Matt Simmons on how depletion works, and how technology and the markets mask its effects "...I came up with my "worry" forecast by merely examining the likely production drops from three non-OPEC producers: the U.S., Canada, and the former Soviet Union (FSU). In all three cases, oil production will drop. It is only a matter of how much. In my opinion, for the U.S. 1999 oil supply, "best case" is a drop of only one million barrels per day. Canadas best case is a drop of 250,000 barrels. And, the big wild card is the FSU, but with almost zero funds to spend, - even if prices begin to rise - their production could easily be off by 750,000 barrels per day. If these three drops happen, the balance of the non-OPEC producers need a drop of only seven percent to get to my mid-point fall in non-OPEC supply. If you look at my worst case for the three countries, the balance of non-OPEC producers have to drop by only two percent, which tells me that a 3.5 to 4 million drop is not a worst case. The fall in U.S. supply is now in full gear.Both API and DOE now show an estimated drop in U.S. oil supply through just the first two-and-one-half months of 1999, totaling around 450,000 barrels per day. It is easy to see why so many analysts still predict rather stable supply. These estimates presume that supply drops only if wells are intentionally shut in. No one would ever shut in a well if the price of oil stays above lifting costs. However, the reality of the oil and gas business is that there is no "supply momentum." That is what the best-in-class data we previously reviewed is all about. This is an industry that needs to spend virtually all the cash that $15 oil generates, simply to maintain flat supply. You do not need to shut in a well to effect a drop in supply. You merely have to experience "depletion." The Concept of Depletion The oil and gas industry, as a whole, essentially forgot about depletion. Almost none of the published oil supply estimates have any model for the decline rate of the existing base production, let alone how this decline rate will likely increase. Every field ever found declines at some point, and when the decline begins, it generally accelerates. The concept of depletion is as real as night and day, but the subtlety of getting ones hands around what depletion rates are all about is far trickier than first meets the eye. Begin with what happens in the production profile of any large field. A field could theoretically be predicted to produce at far higher rates than ever occur. But, production is intentionally choked back to preserve Mother Natures natural lifting power for as long a possible. So, for years the field creates the illusion of having flat production. Ultimately, all fields "roll over" and begin their natural decline. This natural decline rate, which our firm is now calling "gross depletion," rarely shows up. Instead, the fields operator spends considerable sums of money and uses many additional rigs and the decline lessens. This creates "net depletion," which is always a smaller rate of decline. It also requires lots of money and rigs. The larger the field, the longer flat production is maintained and the easier it is to slow decline rates. The problem is that few giant fields are being found. In their place have come hundreds of "high technology" boutique fields like the Tordis Field in the Norwegian Sector of the North Sea. Here is a field that reaches peak production of 80,000 barrels per day in the course of 30 months. It then rolls over and begins a gross depletion rate in excess of 25 percent per annum. However, the net rate is just under 20 percent as satellite fields come onstream to mask the real underlying rate. A field like Tordis is too small to choke back production. The projects economics would be killed. So, it replicates the same "blowout" depletion rate that the giant field would have experienced had nothing been done to hold back production. It turns out that technology never killed depletion. It fed the monster and made it far more of a threat to maintain stable supply. I have become a real believer in depletion. It is truly the most powerful force that will impact the next decade in oil and gas. Our firm has now studied too many basins around the world with identifiable net decline rates at 10 to 20 percent per annum, so I now believe that even a five percent rate is also too low. The real depletion rate must be about 10 percent on average, or more. Thus, to merely keep the current production base flat over the next 11 years, so we can begin the year 2010 with the same amount of hydrocarbon supply as we now enjoy, the industry must add an astonishing 83 million barrels per day. And, this has zero impact on any further growth in demand. ..." http://www.diveweb.com/offshore/features/uw-sp99.01.htm _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
