Are We In The Post-Peak Era?

You cannot step twice into the same river, for other waters are continually flowing in
    —Heraclitus

Three weeks ago I wrote that I would defend the position that the world will never produce as much oil as it did in July, 2008—82.946 million barrels per day (crude + condensate + gas liquids, EIA data). If this conjecture is correct, we are in the post-peak era. Today I will examine that proposition. I'll start by re-posting my simple production model again.

1. S(t) = P_E(t)(1 - D_I) + P_N(t) + P_SC(t) where S = available supply over the time interval t (a year), P_E = the existing production base, P_N = new production, P_SC = spare capacity and D_I = the net decline rate

For the term P_SC, we know that OPEC has made very large output cuts and therefore their spare capacity is much larger than it was in July, 2008 when the cartel's production reached its zenith of 37.352 million barrels per day including gas liquids. (All natural gas liquids are usually put on the non-OPEC side the ledger, but I will not follow that convention today.) OPEC is cutting crude production to support the oil price as demand dwindles during the global recession. These cuts have not done the trick so far and will likely fail to move the price much this year without significant non-OPEC support.

Outside of OPEC, there is basically no such thing as spare capacity unless you count some marginal stripper well production that has been taken out of service in the U.S or idle biofuels capacity if you're including liquids like moonshine. If non-OPEC exporters decide voluntarily to cut production to support higher oil prices, that would also count as spare capacity.

Thus the non-OPEC motto is "damn the torpedoes, full speed ahead" despite destructive low oil prices as I discussed two weeks ago. I predict that as non-OPEC exporters continue their self-defeating behavior, those torpedoes will blow them up sooner than they think.

"The industry worked perfectly fine at $40" a barrel as recently as 2004, Tony Hayward, chief executive of British Petroleum, said, and it will do so again once it gets its costs back in line.

Much has changed since 2004. For example, BP's oil & gas output rose for the first time in 3 years in the 4th quarter of 2008, but they posted a net loss of $3.3 billion. Perhaps Tony, who doesn't subscribe to this peak oil nonsense, is taking Prozac to whisk those blues away. There's so much depressing reality to fend off, including the falling oil price that BP is encouraging by pumping all out when there's a glut on the market. Today's price is around $35/barrel.

Excess OPEC spare capacity can be put back into production when demand growth resumes. Nobuo Tanaka, executive director of the IEA believes "world oil demand is unlikely to rebound until 2010, when it may begin rising by about 1 percent a year through 2013." Tanaka's view may be a tad optimistic but it's in the ballpark.

The Outlook for Non-OPEC Liquids

It is outside of OPEC that the most deleterious effects of the global recession will be felt. Figure 1 shows my reference scenario for non-OPEC liquids production out to 2015.

Figure 1 — Forecast for non-OPEC liquids production and the global recession (gray bar). Based on a modification and extension of the EIA's latest data. OPEC gas liquids are not included. The graph displays an accidental but aesthetically pleasing symmetry in which 2000 production is matched in 2015.

Non-OPEC production declines steadily after 2010, reaching its 2000 level in 2015. As usual the EIA forward data for 2009-2010 was too rosy in regards to post-peak OECD countries, so I made some small but significant downward revisions.

Norway expects a 9.7% decline in their North Sea production in 2009. The EIA used a smaller decline rate, so I corrected their numbers for 2009/2010 and beyond. In Mexico the EIA saw production declines slowing from about 9.5%/year in 2008-2009 to 6.5% in 2010. There was no good reason for this revision, so I corrected that too.

In the U.S. the EIA forecast U.S. crude oil production in 2010 to be 503,000 barrels per day over its admittedly low—due to hurricane disruptions—2008 level. No comparable leap in U.S. production has occurred since 1977/1978—you can look at the historical record. To come up with their number, the energy agency estimated that lower 48 production would actually increase a bit. Steady lower 48 production lately is mostly due to the Bakken shale play. Gulf of Mexico (GOM) production compensates for Alaskan declines and makes up by far the bulk of the increase. Once again the EIA has forgotten how to subtract declines in existing GOM fields, so I made some downward revisions (about half the increase, excluding hurricane disruptions).

The EIA's forecast goes out to 2010. Here's what the February, 2009 Short-Term Energy Outlook (STEO) had to say about the uncertainties—

There are downside risks to the outlook for non-OPEC supply, as additional project delays are certainly possible given the financial crisis and the current price environment. Sustained lower oil prices bring into doubt the viability of some high‐cost non‐OPEC projects, especially those utilizing non-conventional technology or those seeking to exploit frontier oil basins. The credit crunch associated with the global economic crisis can also make it difficult to acquire financing for new projects or even to finance the investment required to prevent accelerated declines at producing fields. EIA's forecast reflects an attempt to account for some of these potential delays.

I extended the EIA forecast based on our new economic circumstances for the period 2011-2015. I also incorporated information presented in my previous two columns as well as some other considerations—

• The loss of Canadian oil sands production will be up to a million barrels per day by 2015. This works out to about 140,000 barrels per year averaged over the period 2009-2015. This is discussed in more detail in last week's column.
• Maintenance in aging post-peak fields (e.g. Western Siberia or West Texas) will suffer in the period 2009-2011 during the recession. This will work out to about 50-100,000 barrels per day each year depending on how much investment is withdrawn. A Barclays Capital survey found that U.S. spending is expected to fall 26% in 2009. Less spending means fewer wells drilled.
• The recession guarantees that Russia is now past peak. I did not revise the EIA data because I didn't have to. Output falls 230,000 barrels per day by 2010. I simply extended the decline. Energy minister Sergei Schmatko recently stated his fears of an 8% decline in oil production by 2013. Schmatko is just doing his job by trying to get Putin to ease tax burdens for Russian oil companies, but he's got a point.
• Future generations of fields in the Gulf of Mexico are smaller than the current crop (e.g. Thunder Horse at 250,000 b/d capacity versus Shenzi at 100,000 b/d capacity). Some fields under-perform and delays were common before the economic downturn. The occasional hurricane blows through and shuts-in production. There are no large fields (200,000 barrels and up) scheduled to come on-stream in the forecast period. (The word on the street is that we might see some oil from Jack/St. Malo in the ultra-deepwater Lower Tertiary Gulf of Mexico play sometime around 2015.)
• Many projects that would have come on-stream in the 2011-2015 period will be postponed as the downturn continues and oil prices remain low. Right now I can't point to specific examples outside of OPEC, but you'll begin to see some announcements in the 2nd half of this year. The average industry-wide marginal cost of production (outside the Persia Gulf) is about $62/barrel. The current WTI oil price is around $35 and financing will be hard to come by. Do the math.

The future race pits non-OPEC declines against OPEC capacity additions. July, 2008 was the record month for world oil production. Oil production outside OPEC was 45.712 million barrels per day that month (excluding biofuels and refinery gains). The IEA's recent World Energy Outlook figured the decline rate for non-OPEC oil at 4.7%/year after investment in field maintenance and upgrades. I will use that number here. Last week's column discussed decline rates in post-peak oil fields. Most of these fields are outside of OPEC, where the decline rate is 3.3%/year.

If the July, 2008 output level outside OPEC were maintained over an entire year, the amount of oil production lost due to geological declines comes to 2.148 million barrels per day (45.712 * .953). All that oil must replaced on a yearly basis to maintain a production plateau, let alone increase output.

Due to the factors (Russia, the tar sands, etc.) explained above, it will no longer be possible to replace over 2 million barrels of lost production each year after 2010 as production follows the general decline shown in Figure 1. Thus if OPEC capacity gains do not exceed losses outside the cartel, world oil production peaked in July, 2008.

Are we in the post-peak era? If my reference forecast for non-OPEC oil is close to correct, then it is likely that we are. Any additional biofuels production we might see by 2015 after the recession will not change the situation. (The ethanol industry is in deep trouble right now as you might imagine.) I believe my "done deal" forecast was also correct, but that estimate, which was made when demand was still strong, is now buried under an avalanche of Depression Era economics. I did not foresee the severity of the downturn.

I have overrun my space for a weekly column, and you've got enough to chew on anyway. Next week I will finish up this series of articles by relating the supply issues presented here to future demand for oil. Put another way, I will discuss when the world at large might actually notice that the peak of world oil production is visible in the rear view mirror.

I encourage you to try to poke holes in my non-OPEC outlook.^{1, 2}

Notes

1. OPEC is cutting crude oil production through its quota system. Natural gas liquids are not counted as part of quotas by the cartel. Some forecasts assume a big future surge in OPEC gas liquids production which boosts the non-OPEC outlook. I will write about gas liquids in a future column.

2. Hint: Be sure to tell me exactly where the new non-OPEC oil that invalidates this analysis will be coming from.

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