The International Energy Agency’s latest Medium-Term Oil Market Report is significantly more pessimistic about global surplus oil capacity over the next half-decade.
The IEA Report (hat tip to Tim Iacono and The Oil Drum for the link) sees a tighter oil market ahead than it had been predicting just last February. The IEA’s methodology has to make an economist wince– they extrapolate demand trends, separately calculate supply prospects, and, when the two numbers aren’t equal to each other, issue a hand-wringing report like the present one.
The forecast now calls for demand growth to exceed supply, presumably putting upward pressure on prices relative to those implied by their previous forecast. The increased strain comes from a number of different sources. The IEA is now anticipating world oil demand in 2010 at 91.9 million barrels per day (mb/d), which is 0.6 mb/d higher than their February forecast– as Tim notes, a good recession could fix that problem. They also are anticipating a 0.9 mb/d smaller increase in non-OPEC crude supply and 0.8 mb/d smaller increase in OPEC crude capacity relative to their February projections. A big factor in the latter adjustments is “slippage”– projects always seem to take longer than originally anticipated. In addition, the IEA is now subtracting 0.4 mb/d in a new category for unplanned production outages– it’s a safe bet that somewhere in the world we’ll see hurricanes or other unscheduled disruptions.
The IEA report stresses that the adjustments are not coming from changes in assumptions about depletion rates, for which they continue to assume:
the implied net non-OPEC decline rate for baseload production is around 4.6% per year. This covers not only fields in decline, but also older supply which is at or approaching plateau. With net decline from OPEC assumed at 3.2% per year, this gives a global annual decline of 4%, suggesting that 3.2 mb/d of new production must be found each year just to stand still. Moreover, this net
global decline for existing assets masks fairly aggressive assumptions for parts of the OECD and for deepwater projects elsewhere. Development schedules for the latter can show rapid ramp-up followed by abrupt annual decline in a 15%-plus range.
The IEA also makes clear they are not signing on to peak oil:
The concept of peak oil production and its timing are emotive subjects which raise intense debate.
Much rests on the definition of which segment of global oil production is deemed to be at or
approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component
of global production appears, for now, to have reached an effective plateau, rather than a peak. Having attained 40 mb/d back in 2003, conventional crude supply has remained unchanged since and could do so through 2012. While significant increases are expected from the FSU, Brazil and sub-Saharan Africa, these are only sufficient to offset declines in crude supply elsewhere. Put another way, all of the growth in non-OPEC supply over 2007-2012 comes from gas liquids, extra heavy oil, biofuels (and, by 2012, 145 kb/d of coal-to-liquids from China). As overall non-OPEC liquids capacity increases, this plateau reduces the share of non-OPEC conventional crude supply from 77% in 2000, to 74% in 2006 and 67% in 2012.
While there might be a temptation to extrapolate this trend, citing a peak in conventional oil output, a degree of caution is in order. Firstly, the concept of ‘conventional’ oil changes with time, technology and economics. In the early 1970s, much offshore production was deemed unconventional, but this portion of global supply has since grown to account for 30% of the total. Evolving economies of scale and infrastructure development could do the same for GTL, oil sands and ultra-deepwater reserves in the future, shifting today’s unconventional resource into tomorrow’s conventional supply category. Moreover, rapidly-growing condensate and NGL supply is scarcely ‘non-conventional’ in a technical sense now.
We also note that for certain regions, notably the FSU and West Africa, the turn of the current decade is likely to mark a hiatus in crude supply growth. Strong growth is expected to resume here towards the middle of the next decade. Whether this will be sufficient to offset the declines expected for mature OECD crude supply, preventing overall decline for non-OPEC, is less easy to predict.
Finally, we note that focussing on non-OPEC crude alone is a rather selective way of considering the sustainability of global oil production. Peak or plateau production is frequently taken as shorthand for impending resource exhaustion. While hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.
But conspicuous by its absence is a discussion of the production decline in Saudi Arabia. The report lists 2007 Saudi production capacity at 10.8 mb/d, but does not offer a theory as to why Saudi production is currently only 8.6 mb/d and has dropped by a million barrels a day over the last two years.
So Saudi Arabia accounts for most of the 3.1 mb/d in OPEC spare capacity that IEA currently perceives. And they are assuming that Saudi capacity will increase from 10.8 mb/d to 12.6 mb/d by 2012, even as their “implied OPEC spare capacity” drops from 3.1 mb/d to 2.2 mb/d. So, as I do the math, that means they are basically assuming that actual Saudi production is going to increase by 2.7 mb/d over the next five years.
Which makes you wonder– If IEA doesn’t know or won’t say why Saudi production has been on a declining trend recently, why is it reasonable to assume that now it’s going to increase by almost 3 mb/d?
And makes you wonder all the more what’s really going on under the Arabian Desert, doesn’t it?
One more question, and then I’ll leave you alone– If IEA thinks we’ll be in trouble even if we get a nice 2.7 mb/d boost from the Saudis, what’s the forecast look like if that increase from the Kingdom never comes?