The Decline Rate Delusion
A short post here ahead of some more detailed ones to come in July and August.
I have recently started working as Special Advisor for the CarbonTracker Initiative, and in particular with their Chief Strategist Kingsmill Bond on energy transition issues.
Published a few weeks back this is our first note, The Decline Rate Delusion.
To quote directly from the piece:
Decline rates will not save the oil sector from the impact of peak demand.
The false narrative. The oil industry argues that average oil field decline rates of up to 8% necessitate high oil prices so as to justify the high expense of new fields.
Decline rates are overstated. Industry analyst Rystad Energy calculates that the global decline rate is in fact 4.4%, while companies like BP argue they can reduce their decline rate to 2% by use of traditional techniques such as infill drilling and modern options such as digital technology.
There is no shortage of oil out there. The world has 1,700 bn barrels of reserves, and produces 34 bn barrels a year, a reserve to production ratio of 50 years. In spite of high decline rates, the oil sector has been growing production for decades.
The issue is therefore capex not decline. As decline can be offset by capex, it makes more sense to look at capex levels, which follow a typical cost curve; most production requires low levels of capex, and there is a steep rise at the top end of the curve.
Capex levels required to offset decline are relatively low. OPEC and Russia (OPEC-Plus), who are responsible for over half of oil production, have been able to sustain production at $7 a barrel and non-OPEC can sustain production at $15 per barrel.
Growth is expensive. We estimate that the marginal capex per barrel for non-OPEC production growth was over $40 in the period 2000-2018. Rystad Energy data implies that at least $30 per barrel in capex is required to grow production in the period to 2030.
High cost capex is at risk. If there is no growth in demand, this expensive capex will not be needed. Rystad Energy data shows that there is a capex gap of $781bn to 2030 between the capex required for 1% growth and what is required for production to be flat.
A new non-OPEC growth model is needed. The bygone model of the oil industry relentlessly exploring frontline regions needs to be replaced by efficient and disciplined management of its existing capacity.
OPEC-Plus cannot be assumed to support production cuts continuously. Under a scenario of stagnant or declining demand, OPEC-Plus still has access to vast amounts of low-cost reserves and increasing access to international capital markets
Enjoy this light reading.
The notes in July / August will be of a more mathematical bent, because I know you all pine for more quadratic equations.
Till then.
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