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Fact not theory
"The signals of peak oil have been around for at
least a
decade"
The premise is simple. In
any oil (or gas) accumulation or group of accumulations, however large,
there will come a time, when output can no longer grow, at which time it
will inexorably decline. It is a simple matter of pressure. As a pool of
oil is produced its pressure declines and so production rates drop off.
Of course it is really quite complex with the impact of
pressure support mechanisms into the reservoir, increasing water and gas volumes flowing
with the oil, and the influence of "above-ground factors" such as pipelines, economics and
politics restricting or encouraging flows. But global supply is controlled by
demand if production can easily rise. And global demand is controlled by supply as
it declines. It just does not matter how much oil is left in the ground
if it is impossible to raise output fast enough to make up for decline
elsewhere.
I have been developing ideas in print on the workings of peak oil since
I
began writing reports for Financial Times Energy in 1995. The concept of
peak oil, first mooted by Marion King Hubbert in the USA in 1956 and developed
over the years by other experts, especially Jean Laherrerre and Colin
Campbell in the 1990s, is moving on rapidly as new evidence
materialises.
In particular the history match, that guides future
forecasts, has lengthened, and many countries
(now over 60 of them) are witnessing permanent and irretrievable
declining oil production. The sharp rise in oil prices
since 2003, for the first time in a century unrelated to any artificial
economic or political events (only that of higher demand), confirms peak
oil to be no longer a theory but a fact. Of course the tight supply
situation is leading to both ups and downs in the oil price. Sharp
increases in price lead to erratic falls off in demand, and so the world
becomes over supplied for a period and then under supplied soon after.
The initial effects of
peak oil are upon us. Peak oil has been observed countless times in thousands of
fields, hundreds of sedimentary basins and tens of countries over the
last century and now numerous signals point to an
impending global peak - signals such as the oil price rise,
a lack of investment opportunity forcing oil companies to use excess
cash to buy back shares rather than explore, the move into exceptionally
harsh and difficult areas, and, above all, the increased nationalism of
most of the exporting countries.
Wishful thinking
"Company officials kid themselves that the
problem will go away. Most expect to retire (or die) before they become
accountable"
There are still many people in government and in oil
companies - especially some economists (and geologists who should know better)
-
who prefer not to accept the evidence of statistics but instead rely on
the argument that man has always adapted in the past and so will do so
in the future. That is one argument that appears to make sense but
unfortunately most economists refuse to consider or
understand the data, preferring to believe the biased words of
politicians and company officials, with their vested interests and their
own lack of insight. A decade ago peak oil was dismissed
by these people as nonsense even though the evidence was mounting, but
now they are forced to think of different ways to explain it and
different names to define it.
Truly believing
their own wishful thinking (or maybe not wishing to admit they were
wrong), they jump on anything that points to
economic and political causes for shortage of supply - shortages that could
perhaps be overcome through investment and wealth creation. In 2005
project delays were blamed for tight supply; as if project delays were
invented in that year. In 2006 it was claimed that refinery shortages
were causing the high price. But in a free market refinery shortages
should reduce the price of crude oil, whilst increasing the price of
gasoline. Later that year traders were criticised for speculating
(hardly something new). But speculation is a result of tight supply, not
a cause.
In late 2006 the blame was laid firmly on nationalism by
some of the exporting countries - particularly Saudi Arabia, Russia,
Venezuela and Iran. But when were foreign companies allowed to exploit
these countries as much as they liked? Certainly not in the last 30
years. And even if they could would it really make much of a difference?
Countries of the Former Soviet Union are seeing more foreign investment
than ever. All these exporters have very mature industries and the
national oil company in each country is no less capable of acquiring the
services to find and develop oil as the international oil companies.
Investments may be restricted, as for example in Mexico, but throwing
money at a region rarely achieves anything rapidly, as was proved in the
early 1980s when success rates plummeted whilst well numbers increased.
When China opened up its offshore waters to foreign companies in the mid
1980s it took 20 years for significant successes to be realised, and, in
fact, it is CNOOC that is now making the most significant finds in an
area largely dismissed by foreign investors at the time.
In 2007 the arguments became one conflated slogan with the words "above-ground
factors" touted at conferences everywhere. A shortage of
workers, OPEC's refusal to allow western companies to explore,
increased nationalism, hurricanes and earthquakes and the platitude that
"all the easy oil is gone" were blamed. But the biggest blame was put at China's
door where "excessive demand growth" was upsetting the market; a market
ignorant of the fact that global oil demand growth in the 1960s was
double that of today.
In truth it is immaterial whether "above-ground"
or "below-ground" factors are causing the current supply squeeze. The
root cause is geology, geology that could handle spiralling growth in
the 1960s, but cannot do so now. Geology, i.e. shortage of productive
reservoirs compared to those of the past, will drive the impending flattening
off, peaking and then decline of oil production.
If demand is
such that supply cannot meet it, then prices will go up. Since 1900 prices
have gone up because supply was restricted artificially, but today the world is
producing all the oil it wants as fast as it can. There are plenty of
resources left - probably well over half what has been produced (it is
here I differ from "classic peak oil theorists") but global resources
are not really in question. Peak oil concerns supply not resources and
supply is becoming constrained because the free-flowing reservoirs of
the past are being steadily replaced by turgid reservoirs of the future.
What about technology?
"In reality new technology depletes fields faster
than ever"
New technology helps companies find and produce more oil
and gas in traditional areas. It also allows the development and production
of oil and gas in previously unreachable areas and lowers the cost of
finding, developing and producing in both traditional and new areas. The
first two raise reserves whilst the third, in a free market, reduces
price.
Engineering advances in deep
water drilling and facilities, along with new ways to develop high
pressure/high temperature fields have increased available reserves
however yet-to-find resource estimates should always include all
potential areas in the world that could possibly yield oil and/or gas in
the future.
Assuming that no major new provinces have been
overlooked, technology will turn yet-to-find resources into remaining
reserves and remaining reserves into cumulative production at a faster
rate. New techniques to increase recovery, called enhanced oil recovery
(EOR), are also potential sources of extra volumes of oil. However most
old giant fields with strong natural water drives have high recovery
factors and will not respond to specialised EOR beyond additional water
flooding and gas injection.
The fundamental fact however is that forecast production
profiles and estimated remaining
reserves and yet-to-find resources have always included steady
technological advancement as well as potential recovery increases in existing
and yet-to-find fields. Since the advent of rotary drilling and the
invention of seismic exploration methods technology has progressed but
never leaped. Technology has always been new and all it can hope to do
is maintain the status quo. A brand new method of exploration or
production is highly unlikely.
Energy shock
"The world faces an energy shock that will not end in
our life time. The alternatives to liquid fuels are
expensive, have their own problems, and are of insufficient volume.
There are no abundant alternatives on the horizon"
There have been many so-called energy shocks in the past.
The ones best remembered were long ago in the 1970s when the Middle East
became central to the industry and US output had first begun to decline.
But numerous
times before that prices rose due to dire world events and lack of
supply. All could have been avoided with diplomacy and understanding but
human nature, being what it is, prefers conflict and challenge.
However when prices first rose to near $100 dollars in 2007 it was described as
the world's first demand-led energy shock by Lawrence Goldstein, an
economist at the Energy Policy Research Foundation of Washington. His
comments demonstrated how little many know of the history of the oil industry and
how important it is to properly understand the ebbs and flows of the
market. Demand has increased rapidly as China and India suck in oil but
globally demand growth has been nowhere near the levels seen over many years
after the second world war.
Conversely this period actually represents the world's first
geology-led energy shock since the invention of rotary drilling. Supply is unable to meet
average demand growth under a generally stable global political
environment, barring Iraq. Other energy shocks were supply-led but artificially through output restriction;
this one is supply-led through lack of opportunity.
There are opportunities though. For example the oil sands of Alberta in Canada are huge in volume.
However,
after 30 years of investment, they still offer only around 2% of global
oil supply. The oil
is either mined or thinned by steam in wells, but both are slow,
expensive, and dirty processes. Furthermore they require considerable
amounts of energy to achieve. The oil sands (and oil shales) of the
world represent a huge resource but not a huge production capacity.
It has been proposed by people, who should certainly Know
better, that a plateau, rather than decline, will be the actual outcome.
This is another attempt to avoid the real truth since a plateau is particularly absurd. There is nothing
special about a plateau - it is a single case within a range of cases from
vertical growth to vertical decline. Empirically there has never been a
plateau except where output is deliberately controlled to preserve
reservoir pressure or because pipeline capacity is limited to a maximum
rate.
To propose a global plateau is wishful thinking in its extreme. In a global distribution
a peak is statistically robust even if
the rise and fall are drawn out and bumpy along the way. A plateau has
no comparison in the natural world except to the extent that human
beings are natural and drive natural events. A plateau would only arise
from a global consensus on peak oil and concerted instigation of
policies to create it. Can you see this happening? As night follows day decline will follow growth. The rich will no
longer be the ones who have the most, but the ones who need the
least.
© 2007 Dr Michael R.
Smith
(all quotes from this article should be
cited: "Dr Michael R.
Smith, Chief Executive of Energyfiles, the oil and gas forecasting
company")
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