Peak Watch

Regaining Perspective on Things That Matter

Everything flows and nothing abides,
everything gives way and nothing stays fixed
    — Heraclitus

It is easy nowadays to get caught up in the latest update to the S&P Case-Shiller Home Price indices or the slight rise in producer prices reported recently by the Labor Department. These indicators tell us about our immediate economic future. I noted last week that we are likely in the Post-Peak Era for oil, or very close to it, and ended by saying I would examine petroleum demand this week to determine when someone might notice that this invisible line has been crossed.

I believe at least 5 years will pass before the oil supply once again sends prices through the roof, but I can't really know the exact timing of such events, so it really doesn't matter what I think. I'll revisit the subject when we're closer to the bottom. We'll know then how long and how deep the impact of the recession on oil demand will be. Assessing the oil supply over the next decade is actually much easier than figuring out how the economy will do in the next few years because most of the facts are in.

What matters now more than ever, and what is getting lost in all the immediate economic turmoil, is the unprecedented scope of the problems we face in the 21st century. Great change is inevitable. Trying to hang on to the way things have been—seemingly endless exponential GDP growth— is a mistake. Focusing exclusively on fixing the economy to get back on the business-as-usual growth track obscures much bigger problems coming down the road.

Today I will try to regain some perspective—sanity—on where we're headed in the coming decades. I will tell some of the story in pictures. I am going to eschew overly technical discussions, but follow the links if you want to know more.

Two Energy Related Crises in the 21st Century

Of course I am referring to anthropogenic (human-caused) climate change and fossil fuel resource depletion. Perspective on our energy problems is best gained by considering long time scales. Look at Figure 1 and Figure 2.

Figure 1 — The Epoch of Fossil Fuels in human history. Taken from geologist M. King Hubbert's Exponential Growth As A Transient Phenomenon In Human History. The age of fossil-fuel exploitation is ephemeral on a millennial time-scale (-5000 to +5000 years).

Figure 2 — Carbon Dioxide Levels in the Holocene. Taken from the IPCC's AR4 Synthesis Report (Figure 2-3). Again on millennial-scale, -10,000 to the present. Annotated to reflect the Epoch of Fossil Fuels (small gray pyramid lower right). W/m² is watts per square meter. Imagine a small Christmas tree light bulb (≈ 1.6 watts) shining over every square meter of the Earth. That's the additional radiative forcing (added to the incoming solar irradiance) resulting from putting greenhouse gases like carbon dioxide (CO_2, the main culprit) into the atmosphere. "ppm" stands for parts-per-million in the atmosphere.

The Age of Fossil Fuels, including the harmful release of CO2 to the atmosphere from burning them, is just a blip on millennial time-scales. The reserves/production (R/P) ratio divides "proved" reserves by the current production level and serves as a rough measure of how much remains for finite resources. For oil  the R/P ratio is about 40 years, for natural gas it is about 60 years and for coal it is about 144 years (and falling). R/P ratios are a bit misleading, however. Production profiles for the resources will look a lot like a Hubbert (bell, gaussian) curve when viewed on long time-scales. Thus deficiencies in available supply start much earlier than 40, 60 or 144 years in the future because we've been ascending the upside of the curve for some time now. For oil, we're probably past-peak or close enough that it doesn't matter.

We always think and act as though we live in "normal" times, but our first two graphs tell us that we actually live in very interesting times. The unique dangers of our situation are hard to grasp. We can keep them in mind only if we make a conscious effort to remember—that's our human nature getting in the way. Let's stand even further back from the moment in Figure 3 and Figure 4.

Figure 3 — Reconstructed Pleistocene Carbon Dioxide And Temperature Levels. Reconstructed from various sources, especially the EPICA Dome C Antarctic ice core. The cold spikes correspond to ice ages. The warm spikes correspond to interglacial periods like the present one (the Holocene). "LGM" stands for Last Glacial Maximum (about -18-20 thousand years ago). MIS 11 refers to the 11th Marine Isotope Stage, part of a standard paleoclimate yardstick. MIS 11 corresponds to a long interglacial period (≈ 20,000 years) that occurred about 400,000 years ago. Some scientists consider this period to be an analogue to the Holocene, partly because the Earth is in a more circular rather than elliptical orbit at present. The Ice Ages are thought to be triggered by changes in the Milankovitch variables (eccentricity, tilt and wobble). The Age of Fossil Fuels is invisible at this scale. For it to be barely visible at 2 millimeters = 1000 years, the graph would need to be over 5 feet wide.

Figure 4 (left, click to enlarge) shows the maximum extent of the ice sheets at the end of the Wisconsin glaciation in North America about 20,000 years ago. In the lower right, you can see that New York City, the home of feckless, greedy investment bankers, was buried under a kilometer of ice. So much for these self-proclaimed "Masters of the Universe." If there is seawater on Wall Street a few hundreds of years from now, that just reinforces the point.

Figure 3 implies that another Ice Age should arrive at some indefinite time in the future. A recent Nature study predicted a long, severe glaciation sometime between 10,000 and 100,000 years from now. Other studies based on the EPICA Dome C ice core postpone the next Ice Age until at least 15,000 years from now. Any prediction of another Ice Age is met with skepticism from climate scientists like James Hansen, who thinks all such discussions are "academic at this point unless humans go extinct."

I'll get back to you—or maybe not!—on that extinction question, Jim. On a related note, a Danish scientist believes we should prepare for when the Earth's orbit once again becomes more elliptical. This story really puts things in perspective. I think it's hilarious, so I'll quote it at length.

Professor Gary Shaffer of the Niels Bohr Institute at the University of Copenhagen has suggested that the peoples of the Earth should hold off from burning all the planet's available fossil fuel supplies over the next couple of centuries, so as to be able to burn them thousands of years from now in order to stave off the next ice age...

The result of such a positive feedback loop [decreased summer insolation in the Arctic due to changes in the Milankovitch cycles leads to ice sheet build-up] is an ice age, which is at least as bad as global warming. According to Shaffer "the greatest climate challenge mankind has faced has been surviving ice ages that have dominated climate during the past million years".

But there's no need to panic. By burning fossil fuels, we have already put enough CO₂ into the atmosphere to stave off ice ages for 55,000 years. Shaffer thinks it would make sense to save a lot of the remaining fossil reserves for the far future, when we'd need to bump up atmospheric carbon or face life in the deep freeze.

The prof says that if we carry on as we are now and burn up all the ... fossil fuels remaining over the next couple of centuries, there will be a 5°C rise in temperatures much as global-warming worriers predict, with all the associated problems of rising sea levels, desertification and so on.

But that will be only temporary. After 170,000 years the Earth will have cooled, the orbit will go elliptical and the polar ice sheets will get out of control, an Ice Age.

[Note: I doubt there will be a 5°C rise. Climate sensitivity is about 3°C for a doubling of CO₂ from pre-industrial levels, which is about 550 ppm in the atmosphere. I don't see how we get there. I must agree that an Ice Age would be "at least as bad" as global warming.]

And you thought the economy was a problem! I hope you're revising your view of where we stand in the early 21st century.

There were humans indistinguishable from you or me mucking around during the Last Glacial Maximum. Our descendants—how many?—will still be living on Earth when the fallout from these Big Problems is all said and done. What will life look like in 100 years? 1000 years? 10,000 years? Shaffer seems to think we should leave some fossil fuels in the ground to stave off another ice age 55,000 years from now. Now that's optimism! Personally I think there won't be anything left on Earth to burn long, long before that.

Economic downturns come and go—the Panic of 1837, the Panic of 1857, the Panic of 1873, the Great Crash of 1929, the subsequent Great Depression, the Recession of 1980-82, the Global Financial Crisis of 2008-2009. The climate and resource problems we face in the 21st century are unique on geological time-scales. The late 21st century may end up looking something like the mid-Pliocene (3.3-3.0 million years ago) when temperatures were 2° to 3°above pre-industrial levels and the continents were more or less in their current configuration. Things cooled off a bit after that when Greenland froze over after CO₂ levels fell for unknown reasons.

Confusion about the Twin Crises

As catastrophes go, climate change is quite popular but resource depletion usually goes begging. I've given a lot of thought to this disparity because depletion is no less a calamity than global warming and popularity is obviously not a gauge of correctness.

Resource depletion means that we're starting to run out of the very thing that is causing the Earth to warm. The benefits of burning fossil fuels are incalculable but so are the costs. The most abundant of the Big Three, coal, emits the most carbon dioxide, so we shouldn't burn it. These contradictory circumstances have engendered a lot of confusion. This derangement resembles the thinking process of drug addicts who are in constant turmoil trying to reconcile the imperative I need to stop using! with the worry Where's my next fix coming from?

Those directly concerned about the twin catastrophes can be divided broadly into 2 groups.

• Climate people who either subsume the fossil fuel resources problem under global warming if they recognize a depletion problem at all, or more typically, do not acknowledge any constraints on exploitable hydrocarbon resources (e.g. oil shales or unconventional natural gas including methane hydrates). These folks are usually techno-optimists who believe renewable energy and efficiency gains will successfully replace fossil fuels over time. They tend to ignore the implications of runaway exponential functions (and this additional graph), choosing to believe that we'll just drive plug-in hybrid SUVs instead gas-guzzling SUVs.
• Resource people who believe that fossil fuel depletion solves much of the climate problem if holding CO2 levels in the atmosphere at 450 ppm or less does indeed fend off the worse consequences of global warming. These folks place little faith in technological progress. They worry a lot about unfavorable net energy calculations and do not believe that unconventional hydrocarbon resources can be economically exploited. They believe exponential consumption patterns of all sorts are unsustainable. Resource people don't think most of us will be driving anything in a few decades.

I prepared a handy table to help you sort these distinctions out.

	Human Ingenuity	Fossil Fuel Dependence
Climate Group	Plays Up	Downplays
Resources Group	Downplays	Plays up

Table 1 — Differences in emphasis between those worried about climate and resources

I must admit my own point of view: it seems almost impossible to overstate our dependence on fossil fuels as things stand in 2009. Exponential functions are hard to ignore. The harmful consequences of anthropogenic climate change should be taken very seriously regardless of the (relatively) rapid depletion of exploitable fossil fuel resources.

Differences of opinion can be based on honest disagreement where large uncertainties exist, but in climate versus resources matters, simple ignorance plays a large role.

Those in the climate group uncritically accept inflated fossil fuel resource/reserves estimates. What they don't know is that all these estimates come from the same unreliable sources (usually the USGS, but also the BP Statistical Review and the World Energy Council). How many times have we read "the EIA expects energy demand to grow X% by 2030"? EIA resource estimates come from the USGS, one of the usual suspects. The U.S. geological survey always over-estimates recoverable resources (e.g. the Bakken Shale). Climate folks—James Hansen and Pushker Kharecha excepted— either don't know all this or ignore it. Probably the former.

Those in the resource group often do not understand the climate science or disregard it. Those paying attention focus exclusively on CO₂ levels following from reduced fossil fuel resource estimates. Thus they ignore potentially harmful positive feedbacks following from human meddling with the Earth's carbon cycle, lessons learned from paleoclimate studies and the effects of land use changes on greenhouse gas levels.

Because we are talking about catastrophes here, emotions often get in the way of objective analysis. In extreme cases, those concerned about climate indulge in delusional techno-optimist fantasies (Table 1, box upper left). Some of those concerned about resources choose to believe that a new Stone Age is fast approaching (Table 1, box lower right).

And because there are two problems, not one, the discussion on the relative importance of these calamities is often little more than a pissing contest over which problem is worse in what time frame. Actually, there isn't any real discussion or debate. Climate concerns are politically correct, so climate activists don't have to acknowledge the resource issues. Doing so is not in their best interest anyway because the more fossil fuel resources there are to exploit, the bigger the potential problem to sound the alarm about. Instead of having a valuable exchange, climate and resource people usually just talk past each other. Resource people usually end up talking only to themselves.

The 21st century is bound to be long, unpleasant and destructive to human welfare and all non-bacterial Earth life. This will be true regardless of the confusions and disagreements about climate versus resources. The current infatuation with insolvent banks will have long ago faded away as the Earth warms and oil production rates decline in the coming decades.

The long view presented in pictures dispels the notion that we will be able to hang on indefinitely to our extravagant late 20th century lifestyles. Watching our political leaders trying get the growth train rolling again by fine-tuning the economy fosters the illusion that we can. As any Buddhist will tell you, the only constant in life is change.

Contact the author at dave.aspo@gmail.com

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.

Contact the author at dave.aspo@gmail.com

Oil Investment Woes During the Downturn

Another flaw in the human character is that everybody wants to build and nobody wants to do maintenance
    —Kurt Vonnegut

Last week we took a look at new oil production outside of OPEC. I found that phased start-ups are not being postponed despite a deteriorating economic situation that has resulted in low prices, large OPEC cuts and an oil glut on the world market. I concluded that this strategy is shortsighted and self-defeating, especially if the global recession is deeper and longer than the Fed and the Treasury Department anticipate. I view a destructive period of deflation as likely.

New oil was the term P_N for conventional oil in equation 1 below.

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

In a significant update to last week's column, secretary general Abdalla el-Badri announced OPEC project delays without being specific about what they were. El-Badri is still hoping the large non-OPEC exporters will cut production to help boost the shaky oil price.

"We urge Norway, Russia and Mexico to give a hand, because the situation is very difficult and we cannot handle it by ourselves," he said...

El-Badri expressed concern about the impact of the lower prices on the oil investment plans of OPEC producing countries, disclosing that 35 of 150 planned upstream projects had been postponed beyond 2013. He said OPEC plans had called for 5 million b/d of new crude output capacity to be added by 2012, but that the timing of this capacity addition would now be "stretched" because of the precipitous fall in oil prices over the past few months."(We are) postponing 35 projects to after 2013 from our 150 planned," he said. "Of our firm projects to 2012, some will be delayed," he said.

I'll bet that most of the delayed projects are maintenance upgrades, not new oil field developments, as I discuss below. Today I examine threats to new unconventional oil production and the effects on declines in the existing production base (i.e. the term P_E(t)(1 - D_I)).

Trouble at the Tar Sands

The first domino to fall when the global economy went south was tar sands unconventional oil production. Suncor, Petro-Canada and other major players have scaled investment way back. A Merrill Lynch analysis indicates that new tar sands oil is competitive at $80/barrel. Existing oil production is said to lose money at $32, so operators are getting close to the edge should prices fall $4/barrel below today's price. The Canadian Energy Research Institute (CERI) has just issued a report which estimates $70 (US) as the price at which new tar sands oil becomes viable.

Figure 1 shows CERI's production scenarios based on future economic conditions. The National Post (February 5, 2009) summarized the hit on investment detailed in the CERI report.

The global credit crunch and collapse of oil prices have cancelled the Alberta oil sands boom, resulting in a loss in investment of $97-billion to $241-billion in the next decade that will be felt throughout the Canadian economy, the Canadian Energy Research Institute said in a report Thursday.

While the Alberta deposits will still attract $218-billion in spending to develop new oil production in the next 11 years, the pace of development will be much slower than was expected only three months ago, the independent research firm said.

Figure 1 — CERI production scenarios under various economic projections. The probable production range is shown in gray. The green line is the worst case.

I concluded that production growth at the tar sands was slowing down long before the current economic crisis (Energy Bulletin, January 2, 2008). The reference case (red line in Figure 1) is very improbable, especially the fast growth out to 2016. The "unconstrained" case (blue line) resides in the realm of pure fantasy. It is easy to see that in the worst economic case, which I consider likely, lost production will be in the range of 1 million barrels-per-day by 2015. This large number speaks for itself.

Perhaps there's an upside to this supply-side disaster. If climate is our chief concern, and problems with the oil supply can be postponed for a decade or longer, as Interior Secretary Ken Salazar and Energy Secretary Steven Chu seem to believe, the loss of tar sands oil could be viewed as a blessing, not a curse. In fact, why not take the initiative? Why doesn't the U.S. simply prohibit imports of dirty carbon-intensive tar sands oil altogether? Canada could do its part by phasing out oil sands production, which would enable them to meet their carbon emissions limits under the Kyoto Protocol.

If Chu and Salazar are right, and I am wrong to characterize the probable loss of 1 million barrels-per-day as a disaster, it looks like a win-win! Unfortunately an unblinkered view of the loss tells a different story. Canada is the largest exporter of oil to the United States. Our future refining plans depend on a continuing and growing supply of tar sands oil. Losing that much production will cause major economic headaches in the U.S. unless we prepare for it in advance.

Peak oil and climate change agendas do not always coincide. If the world were swimming in conventional oil as it seemed during the Golden Age in the decades just after World War II, we would not need synthetic crude from the tar sands.

Lack of Investment and Decline Rates

A substantial part of oil company upstream investment goes toward field upgrades and maintenance.  This spending is necessary to maintain output or slow declines at post-peak oil fields. Such fields are studied in the IEA's World Energy Outlook 2008. Post-peak fields make up a hefty slice of world oil production. Based on an analysis of the IHS database, the IEA's report describes just how large this slice is—

Of a total of 798 producing fields in our field-by-field database, we prepared a dataset of 651 fields with initial reserves of at least 50 million barrels in order to carry out our analysis of decline rates. Of this set, 580 fields were found to have passed peak production. In other words, for each of these fields, production over the latest year of production is below the maximum level ever achieved in any one year. These fields produced a total of 40.5 million b/d (barrels-per-day) in 2007, or 58% of the world crude oil production.

Based on raw production data, the IEA figured the decline rate at 5.1% per year. Generalizing their result by including fields with less than 50 million barrels in initial recoverable reserves, the IEA estimated the overall decline rate in all post-peak fields to be 6.7%—smaller fields decline faster. If no investment were put into maintaining and upgrading these fields, the IEA estimated that the "natural" decline rate is 9%. Thus for all post-peak oil fields, the term D_I in P_E(t)(1 - D_I) from equation (1) lies somewhere between 6.7% and 9% depending on the level of investment.

I prepared an abstract scenario (Figure 2) to give you an idea of how investment levels might affect overall declines in post-peak fields.

Figure 2 — An investment scenario for post-peak fields. The initial period of 6.7% decline is replaced by a middle period of 8% decline based on lack of investment in an economic downturn (red line). An economic upturn lifts demand and prices, and thus reinvigorates investment. Declines are maintained at 6.7% once again.

Notice first that the effects of the exponential decrease overwhelm the relatively small impact of an investment shortfall that raises the decline rate closer to the "natural" rate. Lost production due to lack of investment (the difference between the blue and red lines) amounts to only 2.77% of the total production over time.

Nevertheless, if the decline rate were allowed to rise to 8% for an extended period as shown in Figure 2, the loss over the entire period (not the difference at the end) would come to 1.12 million barrels per day (2.77% of the IEA's 40.5 million b/d). Although this shortfall would be spread across several years in the scenario, it is not a trivial amount of lost production given that the annual production lost from post-peak fields alone is 2.71 million barrels-per-day (40.5 million * .067) after full investment. The additional production shortfall from lack of maintenance must also be replaced by new oil each year. Every drop counts.

There is a lot of evidence that maintenance and upgrades are suffering during the current downturn. Oil service companies are getting hit hard. Schlumberger forecasts hard times ahead in the Houston Chronicle (January, 23, 2009)—

Schlumberger delivered still more bad news Friday about the weakening state of the global oil and gas industry, reporting lower fourth quarter profits, additional layoffs and a glum forecast for the rest of 2009...

Earlier this month, Schlumberger said it would cut up to 1,000 of its 19,000 North American employees, including up to 100 of its 5,000 jobs in the Houston area. But for the first time Friday, the company said it will cut 5,000 jobs worldwide, or almost 6 percent of its 84,000-strong work force...

Schlumberger also offered a downcast view of the coming year. “We expect 2009 activity to weaken across the board with the most significant declines occurring in North American gas drilling, Russian oil production enhancement and in mature offshore basins,” [CEO Andrew] Gou[d said in a statement. With oil and gas prices so low, many emerging resource plays, like heavy oil projects in Canada, also will not be economic, he said. [emphasis added]

Gould's remarks about Russia should give us pause. Last year's production fell 0.7% compared to 2007 and January came in 0.9% below the same month last year. I've got a bad feeling about this. As for mature offshore basins, Shell has announced some delays.

The company postponed investment decisions on upgrading its deepwater Mars platform in the Gulf of Mexico and developing the Pierce field in the U.K.’s North Sea as it waits for industry costs to decline.

Rig counts are also down. The latest Baker Hughes data indicates that—

The number of rotary rigs drilling for oil is down 26 at 283. The number of rigs targeting oil is 41 less than last year's level of activity. Rigs currently drilling for oil represent 21.0% percent of total drilling activity. [Note - the large majority of rigs in service are drilling for natural gas, not oil]

We are closer to the beginning of the severe recession than we are to its end. Inactivity at oil services companies or falling rig counts should be regarded as preliminary indicators, not the end of the story. The scenario shown in Figure 2 clearly shows that money put toward maintenance of post-peak fields would be far better spent on new oil projects if investment is constrained by deteriorating economic conditions and low oil prices, especially for the larger oil companies (IOCs or NOCs). Therefore it is far more profitable for TNK-BP to put the Verkhnechonsk field in Eastern Siberia on-stream than it is for them to maintain output in their aging Western Siberian fields. Unfortunately this new oil may help drive down prices and maintenance will suffer at the same time as investment diminishes.

Contact the author at dave.aspo@gmail.com

Confusion in the Oil Patch

The only difference between a rut and a grave are the dimensions
    —Ellen Glasgow

A standard story is making the rounds which goes like this: low prices and lack of investment will impair future oil production capacity. When the global economy rebounds, which could happen as early as 2010, oil prices will shoot up again as demand once again outstrips available supply. The AP's John Porretto writes don't get used to cheap oil—

The oil industry is scaling back on exploration and production because some projects don't make economic sense when energy prices are low. And crude is already harder to find because more nations that own oil companies are blocking outside access to their oil fields.

When the world emerges from the recession and starts to burn more fuel again, and higher demand meets lower supply, prices will almost certainly shoot higher....

Some analysts say oil could eventually eclipse $150 a barrel, maybe even on its way to $200... No one knows for sure, but some analysts say the spike could happen as soon as next year [in 2010], perhaps in 2011 or 2012.

This line of reasoning is certainly consistent with the "peak oil" narrative, but the situation in the oil markets is not so straightforward. What will the demand for oil be over the medium-term? In order for oil prices to spike over $100 again in 2010 or 2011, demand must once again bump up against available supply, excluding some (spare) capacity that will be held back.

Last week I said that I was going to defend the proposition that it is unlikely that the world oil production would ever exceed its July, 2008 peak. I realize now that I was getting ahead of myself. Instead I will use a simple model for the available oil supply and examine each term in it this week and next.

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

Let's examine new oil projects (the term P_N in equation (1)) in light of the current oil market.

Future oil demand depends on a successful reflation of the U.S. and global economy, a process that could take 2 years or more. A lot of uncertainty exists about the timing of the recovery, but considering the very deep hole we're in now and the low price of oil, it would seem to make sense to keep some new oil in the ground until economic conditions stabilize and indicators reveal some light at the end of the tunnel.

The problem for new conventional oil now is not so much that companies are delaying production of oil which is in the hopper—that would actually make sense. The problem is that they will produce this new oil at a time when OPEC is cutting output and there's a glut on the world market! This behavior is shortsighted and self-defeating.

Contrary to reasonable expectations, oil producers (mostly) outside OPEC are pressing forward with new oil projects everywhere you look, to wit—

• The head of Brazil's state-run energy company Petrobras said there would be no project delays in 2009, bucking a wider trend, and that production was about 2.4 million barrels per day
• BP recently announced that it has successfully started production from the third and fourth wells at the Thunder Horse field with production now in excess of 200,000 barrels of oil equivalent per day (boed), signaling the completion of commissioning and commencement of full operation. BP plans to start-up additional production from the Thunder Horse North field in the first half of 2009.
• Start-ups of major [Chevron] projects in 2009 are expected to include a discovery in the Gulf of Mexico known as Tahiti as well as Tombua-Landana located off the coast of Angola and Frade, a deepwater field well off the coast of Brazil. In addition, Chevron anticipates "significant production increases" from recent start-ups at Agbami in offshore Nigeria, and Blind Faith in the Gulf of Mexico as well as from expansion activity at Tengiz in Kazakhstan.
• Oil production on the Norwegian continental shelf may fall 9.7 percent this year, declining for a ninth year, the country’s Petroleum Directorate said... [but nevertheless] There’s “uncertainty” about what effect the drop in oil prices and the global slowdown will have on investments after 2009, the agency said. Norwegian fields “have a robust economy at $50 to $70 a barrel of oil,” Nyland said in an interview. “Should prices fall below $50, without production costs going down, projects may be postponed.” [Note — Thus Norway is not cutting back their falling output]

Russia's oil companies are not making cuts to support OPEC although low oil prices and "lack of new greenfield projects" will take a toll on their now falling output. Among the major non-OPEC producers, only Azerbaijan appears ready to actually cut production by as much as 300,000 barrels per day. We shall see.

The New York Times reported that OPEC's compliance with announced cuts was running at about 75%, an unusual display of discipline. But Bloomberg reports that compliance is currently closer to 68%, which is still pretty good.

OPEC members with output quotas, all except Iraq, pumped 26.2 million barrels a day, 1.36 million more than their target of 24.85 million barrels a day, according to data compiled by Bloomberg.

How long will countries desperate for revenue adhere to their quotas? Iran, Venezuela and Nigeria are in this boat. Among these, Nigeria is especially prone to fall off the wagon because they've got large oil developments coming on-stream in 2009. This West Africa producer has apparently cut production to 1.76 million barrels per day (their quota) in January, down 265,000 barrels compared with December. The cut conflicts with Nigeria's need for revenue.

Nigeria, the world's eighth biggest oil exporter, is hoping its new offshore oilfields will help boost its production as funding shortfalls and insecurity in the Niger Delta keep a cap on output from onshore and shallow water ventures...

Experts expect Nigerian will struggle to meet the 2.29 million bpd oil production assumption on which its 2009 budget is based, particularly as it complies with OPEC quota cuts meant to help support world oil prices.

Agbami, which is operated by Chevron and Statoil in adjacent offshore blocks, is ramping up to 250,000 barrels per day by the end of the year. Akpo, which is operated by Total, will start production in April and is expected to reach 175,000 barrels per day by year's end. Will Nigeria maintain quota discipline in the face of all that potential new revenue coming on-stream? I don't think so.

My doubts are confirmed by recent statements by Mohammed Barkindo, group managing director of Nigeria National Petroleum Corp. (NNPC), who believes that these and future deepwater projects are viable at only $40/barrel, which conveniently for them is also the current oil price (Oil & Gas Journal, January 28, 2009). And I'm quite sure Chevron, Total and Statoil will not object to producing the oil.

Outside of OPEC, the need for immediate returns for shareholders conflicts with shrinking demand and low prices. Consider the way Chevron and ConocoPhillips have responded to a deteriorating world economy.

Chevron thinks the future looks bright.

Unlike some large oil companies, the company said "an excellent queue" of projects had formed, and there was no reason to change spending from the record levels of 2008.

“Much of our 2009 spending continues to be on large, multiyear projects aimed at increasing energy supplies to meet global demand and also improving operating efficiency and reliability,” chief exec Dave O’Reilly said in a statement...

ConocoPhillips, sensibly, is worried about the future.

The recession and global financial crisis are taking a toll on energy companies after several years of rising oil and natural-gas prices, and is the first of the world's major publicly traded oil companies to respond with big cutbacks...

ConocoPhillips set its 2009 capital budget at $12.5 billion, an 18.3% reduction from 2008. "We are positioning ourselves in the current business environment to live within our means in order to maintain financial strength," said Chairman and Chief Executive James J. Mulva in a statement.

Do Chevron (and British Petroleum, Petrobras, etc.) know what they're doing? Sure they do—they're making money for their shareholders. They will probably accomplish some other things as well—

• With demand continuing to fall, and lots of oil being stockpiled on tankers, they will further drive down the oil price and thus increase risks to future projects.
• They will produce oil now that we'll need later when demand finally does come roaring back sometime after 2010. This will cause another oil price shock like the one in 2008 Quarters I & II.
• They will further weaken faltering non-OPEC production capacity over the medium-term and accelerate OECD dependence on OPEC.

Declines in deepwater oil fields come on relatively quickly and these declines are steep and rapid once they occur. Where's the next generation of Gulf of Mexico projects (Figure 1) that will replace relatively large producers like Thunder Horse, Atlantis and Tahiti?

Figure 1 — Declining well spuds and discoveries in the Gulf of Mexico. From Offshore Magazine

Yet again we see the triumph of short-term thinking and profits over longer-term survival strategies. On this view it is not so much project delays that are impairing the future as it is full implementation of current projects outside of OPEC that were begun 4 or 5 years ago when demand and prices were rising. Persian Gulf countries are not delaying planned capacity expansions, but they're obviously not going to produce this new oil anytime soon. Unlike Chevron, Saudi Arabia, Kuwait, Qatar and the United Arab Emirates take the long view.

One could argue that the international oil companies (IOCs) need whatever profits they can generate to support costly exploration & production (E&P) down the road. That's nonsense. IOC revenues have been extraordinary over the last few years and E&P costs are going down along with costs for everything else during the global recession. Falling costs are not stimulating activity now but should partially offset lower prices over the next few years. The IOCs can afford new E&P. Their real problem is insufficient oil to find in the places they have access to (Figure 1).

The gung-ho production policies of oil companies are counterproductive in those cases where IOCs have the ability to control output. Keeping some oil off the market right now would help stabilize prices at $70-80/barrel, the range required to support investment in longer-term oil field maintenance, future conventional projects and production from unconventional sources. Profligate oil production during the global recession will not pay dividends in the end.

Contact the author at dave.apso@gmail.com