BEYOND THE HORIZON Discontinuity in the making

The World Energy Congress absolutely missed the point about resource constraints. The reason they probabaly did so was the simple mistake that so many people make about the reserves-to-production (R/P) ratio. They probably looked at consensus reserve figures and current production, and divided one by the other to conclude there is enough to last 45 years, without realizing the absurdity of the model that implies.

The World Energy Congress absolutely missed the point about resource constraints. The reason they probabaly did so was the simple mistake that so many people make about the reserves-to-production (R/P) ratio. They probably looked at consensus reserve figures and current production, and divided one by the other to conclude there is enough to last 45 years, without realizing the absurdity of the model that implies.

All oilfields decline during the latter half of their lives and it is ridiculous to imagine that present production can last for 45 years and then stop overnight. Some 90% of present production comes from fields more than 20 years old; 70% from fields more than 30 years old. Most are already in decline.

Once you crank in the decline curves, you realize that peak production comes at the midpoint of depletion. By the end of the century, almost all countries save the five major Middle East producers, will be past midpoint and in decline. It means that the share coming from the Middle East is set to rise, passing 30% (the threshold for the previous shocks) in a year or two.

The main reason for the present price weakness may be Norway, now the world's fourth largest exporter. It will peak in a year or two, and then decline rapidly due to the high offshore depletion rates.

There are about 211 gigabarrels (Gb or billion barrels) left to find with only a few giants remaining. About half of this is in the FSU and Middle East, meaning that there is about 100 Gb open to the international industry.

If you take the World Energy Congress view of there not being a cloud on the horizon for 25 years, no one much is going to care about this 100 Gb, which occurs in progressively smaller fields and more difficult prospects. But, if you accept the growing control by the Middle East and the likelihood of another oil price shock as a consequence, then one would anticipate another surge of exploration.

More work needs to be done to test the few remaining hopes for a new frontier, such as the Atlantic margin off Ireland (following the West of Shetlands area), even a few deepwater plays off West Africa, perhaps for stratigraphic traps with longshore currents cleaning up turbidite sands (as is the case off Brazil). People will want to leave no stone unturned, but I think that the main scope for adding reserves is in the established basins in pursuit of ever smaller satellites. Actually, the success ratio for these small objectives may improve with modern seismic, better understanding, and the computer workstation. The satellites are, after all, in the heart of the oil patch, where most factors controlling accumulation are known. The pursuit will also be labor intensive and may even lead to a shortage of experienced explorers, so many of whom have been heaved out in the past few years.

Another issue is who will do it?

The majors may not do most of it. All international companies together now own only about 7% of the reserves. The majors must be buying nearly all their oil from governments, and I don't see that it makes much sense for them to explore for small fields that will barely impact their core business of marketing. So the day of the independent and the contractor may be coming. For them, the realistic objectives, namely the small fields, are profitable and make sense.

There is also the question of tax.

High marginal tax rates, as in Norway for example, actually provide a hidden subsidy for exploration. Will this continue? Governments may prefer to ring fence fields to end this subsidy if it does not result in revenue generating projects. The UK stopped it, but exploration seems to continue.

Another issue is gas

It is evident that it is more widely distributed in nature than is oil, and also at a much less mature stage of development. I think, therefore, that as oil projects dwindle, attention will turn to gas that will also become economic, once the oil shock happens. The Atlantic margin, already mentioned, may be largely gas prone for geological reasons.

Perhaps I am skeptical about exploration in the FSU. It seems that the FSU reached depletion midpoint in 1992, which means that the fall in production due to the current politico-economic circumstances only advanced the decline that would have happened anyway within two or three years.

If the economy there bottoms out, increased domestic demand will put pressure on exports which will in turn strengthen the Middle east control. I cannot imagine that a western company will make money producing oil in Russia to sell to Russians. Nevertheless, something like Sakhalin could be of interest for a few years, because it is offshore and far from the Russian market anyway.

Many people claim that technology will solve the problem. To the extent that it adds to the resolution needed to find and develop small fields, I agree it can contribute. However, you don't need anything sophisticated to find and develop a giant.

It comes back to the same argument: a realistic future is substantially confined to the small fields. One needs a very large number of them, and that means a lot of work. They will be profitable to those who operate them, but will not make much impact on global supply, which will be short.

A crisis or discontinuity is in the making. It is bad news for some, but good news for others. The World Energy Congress's view is that of economists, which says more of the same and is oblivious to the underlying resources. Economists plot trends but never see the fundamental discontinuities.

C.J. Campbell
Associate Consultant
Petroconsultants - Geneva

This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that will shape the future of our industry. Offshore Magazine invites you to share your thoughts. Send your manuscript to Beyond the Horizon, Offshore Magazine, Box 1941, Houston, TX 77251 USA. Manuscripts will not be returned.

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