The process of finding and delivering crude oil is getting more challenging as aging oilfields become less productive, pointing to higher oil prices for consumers and reduced profits at energy companies, analysts say.
The difficulty in halting the drop in oil production from existing fieldshascontributed to undercutting quarterly profit and production results in recent days for firms like Exxon Mobil Corp. , ConocoPhillips, and Chevron Corp. despite U.S. oil prices trading at a nominal record high of $98 a barrel.
Here's what concerns the International Energy Agency, the energy watchdog for the world's most industrialized nations. It expects producers to develop 25 million barrels a day of new oil production capacity from 2006 to 2012, but warns that about three-quarters of this will simply keep the world's oil pumping capacity from falling due to declining output at other existing fields.
Only a small portion of the new production capacity will go to meeting the annual growth in energy demand from China and other fast-growing economies, the IEA says in its latest World Energy Outlook released Wednesday.
"Based on what we are seeing, the decline rates are getting incrementally bigger year after year because existing fields are getting older. This means it's becoming harder to maintain current production levels," IEA chief economist Fatih Birol told Dow Jones Newswires recently. The Paris-based agency is the energy watchdog for the world's most industrialized nations.
This raises big questions whether new projects will deliver enough oil to offset declines at existing fields and meet the steady increase in demand expected over the next two decades, Birol said.
Another concern is that much of the production drop at aging oil fields is happening in non-OPEC countries, such as Mexico and the U.K.. This will lead to more consumer reliance on OPEC oil at a time when the group takes more of a just-in-time approach to increasing back-up oil pumping capacity.This approach is no doubt linked to keeping oil prices above a certain floor but it's also because holding big quantities of production capacity is expensive.
"Only a handful of (non-OPEC) countries are still expanding production - Brazil, Azerbaijan, Kazakhstan, Sudan are some of the notable ones," says David Kirsch, manager of market intelligence at PFC Energy in Washington. "With the rest of non-OPEC heading into decline, new production increasingly serves only to offset these declines."
The Center for Global Energy Studies in London estimates that about 2.3 million barrels a day of non-OPEC output capacity currently has to be replaced to prevent crude production from falling.
Estimates on decline rates globally equate to about 3.80 million barrels a day, or about 4-5% of world output of 85 million barrels a day. Current decline rates globally are more than 1 million barrels a day higher compared with several years ago, according to some analysts.
Many energy analysts are forecasting non-OPEC production to plateau over the next decade. The IEA expects OPEC's share of world crude supply to rise from 42% today to 52% by 2030 as non-OPEC production falls.
To be sure, OPEC countries, like Indonesia, Algeria and even Saudi Arabia, with the world's biggest untapped proven oil reserves, have their problems with falling crude production at different fields.
Officials at state-run Saudi Aramco say all the new oil set to enter service from a major field known as Manifa in 2011 - about 900,000 barrels a day worth of capacity - will offset falling output elsewhere in the kingdom.
All oil fields hit a physical limit to what they can produce, often for financial and technological reasons, and invariably yield fewer hydrocarbons over time.
"It's like having rooms in your house vanish and you have to rebuild them year to year just to keep your house the same size," is how one executive at a major U.S. oil company describes the decline-rate problem. The executive declined to be named because the issue is a sensitive one for oil companies.
To combat decline rates, companies employ enhanced oil recovery techniques, such as injecting natural gas into reservoirs to boost pressure and ultimately the amount of crude recovered. But these tools require heavy investment which doesn't always reward shareholders.
"We're spending more money than in the past to keep the production needle from dropping in some areas, but this expenditure doesn't result in profits in every (earnings report)," the oil company executive said.
Companies globally have ramped up exploration budgets in recent years and are spending hundreds of billions of dollars on new and existing production projects.
But how much is aimed at rehabilitating old oil fields and developing new projects is basically unknown outside energy companies because they divulge little or no information publicly on the topic, nor on how much of an impact their efforts have financially and on increased oil volumes.
Analysts say technological developments will enhance oil recovery and that even higher crude prices will boost the economics of gleaning more costly hydrocarbons from old fields. High energy prices also make it financially feasible to develop heavy oil and other expensive unconventional projects that can make up for dwindling supplies.