A revolutionary report on the future of oil

The large discounts needed to clear surplus fuel oil production will become a thing of the past.

... we expect fuel oil markets to tighten significantly in the next five years. …the new, largely complex refineries will have low fuel oil yields, and upgrading capacity additions at existing refineries will further cut fuel oil production.

If this leads shipping to burn lighter fuel grades then the:

… potential for distillate markets to ease over the next five years would be dwarfed by the impact of [shipping] switching from fuel oil to distillate.

So increased capacity to refine heavier grades of oil into diesel and gasoline may ease supply for road transport for a while but may create its own problem by reducing the oil available to shipping and forcing them to compete for lighter grade fuels. In fact, it is hard to see how this will not occur if ship transport is to continue - which it must to support our globalised economy.

The IEA report is also especially notable for the damper it has put on expectations for growth in natural gas production. The Economist magazine and others have been optimistic that natural gas might substitute for a large fraction of oil production. But:

Not only does oil look extremely tight in five years time, but this coincides with the prospects of even tighter natural gas markets at the turn of the decade. … it is abundantly clear that if the path of demand does not change on its own, it may well be driven to change by higher prices.

In other words, prices of oil and gas will rise until sufficient demand is destroyed to keep them in balance with supply.

The IEA and peak oil

The IEA report is refreshingly explicit on the dwindling production from older fields and the peak oil idea:

Net oilfield decline rates average 4.6 per cent annually for non-OPEC and 3.2 per cent per year for OPEC crude. … All told, the forecast suggests the industry needs to generate 3.0mb/d of new supply each year just to offset decline.

But, unlike those who support the “peak oil” theory, the IEA is unwilling to give primacy to oilfield decline as the major factor determining the volume of oil produced over the next five years:

… Hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.

So the IEA sees geopolitical problems (for example, resource nationalism), escalating project costs and, especially, “slippage” (delays) in project completions as being more important in restricting oil production than decreasing oil production from maturing fields.