Thursday, January 17, 2008

Another View on Oil

A few days ago I posted a commentary by FPA Capital regarding why they see future oil supply falling short of demand. Today I came across a different perspective:
World's Oil Fields Declining at 4.5%-CERA

Output from the world's oil fields is declining at 4.5 percent per year -- significantly slower than the 8 percent rate many analysts have assumed, according to a study by Cambridge Energy Research Associates released Thursday.
The study of more than 800 oil fields suggests that theories that global oil production may soon hit a peak due to steep declines at maturing fields may not hold water.
"Some of the more gloomy, pessimistic 'peak oil' views about the future of oil supplies that are current today result from an assumption of high decline rates," said CERA analyst Peter Jackson. "This new analysis provides the basis for more confidence about the future availability of oil."
The 811 fields included in the study account for two-thirds of current global oil production and half the proved and probable conventional oil reserves.
Jackson said world production capacity should reach 112 million barrels per day (bpd) by 2017, while demand will be about 100 million bpd.
...
Peak oil proponents argue its difficult to decipher whether Saudi Arabian oil production might be declining.
Jackson said some Saudi fields were included in the study including the giant Gowar field.
"Gowar does not contribute to the decline stats because it's not declining," he said.
CERA said peak oil theory overestimates decline rates but also underestimates advances in technology.
"The analysis also concludes that decline rates are a function of reservoir physics and investment strategies, and that there is a general historical trend toward lower decline rates in recent years which may be due to better reservoir management practices and the impact of new technology," Jackson said.
Who is right? I can safely say I have no idea. Luckily, I evaluated Harvest using a WTI Crude Oil price of $65.44 and found it was cheap then- today the price is at $90, giving me an additional 37.5% margin of safety in the future price of oil.

3 comments:

Eric J. Fox said...

I believe that it is inevitable that all this drilling will lead to meaningful supply growth, enough to offset the declines.

Davy Bui said...

Nick, your site is great, BTW.

With regards to oil, comparing the insights of CERA, a mainstream organization that reminds me of the other like-minded mainstream organizations that claimed that "subprime was contained", "housing prices will not fall", etc., to someone like Robert Rodriguez & FPA, with a track record of being consistently right for over 20 years and putting their money where their mouth is -- well, comparing the two is a mistake.

It would be like comparing Larry Kudlow's opinions with Warren Buffett's insights.

With regard to oil, look at it this way. Man climbs Mt. Everest because it's there. But if man is climbing Mt. Everest looking for food, there's probably a serious supply problem. Substitute the Artic Circle for Mt Everest and oil for food and I think the conclusion is obvious.

Nnejad said...

Thank you. My point with the post was not to necessarily say one was right over the other. But the CERA article stood out to me because they analyzed 800 major worldwide fields. If you look at FPA's analysis, it was much more simplistic and based on a much smaller sample of oil fields. So the true decline rate may likely be in between.

I glanced over this source and I think some readers may find it interesting. It is an advocate of peak oil and publishes some fairly detailed information. I'm looking forward to going through it the next few days.

http://www.simmonsco-intl.com/
research.aspx?Type=msspeeches