"Those projections ignore two fundamental forces that have, in recent years, brought global production to a virtual standstill," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "The first is depletion. You have to run faster to stand still. Depletion from existing fields has accelerated to over four percent, a rate that currently cuts nearly four million barrels per day out of each year's production.
"The second fundamental force blowing up supply forecasts is the huge project delays and massive cost overruns associated with many of the world's largest new oil mega-projects. From Kazakhstan to Nigeria's Delta region, protracted delays in some of the world's largest energy mega-projects will have huge impacts on actual supply growth over the next five years."
As part of its research, CIBC World Markets reviewed nearly 200 new oil projects slated to start production over the next five years and found that scheduled production timelines are far too optimistic, with project delays the norm, not the exception, among the group. It found that heavy reliance on increasingly high cost and technically challenging fields like the Kashagan project in Kazakhstan, Russia's Sakhalin II and Canadian and Venezuelan oil sands have left world supply growth vulnerable to a seemingly never-ending series of project delays.
Mr. Rubin notes that delays in the latter two countries will shave over 700,000 barrels a day from earlier 2012 production forecasts. In some nations, soaring development costs have resulted in complex and often tense re-negotiations of royalty agreements with host countries. Some have even led to either a temporary or indefinite suspension of operating licenses.
"Of course, stagnant conventional world oil production underlies the recent problems associated with harvesting unconventional supply. Virtually all of the increases in global oil production have occurred from deepwater fields or oil sands, with conventional production seemingly stuck at 2005 levels of 67 million barrels per day."
These project delays are also happening at a time of accelerated global depletion in existing fields. The rate has climbed to over four percent, which cuts nearly four million barrels per day out of each year's production. The recent increases are in part, related to the growing importance of offshore, and, in particular, deepwater fields, which have depletion rates twice that of conventional fields.
"Cliff-like depletion rates have already been in evidence in the North Sea and now the huge Cantarell field in Mexico," adds Mr. Rubin. "Since 2000, offshore fields have been the single-largest source of new supply growth. As their weight in total production increases, future depletion rates will continue to rise. Even holding the current depletion rate constant over the next five years, we must produce nearly 20 million barrels per day of new oil just to offset what will be lost through depletion during this period."
Mr. Rubin notes that these major project delays and increasingly rapid depletion will result in a supply increase of only about three million barrels a day by 2012 - far below the 10 million barrels projected by the International Energy Agency. With oil demand soaring in places like China, India, Russia and in the world's largest oil-producing countries themselves, a widening demand-supply gap will push crude oil prices to as high as $150 a barrel by 2012.
"Soaring rates of car ownership in countries like Russia and China have boosted fuel demand in both countries," says Mr. Rubin. "For example, gasoline, a key driver of rising oil use, is growing at over six percent in both countries. But an even more important factor has been massive price subsidization in OPEC countries which has spurred extraordinary near-double- digit growth in oil demand.
"Not only is there virtually no price elasticity between OPEC's own oil consumption and world oil prices but paradoxically, domestic consumption of oil in those countries may actually increase with rising world oil prices because higher crude prices boost incomes, which in turn, further boosts demand for massively subsidized domestic gasoline."
