Primary energy consumption continues to accelerate globally despite several years of slow economic growth. With increased consumption, production of oil continues to grow surpassing record level of 90 million barrels per day worldwide. Not only does the oil industry need to produce more to meet ever increasing demand, it also needs to overcome existing well production declines. All active wells ultimately decline in production as resources are tapped, though there is an opportunity for technology to slow or in some cases even temporarily reverse those decline rates. In addition, as existing wells decline, more and more new wells need to be drilled to keep up with demand. Offsetting of oil decline rates for both existing and new wells, therefore, is high on the industry’s agenda for good reason. It is a critical factor to understand future trends in the oil industry.
What are oil decline rates?
The measure of how rapidly the rate of production from an oil field or group of fields declines is called the decline rate. Production decline rates are dependent on several factors, including geology of the well, drilling and completion processes, and enhanced oil recovery technologies in place to manage or optimize production.
All wells and fields are different and there is no precise way to measure cumulative industry decline rates. While these numbers vary based on several factors, general trends can be gleaned from different sub-segments of oil wells, and those trends are indicative of major industry trends. For example, in 2008 IHS estimated global oil field decline rates to be around 4.5%. In the same year, IEA did a study estimated the worldwide decline rates to be around 6.7%. Both studies took place prior to the phenomenal North American increases in tight oil production beginning in 2010.
In general, here is what the industry knows:
(source: IHS, Deloitte & Touche and USGS databases; other industry sources; IEA estimates and analysis)
· The supply of the oil from an existing fields decline on an average of 5-7% per year
· The largest onshore oil fields decline at a slower rate
· Deepwater offshore fields decline 2+ times faster than onshore fields
· The latest onshore tight oil fields in North America show annual decline rates greater than 30, 40, & 50% in the first years before the rate asymptotes to a more traditional decline rate
So: onshore tight oil has the highest decline rate, whilst deep water offshore wells rank the second. Large onshore conventional wells have the lowest relative decline rate among the three.
A rising decline rate of the global oil production
According to Infield Systems’ Offshore Energy Database, total offshore oil production accounted for approximately 6% of global production back in 1965. But this proportion has been steadily increasing over years. The figure rose 33% between 2000 and 2010, and prospects for the future remain equally positive, with offshore oil production expected to account for ~35% of global oil production by 2015.
It is the same story for the U.S. tight oil production, which has increased dramatically in just the past few years, from less than 1 million barrels per day (MMbbl/d) in 2010 to more than 3 MMbbl/d in the second half of 2013.
It is clear that as the industry goes forward, the mix of high decline fields will grow much faster than production from lower decline onshore conventional fields. This is especially the case as the focus continues to shift to new offshore developments and onshore tight oil to primarily sustain the level of production required to meet increasing global demand.
Given the much higher decline rates of offshore production and of onshore tight oil compared to onshore conventional production, we can clearly see that more technology and more wells will be needed in the coming years to offset the decline rate.
A new look at the future of the global oil industry
Oil demand growth is currently moderating, prompting the IEA to note a relatively weaker outlook for crude oil demand in 2014 and 2015 to 900,000 b/d and 1.2m b/d. But this figure does not slow industry growth. Actually the opposite is true: given the increasing decline rates, the oil industry will expect considerable capex investment and increased growth.
Since decline rates are increasing in the new oil industry mix, more wells need to be drilled to merely deliver against existing demand, even without growth. Inevitably, more O&G equipment and services will be needed to support the increasing production activities. In addition more and more knowledge and technology will be implemented on existing wells in the coming years to soften decline rates and extend production.
The oil industry will increasingly invest capital to implement technologies focused on more efficient oil production to offset the decline rates. The invested capital is likely to increase every year, and the industry will demand not only better technologies, but also more efficient and cost effective technologies.
I will be interested in your thoughts as well.