EIA International Energy Outlook 2019 And Oil Shock Model Scenarios

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By Dennis Coyne

The EIA recently released its International Energy Outlook and it is quite optimistic. In the chart below, I compare their estimate for World Crude plus Condensate (C+C) output with an oil shock model with a URR of about 3100 Gb.

The IEO reference scenario shown above (blue line) for World C+C has a trendline with a slope of 735 kb/d from 2017 to 2050, slightly less than the 1982 to 2018 slope for World C+C output’s annual increase of about 800 kb/d. The difference between the IEO C+C output forecast and my more realistic (and perhaps optimistic) shock model estimate is 46 Mb/d in 2050.

The shock model focuses on conventional C+C output which excludes unconventional oil which I define as the combination of extra heavy oil (API Gravity <10) and tight oil. The economically recoverable resource (ERR) from unconventional oil is 285 Gb in the scenario presented below.

The extra heavy (XH) and tight oil are modelled separately from conventional C+C. The tight (LTO) and XH oil are both read on the left vertical axis and the unconventional oil (sum of LTO and XH) from the right vertical axis. In each of the shock model scenarios presented below the unconventional C+C model output is added to the conventional shock model scenario (three separate cases). I focus on conventional C+C because the bulk of World C+C output consists of conventional C+C about 88% of World C+C in 2018 consisted of conventional C+C.

The extraction rate, r, is the percentage of proved producing reserves that is produced during the year in gigabarrels (Gb), where r = q/p and q = annual C+C output, and p = proved producing reserves at the end of the previous year. This applies only to conventional proved producing reserves and conventional C+C output as unconventional oil is modelled separately and then added to the conventional C+C model to find the World C+C shock model presented above (as well as the two scenarios presented later). At the end of 2017, p=476 Gb, and in 2018, q=26.6 Gb, so r=26.6/476=5.6%. Peak World C+C output for this constant extraction rate model (after 2030) is 87 Mb/d in 2025, URR is 3,100 Gb.

The EIA’s IEO seems quite unrealistic, but it would be instructive to see what level of extraction rates would be needed to raise output to the level forecast by the EIA. We will leave the URR assumption at 3,100 Gb and assume the unconventional scenario is unchanged from what I have presented already (that scenario is my best guess for a World where Brent oil prices gradually rise to $90/b by 2027 and remain at that level until 2050 and then begin to decline as oil demand gradually is reduced over time.)

We assume the extraction rate for conventional C+C rises no higher than 12.1% (the maximum from 1950 to 2018 reached in 1973) and that the maximum annual rate of increase in the extraction rate is no more than the 0.38% average annual rate of increase reached during the 1964 to 1973 period, which was the steepest multiyear rise during the 1950-2018 period. Under this set of assumptions, the limit to the rate of increase in the extraction rate (rather than the limit on the maximum extraction rate of 12.1%) limits the shock model from matching the EIA’s IEO over the entire 2019 to 2050 period. The model fails in 2038 where the maximum rise in the extraction rate of 0.38% per year falls short in raising output to the level of the IEO reference case. The extraction rate continues to rise at this maximum rate of 0.38% per year until 2042. The peak is reached in 2039 at 97.8 Mb/d. We assume the extraction rate increases at a gradually slowing rate of increase over the 2043 to 2049 period. From 2050 to the end of the scenario in 2294, the extraction rate is held constant at 11.4%.

The annual decline rates for World C+C output are very high above 4% per year from 2047 to 2055 in this scenario and decline rates remain above 3.5% for all years from 2046 to 2114 except 2061 to 2065.

Note that the point of this scenario is not to show that it is possible, it is to show that unrealistic extraction rates are needed to reach this level of output and that even if it were possible, we would face extremely steep decline in C+C output 7 years after the peak was reached in 2039.

A more realistic intermediate scenario is presented below where the rate of increase in the extraction rate is limited to the rate of decrease in extraction rate experienced from 1990 to 2015 (0.06% per year.)

The scenario above might still be too optimistic, but seems within reason if oil prices are high enough to stimulate adequate investment without crashing the global economy, a difficult knife’s edge to remain balanced upon, making it a low probability scenario (my guess is less than a 1 in 3 chance). Peak is 90 Mb/d in 2027.

The three shock models presented above are presented together in a single chart below (models only) for comparison. I consider the constant extraction rate scenario most likely with about a 50/50 chance the peak will be higher or lower and/or earlier or later. The high scenario (peak output of 97.8 Mb/d) is the least likely (less than a 1 in 50 chance in my opinion that the peak output level will be reached) and the intermediate case is more likely than the high case, but still not very likely with perhaps a 33% probability that the World peak in C+C output will be as high or higher than that scenario (90 Mb/d). Of course, as always, there are an infinite set of possible future World C+C output scenarios so that the odds that any of these scenarios will be precisely correct is approximately zero.

Data for these scenarios are in a spreadsheet.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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