Worrying about where the next super-giant oil fields are is far more important than weekly rig count data

There is a lot of media noise these days about rising rig counts, how drillers are enthusiastic again, and how production may stop falling and stabilize. The commentators get into a fever pitch awaiting Friday’s weekly report, rushing to their calculators to confirm that there is indeed a trend, their child-like enthusiasm consistently mistaken in the significance of ten more rigs being put to work out of 3,000 in mothballs.

If your planning horizons don’t extend beyond the next month, those stories may be of value and you may share their enthusiasm (and the alternating crushing disappointment when the count only goes up by two). Those articles are useful for traders, but for those wondering when things will rebound in a meaningful way, it’s worth looking at some other variables.

There are much more interesting phenomenon occurring, at the other end of the size- and relevance- spectrum. While stories like the one linked above crow about how the US “has put 76 oil rigs back to work for eighth [sic] weeks,” such a statistic can only be useful if one thinks the oil world begins and ends in Texas. From a global perspective, not only is the statistic insignificant, it’s like an ant next to a horse. To keep the world supplied with petroleum, there are requirements somewhat beyond the capability of 400 rigs operating in the US. And by somewhat I mean incomparable.

First off, consider where the world gets its 95 million barrels per day (or 35 billion barrels per year) from. A significant portion of the world’s oil comes from a surprisingly small number of gigantic fields, and most of these fields are very old. We take for granted the fact that 35 billion barrels are burned up every year, while simultaneously getting excited about a billion barrel find.

In 2008, the IEA in its World Energy Outlook compiled a list of the world’s super giant oil fields (they do compile the list more frequently, but this one is now free), those with proved plus probable reserves of at least 5 billion barrels and that produce more than half a million barrels per day. There are relatively few, and we rely on them heavily. Out of the 70,000 known oil fields in the world, 16 produce more than half a million barrels per day (in 2007). Eleven of the 16 were discovered before 1970. None were discovered after 2000, though there have been a few significant major developments. Of the 20 largest producers, only 2 were discovered after 1970, and only 1 was discovered since 1980.

These elderly super giant fields are extremely important in feeding the global machine. The top sixteen fields produced (in 2008) over 17 million barrels per day. Twelve of these have been in production since before 1970. In other words, almost 20 percent of production is from a handful of fields that have been producing for more than 45 years.

What makes these statistics more meaningful is that we no longer are finding these fields. Since 1980, world scale discoveries have paled in comparison to those found in the 40 years before that. There have been significant developments, such as Brazil’s subsalt field, Canada’s oil sands, and US shale deposits. These are indeed huge, but in combination these developments, along with the 3 officially designated super giant fields found since 1980, have added barely more than 10 million b/d to global production.

And in that time, look what’s happened to the world’s appetite for crude. Global oil consumption has increased from 63 million b/d in 1980 to 95 million b/d today. In other words, major mega-field developments since 1980 have only replaced about a third of the increase in consumption.

This lack of major discoveries is sobering in the context of what was happening globally, exploration wise. The whole world is getting picked over, except maybe a few tourist-unfriendly places such as Marianas Trench. High oil prices led the search everywhere, and the biggest developments that arose were not so much from new discoveries, but from having the cash to develop known existing deposits that previously had been too expensive to consider. Half a decade of oil prices around $100, which provided a lot of cash flow, led to a global exploration boom that opened up the Canadian oil sands, US shale deposits and…not much else, in large-scale terms. These fields are high cost and have been on the radar for a long time, but it took high prices to make them economic to produce.

There are likely other fields out there as well in similar circumstances, fields that will become economic at much higher prices. But they will be sorely needed. Some projections (such as from the EIA)  are that global consumption will rise to 120 million b/d by 2040. If that happened, and without even considering depletion, we would need to add 25 million b/d. That is 2.5 times Russian output, or 2.5 times Saudi Arabia’s, or 10 times the oil sands, or even 2.5 times the US’s, including the entire benefit of the shale revolution.

Going forward, even if demand stagnates, the size of new fields required to offset depletion is considerable. The world has largely been poked over now, and the easy stuff is in the history books. And that’s just with regards to finding petroleum deposits, not even considering the present difficulty in building out new projects which gets harder and harder as the vocal minority’s anti-fossil-fuel squeals get ever louder.

Weekly rig count fluctuations make headlines and move markets on a day-to-day basis, but only serve to mesmerize and mislead the general public. The bigger trends are a thousand times more meaningful over a period of years, because they will move oil prices by multiples, rather than by single digit percentages. Today’s oil prices can’t possibly finance the development of what the world will need, not just because it’s not economic but because no one has the appetite to explore. And even when they do, the world isn’t getting any bigger. So for those waiting for better times, they’re coming. We just have to ride out the storm.