2005. Matt Simmons. THE WORLD’S GIANT OILFIELDS How Many Exist? How Much Do They Produce? How Fast Are They Declining?
July 13, 2005. “Powerswitch” Clive Smith
What seems to be happening…is that our new oil extraction technology, developed over the past 30 years, has allowed us to pull out more oil out of the ground, sooner (in newly developed fields, i.e. North Sea in the 70s) and prolong the peak or plateau (in new and older fields). Unfortunately we are now becoming more aware that the consequences of this: a much sharper decline….
Particularly in the fields like the North Sea, that were brought on line and
pumped at maximum as soon as possible, to meet maximum profits at the time
when this new technology in the oil industry was being used to its full potential.
Now 5/6 years after the peak in the UK sector, we are seeing 10% declines a
year in the North Sea… which is huge.
You have to understand, that the oil companies are not here to save the
world or to look after natural resources. They have shareholders and want to
maximize their profits. The Western Oil companies, pump out oil at the
fastest rate possible to generate revenue on their investment, using the
latest technologies available. It just so happens, that to do this, means a
much faster collapse in production after peak of these fields.
August 3, 2005 Oil depletions are not created equal
[snips throughout] Chris Skrebowski “on Understanding Depletion” used an average depletion rate of 5%, with other sources using 7% for a well in depletion. http://www.globalpublicmedia.com/articles/386 These are averages used until now to estimate how long fields will last, and how much new oil is needed to replace such losses in a market where supply exceeded demand. This average held up, where conventional methods of oil removal (primary recovery using vertical wells, then secondary and tertiary recovery) were used. However, there has been a recent change in the way oil was recovered, initially in the Middle East. Rather than get the oil out in a three-step process, as horizontal drilling came into favor, it was combined with the concurrent injection of water below the oil layer to maintain reservoir pressure and more rapidly recover the oil. (For a sectional view of such a field in late development see here , and for a greater discussion here). The method was very successful and has been adopted in other countries, and in the North Sea, as a way of getting more oil out faster. But here is the rub, because of the success in producing the oil, when the field depletes it drops at a much faster rate. The first place where this was seriously realized was in the Yibal field in Oman (For more on Yibal see Green Car Congress http://www.greencarcongress.com/2004/04/the_shadow_of_y.html). The results for Oman have been significant… production levels – currently at 750,000 barrels per day – have actually fallen considerably in recent years, dropping 8.9 percent between 2002 and 2003 alone. And they are not alone, the production drop in the North Sea is now running over 11% a year. This is of concern because the projections have been used as the basis for British investment plans
Nov 17, 2005 1:30 pm Post subject: Exxon, and the Implications of 8%
As noted at the recent ASPO-USA conference, Andrew Gould, the CEO of big oil services firm Schlumberger, has been saying for a few months that:
…the industry is dealing with a phenomenon that is exaggerated by the lack of investment over the past 18 years. This phenomenon is the decline rate for the older reservoirs that form the backbone of the world’s oil production, both in and out of OPEC. An accurate average decline rate is hard to estimate, but an overall figure of 8% is not an unreasonable assumption. The maintenance required to slow the rate of decline, and increase the overall recovery, is a key element of the supply picture going forward.
He also notes what has been extensively discussed here at the oil drum (TOD):
Finally, the oil service industry is not in particularly good shape to meet the needs of a rapid worldwide ramp up in activity. A lot of the rig fleet, and much of the equipment are old. Very little spare capacity exists. This combination will compromise the service response, but the most disturbing shortage by far is the lack of specialized E&P professionals. A lot of skilled people have either been laid off, or have retired from the industry in the last 18 years. This shortage is as acute on the service side as it is on that of the operators. Training their replacements takes time, and there is already a great deal of evidence to suggest that the industry is fighting over the core of professionals that remain.
It’s also been noted by the EIA that Saudi fields are declining by 5%-12%, and that Iran’s fields are declining by 8%-13%. So OPEC countries appear to generally fit what Andrew Gould is talking about.
Nov 19, 2007. Stuart Staniford. Is the Decline of Base Production Accelerating?
Jan 21, 2006 A 5% decline is not as gradual as it may sound. I don’t think even most peak-oil aware people understand how catastrophic a 5% decline could be. A 5% decline would cut total production by 50% in 14 years. So if the decline begins in 2008 from a peak of 90 mbd, the world would only have 45 mbd in 2022. Most of this 45 mbd would be from highly unstable areas, and a significant portion would be from low EROEI sources like oil sand. But let’s put those aside for a moment and just focus on the total number. 14 years ago, we were using about 65 mbd. Today, we use 85 mbd. How do you think the world would look if we had peaked 14 years ago and today had to manage on 33 mbd instead of 85 mbd? IN order for “business to continue as usual” we need that extra 3% or so per year. So a 5% decline year is really an 8% shortfall per year.
Today, I got email from Kyle Swanson, a Professor of Mathematics and Atmospheric Sciences at the University of Wisconsin-Milwaukee. Kyle looked into what would happen if one did a MegaProjects style analysis on Exxon circa 2001. (Exxon being the most optimistic of the big oil companies – eg. the one not yet running ad campaigns asking the public for help in producing enough oil). Kyle’s conclusion:
Looking over Exxon’s annual reports for the past 5 years, I think that a reasonable case can be made that Exxon’s internal liquid decline rate is actually about 10%.
July 2006 Mr Samsam Bakhtiari testifying to the Australian congress
My WOCAP model has predicted that over the next 14 years present global production of 81 million barrels per day will decrease by roughly 32 per cent, down to around 55 million barrels per day by the year 2020.
Thus in the face of peak oil and its multiple consequences, which are bound to impact upon almost all aspects of our human standards of life, it seems imperative to get prepared to face all the inevitable shockwaves resulting from that. Preparation should be carried out on individual, familial, societal and national levels as soon as possible. Every preparative step taken today will prove far cheaper than any step taken tomorrow
The supergiant oilfields are all very great oilfields. Today you have 40 per cent of world production in these supergiants. Managing a supergiant is a very difficult procedure. The larger the supergiant, the more difficult it is. I will firstly state the case of Ghawar. Why? Because it is the largest oilfield in the world by far. At the beginning, it was estimated that it had in 1952—that is when it came on stream, which is some 54 years ago— some 70 billion barrels of recoverable oil. That was 54 years ago. In the meantime, much of that has been already recovered. The situation for Ghawar today is that you have two major problems. It is still producing, we think, between four and 4½ million barrels every single day, but in order to produce that much oil much needs to be done. I will show you two points, if you allow me. A whiteboard presentation was then given— Let us assume that this is the oilfield. What is happening today is that they are injecting eight million barrels of sea water every single day. What do they get out? This is very schematic. They get 12.5 million barrels of liquid out of the field and they split that into eight million barrels of water and 4.5 million barrels of oil. The water that they are injecting is increasing constantly.
So when they say that Ghawar crude is cheap, it is certainly not cheap any more, because you have to do all this enormous processing. You have these huge pipelines which come from the sea and an enormous compressor reinjecting that water under the oil column and pushing the column up. That is one point. There are problems. If you did not have problems you would not need to do all that.
They have done something else. Usually in all these supergiants you drill vertical wells and you take out the oil from the vertical wells by the pressure either of the gas or the water. That is how it is mostly in the four supergiants in Iran. But in the 1990s there was a new technology called horizontal wells. In Ghawar they thought that instead of relying on the vertical wells they would drill horizontal wells. Horizontal wells are both a blessing and a curse. Why?
The horizontal well is different. It comes down like this and then it goes horizontally for a few kilometres. The horizontal well is a blessing because you can get to the exact middle of the oil structure and so take out your oil more easily. But there is a very great danger with horizontal wells. They tell us that in Ghawar today there are 220, roughly, horizontal wells. The great danger of the horizontal well is that when the water reaches the well it is dead. So one day in the future at Ghawar, the water level will eventually reach the horizontal well.
Yes, it is happening but not on a large scale. When it happens on a large scale then Ghawar is going to collapse and you will have a cliff in the production of Ghawar. When you have a cliff there, the whole Saudi production system is going to fall apart. If that happens, we will start hearing bells ringing all over the place, and the price of oil is going to go through the roof.
It is extremely difficult to forecast precisely the price of oil in the future. I can see a range of $100 to $150 not very far into the future.
In my opinion, we could get there very easily. We are a couple of hurricanes or some geopolitical problems or a war away from having a worse problem than we have today. There you could go very easily, but after that where can this price go? I am studying that right now, and I have not reached a conclusion yet.
There must be some outer limit, and I am beginning to think that maybe the outer limit could be $300 per barrel. I am not so sure yet, because we are entering a brand new era in human history, an era we have not been prepared for at all. For the past six generations, we have been used to having cheap oil always available whenever we wanted it, more or less. Today, in 2006, all of this is beginning to change. We are entering an era in which we know nothing much, where we have a brand new set of rules. I am trying to find out what these new rules are. I have already reached two or three new rules. One of the new rules, in my opinion, is that there will be in the very near future nothing like business as usual. In my opinion, nothing is usual from now on for any of the countries involved. And the lower you are in the pile, the worse it is going to get.
When there is not enough oil, first you will have to raise its price and then you will have the problem of its availability. There may be some kind of worldwide rationing—I do not know. I am trying to look at the future but the future I am talking about, as you mentioned, might be beyond 2020. Maybe beyond 2020 we will have some reasonable idea. What will happen after that is very difficult to predict. I do not think the oil companies would like such a scenario at all. They will be forced—
Maybe they are saying this because they want to grow and buy smaller oil companies. They might say that they will buy at $30 because the price is going to fall to $25, so $30 is a very good price and would be a very good price to pay a small company. And there are other problems. Nobody likes the idea of peak oil. Firstly, you have the politicians. Naturally, a politician will never say that there is such a thing as peak oil. It is suicide to give bad news so a politician will never do that. He will always say, ‘The IEA says that we will be having 118 million barrels in 2030 so why worry?’
Secondly, you have the media. The media does not like peak oil. Why? There is no sponsorship for peak oil. The oil companies do not like peak oil because you should not say that your soup is cold; you should always say that it is very hot and very tasty, yes? So nobody wants to hear of this phenomenon of peak oil. I believe that some of the institutions—-I will not name them; they are here and maybe you can guess which ones they are-—are saying these things to act as a protection for some politicians who can say: ‘Because these institutions are saying these things, then we follow them. We do not follow Campbell and others.’
Senator JOYCE—It could also inhibit the development of a biorenewable fuel industry too. If they say there is a lot of alternative product around, then they do not need a biorenewable fuel industry.
Dr Samsam Bakhtiari—I do not believe that there are alternatives around. In my opinion there is no alternative to crude oil. There is nothing that can replace it, and this is the problem the world is facing today. There are no alternatives and I will try to explain very briefly why. In general economics we are taught a very basic rule. When the price goes up, demand comes down, and you have the marvellous figure of Professor Sam Wilson to explain exactly how this works. For crude oil this does not work at all. We were always taught that when the price doubles demand will come down by something. In the past two years the price has tripled and demand has not come down by anything. How far can we go? Nobody knows. I think that it will take three digits—at least over $110 or $120—for us to start seeing demand maybe coming down.
Why? Firstly, you have no way of preserving oil products easily—no way at all. We are all used to the car and we want to drive that car as far as we can possibly pay for it. Even at prices of $1.40 per litre for petrol you are beginning to have problems in the population economically, so what will it be like when the prices are much higher than that? $1.40 per litre is one of the cheapest prices in the Western world. It is just a little above fuel prices in California today so it is very cheap.
Not only do you not have preservation, you do not have any means of substitution, and I will come back to your previous question on alternatives. There is no alternative to crude oil. For the ones who believe that GTL is going to be an alternative, I am sorry to say that this is not a fact. Today you have only 85,000 barrels per day of GTL capacity in the world. I do not think you will ever have much more than that, and 85,000 is nothing. It is a drop of water in an ocean. The latest GTL plant has just been started in Qatar and I do not know how it is going to fare. It makes 34,000 barrels. It is an enormous plant. I think it cost one and a half billion dollars at least. It has two enormous reactors. If anything goes wrong with these reactors—my God, I do not know what is going to happen! So that is for GTL.
You have coal to liquid. The only coal to liquid plant today in the world is in Secunda in South Africa. It makes 150,000 barrels per day of liquids. I can tell you that because I have visited it, half by helicopter and half by walking around the facilities. It is a very messy affair and it is very inefficient energy wise. Now the Chinese are trying to make CTL—coal to liquid—of one million barrels per day capacity. I think it is going to cost them $10 billion at least. I cannot imagine how this site is going to be. I am waiting for them to finish, but it will probably take them quite a long time to get that one million barrels per day off the ground.
You mentioned ethanol, biodiesel and all that. This is not the future. This is not sustainable because in the future, if our predictions are correct, the No. 1 priority will not be transport and all that. The No. 1 priority is going to be food. And for food you will have to have top priority for fertiliser and insecticides and whatever you need to produce food only. So ethanol is a very, very wasteful system. And again, however much you want to make some ethanol, it will still be a drop of water in the ocean. Just let me tell you that for every litre of ethanol you will need between three and four litres of water to produce it. The best way to go for these types of fuel, and certainly the most efficient way, is sugarcane. That is what the Brazilians are doing today. With sugarcane you need one square kilometre of sugarcane to produce 3,800 barrels of ethanol per year. It is not very easy and it is very inefficient.
So I cannot see any of these alternatives coming up in the future in a big way. Now, certainly solar power will have a small role to play. Today it is still very expensive at between roughly $US 7,000 and $US 10,000 per megawatt. But it could certainly play a role, especially in Australia where you have quite a lot of sun and quite a lot of land to develop that. Wind also, in windy countries, could play a small role. But these roles will amount to two to three, or maybe four, per cent of oil consumption over the next 15 or 20 years, and not more. The orders of magnitude are not at all the same. You will make a small dent with each one of these but not much more than a dent. Replacing crude oil is not that easy.
CHAIR—I would like to follow up on this issue of price. The Australian Bureau of Agricultural and Resource Economics—ABARE—in their submission to us have done predictions based on future oil costs of $US30 per barrel. How realistic do you think that is?
Dr Samsam Bakhtiari—I believe you will never, ever see $US30 per barrel again unless you have a bird flu epidemic that wipes out at least millions of people or, as Senator Joyce said, something hits the planet and disrupts all calculations. Senator JOYCE—That takes out Europe. Dr Samsam Bakhtiari—I cannot foresee anything below even $US50 per barrel. That in my opinion would be very bad news, because if it goes back to, say, $US50 per barrel for some reason and for a short period of time, people will think: ‘Ah! So $US75 was just a spike and now we are back to the good old days and we can begin consuming again. Let’s go and buy that big SUV that we were looking at.’ You then lose two or three years at least. So $US30 in my opinion is absolutely impossible. You can quote me on that.
CHAIR—Thank you. My next question relates to the industry. BP when they made a presentation to the committee said that the prices now are basically the same proportionally as the spike in the 1970s. What is your opinion of those comments? Dr Samsam Bakhtiari—If you take into account inflation, it is the roughly same—it was $US75 to $US80 in those days. But those were spikes. Today it is a totally different problem. Today it is a transition into the unknown; then it was known. I am now personally of the opinion that if they had continued with the spikes we would have been much better off today. But they did not. After the two oil price shocks of 1973 and 1979 you had two price counter shocks in 1987 and 1998, when it dropped below $US10 per barrel. That was very bad news, because then demand started going up again. If all these reserves had been better controlled, maybe the transition would have been much easier. Just to remind you, in 1950, which is not that long ago, global consumption was only 10 million barrels per day. That was very easily controllable with the reserves we had. What is not easily controllable is the 81 million barrels per day that we have today.
Senator MILNE—In your opening presentation, you said that you thought that in 2006 we had begun transition 1, and that it would be a relatively gentle stage, and then we would go to extreme discomfort, presumably in transition 2. Can you outline to me the time frames you see for each of the transition stages, and how they will proceed? What will trigger moving from transition 1 to transition 2? When do you expect the real crisis to hit in that transitional phase?
Dr Samsam Bakhtiari—Certainly. From now on, from 2006 to 2020, making predictions is an extremely difficult process, because we do not know exactly what to expect of these transition periods. But I have decided for the time being to split the next 14 years into four transition periods, which I call transition 1, 2, 3 and 4. Every transition period has a steeper gradient and I do not know exactly how long each of these will take, because it depends on many factors. Nevertheless, I envisage now that transition 1 should take between three, four or five years, but I would have to revise this every three to four months.
We are here in 2006, which is, according to my model, the first year of transition 1.
I want to make an aside here — there is nothing worse for an oilfield than to be pushed. I believe that is what is happening to oilfields like Ghawar and Cantarell. They have been pushed. A better example is the Samotlor oilfield of Russia, which Tuesday, was a marvellous oilfield that the Soviets in the 1980s, when they badly needed money to have a system that would be a rival to the American Star Wars, destroyed, in my opinion. It was an extraordinary oilfield which could produce three million barrels a day. Today it is only producing 300,000 barrels a day. If they had managed that oilfield better, I think they would have had a much higher return. Pushing an oilfield is not very good for it. Letting an oilfield rest is the best thing you can do for it. The Iraqis’ oilfields had a marvellous time during the 1990s because they rested for a long time. I would be glad if such a thing could happen to the Iranian supergiants—if they could rest for some time. I think it would not be bad.
Between the beginning and the end of T1, you will have the two major scales tilting. At the end of T1 you will have a supply, and this supply is going to dictate the demand. Here you will have entities which will have the marginal demand. So it will be a totally different system form what we had at the beginning. It is this tilting of the scale that will in my opinion determine the end of T1. We have just begun shifting from one to the other.
In the time frame of T1, you might have some volatility in that it will start shifting to one side and then shifting back again to the demand side and going back and forth. So one has to be very careful. But in the end it will be the total shift that will in my opinion make the end of T1 clearer. About T2, T3 and T4, it is still very early. I am working on the next transition, but first we have to get this transition right.
One thing I might add about T1 is that I see not only that business as usual is not in the new rules but also that mega projects are not to be begun, because mega projects are long-term projects that take 10, 20, maybe 25 years. Because we do not know exactly where we are going at this stage, it is very dangerous to begin mega projects. But people are still doing this. The Europeans have begun a freight train line from Barcelona to Kiev, which is roughly 2,600 kilometres. The idea of having freight trains is a very good idea, but it is a bit late now. If you have rails you might make the service a bit better, but you should not construct it from scratch because it will take 20 years and cost at least 1/4 …GARBAGE CHARACTERS…ever be finished because the high oil prices will trigger rises in prices for all other commodities. You already see that steel is way above the usual prices. Copper has hit between $7,000 and $8,000, and it will go much higher than that. Nickel is $22,000. I think $22,000 is very cheap today; it will go much higher. All these commodities and all these metals will go very much higher, because it is the crude oil price which dictates the prices. Sugar is going up, orange juice is going up— everything is going up—because the price of crude oil is going up. It is the price of crude oil which more or less dictates all the other price hikes. In my opinion, you will have a correlation between all the price hikes in the future, and you can already see the first signs now.
Senator HUTCHINS—What do you see in transition phases 2, 3 and 4? Do you see any specific dates?
Dr Samsam Bakhtiari—No, not now, not yet. The gradients will get steeper, so the effects and the impacts will be greater. T1 is very benign; the gradient is very slow and you almost do not notice it. We will go from, maybe, 81 to 79½ over the next few years; it is not difficult. But T2 will be much more difficult—it is already—because it will start dropping considerably; then you will notice the drops every year, probably, and then it will get worse and worse. It is a process, fortunately, where the introduction is easier than the following phases. But it is still very early to start predicting what T2 will do. Firstly, we have to see what T1 is going to do, because already, in many aspects, T1 is difficult to predict, with all the events that could take place in the next three to four years.
Senator HUTCHINS—But you yourself have made a prediction that you do not see that the rail link between Barcelona and Kiev will be, to use my words, economically sustainable.
Dr Samsam Bakhtiari—No.
Senator HUTCHINS—What should governments do if you say that supply will determine demand? Dr Samsam Bakhtiari—I think that every society, every city and every government should do a certain number of things—many things; 1,001 things. There are not one or two solutions. There is no panacea. There is no silver bullet that you can just shoot to get rid of this. You have to start as early as possible and think about this type of future. I do not think the Europeans are ever going to make it. I do not think that Airbus A380 is a valuable aeroplane. It is a marvellous aeroplane, but it is arriving at the wrong time. They should have built it 20 years ago—and it would have been marvellous—when we were in the ascending curve of petroleum, not in the descending one, and not now that we have entered T1. I told them five years ago but naturally they did not want to listen at all, so they carried on. Now they have the problems and they are paying the penalties to all these companies already. It is still not commercial. I do not know why it will be commercial. I do not see a very bright future for that.
There is not too much innovation now; there is certainly a returning to commodities and exploration. I know of a company in Australia that invested very heavily and has just found a brand new copper mine. That is fabulous, because the copper they are going to extract in a few years is going to make enormous profits. If you put money into oil exploration—whether onshore or offshore—almost whatever you find is going to make money. These are types of investment. Or you could invest in agriculture but not ethanol or biodiesel.
Senator HUTCHINS—Yes, I was going to ask you about that—and I do not know if that is the point we are at, Madam Chair. You seem to be dismissive of alternative fuels.
Dr Samsam Bakhtiari—Yes. I do not think it is a very good idea. You can always try it on a small scale, but I think that energy wise it does not make much sense. Now we are in transition 1, I try to look at things from an energy point of view, not from an economic point of view. We do not know these days exactly what economics are. You have to think energetically and about the things you really need. For example, Western Australia—sorry is doing all the right things. They were kind enough to have been the very first to invite me, and I am very happy for them.
Western Australia does not have enough water and the water table is falling. It is a very big problem. They are putting in two desalination plants. They are obliged to put in two desalination plants. The desalination plant will need fuel—it will need gas—to run. In my opinion, they have no alternative so they are obliged to do this. When you are forced then you have to do it. I see that one problem in the future in Australia, much more important than the oil problem, is going to be water.
Your precipitation is going lower and lower. I heard that in June you had an average of only 14 millimetres of rain instead of the normal 108 millimetres. When I crossed from Perth to Sydney in the plane, over 3½ hours, what I saw was very dry. I think one of the problems is water. When you consider that every litre of ethanol or biodiesel will take between three and four litres of water then you start having a problem on the water side and on the energy side. I think you have to reconsider the economics of all of that in the near future.
Senator WEBBER—On that optimistic note—being a Western Australian—what do you consider the prospects for the future of gas as an alternative?
Dr Samsam Bakhtiari—Gas is the big issue, because we are not only having peak oil but, according to my prediction, in 2008 or 2009 we are also going to have global peak gas. Peak gas and peak oil are two totally different things because oil is a very special commodity. Gas is not the same because you cannot just put it in a ship. You either have to consume it locally, pipe it to some other country or put it in a LNG tanker. You have only those three alternatives.
Fortunately, Australia has an enormous amount of gas, and I believe this is going to become very handy because the peak for gas will be between 100 and 105 TCF global production in 2008-09. Because of this peak in gas, you will have enormous problems all over the world but firstly in the US. The price of gas is going to go sky high. Today, it is incredibly cheap. Gas in the US has a threshold price today of between $7 and $8 per million BTU. This is going to go much higher. Every year you will have to add $2 to $3 to that price. The US price is going to affect all the other prices, and it has already begun in South-East Asia. All that will be linked through the LNG price that you will have, and the price of LNG is going to go very high. I think that Russia does not have much gas anymore, although it is the largest producer in the world. I am very worried for the Europeans, and probably this winter you will see that the Europeans are going to have an enormous number of problems. If it is a harsh winter in Europe, you might have thousands of people dying. You had hundreds last year, but that was only the beginning. If this winter is harsh, you will have thousands dying because the Russians simply do not have enough gas to provide to Europe.
The Americans do not have enough gas. The Americans had the incredible chance to have the mildest winter last year in 100 years. If that had not happened, I do not know where the price of gas would be today. That was very lucky, and they now have enough reserves for the coming winter because all the storage depots are almost full. That is a positive point, but the Europeans do not have that kind of chance, so you will have lots of problems. The price of LNG is going to go sky high because everybody will want LNG—in America, Mexico and Canada, which are in full decline; in all the South-East Asian countries and especially in China; and even in Europe. If the Europeans cannot get the Russian gas, their only solution will be to get LNG from wherever they can.
I can tell you that, with gas prices in the US being around $6 per barrel, you have LNG spot sales today of $12 per barrel—and we are in a normal situation. So, wait for the panic and you will have prices of $25 or $30 per barrel, and maybe much more than that. For one week in March this year the British did not have enough gas and the price of gas shot up to $258 per barrel oil equivalent. At first I thought I had made a mistake of one decimal place, but then I realised it was not $25.8—it was $258. For one week they were paying that price for their gas. And we are in a very normal situation now; we are not at peak yet. So you can imagine how it is going to be when it is at peak, with the panic in all those countries because of the winter months. Just wait and see how it develops this winter in Europe.
Senator WEBBER—That is pretty dark.
Senator JOYCE—Going back to the biorenewable fuels issue, ethanol is being used in Brazil, and the terminal gate price of ethanol in Australia is around 80c a litre, so the reason that it is not being utilised is that the oil companies refuse to take it up. I have heard of a lot of what is going wrong but what we are really looking for is the solution; we are looking for the way out. Or is the world as we know it going to come to an end and this is just a prologue to the end? We need to find the solution. I do not say ethanol is a panacea but it is certainly a mitigating circumstance. We need to take it up. It could run conjointly with a whole range of issues. I have two questions. Firstly, if ethanol is not the answer, can you explain why it is being used so prolifically in places like Brazil, and why the United States, Europe and Asia are all taking it on board as a component of trying to deal with the impending oil crisis—or the oil crisis that is already here, apparently? Secondly, what is your solution? What is the noble horizon we need to head towards in order to maintain our current standards of living and economies?
Dr Samsam Bakhtiari—Allow me to take those questions one by one. First I will address the alternatives. Brazil can use ethanol as a fuel because of its enormous amount of sugarcane. There is also the idea of self-sufficiency. People like the Brazilians and the South Africans always have a complex about self-sufficiency. If the South Africans have gone after GTL and have pursued coal to liquids, it is because they want to be self-sufficient. It was not an economic decision; it was a political decision. I think the Brazilians are in somewhat the same situation. For them, because of the enormous amount of sugarcane they have, it does make some sense, but I really doubt that it makes a lot of sense in terms of energy. And I believe that, come the day there is conflict between producing ethanol or biodiesel and producing food, food is going to win because, first of all, you have to eat.
There is another danger in Brazil. They are destroying the Amazon rainforest at the rate of some 20,000 square kilometres per year and on that land they are planting food crops —in enormous amounts. I think that this will also be part of the future: when the other countries do not have enough food, they will go back to the Brazilians. Brazil has become one of the largest exporters of food in the world, whether it be soya beans, sugar, coffee or beef. It is almost anything. They have the surpluses. The Americans are also trying to get the ethanol. It makes a small dent for the time being, but not a very big one. I think that it is only a question of a few million gallons. I do not know what percentage you have, but it is not very much.
All of the others are trying. I heard there are a few million in Australia, but it will not make a very big difference, so I am not very keen on these types of bio alternatives. As for your second question about what should be done, there are many things. Everyone should study their own situation and see what can be done with the possibilities at hand, and not one thing, not two, but 10, 20 or 50. In my opinion, the first thing is to develop free public transportation, and that applies to everybody. Make it free from now. Even if it does not make very much economic sense now, it will in the future. Certainly, there is absolutely no doubt, as you go into transition 1, that free public transportation has to make sense. That is one of the things.
There are many other things that you can do. Plan; get new ideas from the grassroots. That is what Perth has been trying to do, to congregate 1,200 people from different walks of life in teams of eight, give them each a computer and have all of these ideas go back to the top for the selection of the ones they think are viable and useful. Have teams of elders. You have a fantastic man out there, Mr Brian Fleay. He predicted peak oil in 1995. It is extraordinary what he did. He was maybe the second person, after Dr Campbell, to have done that. And he did it almost from scratch. So people like this could have predicted that in 1995—in 1995 he wrote his book, so he must have predicted it in 1993 or 1994.
Or create steering committees through such people, and then get younger people to come in, very bright people, to start setting the priorities, because one day you will have to set priorities for the use of petrol. Have these in place soon, maybe in the next year or two. You will not need them in the next year or two, but have them in place already so that you are prepared. Get prepared for any eventuality. Have a special committee for that now. That is what I can see. I can advise that such things should be done this year or next year so that when or if the crisis really hits, then you have something to fall back on; you have a team that is already prepared and who has thought these problems through.
Thinking about these problems is very important, but there is something else. It is going to be very, very difficult to change the minds, to have the minds set on the new realities. For six generations we have been thinking one way—that is, that petrol is always there, petrol is not too expensive, oil products are not too expensive. We do not think about it. We do not think about fertilisers. We do not think about insecticides. Why? They are not that expensive, so it does not come into the day-to-day consideration. Petrol was always $1, not that much of a problem. We are used to that. The problem is going to be when it becomes $3 or $4 or $5. Then people will notice. Already at $1.40, some people are beginning to think about it, so when it becomes higher they have to change their minds, their way of thinking and their way of planning.
Dr Samsam Bakhtiari— [in reply to a question about shale]. There is a lot of shale—many thousands. There is an enormous amount of oil in there, but it is a very messy and difficult industry. In Canada, you have about 1.1 million barrels per day of synthetic crude oil produced, which is being exported mostly to the US, and which makes economic sense, especially at the prices of $74 to $75 per barrel. I think it costs them around $30 to $40 per barrel, so they are making some money. But I think it is limited, and I think the limits to that industry are, according to my prediction, roughly three million barrels per day. I cannot see Canada or the US together making more than three million barrels per day at the 2020 or 2025 horizon, investing enormous amounts of money. The shale oil industry is like the oil industry. You go to the best places first, naturally. And then, as you go along, it gets more difficult, it gets more expensive and it gets messier. I think you need roughly 2,000 tonnes of shale oil to make one barrel of synthetic crude oil. You can imagine, on an enormous scale, what that involves for the land and for everywhere else.
Already, at the level of 1.1 million barrels a day, the Canadian rivers are becoming so polluted as to have triggered alarm bells over Canada; the fish are dying and it will soon be impossible to clean up all the rivers. There are side problems for that as well. If one day we reach three million barrels per day I do not know what the situation will be there, but I do not think we can go further than three million; that is it.
There is also the heavy oil in Venezuela. Today there are 600,000 barrels of capacity. I do not think the Venezuelans can go beyond twice that amount, and with the government they have now they are stuck with their 600,000. I do not think anybody will be willing to invest in such expensive and difficult processes of exploitation. But even if the conditions were right I think they can go to 1.2. I really cannot see them going much further than that. So, yes, there is the potential but you have to transform the potential into production.
I forgot to tell you about the tar sands and the shale oil. All the heat you need for that comes from natural gas. You are spending 1½ million BTUs for every barrel you are going to produce; that makes a lot of gas. What the Americans are beginning to tell the Canadians is, ‘We’d rather have this gas than anything else.’ So you have other problems that arise in this exploitation—at most, three million for tar sands and shale and one million for the Orinoco heavy oil. That makes a total of four million over the next 20 or 25 years. It will not change a thing for people—it is a drop of water—in the 81 we are facing now.
Dr Samsam Bakhtiari— [when asked about oil company profits ] I think that oil companies are like all corporations: they want to make profits, and they want to make the highest return for their shareholders. In 2005, they set new records in every country for profits. I think that in 2006 they will have far higher returns and record profits of, maybe, $50 billion for Exxon or something like that. It will be roughly the same, maybe $40 billion, for BP and a bit less, maybe, for Shell. Their shares will be reevaluated all the time as the price of oil goes up—and, as I told you, it can only go up.
But they control part of the system. You have many players. You have the national oil companies now, like Saudi Aramco, the National Iranian Oil Company and the national oil companies of Kuwait or Qatar. The oil companies control part of the system and it seems that their share of oil production is beginning to decline as well. It is still quite substantial, but it is also beginning to decline. Naturally, I think they are in it for the profits, and they control wherever they are from the wellhead all the way down to the retail. I think they get profit centres all along the way, and they are making enormous profits.
Senator STERLE—I have two questions. If we were to take all the alternatives around the world—solar, hydro, gas, CTL, GTL and all those—how far off subsidising our thirst for oil would that be? Could we supply the world’s demands? Nowhere near it?
Dr Samsam Bakhtiari—Very, very little. In any scenario and in any field for the next, say, 20 years: very, very little. It is a drop of water. If you make the calculation of increasing even by 100 per cent every single year, it is still a drop of water in solar, in biodiesel, in anything.
Senator STERLE—So there really is no alternative at this stage?
Dr Samsam Bakhtiari—No.
Senator STERLE—It will bring in a lot of side issues of employment and revenue for governments—all sorts of things will pop up. If we are not fair dinkum in what we are leaving for the next generation—for our environment, our economies, our communities and our world— we really are in serious trouble. I pick up on that earlier comment you made about public transport and integrating public transport in trains and buses and whatever else there might be. It is not nirvana; it is a reality that we really are confronted with and we have to face.
Dr Samsam Bakhtiari—Yes. Provided that our models and our predictions are correct, this is exactly what you are going to face very soon. I do not want to be more negative, but I have started looking into T2, T3 and T4, and, my God, there are some things I started seeing down there that really send shudders up my spine. But I will spare you that today. Maybe that is for another time. But I entirely agree with your statement. It should be done if only to get prepared so that if things go the wrong way you have something to fall back on—that you have some organisation which you have already set up. As the crisis develops you develop this organisation and make it ever bigger and more powerful to take care of the crisis. There are companies which are employing 300,000 people in 140 countries who do not know a thing about peak oil. I do not know how they are going to react tomorrow. The Europeans do not want to believe this reality. Next year they are going to start—they have already started—dying from the cold. According to my statistics, at least 900 people in eastern European countries froze to death last year. This year it is going to be double or triple that amount. This is the reality already. When there is a real crisis, how are they going to react?
The most important point is that governments do not to cause people to panic. The worst reaction to this type of crisis will be panic. If governments are not prepared there will be panic. The more prepared governments and institutions are, the less panic you will have. Panics are very costly. I entirely agree with what you just said. There is still time to get prepared. We are not that much down the T1 slope. It will be a very slow development, so there is time.
Senator STERLE—Apart from what you saw in Perth with the free public transport around the CBD, are any other countries taking that lead?
Dr Samsam Bakhtiari—No, nobody. There might be a city or two, but I have not heard of any that have taken this drastic step already, and I have not seen such things at all. I can tell you that the future is to rails because rails are the most fuel efficient system. Would you like to see some figures on that? I can illustrate this for you on the whiteboard. This will give you an order of magnitude. At tonne kilometres per litre of fuel, aeroplanes are between two and three, cars are between 10 and 22, trucks are between 65 and 85 and trains are around 320. So on these very simple figures, I think you can see that the future is to trains, but not trains that you build now; trains that you had and that you are going to spend money on. I have heard that Sydney in 2006 is planning to spend half its budget on roads and other infrastructures and half on public transportation—it seems to be roughly fifty-fifty. I think that as soon as you change this percentage towards rail and public, fuel efficiency might begin to make some sense. I think you can see the future here.
CHAIR—It is not planes.
Dr Samsam Bakhtiari—Aeroplanes will be the first casualty in the system. They are already making losses. I do not know how they can carry on because the jet fuel is directly proportional to the increases in crude oil. It is not like petrol. Petrol is very much cheaper because you have hidden subsidies and you have the taxes naturally.
Senator MILNE—I have a strategic question about Iran’s contribution to global oil supply as well as to gas. What percentage of global reserves does Iran hold? If Iran were to stop supplying overnight for a geopolitical reason, what impact would that have on 81 million barrels used perday? In other words, T1 is assuming everything goes along smoothly. Let us assume there is a geopolitical crisis and Iran decides to stop supplying into that 81 million barrels a day. What impact would that have?
Dr Samsam Bakhtiari—At present I think that Iran is supplying roughly two million barrels of oil for exports. In the case of some geopolitical problem, you would have to take the 2 million out of the 81 million. That in itself would not be very harsh. Why? Because major consuming countries have their strategic petroleum reserves. They could start taking it out of their reserves. The latest data on the US SPR is that they have 688 million barrels in their reserves. I believe that the Japanese must have something around 120 million barrels. The Europeans, all together, have roughly the same amount as the Japanese. The Chinese are trying to build up a strategic reserve of roughly 40 million barrels, but they have not started yet. Maybe they hope for the price of crude oil to come a bit lower before they start. They could do that.
What would be impacting heavily on the price is the psychological impact of any geopolitical happening, whether in the Persian Gulf or in South-East Asia. Because the leeway in T1 is extremely small—as I have tried to mention to you—the slightest impact geopolitically will have enormous consequences. If you had in Saudi Arabia, for example, or anywhere else, some two million to three million barrels of spare capacity—that you usually had before—then people would not be so worried about this geopolitical impact. But you do not have spare capacity anymore. I do not believe the Saudis have any spare capacity today, although they say they have a million or 1½ million barrels. They have no spare capacity. Nobody, in my opinion—neither OPEC, nor non-OPEC, nor the Russians, nor the Saudis—has any spare capacity. It would have an enormous impact. The price could go anywhere.
I will give you just one example of what we in NOIC did in 1975 after the first price shock, when the price went from roughly $2 per barrel to $11 per barrel. To find out what the real price was NOIC set up an auction, saying, ‘We have a few barrels and we are going to auction these barrels, so whoever is interested should give us a bid.’ Through the bids, we found out what the real price was. Some bids were up to $41. There were people who were willing, at $11 per barrel, to pay $41.
Then you have the problem that the national oil companies today in the Middle East and in OPEC are not what they were in the past. That is another problem. If there is a disruption, as long as the system is working, you have little problem. It just goes on and on. You see that in cases of earthquake or catastrophe. Once there is a catastrophe, it is very difficult to put it back to the way it was before. You see it taking 10, 12 or 15 years to bring it back. If you have geopolitical problems in the Middle East, it will be very difficult after the crisis has been fortunately somehow solved to put the system back to where it was before. For all these reasons—and because of the herd instinct and the panic that might follow—you could easily have prices doubling overnight. If somebody were smart enough to have an auction, you would see prices that even I could not imagine today.
JAN 21 2008. Randy Udall & Steve Andrews. ASPO Newsletter Commentary — CERA’s Depletion Study: The “Good News” About Running Up the Down Escalator
Last week the Wall Street Journal ran an article on Cambridge Energy Research Associates’ fascinating new study, “Finding the Critical Numbers: What Are the Real Decline Rates for Global Oil Production?”
Although CERA has put more spin on this report than Tiger Woods drops on a sand wedge, it’s still an intriguing look at a critical topic. Shell apparently thought so, too, and posted the article at http://royaldutchshellplc.com/2008/01/17/the-wall-street-journal-new-fields-may-offset-oil-drop/. (A three-page summary of the report is available at www.cera.com)
Any credible projection of future oil supplies must be based, CERA suggests, “on a comprehensive understanding of the production history of and behavior of existing fields…In other words, how much oil supply will come from currently producing fields ten years from now?” CERA looked at 811 fields, half large, half small, in its proprietary data base, and concluded that the global decline rate is 4.5% per year. Many in the peak oil community think this number is too low by half—Schlumberger CEO Andrew Gould used 8% in a corporate newsletter last spring–but let’s take it at face value for a moment.
Depletion never sleeps. Consider the enormous implications of a 4.5% decline rate. If you start with 85 million barrels a day in 2007, but lose 4.5% each year, by 2017 you’ve lost 31 mbd. That’s the equivalent of losing the world’s four largest oil producers: Saudi Arabia, Russia, the USA and Iran. By 2030, you’ve lost 55 mbd, or as much as all the non-Opec nations now provide. Remarkably, CERA finds this to be “good news.”
“Some of the gloomy, pessimistic ‘peak oil’ views…result from an assumption of high decline rates,” said Peter Jackson, lead author of the CERA report. “This new analysis provides the basis for more confidence about the future availability of oil.”
To his credit, Wall Street Journal reporter Neil King observed that, “The study strikes a more optimistic tone than do many heavy hitters in the industry.” Tom Petrie, a Merrill Lynch vice president with a distinguished career in energy banking, told King, “However you spin it, a 4.5% decline rate is a very sobering fact. People are running hard to find new sources of oil, and that’s just to keep even. When was the last time we discovered another Iran?”
“One Iran” is what we are now losing to depletion each year, and Ben Bernanke can’t do anything about it. Forget resource nationalism. If Hugo Chavez turned into George Washington tomorrow, we would still have a serious depletion problem on our hands.
Of CERA’s 811 fields, only half have entered their decline; the rest are new fields that are still ramping up or on their maximum production plateau. In other words, what CERA calls its “aggregate global production decline” is an average of new deepwater fields, young pups, mature giants, and sclerotic geriatrics.
When CERA looks just at fields that have passed peak, its results resemble those so often quoted on peak oil web sites. To wit, of 308 Non-OPEC “post-plateau” fields, the average decline is 8%. Of 209 post plateau offshore fields, the average decline rate is 10%; 29 deepwater fields are declining at 18%.
The Rule of 72 tells us that an 18% decline costs you half your output every four years. A decline that steep is like a gunshot wound to the abdomen: you are bleeding out.
But fear not, says CERA. Yes, 23 Norwegian fields are declining at 13%, but the good news is that “four of the seven largest producing countries (China, Mexico, Russia, and Saudi Arabia) are below 10 percent….There is no looming crisis linked to rapid depletion of the global reserves base.” In other words, get a life, you doomers!
As we said, there’s more spin on this report than there is kudzu in Georgia. Although the 811 fields aren’t identified by name, the data set is said to be a “representative sample” including two-thirds of current global production, and about an equal percentage of remaining conventional reserves. CERA found that a “surprising 63% of remaining reserves are associated with fields that are still either in the buildup period or on plateau. (“Plateau” is defined as any production level that is 80% of the maximum production level.) This bears some consideration: is global oil production “younger” than some of us tend to think?
OPEC fields “generally decline at a slower rate than non-OPEC fields, possibly in relation to basic geological differences, the relative size of OPEC fields, their locations, and perhaps production constraints set by the organization,“ says CERA. (Although a 2005 CERA report showed Ghawar in decline, a sidebar in the current study proclaims it to be in fine fettle.)
The CERA study confirmed Matt Simmons’ and others’ view that the old giant fields are critical both to the present and the future. “Because large fields (>300 million barrels of original reserves) represent 86% of the production in the study, their lower decline rate and higher production level through extended decline periods is likely to make a major contribution to overall future liquids production capacity,” says CERA.
Futhermore, an “improved understanding of giant fields’ complexities and reservoir models…has arrested decline and, in many cases, allowed production to increase significantly.” Specific exemplars of this “fountain of youth” phenomenon are not identified, but they would not include Prudhoe Bay. (Actually, CERA’s data set only includes 6 onshore fields in North America, which seems odd since 75% of the world’s wells have been drilled here.)
More worrisome, perhaps, is that we aren’t finding many giants anymore, and that small fields peak quickly and expire at 22 years. Almost all non-OPEC fields would fall into CERA’s small category. This may be why CERA’s website summary of the report contains an illustration showing non-OPEC production peaking in 2012, or thereabouts. After that, all future supply increases must come from OPEC.
But not to worry. CERA concludes its report with a double dose of its patented petroleum Prozac, arguing that its results “reinforce our model showing that liquids capacity could climb to 112 million barrels a day by 2017…”
Betting on depletion is like betting on rust. Your authors here, Udall and Andrews, on behalf of ASPO-USA, are willing to wager CERA $10,000 that petroleum liquids capacity won’t climb to 112 million barrels a day by 2017. That wager, in our view, is a sure thing.
Randy Udall is an energy analyst and writer based in Carbondale (CO). Steve Andrews is a Colorado-based energy consultant. They are two of the five co-founders of ASPO-USA.
17 Jan 2008. Neil King Jr. New Fields may offset oil drop. Wall Street Journal.
summary of article:
Output from the world’s existing oil fields is declining at a rate of about 4.5% annually according to a Cambridge Energy Research Associates study.
They say this supports a rosy view of the future because it means that new projects will make up for the decline.
The study was based on 811 fields from around the world and rejects the peak oil point of view. The conclusion states that there is no impending short-term peak in global oil production.
Oil field depletion rates are important and much debated. The decline rates are being closely watched because the world is heavily dependent on individual fields that have been producing for decades. Some of these huge fields, i.e. North Sea, Alaska, and the Gulf of Mexico, are declining at rates approaching 18% a year.
CERA says that less than half of the fields were in decline and that decline rates overall aren’t accelerating as some insist.
Andrew Gould, the CEO of Schlumberger says it’s more like 8% per year and growing.
Christophe de Margerie, CEO of Total SA, said “many existing oil fields are being depleted at rates that will do them lasting harm”.
Energy banker Matt Simmons says that very few in the industry believe that the global oil-decline rate is below 5% a year.
Thomas Petrie says that “however you spin it, a 4.5% decline rate is a very sobering fact”.
Jan 21 2008 I find it amusing that CERA comes out with a statement that the average oil field decline rate is 4.5%, and that the “megaprojects” will provide us with the added capacity to keep peak at bay for a long time to come. Just in November, both Khebab and Staniford on the Oil Drum came to the same conclusion about decline rates, but from two very different analytical approaches. They also found that decline rates were accelerating, but CERA doesn’t address that. That 41% of CERA’s fields under study were in decline must mean that the average decline rate they found for fields in decline must be much higher than 4.5%, which is disconcerting enough. From my experience in the industry, expecting every megaproject to come onstream at their peak rate in the time they are planned is rather hopeful, but frankly, I think the financial and banking crisis we are just seeing the beginnings of will probably be more effective than the megaprojects to extend supply a few more years.
3 Mar 2008 Oil & Gas Journal.Volume 106 Issue 9 Mar 03, 2008 by Kjell Aleklett
President, ASPO Professor, Uppsala University, Uppsala Hydrocarbon Depletion Study
Group, Uppsala, Sweden
I understand that the Association for the Study of Peak Oil & Gas (ASPO) will not always be invited to speak at CERA Week (Cambridge Energy Research Associates annual conference in Houston), but if I had been invited I could have discussed the CERA 2006 forecast of future oil production (Journal of Petroleum Technology, February 2007).
CERA’s prediction is divided into conventional and unconventional oil, and if we sum the
CERA-predicted crude oil consumption to 2070 we get a number in the region of 2,000
billion bbl, twice as much as has been consumed to date. Production of 70 million b/d in
2070 requires reserves of the order of 500 billion bbl, and current crude oil reserves
are 800 billion bbl. Adding the numbers, 500 billion bbl plus 2,000 billion bbl, less
800 billion bbl, we arrive at a figure of 1,700 billion bbl. This is the amount of oil
that must be found and developed during the next 62 years, or 27 billion bbl/year.
For these figures to work the oil industry needs to get out and start looking for oil
If we just look 3 years ahead to the end of 2010, CERA perceives that crude oil
production is set to be 80.8 million b/d. This is an increase of 8 million b/d when
compared with today’s production. In 2002 ExxonMobil presented a fantastic graph in
their magazine The Lamp. They showed that the decline in existing oil and gas fields was Expected to be 4-6%/year for the next 20 years.
Last year CERA presented a detailed study of the decline in existing oil fields based on
a study of 811 fields, and that gave an average decline rate 4.5%/year. We at Uppsala
Hydrocarbon Depletion Study Group have made a study of decline in giant oil fields using data from 333 fields, representing 60% of global oil production, and CERA’s stated decline for large fields is of the same order as our figure for decline. For argument’s sake, let us use the CERA number for the rest of our discussion.
CERA’s decline rate for 2008, 2009, and 2010 means that the industry needs to fill a gap
of 10 million b/d by the end of 2010. If we then add the increase in production of 8
million b/d that CERA predicts, we find that the world requires new production in the
order of 18 million b/d in just 3 years. Is this really possible?
First we have to turn to Saudi Arabia and Saudi Aramco as they have the largest
reserves. According to a seminar given in Washington in 2004, they have 700 billion bbl
in place, and the cumulative production for Saudi Arabia to date is 119 billion bbl. Out
of the reported 260 billion bbl of reserves they reported in 2004, they labeled 131
billion bbl as developed, and the depletion rate of developed production was 2.7%/year.
A realistic assumption is that the depletion rate should be no higher the 3% in 2010.
The fact that Aramco claims to have 700 billion bbl in ground, have produced 119 billion
bbl, and have 260 billion bbl in reserves gives a recovery factor of 54%.
Saudi Aramco Chief Executive Officer Abdallah Jum’ah was invited to CERA 2008 and said
that new investment is expected to boost the company’s oil production capacity to 12
million b/d by the end of 2009. With a depletion factor of 3%, this means that Aramco
must increase their developed reserves from 131 billion bbl in 2004 to 146 billion bbl
in 2010. In 1998 Aramco added the Shaybah field and 500,000 b/d. Aramco’s promises
amount to new production equal to four Shaybahs and still require compensation for the
decline of other fields.
Adding the new Saudi oil to the expected increase of production in new deepwater
projects of around 4 million b/d plus other new projects providing an additional 2
million b/d, we end up with a figure of 8 million b/d of the 18 million b/d needed. We
still have to find 10 million b/d to fill the gap in the CERA forecast.
If invited I would have covered many other interesting aspects of future oil production,
but now I would just like to agree with the invited speaker John B. Hess, chairman and
chief executive of Hess Corp.:
“Given the long lead times of at least 5-10 years from discovery to production, an oil
crisis is coming and sooner than most people think. Unfortunately, we are behaving in
ways that suggest we do not know there is a serious problem (OGJ Online, Feb. 15,
June 5th, 2008. David Galland. What the Export Land Model Means for Energy Prices By
DECLINE RATE ELM Jeffery Brown model
2008 7% true: aspo newsletter, June 12, 2008:
So far in 2008 net US imports are down by 7.5 percent over 2007.
2012 and so on!
This is an accelerating decline rate! He predicts the 14% of oil we get from Mexico
will completely stop by 2014. Basically, oil prices likely to double every year (hell,
they doubled going from 5% to 7% decline)
So, what’s the investment angle? Paradoxically, the larger energy companies are probably
a bad bet, because they are forced to replace their depleting reserves, which is getting
harder and more expensive to do with each passing day. The good news is that there are
no shortage of high quality energy-related investments available… in coal, heavy oil,
LNG, photovoltaics, natural gas consolidators, “run of river” hydroelectric, uranium and
small to mid-cap oil companies with the potential for significant near-term gains in
reserves or production.
In my interview, I also asked Jeffrey to share his thoughts on the situation globally.
Here’s his response.
“Global production peaked in 2005, and we’re now into the third year of decline. And the
critical point, to keep in mind, is our model and case histories show that the decline
rate accelerates, year by year. Using the Lower 48 in the United States as an example,
you can see the annual declines going 2%, 3%, 5%, 7%, 10%, 15%, 20, on and on. So it’s
an accelerating decline rate.
Underscoring Brown’s concerns;
* On April 15, 2008 the Russians, the world’s second largest oil exporter announced
that their oil production appears to have peaked, with production in the first quarter
of this year declining for the first time in a decade. If they have indeed peaked then,
based on the ELM, the world could lose Russia’s current ~7 million barrels a day in
exports within 6 to 9 years.
* Echoing the baseline premise of the ELM, Herman Franssen, president of
International Energy Associates, projects that Iran, the world’s fifth largest exporter,
may consume an amount equal to their exports by 2015. A prominent oil analyst, the late
Dr. Bakhtiari, estimated that Iran is either at, or near peak.
* Most concerning, this April Saudi Arabia’s King Abdullah announced they were not
going to raise oil production above 12.5 million barrels a day. Commenting on the news,
Tom Petrie, vice president of Merrill Lynch said…
“King Abdullah’s quote speaks to the fast-emerging reality of what I call
‘practical peak oil.’ The Saudis and other exporters are placing a new emphasis on
elongating the petroleum exploitation and depletion cycle. This stems from a growing
awareness of the challenges of conventional resource maturity, as well as rising
resource nationalism. This is likely to result in an earlier occurrence of global peak
oil output than many consumers yet recognize.”
Summing it up, Brown told me that “The reality is that this thing is coming so much
faster and so much harder than even most pessimists were expecting.”
Nov 18, 2008. Matt Simmons. ASPO newsletter
IEA big announcement critique
During 2007, the 20 largest oilfields produced 19.2 mbpd of crude or 27% of global production. On average these fields were found 50 years ago and are still the anchor of supply. Of these fields 4 are at peak; 2 fields are in decline phase 1, meaning they are at plateau (producing more than 85% of peak); 9 are in decline phase 2 ( producing between 85% and 50% of peak); and 5 are in decline phase 3 ( producing less than 50% of peak). As we see below, decline rates accelerate as you move from one decline phase to the next.
110 fields produce 50% of global supply while 70,000 fields produce the remaining 50%.
One of the report’s conclusions is that decline rates increase as the fields get smaller. The study is based on 800 large fields. One question is if the adjustment of decline rates to include the 69,200 fields is aggressive enough or whether on a global basis the real decline rate is larger?
Another important finding is the high level of natural and observed decline. The decline rates referred to match fairly well with what Schlumberger has been known to convey, although they always say they have been told by others. These decline rates are also a far cry from what a certain consultancy firm has reported. The surprising thing is that they have both used the IHS database and come up with starkly contrasting conclusions.
The following is a table of observed decline rates based on size of fields in decline phase 1 and 2.
As we fill up the funnel with ever-more new and small fields to compensate for the decline from the old Giants, we can see how it will accelerate global decline rates.
The global natural decline rate for post-peak fields is 9%. This figure is expected to increase to 10.5% in 2030. Based on the tables above one has to ask oneself if this is being too cautious.
Two other interesting data points in the report: the IEA’s own analysis gives a world-wide natural decline rate growing from 8.7% in 2003 to 9.7% in 2007, in only 4 years. Similar findings were referred to in a Goldman Sachs study, where the natural decline rate for 15 major oil companies rose from 10.6% to 13% in the space of 5 years (2001 to 2006). Given that 2030 is still 22 years off, it looks unlikely that natural decline rates will only grow by 1.5% in this time span.
Supply growth other than crude oil
In addition to 19 mbpd from fields not yet found the IEA relies on global NGL production to rise by almost 9mbpd, or almost 100%. This will require a massive growth in gas production. A large percentage of the gas reserves are also tied to oil in the form of associated gas. If that oil is not produced in larger volumes and at higher gas-to-oil ratios, that NGL will also not materialize. In offshore fields it is often difficult to produce the gas so that gives you more stranded gas. In recent years, the IEA has also shown the same tendency to overstate next year’s production of Opec LNG (in their July forecast for next year). This has become a pattern. The 9mbpd growth is a huge number and a shortfall could be very damaging to global supply.
In the report IEA assumes that oil from tar sands will grow with 4.7 mbpd, GTL (gas to liquids) with 0, 7 mbpd and CTL (Coal to liquids) 0.7 mbpd. The report is also very focused on carbon emissions and climate change. Yet a very material portion of net growth in the period comes from an extraction process which releases huge volumes of CO2, in addition to consuming large volumes of NG as process energy. This gives a very unfavorable net energy ratio, as well as all the other environmental challenges tar sands represent (e.g., water use). To simply assume all these political challenges will be solved in order to expand oil supply seems optimistic.
As to GTL and CTL they are not very significant by 2030 (1.4 mbpd) but clearly represent huge CO2 challenges and net-energy considerations which may stop or slow these efforts.
On page 267 one will find a table showing expected non-Opec conventional production in 2030. The US will only loose 400.000 bpd in production over the next 22 years even though the US lost 800.000 bpd over the last 7 years. Canada will only lose 200.000 bpd and Mexico will only loose 500.000 bpd from 3.5 mbpd in 2007 in spite of Cantarell being in a tail spin. China’s super-giant Daquing is now in decline but still that country will only loose 200.000 bpd. It is of course impossible to claim that “one knows better” than all the experts who have produced this model, but a decline in production of such a small magnitude does look quite optimistic.
As far as OPEC is concerned there must be an assumption of political peace built into the model. Iran has not been able to grow their production for years in spite of all efforts. Now they will grow to 5.4 mbpd by 2030. Obviously Mr. Ahmadinejad or anybody like him will no longer be in office. Iraq will reach 6.4 mbpd and Kuwait 3.3 mbpd in spite of doubtful reserves. Nigeria will grow from 2.3 mbpd to 3.7 mbpd. A deal will apparently have been made with insurgents in the delta. And, most importantly, no other political problems affecting oil production will arise by 2030. Political turmoil is hard to predict, but we must assume something bad will happen which makes these figures less likely.
Saudi Arabia is being assumed to produce 15.7 mbpd although they have never promised to do so. Sadad al Husseini, former head of E&P in Saudi Aramco, has said the Saudis should not produce more than 12 mbpd if they want to avoid damaging their reservoirs. He has also said that Middle East OPEC will never produce more than 25 mbpd. Yet IEA projects that these countries will produce 37.1 mbpd by 2030. There is clearly a downside risk of some magnitude.
This report has been criticized by some of the peak oilers for not being alarmistic enough in its conclusions. In a way that is unfair. You cannot expect the IEA to shout “Fire in the theater!” They lay out the facts in Chapters 10 and 11. There you can see the assumptions being used and you can make up an educated assessment as to whether they are all realistic.
Are all the various data for decline rates indicating that they will accelerate with more than 1.5% in 22 years? They probably will.
Is it realistic to assume that all geopolitical tensions today affecting oil production will be solved and no new conflicts will arise by 2030? Clearly not.
Is it realistic that we will bring on 19 mbpd of production from fields we have not yet found ? Probably not. Is the USGS study realistic? Definitely not.
Is it realistic that non-Opec production will stay more or less flat and all the unconventional will roll in place unopposed in this world of climate change ? Probably not.
In short, the IEA has given us the tools to analyze and draw our own conclusions. Knowing the driving forces behind this report, this is only the beginning of their valuable work. On the shoulders of their report it is up to others, like us, to shout: “Fire in the theater!”