Oil - Spare Capacity vs Inventories21 Jan 2019 19:45
Picking up a thread from Motley Fool by another poster (Pistrix) a couple of years ago, I'd be interested in people's thoughts on global spare capacity and whether the lack of focus on it in recent years may leave the world much more vulnerable to supply outages or political/economic crises.
Illustration:
1986
Global production: 58 million bopd
Global spare capacity: 10 million bopd
Compound Annual Decline Rate: 1.5%
58,000,000 * 1.5% = 870,000 bopd of natural declines. To keep production level the industry had to drill and complete 870,000 bopd each year. The industry had to drill and complete 2,383 bopd per day.
However in 1986 there was 10 million bopd of spare capacity already drilled and completed.
10,000,000 bopd / 2,383 bopd per day = 4,195 days = 11.5 years of natural production declines were already drilled and completed.
^^That is what an oil glut looks like!
2014
Global production: 94 million bopd
Global spare capacity: 5 million bopd
Compound Annual Decline Rate: 4.5%
94,000,000 * 4.5% = 4,230,000 bopd of natural declines. To keep production level the industry had to drill and complete 4,230,000 bopd each year. The industry had to drill and complete 11,589 bopd per day.
However in 2014 there was 5 million bopd of spare capacity already drilled and completed.
5,000,000 bopd / 11,589 bopd per day = 431 days = 14.5 months of natural production declines were already drilled and completed.
2019
Global production: 100 million bopd
Global spare capacity: 1.5 million bopd
Compound Annual Decline Rate: 5%
100,000,000 * 5% = 5,000,000 bopd of natural declines. To keep production level the industry has to drill and complete 5,000,000 bopd each year. The industry has to drill and complete 13,699 bopd per day.
Now there is 1.5 million bopd of spare capacity already drilled and completed.
1,500,000 bopd / 13,699 bopd per day = 110 days = 3.7 months of natural production declines are already drilled and completed.
Focus has been on inventories but perhaps the picture has been skewed because everybody has been pumping at close to full capacity since the middle of last year. Even though shale production has been growing at record rates, spare capacity has been falling thanks to the decline rate. I realise that shale has changed the picture slightly in recent years because production can be increased quickly, but is it enough? Spare capacity elsewhere is not being replaced so it would seem that the current ‘oversupply’ situation is very fragile, particularly with chronic underinvestment in recent years.
It could be that we are much closer to a supply shock than we realise.
I'd appreciate other people's thoughts on this.
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