Sunday, May 19, 2013

Will the International Energy Agency's oil forecast be wrong again?

The famous Danish physicist Niels Bohr once humorously observed, "Predictions are very difficult, especially about the future." And so, as the world considers yet another rosy oil supply forecast, this time from the Paris-based International Energy Agency (IEA), it is worth reviewing the agency's record.

Back in the year 2000, the IEA divined that by 2010, liquid fuel production worldwide would reach 95.8 million barrels per day (mbpd). The actual 2010 number was 87.1 mbpd. The agency further forecast an average daily oil price of $28.25 per barrel (adjusted for inflation). The actual average daily price of oil traded on the New York Mercantile Exchange in 2010 was $79.61.

(The IEA included in its 2000 supply projections not only crude oil plus lease condensate, which is the definition of oil, but also natural gas plant liquids--only a small fraction of which can be substituted for oil--and refinery processing gain which is the result of applying energy to break oil into its components, causing the final volume to expand. The agency refers to the resulting number as "oil" supply. But, clearly this number is not really just oil supply, and this practice continues to confuse policymakers and the public.)

So, what made the IEA so sanguine about oil supply growth in the year 2000? It cited the revolution taking place in deepwater drilling technology which was expected to allow the extraction of oil supplies ample for the world's needs for decades to come. But, deepwater drilling has turned out to be more challenging than anticipated and has not produced the bounty the IEA imagined it would. This is not to say that it hasn't been a critical adjunct to world oil supplies. It's just that deepwater oil production hasn't been able both to make up for declines in production elsewhere AND grow supplies beyond that--something that has resulted in a bumpy plateau for world oil production (crude plus lease condensate) starting in 2005.

Now, the IEA tells us that a "revolutionary" new technology called hydraulic fracturing--actually, a newly deployed variant called high-volume slick-water hydraulic fracturing--is going to cause what it calls a "supply shock" that spells ample and rising oil supplies. But, despite years of such drilling in the United States--which the agency says will be the center of this "shock"--world oil prices remain near all-time highs as measured by the average daily price. And, world oil production (crude plus lease condensate) has only occasionally bounced above 75 mbpd in the last seven years before retreating downward.

Perhaps the IEA means that using these new techniques to unlock so-called light tight oil deposits beyond the United States will bring about this supply shock? Nope. The report states specifically that over the forecast period through 2018, the IEA does not expect significant development in other countries of these deposits using the new type of hydraulic fracturing.

Perhaps the agency noticed the withdrawal of ExxonMobil Corp. last year from Poland. The company said it could not find commercial quantities of hydrocarbons in what had been billed as Europe's most promising shale gas deposits. Shale gas, of course, is extracted using the same fracking techniques as tight oil. And, both oil and natural gas tend to appear together in such deposits.

And then, just prior to the release of the IEA's latest forecast, Talisman Energy Inc. and Marathon Oil Company pulled out of Poland as well for similar reasons.

The point is not that there is no exploitable tight oil or shale gas outside the United States. Rather, the quality of those resources varies far more than the industry has led the public to believe. At first, the oil and gas industry portrayed such deposits as subject to what it called the "manufacturing model." The notion was that a company could drill anywhere within known deposits and extract commercial quantities of oil and/or natural gas.

The reality is far different. Even in the United States--the center of the putative boom--drillers have ended up focusing on a few "sweet spots" that yield commercial quantities of oil or natural gas. These can represent as little at 15 percent of the total area of the formation.

The IEA seems to be unaware of certain key information that is publicly available or doesn't understand the significance of that information. And, the agency doesn't seem to remember what it said in its last forecast. Here is a sampling:

  • The production decline rate of hydraulically fractured tight oil wells is around 40 percent PER YEAR in the two most prolific plays, Eagle-Ford in Texas and Bakken in North Dakota. This means that drillers must replace 40 percent of last year's production capacity EACH YEAR before they can increase the overall rate of production from their tight oil wells. The average annual production decline rate for existing wells worldwide is around 4 to 5 percent. Essentially, the IEA doesn't appear to understand that it is expecting oil extracted from wells that decline at a rate 10 TIMES FASTER than average wells worldwide to make up for worldwide declines elsewhere AND provide significant growth in world oil supplies. But, the agency apparently did not look at publicly available well data from each state to determine annual decline rates and their implications for future supply. The IEA seems simply to have taken self-interested industry forecasts on their face--forecasts made with an eye toward engendering confidence among investors and lenders and thereby pumping up the value of lucrative stock options held by company insiders.

  • The IEA expresses concerns about adequate infrastructure for the tight oil producers. Yet, the agency does not seem to be aware that the oil producers in the Bakken play refused to support a pipeline that would have given them their first pipeline access to major oil centers, preferring instead to rely on rail transport. Contrary to their public pronouncements, could it be that the oil producers don't really believe they have enough oil in the long term to support a pipeline and therefore did not want to make long-term shipping commitments to a pipeline company? Perhaps the oil companies would rather saddle the railroads with the capital costs of new tank cars so the oil producers won't be on the hook for any long-term infrastructure costs associated with transporting their oil.

  • The IEA talks about a surge in U.S. natural gas production. Yet, it seems unaware that natural gas production in the United States has been flat since January 2012 even as domestic gas prices rose from $1.82 per thousand cubic feet to above $4 today. The so-called shale gas boom has ended, and we are now finding out just how costly it will be to bring that gas out of the ground. Correspondingly, the rate of extraction will not be so great as promised either.

  • In just a few months time, the IEA has dramatically altered its view about the trajectory of world consumption of liquid fuels. Its 2012 World Energy Outlook released in November prophesied that world demand would reach 99.7 mbpd by 2035. The more recent report mentioned at the beginning of this piece, the Medium-Term Oil Market Reportnow projects that world demand will reach 96.7 mbpd just five years from now, implying a growth trajectory far in excess of that projected in the agency's 2012 report.

  • The IEA says it does not forecast prices and then tells us it uses the futures prices for its model. What its model implies is continuing high prices for oil and oil products. The IEA makes no attempt to understand the effect that high prices have on the world economy and its ability to grow under such circumstances. Nor does it address the dampening effect of high prices on demand, calling into question its projection of rapid increases in demand.

  • The IEA then tells us that so-called oil production "capacity," the basis of which is never described, will grow faster than demand. This would imply falling prices as excess capacity overhangs the oil markets. But that would mean that the high prices which it agrees are needed to extract tight oil profitably would disappear. So, how would this allow tight oil volumes to grow dramatically if extraction is unprofitable or only marginally profitable? This contradiction is never addressed.

  • Burning all the known reserves of fossil fuels would put us on a path to a climate catastrophe, something the IEA acknowledged in the executive summary of its 2012 World Energy Outlook saying, "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed." CCS technology is not being widely deployed, nor is it likely to be. By contrast the agency's most recent forecast reads like a promotional brochure for the North American oil and gas industry. How does that square with the agency's concern about climate change?

It's not unusual for government-sponsored organizations such as the IEA to be given contradictory directives, in this case, to promote adequate energy supplies and also to warn about climate change. There has been little mention of this contraction in the media because the media has focused on what it perceives as sensational news about oil and natural gas supplies in North America.

Given that focus, it is troubling that neither the agency nor the media have bothered to revisit past forecasts. It turns out such forecasts fail so often that it's puzzling that the media, governments, corporations, and the public put so much faith in them. Those whose plans were based on the IEA's 2000 forecast were completely blindsided by developments just a few years later.

We would be much better served by looking at what we know right now from publicly available figures about actual trends. It's not as exciting as dramatic predictions about a future of plenty--or one miserable from want. But it's a far firmer basis for sound policy.

UPDATE: Not surprisingly, it is the foreign press which is reporting signs of fatigue in the tight oil boom in America. The American media has been thoroughly bamboozled by the industry. See "US shale boom starts to fade" in the Australian publication The Age.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


didier said...

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Thanks for that!
Didier, Belgium

Mike said...

Mr. Cobb, I think that you are spot on about pipeline infrastructure in the Bakken; very little of the associated gas is sent to market for lack of gas gathering systems and a very large percentage of liquids transportation is now by rail, also for lack of pipelines. Producers take a big hit getting their product to market but economics are still OK. So they think.

And that's my point: As a producer myself of conventional resources I cannot comprehend the economic parameters tight oil players work
under. Risking borrowed money for
2.8:1 total returns on investment, over 20 years is lunacy.

Often in field development it is midstream companies that review well performance and long term probability for sustained production rates. They listen to all the hubbub from producers but ultimately act independently, in their own self interest, and decide to make large capital expenditures for pipeline infrastructure.

In the Bakken it seems the decision was no way, Jose.

Thank you for your good work

yvesT said...

The IEA is now clearly nothing more than a propaganda office for the oil industry (and especially the U.S. one) and associated financial interests.

In a way there is nothing new in this, see Lionel Badal study around the 1998 report :

But it clearly accelerated in line with the Maugeri and WOE 2012 reports.

And also with Maria van der Hoeven becoming IEA executive director end 2011, and now being the one delivering the "information".

yvesT said...

And about shale gas and tight oil, see also Robert Ayres recent article published in Forbes :
And Rune Likvern studies published on the Oil Drum, for instance :

JBeaulieu said...

The Railroads do not buy the tank cars nor do they build the terminals. At most they make some improvements to track infrastructure, which will be useful even if the Oil Boom goes bust. Compared to a pipeline using rail to move crude is like leasing a car, a little bit more money upfront, but the investment is covered after 5-6 years, versus 20 for a pipeline.

laurent said...

Today, the world is using around 90 million barrels per day.
Cars are using 30 million barrels per day.

Using double stack freight trains, using biomass boilers, using ships fitted with sails, using trucks powered by biogas, using recycled plastics ... , the world could save at least 30 million barrels a day without reducing car use.

Than oil should drop down to less than $50 per barrel and OPEC should earn up to 75% less than today.

The oil price collapse and the collapse of OPEC's earnings will be the reward.

This energy policy would be far better than using very expensive drillings that need $90 per barrel to break even.

Anonymous said...

Thank you so much for your superb research, analysis, and eloquent writing. It enables me to provide plenty of data and sound argument to my friends who do not question the mainstream media account of our energy predicament. With much gratitude.