Oil glut forecaster Maugeri admits duff maths

Is the world heading for an oil glut?

Move over peak oil, the world is heading for glut, according to a recent report by Leonardo Maugeri, a former executive with the Italian oil company Eni.

Subtitled “the unprecedented upsurge of oil production capacity and what it means for the world”, the report claims the next decade could see the largest increase in production capacity since the 1980s, leading to prolonged overproduction and “a significant, stable dip of oil prices”.

Good news for motorists and the world economy then, and bad news for tar sands producers and OPEC members who need more than $100/barrel to rub along these days. But is this scenario remotely credible?

Maugeri claims his looming glut has three causes: a decade-long upstream investment boom, climaxing with $1.5 trillion spending in the last three years; the rise and rise of unconventional production such as US shale oil; and a tendency among forecasters to over-estimate massively the rate at which production from existing oil fields declines.

The last point is the most important; without it, Maugeri’s glut evaporates. All told, Maugeri forecasts global oil production capacity will soar from 93 million barrels per day (mb/d) today to almost 111 mb/d by 2020.

In a report sponsored by BP and published by Harvard, you might expect the basic sums to add up, but they don’t. When I interviewed him by phone and email, Maugeri was forced to admit a mathematical howler that would disgrace the back of an envelope, and it also became clear he did not understand the work of the forecasters he attacks.

It was not an easy read. Maugeri’s report is long on anecdote and assertion, he often uses the word “depletion” when he means “decline” (reserves deplete; production declines), and nowhere in 75 pages does he explain his method.

His central claim that decline rates have been massively overestimated rests on the following passage:

  • For example, in its World Energy Outlook 2008, the International Energy Agency alleged that it performed an “exhaustive field-by-field analysis” collaborating with IHS-CERA, which owned the field-by-field database. 
    Yet the numbers of IEA and those of IHS-CERA differed significantly. The IEA projected the world oil average decline rate up to 2030 would increase to over 10% by 2010, while IHS-CERA predicted a 4.5% depletion rate.

    Throughout recent history, there is empirical evidence of depletion overestimation. From 2000 on, for example, crude oil depletion rates gauged by most forecasters have ranged between 6% and 10%: yet even the lower end of this range would involve the almost complete loss of the world’s “old” production in 10 years (2000 crude production capacity = about 70 mbd). 
    By converse, crude oil production capacity in 2010 was more than 80 mbd. To make up for that figure, a new production of 80 mbd or so would have come on-stream over that decade. This is clearly untrue: in 2010, 70% of crude oil production came from oilfields that have been producing oil for decades.

In the first paragraph, Maugeri dismisses two major studies of decline rates of recent years by claiming their results are in conflict. Had he read a third, a comprehensive review of the evidence by the UK Energy Research Centre (UKERC) in 2009, he ought not to have made such a fundamental mistake.

As Steven Sorrell, lead author of the UKERC report, has explained, decline rates can be expressed in several different ways, and Maugeri appears to have mangled them.

Decline rates are a snapshot of the amount of production lost over the course of a year due to falling reservoir pressures, and as water increasingly dilutes the flow of oil from the well.However, not all fields are in decline; some are ramping up production and others on plateau.

Sometimes the lost production is expressed as the average loss from only those fields which are in decline, to give a post-peak decline rate. More usefully, they are also expressed as a percentage of total production – including the fields that are growing or on plateau – to give an overall decline rate. Obviously the post-peak decline rate is higher than the overall rate.

Some analysts also calculate a natural decline rate, which is what would have happened had the industry not invested in remedial measures such as enhanced oil recovery (EOR), and this rate is higher still. The observed rate is what actually happened.

In the first paragraph, Maugeri plucks the IEA’s natural decline rate forecast for 2030 and compares it to IHS-CERA’s observed overall decline rate for 2010, which is wrong in terms of both definition and time frame – because decline rates should accelerate as the average field size continues to fall. This comparison is not so much apples to oranges, as apples to marmalade.

In the following paragraph he claims “most forecasters” work on decline rates of 6% to 10%, which was news to me. When I asked him to justify this, he emailed that “the IEA's World Energy Outlook 2008 estimated a global decline of 6.7%, including new production and mantainance (sic) of old oilfields”. But 6.7% is the IEA’s post-peak number; it explicitly excludes “new production”.

And yet Maugeri goes on to apply these kinds of numbers to global oil production, which is entirely misleading.

Perhaps there is some faint excuse for Maugeri’s confusion, because for some reason the IEA did not publish a global overall decline rate in its 2008 study.However, UKERC worked it out from the rest of the IEA report, and the agency’s implied number turned out to be 4.1%. Far from conflicting with IHS-CERA’s 4.5%, it is in close agreement. Again, had Maugeri done his homework, he would know this.

But that’s not the half of it. Even if we were to accept the 6-10% range, Maugeri has got his sums horribly wrong.

In the second paragraph, he claims even the lower end of the range “would involve the almost complete loss of the world’s “old” production in ten years”. This is just not true. A 6% annual decline over ten years leaves you with 54% of your original production, because each year’s 6% decline is smaller volumetrically than the previous one. So over a decade the decline is 46% – and very far from an “almost complete loss”.

When I put this to him, Maugeri seemed genuinely confused, and tried briefly to persuade me the loss was much larger. “If you have a 6% decline each year over a ten year period, the loss of production is close to 80%”, he said, but then the penny dropped. It looks to me as if he compounded 6% in the wrong direction – for growth, not decline. “Maybe on this you are right”, he conceded. So even in his own terms, Maugeri has overestimated the alleged overestimation of production decline by almost three-quarters (80-46)/46 x 100 = 74%).

Having admitted a huge error at the heart of his report, Maugeri then took another tack, claiming “My mistake was in saying the lower end, because I had in mind, when I was writing, considering an extreme case at the higher end of 10%”. But nor can this explain the discrepancy; a 10% decline over ten years still leaves you with 35% of your original production – still nothing like an “almost complete loss”.

Even so, Maugeri insists he is right, and that the gross capacity additions required to replace this lost production, and cover increased demand, are far larger than what actually occurred. “You can twist the number as you wish, but the number remains huge”, he says. “You cannot find any explanation of the number if you don’t take into account the possibility that decline rates were much lower”.

The IEA and IHS-CERA declined to comment, but Maugeri’s claim is roundly rejected by authors of the UKERC study who – unlike Maugeri – have written many peer-reviewed papers on the future oil supply.

“Why should we have any faith in anything Maugeri says?” asks Richard Miller, an oil consultant who previously worked for BP, and was the first to spot Maugeri’s dodgy maths. “He hasn’t explained his methodology, so this isn’t science, just assertion”.

Nowhere in his report does Maugeri state explicitly his own decline rate assumptions. The closest he gets is the unsupported claim that “I did not find evidence of a global depletion rate of crude production higher than 2-3% when correctly adjusted for reserve growth.”  

And yet his actual assumptions appear to be far lower. By analysing Maugeri’s forecasts, Steven Sorrell and Christophe McGlade, a doctoral researcher at the UCL Energy Institute, have shown his actual global decline rate for 2010-2020 is just 1.4%, less than half the IEA/UKERC number and a third of IHS-CERA’s.

Replacing this implicit rate with the IEA/UKERC number eliminates the Maugeri glut entirely, slashing his forecast of almost 111mb/d in 2020 to 92.4mb/d – which is actually lower than his estimate of current capacity. Sorrell concludes: “Since most analysts expect average decline rates to increase over this period, this projection must be considered optimistic.”

When I challenged Maugeri about the discrepancy between the 2-3% decline rate and the 1.4%, he said the difference was explained by reserves growth – the tendency to squeeze more oil than originally expected from existing fields, through new technology, the exploitation of secondary reservoirs and so on.

But in that case he seems to have counted it twice, to judge by his quote in the paragraph above. Or possibly even three times, since the notion of reserves growth is already accounted for in the existing estimates. Both the IEA and IHS-CERA numbers are observed overall decline rates: they reflect the actual loss of production that happened after – or in spite of – all the industry’s investment to bolster flagging output at existing fields.

“If Maugeri has adjusted decline rates for future reserves growth, he has either double counted, because it’s already in the existing forecasts, or assumes a massive acceleration in reserves growth in future,”, explains Miller. “Either way, it’s not credible”.

When I emailed Maugeri to check if he understood the status of the IHS-CERA decline number he had quoted, I received no reply.

After interviewing Maugeri at some length, I am still not much the wiser about exactly how he went about his calculations, but it is quite clear they are full of holes, and I am convinced his predicted glut is a cornucopian’s fantasy.

Roger Bentley, another of the UKERC authors, sums up more bluntly: “Mr Maugeri’s report misrepresents the decline rates established by major studies, it contains glaring mathematical errors, and now he says he meant the opposite of what he wrote.

"I am astonished Harvard published it.”

This article was first published in EurOil, on July 24 2012. 

David Strahan is an energy writer based in London, and the author of The Last Oil Shock (John Murray, 2007). www.lastoilshock.com.