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‘World Energy Outlook 2008’ is finally here

by Paula | 12 November 2008 | permalink | comments
Tags: peak oil, news
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• On background: World Energy Outlook 2008

Many of us have been biting our nails in anticipation of the final WEO 2008 after the Financial Times’ leak last month, which reported early calculations in the natural decline rate of the world’s top 400 oilfields to be 9.1% — an absolutely staggering figure.

IEA disavowed the FT report stating that it had revised that figure. And sure enough, it has. From page 7 of the Executive Summary:

For the world as a whole, it is estimated at 9% for post-peak fields.

Scary stuff, to be sure, but quoting that sentence without any sort of context is bad journalism and does not really communicate what the IEA has to say about it. So here’s the full paragraph:

Natural, or underlying, decline rates are about a third higher on average than observed decline rates, though the difference varies across regions reflecting differences in investment. (The natural decline rate strips out the effects of ongoing and periodic investment.) For the world as a whole, it is estimated at 9% for post-peak fields. In other words, the decline in production from existing fields would have been around one-third faster had there been no capital spending on those fields once they had passed their peak. Our Reference Scenario projections imply an increase in the global average natural decline rate to around 10.5% per year by 2030 (almost two percentage points higher than the observed rate), as all regions experience a drop in average field size and most see a shift in production to offshore fields over the projection period. This means that total upstream investment in some countries will need to rise, in some cases significantly, just to offset this faster decline. The implications are far-reaching: investment in 1 mb/d of additional capacity — equal to the entire capacity of Algeria today — is needed each year by the end of the projection period just to offset the projected acceleration in the natural decline rate.

The next two grafs give an excellent example of diminishing returns on investment, and the difficulty such investments face whether or not they succeed in providing returns big enough to justify expenditures:

…and barriers to upstream investment could constrain global oil supply

Faster natural decline rates will mean a need for more upstream investment, both in existing fields (to combat natural decline) and in new fields (to offset falling production from existing fields and to meet rising demand). In fact, total upstream investment (in oil and gas fields) has been rising rapidly in recent years, more than tripling between 2000 and 2007 to $390 billion in nominal terms. Most of this increase was to meet higher unit costs: in cost-inflation adjusted terms, investment in 2007 was 70% higher than in 2000. Worldwide, upstream costs rose on average by an estimated 90% between 2000 and 2007 and by a further 5% in the first half of 2008, according to the IEA Index of Upstream Capital Costs. Most of the increase occurred in 2004-2007. Based on the plans of 50 of the world’s largest companies surveyed for this Outlook (accounting for more than three-quarters of world oil and gas production), global upstream oil and gas investment is expected to continue to rise, to just over $600 billion in nominal terms by 2012 — an increase of more than half over 2007. If costs level off, as assumed, real spending in the five years to 2012 would grow by 9% per year — about the same rate as in the previous seven years.

The Reference Scenario projections imply a need for cumulative investment in the upstream oil and gas sector of around $8.4 trillion (in year-2007 dollars) over 2007-2030, or $350 billion per year on average. That is significantly less than is currently being spent. This is due to a major shift in where that investment is needed. Much more capital needs to go to the resource-rich regions, notably the Middle East, where unit costs are lowest. In short, the opportunities for international companies to invest in non-OPEC regions will diminish as the resource base contracts, eventually leaving the countries holding the bulk of the world’s remaining oil and gas reserves to take on a larger burden of investment, either directly through their national companies or indirectly, in partnership with foreign investors. It cannot be taken for granted that these countries will be willing to make this investment themselves or to attract sufficient foreign capital to keep up the necessary pace of investment.

And here are a few other noteworthy quotes from the Executive Summary:

The Reference Scenario projections call for cumulative investment of over $26 trillion (in year-2007 dollars) in 2007-2030, over $4 trillion more than posited in WEO-2007. … That increase outweighs the slower projected expansion of the world energy system. The current financial crisis is not expected to affect longterm investment, but could lead to delays in bringing current projects to completion, particularly in the power sector. Just over half of projected global energy investment in 2007-2030 goes simply to maintain the current level of supply capacity: much of the world’s current infrastructure for supplying oil, gas, coal and electricity will need to be replaced by 2030.

Okay, just so we’re clear: delays in bringing current projects to completion represent their own financial crisis, since those projects are required to offset the “natural decline” rate of existing oilfields. It means oil prices will go up, crunching the economy further; and depending how high they go, could mean future investments do not produce sufficient ROI to justify investment.

The projected increase in global oil output hinges on adequate and timely investment. Some 64 mb/d of additional gross capacity — the equivalent of almost six times that of Saudi Arabia today — needs to be brought on stream between 2007 and 2030. Some 30 mb/d of new capacity is needed by 2015. There remains a real risk that under-investment will cause an oil-supply crunch in that timeframe.

Exactly. Welcome to peak oil.

Ultimately recoverable conventional oil resources, which include initial proven and probable reserves from discovered fields, reserves growth and oil that has yet to be found, are estimated at 3.5 trillion barrels. Only a third of this total, or 1.1 trillion barrels, has been produced up to now. Undiscovered resources account for about a third of the remaining recoverable oil, the largest volumes of which are thought to lie in the Middle East, Russia and the Caspian region. Non-conventional oil resources, which have been barely developed to date, are also very large. Between 1 and 2 trillion barrels of oil sands and extra-heavy oil may be ultimately recoverable economically.

How on earth does one account for undiscovered resources? That figure should not be included in the total of what is accounted for… it is a sidebar, at best.

And: How on earth does one pay for non-conventional development if ROI of upstream conventional production does not justify further investment? There is no non-conventional development without conventional supplies to power the operation profitably.

In the end, WEO 2008 confirms everything — everything — peak oil researchers have been saying for the better part of a decade now, but the cornucopians will still use it as ammunition to lull themselves, and anyone they can take with them, back to sleep. Why? Because cornucopians cling to the “running out of oil” strawman like a child clinging to a doll, which the Executive Summary explicitly knocks down on page 41: “The world is not running short of oil or gas just yet.” At the same time, the words “peak” and “oil” do not appear together anywhere, at least in the Executive Summary. Whatever the IEA’s intentions, and regardless of its extreme findings and their staggering implications, WEO 2008 will ultimately serve to increase public confusion on the issue of oil depletion.

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