Wednesday, December 06, 2006

Peddling PetroProzac: CERA Ignores Ten Warning Signposts of Peak Oil


15 November 2006 Oil

In Brief: In recent years, Daniel Yergin and his colleagues have been peddling a curious form of PetroProzac. This fall, Esser went so far as to proclaim, “Peak oil theory is garbage, as far as we are concerned.” In this newly updated article, ASPO USA responds.

Randy Udall, Energy Analyst, Co-Founder ASPO-USA
Jeremy Gilbert, Former Chief Petroleum Engineer, BP
Steve Andrews, Co-Founder ASPO-USA

At the end of World War II, the entire planet ran on ten million barrels a day, two-thirds of it produced in the U.S. Since 1950, global oil production has expanded eightfold, driving a similar expansion in economic activity. This era of exponential increase is now drawing to a close, even as the oil appetites of China, India and other developing countries grow apace.

Half the oil ever produced has been consumed since 1983. Today, Americans use 140 pounds of petroleum products per person per week. We are the Oil Tribe, consuming one-quarter of the world’s supply. We have built an entire way of life around cheap oil. Our land use patterns, agriculture, transportation systems, inefficient vehicles, and prosperity… all owe a debt to what Chevron calls “easy oil.”

A number of independent, mainstream analysts have confirmed that growth in global conventional oil production may end soon. Last week, the International Energy Agency’s Claude Mandel concluded, “On current trends we are on course for a dirty, expensive, and unsustainable energy future. Urgent government action is required. The key word is urgent.” However, a few outliers, like ExxonMobil and Cambridge Energy Research Associates, continue to insist that all is well, and that there is no immediate need for action.

Daniel Yergin’s book “The Prize” is a triumph and the companion VHS tapes should be required viewing by all teenagers. In recent years, though, Yergin and his colleagues Peter Jackson and Robert Esser have been peddling a curious form of PetroProzac. This fall, Esser went so far as to proclaim, “Peak oil theory is garbage, as far as we are concerned.” Tell it to Texas. Tell it to Norway. Tell it to the United Kingdom, whose citizens will soon be heavily dependent on imported oil and natural gas.

Declining production in individual fields is commonplace in the petroleum industry; it’s what petroleum geologists and engineers get paid to combat by developing new technologies for increasing resource recovery or by finding new fields to replace those that are aging. In its new report, CERA strikes a more conciliatory and reasonable tone, noting that this debate deserves “a rational and measured discourse.” We wholeheartedly agree. In some of his public pronouncements, however, Daniel Yergin continues to parrot an old shibboleth, saying “This is the fifth time that the world is said to be running out of oil.”

As Yergin well knows, the arrival of peak oil does not mean we will be “running out.” This is a red herring. To be fair, some peak oil commentators have been equally obtuse and shrill. It sometimes seems to us that both sides in the debate are shouting down a well. The public interest would be better served by a more intelligent discussion.

Peak oil is not the end, nor even the beginning of the end, of the Oil Age. Indeed, at peak the world will have more discovered oil available than it ever had before; to the casual observer all will appear well. No one can predict how rapidly oil production rates will fall once they have peaked, plateaued and begun to decline. Because heroic, expensive efforts will be made to reduce demand and expand supply, the plateau could last for some years, and the backside of the global production curve is likely to be less steep that the ascent. On this we agree with CERA. Eventually, however, production will fall, even as human numbers continue to climb. On a Btu basis, even a 2% annual reduction in global oil supply is equivalent to losing the energy provided by 80 nuclear power plants. The prospect of such reductions recurring year after year is most sobering.

Peak oil presents humankind with an enormous challenge. To minimize economic disruption, intelligent responses must begin years, even decades, prior to peak oil, and certainly cannot wait until the peak has actually occurred . Far better to act too early than too late. Although much of the key data which might allow more accurate identification of the timing of the peak is unavailable or unreliable, attempts to reassure politicians that “all is well” strike us as misleading, duplicitous, and dangerous.

As respected oil industry analyst Charlie Maxwell noted in a recent interview in Barron’s: “Exxon has taken out advertising saying there'll be plenty of future supplies.

“This verges on the irresponsible because it says to the government there is no problem. It says to the media there is no problem. It says to the public there is no problem.

“So we are to march with fife and drum, banners flying, into the maw of destruction… because Exxon tells us that there is no problem.”


What evidence is there to suggest that a peak in global oil production is near? CERA seeks a sober dialogue to identify “clear signposts that will herald the onset” of either the peak or their “undulating plateau” of world oil production. Here, ten reasons why this turning point is likely between now and 2015.

1. M. King Hubbert, winner of the top award in earth sciences—the Vetlesen Prize-- was an enormously courageous, bright, and prescient man who may have done more with a slide rule than his contemporary critics can with a supercomputer, but it’s a mistake to build the peak oil case entirely around his famous curve. With some exceptions, (the North Sea, the United States, Indonesia, for example, and most of the minor producers who are long past peak) falling reserves are generally not the most important brake on efforts to increase oil production. There are numerous other constraints (including limits on financing, logistics, shortages of rigs and drilling ships, a lack of skilled manpower, extremes of weather, political or military conflict) that make it increasingly difficult to expand production. These constraints, which sometimes operate synergistically, work to restrain and delay production growth which might otherwise compensate for declines elsewhere. Iraq, for example, has sufficient reserves to support production of 5 million barrels a day. But wishing won’t make it so.
2. Globally, oil production is highly concentrated in a small number of countries and regions and is becoming more so. Twenty nations produce 83% of the world’s oil, and production in many has already peaked. As others in this top twenty gradually “roll over,” it will become increasingly difficult for the remaining members of this exclusive club to “up the ante,” increasing their own production to offset declines elsewhere. Indeed, in CERA’s forecast to 2015 published last summer, the authors acknowledge that conventional crude production will plateau around 2010; they forecast that the availability of natural gas liquids will grow as global gas production expands and compensate for declining crude oil production.
3. Production outside OPEC is forecast by most experts to peak between 2010 and 2015. Once that occurs, there is no possibility that any combination of non-OPEC countries could offset significant production declines in other parts of the world. A wide range of analysts agree on this, including PFC Energy, ExxonMobil, Cambridge Energy Research Associates, and Woods Mackenzie. Their conclusions are supported by other studies carried out by Chris Skrebowski, Tom Petrie, Henry Groppe and others.
4. The overwhelming majority of remaining conventional petroleum reserves are concentrated around the Arabian Gulf. There, they are largely off-limits to the world’s independent oil companies which tend to have the best technology and the most highly trained engineers and geoscientists. This technology and these people are increasingly essential to efficiently extract the oil from the increasingly complex reservoirs which hold most of the remaining conventional oil.
5. The Middle East region is riven by religious, cultural, geopolitical and military conflicts. It is a cauldron for conflict. Muslim governments control about two-thirds of the world’s remaining conventional oil and are increasingly bitterly opposed to U.S. government policies. In most of these key nations, the ability to expand production is larger than the current desire to do so; they are unlikely to see any benefit in early production of their oil to slake an American or Chinese thirst.
6. Increases in production from the non-Middle East OPEC member countries are unlikely to compensate for production declines elsewhere. Nigeria's production has been undercut by insurgents; Venezuela's production is falling due to mismanagement and the "Chavez factor"; Indonesia’s production appears to be in irremediable decline.
7. Unconventional petroleum resources (Canada’s tar sands, Venezuela’s bitumen and U.S. oil shales) are very large and very misunderstood. All oil is not created equal. Although they total trillions of barrels in the aggregate, expanding unconventional production is expensive, technically arduous and slow. Because these resources can not be produced at high rates, they can do little to postpone the peak in global production. For example, at forecast 2015 rates of production, it will take more than a century to produce Canada’s 175 billion barrels of tar sand reserves. (A financial analogy: Imagine having $100,000,000 in your IRA, but being forbidden to withdraw more than $100,000 per year. You are rich, sort of.) With tens of billions of investment dollars, Venezuela could expand its bitumen production, but Chavez is in no rush to do so, nor are the importing countries showing any indication of readiness to make the investments in refinery modifications which would be required to deal with the increased proportion of very heavy oil. As for oil shale, global production has never exceeded 25,000 barrels a day, has fallen by half since 1990, and now provides just 1/10,000th of global energy. Typical oil shales have the energy density of a baked potato. (In Colorado, Shell hopes to pull the sword from the stone using electricity: a dedicated 1,200 MW powerplant will be needed to produce 100,000 b/d, making this project the world’s largest electricity consumer.) Other oft-heralded types of unconventional liquids, such as gas-to-liquids and coal-to-liquids, are very capital intensive and offer abysmal energy returns. Biofuels, particularly Brazilian ethanol, will make an important contribution but only regionally. A breakthrough in the production of cellulosic ethanol is unlikely to occur before oil production peaks.
8. Production decline from producing fields is inevitable and relentless, and trees don’t grow to the sky! Not all the world’s oil fields are in decline, but the majority are. No one knows what the average global decline rate is, but assuming CERA’s conservative 5% decline rate in mature fields, the existing global production base loses more than 2.5 million barrels per day/year. This means that by 2015 we may need 20 million barrels per day of new production just to maintain current world production. Most of the world’s large fields, a few hundred of which are the main contributors to global production, have been on production for decades. Many are known to have increasing water cuts or gas-oil ratios, and are in decline. Examples of major fields which are thought to have gone into decline include Mexico’s Cantarell, Alaska’s Prudhoe Bay, Kuwait’s Burgan, and perhaps Saudi Arabia’s Ghawar – the world’s largest oilfield. (If the Saudis wish to allay wide-spread fears about the well-being of their major fields, they could do so by releasing data on their production histories. Their reluctance to do this, while perfectly understandable, is not particularly reassuring.)
9. Roughly 80% of the world’s remaining oil reserves are controlled by national oil companies such as Saudi Aramco, Pemex, Petrobras, ADNOC and NIOC. In the grand scheme of things, BP, ExxonMobil, and Shell are relatively small players and no longer have the ability to significantly expand production. (Exxon has spent $100 billion since year 2000 with no growth to show for it. Lee Raymond may not “believe” in peak oil, but his former company’s recent performance doesn’t exactly refute the idea.) In evaluating whether to invest in increasing production, the NOCs rely on a different set of calculations and motivations than the IOCs. National interests, which tend to favor ensuring that oil reserves will still exist for the current leaders’ grand-children, often trump what Westerners would define as rational economic decision-making. Recently, a number of these government-owned companies have unilaterally rewritten the terms of existing contracts, rejected joint-development proposals from IOCs, and taken various steps to further restrict access by the IOCs to their reserves. Consider Putin, who has recognized that energy is the original currency, and with it he can wage a new cold war. In short, production expansions by the NOCs are likely to take place over longer periods and to lower levels than some analysts had expected.
10. Discovery rates are falling rapidly. We are now producing two to three barrels of oil for every additional one we find. New discoveries are much smaller than those of a few decades ago. It has been 25 years since we discovered a field capable of producing 1 million barrels per day. During the 1970s, at the time of the first Oil Crises, the North Slope, North Sea, and Cantarell were standing in reserve, ready to ride to the rescue. In contrast, today, there are few, if any, large, untapped virgin fields waiting in the wings. The offshore fields that are being developed (primarily in West Africa, the Caspian, Brazil and the deepwater Gulf of Mexico) are smaller, more complex, and, in some cases, nearly prohibitively expensive to develop.
The authors, aware of CERA’s disagreement with item #10 above, will publish a more detailed response to CERA’s work later this fall.