Harvard Study Refutes Concerns over Oil Becoming a Scarce Commodity

Harvard Study Refutes Concerns over Oil Becoming a Scarce Commodity

Global oil supply capacity is growing at an unprecedented level, and could result in an overproduction glut and steep dip in oil prices, according to a June 2012 study from Harvard University's Kennedy School of Government.

Contrary to the idea among some that global oil supply is running out, additional production of 17.6 million barrels of oil per day (bopd) could come online by 2020, boosting global production capacity to 110.6 million bopd, even with depletion rates for currently producing oilfields and reserve growth.

"This would represent the most significant increase in any decade since the 1980s," said Leonardo Maugeri, author of the study "Oil: The Next Revolution -- The Unprecedented Upsurge of Oil Production Capacity and What It Means for the World."

Field-by-field analysis of global oil exploration and production projects suggests unrestricted, additional production of over 49 million bopd of crude oil and natural gas liquids could come online in 2020, the equivalent of over half the current world production capacity of 93 million bopd.

After adjusting for risk factors that would impact actual production, the additional production that could be available by 2020 is 29 million bopd.

For this new production to develop, a long-term oil price of $70 per barrel would be needed. At current costs, less than 20 percent of the new production does not seem profitable at prices lower than this level.

Only four of current oil suppliers with more than 1 million bopd of production capacity – Norway, the United Kingdom, Mexico and Iran – face a net reduction of their production capacity by 2020. The loss of production for Mexico and Iran is primarily due to political factors.

"All other producers are capable of increasing or preserving their production capacity," Maugeri said. "In fact, by balancing depletion rates and reserve growth on a country-by-country basis, decline profiles of already producing oilfields appear less pronounced than assessed by most experts, being no higher than 2 to 3 percent on a yearly basis."

Maugeri credited the oil revival to the "unparalleled investment cycle" that started in 2003 and has reached its climax from 2010 on, with three-year investments in oil and gas exploration and production of more than $1.5 trillion.

The aggregate capacity growth will occur almost everywhere, bringing about a "de-conventionalization" of oil supplies. During the next decades, this will produce an expanding amount of what we define today as "unconventional oils", including U.S. shale/tight oils, Canadian tar sands, Venezuela's extra-heavy oils, and Brazil's pre-salt oils.

Iraq, the United States, Canada and Brazil are the four countries with the highest potential in terms of effective production capacity growth, after considering risk factors, depletion pattern and reserve growth.

The fact that three of the four countries are in the western hemisphere, with Iraq the only country in the Persian Gulf, the traditional center of gravity of the oil world, is a novelty, Maugeri said.

Maugeri estimates spare global oil capacity – the difference between the world's total oil production capacity that can be reached within 30 days and sustained for 90 days and the actual production – at about 4 million bopd, which seems capable of absorbing a major disruption from a big oil producer such as Iran.

"In fact, the mere dynamics of supply, demand and spare capacity cannot explain the high level of oil prices today," Maugeri said. Only geopolitical and psychological factors and a still deep-rooted belief that oil is about to become a scarce commodity can explain the departure of oil prices from economic fundamentals.

These factors, and the current global market instability, will make the current oil market highly volatile until 2015, with oil prices likely to fall and spike due to supply and demand fundamentals and geopolitical tensions respectively.

"This will make it difficult for financial investors to devise a sound investment strategy and allocate capital on oil and gas companies."

U.S. Oil Output 'Most Surprising Factor' in Global Oil Picture

The explosion of U.S. oil output – the result of the "technological revolution" that made exploiting huge, untouched shale and tight oil fields in the United States possible -- is the most surprising factor in the global picture, Maugeri commented.

"The U.S. shale/tight oil could be a paradigm-shifter for the oil world, because it could alter its features by allowing not only for the development of the world's still virgin shale/tight oil formations, but also for recovering more oil from conventional, established oilfields – whose average recovery rate is currently no higher than 35 percent," Maugeri said.

The United States has more than 20 big shale oil formations, in particular the Eagle Ford shale, which has a hydrocarbon endowment on par with the Bakken. Most U.S shale and tight oil plays are also profitable at a West Texas Intermediate price ranging from $50 to $65 per barrel, making them "sufficiently resilient" to a significant downturn in oil prices.

Combined additional, unrestricted liquid production from the aggregate shale/tight oil formations examined by Maugeri could reach 6.6 million bopd by 2020, in addition to another 1 million bopd of new conventional production.

However, obstacles such as an inadequate U.S. oil transportation system and refining structure, the amount of associated natural gas produced with shale oil, and environmental concerns regarding hydraulic fracturing could hinder this production growth, Maugeri noted.

Taking risk factors and depletion from current fields into consideration, the United States could see its production capacity increase by 3.5 million bopd.

"Thus, the U.S. could produce 11.6 million bpd of crude oil and NGLs by 2020, making the country the second largest oil producer in the world after Saudi Arabia," said Maugeri. "Adding biofuels to this figure, the overall U.S. liquid capacity could exceed 13 million bpd, representing about 65 percent of its current production."

The study was conducted as part of The Geopolitics of Energy Project from the Belfer Center for Science and International Affairs at Harvard.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com


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Rick Weiss | Aug. 13, 2012
One should be aware of possible incompetence in the report. Crucial errors were summarized in David Strahan’s blog (http://www.davidstrahan.com/blog/?p=1576) as follows (quoted from that blog). Plenty of ink has already been spilled by oil depletion experts exposing some of the wildly optimistic assumptions contained in Maugeri’s report. More damning is that the work is shot through with crass mistakes that render its forecast worthless. When I interviewed him, Mr Maugeri was forced to admit a mathematical howler that would disgrace the back of an envelope, and it also became clear he did not understand the work of the other forecasters he attacks. It also looks as if he has double or even triple counted a vital component of his predicted oil glut. Maugeri forecasts the global oil supply will soar by almost 18 million barrels per day to around 111mb/d by 2020, the biggest increase in production since the 1980s, which he claims could lead to prolonged overproduction and “a significant, stable dip of oil prices”. Maugeri claims this looming glut has three legs: booming upstream investment by the oil industry; the rise and rise of unconventional production such as US shale oil; and a tendency among forecasters to over-estimate massively the rate at which production from existing oil fields declines. The first point is uncontroversial, the second is moot, but the third is the most important; without it, Maugeri’s glut evaporates. Maugeri cherrypicks numbers from the IEA study and misrepresents them to claim that “most forecasters” work on decline rates of 6 to 10 percent. He then argues this is incompatible with the observed growth of the oil supply over the last decade – and therefore must be wrong – and uses this conclusion to justify his inflated oil production forecast. But the whole thing is a straw man; an email he sent me revealed he simply doesn’t understand the IEA numbers. The IEA’s global decline rate is actually 4.1%, and CERA’s broadly agrees, at 4.5% (see here for more detail). Even if we were to accept his 6 to 10 percent range, Maugeri has got his sums horribly wrong. In the key section of the report, he claims that even the lower end of the range “would involve the almost complete loss of the world’s “old” production in 10 years”. But this is laughable. A 6% annual decline over 10 years leaves you with 54% of your original production, because each year’s 6% decline is smaller volumetrically than the previous one. So over a decade the decline is 46% – and very far from an “almost complete loss”. When I put this to him, Mr Maugeri seemed genuinely confused, and tried briefly to persuade me the loss was much larger. “If you have a 6% decline each year over a 10 year period, the loss of production is close to 80%”, he said, but then the penny dropped. It looks to me as if he compounded 6% in the wrong direction – for growth, not decline. “Maybe on this you are right”, he conceded sheepishly. So by his own admission, Mr Maugeri has overestimated the alleged overestimation of production decline by almost three-quarters(1). Nowhere in his report does Mr Maugeri explicitly state his own decline rate assumptions. The closest he gets is the unsupported claim that “I did not find evidence of a global depletion rate of crude production higher than 2-3 percent when correctly adjusted for reserve growth”. And yet his actual assumptions appear to be far lower. By analysing Maugeri’s forecasts, Steven Sorrell of the Sussex Energy Group and Christophe McGlade, a doctoral researcher at UCL Energy Institute, have shown his actual global decline rate for 2011-2020 is just 1.4% – scarcely a third of the established estimates. Replacing this implicit rate with the IEA number eliminates the Maugeri glut entirely, slashing his production forecast for 2020 to below his estimate of current production capacity. Sorrell concludes “Since most analysts expect average decline rates to increase over this period, this projection must be considered optimistic”. When I challenged Mr Maugeri about the discrepancy between the 2-3% decline rate and the 1.4%, he said the difference was explained by reserves growth – the tendency to squeeze more oil than originally expected from existing fields, through new technology, the exploitation of secondary reservoirs and so on. But in that case he seems to have counted it twice, to judge by his quote in the paragraph above. Or possibly even three times, since the notion of reserves growth is already accounted for in the existing estimates. Both the IEA and IHS-CERA numbers are observed overall decline rates: they reflect the actual loss of production that happened after – or in spite of – all the industry’s investment to boost flagging output at existing fields. “If Maugeri has adjusted decline rates for future reserves growth, he has either double counted, because it’s already in the existing forecasts, or assumes a massive acceleration in reserves growth i

Achieng Arende | Aug. 13, 2012
I agree with you Bill. The above presentation is oversimplified. A lot of elements that would be the center of a debate on balancing oil demand and supply have been left out. Maybe that is intentional so as to convey a certain message? Most striking is the oversimplification of the impact of growing demand for oil from other continents besides Northern America. In my view, any discussion on global oil supply capacity is incomplete if not linked to the demand story.

Finley | Aug. 12, 2012
havent looked at the study, but so often these things fail to mention price. If demand is high, the price will be high and production will grow. If demand is low, the price will be low and production will fall. It depends on the economy just as much as it does on technology and geology.

Bill Messer | Aug. 10, 2012
NAm crude production increasing by 3mn boe per day is not unrealistic by 2020. But as anyone will tell you, the economics have to be there for E&P firms to take on the risks. Oversimplification to say that it is or is not a scarce resource based on how much potential there is without considering the costs involved. Maybe the guys at MIT can help out the Harvard "boys" to provide some analysis with substance?


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