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."