Global Oil Supply Challenges Will Drive Crude Prices to US$150

Modest Russian Production Growth to be Gobbled up by Domestic Demand

Consumers should brace for a 50 per cent jump in oil prices in the near future as global oil supply will increasingly have trouble keeping pace with demand, forecasts a new energy report from CIBC World Markets.

The report predicts that surging demand in developing economies combined with accelerated depletion of existing supply and widespread delays in getting new oil fields up and running will see the global supply of oil fall as much as eight million barrels a day below International Energy Agency estimates by 2012.


“Those projections ignore two fundamental forces that have, in recent years, brought global production to a virtual standstill,” says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. “The first is depletion. You have to run faster to stand still. Depletion from existing fields has accelerated to over four per cent, a rate that currently cuts nearly four million barrels per day out of each year’s production.

“The second fundamental force blowing up supply forecasts is the huge project delays and massive cost overruns associated with many of the world’s largest new oil mega-projects. From Kazakhstan to Nigeria’s Delta region, protracted delays in some of the world’s largest energy mega-projects will have huge impacts on actual supply growth over the next five years.”

As part of its research, CIBC World Markets reviewed nearly 200 new oil projects slated to start oil production over the next five years and found that scheduled production timelines are far too optimistic, with project delays the norm, not the exception, among the group.

It found that heavy reliance on increasingly high cost and technically challenging fields like the Kashagan project in Kazakhstan, Russia’s Sakhalin II and Canadian and Venezuelan oil sands have left world supply growth vulnerable to a seemingly never-ending series of project delays.

Mr. Rubin notes that delays in the latter two countries will shave over 700,000 barrels a day from earlier 2012 production forecasts. In some nations, soaring development costs have resulted in complex and often tense re- negotiations of royalty agreements with host countries. Some have even led to either a temporary or indefinite suspension of operating licenses.

“Of course, stagnant conventional world oil production underlies the recent problems associated with harvesting unconventional supply. Virtually all of the increases in global oil production have occurred from deepwater fields or oil sands, with conventional production seemingly stuck at 2005 levels of 67 million barrels per day.”

These project delays are also happening at a time of accelerated global depletion in existing fields. The rate has climbed to over four per cent, which cuts nearly four million barrels per day out of each year’s production. The recent increases are in part, related to the growing importance of offshore, and, in particular, deepwater fields, which have depletion rates twice that of conventional fields.

“Cliff-like depletion rates have already been in evidence in the North Sea and now the huge Cantarell field in Mexico,” adds Mr. Rubin. “Since 2000, offshore fields have been the single-largest source of new supply growth. As their weight in total production increases, future depletion rates will continue to rise. Even holding the current depletion rate constant over the next five years, we must produce nearly 20 million barrels per day of new oil just to offset what will be lost through depletion during this period.”

CIBC World Markets