Interview of Richard G. Miller by Steve Andrews in Peak Oil Review. Feb 2014.
Q: You refer to the widely used phrase—“it’s not so much the size of the tank as it is the size of the tap.” Care to comment on what the bottom line message is there?
Miller: Nobody should be misled by discussion of the size of global reserves. What matters is the speed at which you can get them out, and that speed is limited by physics and engineering and money. Very basic stuff. If you really really wanted to get the existing reserves out faster, it would cost too much to buy. So there is a rational size to the tap that you can have.
Q: You were quoted as saying we can’t grow the supply at the average rate of 1.5% per year at today’s prices.
Miller: To grow by 1.5% per year, I don’t think it would be long before you got up into the $180 range. And that’s a price that breaks economies.
Dr. Richard G. Miller, trained as a geologist, joined BP as a geochemist in 1985. He studied peak oil matters since 1991, when BP asked him the following year to devise a wholly new way to estimate global oil resources. In 2000, he was tasked with creating an in-house projection of global future oil demand and supply to 2030. The model he created was updated annually through 2008; then the effort was disbanded and he moved on to his present work consulting on peak oil. Most recently, Dr. Miller co-authored The Future of Oil Supply, which was published by The Royal Society (on-line December 2, 2013), in a thematic issue of Philosophical Transactions entirely devoted to future world oil supply; he also served as co-editor of that 12-article publication.
Jan 9, 2008 AN INTERVIEW WITH MATTHEW SIMMONS – The Casey Files – http://www.financialsense.com/editorials/casey/2008/0109.html
the IEA mid-term report claimed that oil demand will outstrip production causing a supply crunch starting in 2010 that will worsen until 2012.
We know that flow rates are what we measure to understand whether we’re at peak or not. In M. King Hubbert’s work, peak oil is calculated using the total resource base, but your point is that we may still have oil that we’re just not able to produce in an economic way.
MS : If it’s in the ground and you can barely get it out, it’s as irrelevant as me looking out over Penobscot Bay and saying “There’s a vast amount of hydrates about a thousand miles from here, a thousand feet underwater.” Well, so what? That’s not useful energy.
BC: If it takes more energy to dig up that last barrel of oil than it produces, then there’s no sense in trying.
MS: And another important concept is that if you’re lucky enough to find a highly pressurized field and it turns out to be condensate, which is sometimes called natural motor gasoline, you can literally bypass the refinery – because it’s been baked in the ground – and put it right in your car. It doesn’t run perfectly, but it runs.
With the heavy oil out of Canada, you have to expend energy to make it ooze out of the ground, and once it’s oozed out of the ground, you still have totally unusable oil.
You still have to go through a fairly hefty process of upgrading, and then finally diluting it with high-quality oil before it can flow. So one is total junk oil, and the other is the Rolls Royce of petroleum.
BC: The world needs to understand that we’ve been using up the Rolls Royces first because they’re more available. The harder-to-find and harder-to-refine stuff is what’s left. I think that’s misunderstood.
MS: Oh, it’s totally misunderstood. Sour, heavy oil is really not worth very much.
BC: We’re probably in more serious a situation than most people would realize, and it’s no better with natural gas. Switching gears for a moment, do you think the rise of LNG will be enough to keep up with declines in natural gas discovery and subsequently in natural gas production?
MS: Well, first of all, the problem with LNG is that if we try to develop a spot market out of LNG, the odds of it ending in bankruptcy are about 90%.
BC: Who goes bankrupt?
MS: All the players. The cost to produce and distribute LNG is so high that to make LNG work in any sort of financial reality, you would need a 25- or 30-year guaranteed supply. And then you can amortize it over 25 or 30 years. If you’re going on a spot supply, you’ve got to write it off over 10 years and then you’ll need $40 per million BTU to make the economics work. The other thing is that about 35% of the hydrocarbon value gets chewed up in the process of cryogenically freezing natural gas, transporting it, and then re-gassing it.
BC: In your opinion then, LNG is not an economically viable solution. We won’t do it.
MS: We shouldn’t do it. But it turns out that high-quality natural gas – sweet, high-quality natural gas – is just like sweet oil. It’s basically in decline.
BC: And therefore also harder to find, despite our original hope of about a decade ago. Clean energy was going to fix everything through natural gas for electricity and everything else.
MS: Yes, and using natural gas for electricity turned out to be an unbelievably stupid decision. Using electricity for heat was equally stupid. Natural gas should be refined to one use and one use only, and that’s creating instantaneous and high-efficiency heat.
BC: In one of your presentations, you have a very memorable clip of a ration book from World War II. Are we headed towards rationing and if so, between here and there, what are your estimates on what the price of energy might do, especially if we’re hit by any ugly political events?
MS: I try to stay agnostic about political events because they’re unpredictable. If you took a blackboard and filled it up with every political event that could impact the supply of energy, not a single one of them is positive. All political events are just unforeseen black swans.
MS: Our firm has daily recommendations, and I basically stay totally out of that. I tend to buy a stock and then hold it for five or ten years, unless I think that I’ve made a mistake. And I tend to think more about which sectors to avoid or be interested in to look at.
One of the things that really amazes me about the stock market and their love/hate relationship with energy is that of the current weighting of institutional investors in the market, the S&P weighting of energy is about 9%. Institutional ownership comprises about half of that. What’s interesting is that about two-thirds of the ownership is in the major oil companies, which is the one group that I would avoid like the plague. So the market is invested in the wrong area – the major oil companies.
BC: They haven’t been able to keep up their reserves.
MS: Yeah, and they can’t. Their decline rates are so high and they operate such old, mature basins that they can’t drill enough wells, and they don’t have places to drill wells, and they don’t have a sustainable strategy. So, in that respect, the oil service companies are the savior of all the problems.
MS: The service industry is Schlumberger (NYSE: SLB ), Baker Hughes (NYSE: BHI ), Transocean (NYSE: RIG ) and others. There’s about 150 of them and, like in any sector, some of them are very poorly run companies, and some of them are outstandingly well run. What I really think is going to be the most active area is West Africa, or Libya, or that region. You can sort of name your scenario, and then you can pick the handful of service companies to give you good exposure.
In the E & P business, you get companies like Chesapeake (NYSE: CHK ), for instance, who have an unbelievably high talent, quality senior management, and they basically figured out a decade ago that the only way you grow production is by monopolizing drilling rigs and drilling like crazy. And so they’ve had double-digit production growth in their natural gas while almost every one of their peer group is in decline. I guess that’s one thing that I would observe in forty years of energy investment banking is that management matters.
Here’s another article on FLOW
Published on 10 Jan 2008 by Energy Bulletin. Archived on 20 Jan 2008.
Peak oil: Why is it so difficult to explain/understand?
by Martin Payne
OK, here is the key take-away:
Due to the physics of the flow of oil through rock, a field’s (or a country’s, or the world’s) maximum oil production RATE is not arbitrary but is dependent on the RESERVES:
SIZE (how big is the field in terms of area and thickness?) AGE (is the field newly discovered/produced, or is has it been producing for 40 years?) QUALITY (how well does the oil flow through the rock?) Examples:
All of the world’s largest oil fields – Ghawar, Cantarell, Burgan and Daquing – have excellent SIZE and excellent QUALITY … but their AGE is old! Hence, all of these (except possibly Ghawar) are in decline (their RATE is declining each day). The Athabasca tar sands, on the other hand, have excellent SIZE, they are essentially “new” in AGE (relatively little compared to the RESERVES has been produced so far), but they have the very poorest QUALITY – the oil is so thick it won’t flow and must be melted with heat, dissolved with solvents or mined. Most who take the “no Peak Oil” (or no Peak Oil until 2030 and then an “undulating plateau”) side of the debate speak of RESERVES. They don’t often address the difficult topic of trying to explain where the RATE will come from.
Recently this author attended a trade conference concerning “unconventional resources”. “Unconventional resources” is another way of saying “difficult to produce at a high rate, but prevalent in a given area”. For the most part, it’s what we’re left with, especially in the United States . So, a representative from IHS (who owns CERA) gave a talk and presented, among other things, maps showing trillions of barrels – worldwide – of bitumen, tar sands and heavy oil. Afterwards he smugly said, “WELL, I guess there are no supporters of PEAK OIL in this room!
With respect to oil production RATE (which is what Peak Oil is all about), he may as well have been showing a map of coal resources.
What he didn’t explain was the fact that Canada , despite having huge tar sands RESERVES of 188 billion barrels (or call it a trillion barrels, it really doesn’t matter), is currently producing oil from those tar sands at a RATE of about 1.1 million barrels per day. And this after a Herculean effort and tens of billions of dollars invested!
The Canadian tar sands producers have a roadmap for increasing the production RATE from those huge RESERVES to a total of … 3 million barrels per day, by 2015! That’s an increase of only another 1.9 million barrels per day, but over 7 years, and with additional tens of billions of dollars injected!
So, that huge amount of RESERVES is limited in RATE because it is of the poorest QUALITY.
To put this in perspective and show why it is important – why Peak Oil is important – take a look at the second largest field in the world, Cantarell, in Mexico . In early 2006, PEMEX announced that Cantarell Field was about to go into decline, for the first time ever. In fact, they projected that this field that produced 2 million barrels per day of Mexico ’s total 3.4 million barrels per day (end of 2005) would be down to between 1.5 and 0.5 million barrels per day by the end of 2008! Now, at the end of 2007, it is already down to 1.3 – 1.5 million barrel per day! So, if it finishes 2008 at 800,000 barrels per day, that is a loss of 1.2 million barrels per day, over just 2 years.
Compare this with the Canadian tar sands production increase of only 1.9 million barrels per day over 7 years – after a huge incremental effort. Factor in the depletion going on in most every field around the world – and you have an idea of the problem at hand, and a better understanding of Peak Oil. Among other things, huge RESERVES of poor QUALITY oil are not going to be able to provide the RATE of production necessary to stem the declines from the giant high QUALITY fields that are now old in AGE, much less continue to increase our total RATE.
In summary, Peak Oil is about RATE. And RATE is dependent on the SIZE, AGE and QUALITY of the RESERVES.