For my Energy and Capital article this week, I wrote up some highlights from the recent peak oil conference.

Highlights of the 2008 ASPO-USA Peak Oil Conference, Part 1

Oil Peaks in Two Years, But America Sleeps On…

2008-10-16
By Chris Nelder

For those who aren’t inclined to wade through all 57 pages, here are some highlights.

On the whole, I detected a distinctly different tone from the previous ASPO-USA conferences I have attended. The range of forecasts seems to have narrowed considerably, and there was a marked sense of urgency in many of the presentations. Most of the presenters have been studying energy and peak oil for many years, and warning of the potential results, but we have done little about it, and have been delayed by politics and propaganda. I think the general feeling of the conference was that we are truly out of time to mobilize a response.

The presentation by Jeremy Gilbert, the former Chief Petroleum Engineer for BP, was a good example. He noted that while the world has had multiple “wake up calls” about peak oil, and that the ASPO has been doing conferences detailing the problem since 2001, nothing seems to have changed. Oil discovery peaked 40 years ago, and despite the most intensive and technically advanced drilling in history, it continues to fall. We now only discover about one barrel for every 4-5 we consume, and that trend is only getting worse.

The major international oil companies (IOCs) like ExxonMobil have not invested in future production as had been hoped; new technology has not dramatically improved recovery; and wells drilled over the last few years have nearly doubled but production has remained flat. Yet demand continues to rise and per-capita usage in the US and Canada is little changed. He rather directly chastised America for continuing to dream that exploration and technology will save the day, when the data is abundantly clear that they cannot.

The IOCs, for their part, have access to only about 6% of the world’s remaining oil reserves; the reserves of Exxon, the largest of the majors, rank only #17 worldwide. The rest is in the hands of the National Oil Companies (NOCs), which take much larger shares of the revenue (around half), are often rife with corruption and have uneasy relationships with their governments. Jim Buckee of Talisman Energy noted that the NOCs are also far less efficient, producing only about $5.25 of revenue per barrel vs. $15.28 for the IOCs.

Recognizing that the remaining large supplies of oil are in geopolitically challenging areas, there was a considerable focus on the geopolitics of energy. Jeff Vail noted that oil is part of the intersection of nation and state, and that global feedback loops among nations tend to increase resource nationalism, and exacerbate the peak oil problem. Oil is increasingly being used as a weapon, and addressing the root causes of the tension will require radical restructuring of our economies. However, finding realistic solutions remains a challenge, and trumps geological factors in affecting oil production.

Supply Outlook Dim

OPEC, of course, is the geopolitical prime mover of the oil markets, producing 43% of the world’s crude. A great deal of attention was given to its oil reserves, and its production outlook. Dr. Peter Wells emphasized that OPEC producers have long horizons for their investment decisions, and an increasing concern for saving some oil for future generations. Their ambition is not to pump it as fast as possible, but to seek the maximum sustainable rate. It is in their interest to keep the spare production capacity as low as possible while keeping prices rising but moderate, without disrupting the markets. He noted that the price floor for oil is no longer set by spare capacity so much as it is by the needs of Saudi Arabia’s budget.

Since non-OPEC production appears to have peaked, the world is looking to OPEC to satisfy additional demand and make up for the decline of non-OPEC. But it is looking increasingly unlikely that OPEC will be able to meet that expectation, as their large fields are mature, and exploration successes peaked 40 years ago. Wells believes that OPEC production will never exceed 40 million barrels per day (mbpd), as compared to its 37 mbpd today (EIA), mainly due to political decisions.  

Saudi Arabia will likely peak within about five years, after which any further growth is essentially out of the question. Prof. Kjell Aleklett, a founder of ASPO International, quoted King Abdullah of Saudi Arabia: “The oil boom is over and will not return. All of us must get used to a new lifestyle.”

This is where the depletion question becomes important. If the global depletion rate is roughly 5% (a broadly accepted figure for now, but it is increasing), and today’s production is approximately 87 mbpd, then we are currently losing 4.35 mbpd of capacity each year just due to depletion.

If Wells’ estimate is correct (many at the conference believed it was on the optimistic side) and non-OPEC is indeed in terminal decline (which I believe is true) then the total OPEC additions won’t even offset the global decline. Accordingly, we are now relying entirely on the non-crude “unconventional liquids” like natural gas liquids, oil from tar sands, biofuels, and coal-to-liquids to increase the production of “all liquids” at all.

But as Jim Buckee of Talisman Energy pointed out, even these unconventional liquids may not be able to fill the gap of crude decline. By his reckoning, conventional oil reserves are 750-1000 billion barrels, and the decline in production amounts to 50-60 mbpd over 10 years. Natural gas liquids (probable), yet-to-find oil (10-20 billion barrels), enhanced oil recovery technology, plus tar sands bitumen and extra heavy oil all put together equals about 300 billion barrels, and can’t make up for the decline of conventional crude. (Something ASPO founder Colin Campbell has been saying for a long time.)

Peak Oil In Two Years – It’s Crunch Time

Estimates of the global peak of oil production varied, as always, but I would say that there was a strong consensus around the 2010-2013 time frame for “all liquids.” Natural gas is expected to occur between 5 and 10 years later. This is in line with the estimates I used for Profit from the Peak.

One such outlook was offered by Ken Verosub, a professor of geology at UC Davis. For the world, his calculation shows a peak around 2015, +/- 2 years. His simple math on the outlook for US domestic oil production was quite clear:

• Total US reserves: About 20.9 billion barrels
• Total US daily consumption: 20.7 mbpd, of which we import 11.7 mbpd
• Domestic oil, daily production: 9 mbpd
• Domestic oil, annual consumption: 3 billion barrels per year
• 20.9/3= 7 years

Therefore at current rates, our domestic oil production would be kaput by roughly 2015, +/- 2 years! In actuality though, production doesn’t speed along at a high rate and then quit, but rather tails off in a bell curve. So what this really tells us is that by the end of the next presidential administration, we will be almost entirely dependent on oil imports. Verosub summed up his presentation by saying, “It’s crunch time!”

As for the undeveloped oil regions of the US, several presenters noted that increased production from the Outer Continental Shelf (OCS) and the Arctic National Wildlife Refuge (ANWR) would make only a negligible difference in production and prices, due to the long lead times (roughly 10 years) and the low flow rates that might be achieved. Newt Gingrich’s “Drill Here, Drill Now, Pay Less” campaign was widely mocked as being altogether unclear on the concept of oil flows. Gilbert stated that if all of the OCS were opened to exploration, it would only increase US reserves by about 20%; that’s about 4 billion barrels, or the equivalent of six months of our current domestic oil production.

According to Gill Mull, a retired geologist from the Alaska Geological Survey, the P50 (50% probability) estimate for ANWR is about 10 billion barrels total, or roughly a three-year supply as compared with current US domestic production. However, due to the flow rates, all of the new fields in the region put together couldn’t overcome the decline rate of the North Slope.

Simmons Warns of a Run on the Pump

The most shocking presentation, though, had to be the one given by Matthew Simmons, author of Twilight in the Desert and one of the world’s top oil investment bankers. You could have heard a pin drop in a room of 500 people while he was speaking. The hurricanes and high prices have driven inventories to an extremely low level, he said, and he was very concerned about the possibility of a “run on the bank” with fuel supplies, which could easily breach the system’s minimum operating levels.

He presented an example of how quickly we could “break the bank” of oil supply:

·         220 million vehicles

·         20 gal capacity each

·         Average tank has 5 gals in it (an estimate supported by recent research)

·         If everybody rushes to top off their tanks, at ~15 gallons x 220 million = stock draw of 78 million barrels.

·         But our current finished stocks are only about 87 million barrels!

Even a few weeks of cold winter could deplete the usable stocks of heating oil, he said.

When the stocks deplete, he warned, food supply could be in jeopardy within a week. The economy would slow to a crawl, and the financial markets would panic, as the country finally grasps the energy risk. And yet, this risk is unpriced. Nobody knows the odds. Nobody does charts of peak oil, even though it has ominous parallels with the financial crisis. Most global leaders have no idea of any of the risks that face the energy markets. Whereas it took 5 months to melt down the financial markets, he said, the energy markets could unwind in less than a month.

Very sobering stuff, and that only roughly covers the first half of the conference. In part two of this article, I’ll take a look at coal, China, the airlines, and renewable energy…and explain why one presenter believes that the massive increase in oil demand from China and India could, paradoxically, spell the end of globalization.

Until next time,

Chris