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Survive Peak Oil: Peak Oil: Laherrère, Real Curves, and Official Curves
Survive Peak Oil: Peak Oil: Laherrère, Real Curves, and Official Curves.
Sunday, March 23, 2014
Peak Oil: Laherrère, Real Curves, and Official Curves
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OPEC Update and my argument that OPEC is producing flat out » Peak Oil BarrelPeak Oil Barrel
OPEC Update and my argument that OPEC is producing flat out » Peak Oil BarrelPeak Oil Barrel.
The OPEC Monthly Oil Market Report is just out with OPEC crude only production numbers for February 2014. OPEC Crude production was up 258.6 kb/d in February on the strength of a big jump from Iraq. Iraqi crude oil production was up 400 kb/d to 3,397 kb/d. OPEC crude only production, less Iraq, was down 141.4 kb/d.
Iraq was the only big gainer this month.
Saudi Arabia was down 102 kb/d but that was after January production had been revised up by 99 kb/d.
Saudi admitted, early that their old giant fields were in steep decline. Ravensworth.org published the following quote about eight years ago however their web site has since been taken down:
One challenge for the Saudis in achieving this objective is that their existing fields sustain 5 percent-12 percent annual “decline rates,” (according to Aramco Senior Vice President Abdullah Saif, as reported in Petroleum Intelligence Weekly and the International Oil Daily) meaning that the country needs around 500,000-1 million bbl/d in new capacity each year just to compensate.
That quote by Abdullah Saif was widely circulated. and in 2007 International Business Publications published this on page 144:
One challenge for Saudi in achieving their strategic vision to add production capacity is thattheir existing fields sustain, on average, 6 to 8 percent annual “decline rates”(as reported by Platts Oilgram) in their existing fields, meaning that the country needs around 700,000 bbl/d in additional capacity each year just to compensate for natural decline.
However in 2006 Saudi Arabia’s Center for Strategic and International Studies claims they have gotten this decline rate down to almost 2%.
Without “maintain potential” drilling to make up for production, Saudi oil fields would have a natural decline rate of a hypothetical 8%. As Saudi Aramco has an extensive drilling program with a budget running in the billions of dollars, this decline is mitigated to a number close to 2%.
The drilling program they are talking about is those horizontal wells placed at the very top of the reservoir. Now imagine, that with all those brand new horizontal wells sucking the oil right off the top of the reservoir, they still had a decline rate of over 2%! Of course that was in 2006. It is likely that the water has already hit many of those horizontal wells and their decline rate is now well over 2%. More likely it is a lot higher than that.
But they have brought on Khurais and Manifa since then with a combined production capacity of 2 mb/d. That has enabled them to keep their production levels up… for now. Saudi may, just may, be able to produce half a million barrels per day more than they are right now but I doubt it.
Okay then is OPEC producing flat out? There is absolutely no doubt that, with the possible exception of Saudi Arabia, they are. Eight OPEC nations have serious declining production since 2005. Even to suggest that these eight nations are not producing flat out is to deny reality. To believe that they would deliberately cut production while four countries, Iraq, Saudi Arabia, Kuwait and UAE, are increasing production is delusional.
What about the other four? Iraq makes no bones that they are producing every barrel possible and hope to produce more. And I have discussed Saudi Arabia but what about Kuwait and UAE?
Kuwait and the UAE were later than Saudi Arabia in getting their infill drilling program going. They both started their infill drilling program around 2007, delayed it during the drastic OPEC cuts from late 208 until early 2011, but have since gone full steam with that program. They reached their peak about a year ago. I expect them to hold at this level for two or three years before they start a not too slow decline.
Yes, it is my sincear opinion that OPEC is now producing every barrel they possibly can. OPEC production may increase slightly as Iran dlowly increases their production as sanctions are lifted. And there is even a slight chance that peace may break out in Libya and their production increases, but not likely.
My point is there is OPEC has no spare capacity. If anyone seriously doubts my opinion on this subject then please post your reasons, and name the countries you believe are not producing flat out, in the comments section below.
Updated charts of all 12 OPEC countries can be found here: OPEC Charts
Energy & Capital is a web site that pushes energy stock. They are usually bullish, very bullish on shale oil and usually deny peak oil. That is why it was so surprising to get their latest edition in my email box. However this is just one writer for Energy & Capital. I am sure most others have a different opinion.
Over the past few months, I’ve been sharing my concerns about shale oil.
Namely, that it’s more comparable to a Ponzi scheme than any sort of boom.
I’ve articulated the reasons for my thesis, including fast decline rates, the amount of new rigs and wells needed, and a cost of production that’s been higher than the price of sale for some time now.
And further down he says:
Predictions are tough, especially with a still-struggling economy. If I had to say, prices at least need to rise to the marginal cost of production at $115ish. Trouble with that is anything over $110 for a sustained time causes recession, which of course would send prices lower making projects unviable once more.
It’s classic peak oil. It never went away, we’ve just been able to paper over it with free money for the past half decade.
Seems like the majors realize the gig is up. They’re selling unconventional assets in a big way, wanting to mitigate risk and capex by getting back to conventional. Still, conventional peaked in 2005 and that strategy seems like a last-ditch effort.
Note: I send out an email notification to about 110 people when I have published a new post. If you would like to be added to that list, or your name removed from it, please notify me at: DarwinianOne at Gmail.com
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Can we depend on a “Call on OPEC”, or has OPEC peaked? » Peak Oil BarrelPeak Oil Barrel
Can we depend on a “Call on OPEC”, or has OPEC peaked? » Peak Oil BarrelPeak Oil Barrel.
Steve Kopits, in his recent presentation at Columbia University, ridiculed the IEA’s often used term a “Call on OPEC“. That is, the IEA looks at the world oil supply and if they see a supply shortage looming on the horizon they then issue a “Call on OPEC” to supply x number of extra barrels and fill that gap. But the next time the IEA issues such a call can OPEC deliver? Or, is OPEC already producing every barrel they possibly can.
One thing for sure, there are eight OPEC countries that are definitely producing every barrel they possibly can, those countries are Algeria, Angola, Ecuador, Iran, Libya, Nigeria, Qatar and Venezuela. The chart below is the combined production of those 8 nations.
All charts in this post are “Crude Only” in kb/d with the last data point Jan. 2014.
There can be no doubt that all eight of these OPEC countries are producing every barrel they possibly can. While it is true that Iran and Libya have political problems that is holding their production back, but political problems in that part of the world are likely to get worse rather than better.
But what about the other four OPEC nations. The chart below shows the combined production of Iraq, Kuwait, Saudi Arabia and the UAE.
It is my contention that not only are these four OPEC nations producing every barrel they possibly can but that they have little prospect of producing much more. I will examine each country one by one.
Iraq has not been subject to OPEC quotas since the the beginning of Mr. Bush’s war and make no bones about producing every barrel they can and hope to produce more, a lot more.
But their production has been relatively flat for almost two years. They may be able to squeeze out a few more barrels in the future but any increase will be very slow in coming.
But what about the other three. First Kuwait.
Kuwait initiated Project Kuwait in 1997 in hopes of slowing the decline of Burgen and increasing production in their northern fields. The project was delayed by political bickering about bringing in outside contractors but finally got underway in early 2007 only to be delayed a year later by the crash. But the project, really a massive infill drilling program, got underway again in early 2011 and has managed to increase their production by some 200,000 bp/d over their 2008 peak. That simply means more infill drilling. But they are clearly at peak right now.
However their production has been flat for almost two years. Recently they announced an effort to increase their “Production Capacity” by another 150 kb/d. Like all other OPEC countries they claim to be able to produce a few more barrels than they are actually producing.
The United Arab Emirates?
The UAE has learned the same trick as every other nation with tired old fields. That is if you drill new horizontal wells that run along the length of the top of the reservoir, they can increase production slightly or at least slow the decline rate. They are looking toppy right now and can expect decline to set in soon.
That leaves Saudi Arabia.
Saudi Arabia was among the first nations in the world to initiate new infill drilling programs. Before they they did this their decline rate of their old fields was averaging 8% per year. They claimed, with that drilling program, they got that decline rate down to almost 2% per year. But that was over eight years ago. I suspect that the decline rate has increased considerably since then.
Saudi has however, been able to keep from declining in net production by bringing on new fields, or rather old mothballed fields back on line. The most recent being Khurais which was brought on line in 2009 and Manifa which came on line last year with 500,000 bp/d and is ramping up to its full capacity of 900,000 bp/d this year. The spike you see in 2013 is Manifa ramping up.
Saudi may be able to produce a few more barrels but not very many. But as, Sadad Al Husseini a former executive at Aramco, said in 2012 “Saudi is producing flat out”. If they did manage to squeeze out a few more barrels it would be only temporary. Saudi is about to go into decline, or at least that is my opinion.
Any “call on OPEC” by the IEA would likely produce about as much new oil as a call on their grandma.
Note: I send out an email notification to about 100 people when I have published a new post. If you would like to be added to that list, or your name removed from it, please notify me at: DarwinianOne at Gmail.com
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Can we depend on a "Call on OPEC", or has OPEC peaked? » Peak Oil BarrelPeak Oil Barrel
Can we depend on a “Call on OPEC”, or has OPEC peaked? » Peak Oil BarrelPeak Oil Barrel.
Steve Kopits, in his recent presentation at Columbia University, ridiculed the IEA’s often used term a “Call on OPEC“. That is, the IEA looks at the world oil supply and if they see a supply shortage looming on the horizon they then issue a “Call on OPEC” to supply x number of extra barrels and fill that gap. But the next time the IEA issues such a call can OPEC deliver? Or, is OPEC already producing every barrel they possibly can.
One thing for sure, there are eight OPEC countries that are definitely producing every barrel they possibly can, those countries are Algeria, Angola, Ecuador, Iran, Libya, Nigeria, Qatar and Venezuela. The chart below is the combined production of those 8 nations.
All charts in this post are “Crude Only” in kb/d with the last data point Jan. 2014.
There can be no doubt that all eight of these OPEC countries are producing every barrel they possibly can. While it is true that Iran and Libya have political problems that is holding their production back, but political problems in that part of the world are likely to get worse rather than better.
But what about the other four OPEC nations. The chart below shows the combined production of Iraq, Kuwait, Saudi Arabia and the UAE.
It is my contention that not only are these four OPEC nations producing every barrel they possibly can but that they have little prospect of producing much more. I will examine each country one by one.
Iraq has not been subject to OPEC quotas since the the beginning of Mr. Bush’s war and make no bones about producing every barrel they can and hope to produce more, a lot more.
But their production has been relatively flat for almost two years. They may be able to squeeze out a few more barrels in the future but any increase will be very slow in coming.
But what about the other three. First Kuwait.
Kuwait initiated Project Kuwait in 1997 in hopes of slowing the decline of Burgen and increasing production in their northern fields. The project was delayed by political bickering about bringing in outside contractors but finally got underway in early 2007 only to be delayed a year later by the crash. But the project, really a massive infill drilling program, got underway again in early 2011 and has managed to increase their production by some 200,000 bp/d over their 2008 peak. That simply means more infill drilling. But they are clearly at peak right now.
However their production has been flat for almost two years. Recently they announced an effort to increase their “Production Capacity” by another 150 kb/d. Like all other OPEC countries they claim to be able to produce a few more barrels than they are actually producing.
The United Arab Emirates?
The UAE has learned the same trick as every other nation with tired old fields. That is if you drill new horizontal wells that run along the length of the top of the reservoir, they can increase production slightly or at least slow the decline rate. They are looking toppy right now and can expect decline to set in soon.
That leaves Saudi Arabia.
Saudi Arabia was among the first nations in the world to initiate new infill drilling programs. Before they they did this their decline rate of their old fields was averaging 8% per year. They claimed, with that drilling program, they got that decline rate down to almost 2% per year. But that was over eight years ago. I suspect that the decline rate has increased considerably since then.
Saudi has however, been able to keep from declining in net production by bringing on new fields, or rather old mothballed fields back on line. The most recent being Khurais which was brought on line in 2009 and Manifa which came on line last year with 500,000 bp/d and is ramping up to its full capacity of 900,000 bp/d this year. The spike you see in 2013 is Manifa ramping up.
Saudi may be able to produce a few more barrels but not very many. But as, Sadad Al Husseini a former executive at Aramco, said in 2012 “Saudi is producing flat out”. If they did manage to squeeze out a few more barrels it would be only temporary. Saudi is about to go into decline, or at least that is my opinion.
Any “call on OPEC” by the IEA would likely produce about as much new oil as a call on their grandma.
Note: I send out an email notification to about 100 people when I have published a new post. If you would like to be added to that list, or your name removed from it, please notify me at: DarwinianOne at Gmail.com
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Jan Winiecki compares Vladimir Putin’s short-sighted leadership to Soviet rule in the 1970’s and 1980’s. – Project Syndicate
RZESZOW – With the Winter Olympics underway in Sochi, Russia is again in the global spotlight – and President Vladimir Putin is taking the opportunity to present his country as a resurgent power. But, beneath the swagger and fanfare lie serious doubts about Russia’s future. In fact, long-term price trends for the mineral resources upon which the economy depends, together with Russia’s history (especially the last two decades of Soviet rule), suggest that Putin’s luck may well be about to run out.
Mineral-resource price cycles generally begin with a rise lasting 8-10 years, followed by a longer period of stable, relatively low prices. Given that prices have been on an upswing since the middle of the last decade, they should begin declining within two years, if they have not done so already. Moreover, the last price trough lasted more than 20 years, implying that Russia cannot expect simply to wait it out.
But, beyond acknowledging the need to cut spending – an obvious imperative, after the estimated $50 billion cost of the Sochi Olympics – Putin has not signaled any concrete plans to tackle Russia’s economic weaknesses.
Russia faced a similar challenge in the 1970’s and 1980’s – and, like Putin today, its leaders failed to do what was needed. According to former Prime Minister Yegor Gaidar, who led Russia’s only post-Soviet government that was oriented toward systemic change, the socialist command economy exhausted its growth potential by 1970.
Under non-totalitarian circumstances, the threat of stagnation would have generated strong pressure for systemic reform. But the Soviet Union’s aging communist leadership, encouraged by the OPEC-generated oil-price explosion and the discovery of massive hydrocarbon reserves in western Siberia, took a different tack, using natural-resource revenues to finance continued military expansion.
In an effort to appease the public, the Soviet leadership increased food imports – both directly (meat imports, for example, quintupled from 1970 to 1980) and indirectly (by increasing feedstock imports). While this strategy worked in the short term, it caused food consumption to increase far beyond what the economy could sustain.
As a result, the Soviet economy became even more dependent on resource revenues, making it extremely vulnerable to price fluctuations in international commodity markets. When mineral prices began to decline in the early 1980’s – reaching their lowest point in 1999 – the economy, which had already been stagnating for about five years, went into a free-fall.
Today, the Russian economy is no more resilient than it was in the late Soviet era, with commodities, especially oil and natural gas, accounting for around 90% of total exports and manufacturing for only about 6%. If anything, the economy’s dependence on exports of fuels and industrial minerals has increased, meaning that smaller price fluctuations have a greater impact on Russia’s fiscal and external position. Indeed, some observers – including the Central Bank of Russia (CBR) – have predicted that the country’s current account could slip into deficit as early as next year.
A lasting deficit would eliminate the major economic difference between Putin’s Russia and its Soviet counterpart during the 1980’s – namely, the financial buffer that has been accumulated over the last decade. It is this buffer – which amounted to $785 billion in the 2000-2011 period – that protected the economy from a larger shock when the global financial crisis erupted in 2009, and that has financed Russia’s foreign-policy initiatives, including its recent cooperation with Ukraine.
The CBR’s warning of twin fiscal and current-account deficits assumed that oil prices would remain steady, at $104 per barrel in 2015. But my expectation that oil prices will decline over the next 3-7 years suggests that Russia’s medium-term prospects are actually considerably worse.
In short, Russia will soon have to confront diminished macroeconomic health, with few options for restoring it. Russia’s uncompetitive manufacturing sector certainly cannot pick up the slack, and this is unlikely to change, given Putin’s unwillingness to pursue the needed shift to a more knowledge-intensive economy.
This new reality will not only affect Russia’s foreign-policy and imperial ambitions; it will also undermine the relative social and political stability that has characterized the last decade. Without resource revenues, the government will struggle to finance the policies and programs that are needed to placate ordinary Russians. In this context, the Sochi Olympics, intended to herald Russia’s triumphant return as a global power, may soon come to be regarded as a swansong.
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Guest blog: A 10-year oil supply retrospective shows unwarranted optimism « The Barrel Blog
Guest blog: A 10-year oil supply retrospective shows unwarranted optimism « The Barrel Blog.
By Steve Andrews | February 19, 2014 12:01 AM
Our guest blog today comes from Steve Andrews, who is a retired energy consultant and contributor to the Peak Oil Review, reachable at sbandrews@att.net. We reached out to CERA to determine its interest in providing a response, but did not hear back.
“False optimism leads to very poor investment decisions.”: Jeremy Grantham, co-founder and Chief Investment Strategist, GMO
Ten years ago this month the Oil & Gas Journal published a story from CERAWeek—an annual elite conference for the oil industry put on by Cambridge Energy Research Associates—that bears revisiting.
Why go back? Three reasons. First, CERA arguably has maintained the highest profile of any oil industry analytical shop since at least the turn of the century, thanks in large part to founder Daniel Yergin’s reputation. Every time there is a surprise in world oil supply, he’s the media’s go-to guru. When the National Petroleum Council convenes a world oil study, you can bet the ranch that CERA will play a lead role. When the US Senate or House convenes a committee hearing on oil, CERA often sits on the panel; they also deliver some of their key research papers free of charge to all US lawmakers. Their policy-oriented footprint is large and their strategic media outreach effective.
Second, at the time CERA’s 2004 forecast of seven years of history-breaking sustained growth in world oil production capacity struck many players as being an unreasonably if not outrageously optimistic headline. How does it look 10 years later? Way off base.
Third, if CERA’s oil forecast was that off base a decade ago, should we believe the current abundant-oil storyline that CERA jumpstarted in the fall of 2011 and that has been embraced by the press and policy makers alike? So let’s look back.
On CERA’s lead panel in February 2004, Robert W. Esser, senior consultant and director on global oil resources, predicted global oil production capacity would expand by 20 million barrels/day from 2004 through 2010. (CERA doesn’t forecast production. It forecasts production capacity, which is essentially unverifiable.) That’s nearly 3 million b/d of capacity growth every year for seven straight years from 2004 onward. It didn’t happen.
Per data from BP’s Statistical Review of World Energy, actual production of global petroleum liquids grew by 5.7 million b/d during that period. Then consider the 4 million b/d of spare OPEC capacity that the US EIA shows for 2010. But there were also at least 2 million b/d of spare OPEC capacity in January 2004, at the start of the forecast period. So net, CERA missed their forecast by well over two thirds.
Note that by CERA’s definition production capacity “…eliminates economic or political factors and temporary interruptions such as weather or labor strikes.” Note too that unused productive capacity is never intentionally present among non-OPEC nations, and unused and undamaged production capacity among OPEC nations was primarily limited to Saudi Arabia, Kuwait and United Arab Emirates during 2010.
Why did CERA stumble so badly?
First and foremost, CERA underestimated decline rates from existing oil fields. About the time of its 2004 conference, an oil industry analyst who knew Daniel Yergin asked him, during an elevator discussion, what decline rate for producing fields CERA used when calculating growth in world oil supply in their major studies. Mr. Yergin replied that it would be in the 1% to 2% range.
Chalk that up as a fatal flaw. Over seven years, a decline rate of 1.5% would mean having to replace only 8+ mbd of production capacity. It’s ironic that by late 2007, in what CERA called a groundbreaking study, they calculated the actual decline rate from 811 of the world’s major oil fields at 4.5% per year. Over those same 7 years, using their 4.5% decline rate would require 23 million b/d of capacity just to keep production flat. IEA estimates for decline rates rank even higher than CERA’s.
On the production side, CERA spoke optimistically about projected gains from the Gulf of Mexico, West Africa, Brazil, the Caspian area, Canada, Venezuela, Iraq, Nigeria, Algeria, Ecuador, Sudan and Russia. Indeed, production increased in 11 of those 13 nations for a net gain of 6.7 million b/d. But on the bad news front, the rest of the world lost 1 million b/d of oil production during CERA’s forecast period, hence the 5.7 million b/d net gain. Declines badly undercut forecast gains.
On the demand side, CERA actually worried that “should this spurt in output exceed projections of a very large increase in world oil demand this decade, then persistent downward pressure on oil prices might result.” For the record, when CERA made that comment, oil prices were upward of $30. But while nearly everyone was wrong about oil prices a decade ago, CERA was also wrong about the key demand driver: China. CERA forecast that China’s demand growth for oil would slow to 5% in 2004, compared to what eventually occurred: record-breaking growth of nearly 17%. And while CERA talked about volatility in Chinese demand going forward, China’s record-setting growth rate for oil demand continued throughout CERA’s 2004-10 forecast period.
If this was a personal forecast which I had blown this badly (and I’ve blown a couple), no one would notice. But this enormously flawed vision was widely circulated. CERA gets press coverage, but the press isn’t checking CERA’s track record, and this 2004 prediction is just the tip of the iceberg.
In 2005, CERA dialed back their optimism only slightly. They projected world oil supply capacity still growing 16.4 mbd from 2004 through 2010—a reduction of 3.6 mbd from their original forecast. They projected world demand in 2010 at 94 million b/d, leaving 7.5 million b/d of idle capacity. Note this comment about related impacts on prices: “We generally expect supply to further outpace demand growth in the next few years, which could result in oil price weakness around 2007-08 or thereafter.”
In 2006, CERA projected potential world oil capacity growth of 21.3 million b/d—from 88.7 million b/d in 2006 to 110 million b/d in 2015. We’re less than two years away from year-end 2015, yet total petroleum liquids production will likely run in the 90 million b/d range. Clearly, CERA’s was an exceedingly pollyanish view, rather like a best case in a perfect world.
Now square CERA’s long-standing optimism bias on future world oil supplies with the recent spate of sobering news from Wall Street on the financial travails of the large investor-owned super-majors. Mark Lewis has done a nice job highlighting the near tripling of oil and gas capacity expansion costs since 2000—from $250 vs. $700 billion; three quarters of that was spent on oil, yet oil supply rose only a modest 15% (BP data). Increasingly blunt reports from analyst shops like Sanford Bernstein add to the growing contrarian chatter. Solid coverage in the UK of Richard Miller’s recent paper “The Future of World Oil Production” opened a few eyes about limits. But those voices still have a steep hill to climb.
That’s in part because, starting in September 2011, CERA went on the offensive as chief cheerleader of an overly optimistic, US-led oil abundance storyline. It features the US’s record-breaking shale oil bonanza—an amazingly successful yet term-limited reality. Viewed at the global level, for the last few years the brouhaha about our shale oil bonanza has been the tail wagging the world oil supply dialogue.
CERA’s oil supply predictions should have earned deep skepticism from the press and policy makers. That hasn’t happened yet. It’s overdue.
But please keep the larger backdrop in mind: Without a serious revisiting of the questionable optimism that dominates any dialogue related to longer-term world oil supplies, without a harshly realistic scrub of the facts, we face unnecessarily large energy policy risks.
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EIA International Energy Statistics for August and September » Peak Oil BarrelPeak Oil Barrel
EIA International Energy Statistics for August and September » Peak Oil BarrelPeak Oil Barrel.
The EIA has finally published its International Energy Statistics. The last one had July data. This one is has two months updates, August and September. All the data I publish comes is Crude+Condensate from January 2000 through September 2013.
Again, all data is C+C in thousand barrels per day with the last data point September 2013.
As you can see from the chart World C+C production has leveled out in the last year and one half. September 2013 is slightly lower than February 2012.
There were a couple of major revisions in the July data. Canada was revised down by 269 kb/d while Non-OPEC was revised down by 228 kb/d. There were other small revisions upward. OPEC C+C had no revisions so that left World C+C for July revised down by 228 kb/d.
Both the USA and Canada are on a real tear, owing of course to Light Tight Oil and the Oil Sands. Their combined production is up about 1.9 mb/d since in one year, since last September.
But they are the only ones on a tear. Almost everyone else is flat to down with a few small producers up slightly.
World less USA and Canada is actually below where it was in June 2004 and is swiftly approaching the bottom it hit after the crash of 2008. The peak was in January 11 and they are down 2.65 mb/d since that point.
Actually only Light Tight Oil is keeping the world from declaring peak.
World less USA is down over 1.5 mb/d since the peak of January 2011.
Non-OPEC is up on the strength of the USA and Canada.
However the EIA has OPEC C+C down considerably.
Charts of all Non-OPEC producers are now up on the Non-OPEC Chartspage.
Also a new page has been added, World Crude Oil Production by Geographical Area
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Fears of global oil crisis aired at Transatlantic Energy Security Dialogue. : Jeremy Leggett’s Triple Crunch Log
Jeremy Leggett column in Recharge magazine: “We are betting our entire national economic life on the hope — indeed the expectation — that the fracking boom will continue until well into the 2020s, and that, at a rate and cost we desire, significant amounts of ‘yet to be discovered’ oil will somehow be found to meet the demand.”
“If any of that proves incorrect, we have no plan, no alternative, and have given no thought to how we would respond in such a case.”The speaker is national-security expert Lieutenant Colonel Daniel Davis, a veteran of four tours of duty with the US Army in Iraq and Afghanistan. I am not a military man, but I worry just as much about the energy security of my own country as he does about his. In the UK, the government, the civil service and most of the big energy companies seem perfectly content to replicate the grand gamble under way in the US.
On 10 December, Lt Col Davis and I convened video-linked gatherings in Washington and London of people who share our concerns about the risk of a global oil crisis. We also invited key people who don’t, but who were interested in probing beyond the propaganda that energy-policy discourse seems to attract these days. [Two powerpoints, and Agenda / Participants / Transcript of first half are appended below.]
Those joining us included retired military officers, security experts, senior executives from a wide spectrum of industry and politicians of all the main parties, including two former UK ministers.
We began with a presentation by Mark Lewis, a former head of energy research at Deutsche Bank. With this background, you might expect Lewis to be a disciple of the conventional narrative of plenty in oil markets. Many of his peers are. But he suggested that three big warning signs in the oil industry point to a counter-narrative of impending problems for supply: high decline rates, soaring capital expenditure and falling exports.
The decline rates of all conventional crude-oil fields producing today are spectacular; the International Energy Agency projects output falling from 69 million barrels per day (bpd) today to just 28 million bpd in 2035. Current total global production of all types of oil is some 91 million bpd.
Consider the spending needed to try to fill that gap.
Capex for oilfield development and exploration has nearly trebled in real terms since 2000: from $250bn to $700bn in 2012. The industry is spending ever more to prop up production, and its profitability is reflecting this trend, notwithstanding an enduringly high oil price. Meanwhile, consumption is soaring in Opec nations. As a result, global crude-oil exports have been declining since 2005. It is difficult to conflate this data and not see an oil crunch ahead, Lewis concludes.
What of the recent addition of two million bpd of new oil production from American shale: the boom that has even been cast as a “game-changer” and a route to “Saudi America” by industry cheerleaders?
Geological Survey of Canada veteran David Hughes, who has conducted the most detailed analysis of North American shale of anyone outside the oil and gas companies, offered some sobering views on this. His data shows that spectacularly high early decline rates in existing shale gas and shale oil (more correctly known as tight oil) wells means high levels of drilling are needed just to maintain production. This problem is compounded because “sweet spots” become exhausted early in field development.
As a result, shale-gas production is already dropping in several key drilling regions, and production of tight oil in the top two regions is likely to peak as early as 2016 or 2017. These two regions, in Texas and North Dakota, comprise 74% of total US tight-oil production.
Like Lewis, Hughes believes that the oil and gas industry is leading the world by the nose towards an energy crisis.
In my book The Energy of Nations, I describe how military think-tanks have tended to side with those, like Lewis and Hughes, who distrust the cornucopian narrative of the oil incumbency. One 2008 study, by the German army, puts it thus: “Psychological barriers cause indisputable facts to be blanked out and lead to almost instinctively refusing to look into this difficult subject in detail. Peak oil, however, is unavoidable.”
This blanking-out extends to the mainstream media, which has enthusiastically echoed the mantras of the oil companies, to the extent that the very words “peak oil” have been positioned as a badge of baseless scaremongering.
We should never forget that in the run-up to the credit crunch, the financial incumbency deployed exactly the same PR tactics against those warning about the fragility of mortgage-backed securities.
Transatlantic Energy Security Dialogue: Agenda, Participants, Part One discussion edited transcript
The Three Witches: Decline rates, soaring capex, and falling exports. Presentation by Mark Lewis.
The “Shale Revolution”: Myths and Realities. Presentation by David Hughes.
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WTI Trades Near Two-Month High Above $100 on Stockpiles – Bloomberg
WTI Trades Near Two-Month High Above $100 on Stockpiles – Bloomberg.
West Texas Intermediate traded near a two-month high above $100 a barrel after U.S. crude and distillate stockpiles fell more than forecast, while exports from Libya remained curbed by port closures.
Futures were little changed near the highest settlement since Oct. 18. Crude inventoriesdropped by 4.73 million barrels to the lowest level since September last week amid an increase in refinery operations, while distillate supplies, including diesel and heating fuel, fell by 1.85 million barrels to 114.1 million, the Energy Information Administration reported Dec. 27. A possible agreement with rebels to reopen the Libyan port of Hariga collapsed, the oil ministry said Dec. 28.
“The recovery of the U.S. economy is fueling expectations of higher oil demand in the U.S.,” saidOlivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland. “Distillate stocks will end 2013 at a multi-year low for the season and that should translate into very low stocks by spring.”
WTI for February dropped 7 cents to $100.25 a barrel in electronic trading on the New York Mercantile Exchange as of 11:43 a.m. London time. It closed at $100.32 on Dec. 27, settling above $100 a barrel for the first time since October. The volume of all contracts traded was about 56 percent below the 100-day average. Prices have climbed 9.2 percent in 2013, set for a fourth annual gain in five years.
Brent for February settlement was down 2 cents at $112.16 a barrel on the London-based ICE Futures Europe exchange. Prices have advanced 1 percent this year. The European benchmark crude was at a premium of $11.91 to WTI. The spread closed at $11.96 on Dec. 27, narrowing for a third day.
Oil Supplies
While there is currently no deal to reopen the port of Hariga, negotiations with rebels holding the terminal continue, Ibrahim Al Awami, head of measurement and inspection at Libya’s oil ministry, said by phone Dec. 28. The country is pumping 233,889 barrels of crude a day, compared with a daily capacity of about 1.6 million, the oil ministry said Dec. 21.
WTI has increased 8.2 percent in December amid reduced crude stockpiles in the U.S., the world’s biggest oil consumer. The country will account for about 21 percent of global demand this year, according to the International Energy Agency.
Inventory Drop
Crude inventories slid for a fourth week to 367.6 million barrels, according to the EIA, the Energy Department’s statistical arm. A median decline of 2.65 million barrels was forecast by analysts in a Bloomberg News survey. Refineries operated at an average 92.7 percent of capacity, the highest rate since July 12. Consumption of distillates climbed 2 percent to 4.17 million barrels a day.
“We saw some strength on West Texas based on the better-than-expected figures” from the EIA, Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone today. “There’s potential for the market to rally further if it gets more good news. The U.S. may see further improvement in economic statistics in the next few weeks.”
The EIA will next report weekly data on inventories and demand levels on Jan. 3, two days later than normal because of the New Year holiday.
Brent will drop for a second year in 2014 as U.S. oil production expands and supply threats ease in the Middle East and North Africa, a separate Bloomberg survey showed. Futures will decline to $105, down from $108.70 in 2013, according to the median estimate of the seven analysts who most accurately predicted this year’s level. Prices averaged $111.68 in 2012.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net
To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net
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The Shale Oil Party Is Ending, Phibro’s Andy Hall Warns | Zero Hedge
The Shale Oil Party Is Ending, Phibro’s Andy Hall Warns | Zero Hedge.
Phibro’s (currently Astenback Capital Management) Andy Hall knows a thing or two about the oil market – and even if he doesn’t (and it was all luck), his views are sufficiently respected to influence the industrial groupthink. Which is why for anyone interested in where one of the foremost oil market movers sees oil supply over the next decade, here are his full thoughts from his latest letter to Astenback investors. Of particular note: Hall’s warning to all the shale oil optimists: “According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month… Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.”
From Astenback Capital Management
Oil Supply
The speed with which an interim agreement was reached with Iran was unexpected. Equally unexpected was the immediate relaxation of sanctions relating to access to banking and insurance coverage. This will potentially result in an increase in Iranian exports of perhaps 400,000 bpd. Beyond that it is hard to predict what might happen. The next set of negotiations will certainly be much more difficult. The fundamental differences of view that were papered over in the recent talks need to be fully resolved and that will be extremely difficult to do. Also, Iran’s physical capacity to export much more additional oil is in doubt because its aging oil fields have been starved of investment.
As to Libya, it seems unlikely that things will get better there anytime soon. The unrest and political discontent seems to be worsening. Whilst some oil exports are likely to resume – particularly from the western part of the country (Tripolitania), overall levels of oil exports from Libya in 2014 will be well below those of 2013.
Iraqi exports should rise by about 300,000 bpd in 2014 as new export facilities come into operation. But there is a meaningful risk of interruptions due to the sectarian strife in Iraq that increasingly borders on civil war. Saudi Arabia’s displeasure at the West’s quasi rapprochement with Iran is likely to add fuel to the fire in the Sunni-Shia fight for supremacy throughout the region.
If gains in 2014 of exports from Iran are assumed to offset losses from Libya, potential net additional exports from OPEC would amount to whatever increment materializes from Iraq. Saudi Arabia has been pumping oil at close to its practical (if not hypothetical) maximum capacity of 10.5 million bpd for much of 2013. It could therefore easily accommodate any additional output from Iraq in order to maintain a Brent price of $100 – assuming it wants to do so and that it becomes necessary to do so. Still, $100 is meaningfully lower than $110+ which is where the benchmark grade has on average been trading for the past three years.
So much for OPEC, what about non-OPEC supply? Most forecasters predict this to grow by about 1.4 million bpd with the largest contribution – about 1.1 million bpd – coming from the U.S. and Canada and the balance primarily from Brazil and Kazakhstan. Brazil’s oil production has been forecast to grow every year for the past four or five years and each time it has disappointed. Indeed Petrobras has struggled to prevent output declining. Perhaps 2014 is the year they finally turn things around but also, perhaps not. The Kashagan field in Kazakhstan briefly came on stream last September – almost a decade behind schedule. It was shut down again almost immediately because of technical problems. The assumption is that the consortium of companies operating the field will finally achieve full production in 2014.
Canada’s contribution to supply growth is perhaps the most predictable as it comes from additions to tar sands capacity whose technology is tried and tested. Provided planned production additions come on stream according to schedule in 2014, these should amount to about 200,000 bpd.
Most forecasters expect the U.S. to add 900,000 bpd to oil supplies in 2014, largely driven by the continuing boom in shale oil. That would be lower than the increment seen this year or in 2012 but market sentiment seems to be discounting a surprise to the upside. As mentioned above, many companies have been creating a stir with talk of exciting new prospects beyond Bakken and Eagle Ford which so far have accounted for nearly all the growth in shale oil production. Indeed at first blush there seem to be so many potential prospects it is hard to keep track of them all. Even within the Bakken and Eagle Ford, talk of down-spacing, faster well completions through pad drilling and “super wells” with very high initial rates of production resulting from the use of new completion techniques have created an impression of a cornucopia of unending growth and that impression weighs on forward WTI prices.
But part of what is going on here is the industry’s desire to maintain a level of buzz consistent with rising equity valuations and capital inflows to the sector.
The hot play now is one of the oldest in America; the Permian basin. A handful of companies with large acreage in the region are making very optimistic assessments of their prospects there. These are based on making long term projections based on a few months’ production data from a handful of wells. We wonder whether data gets cherry picked for investor presentations. We hear about the great wells but not about the disappointing ones. Furthermore, many companies are pointing to higher initial rates of production without taking into account the higher depletion rates which go hand in hand with these higher start-up rates. EOG, the biggest and the best of the shale oil players recently asserted that the Permian – a play in which it is actively investing – will be much more difficult to develop than were either the Bakken or Eagle Ford. EOG figures horizontal oil wells in the Permian have productivity little more than a third of those in Eagle Ford.EOG has further stated on various occasions that the rapid growth in shale oil production is already behind us.
In part this is simple math. The DOE recently started publishing short term production forecasts for each of the major shale plays. They project monthly production increments based on rig counts and observed rig productivity (new wells per rig per month multiplied by production per rig) and subtracting from it the decline in production from legacy wells. According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per month. When these fields were each producing 500,000 bpd that legacy decline therefore amounted to 33,000 bpd per month per field. With both fields now producing 1 million bpd the legacy decline is 65,000 bpd per month. Production from new wells has been running at about 90,000 bpd per month per field meaning net growth in production is 25,000 bpd per month. It will become smaller as output grows and that’s why ceteris paribus growth in output for both fields will continue to slow over the coming years. When all the easily drillable sites are exhausted – at the latest sometime shortly after 2020 – production from these two fields will decline.
Others have made the same analysis. A couple of weeks ago the IEA expressed concern that shale oil euphoria was discouraging investment in longer term projects elsewhere in the world that will be needed to sustain supply when U.S. shale oil production starts to decline.
Decelerating shale oil production growth is also reflected in the forecasts of independent analysts ITG. They have undertaken the most thorough analysis of U.S. shale plays and use a rigorous and granular approach in forecasting future shale and non-shale oil production in the U.S. Of course their forecast like any other is dependent on the underlying assumptions. But ITG can hardly be branded shale oil skeptics – to the contrary. Yet their forecast for U.S. production growth also calls for a dramatic slowing in the rate of growth. Their most recent forecast is for U.S. production excluding Alaska to grow by about 700,000 bpd in 2014. With Alaskan production continuing to decline, that implies growth of under 700,000 bpd in overall U.S. oil production, or 200,000 bpd less than consensus.
The final element of supply is represented by the change in inventory levels. The major OECD countries will end 2013 with oil inventories some 100 million barrels lower than they were at the beginning of the year. That stock drawdown is equivalent to nearly 300,000 bpd of supply that will not be available in 2014. Data outside the OECD countries is notoriously sparse but the evidence strongly suggests there was also massive destocking in China during 2013.
Olduvaiblog: Musings on the coming collapse 