HSBC produced an interesting report on oil production decline rates and their implications for the long-term oil supply outlook – Global oil supply: Will mature field declines drive the next supply crunch?.
1. The oil market may be oversupplied at present, but we see it returning to balance in 2017e2. By that stage, effective spare capacity could shrink to just 1% of global supply/demand of 96mbd, leaving the market far more susceptible to disruptions than has been the case in recent years
3. Oil demand is still growing by ~1mbd every year, and no central scenarios that we recently assessed see oil demand peaking before 2040
4. 81% of world liquids production is already in decline (excluding future redevelopments)
5. In our view a sensible range for average decline rate on post-peak production is 5-7%, equivalent to around 3-4.5mbd of lost production every year
6. By 2040, this means the world could need to replace over 4 times the current crude oil output of Saudi Arabia (>40mbd), just to keep output flat
7. Small oilfields typically decline twice as fast as large fields, and the global supply mix relies increasingly on small fields: the typical new oilfield size has fallen from 500-1,000mb 40 years ago to only 75mb this decade
8. New discoveries are limited: last year the exploration success rate hit a record low of 5%, and the average discovery size was 24mbbls
9. US tight oil has been a growth area and we expect to see a strong recovery, but at 4.6mbd currently it represents only 5% of global supply
10. Step-change improvements in production and drilling efficiency in response to the downturn have masked underlying decline rates at many companies, but the degree to which they can continue to do so is becoming much more limited
This is one of the best reports I’ve ever seen for understanding oil production trends. A wealth of data & analysis. https://t.co/d38JmCPLkx
— Chris Nelder (@chrisnelder) January 9, 2017
Cloud9 on Thu, 12th Jan 2017 9:19 pm
The next 12 years should be interesting.
makati1 on Thu, 12th Jan 2017 9:46 pm
Cloud9, the rest of your life is going to be “interesting” in the Chinese way. Wiley Coyote is about to realize he has been standing in mid-air.
Davy on Fri, 13th Jan 2017 6:09 am
I am OK with “returning to balance in 2017e2” but the “IF” is if the economy is able to avoid a recession. This return to balance may accelerate if markets are supportive. We are in an uncertain period of great changes across the board. Trump has mapped out an expansive economic program. China against so many odds is maintaining itself. The global economy is growing but just below a healthy range which means a slow death. Yet, growth is growth and growth requires oil.
The global economy is stranded in a stagflation trap. China has a property and bond market bubble with banks grossly underwater on non-performing loans. Its currency is being bled to death with the risk of outflows, devaluation and reserve depletion. Trump will only complicate that with trade war talk. China and the US are the only real global force. If either of these economies are in below normal growth the world is. On the other side of the coin consumption from the US is very poor. We have a retail meltdown beginning. The dollar is becoming a problem for exports and other economies. The threat of interest rates going up via an unstable bond market is ever present. Real estate and housing is stagnating. Car consumers are tapped out. All this with a FED without tools to reflate. Europe is in a quiet banking crisis with social rumblings of nationalism. Tell me this is a healthy global economy.
Oil demand has been growing but we know when oil is cheap it is used. How long will oil demand grow with higher prices and a global economy in dangerous stagflation bordering on recession? We know there is inflation when we go out to eat or fix our car. Deflation is there too with depressed activity and certain goods cheap from collapsing global trade. We then have this artificial Trump economic world of make believe. Trade wars and hollow infrastructure talk is not going to make things healthy again. Infrastructure investments take years to trickle down. Do we really need more airports and highways? Trade wars will create disruption that will be felt immediately. This is insane to think the possibility of dangerous demand destruction is not possible. The onset of a recession will ensuring oil remains in oversupply.
If you subscribe as I do to the ideas behind ETP and many other peak oil dynamics you then see the ability of oil to economically change the global economy is not there as once was the case. I am not so concerned about the details of the ETP model and other peak oil dynamics. People get lost in the details and fail to see oil and the economy are in a relationship that is precarious when negative. Sooner or later the stagflation which is really a plateau of inconsistent economic signals will cause the global economy to inch closer to recession. A recession in today’s world is likely to lead to a depression because of all the incongruities of growth and spent tools of central bank economic management. A recession will kill oil demand growth or drop it considerably.
Oil demand growth might continue but risks are more present now than ever for a serious structural slowdown because of years of repression, easing, and poor investments. Economic repression and managed liquidity might maintain the markets but how long. Stagflation could bump along with its destructive effects. Trump may boost growth much like the central banks and China post 08 but this growth is surely just more malinvestment with temporary effects. Malinvestment is bad debt and bad debt must be realized or pretended away. When will this pretending end? Sooner or later forces beyond pretend will occur and when they do the potential of all kinds of suppressed risk surfacing is dangerously present.
The other side of demand destruction to oil demand is alternatives and increasing efficiency. Alternatives are coming on stronger than ever. If the economy remains as-is we will see more alternative growth. That is not going to affect oil that much because transportation is not a big alternative penetration area but we should not disregard its effects. Just because oil demand growth has always been there does not mean it may not go into sudden decline considering all the bad economic conditions that are just below the surface.