Prudhoe Bay oil fields - aerial view
Prudhoe Bay, Alaska. Even with the discovery of oil above the Arctic Circle in the 1970s, the nation's domestic oil production has steadily declined, compelling increased reliance on imports from Canada, Mexico, Venezuela, Nigeria and the Middle East. Opening up the Arctic National Wildlife Refuge will do little to reverse this dangerous trend. Photo courtesy of ArcticGems.Org

Oil Depletion? It's All In The Assumptions

Part one of two-part series examining CERA's optimistic assessment of world oil resources

By Ronald Cooke

Good News
In good news for the SUV set, Daniel Yergin's Cambridge Energy Research Associates (CERA), is predicting we will soon be awash in light, sweet crude - ideal for making gasoline.

CERA's Worldwide Liquids Capacity Outlook To 2010 -- Tight Supply Or Excess Of Riches predicts we humans will have 6 to 7.5 million barrels per day of excess capacity and we can expect an extended period of lower prices – perhaps by 2007. Petroleum production will be expanding faster than demand over the next 5 years. The report has tabulated 20 to 30 new projects with a capacity of over 75,000 barrels per day that will become available in each and every year until 2010. By then, worldwide production could increase by up to 16 million Bbl/day. However, most of the increased production will come from reworking existing fields, rather than new oil discoveries, and after 2010 the majority of new production will come from OPEC.

CERA doesn't believe in peak oil, at least not before 2010, and probably not before 2020. The report indicates that the "inflexion" point will come between 2030 and 2040.  Moreover, rather than a "peak," it will be an "undulating plateau" that will continue for several decades. OPEC, the company claims, will be able to add 8.8 Mbl/day by 2010 and can continue its expansion – at a somewhat slower rate – beyond 2010. Non-OPEC production will experience a robust increase through 2010, and then slow significantly thereafter.  Unconventional oil production will increase throughout this period, supplying almost 35 percent of the world's oil by 2020.

Then Yergin adds a sobering caveat: "The main risks to our Supply Expansion scenario are above ground, not below ground – changes in the political and operating climate that could delay expansion."   In CERA’s downside "Delay and Disruption" scenario, capacity increases by only 11.5 million barrels between 2004 and 2010.


What is the implication? Will delayed projects and disruptions in the supply chain lead to temporary shortages before "Peak Oil" hits us? Perhaps we should review CERA's implied assumptions. They are, after all, the basis of CERA's optimistic conclusions.


Underlying every data analysis and series of conclusions is a collection of assumptions. In order to avoid oil shortages, temporary or longer term, for example, we have to make multiple assumptions about our ability to find, produce, transport, refine and distribute oil (the supply chain). At some point in our analysis, these assumptions have to be tested for credibility.

Will they hold up under careful examination?

Assumption # 1. Peace in Iraq.
A key element for any increase in Middle East oil production has to be Iraq. Estimates of found oil range from 46 to 112 Bbl, with another 100 Bbl a strong "maybe it's there". If there is no peace in Iraq, or if Iraq succumbs to the policies of an Islamic Theocracy, then Iraq's contributions to OPEC's annual production volumes will never reach the levels envisioned by the International Energy Agency (IEA). If Iraq's government is stable, and favors a high production policy, then world oil supplies will be a little closer to the IEA's projections through 2020.

The future of Iraq rests on the outcome of an escalating cultural conflict between Islamist and Western values. Until that gets resolved, we can only guess at the future of Iraqi oil production.

Assumption # 2. Political and labor stability.
Any optimistic analysis of oil production must assume there will be relative political and labor stability in the Middle East, North West Africa, South America, and Caspian regions. As recent events have shown, however, these areas are prone to conflict that disrupts the flow of oil. Up until 2004, temporary disruptions in one region could usually be replaced by production from other resources. Going forward, there may not be sufficient spare capacity to cover lost production from one or more regions. As a result, sporadic shortages are a possible reality.

Assumption # 3. Islamist terrorist activity will not disrupt the supply chain.
Islamist terrorist activity will continue to disrupt the supply chain from time to time. The land locked Caspian, for example, could be the source of 60 Bbl of oil. Maybe more. And these wells are coming on-line. But most of the oil in this region must pass through a very long pipeline in order to reach the consumer. History suggests political volatility in this region will eventually disrupt supply chain operations. Perhaps for multiple years.

Islamist terrorist activity, whether sporadic or sustained, will continue to be a potential threat to the flow of oil, not only in the nations of the Caspian, the Middle East, and North West Africa, but also within the borders of consuming nations.

Assumption # 4. The proven reserves claimed by OPEC actually exist.
It is unlikely the proven reserves claimed by OPEC actually exist. Many believe they are a fabrication of the quota justifications that occurred in the 1980s. Furthermore, the claim that "Proven" reserves are increasing needs to be examined because in a sense we are merely talking about definitions. Words. As the price of oil increases, it becomes economically feasible to spend more money on production. Make sense? So the reserves that could not be classified as "Proven" at $26.00 per barrel become damn attractive if the price for a barrel goes to $55.00. There isn't any more oil. It's just that "Probable" oil reserves become "Proven" oil reserves as the price of oil increases because we can afford to spend more money on recovery. All we did was reclassify the definition of the oil we already have in the ground. No one found any more oil. Not a drop.

Assumption # 5. There will not be a substantial increase in reserve depletion rates.
Only 4 "super-giant" oilfields have been found outside the Middle East since 1960 (in Russia, China, Alaska and Mexico) and all of these - except China - are now in decline. Oil production is in decline in 33 of the 48 largest oil producing nations. Using improved technology often increases the rate of depletion. New finds tend to be smaller and deplete faster. Worldwide, estimated rates of depletion run as high as 8 percent per year.

Assumption # 6. All proven and potential reserves will be produced on schedule.
This assumption only works if hundreds of exploration and drilling operations in multiple countries and oceans under a wide variety of operating conditions and technical challenges occur on a schedule that coincides with the IEA's demand projections. Everything has to work. No significant political or labor conflicts. No ideological confrontation. No financing or management Snafus. Cooperative weather. And a reasonably predictable growth in market demand so consumption can equal production (with a little to spare).

Assumption # 7. Middle Eastern production capacity will continually increase, reaching ~ 29 Mbl/d by 2010 and at least 43 Mbl/d by 2020.
Middle Eastern production capacity will increase. The goal of 29 Mbl/day by 2010, however, is ambitious, and few believe OAPEC will be able to deliver 43 to 50 Mbl/day by 2020. Exploration and production will be challenged by Islamist opposition in Iran, Iraq and Saudi Arabia (and perhaps elsewhere). There is a long list of reserve and technical restraints in this region. We must also understand that the creation of a large surplus capacity is NOT in OAPEC's selfish best interest. Faced with enormous population growth and big welfare bills, every Middle Eastern government knows that when the oil is gone, their regime is in trouble. Leaders may determine they can actually make more money, and enjoy greater personal longevity, - by pumping less.

Assumption # 8. The EROEI of all oil production exceeds 1.
EROEI. Energy Returned On Energy Invested means that the energy derived from exploration, production, refining, and transportation exceeds the energy consumed for these activities. We tend to forget. If the EROEI of any energy resource is 1 or less, then doing that activity no longer provides a net addition to our stockpile of energy.

The average EROEI of world oil production has been declining. I read somewhere that before 1950 the EROEI for oil was more than 100:1. By the 1970s it had dropped to 30:1, and by 2005 the average EROEI on new production had fallen to 10:1. As we go for oil in increasingly difficult environments (deep under the ocean, open pit mining, etc.) the EROEI will decline further. We have to face the facts. Just because there is oil in the ground does not mean it is practical to extract. Every well has its cost in money AND energy. At some point the EROEI for every well will fall to less than 1, making oil from that well an impractical resource for energy.

Assumption # 9. Unconventional oil production will increase throughout this period, supplying almost 35 percent of the world's oil by 2020.
We have inherited up to 7 Tbls of oil trapped in sand or shale formations. But that is a misleading number. Only 5 Tbl are worth mining and of that number, perhaps 25 percent will be feasible to produce because production cost and EROEI factors make extensive mining impractical. Given the production problems associated with squeezing oil from rock and sand, the rate of production will be painfully slow. A goal of 15 to 18 Mbl per day by 2020 from recoverable reserves of 620 to 910 Bbl appears reasonable.

We expect to find oil beneath polar ice and permafrost in the Artic. Although total recoverable oil is something of a mystery at this point, figure 55 to 100 Bbl (maybe more). Unfortunately, exploration, production and transportation in this frigid environment are no fun. And costly. So don't expect polar oil to yield enough production to avoid oil shortages.

We are learning how to drill in the deep waters (over 2,500 meters) of the ocean. There is oil in the Gulf of Mexico, along the coastal shelves of South America and Africa, and a number of other locations around the world. Recovery takes time, is a technical and operations challenge, and is very costly. Add another 80 to 120 Bbl of oil to the reserves we will ultimately recover.

In addition, one can expect we humans will pump out a limited amount of heavy oil and oil from coal bed methane deposits.

If we add up all of these resources, we probably have up to 1.1 Tbl of unconventional oil to play with over the next 20 years. But our estimate of annual production is much lower. Technical, weather, geography, political, environmental, cost and EROEI factors will limit total production to around 100 Bbl from 2005 to 2020. This estimate – by the way - mirrors the Energy Outlook projections made by ExxonMobile in its "World Liquids Production Outlook" presentation.

To these numbers we need to add, as CERA does, Natural Gas Liquids (NGL) and condensates as unconventional oil. If we add all of these forms of unconventional oil together, CERA's projections appear reasonable.

Assumption # 10. There is sufficient infrastructure to support a vigorous increase in production.
Oil is a cyclical business. Prices bounce up and down because there is almost always a mismatch between supply and demand. For a number of reasons, exploration and production investments have not kept up with projected increases in demand. That investment deficit has left us with insufficient spare production capacity to sustain the world's projected economic growth. Even if we have ample reserves in the ground, there is no guarantee enough oil wells will be developed in time to avoid sharply higher prices and possible shortages. We don't have enough oil rigs, tankers, petroleum engineers, or refinery capacity. The problem is systemic and will take several years to resolve.

Assumption # 11. Non-Muslim engineers, technicians and laborers will be permitted to work in the fields of the Middle East, North West Africa, and countries adjacent to the Caspian basin.
Non-Muslim engineers, technicians and laborers will be permitted to work in the fields of the Middle East, North West Africa, and countries adjacent to the Caspian basin. However, Islamist activity and local sociopolitical conflict could jeopardize personnel security. Iran's new government, for example, has made it clear that non-Muslim foreigners are not welcome to bid, or work, in Iran's oil patch.

Assumption # 12. There is sufficient capital to fund the proposed supply chain activities.
There is sufficient capital to fund all of the proposed supply chain activities if one assumes the credit markets will not be overly stressed by other economic events, such as a collapse of the market for Mortgage Backed Securities or a massive default on the loans outstanding to Hedge Funds.

Assumption # 13.There will be a dramatic decrease in the growth rate of oil consumption.
Emerging nations, like China and India, will increase their per-capita and total consumption of oil. Although I fully expect a decrease in the growth rate of oil consumption will occur, it will - as I point out in "Oil, Jihad and Destiny" – be due to recessive factors. Production will equal consumption only if there is a destruction of natural demand or if shortages force reduced consumption. In either case, the rate of growth decreases.

Assumption # 14. As a result of over production, we will be awash in oil.
It is more likely that Saudi Arabia will continue to act as a swing producer, restricting its production in order to encourage higher prices. Indeed, Saudi Aramco engineers may welcome the opportunity to take key wells off-line for service if the world appears to be "awash" in oil.

Assumption # 15. The price of oil will decline.
It is highly likely that the price of oil will fall below $40.00 per barrel. The history of the oil industry is characterized by volatile changes in price because of the chronic imbalance between supply and demand. But a temporary decline in price is no basis for making either public policy or personal choice decisions. For every short term decline, expect a subsequent increase in the price. The long term trend for all petroleum prices is UP.

Assumption # 16. Resource nationalism will not disrupt world oil markets.
If there is so much oil available for production, why are we drilling new wells in deep water? They are very expensive, challenge our best technology, pose an environmental hazard, and are at the mercy of the sea. Why don't we just drill on land?

Because the North Sea fields are declining, West Africa is in turmoil, Venezuela is politically unstable, Iraq is a crap shoot, Saudi Arabia is vulnerable to revolution, and Putin plans to use Russia's petroleum as a political weapon. China is buying up every drop it can find. The Italians have pointed out that the geographical flows of crude oil favor refineries on the Mediterranean coast over refineries located in North America.

Hmmmm. Are we witnessing an increase in resource nationalism?

The industrialized nations have no choice. Oil shortages will create a growing cadre of unemployed citizens and declining GDP. Political survival means drilling in every plausible location on this planet and competing with other nations for the oil that is left.

The race is on.

Assumption # 17. Technology will save us.
Optimists claim that continuing improvements in computer, exploration, and drilling technology will sharply increase oil production. In truth, the oil industry has been continually improving upstream exploration and production technology since the birth of the oil age. Engineers are currently hard at work on improvements for drilling fluids, drill bits, directional drilling, multilateral drilling, sensors, GPS, drill casing materials, CO2 injection, reservoir modeling software, and a thousand other opportunities to increase recovery operations. The point is, there is no magic solution that will suddenly increase our reserves. Almost every technical solution has already been explored. Yes. New technologies will increase production. But the net impact is more likely to be incremental – not revolutionary.

For example, much has been made about the use of CO2 injection to increase recoverable reserves. Granted. It is possible to recover 60 percent (or more) of the oil that in the ground as we humans struggle to liberate every drop of oil from existing reservoirs. But many of our older oil formations have already been flushed with fluids and chemicals in an effort to increase production. Consequently, the use of newer technology will not always yield dramatic improvements in mature field recovery. New finds, on the other hand, provide an opportunity to secure higher increases than older formations. Recovery rates will also be higher and faster for light oils than for heavier crude. And finally, it may - or may not - be economical to use newer technology, such as CO2 injection, on some wells. What does this all mean? Over a period of years, average world recovery rates are more likely to be in the 45 to 50 percent range.

And there is a downside to the application of reserve enhancement technology. If we increase the rate at which we drain our available reserves, - depletion happens sooner.

Assumption # 18. Higher prices will encourage the production of more oil.
The classic economist assumes higher prices will stimulate greater production. And it usually works. But our hydrocarbon resources are finite. New production involves a complex series of challenges that can take several years to overcome. In order to continue along the growth curve of projected demand through 2020, we humans will have to consume most of our "Proven" reserves, convert most of our "Probable" reserves into "Proven" reserves, and maximize a phenomenon peculiar to the petroleum industry called "Reserve Growth". Oil prices will have to increase in order to justify the economics of this sequence. Total oil production, however, will continue to be limited by the factors discussed above in Assumptions 1 – 17.

PART TWO: Reality Check... What Other Experts Say

Times Article Viewed: 7076
Published: 04-Aug-2005


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