Monday, September 28, 2009

Let's Get Real

There has been happy talk about oil recently. So much happy talk that I wondered when reality would strike. The combination of BP's Tiber well and the ongoing development of Brazil's Tupi field have been used to suggest that all this talk of Peak Oil is really a modern day tale of Chicken Little. In this case, the falling sky is falling oil production. Even the New York Times recently published an article trumpeting the ongoing discoveries of new oil this year. Peak Oilers know that oil will continue to be discovered, but the volumes discovered will not close the gap of declining production in existing fields, and the costs to produce that oil will rise with the resulting impact on our oil based economy. The foregoing is not enough for some folks, who I think may have stuck their fingers in their ears while singing "la, la, la." It's hard to reach folks who don't want to face the facts, especially when you are not an expert, just a well read amateur who understands the risk we face. Fortunately, there are professionals willing to speak up and be counted.

The Energy Bulletin has posted an interview with Sadad al Husseini, the retired head of exploration and production for Saudi Aramco, the Saudi national oil company. In 2005 Mr. Husseini forecast peak oil occurring in 2015, followed by a long plateau past 2020. The plateau would be supported by higher oil prices. In the current article Husseini paints a far more realistic picture around the happy talk I mentioned earlier.

Regarding current supply and new capacity coming online:
The bottom line is that there are not enough projects. There is not enough new capacity coming on line, within say the next five to six years, to make up for global declines. And that’s assuming a very moderate level of declines—6% to 6.5% for non-OPEC, perhaps a 3.5% to 4% decline rate for OPEC.

Even at these modest decline rates, we are basically going to see a shortage of capacity within two to three years. We’re being lulled by this current excess capacity, which has more to do with lower demand than anything to do with supply. So we do have a problem in the near term. In the longer term it’s even worse because in the longer term the lead time to discover, develop and put on line production runs into 10 years.

Regarding production costs (and these are eye-popping numbers IMHO):
If you look at the conventional oil projects, which I have, and plot the cumulative capacity against cumulative cost, what you come up with is $30,000 to $32,000 per barrel of capacity for conventional oil. That’s for projects coming on-stream between 2008 and 2015. If you look at the unconventional—that’s the Canadian extra-heavy, and I included two Qatari gas-to-liquids projects—the cost per barrel of capacity is $92,000 per barrel. It’s three times the cost of conventional oil. That means that if you want 100,000 barrels of unconventional oil (syncrude), you’ve got to invest $9 billion. And those are just at current costs. For the conventional oil, when you can find it, it’s $3 billion per 100,000 barrels/day. But even the conventional has gotten very expensive. If you look at the Tengiz and the Kashagans, they’re running $40 billion to $50 billion to get 500,000 to 600,000 barrels of oil/day. So everything is getting far more expensive and slower to develop.

Regarding new discoveries:
There has been a regular number of discoveries in the last, say, five to ten years, in terms of major fields and even giant fields, in the ultra-deep-water in the Gulf of Mexico, for example. But these are very tight formations and very expensive. When you drill a well that costs you $80 million to $90 million, that one well doesn’t tell you what the reserves are so you have to go drill four or five additional wells to delineate the accumulation. And then you have to look at how you are going to stimulate and fracture what is basically source rock at that depth. These become very expensive accumulations to develop.


So there are a lot of challenges that come with these fields that need technology breakthroughs in their own rights. So yes, we have had discoveries, they are important, they are slow to evolve. If the Tupi discovery, which happened a couple of years ago, is going to take until 2017 or 2018 to be online,that’s a long time to wait. What’s the target? A million barrels a day. Declines will have overcome that rate a long time earlier, certainly in Brazil itself. So we’re basically staying even.

Regarding the denial that manifests:
There is a push-back to the notion that there is a plateau in world oil supplies which is largely based on lack of information or lack of research. In fact, if you look at published information—for example, British Petroleum’s annual statistical report—it very clearly shows that from 2003 forward, oil production has hardly increased. So the information is there. If you look at some of the advertising that Chevron has been putting out for years now, they clearly say we’re half-way through the world’s reserves. The information is there. The facts are there. Oil prices did not jump four-fold over a three- or four-year period for any reason other than a shortage of supply. Yes, there may have been some recent volatility in 2008, but the price trend started climbing way back in 2002-2003.

His bottom line is that future production, at best, will not exceed current levels. We will be staying even. But the costs of that production will increase, especially given the geographic and technical issues associated with the new finds. No oil company is going to spend a lot of money on projects that won't be profitable. Slim profits are better than no profits. Pump prices will have to rise or we won't be seeing that resource. Yes, we have a lot of oil in the pipeline now, but tomorrow is another day.

It may be that some readers of this blog will keep their fingers in their ears, and sing "la, la, la" louder than ever. The year 2020 is not that far away when you think about it. I wonder what tune they will be singing then.

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