Hello Rkshepard,

Well said. Please contact Khebab or SS offline if you are reluctant to post your decline rate on this public forum.

Oh yeah--almost forgot--two terrific keyposts by the TopTODers--Big Kudos for this bleeding edge analysis! Cheers!

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

We based our model templates on sets of fields of various sizes and development systems offshore on those developed in various eras, mainly those in the decade prior to 1997 and applied them to new fields with revisions after five years. We then measured actual behaviour in each field where the data was credible against the model profile. Result: there are big variations of coure especially in smaller fields, but in general for a set of say 50 Gulf of Mexico fields, the result was between 15% and 20% lower than we projected.

Taken as a whole, the offshore fields around the world have been declining at about 11-12% over the last five years or so,including old and new,big and small, roughly matching the capacity additions coming on stream in each year, until 2005 when we mapped the first absolute net decline more or less since offshore oil took up its position as the main contributor to growth during the long OPEC capacity overhang.

We calculated back in 2000 that the large difference between declared new capacity additions around the world, OPEC and non-OPEC would mean that the surplus capacity would disappear sometime in 2004, which it did, leading to a price spike. So far, so good.

Then non-OPEC offshore net production (new field starts versus declining older fields) dipped into absolute decline in 2005 for the first time and although the new capacity was still coming through, it looked as if that decline would start to accelerate by 2009-10 which looks to be the case.

That shifted the burden for growth back to OPEC and the FSU since onshore non-OPEC is not great either. OPEC has steadily failed to match declared new capacity to actual performance. That is for a good reason: many of the OPEC field projects are just that: projects with no contracting commitment and thus no drilling. No drilling,no oil.

We don't have any better data than anybody else on decline in OPEC's onshore fields in the Gulf but it looks like decline rates are perhaps half that of the offshore set, say 5-6%.

At the IEA, Birol says we need three barrels of oil (liquids) to offset decline for every one barrel to meet new demand growth. There are simply not enough rigs, not enough people, not enough service contracting equipment and certainly not enough investment commitment to handle the hundreds of new projects that are still in the pipeline (or on the waiting list) to match thatlevel of new capacity requirement.

The irony is that the offshore contractors have committed tens of billions of dollars to new offshore rigs because of high day rates and asset values. But how many companies want to take a flyer on exploration and small fields when a well in deep water would cost at least $50-70 million? At the deep water frontier in the sub-salt plays those wells can cost $100 million plus each jn the exploration, appraisal and test phases.

Yet it still takes four to five years after a successful discovery to get production started on any scale and if the field is big and difficult, the cashflows are a long time going positive. It doesn't look like a great proposition on Wall Street (better to buy into some old oil somewhere) and it doesn't look great for global liquids supply in general.

I didn't answer the question, but I do know that defining decline is now the primary target for the international institutions these days and I do not think they know the answers either.

There will be over-supply of well service and subsea intervention vessels as well as rigs. The new equipment of all sorts is very expensive so that E&P costs across the board are probably rising much faster than oil price. Further, the financial analysts still reckon that there is a big speculative factor in the paper market that over-values oil and so their consensus still suggests a "real" price level of closer to $65 for 2008 and onwards. The debate in these columns would suggest the opposite: namely that oil is still under-priced in terms of the returns on capital expected by large oil companies.

You are right that there will be a period when offshore rig and service vessel rates will fall as supply gets out of synch with actual upstream spending. But I doubt there will be a huge reaction on the new oil investment side from players who are seeking to protect their returns. It will take time until the Chinese and other importer state companies get up to speed to charge in to new field development at the lower rates of return that their own priorities will allow.