The Paris-based International Energy Agency was formed during the oil crisis of the 1970s to help consumer countries best coordinate mitigation of politically-induced oil scarcity 30 years ago. They helped to spur demand reduction and supply stability that brought prices down to historical norms in the mid-1980s. But now they warn of a more serious and long-term development in the oil sector: the age of cheap oil is ending because tired old fields are producing less and less.
The executive summary of their 800-field assessment projects a reference business-as-usual scenario as well as two climate mitigation scenarios through 2030 in its annual World Energy Outlook. Their Outlook includes major shifts from last year stemming largely from a deeper understanding of accelerating declines in the bulk of global oil fields. Their research found that smaller oil fields decline faster (especially offshore) than the giants and super-giants of old. So, as we become more dependent on offshore and smaller oil fields for the bulk of our new oil, the overall decline rate accelerates. They estimate natural decline rates are currently 9% per year and expect rates to rise to 10.5% by 2030. Advanced technology and investment allows producers to slow the current rate to 6.7%, though they project it will increase to 8.6% by 2030. Based on these estimates, producers will have to add ~5.5 million barrels per day (Mbd) in new fields in 2009 and a growing amount each year afterward just to maintain current production levels ~86 Mbd.
If you match up this 6.7% decline rate to the Oil Megaprojects Database maintained by Petroleum Review editor Chris Skrebowski, we get peak global oil production by 2012. Beyond that year, the world has less and less oil to transport its people and goods. This wouldn’t mean the world runs out of oil in 2013 by any means — 80+ Mbd of oil will still allow millions of trucks to roll and airlines to fly. But prices would increase to levels to slow demand growth, probably above $100 per barrel again. The IEA calls current prices ~$60 per barrel temporary, believing that a return to average economic growth will bring higher prices. As I’ve mentioned in previous blogs, they think any further fall in price is dangerous for oil market balance since it could delay high-cost oil projects that are needed to come online to make up for field declines in the years ahead.
Contrary to the Oil Megaprojects conclusion, the IEA still believes oil production can grow through 2030, thanks to unconventional oil sands, heavy oil, and oil shale making up for declines in conventional oil. But their hopes are precariously pinned on maintaining current high investment levels ~$350 billion per year and increased cooperation between international oil companies (IOCs) and national oil companies, especially in the Middle East. At a time when many oil producing nations are getting more nationalistic and making terms less favorable for IOCs, the IEA projects greater cooperation. For instance, the IEA depends on Saudi Arabia increasing its production by ~50% to over 15 Mbd — even though their current policy is to grow capacity to only 12.5 Mbd, leaving some oil in the ground “for future generations.”
For the climate, the 9% lower oil consumption estimate in this year’s WEO for 2030 (106 Mbd rather than 116) translates into a reduction in carbon dioxide emissions. But since coal is a key substitute, the overall reduction is only 1% and does not prevent dangerous emissions levels. The IEA then makes a serious call for climate change mitigation, outlining scenarios of emissions reduction to achieve 550 parts per million (ppm) carbon dioxide in the atmosphere and 450 ppm. The climate scenarios not only help the environment but they also lower the price of oil significantly and create trillions of dollars in fuel savings over the years. But to get implemented, either scenario will take serious political will and progress in post-Kyoto negotiations culminating in Copenhagen next year.
The report highlights the exact reason I launched SET — our world faces twin challenges of oil energy security and climate change. The best policy choices are ones that mitigate both challenges simultaneously: a Sustainable Energy Transition based on rapid deployment of efficiency and renewables.
With the full report coming out on Wednesday, I will share more information on this groundbreaking report in the days ahead.
Tags: climate change, IEA, oil prices
Neat web page – Many changes down the road. I would agree that crude will find it’s way back above $100 soon.