In good news for the SUV set, Daniel Yergin's Cambridge Energy
Research Associates (CERA), is predicting we will soon be awash in
light, sweet crude - ideal for making gasoline.
CERA's Worldwide Liquids Capacity Outlook To 2010— Tight Supply
Or Excess Of Riches predicts we humans will have 6 to 7.5 million
barrels per day of excess capacity and we can expect an extended
period of lower prices – perhaps by 2007. Petroleum production
will be expanding faster than demand over the next 5 years. The
report has tabulated 20 to 30 new projects with a capacity of over
75,000 barrels per day that will become available in each and
every year until 2010. By then, worldwide production could
increase by up to 16 million Bbl/day. However, most of the
increased production will come from reworking existing fields,
rather than new oil discoveries, and after 2010 the majority of
new production will come from OPEC.
CERA doesn't believe in peak oil, at least not before 2010, and
probably not before 2020. The report indicates that the
“inflexion” point will come between 2030 and 2040. Moreover,
rather than a “peak,” it will be an “undulating plateau” that will
continue for several decades. OPEC, the company claims, will be
able to add 8.8 Mbl/day by 2010 and can continue its expansion –
at a somewhat slower rate – beyond 2010. Non-OPEC production will
experience a robust increase through 2010, and then slow
significantly thereafter. Unconventional oil production will
increase throughout this period, supplying almost 35 percent of
the world's oil by 2020.
Then Yergin adds a sobering caveat: "The main risks to our
Supply Expansion scenario are above ground, not below ground –
changes in the political and operating climate that could delay
expansion.” In CERA’s downside “Delay and Disruption” scenario,
capacity increases by only 11.5 million barrels between 2004 and
What is the implication? Will delayed projects and disruptions
in the supply chain lead to temporary shortages before "Peak Oil"
hits us? Perhaps we should review CERA's implied assumptions. They
are, after all, the basis of CERA's optimistic conclusions.
Underlying every data analysis and series of conclusions is a
collection of assumptions. In order to avoid oil shortages,
temporary or longer term, for example, we have to make multiple
assumptions about our ability to find, produce, transport, refine
and distribute oil (the supply chain). At some point in our
analysis, these assumptions have to be tested for credibility.
Will they hold up under careful examination?
Assumption # 1. Peace in Iraq.
A key element for any increase in Middle East oil production
has to be Iraq. Estimates of found oil range from 46 to 112 Bbl,
with another 100 Bbl a strong "maybe it's there". If there is no
peace in Iraq, or if Iraq succumbs to the policies of an Islamic
Theocracy, then Iraq's contributions to OPEC's annual production
volumes will never reach the levels envisioned by the
International Energy Agency (IEA). If Iraq's government is stable,
and favors a high production policy, then world oil supplies will
be a little closer to the IEA's projections through 2020.
The future of Iraq rests on the outcome of an escalating
cultural conflict between Islamist and Western values. Until that
gets resolved, we can only guess at the future of Iraqi oil
Assumption # 2. Political and labor stability.
Any optimistic analysis of oil production must assume there
will be relative political and labor stability in the Middle East,
North West Africa, South America, and Caspian regions. As recent
events have shown, however, these areas are prone to conflict that
disrupts the flow of oil. Up until 2004, temporary disruptions in
one region could usually be replaced by production from other
resources. Going forward, there may not be sufficient spare
capacity to cover lost production from one or more regions. As a
result, sporadic shortages are a possible reality.
Assumption # 3. Islamist terrorist activity will not disrupt
the supply chain.
Islamist terrorist activity will continue to disrupt the supply
chain from time to time. The land locked Caspian, for example,
could be the source of 60 Bbl of oil. Maybe more. And these wells
are coming on-line. But most of the oil in this region must pass
through a very long pipeline in order to reach the consumer.
History suggests political volatility in this region will
eventually disrupt supply chain operations. Perhaps for multiple
Islamist terrorist activity, whether sporadic or sustained,
will continue to be a potential threat to the flow of oil, not
only in the nations of the Caspian, the Middle East, and North
West Africa, but also within the borders of consuming nations.
Assumption # 4. The proven reserves claimed by OPEC actually
It is unlikely the proven reserves claimed by OPEC actually
exist. Many believe they are a fabrication of the quota
justifications that occurred in the 1980s. Furthermore, the claim
that "Proven" reserves are increasing needs to be examined because
in a sense we are merely talking about definitions. Words. As the
price of oil increases, it becomes economically feasible to spend
more money on production. Make sense? So the reserves that could
not be classified as "Proven" at $26.00 per barrel become damn
attractive if the price for a barrel goes to $55.00. There isn't
any more oil. It's just that "Probable" oil reserves become
"Proven" oil reserves as the price of oil increases because we can
afford to spend more money on recovery. All we did was reclassify
the definition of the oil we already have in the ground. No one
found any more oil. Not a drop.
Assumption # 5. There will not be a substantial increase in
reserve depletion rates.
Only 4 "super-giant" oilfields have been found outside the
Middle East since 1960 (in Russia, China, Alaska and Mexico) and
all of these - except China - are now in decline. Oil production
is in decline in 33 of the 48 largest oil producing nations. Using
improved technology often increases the rate of depletion. New
finds tend to be smaller and deplete faster. Worldwide, estimated
rates of depletion run as high as 8 percent per year.
Assumption # 6. All proven and potential reserves will be
produced on schedule.
This assumption only works if hundreds of exploration and
drilling operations in multiple countries and oceans under a wide
variety of operating conditions and technical challenges occur on
a schedule that coincides with the IEA's demand projections.
Everything has to work. No significant political or labor
conflicts. No ideological confrontation. No financing or
management Snafus. Cooperative weather. And a reasonably
predictable growth in market demand so consumption can equal
production (with a little to spare).
Assumption # 7. Middle Eastern production capacity will
continually increase, reaching ~ 29 Mbl/d by 2010 and at least 43
Mbl/d by 2020.
Middle Eastern production capacity will increase. The goal of
29 Mbl/day by 2010, however, is ambitious, and few believe OAPEC
will be able to deliver 43 to 50 Mbl/day by 2020. Exploration and
production will be challenged by Islamist opposition in Iran, Iraq
and Saudi Arabia (and perhaps elsewhere). There is a long list of
reserve and technical restraints in this region. We must also
understand that the creation of a large surplus capacity is NOT in
OAPEC's selfish best interest. Faced with enormous population
growth and big welfare bills, every Middle Eastern government
knows that when the oil is gone, their regime is in trouble.
Leaders may determine they can actually make more money, and enjoy
greater personal longevity, - by pumping less.
Assumption # 8. The EROEI of all oil production exceeds 1.
EROEI. Energy Returned On Energy Invested means that the energy
derived from exploration, production, refining, and transportation
exceeds the energy consumed for these activities. We tend to
forget. If the EROEI of any energy resource is 1 or less, then
doing that activity no longer provides a net addition to our
stockpile of energy.
The average EROEI of world oil production has been declining. I
read somewhere that before 1950 the EROEI for oil was more than
100:1. By the 1970s it had dropped to 30:1, and by 2005 the
average EROEI on new production had fallen to 10:1. As we go for
oil in increasingly difficult environments (deep under the ocean,
open pit mining, etc.) the EROEI will decline further. We have to
face the facts. Just because there is oil in the ground does not
mean it is practical to extract. Every well has its cost in money
AND energy. At some point the EROEI for every well will fall to
less than 1, making oil from that well an impractical resource for
Assumption # 9. Unconventional oil production will increase
throughout this period, supplying almost 35 percent of the world's
oil by 2020.
We have inherited up to 7 Tbls of oil trapped in sand or shale
formations. But that is a misleading number. Only 5 Tbl are worth
mining and of that number, perhaps 25 percent will be feasible to
produce because production cost and EROEI factors make extensive
mining impractical. Given the production problems associated with
squeezing oil from rock and sand, the rate of production will be
painfully slow. A goal of 15 to 18 Mbl per day by 2020 from
recoverable reserves of 620 to 910 Bbl appears reasonable.
We expect to find oil beneath polar ice and permafrost in the
Artic. Although total recoverable oil is something of a mystery at
this point, figure 55 to 100 Bbl (maybe more). Unfortunately,
exploration, production and transportation in this frigid
environment are no fun. And costly. So don't expect polar oil to
yield enough production to avoid oil shortages.
We are learning how to drill in the deep waters (over 2,500
meters) of the ocean. There is oil in the Gulf of Mexico, along
the coastal shelves of South America and Africa, and a number of
other locations around the world. Recovery takes time, is a
technical and operations challenge, and is very costly. Add
another 80 to 120 Bbl of oil to the reserves we will ultimately
In addition, one can expect we humans will pump out a limited
amount of heavy oil and oil from coal bed methane deposits.
If we add up all of these resources, we probably have up to 1.1
Tbl of unconventional oil to play with over the next 20 years. But
our estimate of annual production is much lower. Technical,
weather, geography, political, environmental, cost and EROEI
factors will limit total production to around 100 Bbl from 2005 to
2020. This estimate – by the way - mirrors the Energy Outlook
projections made by ExxonMobile in its "World Liquids Production
To these numbers we need to add, as CERA does, Natural Gas
Liquids (NGL) and condensates as unconventional oil. If we add all
of these forms of unconventional oil together, CERA's projections
Assumption # 10. There is sufficient infrastructure to support
a vigorous increase in production.
Oil is a cyclical business. Prices bounce up and down because
there is almost always a mismatch between supply and demand. For a
number of reasons, exploration and production investments have not
kept up with projected increases in demand. That investment
deficit has left us with insufficient spare production capacity to
sustain the world's projected economic growth. Even if we have
ample reserves in the ground, there is no guarantee enough oil
wells will be developed in time to avoid sharply higher prices and
possible shortages. We don't have enough oil rigs, tankers,
petroleum engineers, or refinery capacity. The problem is systemic
and will take several years to resolve.
Assumption # 11. Non-Muslim engineers, technicians and laborers
will be permitted to work in the fields of the Middle East, North
West Africa, and countries adjacent to the Caspian basin.
Non-Muslim engineers, technicians and laborers will be
permitted to work in the fields of the Middle East, North West
Africa, and countries adjacent to the Caspian basin. However,
Islamist activity and local sociopolitical conflict could
jeopardize personnel security. Iran's new government, for example,
has made it clear that non-Muslim foreigners are not welcome to
bid, or work, in Iran's oil patch.
Assumption # 12. There is sufficient capital to fund the
proposed supply chain activities.
There is sufficient capital to fund all of the proposed supply
chain activities if one assumes the credit markets will not be
overly stressed by other economic events, such as a collapse of
the market for Mortgage Backed Securities or a massive default on
the loans outstanding to Hedge Funds.
Assumption # 13.There will be a dramatic decrease in the growth
rate of oil consumption.
Emerging nations, like China and India, will increase their
per-capita and total consumption of oil. Although I fully expect a
decrease in the growth rate of oil consumption will occur, it will
- as I point out in "Oil, Jihad and Destiny" – be due to recessive
factors. Production will equal consumption only if there is a
destruction of natural demand or if shortages force reduced
consumption. In either case, the rate of growth decreases.
Assumption # 14. As a result of over production, we will be
awash in oil.
It is more likely that Saudi Arabia will continue to act as a
swing producer, restricting its production in order to encourage
higher prices. Indeed, Saudi Aramco engineers may welcome the
opportunity to take key wells off-line for service if the world
appears to be "awash" in oil.
Assumption # 15. The price of oil will decline.
It is highly likely that the price of oil will fall below
$40.00 per barrel. The history of the oil industry is
characterized by volatile changes in price because of the chronic
imbalance between supply and demand. But a temporary decline in
price is no basis for making either public policy or personal
choice decisions. For every short term decline, expect a
subsequent increase in the price. The long term trend for all
petroleum prices is UP.
Assumption # 16. Resource nationalism will not disrupt world
If there is so much oil available for production, why are we
drilling new wells in deep water? They are very expensive,
challenge our best technology, pose an environmental hazard, and
are at the mercy of the sea. Why don't we just drill on land?
Because the North Sea fields are declining, West Africa is in
turmoil, Venezuela is politically unstable, Iraq is a crap shoot,
Saudi Arabia is vulnerable to revolution, and Putin plans to use
Russia's petroleum as a political weapon. China is buying up every
drop it can find. The Italians have pointed out that the
geographical flows of crude oil favor refineries on the
Mediterranean coast over refineries located in North America.
Hmmmm. Are we witnessing an increase in resource nationalism?
The industrialized nations have no choice. Oil shortages will
create a growing cadre of unemployed citizens and declining GDP.
Political survival means drilling in every plausible location on
this planet and competing with other nations for the oil that is
The race is on.
Assumption # 17. Technology will save us.
Optimists claim that continuing improvements in computer,
exploration, and drilling technology will sharply increase oil
production. In truth, the oil industry has been continually
improving upstream exploration and production technology since the
birth of the oil age. Engineers are currently hard at work on
improvements for drilling fluids, drill bits, directional
drilling, multilateral drilling, sensors, GPS, drill casing
materials, CO2 injection, reservoir modeling software, and a
thousand other opportunities to increase recovery operations. The
point is, there is no magic solution that will suddenly increase
our reserves. Almost every technical solution has already been
explored. Yes. New technologies will increase production. But the
net impact is more likely to be incremental – not revolutionary.
For example, much has been made about the use of CO2 injection
to increase recoverable reserves. Granted. It is possible to
recover 60 percent (or more) of the oil that in the ground as we
humans struggle to liberate every drop of oil from existing
reservoirs. But many of our older oil formations have already been
flushed with fluids and chemicals in an effort to increase
production. Consequently, the use of newer technology will not
always yield dramatic improvements in mature field recovery. New
finds, on the other hand, provide an opportunity to secure higher
increases than older formations. Recovery rates will also be
higher and faster for light oils than for heavier crude. And
finally, it may - or may not - be economical to use newer
technology, such as CO2 injection, on some wells. What does this
all mean? Over a period of years, average world recovery rates are
more likely to be in the 45 to 50 percent range.
And there is a downside to the application of reserve
enhancement technology. If we increase the rate at which we drain
our available reserves, - depletion happens sooner.
Assumption # 18. Higher prices will encourage the production of
The classic economist assumes higher prices will stimulate
greater production. And it usually works. But our hydrocarbon
resources are finite. New production involves a complex series of
challenges that can take several years to overcome. In order to
continue along the growth curve of projected demand through 2020,
we humans will have to consume most of our "Proven" reserves,
convert most of our "Probable" reserves into "Proven" reserves,
and maximize a phenomenon peculiar to the petroleum industry
called "Reserve Growth". Oil prices will have to increase in order
to justify the economics of this sequence. Total oil production,
however, will continue to be limited by the factors discussed
above in Assumptions 1 – 17.
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