Predicting non-OPEC supply remains a controversial and difficult task. In recent years, most forecasts turned out to be too optimistic, sending the wrong signal not only to the market but also to OPEC, which uses the threat of rising non-OPEC supply to justify output restrictions. At the start of 2007, OPEC expected an increase of 1.2 mbpd in non-OPEC supplies for that year (excluding Angola) and cited this strong growth as a reason for maintaining deep output cuts in the first half of the year. However, reality was very different, for as the year progressed it became clear that non-OPEC supply was growing much more slowly than OPEC had expected and that the market was being squeezed more tightly than OPEC had intended, as stocks started to fall rapidly in the second half of the year.
Last year, non-OPEC oil output rose by just under 300,000 bpd, according to the latest data and the CGES’ estimates — much less than OPEC and most other forecasters had originally predicted. The reasons are familiar: rising costs and a shortage of skilled labour and essential equipment continue to delay projects, as companies find that they cannot always obtain the resources required to complete these increasingly complex upstream developments on schedule. In addition, adverse weather, equipment failure and oilfield problems can cause further disruption to plans. With only a small number of large projects underpinning increases in non-OPEC supply each year, any startup delays or shortfalls in production quickly erode growth prospects, for the underlying output of many mature fields is in secular decline.
Estimates of the underlying rate of decline vary depending on the type of oilfield. A recent study1 of 811 fields accounting for two-thirds of global oil production by Cambridge Energy Research Associates (CERA) concluded that the aggregate decline rate was 4.5% per annum, but CERA found different production life cycles for large and small fields. OPEC oilfields are generally larger and typically decline at a slower rate than non-OPEC fields, although this also reflects different geology and output policies. Moreover, offshore projects — which are more common in non-OPEC countries — typically decline more rapidly that onshore projects. The study found that offshore fields decline at 10% a year compared with 6% a year for onshore fields and deepwater fields decline at 18% per annum compared with 10% a year for shallowwater fields. These results are consistent with the CGES’ earlier analysis of North Sea oil field production profiles and studies by the US Minerals Management Service (MMS).
Some forecasters expect a strong recovery in non- OPEC supply growth this year, because they see a large backlog of projects starting up in 2008. Others take a more cautious view, pointing to past delays. With rising costs and shortages of key materials, equipment and personnel, there seems to be a limit to the number of developments that the industry can cope with. Last year, around ten big projects — each with a peak capacity of 100,000 bpd or more — provided most of the gross additions to non-OPEC supply (excluding Angola). This year, most of the growth will come from around a dozen big projects — half of which are already on stream. Together, these twelve projects will add 1.9 mbpd of peak capacity and around 700,000 bpd of new non-OPEC supply in 2008.
For 2008, a ‘rational’ project-based forecast indicates that non-OPEC oil production — excluding Angola and Ecuador — could rise by just over 600,000 bpd. The main source of growth remains the FSU, but significant increases are also projected for Asia/Pacific, Africa and Latin America. In North America, rising output from the Canadian oil sands projects is no longer expected to outweigh declines in Mexican production, with little of no change in US supply. However, oil production will continue to fall in Europe and the non-OPEC Middle East.
The CGES, though, believes that this ‘rational’ project-based forecast will necessarily turn out to be too optimistic and should be trimmed by 400,000 bpd to reflect the impact of uncertainty on output growth, as has occurred in recent years. As a result, the CGES expects non-OPEC supplies to rise by around 200,000 bpd in 2008 — much the same as last year.