Wednesday's Financial Times (London) reports that "the first authoritative public study of the biggest fields," by the International Energy Agency, indicates that the annual rate of oil "production" (extraction, really) without "extra investment to raise production" is 9.1%.[1]  --  A draft of the report was obtained by the newspaper.  --  While "[t]he decline will not necessarily be felt in the next few years because demand is slowing down," nevertheless "wih the expected slowdown in investment the eventual effect will be magnified, oil executives say."  --  Wednesday's Wall Street Journal also expresses the fear that with the recent sudden decline in oil prices, "the industry could be setting the stage for yet another supply-and-demand whiplash down the road."[2]  --  But Guy Chazan's article suggested that these concerns may be overblown:  "[M]ost big oil companies have shown no sign of trimming their investments.  Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year — the largest in its history — and Chevron Corp. is also charging ahead with its $23 billion program.  --  Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude.  'I don't think there will be major changes in investment,' said Paolo Scaroni, chief executive of Italian oil company ENI SpA.  'Maybe in unconventionals, but not conventional oil projects.'" ...

1.

In depth

Oil

WORLD WILL STRUGGLE TO MEET OIL DEMAND
By Carola Hoyos and Javier Blas

Financial Times (London)
October 28, 2008

http://www.ft.com/cms/s/0/e5e78778-a53f-11dd-b4f5-000077b07658.html

LONDON -- Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the *Financial Times*.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia, and Alaska, and meet long-term de­mand. The effort will become even more acute as prices fall and investment decisions are delayed.

The IEA, the oil watchdog, forecasts that China, India, and other developing countries’ demand will require investments of $360bn each year until 2030.

The agency says even with investment, the annual rate of output decline is 6.4 per cent.

The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

The watchdog warned that the world needed to make a “significant increase in future investments just to maintain the current level of production.”

The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry -- already struggling to find enough supply to meet needs, especially from China -- a reprieve in the past few months.

The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth.”

It expects oil consumption in 2030 to reach 106.4m barrels a day, down from last year’s forecast of 116.3m b/d.

The projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.

All the increase in oil demand until 2030 comes from emerging countries, while consumption in developed countries declines.

As a result, the share of rich countries in global demand will drop from last year’s 59 per cent to less than half of the total in 2030.

This is the clearest indication yet that the focus of the industry on the demand -- not just the supply -- side is moving away from the U.S., Europe, and Japan, towards emerging nations.

2.

OIL'S SLIDE THREATENS FUTURE SUPPLY
By Guy Chazan

Wall Street Journal
October 29, 2008

http://online.wsj.com/article/SB122523334615277739.html?mod=googlenews_wsj

LONDON -- The slump in oil prices has spread relief among consumers and fuel-reliant industries, but also is squeezing the companies who could invest in new sources of oil -- spurring concerns that prices will prompt them to shelve investments.

Industry executives warn that could mean the world will face a dramatic ramping up of prices as soon as the global economy, and demand, begins to rebound.

"Low oil prices are very dangerous for the world economy," said Mohamed Bin Dhaen Al Hamli, the United Arab Emirates' energy minister, speaking Tuesday at an oil-industry conference in London. "We need an adequate and reasonable oil price that will continue to stimulate investment." With prices now languishing, he said, "a lot of projects that are in the pipeline are going to be reassessed."

The global economic slowdown has driven down demand for oil, pushing crude prices to levels not seen since the spring of 2007. In an attempt to stem the decline, the Organization of Petroleum Exporting Countries agreed last week to slash output by 1.5 million barrels a day -- its biggest single reduction in almost eight years.

But the move didn't stop the slide. U.S. benchmark crude for December delivery fell 49 cents on Tuesday, or 0.78%, to $62.73 on the New York Mercantile Exchange. That is down about 57% from its record high of $145.29 in July.

Nobuo Tanaka, head of the International Energy Agency, the Paris-based watchdog, was one of several experts at the annual Oil and Money conference here predicting that the industry could be setting the stage for yet another supply-and-demand whiplash down the road. "We're concerned that supply won't catch up with demand after this crisis," Mr. Tanaka said. "The supply crunch may come again, but in a more acute way."

The price of crude began its rally five years ago, when an oil industry that hadn't invested enough in new capacity during the years of low prices failed to cope with surging demand from the booming economies of China and India. That scenario could now play out all over again. "I hope we don't go through the same cycle," said Mr. Al Hamli.

In two years' time, "we could see much higher prices than we saw three months ago, if the investments are not going through," said Fatih Birol, the IEA's chief economist.

To be sure, most big oil companies have shown no sign of trimming their investments. Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year -- the largest in its history -- and Chevron Corp. is also charging ahead with its $23 billion program.

Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude. "I don't think there will be major changes in investment," said Paolo Scaroni, chief executive of Italian oil company ENI SpA. "Maybe in unconventionals, but not conventional oil projects."

Yet it is precisely the so-called unconventionals that have become a big focus of the oil companies' activities in recent years. Billions of dollars have been poured into squeezing crude out of Canada's gooey tar sands, converting Venezuela's heavy oil, and pumping ultra-sour natural gas in the Middle East. Some of those projects could now be scaled back or even abandoned, conference speakers said. Already, some independent companies producing natural gas in the U.S. have announced cuts in investment.

"If this oil price stays low, alternative energy, Canadian oil sands, Brazilian new discoveries will be out of the market," said Abdalla Salem El-Badri, OPEC's secretary-general.

Though forecasters expect demand for oil to be flat or even negative next year in the rich world, it is likely to grow in countries like China, whose economy has so far weathered the world-wide financial crisis.

Mr. Birol said falling oil prices will also deter investment in alternative energy. Low-carbon technologies such as wind and solar were economically competitive only so long as oil prices were high. Countries set to meet in Copenhagen next year to agree a new deal on curbing emissions may decide it is a "luxury" in view of the financial crisis. Lower oil prices are "not good news for climate change," he said.

—Neil King Jr. in Washington contributed to this article.