IEA Warns New Crude Supplies Dropping

Jim Brown
 
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The IEA said this week that the BP oil spill has put a cloud over deepwater exploration worldwide and will delay finding and production of new oil for years to come.

This is a critical point since 30% of existing global supply and 50% of new supplies by 2015 will come from deepwater wells. The IEA said the ability of the industry to find new supplies was on a "knife-edge" and poised on the edge of disaster.

The IEA said the new regulatory rules in the U.S. would probably cost 100,000 barrels per day of production in 2011 and beyond. Drillers are already making plans to sell gulf assets or put off development of some leases for 3-5 years. The regulatory environment today is chaotic. There are multiple agencies proposing rules as well as the House and Senate. Nobody knows what the eventual rules will be or how much it will cost to comply. This is causing some serious consternation in the gulf.

BP is one of the biggest leaseholders in the gulf and they are not expected to just go back to drilling as usual once the relief well is completed. BP will need to get its house in order first and concentrate on the rest of the cleanup and paying the billions in claims. If they just went back to drilling 3-4 wells at one time the public and lawmakers would be outraged. This will cost U.S. lost production for years to come.

Several smaller drillers have put their rigs up for sale and Noble, Transocean and Diamond Offshore are trying to decide if they want to put out more cash for hardware or wait and see what regulations are finally enacted. The drilling sector is in wait and see mode. The moratorium is another problem because commitments change and plans redrawn when there is such a large calendar delay.

Around the world in the various deepwater fields there has been some slowdowns and some postponement of projects until they see what the U.S. will institute as new safety programs and processes. Once the U.S. rules are set they will determine if they want to follow suit. For the time being some projects are being put on hold like the new BP project in Lybia. Mexico postponed a new deepwater project in the gulf until mid year 2011 for the same reasons.

Today this decline in exploration is not a real problem but the future results will be painful. Today there are four million barrels of excess capacity because of the weak global economy. That excess capacity shrinks a few barrels every day because of depletion. We have capacity shrinking and new exploration and new production shrinking. That means our cushion in future years, say 2012 and beyond, is shrinking from both sides at an accelerated rate.

World oil demand is expected to rise from 86.6 mbpd in 2010 to 87.9 mbpd in 2011 and something close to 90 mbpd in 2012.

According to the IEA depletion subtracts about 4.5 mbpd in production every year and that number is accelerating as the decades old fields near their end of life. That means we have to find and produce another 4.5 mbpd of new oil EVERY year just to stay even with depletion. We are currently adding about 2.5 mbpd. If you do the math it means oil is going much higher in price once demand returns to normal.

Jim Brown

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