research problem. But it soon reaches an impasse because you need to use extremely volatile and unreliable project cost assessments (p244). There are hardly 'real-world' examples and their decline rates vary from 6-23%. Having said this, the IEA calculated a natural decline rate of 9.0% for the post-peak oil world.

d) Size matters?
A crucial result of the study was that size and location (onshore or offshore) of an oil field are the most important determinants for their production profile. However, most large onshore fields are located in OPEC countries. It would require an additional statistical effort to find out whether the field parameters or the political parameters are more important.

Keep it up!
Despite these methodological challenges the WEO results is of high relevance for oil policy makers. The IEA and its new boss Tobuo Tanaka should be encouraged to address even more 'hot potatoes' of the oil debate and continue to caution the world against a coming oil supply crunch.