Natural Declines in Oil & Gas Fields, and the Need for Investing More in Canadian-Made Supply

Key Points

• Natural declines in oil & gas fields mean significant volumes of new supply need to be brought online every year to keep up with global energy demand

• The world still gets more than 80 per cent of its energy from fossil fuels, despite trillions of dollars of investment into renewables

• Some Canadian oil sands projects have near-zero decline rates, making them an ideal source of supply for as long as the world needs oil


Natural declines in oil and gas fields and why the world needs more reliable Canadian supply cover


We don’t talk about oil and gas depletion rates very much. It is a discussion worth having, especially considering that half a Saudi Arabia’s worth of oil production – about 6 million barrels per day – needs to be brought online every year to replace declines in current global supply [1]. This also translates to more than an entire Canada’s worth of new oil production annually just to keep global oil supply flat.

But how do these declines in existing oil and gas fields happen anyway?

Natural declines in oil and gas wells result mainly from decreasing reservoir pressure over time. As a well is produced, the pressure will drop, making it much harder and more costly for operators to force hydrocarbons up to the surface [9]. Other factors such as drilling and completion methods, geological conditions, wellbore damage, and technical issues can also contribute to natural declines in oil and gas production, but are less likely.

With these natural declines in oil and gas fields, understanding the potential consequences of underinvestment in new supplies is crucial for our energy security and economic well-being. Both energy commodities are experiencing record-high consumption levels worldwide, and demand is projected to grow for years to come. These facts make it even more of a pressing concern if activists succeed in their calls to “end all fossil fuel investments.”

Cumulatively, trillions of dollars is required to meet global oil and natural gas demand through 2050 [6]. No more capital investment to replenish naturally declining wells would mean complete social and economic turmoil for a world that consumed more than 101 million barrels of oil daily in 2023 [8].

Daniel Yergin on natural declines in oil and gas wells and investment necessary to maintain global energy supplies at adequate levels

Daniel Yergin, American Author and Vice Chairman of S&P Global, has long said there is an inherent need to balance energy security with the energy transition.

“The engine of energy security is investment in supplies and infrastructure needed to meet increasing demand. Moreover, given a natural decline of about 3-4 per cent per year in existing oil production, substantial investment is needed merely to maintain current levels of supply,” said Yergin, considered by many as the world’s foremost energy expert.

Yergin’s concerns were, in more words or less, echoed by the head of the world’s largest oil producer at CERAWeek 2024.

“The natural decline in oil fields is about 4 per cent per year, so we will need to continue to invest in oil and gas fields” to maintain current output levels, said Saudi Aramco CEO Amin Nasser at the annual event in Texas, according to reporting by the Governors’ Wind and Solar Energy Coalition.

“Otherwise, the price will go high and people will be super angry.”

Exxon Mobil CEO Darren Woods highlighted how a lack of drilling investment could exacerbate energy shortages globally and help fuel inflation at the World Petroleum Congress 2023 in Calgary.

“If we don’t maintain some level of investment in the industry, you end up running short of supply which leads to high prices,” Woods said via reporting by Reuters. He went on to explain how oil and gas reserves deplete at 5-7 per cent annually, and output will decline if no efforts are made to replace falling production levels.

As environmentalists and non-governmental organizations (NGOs) pressure Western leaders to adopt policies that would see the depletion of fossil fuel investment, we must remain vigilant and educate people on what would happen if these activists had their way.

Supply shortages resulting from underinvestment in oil and natural gas production would cause prices for just about everything to skyrocket, adversely affecting the security and bottom line of families at home and abroad.

High oil prices are typically associated with high inflation levels, as the cost of transportation and production of goods is driven up throughout the economy [4]. These costs are then transferred to consumers. Whether it is higher bus fares, more expensive airline tickets, the cost of shipping avocados from Mexico, or new electronics freighted from Asia, high oil prices can result in higher prices for almost everything, including seemingly unrelated goods and services [4].

share of global oil reserves by country 2021

Today, coal, oil and natural gas account for over 80% of global primary energy consumption, while wind and solar make up about 5 per cent [5]. And despite trillions of dollars spent on renewables over the past few decades, the world’s reliance on fossil fuels has dropped just a few percentage points.

So let’s not entertain unrealistic calls to end fossil fuel investments in Canada, because the fallout would be catastrophic.

If you care about affordability, you should care that we have ample investment into finding new oil and gas supplies to avoid the scenarios above.

A pragmatic approach to meeting our energy needs today and tomorrow would be to support the development of new oil and gas supplies, as well as the deployment of renewables and other clean technologies like carbon capture and storage to help abate emissions from current fossil fuel production.

It should be noted that Canada’s oil sands often have extremely low rates of decline, making them a highly viable long-term and reliable source of oil. While oil sands projects require larger upfront spending, once operational, they have near-zero decline rates because of their geology. In fact, according to a 2023 report by C.D. Howe, oil sands production will often increase over time, unlike many conventional operations.

After what we’ve seen across the world over the past few years, there is more than something to be said about improving access to supply sources like the Canadian oil sands, which are proven to have near-zero rates of production decline over many, many years.

Today, Canada stands tall as one of the most transparent, regulated, and environmentally conscious energy producers on the planet. As the world’s fourth-largest oil exporter and sixth-largest natural gas exporter, we have the reserves to supply our friends in Europe and Asia with huge amounts of energy.

By opening up our responsibly produced energy to global markets, we could help prevent energy supply shortages like those seen in Europe while also displacing less responsible and reliable suppliers abroad.

The world would clearly be a better place with more Canadian oil and natural gas on global markets, so what are we waiting for?

i love canadian oil and gas banner

SOURCES:

1 - https://oilprice.com/Latest-Energy-News/World-News/Saudi-Aramco-6-Million-Bpd-of-Global-Oil-Production-Is-Being-Lost-Every-Year.html

2 - https://www.spglobal.com/en/research-insights/featured/special-editorial/look-forward/the-return-of-energy-security?trk=article-ssr-frontend-pulse_little-text-block

3 - https://www.nzz.ch/english/energy-guru-daniel-yergin-im-sick-of-the-discussion-about-energy-transition-ld.1821620

4 - https://www.investopedia.com/articles/investing/032515/how-oil-prices-impact-us-economy.asp

5 - https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/oil-unrestrained-underappreciated-and-underinvested.html

6 - https://www.canadianenergycentre.ca/global-investment-in-oil-and-gas-will-remain-robust-through-2050/

8 - https://www.reuters.com/markets/commodities/oil-consumption-prices-revert-trend-kemp-2024-01-12/

9 - https://fastercapital.com/topics/causes-of-production-decline.html