Tuesday, March 04, 2008

The World Has Plenty of Oil

Oil prices are rising. And oil consumption is heading higher as well. But, like every aspect of modern life, technology is playing a bigger and bigger role. In the old days, drillers "put a straw in the ground" and sipped the oil. Today's drillers and oilfield managers are much smarter and much better at what they do. Oilfields that were once thought to be depleted are still producing. Estimates of reserves continue to climb.

The problem? The problem is corrupt and inept governments that control oil reserves in countries like Mexico, Venezuela, Iran and the former Soviet Union. Modern oilfield technology has not arrived in those countries to tap their reserves. Oil selling for a hundred dollars a barrel should wake up a few leaders in those countries, especially a country like Venezuela which derives 90% of its export revenue from oil. You'd figure even a bonehead like Chavez would study the simple concept of return-on-investment if acquiring a little knowledge would boost the flow of capital to his nation by a big margin. But, he and others like him think oil in the ground is like a savings account earning compounding interest.

He's wrong. Despite claims that the end of the Oil Age is approaching, it's worth recalling the observation that the Stone Age did not end due to a lack of stones.

Technology changes everything. The same intellectual forces that have given us cell phones, flat panel TVs and amazingly effective pharmaceuticals will also find and extract every molecule of hydrocarbons in the Earth as well as design and produce cars, trucks, planes and other energy-consuming devices that will operate at levels of efficiency we only dream of today.

Many energy analysts view the ongoing waltz of crude prices with the mystical $100 mark -- notwithstanding the dollar's anemia -- as another sign of the beginning of the end for the oil era.

"At the furthest out, it will be a crisis in 2008 to 2012," declares Matthew Simmons, the most vocal voice among the "neo-peak-oil" club. Tempering this pessimism only slightly is the viewpoint gaining ground among many industry leaders, who argue that daily production by 2030 of 100 million barrels will be difficult.

In fact, we are nowhere close to reaching a peak in global oil supplies.

Given a set of assumptions, forecasting the peak-oil-point -- defined as the onset of global production decline -- is a relatively trivial problem.

Four primary factors will pinpoint its exact timing. The trivial becomes far more complex because the four factors -- resources in place (how many barrels initially underground), recovery efficiency (what percentage is ultimately recoverable), rate of consumption, and state of depletion at peak (how empty is the global tank when decline kicks in) -- are inherently uncertain.

- What are the global resources in place? Estimates vary. But approximately six to eight trillion barrels each for conventional and unconventional oil resources (shale oil, tar sands, extra heavy oil) represent probable figures -- inclusive of future discoveries. As a matter of context, the globe has consumed only one out of a grand total of 12 to 16 trillion barrels underground.

- What percentage of global resources is ultimately recoverable? The industry recovers an average of only one out of three barrels of conventional resources underground and considerably less for the unconventional.

This benchmark, established over the past century, is poised to change upward. Modern science and unfolding technologies will, in all likelihood, double recovery efficiencies. Even a 10% gain in extraction efficiency on a global scale will unlock 1.2 to 1.6 trillion barrels of extra resources -- an additional 50-year supply at current consumption rates.

The impact of modern oil extraction techniques is already evident across the globe. Abqaiq and Ghawar, two of the flagship oil fields of Saudi Arabia, are well on their way to recover at least two out of three barrels underground -- in the process raising recovery expectations for the remainder of the Kingdom's oil assets, which account for one quarter of world reserves.

Are the lessons and successes of Ghawar transferable to the countless struggling fields around the world -- most conspicuously in Venezuela, Mexico, Iran or the former Soviet Union -- where irreversible declines in production are mistakenly accepted as the norm and in fact fuel the "neo-peak-oil" alarmism? The answer is a definitive yes.

Hundred-dollar oil will provide a clear incentive for reinvigorating fields and unlocking extra barrels through the use of new technologies. The consequences for emerging oil-rich regions such as Iraq can be far more rewarding. By 2040 the country's production and reserves might potentially rival those of Saudi Arabia.

Paradoxically, high crude prices may temporarily mask the inefficiencies of others, which may still remain profitable despite continuing to use 1960-vintage production methods. But modernism will inevitably prevail: The national oil companies that hold over 90% of the earth's conventional oil endowment will be pressed to adopt new and better technologies.

- What will be the average rate of crude consumption between now and peak oil? Current daily global consumption stands around 86 million barrels, with projected annual increases ranging from 0% to 2% depending on various economic outlooks. Thus average consumption levels ranging from 90 to 110 million barrels represent a reasonable bracket. Any economic slowdown -- as intimated by the recent tremors in the global equity markets -- will favor the lower end of this spectrum.

This is not to suggest that global supply capacity will grow steadily unimpeded by bottlenecks -- manpower, access, resource nationalism, legacy issues, logistical constraints, etc. -- within the energy equation. However, near-term obstacles do not determine the global supply ceiling at 2030 or 2050. Market forces, given the benefit of time and the burgeoning mobility of technology and innovation across borders, will tame transitional obstacles.

- When will peak oil arrive? This widely accepted tipping point -- 50% of ultimately recoverable resources consumed -- is largely a tribute to King Hubbert, a distinguished Shell geologist who predicted the peak oil point for the U.S. lower 48 states. While his timing was very good (he forecast 1968 versus 1970 in fact), he underestimated peak daily production (9.5 million barrels actual versus eight million estimated).

But modern extraction methods will undoubtedly stretch Hubbert's "50% assumption," which was based on Sputnik-era technologies. Even a modest shift -- to 55% of recoverable resources consumed -- will delay the onset by 20-25 years.

Where do reasonable assumptions surrounding peak oil lead us? My view, subjective and imprecise, points to a period between 2045 and 2067 as the most likely outcome.

Cambridge Energy Associates forecasts the global daily liquids production to rise to 115 million barrels by 2017 versus 86 million at present. Instead of a sharp peak per Hubbert's model, an undulating, multi-decade long plateau production era sets in -- i.e., no sudden-death ending.

The world is not running out of oil anytime soon. A gradual transitioning on the global scale away from a fossil-based energy system may in fact happen during the 21st century. The root causes, however, will most likely have less to do with lack of supplies and far more with superior alternatives. The overused observation that "the Stone Age did not end due to a lack of stones" may in fact find its match.

The solutions to global energy needs require an intelligent integration of environmental, geopolitical and technical perspectives each with its own subsets of complexity. On one of these -- the oil supply component -- the news is positive. Sufficient liquid crude supplies do exist to sustain production rates at or near 100 million barrels per day almost to the end of this century.

Technology matters. The benefits of scientific advancement observable in the production of better mobile phones, TVs and life-extending pharmaceuticals will not, somehow, bypass the extraction of usable oil resources. To argue otherwise distracts from a focused debate on what the correct energy-policy priorities should be, both for the United States and the world community at large.


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