Global oil production: A (true) tale of yet another torpedoed production forecast

Fresh picked Nova Scotia beach glass, an antidote to worrying about oil prices.

This site was never intended to adopt any sort of big position on a current media event, but recently I have to admit the posts have become a bit one-dimensional, perhaps even shrill or mildly hysterical. It can’t be helped, the world is in danger. Well, not really but I don’t think it’s unfolding the way the news indicates and if you’re expecting cheap gas forever that delusion should probably be smashed.

The media takes the biggest event happening in any given field and makes a Very Big Deal out of it, which is natural I suppose if success is measured totally by readership (no such problem here luckily). Energy industry media coverage is no different. A few years ago, just before shale this-and-that took over the headlines, Brazil was the biggest story in oil production. Huge deposits of oil had been found offshore, and the latest drilling technologies had made production from difficult, deep oil reservoirs feasible. Brazil was touted as having billions of barrels of oil reserves that would help keep us driving cheaply forever.

In 2010, Petrobras (Brazilian government-controlled oil company) issued $67 billion in shares to support investment plans of $128 billion through 2016, which were projected to increase Brazilian production from 2.1 million barrels per day in 2010 to 4.4 million barrels per day in 2020. That ass-pulled statistic came from the International Energy Agency and was soon trumped. The chief executive of Petrobras predicted in 2011 that Brazilian production would be 6.42 million barrels of oil equivalent by 2020 (“equivalent” includes things like natural gas and byproducts, converted to an oil equivalent to assist in making big predictions like this).

I bring this up because it is worth comparing the current Beatlemania-eque shrieking over shale oil to the very similar Brazilian equivalent of 5 years ago. Media publications fell over themselves talking about Brazil’s newfound billions of barrels of oil and how all that stuff was going to reshape the global production landscape, and how stupid it was to ever think we’d be short of oil, etc.

It is useful to periodically go back and see how these forecasts pan out, and in this instance the comparison should give pause to shale oil sommeliers. In the past few weeks Petrobras has come out with a revised 2020 oil production forecast of 3.7 million barrels per day. The new forecast is accompanied by a spending target of $137 billion for the 2015-19 period to achieve this goal, which sounds pretty big except when compared to the number that was revised down from ($205 billion). This is in addition to the $128 billion, plus or minus, spent through 2010-15.

So the original plan was spend $128 billion to get to 4 or 6 million barrels per day by 2020, then mean old reality set in and the new numbers are a budget of $265 billion over the 10 year period to get to maybe 3.7 million barrels per day. Apologies for the blizzard of numbers; no need to go get the calculator. The point is the cost has gone up and production forecasts have gone way down.

This isn’t meant to be some sort of indictment of Brazilian forecasting capabilities, of which I have no particular beef. Any new large complicated deposit has a lot of guesswork, and revisions are almost always downward from initial giddy prognostications. That’s just human nature. But the fact remains that a general perception was created in global news that is being refuted before our very eyes, and no one could care less at this point, and we really should if for no other reason than to inject current manias with a healthy dose of skepticism.

Note also that these predictions were all made when oil was around $100 per barrel. Petrobras, like all other oil companies, is getting squeezed by low oil prices which will make these spending plans harder to achieve, without the usual rioting in the streets (hey the money has to come from somewhere).

So remember this story next time you hear about the shale oil revolution. Not too many people are talking about how much it cost to get there or how the growth curve will continue when there’s no money in the piggy bank.