Kemp: Decline Rates Will Ensure Oil Output Falls in 2016

Kemp: Decline Rates Will Ensure Oil Output Falls in 2016
Decline rates on conventional fields will play a critical part rebalancing the oil market and determining where oil prices settle in the longer term.

Reuters

John Kemp is a Reuters market analyst. The views expressed are his own

LONDON, Sept 15 (Reuters) - "It takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast," the Red Queen told Alice in Lewis Carroll's novel "Through the Looking-Glass".

Oil companies have to invest heavily simply to offset the impact of natural decline rates on their existing fields, and even more if they want actually to increase production.

The need for continued investment and drilling to maintain output as a result of the rapid decline rates on shale wells has been widely discussed.

But decline rates on conventional oil fields are even more important because they account for more than 90 percent of global production.

Decline rates on conventional fields will play a critical part rebalancing the oil market and determining where oil prices settle in the longer term.

Decline rates will cut output by several million barrels per day each year in 2016 and 2017 unless oil producers invest to maintain production levels from existing fields and develop replacement fields.

But with oil prices below $50 per barrel, almost all companies, from the super-majors to national oil companies and independents, are slashing exploration and production budgets hard to conserve cash.

Cuts will hit sustaining expenditure on existing fields as well as frontier exploration. In a typical example, Iraq's oil ministry wrote to contractors on September 6 warning it will cut exploration and field development spending next year ("Iraq warns oil companies of spending cuts" Sep 14).

"Because of the drop in oil-sales revenues, the Iraqi government has sharply reduced the funds available to the Ministry of Oil," the ministry told operators. "This will reduce the funds available for the reimbursement of petroleum costs to our contractors."

Some of the cuts in spending reflect a successful efficiency drive and efforts to squeeze the costs of supplies and oilfield services. But there are also real cuts in exploration and development programmes which will have a direct impact on the replacement of declining output.

"Spending curbs are accelerating decline rates," the International Energy Agency (IEA) cautioned in a recent editorial ("Oil Market Report" Sep 2015).

The agency predicts non-OPEC oil supply could decline as much as 500,000 barrels per day (bpd) in 2016 because of the capital strike, which would be the biggest annual fall in 24 years.


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