Industry leaders question if production can expand to meet demand

Feb. 19, 2001
World production of oil and other petroleum liquids is growing, assuring ample supplies through 2005, Cambridge Energy Research Associates officials said at a Houston energy conference last week. But industry leaders questioned whether they can supply bigger oil and gas markets in 2010.

HOUSTON, Feb. 19�World production of oil and other petroleum liquids is growing by 1 million b/d per year and will triple to 3 million b/d per year by 2004-2005, providing ample fuel for the short term, Cambridge Energy Research Associates officials said at the energy conference here late last week.

But with world demand growing 2%/year for oil and more than 3% for gas, some industry leaders at that conference questioned whether they can meet projected markets in the range of 140 million b/d of oil equivalent by 2010.

Global production capacity for petroleum liquids is expected to grow to 92 million b/d in 2005 from 79 million b/d at present, even allowing for the steep increase in depletion rates in recent years, said Bob Esser, CERA senior consultant for world oil operations.

That growth will be equally divided between the Organization of Petroleum Exporting Countries and non-OPEC producers, he said.

But in a speech Tuesday at the CERA conference, Harry J. Longwell, director and senior vice-president of ExxonMobil Corp., said that developing ever-increasing supplies of oil and gas will be �clearly a formidable challenge� for the industry.

Among OPEC members, who control most of the world�s known oil reserves, the oil depletion rate is about 2%-3%/year. But among some non-OPEC producers, he said, the depletion rate runs 7%-8%/year.

�If you assume a worldwide average depletion rate of 4%-5%/year, then the real required production growth rate needed to meet predicted demand approaches 7%,� said Longwell. �That means we will need to add some 80 million boe of new production by 2010.�

The cost of adding those extra barrels could exceed $1 trillion, at a rate of about $100 billion/year, up from the $60 billion/year that the industry now spends. �This is doable, but only in a proper investment environment,� Longwell said.

Esser points to major oil discoveries in the deep waters of the US portion of the Gulf of Mexico and off West Africa and Brazil in recent years. �We�re looking at 500,000-1 billion bbl fields,� he said.

With a projected 20% increase in exploration spending this year, high discovery rates will likely continue, he said.

The extended decline in US production of oil and petroleum liquids is expected to turn around this year, with production growing through 2005 with the addition of deepwater fields in the gulf and the reversal of Alaska�s production declines. �A lot of smaller pockets of oil have been discovered in Alaska that will be coming on,� said Esser.

He also foresees production increases in Canada; Latin America, �particularly Brazil, Mexico, and Venezuela�; Algeria and Libya in North Africa; the deep waters off Angola and Nigeria; Russia and the Caspian Sea area; and the Middle East.

Many of development projects underway in those areas will be coming onstream through 2003 �even if oil prices go to $5/bbl,� Esser said.

Longwell acknowledged recent large finds. �Worldwide, the industry has discovered more than 700 billion boe that have not yet been developed,� he said. �But more resources will be needed for the future.�

Half of the oil and gas that will be required 10 years from now is not yet on production, said Longwell.

�On average, it has been taking 7-8 years to bring new resource adds onto production,� he said. �If we are to meet the demand that we expect in the future, we�ll need to cut years off that time frame.�

In order to bring future supplies on-stream in a timely manner, Longwell said, governments of oil and gas-producing countries must first establish regulatory and fiscal polices that encourage rather than deter access to exploration prospects.

He identified five fundamental areas in which governments can formulate policies to benefit both their national economies and the oil industry.

They were:

� A fiscal regime that makes private investment economically attractive and that fairly divides profits. �The most important thing is that the rules remain consistent for a given investment,� said Longwell.

� Contract stability. Later attempts to renegotiate contract terms will delay projects.

� Sufficient periods for exploration and production. Companies need time to define the resource and develop it in an orderly manner for maximum economic recovery, Longwell said. Attempts to rush production can damage the resources.

� Assurances that, once an agreement is reached, the industry can proceed with its job without �unnecessary or counterproductive interference.�

� Fair procedures to resolve disagreements. Parties should be able to resolve their differences through good-faith negotiations rather than resorting to litigation or arbitration.