BIKE: Dow Jones meets peak oil

[Roger Baker]

Impact Of Oil Output Fall At Ageing Fields Seen As Acute"In order to 
merely replace lost production from now on, the industry needs to 
develop around 3.5 million barrels of oil a day. All our research 
indicates this won't be possible."

Friday August 27, 12:48 PM

By Stella Farrington
Of DOW JONES NEWSWIRES
http://sg.biz.yahoo.com/040827/15/3mqn7.html

LONDON (Dow Jones)--Falling oil output from ageing fields, once
insignificant compared with global production, has become large enough 
to
impact world supply and may help explain the constant tightness in the 
oil
market this year, according to analysts.

Oil production is now in decline in at least 18 major producing 
countries
including the U.S., U.K. and OPEC members Indonesia and Venezuela, and 
total
production from this group is falling by around 1 million barrels a day
every year, according to the latest data.

The oil futures market can spike on a temporary outage of just a few 
hundred
thousand barrels a day, so what is in effect a permanent outage of 1 
million
b/d may help explain some of the momentum behind the 53% rise in U.S. 
crude
futures so far this year to near $50 a barrel, analysts who study 
depletion
said.

"Depletion has become a serious issue for the oil market, and I believe 
it
is contributing to market tightness," said Chris Skrebowski, editor of 
the
London-based Energy Institute's Petroleum Review. Skrebowski has 
studied the
issue using data from BP PLC's (BP) widely-read Statistical Review of 
World
Energy data.

"What it means is that before you meet a single barrel of demand growth 
you
have to replace all the missing barrels," he continued. "Depletion is 
really
an extra demand. Countries where oil production is still expanding are 
being
put under increasing pressure to make up growing depletion rates. It's a
huge drag on the system."

And, as oil fields are ageing and their output declining even within
countries where outright production is expanding, overall decline rates 
are
estimated at closer to 3.5 million b/d.
Michael R. Smith, technical director of Energyfiles, an oil and gas
information and forecasting service, estimates depletion from declining
countries is running at even higher levels, at around 1.5 million b/d. 
Add
in the declines at mature fields in expanding crude producers and an
additional 5 million b/d is required to keep up with an average demand 
rise
of 1.5 million b/d, he said.

"The 30 or so countries that can increase output will not only be 
required
to satisfy demand growth of say 1.5 million b/d, but will also need to
provide an additional approximately 1.5 million b/d each year to make 
up for
the declining countries," he added.

Depletion "A Foreign Concept" To Most

Global supply continues to grow overall despite the depletion, with 
flows in
the second quarter of this year up 5% , or 4 million b/d, against a year
ago, at 82.3 million b/d, according to the International Energy Agency.
But as supply peaks and declines in more countries over the coming 
years,
fewer nations will be left to make up the shortfall. Smith estimates
production from declining countries makes up around 38% of global 
supply.
But few analysts factor such depletion into their forecasts.

"Depletion is a foreign concept to most people's thinking," said Henry
Groppe, founding partner at Houston-based oil and gas consultancy 
Groppe,
Long and Littell.

He has analyzed oil supply trends for 30 years. "So much of the world's 
oil
production is carried out by governments or companies vying for 
government
money who have an incentive to stress new production. It's not in their
interests to point out that some of this will be swallowed up by 
declining
fields."

"People often take future supply forecasts for new fields and simply 
add it
on to current production," Smith said. "But current production could 
have
dropped by the time the new field comes on stream leaving an 
overestimated
supply figure."

Calculating depletion rates is fraught with difficulties as each oil 
field
is different. The IEA, the energy watchdog for the industrialized world,
warns against looking at the issue simplistically, or in isolation.

"Depletion is very important and needs to be factored into forecasts," 
said
Klaus Rehaag, editor of the agency's monthly oil report. He said the 
agency
factors depletion into its forecasts field-by-field where possible, and
offsets it against estimates of new growth. "But depletion is only one
dimension," he added. "Depletion may contribute to higher oil prices, 
but
that will open up other opportunities" for investment.

Many analysts compare events in today's oil market with the oil shocks 
of
the 1970s and early 1980s. Oil peaked at almost $80 a barrel in today's
money after the Iranian revolution and triggered so much investment in 
oil
production in non-OPEC countries that the world was swamped with crude 
which
eventually drove prices down to just $10 a barrel by 1998.

But Groppe says the situation is different now. "In the ensuing years 
since
1979 we've had the opportunity to find and produce all the cheap oil," 
he
said. "Now what's left is much more expensive, and there's simply not 
going
to be a flood of cheap crude hitting the market again."

"High prices will draw forth some incremental supply," Skrebowski said, 
"but
the problem is one of timing."

He estimates around 8 million b/d of new oil is expected up to 2007, 
though
depletion will weaken its impact. After that, there is a dearth of new
projects. "Because of the lead time, even if projects are started now 
they
won't impact until 2010. In 2008-2009 I think volumes are going to fall
below requirements."

Groppe agrees: "In order to merely replace lost production from now on, 
the
industry needs to develop around 3.5 million barrels of oil a day. All 
our
research indicates this won't be possible."

Copyright © 2004Dow Jones & Company Inc. All rights reserved.
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