October 31, 2007
“Oil and Money” discusses the limits to oil production
Peak oil - the prospect that global oil production is close to or even past its peak - turned out to be the dominant theme of the first day of the 2007 Oil & Money conference in London. With prices close to $90 a barrel - even though they fell sharply on Tuesday - the threat of oil shortages seems much more pressing than it did a year ago.
Plenty of speakers showed versions of a chart showing investment into upstream projects - finding and producing oil - soaring in the past five years, while total output remains almost flat. There was a lot of talk about the battle against the brutal logic of decline rates - the rate at which production declines from mature fields - and how today’s oil finds were smaller, more challenging to produce and generally of lower quality than the finds of past decades.
Shokri Ghanem, Libya’s oil minister and chairman of the National Oil Company, observed that he did not expect world oil production to get much higher than 100m barrels a day, plus or minus 5 per cent. That is well up on today’s 85m b/d or so, but a long way short of the 116m b/d that the International Energy Agency expects for 2030.
Mr Ghanem was responding to a question from David Strahan, a writer and TV producer who is the author of "The Last Oil Shock", a well-written exposition of the peak oil case.
On the other side of the argument, representatives of the industry including Andrew Gould of Schlumberger, the world’s biggest oil services company, and Thomas O’Malley, chief executive of Petroplus, who is a US oilman now running Europe’s biggest independent refiner, argued that higher prices would ultimately draw out more supplies.
As Mr O’Malley put it:
"You get $30 crude oil, you’re not going to have enough crude oil. You get $50 crude oil, you’re going to get more crude oil. You get $75 crude oil, I wouldn’t worry so much. And if it’s where it is today… The greatest reserves of oil in the world do not exist in Saudi Arabia, they exist in oil shale deposits in North America. At 90 bucks a barrel, you can recover oil from oil shale, and indeed your great Canadian oil sands projects are moving forward. I believe that the amount of crude oil we have available is a function of the price."
However, another issue was highlighted by Nobuo Tanaka, the head of the IEA, and Matthew Simmons of Simmons and Co, author of the much-debated "Twilight in the Desert", about "the coming Saudi oil shock". They pointed out that, whatever you think about the geology and the existence of the reserves claimed by the optimists (Mr Tanaka believes they are there, Mr Simmons, broadly, does not), the industry has huge problems in getting the oil out of the ground fast enough to meet growing demand, because of shortages of equipment and skilled staff.
However compelling their arguments may be, though, one should be wary of extrapolating ever-higher prices from what does, admittedly, look like a tight balance of supply and demand over the next few years.
When oil broke through $40, in the 1979-81 oil shock, people started saying "next stop $100". As it happened, oil got to $10 long before it hit $100. Now $100 is in sight, people are saying $200 is approaching. To predict that we will see $20 before $200 would be very brave, but it is not at all courageous to suggest we could have a sharp downward move when some of the speculative excitement goes out of the market. Goldman Sachs is thinking about that possibility already.
The oil industry, like many others, has always been through cycles in the past. Investment cycles, created by the lags between the money being committed and the production starting to flow, create a predictable dynamic. The time people start saying: "This time it’s different; this cycle is not going to turn down" is exactly when you should start looking out for that downturn.
FOOTNOTE: In the projections for oil supply and demand, there is often confusion about whether the figures being quoted are simply for conventional crude, or include syncrude from oil sands operations, gas to liquids production, biofuels and so on. Michael Klare at the Nation argues that the shift from talking about "oil" to talking about more broadly defined "liquids" is a "fundamental, near epochal shift in US and indeed world history." (Thanks to the Oil Drum for the pointer.) That seems perverse to me: if the stuff, whatever it is, makes your car go, it does the job you need oil to do. The other considerations of the "unconventional" sources of fuel - cost, carbon dioxide emissions and so on - may be very important, but they are secondary to the question of whether the world can supply all the fuel it needs.
“if the stuff, whatever it is, makes your car go, it does the job you need oil to do”
The problem is, it’s not just stuff we pull out of the ground which gets included, things like ethanol from corn also get added to the tally. You may think this is fair but one litre of ethanol will not make your car go as far as one litre of good old petroleum because there’s less energy in it. In addition, one litre of tar from the tar sands will not produce as much fuel as one litre of clear Brent crude lifted from the North sea.
Posted by: Richard | October 31st, 2007 at 11:34 am | Report this comment“if the stuff, whatever it is, makes your car go, it does the job you need oil to do”
Only an economist could write that.
Any engineer or physicist knows that the energy invested in producing nonconventional or synthetic oil is a very significant fraction of the energy released. In the case of corn ethanol, the energy yield (EROIE) is hardly better than break-even. The corresponding figure for tar sands is not a lot better. This contrasts radically with the EROEI for old-time conventional oil of around 100.
This drastic reduction in energy quality means that the total liquids production figure of 85 million barrels/day that gets bandied about is increasingly meaningless. An awful lot of good oil and gas went into getting that total, and so the actual amount of net energy available corresponds to only about 82 million barrels/day.
Since it is generally agreed that old-time conventional oil production peaked at least a year ago, I find it difficult to understand how anyone can be optimistic about the future of oil production.
Posted by: gernos | October 31st, 2007 at 12:46 pm | Report this commentEd,
Another expert on the oil industry agrees with you, albeit for a different reason. Steve Levine writes on his blog:
I just got back from Houston and managed to get in some private conversations with oilmen I know. The private talk within the industry is that short of an evolutionary shift in business plan the oil majors as we know them are done for.
Levine’s analysis in full: http://oilandglory.com/2007/10/sell-your-oil-shares.html
Posted by: Eric | October 31st, 2007 at 2:31 pm | Report this commentWell, someone is wise about this oil-jump : China and G.M. are partnering in a massive hydrogen fuel cell research center in China,and as many engineers and professionals are pointing out today ( story in Washington Post,October,30,2007) is insulting and High Treason : that G.M. after getting billions of dollars for research (and tax discounts in the USA ) from Defense,Energy,etc.,in Hydrogen Technology in the last 15 years, would , close to the “cake” line, move its final operations to China and let some asians make the final touches in Protocols and Standards, parts,manufacturing,Patenting,design,software systems,distribution and power networks, etc.,so of course, to dilute the absurdity, they insist to the media that they will have total control over the research center in China, so if you believe the chinese will not demand access, i know of a bridge in NYC you can buy for $49.99 , just send your check to the Tooth Fairy or Santa Klaus…
this is another incompetent move that will turn the USA and Europe into puppies of the Oil and Asian Lobby’s, a cascade of mistakes, criminal incompetence, greed and High Treason,ignorance and shortsighted arrogance,to think that the USA and Europe invented batteries,fuel-cells, evacuated tubes,photo-voltaic cells and now most , if not all, of the growth and manufacturing is now in Asia,is insulting and revealing: they will rule while the politicians and bourocrats in DC and Brussels check their custom made shirts , ties , pants and hair styles and reach for the next cocktail , nicotine hit or line, what a criminal shame ! Europe and the USA are about to lose the whole Hydrogen Industry, criminal !….and in the meantime, all the USA and Europe consumers send their money and savings to the Middle East for oil and gas that also finances more terrorism and religious wars, wonderful !
Posted by: blogger | October 31st, 2007 at 5:12 pm | Report this commentGM is just another Benedict Arnold company, acting in the interests of its international shareholders. Not the national interest of a nation state.
Isn’t this the reason why so many companies were, and are, nationalised?
Posted by: Slightly Optimistic | October 31st, 2007 at 10:11 pm | Report this commentGernos:’”if the stuff, whatever it is, makes your car go, it does the job you need oil to do” Only an economist could write that”… Guilty as charged, I admit. But surely you have to admit that you have been selective in picking corn ethanol as your example, because it has one of the worst possible energy yields from unconventional fuels. Brazilian sugar cane ethanol looks a lot better. Cellulosic ethanol, if it can be made to work, would be better too. And although tar sands are bad compared to conventional oil, I still think most people would concede their energy yield is well above break-even. Like I say, these unconventional sources are far from problem-free. But they can probably keep the wheels rolling until we are all in GM’s Chinese hydrogen vehicles.
Posted by: Ed Crooks | October 31st, 2007 at 11:05 pm | Report this commentEric: thanks for the link. For some uncommonly plain speaking from a Big Oil boss about the scale of the problem, see the post below on the views of Christophe de Margerie of Total.
Posted by: Ed Crooks | October 31st, 2007 at 11:11 pm | Report this comment“But they can probably keep the wheels rolling until we are all in GM’s Chinese hydrogen vehicles.”
I would wager large amounts of my own money that hydrogen is not going to be the solution we all think it is. Hydrogen does not occur on its own in nature in any significant quantity, so we would have to make it from other feedstocks, such as water or fossil fuels; is it desirable economically and environmetally to split FFs (inevitably costing energy) to power fuel cell cars which are still prohibitively costly and even if by some miracle they can be made for the same price as a gasoline car (exceedingly unlikely), what exactly is going to compel customers to buy them (especially the fastest growing customer base, in the developing nations like China and India)? not to mention the storage and transportation difficulties of hydrogen. this seems to be a case of merely accepting the “next big technology” at face value, rather than finding out whether it is really practical, and whether a hydrogen-powered future would be any better, economically and environmentally, than the status quo.
Posted by: gavin walsh | November 1st, 2007 at 12:58 am | Report this commentPEAK OIL - AND NOW?
Whatever the answer to the Peak Oil scenario might be, it could be a wise move to bring more efficient technologies into the mass market now. The news aren’t as gloomy as they might appear.
A newly published global oil supply report presented by the Energy Watch Group (EWG) at the Foreign Press Association in London, concluded that world oil production peaked in 2006. Production will start to decline at a rate of several percent per year. By 2020, and even more by 2030, global oil supply will be dramatically lower. This result, together with the timing of the peak, is obviously in sharp contrast to the projections by the IEA. This cautious energy outlook corresponds with statements made by former US Defense Secretary and CIA Director, James Schlesinger, who said at a recent oil summit in Cork: “The battle is over, the oil peakists have won. Current US energy policy and the administration’s oil strategy in Iraq and Iran are deluded.” Remaining world oil reserves are estimated to be 1,255 Gb (Giga barrel) according to the industry database HIS (2006).
For the EWG there are sound reasons to modify these figures for some regions and key countries, leading to a corresponding EWG estimate of 854 Gb. “The oil boom is over and will not return. All of us must get used to a different lifestyle.”, said King Abdullah of Saudi Arabia, the largest global oil producer. This change could influence almost all aspects of daily life. The automotive, aviation or telecommunications industries have demonstrated in the past that they can innovate. Sometimes with breathtaking speed. (Source: www.energywatchgroup.org).
Posted by: Ralph Kappler | November 1st, 2007 at 11:36 am | Report this commentTalking about China is interesting. But what about Russia and its extrem power on Europe through oil distribution ? About an agremment between Russia and Belarus, I read that “Commenting on the agreement, Alexandre Garese, French attorney at law and an expert on Russian commercial law, said that the agreement between Russia and Belarus shows that Russia’s gas giant Gazprom is moving towards global market principles in the energy sector. Garase has also added that the gas transportation agreement between the two countries will strengthen and further boost Russia’s gas supplies to Europe.” (http://bhtimes.blogspot.com/2006/01/belarusian-business-russian-oil-viasna.html).
Posted by: Cedric | November 6th, 2007 at 9:42 am | Report this commentWhat about the western european policies to get more independant from such a supplier (Russia) ?
What should happen if russia decides to “play” with Europe, using that strength ? I don’t believe in (only) ethanol to make my car work … !
Now is five months later. Can anyone comment whether the 100m barrels a day judgement as peaking volume has been followed up by additional statements by experienced people that you should pay particular attention to?
Posted by: Søren Tafdrup | April 8th, 2008 at 5:07 pm | Report this comment