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How good are predictions on peak oil?

By Oliver L Campbell

Georges Clemenceau (1841 to 1929) was the French Prime Minister from 1906 to 1909 and again from 1917 to 1920. I guess it was the latter period of the First World War that led him to make that famous quote, “La guerre. C’est une chose trop grave pour la confier à des militaires” which has been translated as “War is too important to be left to the generals.”

I would like to parody that and say, “Peak oil is too important to be left to the oil experts.” I make this assertion with some trepidation as I have several good friends who are geologists and petroleum engineers. I trust they will pardon me as I try to convince the reader why it is so. Geologists and petroleum engineers are clever people, at the sharp end of the oil industry, who discover oil, quantify the amount found and then produce it. All these aspects have become more and more technical over the last 50 years.

Some geologists and reservoir engineers believe that, because they calculate the oil in place, i.e. the oil deposits in the reservoirs, they are the only ones who, with any authority, can predict the amount of oil that can be produced. There is no doubt the amount of oil in place is a geological fact, but the amount that will be produced does not depend solely on geology. Two other material factors--economics and technology--enter into the equation. There are others, such as environmental considerations, but geology, economics and technology are the most important.

It is patently obvious that if it costs $15 a barrel to produce oil from an offshore field and the price of oil is $15 a barrel--it was lower than that in 1998--then that oil will not be produced. But if the price of oil goes up to $30 a barrel and the tax-paid production cost, i.e. after the government has taken its share, is $20 a barrel, then oil companies will be in business. The quantity of oil in place remains the same, but the amount that may be produced has increased

With the oil price now in excess of $80 a barrel, geologists and reservoir engineers are busy recalculating the oil reserves that can be economically produced. But, you may ask, why are not the reserves restated downwards when oil prices fall? It is because the oil companies are conservative when they calculate the reserves in the first place and do not use the current price if they believe it is not sustainable in the longer term. In other words, they may not use the current $80 per barrel but, say, a more cautious $60 or even $40 a barrel. Besides, shareholders are not impressed if reserves are constantly going up and down.

Technology is a dynamic factor which goes hand-in-hand with economics. A higher oil price means costlier, secondary-recovery production methods, like steam injection, gas injection and water flooding, can be used. But it also encourages greater research which leads to new production methods, such as in situ upgrading, that can either reduce production costs or enhance the amount of oil that can be recovered.

So, though the amount of oil in place may be fixed, the amount of oil that may be produced has been constantly increasing with rises in the oil price and advances in technology. For many years, a recovery factor of 30 percent of the oil in place has been considered reasonable, but new technology like THAI (toe to heel air injection) may double that figure in the years to come.

The Securities Exchange Commission realize that economics and technology play an important part in the quantification of oil reserves when they lay down, “The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.” (the highlighting is mine).

Why are not stockbrokers and jockeys all multi-millionaires? One knows a lot about shares and the other about race-horses, so surely they should constantly pick winners. They don’t and this is my point--knowing a lot about a subject does not mean your predictions are much better than any one else’s. There are so many variables that one or the other will catch you out. But have the oil experts’ predictions been an exception to this rule? I will let the reader judge from my following comments.

In the early 1950s, when I was a young and very green oil field accountant, I took what the oil experts said as gospel. Distinguished geologists predicted that oil would run out in 40 years since more oil was being extracted than was being found. Why it should be 40 years, I don’t know but that was the consensual number. However, at the end of the 1950s and into the 1960s, large oil provinces were found in Nigeria, Libya, the North Sea and Alaska (Prudhoe Bay). Further predictions about oil running out were quietly dropped which is just as well because, since then, more large oil provinces have been found.

Not long after, oil experts changed their attention to something more immediate--not when oil would run out, but when world production would no longer meet world demand. This fascinating topic, known as “peak oil,” has sparked off many predictions as to when it will occur. Many prominent geologists, petroleum engineers and oil economists have written on the subject, as well as writers like myself without geological or technical expertise. The latter may be desirable, but it is by no means essential as, once again, geology is only one of many factors that affect peak oil.

On the supply side, there are other hydrocarbon alternatives such as coal and natural gas. Who would have thought 30 years ago that huge gas deposits would be found high up in the Andes of Bolivia? There are also other, less conventional crude oil sources like the tar sands of Athabasca, extra-heavy crudes in the Orinoco Belt, and oil shale in the Green River Formation of the USA. Then there are the substitutes of fossil fuels such as nuclear power and biofuels. These will reduce the pressure on crude oil production.

As regards oil demand, it is surprising the current high price has apparently not damaged the world economy. It seems an increase in world-wide wealth, reflected in the growth of countries’ per capita GDP, was able to take the strain. To give you an idea of the rise in prices, West Texas Intermediate averaged $31 a barrel in 2003, doubled to $66 in 2006 and has almost tripled to its current price of some $90 a barrel.

However, there is little doubt less developed countries, with no indigenous oil, will be looking for less costly substitutes including the so-called “renewables.” These are natural resources and include hydro power, solar power, wind power, geothermal and wave motion. The high oil price will give further impetus into the research for oil substitutes, particularly for transport and power generation.

Despite the above, oil demand is still expected to increase annually. That means peak oil is coming and it is only a question of predicting when it will occur. Is it imminent or someway down the road? An eminent geologist, Colin Campbell, and a distinguished petroleum engineer, Jean Laherrère, are the leaders in the former camp. Their article, “The End of Cheap Oil,” published in March 1998, is obligatory reading as it explains their reasoning. In brief they believe that a) no more large oil provinces are to be found, b) technology will have little effect on the amount of oil ultimately recovered, and c) substitutes for oil, including renewables, will not delay peak oil to any marked extent.

They, and their adherents, have predicted the years 2000, 2006, 2007, 2008 and 2010 as the dates for peak oil. As time goes by, so the date has been pushed back.

Colin Campbell’s latest prediction is 2008 and Chris Skrebowski’s, the editor of Petroleum Review, is 2010 plus or minus two years. Don’t hold your breath--it is most unlikely to occur in 2008. We can all be clever after the event, and I have tried to avoid this. However, I have always been in the other camp which believes peak oil in not imminent. In the last couple of years, large oil provinces have been found in the Gulf of Mexico, the Bay of Bohai and, just recently, off the coast of Brazil. It is no coincidence these are all offshore and, without being a geologist, I confidently expect more oil provinces will be found offshore--there is just so much coastline, including the long Eastern Seaboard of the USA, which has not been thoroughly explored.

Those of us in the “not imminent” camp also believe that, as technology advances, it will lead to the discovery of more oil--just think of the success that has been attained with 3D seismic surveys in recent years. It will also result in improved oil recovery rates from both new and existing oil fields--under laboratory conditions THAI has recovered 60 percent of the oil in place. There are many inventive scientists and engineers researching new production methods, and a high oil price means that the effort will be intensified.

Others will research substitutes and the use of renewables which should curtail the rate at which oil consumption grows. Nuclear power has yet to be accepted as safe, but biofuels and renewables will have an impact. In Northern Ireland, tidal stream power has just been harnessed through the use of submerged turbines. Its great advantage over wind and solar power is that the tides are constant and entirely predictable. In the United Kingdom, the installation of wind turbines, on floating platforms way out in the North Sea where the wind always blows, is being studied. Africa has plenty of solar energy and many rivers whose hydro power can be harnessed to produce electricity. It is true that, at present, renewables account for a very small proportion of energy generation but a great potential exists.

But how good are predictions about peak oil? Those oil experts who made them have certainly been right about the end of cheap oil. However, their record on predicting a date for peak oil has been dismal. So when you read statements from the Association for the Study of Peak Oil and Gas, the Club of Rome, Depletion Scotland, the Energy Watch Group, the Oil Depletion Analysis Centre, Petroleum Review et al that peak oil will occur in 2008, 2009, 2010 or even 2020, take it with a large pinch of salt. Only in November this year, the Energy Watch Group of Germany made a statement that oil production peaked in 2006 and that from now onwards production will fall at around three percent per annum. This needs a leap of faith to be believed.

Do not be persuaded by references to Hubbert’s Curve which is the bell-shaped curve you would expect from a producing oil field, if all things remain equal. It climbs slowly, rises steeply, reaches a peak, falls steeply and then flattens out. However, all things do not remain equal as we have seen above--along the time scale, the level of production is influenced by the oil price, production cost, and new technology.

In brief, geology is the most important factor. The probability more oil provinces will be found, most likely offshore, is greater than that they will not. Technology plays an important part in finding oil, reducing production costs, and enhancing the oil recovery rate. Economics is particularly significant since high oil prices permit more costly production methods and also lead to an intensified search for oil substitutes.

However, more important than the date for peak oil is the fact it will happen sooner or later. Governments of consumer countries should take action, while there is still time, to limit their dependency on oil, find substitutes, including the use of renewables, and so mitigate the possible, catastrophic consequences of an insufficient supply--peak oil is too important to be left to the oil experts.

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 does not necessarily share these views.

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