61: On the likelihood of peak oil

01-06-2007

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Energy Bulletin

This is the fifth time that the world is said to be running out of oil. Each time ... technology and the opening of new frontier areas has banished the specter of decline. There is no reason to think that technology is finished this time. — Daniel Yergin

Prophesy is a good line of business, but it is full of risks. — Mark Twain

No one can predict the future. The best we can do is to amass lines of evidence that point toward plausible scenarios. Cambridge Energy Research Associates (CERA) claims that the oil supply will continue to grow as it has in the past. Those studying the peak oil hypothesis, so-called peakists, are not so confident that the future will resemble the past. Peakists believe that CERA is ignoring the warning signs of peak oil. Can we gauge the likelihood of a near term peak in the oil supply?

A 1997 Battelle study for the U.S. Department of Energy, Foresighting Around the World, by Marina Skumanich and Michelle Silbernagel, explains why humankind's age-old struggle to predict the future is doomed to failure.

Foresighting is the effort to assess future conditions based on current conditions and trends... Although popular perception is that the future will become more predictable as foresighting methods improve, experts involved in futures studies and foresighting have developed a perspective of the future as inherently "contingent;" i.e., not able to be directly determined by current conditions regardless of how much more detailed and rigorous any foresighting method becomes.

Trend extrapolation is the simplest form of foresighting. This method is based on an assumption that patterns in the past will continue into the future. To perform this method, information is collected about a variable over time, and then extrapolated to some point in the future....

This method has two major weaknesses. First, it is often a fallacy to assume that the future will follow the pattern of the past. While people often make such assumptions due to a lack of better information, any picture of the future that is developed on this basis can be inaccurate. The second weakness of this method is that it typically provides information on only a single variable. Especially in current world conditions, it is rare for any variable to act independently. More often, the influence of outside forces can dramatically alter the future of any one event or condition.

Extrapolation of a single variable, the oil supply, is subject to large uncertainties. This is true regardless of the method used, e.g. applying the first derivative of Verhulst's logistic function to model oil production rates over time.

The peak oil scenario's plausibility depends on an analysis of constraints limiting the conversion rate of oil reserves or resources into usable flows. In its usual usage, the phrase "peak oil" refers to the hypothesis of a near term (by 2015) peak or plateau in the available oil supply — a maximum production rate. CERA asserts that "there is no evidence that a peak will occur in the next 10 to 15 years." Their futurology predicts an undulating plateau of oil production sometime after 2030 (graphic, left). An eventual peak or plateau in conventional oil production is not in dispute. Only the time frames under consideration are incompatible.

A fallacy dogs those studying the peak oil question. It is commonly believed that these analysts are making dire "end of the world" predictions about the future. While some are drawn to Mark Twain's risky enterprise, many of those studying the problem, including a number of oil & gas industry veterans, spend their time examining worrisome evidence that tends to support a near term peak scenario. The plausibility of their case rises or falls on this evidence and its interpretation.

Oil production rates are a function of these six interacting factors.

1. volumetric estimates of discovered reserves, and undiscovered or unconventional resources
2. the geology of these reserves and resources (reservoir characteristics, aging)
3. required investment for upstream oil exploration and production (E&P)
4. technology available for commercial exploitation of reserves and resources (recovery rates)
5. geopolitical disruptions to E&P emanating from policy or conflict (e.g. Nigeria, Iraq, Venezuela)
6. demand for oil

There is evidence arguing for a plausible peak oil scenario in each area. Despite what CERA says for public consumption, they agree that demand is unrelenting (#6), geological declines are happening (#2), and aboveground risks (#3, #5) may adversely affect the oil supply. The disagreements pertain to aspects of volumetric reserve and resource estimates (#1) and whether technology can come to the rescue fast enough to increase production (#4) in the required 2015 time frame.

Note — future columns will deal with all the factors affecting production rates. Only volumetric estimates (#1) and demand (#6) will be discussed here. Unconventional resource plays (e.g. Orinoco extra-heavy oil or the Canadian tar sands) are not discussed here.

CERA's main argument that there is no imminent peak in production rests on what is termed reserves growth, and uses data compiled by IHS Energy, their parent company. The discoveries curve (graphic, left) is from Perspective on Oil Resource Estimates (PORE), a presentation made by Ken Chew and Pete Stark of IHS Energy at the AAPG Hedberg Conference in November, 2006. The figure shows that since 1986, more liquids (conventional oil, condensates and natural gas liquids) were produced to meet demand than were replaced by new discoveries. Most reserves were found prior to 1980, and the peak of discoveries took place in the mid-1960's.

Reserves growth, also called field upgrades, refers to additions to existing producing fields, and is due to four factors (PORE, slide #17): 1) new pool discoveries; 2) improved oil recovery (IOR) technology that raises recovery factors; 3) higher commodity (oil) prices that spur investment in IOR or infill drilling; 4) field micromanagement, e.g. computerized downhole data acquisition. In 2005, CERA's Peter Jackson and Robert Esser testified before the House Energy and Air Quality subcommittee, saying that "from 1995 to 2003 global production of 236 billion barrels (bbo) was more than compensated by exploration success and field upgrades that collectively added 144 billion barrels and up to 175 billion barrels, respectively."

CERA's testimony was based on IHS Energy's Report on 10-year Petroleum Trends: 1994-2003. This document indicates that the 175 bbo backdated reserves addition was a proved-plus-probable (P50) rough estimate of pre-1995 reserves as assessed at the end of 2003. This represented a 133% liquids replacement during the period, so the world was "discovering" more oil than it was consuming between 1995 and 2003.

CERA claims that failure to take reserves growth into account is the fatal flaw in the peak oil argument (setting aside unconventional resources). Is it all over for the peakists? Judge for yourself. The future can not be determined from past trends or current conditions, but consider the world's position regarding oil reserves and demand, taking IHS Energy's data at face value.

1. At no time in the past has the world had to produce so much oil to meet demand. The EIA supply data indicate that the world produced 81.59 million barrels per day (b/d) of oil in February, 2007. The 2006 EIA average daily demand was 81.34 million barrels. This works out to 29.69 billion barrels produced in 2006.
   
2. World demand consumed the entire pre-1995 reserves growth addition of 175 bbo cited by CERA in the six year period 2000 — 2005.
   
3. IHS Energy data (PORE, #20) indicates that oil consumed in 2005 exceeded all newly compiled pre-2005 additions from reserves growth or new discoveries. Liquids replacement stood at 71%. In other words, the world actually did consume more than it "found" in 2005.
   
   
4. According to IHS Energy's low estimate, global oil depletion stood at 46.3% on January 1, 2006 (PORE, #14). Total discovered reserves were 2.328 trillion barrels. Cumulative production stood at 1.077 trillion barrels. Adding in 2006, and assuming that 2006 reserves additions were similar to those in 2005, depletion stood at 47.2% at the beginning of 2007. Reserves growth data for 2006 is not available.
   
5. The world is more thoroughly explored with each passing year. Production is shifting to ever deeper water on the outer continental shelves as these are opened up by technological advances. The final frontier, the Arctic, is now under appraisal (discounting Antarctica). Reserves growth in existing oil fields is subject to diminishing returns. Once an older field has been reappraised, further efforts are unlikely to find much more recoverable oil there.
   
6. New discovery field sizes are smaller, on average, than those found in the past. New pools in existing fields are usually smaller than the original discovery. The largest oil volumes are almost always found first, as reflected in the discoveries trend (graph above). Smaller fields, if they are commercial, support lower production rates and deplete faster than giant fields. The world's super giant fields, which were discovered decades ago, are now in decline.
   
7. Using an inferred decline rate of 4% — CERA uses 5% — it will be necessary to replace 25 million b/d of liquids in 2015 just to breakeven. (Unfortunately, this observation extrapolates present declines!) Assuming that unconventional resources will provide 5 million b/d by 2015, the shortfall will be 20 million b/d.
   
8. Reserves data is unreliable. No one knows how the Persian Gulf nations, where most of the remaining conventional oil is, calculate their reserves numbers. These numbers always stay flat, or rise (Kuwait, PORE #11, 12), without subtracting produced oil. IHS Energy notes (PORE, #9) that in the country reserves estimates published by Oil & Gas Journal in December, 2005, 67 estimates were unchanged from previous year, 39 estimates were unchanged for 5 years, 27 estimates were unchanged for 10 years, and 17 estimates were unchanged for 15 years.
   
9. Production of reserves additions usually begins when primary production in an oil field, driven by natural reservoir pressure, is faltering. This often signals the peak or high plateau of the field's production. At this point, IOC (infill, horizontal drilling) or enhanced oil recovery (EOR) techniques (gas injection) are used to partially offset production declines. A higher recovery factor does not imply a boost in production rates. At a country level, the U.S. had 72 bbo of reserves growth during the period 1973 — 2005, and all of these reserves were produced. However, the U.S. production rate never again matched its 1970 peak.
   
10. According the EIA data, the liquids (as defined above) supply (demand) expanded from 72.241 million b/d at end 1996 to 81.335 million b/d in 2006, a rise of about 11% in 10 years. The year-on-year growth rate averaged 1% and in three of the years (1999, 2001, 2002), production declined. 2006 growth over 2005 was only 0.3%, despite renewed investment in oil E&P after the slowdown in the 1990's and much higher oil prices. Looking at conventional oil and condensates only, global production fell by 266 thousand b/d in 2006 against the 2005 level.

It is not possible to discuss the future without making reference to the present and past. If demand continues to rise, if reserves growth does not imply greater production rates, if reserves estimates are invalid, if declines rates remain constant, etc. The future is unpredictable. A severe global recession could ensue, causing oil demand to crash. Almost anything could happen, but not all events are equally probable. Although we must examine the likelihood of future scenarios based on current knowledge and past trends, it is not valid to extrapolate past growth of the conventional oil supply into the future as CERA does. Daniel Yergin's "fifth time" statements, based on his fine history The Prize, are prophecy. CERA's gospel is sanctioned by his status as an "expert" authority on the future oil supply.

The observations made here do not permit the inference that peak oil will certainly arrive by 2015. The evidence does allow for a plausible scenario under which the oil supply may shrink or plateau in the near term, and never rise above that level ever again. CERA's assertion that "there is no evidence that a peak will occur in the next 10 to 15 years" does not hold water. Concerning the future, it is helpful to remember that —

           Some things are so unexpected that no one is prepared for them — Leo Rosten

Well, virtually no one.

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ASPO-USA is a nonpartisan, proactive effort to encourage prudent energy management, constructive community transformation, and cooperative initiatives during an era of depleting petroleum resources. ASPO-USA will hold its 2007 World Oil Conference, October 17-20, at the Hilton Americas in downtown Houston, Texas.

~~~~~~~~~~~~~~~ Editorial Notes ~~~~~~~~~~~~~~~~~~~

Related article on energy predictions from economist John Kay at Financial Times: Energy wisdom is knowing that you do not know (also at EB.)

Contributor Steve Andrews (co-founder of ASPO-USA) writes:
This is latest in a series of columns, beginning in early April, that Dave Cohen has written for and posted on the ASPO-USA website.

UPDATE (June 1):
Corrected point number 9 to read:

A higher recovery factor does not imply a boost in production rates.

(added the "not").
-BA

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