Challenging the Status Quo: Reassessing Oil and Gas Decline Rates
ExxonMobil's outlook hinges on aggressive decline rates
Earlier this week, while perusing John Kemp's daily energy digest, I stumbled upon Mark Finley's commentary, What’s Happening to Oil Market Forecasts?1. Two days later I delved into ExxonMobil's energy outlook until 20502 Two specific data points regarding hydrocarbon supply rates caught my eye. I'm still grappling with the origins of their 11% and 15% decline rates. Any insights or comments about global natural decline rates would be greatly appreciated.
The following figures raised my eyebrows:
Sensitivity analysis on constrained oil and natural gas investment:
In the absence of any further investment, oil supply would be expected to quickly decline at ~15% per year, leading to major shortages of critical energy supplies. Similarly, natural gas supply would decline by ~11% per year without investment.
Some have advocated for continued investment in existing fields, but no new oil and natural gas developments. This would still lead to energy shortages, as oil supply would decline by ~4% per year and natural gas by ~3% per year.
The resulting supply in either case of constrained investment would be well below levels needed to meet projected demand, even in the majority of the IPCC’s Likely Below 2°C scenarios.
These rates seem significantly higher than the generally accepted industry averages.
If we assume that there are no further investments in oil and gas supply, production could decline at a rate of approximately 15% per year for oil and 11% per year for gas. Under this scenario, global oil production could plummet from around 100 million barrels per day (MBPD) today to a mere 15 MBPD by 2050.
While these charts don't represent a specific field but rather an aggregation of global production, the natural decline rates are still staggering.
Ok, I downloaded the complementary report which writes on the last page:
Without continued investment to sustain existing fields and develop new ones, the supply of oil and natural gas declines. The estimated natural decline rate is 7% per year and 5% for natural gas.
As shown in the charts, these decline rates create a significant need for continuous investment just to sustain 2021 production levels. The natural rate of decline for oil and gas exceed the range of demand projections out to 2050. Ceasing to invest in either oil or gas could cause supplies to fall well short of demand, both for the near term and in the broad range of scenarios.
No I am completely puzzeled.
Regarding the discrepancy between ExxonMobil's figures (15% and 11%) and the report's figures (7% and 5%), here are a few possible explanations:
Different Assumptions: ExxonMobil's projections might be based on different assumptions regarding factors like technological advancements, future investment levels, and specific field characteristics.
Regional Variations: Decline rates can vary significantly across different regions. ExxonMobil's numbers might reflect a more pessimistic outlook for specific regions or field types.
Scenario Analysis: ExxonMobil's projections may be part of a broader scenario analysis, where they explore different potential outcomes based on varying assumptions.
Next, I delved into other prominent energy outlooks to uncover information about decline rates.
The OPEC 2023 World Oil Outlook 2045 (WOO) mentions the term "decline" 233 times. However, I was unable to locate any specific numbers for the natural decline rates used for oil and gas3
Similarly, the IEA's World Energy Outlook 2023 (WEO) references "decline" 157 times but lacks concrete figures for natural decline rates4
Frustrated by my lack of success, I turned to Gemini for assistance.
EIA's Approach to Decline Rates in the International Energy Outlook 2023
The U.S. Energy Information Administration (EIA) does not explicitly publish specific decline rate numbers for oil and gas fields in its International Energy Outlook (IEO) 2023. However, it does incorporate decline rates into its projections for global energy supply and demand.
Here's how the EIA likely approaches decline rates in its IEO:
Region-Specific Models: The EIA likely uses region-specific models for oil and gas production, incorporating factors such as geological characteristics, production practices, and technological advancements. These models would inherently include assumptions about decline rates.
Historical Data and Trends: The EIA would analyze historical production data for various fields and regions to identify trends and patterns in decline rates.
Expert Judgment: The EIA may consult with industry experts and analysts to gather insights and refine their assumptions about decline rates.
While the EIA may not publish specific decline rate numbers, their projections reflect the overall impact of decline rates on global energy supply. If you're interested in understanding how decline rates are factored into the IEO, you can explore the methodology and assumptions outlined in the report.
To find more information on the EIA's approach to decline rates in the IEO 2023, you can consult the report itself or contact the EIA directly for further details.
Finally, I revisited my school notes and petroleum economics coursework to refresh my understanding of decline analysis:
J.J. Arps wrote a paper on decline analysis5, and introduced three mathematical equations to model production decline:
Exponential decline: A constant percentage decline in production over time
Hyperbolic decline: A rapid initial decline that slows over time.
Harmonic decline: A gradual decline with a decreasing rate of decline.
More details about it can be discovered on the ResIngsight website6. e charts presented earlier illustrate an exponential decline. However, real-world reservoirs are often more complex, exhibiting a combination of these decline curves.
Different fluids behave differently within various reservoirs, and the implementation of primary, secondary, and tertiary recovery technologies can mitigate decline rates. Generally, I recall that oil decline rates tend to be lower than gas decline rates. For conventional reservoirs, I would estimate a range of 3% to 10% per year for oil and 5% to 12% for gas. Unconventional reservoirs, known for their steep decline rates, typically exhibit significantly higher decline figures.
As a quick reference, I consulted Gemini (without verifying the accuracy).:
While decline rates can vary widely, here are some general ranges based on field type:
Conventional Fields
Oil: 5-20% per year
Gas: 10-30% per year
Unconventional Fields
Shale oil: 20-50% per year
Tight gas: 30-60% per year
Please note that these are rough estimates and can vary significantly based on specific reservoir characteristics, production practices, and other factors.
Overall, ExxonMobil's projected decline rates seem relatively high. However, when considering the diverse range of oil and gas fields worldwide, including their varying maturity levels, the aggregate decline rate is likely to increase. Tight-oil and shale-gas fields, in particular, often exhibit steeper decline curves.
If you have any additional insights or comments, please feel free to share them. In the meantime I will keep guessing. And maybe, the decline rates might not be as high as they initially seem...
Well, Carbon Tracker7 writes:
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.
Finley, M. “What’s Happening to Oil Market Forecasts?” Baker Institute for Public Policy. August 23, 2024. https://www.bakerinstitute.org/research/whats-happening-oil-market-forecasts
ExxonMobil Global Outlook: Our view to 2050 https://corporate.exxonmobil.com/sustainability-and-reports/global-outlook#Projectionsandkeytakeaways
OPEC: World Oil Outlook https://www.opec.org/opec_web/en/publications/340.htm
IEA: World Energy Outlook 2023 https://www.iea.org/reports/world-energy-outlook-2023
Arps, J.J.. "Analysis of Decline Curves." Trans. 160 (1945): 228–247. doi: https://doi.org/10.2118/945228-G
ResInsight: Decline Curve Analysis: https://resinsight.org/plot-window/declinecurveanalysis/
Carbon Tracker: https://carbontracker.org/reports/the-decline-rate-delusion/