Lagniappe

 

 

Oliver L Campbell:
Peak oil production again in the news

An article by Daniel Howden, published on 14 June 2007, states “Scientists, led by the London-based Oil Depletion Analysis Centre, say that global production of oil is set to peak in the next four years before entering a steepening decline.”
Back in October 2003 I wrote an article explaining why I believed peak oil production was not imminent. The harbingers of gloom have now returned to their prediction but with another twist--it is not a matter of insufficient reserves of oil but “whether countries have the desire and means to produce it.” (Centre for Global Energy Studies). Both parts of this observation are worth noting. Large state companies may lack the desire because, with $70 oil, so much money is already rolling in. For the same reason, the large state companies may not feel pressed to invest in new production. Those that want to invest more and increase production are the smaller state companies, whose countries need the extra revenue, and the private companies which want to make more profit, but both have a lesser impact on oil production levels. In a nutshell, there is no shortage of oil in the ground, but the question is can it be produced quickly enough to satisfy growing demand?

In 1956, M. King Hubbert, a USA geologist, devised what is called Hubbert’s Curve. This bell-shaped curve shows how production increases, peaks and then declines over time. Mr Hubbert accurately forecast in 1956 that production in continental USA would peak in 1970. Geologists have such faith in this curve that they use it to predict peak production in other countries.

So, is it merely a question of applying this curve to each oil-producing country and so come up with the peak for the whole world? Well, not exactly. The trouble is the curve does not allow for the effect of new technology and changing economic factors. For instance, the oil recovery rate has traditionally been around 30 percent of the oil in place, but with new technology this rate can exceed 50 percent e.g. in laboratory conditions, THAI (toe to heel air injections) has recovered 60 percent. Other enhanced recovery methods are also on the drawing board. Just imagine if it is possible to go back to seemingly depleted fields and double the recovery rate.

Economics also play an important part in new oil development. As the price has shot up from $30 to $50 to $70 a barrel, it allows the development of more costly production e.g. offshore and in deeper waters. It also permits the introduction of more costly enhanced recovery methods. Conventional wisdom says the price will not fall below $40 a barrel in the foreseeable future.

So while geologists are certainly the ones to calculate the oil in place, the calculation of the oil recovery rate depends on technology and economics and, to a lesser extent, on politics, demography and ecological issues. For those reasons, they cannot claim to be the only ones qualified to calculate peak production.

It is a quirk of life that, when geologists say there are no more large oil provinces to be found, right away one is discovered. I recall in the early 1950s that eminent geologists predicted that the world’s oil reserves would run out in 40 years. In fact, in the 1960s oil was found in Nigeria, Libya, the North Sea and Alaska (Prudhoe Bay) and the predictions on how long oil reserves would last were quietly dropped.

The experts on peak oil, Colin Campbell and Jean Laherrere, in their article “The end of cheap oil,” state it is unlikely other large oil deposits remain to be discovered. However, only a couple of months ago the Chinese announced the finding of a large oil province offshore in the Bay of Bohai. It is probable more oil will be found in deeper waters in the Gulf of Mexico and in the Beaufort Sea. .

The same experts inform us their peak oil calculation excludes “non conventional” oil. But this is an important omission as, with present oil prices, many non conventional oil projects have become economically viable. This is certainly the case with tar sands (such as the Athabasca Tar Sands) and extra heavy oil (such as in the Orinoco Belt). .

Oil from the Athabasca sands has to be mined, and separating out the oil uses energy to produce energy. It also consumes a lot of water and making large holes in the ground is not environmentally friendly. Oil in the Orinoco Belt does not have these drawbacks--in the subsurface it is a liquid with a temperature of 50º C and can be pumped to the surface normally like any heavy oil. The difficulty starts at the surface when the oil cools down and becomes like boot polish. However, that problem has been solved by mixing the oil with a diluent and pumping it to the upgrading plant where the diluent is extracted and pumped back to the production area.

The costly part of the operation is upgrading from an 8º API to one of 16º API or 32º API depending on the complexity of the plant. But the total production and upgrading cost is in the order of $12 a barrel which leaves a wide margin with a sale price of $50 or $60 a barrel. Oil reserves are estimated at the huge amount of 235 billion barrels, though production capacity at the moment is only 600,000 barrels per day. This is indeed a case of oil in the ground which may or may not be produced quickly enough.

Oil shale is found in many countries and there are huge amounts in Colorado and Wyoming in the USA. It can be heated to produce oil or used in its natural state as a low grade fuel in power plants. The mining operation has the same drawbacks as tar sands, but current high oil price makes it economically viable and allows for the restoration of the sites damaged by the extraction process.

Advanced technology means wells can be drilled in deeper water like the Gulf of Mexico, but drilling in very deep water is still a challenge to be overcome and production from that source is many years away. For ecological reasons, drilling in the Polar regions is unlikely in the foreseeable future.

The main primary sources of energy are oil, natural gas and coal. Increased use of the two latter can take the pressure off oil consumption. Venezuela, Bolivia and Peru have huge natural gas reserves which can supply the rest of South America and some of Central America. Venezuela has huge reserves onshore and offshore, Peru has large reserves in the Amazon jungle (Camisea field) and more reserves have recently been found in northern Peru. Who would have thought that Bolivia, high in the Andes, would have the second largest reserves after Venezuela?

Both Bolivia, which hopes to have access to a sea port, and Peru intend to export the excess natural gas as LNG. Qatar is the world’s largest exporter of LNG, followed by Indonesia, and other countries want to get on the band wagon. Increased production of natural gas and LNG worldwide should fill some of the future demand for energy.

There are also enormous deposits of coal worldwide which can relieve the pressure on oil consumption. The problem with coal has been the pollution caused by its emissions, but new technology should virtually eliminate its harmful effects. Where indigenous reserves are available, the cost to the country is only the production cost so one can certainly expect poorer countries to substitute oil imports with their own coal.

Turning now to the demand side, Colin Campbell and Jean Laherrere believe any impact on the consumption of fossil fuels by renewables and substitutes will be small. The latter include natural sources such as solar, wind, tidal, hydro, and geothermal, plus man-made sources such as nuclear and biofuels. Ethanol is currently being made from sugar cane, cornstarch and rapeseed but new “cellulosic” technology will use cellulose, which exists in all plant matter including waste, and considerably reduce the cost. So while it may be true no single substitute will have a significant effect, the collective effect should be material. Once again, use of these will take the pressure off oil consumption.

Another interesting headline I should like to quote is “Sweden plans to be world's first oil-free economy.” They hope to achieve this by setting a 15 year limit to switch to renewable energy and by favouring biofuels over nuclear power. It looks an optimistic goal, but it does indicate a trend away from oil consumption.

So while Messrs Campbell, Laherrere and Skrebowski of the Oil Depletion Analysis Centre predict peak oil will be reached in 2010, the US Department of Energy predicts it will not occur till after 2030. My basic difference of opinion with the above experts is that I believe new technology, economic factors and the use of substitutes will have a significant impact on delaying peak oil production. In this respect, my views are close to those expressed by Michael Lynch, the well-known USA economist. I believe trying to predict the peak oil production date is a mug’s game, but if the reader really thinks my opinion is worth having, I believe that it is not imminent and will occur after 2030.

 

Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in
England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld not necessarily share these views.

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Petroleumworld News 07/12/07

Copyright©2006 Oliver L Campbell. All rights reserved

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