Folks,

In this week’s article for Energy and Capital, I address the buzz du jour: the new forecast on oil supply and demand from the National Petroleum Council. They’re still not acknowledging reality, but they seem to be getting closer.

Peak Oil By Any Other Name

2007-07-20

By Chris Nelder

With apologies to William Shakespeare:

What’s in a name? That which we call a peak

By any other name would hurt as much.

This week, the National Petroleum Council (NPC) finally coughed up a report that we’ve been awaiting for two years, ever since U.S. Energy Secretary Samuel Bodman asked them to determine "what the future holds for global oil and gas supply" and whether "incremental supplies can be brought on-line, on-time and at a reasonable price that does not jeopardize economic growth."

Translation: the Energy Secretary was wise to peak oil, and asked the oil industry to tell him where we really stand. After all, if it goes down on his watch, he’s going to have one of the worst jobs on earth.

If he has any idea at all what the truth about global oil supply really is at this point, then I think he’ll be as disappointed in the result as the rest of us "walking worried" are.

The report was titled "Facing the Hard Truths about Energy," but it could just as easily have been called "Dodging the Hard Truths about Energy."

ASPO’s Randy Udall hit the nail on the head: "Charging the NPC with analyzing oil and gas is akin to asking the tobacco industry to forecast lung cancer."

The comparison is fair. The NPC report was chaired by Lee Raymond, former ExxonMobil CEO, and included over 350 participants, primarily from the energy industry, including such luminaries as the media’s favorite wild-eyed optimist, Daniel Yergin of Cambridge Energy Research Associates (CERA). We should expect nothing less than a positive spin on the energy business from the likes of these fine gentlemen.

The 422-page report claimed to be "a comprehensive study considering the future of oil and natural gas to 2030 in the context of the global energy system" and in fact, contained some good work. It’s worth a read and available on their Web site. And in all fairness, it did concede a couple of key points:

• "It is a hard truth that the global supply of oil and natural gas from the conventional sources relied upon historically is
  unlikely to meet projected 50% to 60% growth in demand over the next 25 years."
• "The concept of energy independence is not realistic in the foreseeable future,
  whereas U.S. energy security can be enhanced by moderating demand, expanding and diversifying domestic
  energy supplies, and strengthening global energy trade and investment. There can be no U.S. energy security
  without global energy security."
• "The United States must moderate the growing demand for energy by increasing efficiency of transportation,
  residential, commercial, and industrial uses."
• "The world is not running out of energy resources, but there are accumulating risks to continuing expansion
  of oil and natural gas production from the conventional sources relied upon historically. These risks create
  significant challenges to meeting projected total energy demand."

It’s a start. At least they admitted that there are serious supply challenges between now and 2030. The report also addressed the need for reducing demand, carbon capture and sequestration, and expanded production of renewables and other energy alternatives, as well as the demand-side challenges such as population growth and the red-hot economies of Asia.

It also mentions "The Peak Oil Debate," and for once, it represents the peaker case fairly accurately. The authors reviewed a range of global production forecasts, and noted that there was a significant gap between the ASPO forecast on the low side, the EIA reference case on the high side, and the forecasts of the international oil companies in between.

But like the IEA, the NPC seems to be bending over backwards in order to avoid saying "peak oil," by trying to couch it in terms of "accumulating risks" and "challenges" and parsing out the factors that are "conventional" or "above-ground."

The Peak By Any Other Name

Can we cut the crap?

When we reach the point where production stops increasing-as appears to be the case somewhere between last year and 2012-it’s the peak. They can call it Ray, they can call it Jay, but it’s still the peak.

Their belief that the many "challenges" can be overcome is based in the same old dogma, and is utterly unsupported by the facts on the ground. Factors pointing to an imminent peak, they say, "are countered by expectations for new discoveries, enhanced recovery techniques, advancing technology for producing oil from unconventional sources, and reassessments and revisions of know[n] resources."

Here’s their scenario:

What’s wrong with this picture?

Let’s take their assertions point by point:

"expectations for new discoveries": The NPC forecasts that production will increase from 86 million barrels/day today to over 115 mmb/day by 2030. Based on all the numbers we have seen, that’s simply not tenable, and even the EIA and IEA have said so.

The NPC production scenario for "known reserves" agrees with the ASPO model, as well as with the IEA forecast, with a peak around 2012. But after that, the NPC model takes a hard turn into fantasy land.

Worldwide discoveries have been on the decline for over 20 years. A sudden reversal of this trend to discover increasingly more oil ("exploration potential") after 2015 is pure fantasy. And as these oil industry experts know full well, it typically takes an average of seven years between discovery and first production of an oil field, so the fields that they expect to come online after the 2012 conventional peak should have already been discovered!

Like other forecasters, NPC expects that new supply will be provided mainly by the OPEC countries of Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates. Where they diverge is in the scale: the NPC believes that those countries will actually double their exports. But exports from those countries have been decreasing in the last few years, as they struggle to maintain current production levels while their domestic consumption rises. The top 15 exporters in the world account for fully 84% of the total oil exported worldwide, and production in half of them is either flat or in decline. Very few industry analysts believe that a doubling of OPEC exports is even possible.

"enhanced recovery techniques": The historical experience of using enhanced oil recovery (EOR) techniques does not affect the date of the peak, nor the peak rate of production. It typically just extends the "tail" on the back end of the curve and increases the ultimately recoverable total. This graph seems to hugely misrepresent the role of EOR.

"advancing technology for producing oil from unconventional sources":  The sources they refer to are oil shale, tar sands and unconventional natural gas production. As I have written about previously, oil shale is so unlikely to ever be a major player that I have written it off entirely. Tar sands production might reach 5 mbpd by 2030, but then it won’t be able to grow much more, and that would barely compensate for the decline of Canada’s conventional oil production. And while unconventional natural gas certainly holds significant potential, by 2030 both natural gas and oil will be in such tight supply that it won’t make any sense to think about one compensating for the other.

"reassessments and revisions of known resources":  As any peak oil student knows, this is a very sketchy area. The major revisions that have been made over the last thirty years appear to be more politically driven than anything, so all good models of oil peaking, like the ASPOs, rely on backdated reserve estimates which have proven themselves to be quite reliable. The honest revisions in the future are guaranteed to be marginal.

Remarking on the forecast that we’ll get to 120 million barrels per day of production by 2030, Matthew Simmons, the world’s top oil investment banker, said, "We don’t have any idea where those reserves are going to come from or how we are going to get them out of the ground. The odds of this ever happening are zero."

Simmons was reportedly disgusted with the report, and threatened to leave the council over it. "We should be preparing for a time when, in 10, 15 or 20 years, oil production is likely to be 40 million barrels a day to 60 million barrels a day, not 120 million," he said.

The Real Gulf War

Meanwhile, last week, the IEA had its come-to-Jesus moment, admitting that a global supply shortfall in oil is looming dead ahead:

Despite four years of high oil prices, this report sees increasing market tightness beyond 2010…It is possible that the supply crunch could be deferred — but not by much.

So the IEA (and the ASPO) see a supply crunch within three years, and yet the NPC sees smooth sailing for a full decade longer. It bears repeating: just three weeks ago, IEA chief economist Fatih Birol said in an interview with French newspaper Le Monde, "[I]f Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfills all its promises. The numbers are very simple, there’s no need to be an expert."

At this point, we can only speculate as to the reasons for the reality "gulf war" between the sober, 150-odd nonaligned energy analysts of the IEA, and the 175 members of the industry group NPC.

But it doesn’t take a huge stretch of the imagination.

These Big Oil insiders all know what’s up with peak oil. They’re simply digging in their heels and denying it as long as possible in order to extract the highest possible value from their investments, plain and simple. We don’t hire them to tell the simple truth, and they make no promises of it. "Ask me no questions and I’ll tell you no lies" is their motto, and their obligations, as they are fond of telling us, are strictly to their shareholders.

The oil industry can no more wed itself to the truth than poor Romeo could his Juliet.

So by the time the NPC comes around to making its confession, they’ll have one more sin to add to the list: deliberately misleading the nation into squandering precious time that we could have spent averting the pain and chaos that peak oil will bring.

In the meantime, we can count on staying the course for at least a few more months, as oil rises up, up and away, and energy stocks rise right along with them. If you haven’t been playing the solar stocks in the Green Chip Stocks portfolio, you’ve been missing out on some serious fun this last week, where we’ve been bagging 20-30% gains in a single day!

So party on, NPC. We’ve got your number. But we’ll ride your coattails to profit until the day you decide to come clean and call a peak a peak.

Until next time,

–Chris