Beyond Oil: Intelligent Response to Peak Oil Impacts—a Dialogue with the Experts

Title: Beyond Oil: Intelligent Response to Peak Oil Impacts—a Dialogue with the Experts
Author: Andy Logan
Publication: The Outcrop, January 2006, p. 1, 6-7, 10

On November 11, 2005, the ASPO Peak Oil conference attracted over 425 attendees and roughly 30 world class experts with very impressive presentations on the potential timing, impacts of, and responses to “Peak Oil.” I have attempted to consolidate this sea of data into a brief summary. Unfortunately, this is not nearly enough space to do more than scratch the surface of this fascinating topic, much less review each of two days worth of high-data-content presentations. My hope is that you, the reader of this article, will take it upon yourself to do some research on the myriad of topics that were addressed to become more familiar with the very large impact the eventual peaking of hydrocarbon production will have on the world economy and on the “way of life” our descendants can look forward to. An obvious starting point for your research would be to contact ASPO and ask for copies of the wonderful Power Point presentations that were given at the conference for your own review (http://www.peakoil.net/).

I would like to start with a brief discussion of “Peak Oil.” M. King Hubbert, a geophysicist working for Shell, predicted in 1956 that the US would reach “peak” oil production between 1965 and 1970. He made this prediction by looking at the rate of discoveries made up to that point in time, quantifying the size and performance of existing production at that time, and applying basic theories such as the “creaming curve” to extrapolate future discoveries and their aggregate performance. Tom Petrie, head of Denver-based investment bank Petrie Parkman, shared at the conference that he started as an oil analyst in 1971, and spent until 1981 disagreeing (along with most of America’s oil industry) with Hubbert’s work. Tom felt technology, and potential big new discoveries in places like Alaska, would allow the US to continue to expand oil production well beyond Hubbert’s predicted 1970 peak. In fact, US oil production reached a rate of roughly 10 million barrels of oil per day (MMbo/d) in 1970, and even with Alaskan oil increasing dramatically until 1988 when that state achieved a peak rate of 2 MMbo/d, total US production had declined to only 8 MMbo/d by that year. As of August 2005 we were down to 5.4 MMbo/d in the US (http://www.eia.doe.gov/emeu/aer/txt/ptb0502.html).

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Figure 1: Oil discoveries vs. demand for oil. Used with permission. Source: Harry J. Longwell, Director and Executive Vice President, Exxon Mobil Corporation. The Future of the Oil and Gas Industry: Past Approaches, New Challenges In World Energy, Vol 5 No 2, 2002.

A basic premise of Hubert’s work is that exploration precedes discoveries and that discoveries precede production. Several presenters referenced an article authored by Harry J. Longwell of Exxon Mobil (see Figure 1) indicating that world wide discoveries peaked in 1964 and have been declining steadily ever since. To put this in perspective, today we are finding one new barrel of oil for every 3-4 consumed. We are currently living on the fruits of past efforts, and unless this trend is reversed, production will inevitably peak and begin to decline. There is an active debate as to when this will occur with presenters such as Matt Simmons proposing that we may have already reached this point in his book Twilight in the Desert. Contrasting opinions were presented by such notables as Daniel Yergin (author of The Prize) and his colleagues at Cambridge Energy Research Associates (CERA); government agencies including the EIA project continued production increases for decades into the future. The discussion was highlighted by the appearance on the curb outside the conference of a chicken-suited individual handing out a letter written by Alex Cranberg decrying “Peak Oil guys” as “Chicken Littles” and assuring all that technology and market forces will provide growing oil production until alternatives have matured to a point where they can shoulder the burden. Many, however, would agree that at some point production will reach a peak and, as in the US before it, world oil production will decline thereafter.

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Figure 2: Oil production vs. new supply with varying decline rate assumptions.

Simmons and those in his camp (“peakists”) point out that many of the largest producing provinces in the world have already reached their maximum production rates and are currently in decline. They agree with the general magnitude of the numbers CERA has put together indicating that projects currently in the works will add as much as 10-20 MMbo/d of incremental new production by 2010. However, as Tom Petrie and several others pointed out, nearly 2/3 of the existing 85 MMbo/d current world production comes from fields that are mature (over 25 years old). If our 84MMbo/d+ base is currently declining at 2% per year (similar to US production even with large deep water Gulf of Mexico discoveries coming on line), we will need to replace 10 MMbo/d by 2010. If companies such as Schlumberger are correct and this base production is declining at 5%/year, declining base production will need 19MMbo/d of additional production just to stay even (see Figure 2). Some forecasters anticipate an even steeper slope for the existing reserve base (the North Sea is currently experiencing 10% annual declines).

This adds up to an ever-accelerating treadmill of new large projects required to offset declines in existing fields superimposed on a backdrop of new discoveries, measured in barrels of oil discovered per year, which has been declining since the 1960s.

At the Peak Oil conference several talks made a very strong argument that if world oil production has not already peaked, it will do so in the foreseeable future (0-20 years). They then went on to discuss the implications of this event. The energy industry is the largest in the world, and hydrocarbons (oil, gas, and coal) make up the vast majority of the energy that runs the economies of the world today. Oil accounts for 80-95% of all transportation, 100% of petrochemicals, and 99% of all lubrication. Ninety-nine percent of the food we eat requires oil to reach our markets (figures presented by Chris Skrebowski at ASPO Peak Oil Conference, 11/11/2005, Denver, Colorado). Over the past century, the population of the earth has grown exponentially in lockstep with access to cheap hydrocarbon-based energy. The foundations of our constantly expanding economy are underpinned by our access to constantly increasing energy sources (predominantly hydrocarbon based). As our overall population and economy have grown, our demand for oil has increased 1.5-2% per year for much of the last century (Figure 3). For this trend to continue, we must either maintain this ramp-up in hydrocarbon extraction, or find alternative energy sources to fill the gap created by the needs of an accelerating population and potentially peaking oil. Figure 2 shows the looming gap between depleting current supply, and growing demand. Mr. Skrebowski makes predictions of what is likely to come on line over the next few years, combines them with 5% world wide depletion rates, and 2% growth in demand to create what he calls the “Oil-a-Gator.” In his model, the 10-19 MMbo/d of new production identified by CERA is enough to cover the 19 Mmbo/d decline in current base production, leaving another 10 or so MMbo/d of un-met demand if the world economy continues to expand at 2%/year as it has done recently. He may turn out to be optimistic in each of these estimates (consider the 6-12 months in project creep seen recently when BP’s Thunder Horse platform, a multi-billion barrel oil development in the Gulf of Mexico, which is included in the projects represented by the yellow bars, nearly sank while evacuated during Hurricane Dennis).

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Figure 3: Population growth is strongly correlated to energy growth. Sources: U.S. Census, EIA, U.S. Bureau of Mines.

So how do we respond to this situation, as an industry targeting oil and natural gas, and as an increasingly global civilization? Talks were given showing the economic viability of alternative sources including shale oil, coal to liquids, tar sands, bio-diesel and other bio-fuels, solar, wind, hydro, and a variety of other sources of energy. In aggregate, these “renewable” energy sources make up roughly 7% of the total energy mix in the US (hydro accounts for over half of this). Oil, gas, and coal account for roughly 85% and nuclear rounds out the difference. Any of these renewable sources, with the exception of hydro, accounts for less than 1% of our total energy needs. To ramp any or all of these up to a scale capable of replacing hydrocarbons will take huge investments of time and money.

More substantial and immediate gains on the coming energy crunch can be made through conservation measures and adjustments to life styles. Even here, however, the lead time necessary to adjust our consumption patterns will take years if not decades (the average half life on a new SUV is 10 years). Modeling done by Roger Bezdek indicates that the optimal time to begin a “crash program” to conserve hydrocarbons and replace demand with alternative sources is between 10 and 20 years prior to peaking. While there is cost associated with ramping up production of new technologies too early, these costs are far outweighed by the penalty of waiting for the peak to arrive before responding. The challenge then becomes determining when our current hydrocarbon supplies will truly reach their maximum output. Many predictors expect oil to peak first, and within the next 10 years, followed closely by gas and then coal as demand for those fuels increases to cover the shortage created by peaking oil. If these prognosticators are correct, then we are looking at substantial economic disruptions in the not too distant future. If the time frame is closer to 20 years, as CERA suggests, or longer as the EIA has predicted (2031 or later) we have some breathing room.

In conclusion, I would like to paraphrase two of the speakers from the ASPO conference. First Matt Simmons: “Great crises are created by ignoring solvable problems.” And second: Roger Bezdek, who pointed out that in the boy-who-cried-wolf parable, people were eventually eaten by the wolf.

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