The oil industry is finding it harder and harder to expand upstream capacity. Development costs are up sharply, essential equipment and skilled labour are in short supply and host governments want a bigger share of the proceeds. As a result, projects take longer to complete and output is growing more slowly than predicted. In 2006, non- OPEC oil production rose by about 450,000 bpd and although this was better than 2005 — when a myriad of unanticipated problems kept output virtually flat — it was still less than expected by most industry forecasters. Once again, project delays, adverse weather, equipment failure and oil field problems combined to trim nearly 1 mbpd off non-OPEC supply growth projections for 2006 — leaving the market much tighter than expected.
While there is no doubt that the industry is working flat out to expand its production capacity in response to high oil prices, the problem is that new projects must first compensate for output declines at existing fields before they can add to overall capacity. With underlying oil well productivity declining at an average rate of 5% worldwide, the industry needs to drill enough wells to replace more than 2 mbpd of ageing non-OPEC capacity every year just for production to stand still. Any delay in starting up a new project therefore widens the gap that needs to be filled before overall non-OPEC production can begin to rise.
In recent years, a ‘rational’ approach to forecasting based on planned capacity additions and observed output decline rates for mature producing areas over-estimated the actual growth in non-OPEC supplies by an average of more than 400,000 bpd. Using the same publicly available information about new projects and oil field performance, both the CGES and the IEA made errors of the same magnitude, suggesting that the real problem is not accuracy but uncertainty.
For 2007, a ‘rational’ forecast indicates that non-OPEC oil supplies (including Angola) are expected to rise by just over 1 mbpd. Like last year, the biggest growth is expected in the FSU, closely followed by Africa. Significant increases are also expected in North America and Latin America, and modest gains in the Asia Pacific region. Production is expected to decline in Europe and the non-OPEC Middle East countries. The CGES believes, however, that this rational forecast should be cut by 400,000 bpd to reflect the impact of uncertainty on output growth, implying a likely gain of only 700,000 bpd in non- OPEC supplies this year.