Supply & Demand

Battling depletion with production from deepwater, frontiers IEA forcast [33,394 bytes] As a share of total global production of crude oil, offshore output continues to provide a larger share. [37733 bytes] Future increases in oil and gas demand across the globe will have to be met for the large part by increases in offshore production. Onshore global production has leveled off, and is supported only by reserve additions in the Mideast and discoveries in Latin America and Russia. OPEC's

Global oil/gas demand to be met by offshore production

Battling depletion with production from deepwater, frontiers
Leonard Le Blanc
Future increases in oil and gas demand across the globe will have to be met for the large part by increases in offshore production. Onshore global production has leveled off, and is supported only by reserve additions in the Mideast and discoveries in Latin America and Russia. OPEC's heralded surplus capacity has been absorbed by growing demand over the past 10 years.

The trend in meeting future demand with offshore supplies is a continuation of the growth in offshore production in recent years. Offshore production grew from 7.6 million BOE/d in 1970 to nearly 30 million BOE/d in 1996. This gradual shift from onshore production to offshore output in meeting new global oil and gas demand was cited by Matthew Simmons of Simmons & Company as the reason for developing shortages in offshore drilling rigs and supplies. He spoke at a recent oil and gas outlook seminar.

Record oil demand

In 1996, worldwide oil demand exceeded 72 million b/d for the first time ever, and according to Simmons, transportation and refining systems also handled more oil production than ever before. This compares with total global production of 49 million b/d in 1970 and 21 b/d in 1960.

In the middle of this growth rate, oil and gas demand in Russia and Eastern Europe collapsed. Astonishingly, consumption from these regions was less in 1996 than in 1970.

Only a decade ago, global oil and gas productive capacity exceeded demand by almost 25 million BOE/d, according to Simmons. Of this excess capacity volume, 20 million BOE/d was OPEC's share. In addition, the gas supply in the US was about 30 bcf/d (or 5 million BOE/d) greater than demand. "With such a massive overhang, it is surprising that another well was ever drilled, and at the worst point of 1986-1987, few were," Simmons said.

The turnaround, Simmons pointed out, began in 1990, when demand for oil alone exceeded the old 1978 peak of 64 million b/d. Gradually, demand escalated to 70 million b/d by 1996, and the IEA predicts that demand will hit 76.1 million b/d by the last quarter of this year.

Sources of demand

The difference between production levels in 1970 and 1996 represents a compound annual growth rate in demand of 1.6% annually.

The developed countries (OECD) had only a 0.6% annual growth during this interval, explains Simmons, a period that included two severe recessions and a four-year period when oil demand fell by 7.6 million b/d. But low OECD consumption during the earlier years of the period escalated to a 1.3% growth rate during the 1990-1996 period.

The developing nations, in 1971, consumed only 7.5 million b/d, 13% of the world's total, Simmons states. During the following 25 years, developing countries demand increased every year.

Oil demand jumped to 13 million b/d by 1980, to 19 million b/d by 1990, and to 25 million b/d by 1996. The increase, Simmons points out, represents a 4.9% annual growth rate over the past 11 years and a 5.1% growth rate over the past six years.

The only reason global demand has not been higher than the 1.6% global increase is the collapse in demand in Eastern Europe and Russia over the past eight years. If Eastern Europe and Russia are not included in global demand, the growth rate would rise to 2.8% annually, Simmons stated.

When natural gas demand is added in on a BOE equivalent, then the growth rate is about 3%. Natural gas, which is finally recapturing markets it lost to competing nuclear and coal energy forms, is just coming into use in the developing countries and demand for this energy form should increase in the coming years.

Most annual demand growth forecasts through the year 2015 use a range of 1.4% to 1.7%, which does not reflect real conditions of supply and demand, Simmons says. Even the IEA's long-term oil demand growth totals just under 2%. With 90% of the world's oil markets growing by close to 3% each year, a worldwide forecast of less than 2% is simple unrealistic, he added.

Simmons estimated that conservative demand growth in developed and undeveloped nations, at 1.5% and 5%, respectively, would boost demand to 10.1 million b/d by the year 2001, over the world's current production rates.

The depletion battle

On top of Simmons' estimate of the 10.1 million b/d in new production needed, an additional equal amount would have to be produced daily in order to replace the amount lost by depletion.

Simmons estimates that average blended annual global depletion is at least 3%. This is a fairly conservative estimate, he explained, because most fields around the world are depleting at rates of 4-7%. He cited four estimates:

  • IEA's Global Offshore Oil Supply to 2000 report, which identifies a production drop from 41 major offshore fields of 6.96 million b/d in 1990 to 4.86 million b/d in 1995, a depletion rate of 6.9%.
  • US Gulf of Mexico near-shore fields are depleting in terms of BOE/d at an annual rate of 6.8%.
  • The top 100 onshore and offshore fields in the US were depleting at an average 4.5% annually.
  • Estimates from 45 fields in the UK (expanded with 10 additional new fields over time) are depleting at an average rate of 5.1%.
These depletion numbers are balanced by rates in the Mideast of slightly more than 1%, a decline rate aided by frequent and costly well intervention. Also, non-OPEC fields that show depletion numbers of only 4-5% annually are the result of extensive re-development and workover operations, Simmons explained.

"Technology has made its biggest impact on staving off depletion," he explained. "Through identifying smaller reservoirs previously overlooked, small pockets of hydrocarbons at the edge of older fields, extended reach and horizontally drilled wells, we are taking a far greater amount of oil out of fields than ever before and extending the life of a field, which would otherwise have been abandoned."

Eventually, employing any technology to stem depletion must confront the same reality that adding new production does. "It requires a drilling rig before anything else can begin," Simmons stated.

Offshore production

Much of the new production added to meet global hydrocarbon demand over the past years has come from OPEC, which simply had to "turn on the taps," Simmons explained, and through liquidating oil and gas inventories. Of the 13 million BOE/d increase in global demand for hydrocarbons over the past 10 years, 84% came from OPEC.

During that same period, offshore production increased by 8 million BOE/d, 6.3 million BOE/d of which was represented by crude oil. Almost 80% of the 8 million BOE/d in offshore production came from non-OPEC sources.

Offshore, Simmons said, is the last obvious place to find new sources of oil and gas. " We have found ways to exploit oil and gas fields at water depths beyond one's wildest imagination, but there is no evidence to date that we might begin finding giant fields in mature, onshore areas..."

In order to meet growing demand (projected at 10.1 million b/d) in the 1997-2001 period, plus an additional 10.2 million b/d to account for a 3% global blended depletion rate, Simmons says another 20.3 million b/d in new production is needed. These figures reflect liquid hydrocarbon needs, excluding natural gas, where demand is growing even faster.

Most of the necessary 20.3 million b/d needed to serve growing demand from now through 2001 will have to come from increasing offshore supplies. There are few other alternatives.

"With demand growing so quickly, with so little excess capacity left to aid in providing more supply, with no easy way to quickly add more offshore rigs, and with so little extra processing and perhaps even transportation capacity left (combined with such low days forward inventory), the industry needs a wake up call so that the greatest and most widespread expansion in the industry's history can begin," Simmons concluded.

What if producers' drilling, equipment costs doubled?

A 16% rise in oil and gas prices would the only correction needed to recoup the loss of a producer's profit margin as a result of the doubling of costs to drill and equip oil and gas wells. Matthew Simmons of Simmons & Company, using IEA data, determined the needed price increase. The calculation assumed that no other expenses or revenues changed.

"Given the inevitability of rising costs, it is enlightening to test the sensitivity of increased drilling and completion costs on overall E & P profitability," Simmons stated. "If we use actual 1995 E & P profitability for the top 25 US producers (from the IEA's financial performance profiles), these companies generated $36.6 billion of pre-tax cash flow and $7.5 billion after tax income on $90 billion of revenue.

"Total exploration and development expenses totaled $25.6 billion and 54% of these expenses were for drilling and equipping the wells. If the cost to drill and equip a well doubled, and no other expenses or revenue changed, this would drop net income to almost break-even, which would be unpleasant news to a lot of shareholders.

"It is interesting, though, to see that the price of hydrocarbons would only need to rise 16% to restore the old profitability, assuming no other costs rose at the same time," Simmons pointed out. On price assumptions, he used $17.14/BOE before the doubling of costs, and $19.80/BOE after the costs increase to keep profitability level.


Simmons, M., "Understanding Our Hydrocarbon System in Uncharted Waters," Simmons & Co. Oil and Gas Outlook Seminar, March, 1997.
Simmons, M., "A Wake Up Call," Simmons & Co. Oil and Gas Outlook Seminar, March, 1997.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.

More in Home