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CERA’s depletion study: the “good news” about running up the down escalator

Last week the Wall Street Journal ran an article on Cambridge Energy Research Associates’ fascinating new study, “Finding the Critical Numbers: What Are the Real Decline Rates for Global Oil Production?”

Although CERA has put more spin on this report than Tiger Woods drops on a sand wedge, it’s still an intriguing look at a critical topic. Shell apparently thought so, too, and posted the article at The Wall Street Journal: New Fields May Offset Oil Drop. (A three-page summary of the report is available at No Evidence of Precipitous Fall on Horizon for World Oil Production: Global 4.5% Decline Rate Means No Near-Term Peak: CERA/IHS Study on CERA's website.)

Any credible projection of future oil supplies must be based, CERA suggests, “on a comprehensive understanding of the production history of and behavior of existing fields…In other words, how much oil supply will come from currently producing fields ten years from now?” CERA looked at 811 fields, half large, half small, in its proprietary data base, and concluded that the global decline rate is 4.5% per year. Many in the peak oil community think this number is too low by half—Schlumberger CEO Andrew Gould used 8% in a corporate newsletter last spring--but let’s take it at face value for a moment.

Depletion never sleeps. Consider the enormous implications of a 4.5% decline rate. If you start with 85 million barrels a day in 2007, but lose 4.5% each year, by 2017 you’ve lost 31 mbd. That’s the equivalent of losing the world’s four largest oil producers: Saudi Arabia, Russia, the USA and Iran. By 2030, you’ve lost 55 mbd, or as much as all the non-Opec nations now provide. Remarkably, CERA finds this to be “good news.”

“Some of the gloomy, pessimistic ‘peak oil’ views…result from an assumption of high decline rates,” said Peter Jackson, lead author of the CERA report. “This new analysis provides the basis for more confidence about the future availability of oil.”

To his credit, Wall Street Journal reporter Neil King observed that, “The study strikes a more optimistic tone than do many heavy hitters in the industry.” Tom Petrie, a Merrill Lynch vice president with a distinguished career in energy banking, told King, “However you spin it, a 4.5% decline rate is a very sobering fact. People are running hard to find new sources of oil, and that’s just to keep even. When was the last time we discovered another Iran?”

“One Iran” is what we are now losing to depletion each year, and Ben Bernanke can’t do anything about it. Forget resource nationalism. If Hugo Chavez turned into George Washington tomorrow, we would still have a serious depletion problem on our hands.

Of CERA’s 811 fields, only half have entered their decline; the rest are new fields that are still ramping up or on their maximum production plateau. In other words, what CERA calls its “aggregate global production decline” is an average of new deepwater fields, young pups, mature giants, and sclerotic geriatrics.

When CERA looks just at fields that have passed peak, its results resemble those so often quoted on peak oil web sites. To wit, of 308 Non-OPEC “post-plateau” fields, the average decline is 8%. Of 209 post plateau offshore fields, the average decline rate is 10%; 29 deepwater fields are declining at 18%.

The Rule of 72 tells us that an 18% decline costs you half your output every four years. A decline that steep is like a gunshot wound to the abdomen: you are bleeding out.

But fear not, says CERA. Yes, 23 Norwegian fields are declining at 13%, but the good news is that “four of the seven largest producing countries (China, Mexico, Russia, and Saudi Arabia) are below 10 percent….There is no looming crisis linked to rapid depletion of the global reserves base.” In other words, get a life, you doomers!

As we said, there’s more spin on this report than there is kudzu in Georgia. Although the 811 fields aren’t identified by name, the data set is said to be a “representative sample” including two-thirds of current global production, and about an equal percentage of remaining conventional reserves. CERA found that a “surprising 63% of remaining reserves are associated with fields that are still either in the buildup period or on plateau. (“Plateau” is defined as any production level that is 80% of the maximum production level.) This bears some consideration: is global oil production “younger” than some of us tend to think?

OPEC fields “generally decline at a slower rate than non-OPEC fields, possibly in relation to basic geological differences, the relative size of OPEC fields, their locations, and perhaps production constraints set by the organization,“ says CERA. (Although a 2005 CERA report showed Ghawar in decline, a sidebar in the current study proclaims it to be in fine fettle.)

The CERA study confirmed Matt Simmons’ and others’ view that the old giant fields are critical both to the present and the future. “Because large fields (>300 million barrels of original reserves) represent 86% of the production in the study, their lower decline rate and higher production level through extended decline periods is likely to make a major contribution to overall future liquids production capacity,” says CERA. Futhermore, an “improved understanding of giant fields’ complexities and reservoir models…has arrested decline and, in many cases, allowed production to increase significantly.” Specific exemplars of this “fountain of youth” phenomenon are not identified, but they would not include Prudhoe Bay. (Actually, CERA’s data set only includes 6 onshore fields in North America, which seems odd since 75% of the world’s wells have been drilled here.)

More worrisome, perhaps, is that we aren’t finding many giants anymore, and that small fields peak quickly and expire at 22 years. Almost all non-OPEC fields would fall into CERA’s small category. This may be why CERA’s website summary of the report contains an illustration showing non-OPEC production peaking in 2012, or thereabouts. After that, all future supply increases must come from OPEC.

But not to worry. CERA concludes its report with a double dose of its patented petroleum Prozac, arguing that its results “reinforce our model showing that liquids capacity could climb to 112 million barrels a day by 2017…”

Betting on depletion is like betting on rust. Your authors here, Udall and Andrews, on behalf of ASPO-USA, are willing to wager CERA $10,000 that petroleum liquids capacity won’t climb to 112 million barrels a day by 2017. That wager, in our view, is a sure thing.

Randy Udall is an energy analyst and writer based in Carbondale (CO). Steve Andrews is a Colorado-based energy consultant. They are two of the five co-founders of ASPO-USA.

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