Aging oil fields 'a concern'

Aging oil fields 'a concern'

Stella Farrington, Dow Jones/London

Falling oil output from aging fields, once insignificant compared with global production, has become large enough to impact world supply and may help explain the constant tightness in the oil market this year, according to analysts.

Oil production is now in decline in at least 18 major producing countries including the U.S., U.K. and OPEC members Indonesia and Venezuela, and total production from this group is falling by around 1 million barrels a day every year, according to the latest data.

The oil futures market can spike on a temporary outage of just a few hundred thousand barrels a day, so what is in effect a permanent outage of 1 million barrels per day (bpd) may help explain some of the momentum behind the 53 percent rise in U.S. crude futures so far this year to near $50 a barrel, analysts who study depletion said.

"Depletion has become a serious issue for the oil market, and I believe it is contributing to market tightness," said Chris Skrebowski, editor of the London-based Energy Institute's Petroleum Review.

"What it means is that before you meet a single barrel of demand growth you have to replace all the missing barrels," he continued. "Depletion is really an extra demand. Countries where oil production is still expanding are being put under increasing pressure to make up growing depletion rates. It's a huge drag on the system."

And, as oil fields are aging and their output declining even within countries where outright production is expanding, overall decline rates are estimated at closer to 3.5 million bpd.

Michael R. Smith, technical director of Energyfiles, an oil and gas information and forecasting service, estimates depletion from declining countries is running at even higher levels, at around 1.5 million bpd. Add in the declines at mature fields in expanding crude producers and an additional 5 million bpd is required to keep up with an average demand rise of 1.5 million bpd, he said.

"The 30 or so countries that can increase output will not only be required to satisfy demand growth of say 1.5 million bpd, but will also need to provide an additional approximately 1.5 million bpd each year to make up for the declining countries," he added.

Global supply continues to grow overall despite the depletion, with flows in the second quarter of this year up 5 percent, or 4 million bpd, against a year ago, at 82.3 million bpd, according to the International Energy Agency (IEA).

But as supply peaks and declines in more countries over the coming years, fewer nations will be left to make up the shortfall. Smith estimates production from declining countries makes up around 38 percent of global supply.

But few analysts factor such depletion into their forecasts, while calculating depletion rates is fraught with difficulties as each oil field is different.

"Depletion is very important and needs to be factored into forecasts," said Klaus Rehaag, editor of the IEA's monthly oil report. He said the agency factors depletion into its forecasts field-by-field where possible, and offsets it against estimates of new growth. "But depletion is only one dimension," he added. "Depletion may contribute to higher oil prices, but that will open up other opportunities" for investment.

Many analysts compare events in today's oil market with the oil shocks of the 1970s and early 1980s. Oil peaked at almost $80 a barrel in today's money after the Iranian revolution and triggered so much investment in oil production in non-OPEC countries that the world was swamped with crude which eventually drove prices down to just $10 a barrel by 1998.

But Henry Groppe, founding partner of Houston-based oil and gas consultancy Groppe, Long and Littell, says the situation is different now. "In the ensuing years since 1979 we've had the opportunity to find and produce all the cheap oil," he said. "Now what's left is much more expensive, and there's simply not going to be a flood of cheap crude hitting the market again."

Skrebowski estimates around 8 million bpd of new oil is expected up to 2007, though depletion will weaken its impact. After that, there is a dearth of new projects. "Because of the lead time, even if projects are started now they won't impact until 2010. In 2008-2009 I think volumes are going to fall below requirements."