The Financial Times has run two important articles today on global oil supplies, one of which was the lead story on the front page running under the title of "World will struggle to meet oil demand".

These articles stem from the fact that the FT has obtained a draft of the much awaited International Energy Agency's 2008 World Energy Outlook report which involves an in depth analysis of the production data from the world's largest 500 oil fields, the first authoritative public study of its kind. The conclusion is that the average rate of production decline is proving much faster than previously thought.

The FT says that "Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent....even with investment, the annual rate of output decline is 6.4 per cent."

After speaking to one of the FT journalists concerned it seems this figure relates to the average depletion rate of those fields which are at plateau or in decline, if I have understood the situation correctly (i.e. it seems to exclude fields that are currently 'ramping up' production - but this should be clarified once the document is published next month).

The second article is entitled "Investment is the key" and includes three useful graphs (in the print edition). The overall conclusions from these two articles, as far as I can see with some interpretation, would seem to be:

Projected world oil production to 2030

• Conventional oil production is projected to grow from barrels 70.4 m/d in 2007 to only 75.2m/d in 2030. This very limited growth is because nearly all new production is off-set by declines in older fields.
• Total production by 2030 is projected to be 106.4 m/d by 2030. This total, in addition to conventional oil (currently producing fields, yet to be developed fields, and fields yet to be found), is also made up of:

'natural gas liquids' - NGL (looks to be roughly about 20 m/d from the relevant graph, but not specifically stated)

'non-conventional oil' (8.8 m/d specified, of which 4 is specified as Canadian Tar Sands - presumably biofuels also feature in this category)

'enhanced oil recovery' (looks to be roughly about 7 m/d from the graph, but not specifically stated) (note the above produce a total of more than 106 million, so the scaling off the graph has probably been too crude, or perhaps involves some double counting somewhere)

The total figure of 106.4 m/d is now much more in line with previous forecasts by Total, Conoco Philips, PFC Energy etc, even if they have viewed (pre-September banking collapse) that figure as likely to be reached at much earlier date (2020 or sooner)

This figure is well below the 130 m/d previously forecast by CERA

Net change in oil production by country/region 2007-2030

The four most significant countries with production increasing during this period are (these figures are not stated, but are read off the relevant graph):

• Canada - increase of approx 5.1 m/d - mostly tars sands, but also some NGL
• E.Europe/Eurasia (presumably mainly Caspian sea region, as it does not include Russia) - increase of approx 4.6 m/d - nearly all conventional production, but some NGL
• Iraq - increase of approx 4.9 m/d - nearly all conventional production, but a slither of NGL
• Saudi Arabia - increase of approx 3.7 m/d - surprisingly, nearly all from NGL (only around half a million from conventional crude)

Therefore Iraq and the Caspian (basically those areas in whose vicinity most of the 'war on terror' is taking place) are responsible for the vast bulk of the growth in the cheaper to produce conventional crude output to 2030 (there is also some much smaller conventional production growth in Brazil, Kuwait, and Venezuela - but almost none in United Arab Emirates, really only NGL growth)

The FT cites separate figures from the IEA apparently projecting Saudi production climbing from 10.2m b/d in 2007 to 15.7m in 2030. Nonetheless, the IEA seems to hint at possible doubts that the necessary investment will occur. Others have previously challenged such a high figures in any case claiming that 12.5 million is a more likely ceiling and even that will be a challenge (see Business Week, 10 July 2008). Some believe the Saudis may have been cool about more investment (the King said earlier this year that some oil must stay in the ground for future generations - but is this prudent management or just a fig-leaf for an inability to raise production?) because their oil reserves may not be as large as previously stated (a hot potato - but perhaps consistent with the high NGL figure given above).

Major producers which are shown as having falling conventional production during this period include Norway, UK, Russia, Mexico, India, United States, China, Nigeria, and Iran. The last four, however, have their conventional losses more than fully counter-balanced by increases in non-conventionals and/or NGL (how this now applies to China is unclear as they have recently announced that they are largely abandoning coal-to-liquids technology because of water resource limitations - that may have occurred since this IEA draft was prepared).

Estimated cost of alternative oil production technologies

The IEA's projection of 106.4 m/d by 2030 is dependent on sufficient investment being made. The IEA provides a graph of costs per barrel associated with producing various categories of oil - including unconventional oil, and natural gas liquids, much of which lies at the heart of the IEA's projections for production growth.

Although the costs used are substantially less than some of those recently cited in the press by oil companies (more in the range of $70 to $100), those categories on the IEA graph which have development costs lying above $60 per barrel for at least some of their remaining resource base include:

• CO2 and non-CO2 driven enhanced oil recovery (EOR)
• Ultra deep water
• Arctic
• Heavy oil/Bitumen
• Oil shales
• Gas to liquid
• Coal to liquid

It is not stated whether the IEA is placing tar sands in the heavy oil/bitumen category, or amongst oil shales. However, the FT says it is unclear how much of the "increase in expensive non-conventional oil, particularly in Canada, will become reality, as the draft report was written before the worst of the financial crisis".

What Conclusions Can We Draw From This?

Taking into account the report as described, and what we have also learnt about the investment impact of the credit crunch, the following seems to be the overall scenario:

Oil demand is now easing, but for all the wrong reasons - credit log jam, economic recession etc.
Existing fields (or at least those which are at, or past, peak) are now averaging a depletion decline of 9.1% per annum - this is a seriously challenging development, particularly given that back in 1999 current US Vice President Dick Cheney was worried about a total depletion rate for existing fields of a mere 3%.

The IEA now seems to be in line with others who say oil production in the period to 2030 will not reach much more than 100 million barrels per day (either due to geological, investment, or political constraints, or a mixture of these) - even if others think that limit (at least before the onset of the currently emerging recession) would come much sooner than 2030.

Even this figure for the most 'hopeful' scenario is dependent on major new investment, but investment is now being cut back because of the banking crisis.

If the credit crunch is resolved, but the price of oil stays at $60 or less, then much of that investment will still not happen.

• In the absence of such investment, and in the context of unexpectedly high levels of depletion in existing fields, we could even start to see global oil production fall in the next few years (the FT says "the IEA 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". )
• If the world economy emerges from recession and energy demand returns (i.e. there are not serious shifts towards energy conservation/efficiency and alternative energy development) it seems highly likely that oil prices will start to rise steeply again, particularly if investment in new capacity turns out to be low during the downturn - as currently seems likely. In short, the days of economic growth based on cheap oil seem to be already over and an alternative economic model will have to be developed.

More than a little symbolically, the article on the front page of the print edition of the FT is accompanied by a picture of Russian Prime Minister Vladimir Putin accompanying Chinese premier Wen Jiabao at an economic forum in Moscow yesterday, where the two countries agreed to extend an oil pipeline from Siberia to the Chinese border and discussed a package of Chinese loans. Russia's top energy official said oil companies could receive 'considerable' loans from China in return for increased supplies (so that seems to be just one more interface between the credit crunch and the global energy crisis - Russia's oil companies are currently struggling to raise credit for development projects).

If a queue for falling global oil supplies develops China is clearly aiming to be at the front.

Mark Griffiths is a Chartered Surveyor with property consultants Dreweatt Neate and a spokesman on energy for the Royal Institution of Chartered Surveyors. The views expressed in this commentary are his own."