Oil Depletion? It's All In The Assumptions -- Part 2
10.12.05   Ronald R. Cooke, Cultural Economist


Reality Check


CERA's optimistic views are in the minority.


John S. Herold, Inc.
Wall Street firm John S. Herold Inc. of Norwalk, CT http://www.herold.com/ has estimated peak production for about two dozen oil companies. Without substantial new investment and additional discoveries, the company believes that French oil company, Total S.A., will reach peak production in 2007. Exxon Mobil, ConocoPhillips, BP, Royal Dutch/Shell Group, and the Italian producer, Eni S.p.A. will hit peak production in 2008. In 2009, Herold expects ChevronTexaco Corp. to peak. In Herold's view, each of the world's seven largest publicly traded oil companies will begin seeing production declines within the next 48 months or so.


PFC Energy
From the July 1, 2005 edition of the Washington Post comes this commentary by Robin West, in an article entitled "Crude Courage":

"J. Robinson West, chairman of the consulting group PFC Energy, has floated with administration officials his idea of a sustained national dialogue on energy that includes all stakeholders. And his group has gathered what may be the best statistics available on the seriousness of the supply-demand crunch.


West argues that the oil market squeeze will only get worse -- and more vulnerable to political disruptions. By his estimate, about 77 percent of proven oil reserves are controlled by nationalized oil companies rather than by the international majors such as Exxon Mobil. Meanwhile, non-OPEC sources of supply are slowly declining. …. Even if more crude were suddenly discovered, there's a worldwide refining squeeze, with almost no spare capacity left. The day of reckoning is less than 15 years away, by West's calculation. Assuming fairly slow growth in demand of about 1.8 percent annually, he reckons that by 2020 demand will total over 100 million barrels per day, and OPEC will be unable to fill the supply gap. Unless the United States and other consuming countries have taken steps to reduce consumption, the supply-demand imbalance will throw the world into economic chaos ….. "


Dave O'Reilly, the chairman of ChevronTexaco: “The time when we could count on cheap oil and even cheaper natural gas is clearly ending.” Chevron has started a petroleum resource discussion on the WEB at http://www.willyoujoinus.com/. Vice President of Policy, Government and Public Affairs, Patricia Yarrington believes the site is an important first step in a new dialogue. "We developed a campaign that is rooted in the real issues facing our industry. They are issues that affect everyone who has a stake in energy – consumers, businesses, policymakers, environmentalists, educators and political leaders. We think it’s a very compelling campaign about a very compelling subject."


ExxonMobil projects non-OPEC Crude and Condensate production will plateau before 2015 in its Energy Outlook presentation. ExxonMobil proposes that increased demand be met in two ways. The first is greater fuel efficiency. (How often do you hear oil companies pleading with us to buy cars that use less gas?). The second way is for OPEC to vastly increase production.


We should pay attention to ExxonMobil's judgment. "This assessment (of increased OPEC production) is somewhat ominous" writes Dr. Colin Campbell, a founder of ASPO, "… such production increases are only possible from Iraq, Saudi Arabia, Kuwait, and the United Arab Emirates. For these countries, and indeed for most OPEC members, petroleum and petroleum products are their only significant export. As such, they have a vested interest in obtaining the best possible price for their non-renewable resources. OPEC nations would be quite unlikely to increase production as rapidly as needed unless compelled to do so." And in the ASPO Newsletter 55 (July 2005), Dr. Campbell writes "It is significant that the first quarter production of most of the major oil companies is falling : ExxonMobil -3%; Chevron -6% ; Shell -8% ; Repsol YPF -7%., while Phillips-Conoco maintained its level with BP at least reporting a 2% increase (see Petroleum Review, June 2005). All the more reason that the public should heed the silent alarm sounded by the ExxonMobil report, which is more credible than other predictions for several reasons. First and foremost is that the source is ExxonMobil. No oil company, much less one with so much managerial, scientific, and engineering talent, has ever discussed peak oil production before. Given the profound implications of this forecast, it must have been published only after a thorough review."


The Royal Dutch/Shell Group of Companies, in their presentation "Visions of the Future: Shell launches new Global Scenarios looking forward to 2025" lays out the risks: " The energy scene will be reshaped by the combination of three discontinuities: a relinking of energy consumption and economic growth as a result of the faster development of emerging countries, the emergence of carbon as a commodity in its own right, and the search for energy security. The latter will remain a key consideration during the scenario time span, potentially leading to far more politicized energy relations and creating new sources of tensions among countries as well as new opportunities for entrepreneurship and cooperation. Ambiguity will persist as to what the term “energy security” covers: physical supplies can be threatened by rising international insecurity as well as by depletion of supply sources. Insecurity can also result from the lack of investment in enhanced recovery of existing sources, in new energy sources and/in infrastructures."


Although Aramco, Saudi Arabia's national oil company (and the largest oil company in the world), has launched a massive expansion program, it could be 5 to 7 years before we see any meaningful increase in production from this additional investment. Worse, Saudi officials have apparently told the Bush Administration that OPEC will be unable to meet projected oil demand in 10 to 15 years. Saudi Arabia would have to produce up to one half of the increased demand, with most of the remainder coming from Kuwait, the United Arab Emirates, and Iraq. In order for the CERA scenario to work, the cartel would have to boost its production to 50 Mbl/d. Few believe that will happen. Saudi Arabia, for example, has apparently calculated that its contribution will fall short by up to 5 Mbl/d by 2024.


Only BP appears to agree with CERA. There "is no shortage of oil and gas resources for the long term" (From "Making the right choices, The energy year in perspective"). The world has enough proved reserves of oil to last 40 years "at current consumption levels". Higher prices, BP claims, have been caused by a supply-demand imbalance that should be resolved with the addition of new production over the next few years. Incidentally, BP is the only major independent oil company that had more reserves at the end of 2004 than it had at the beginning of that year.





Delayed projects and disruptions in the oil supply chain, coupled with current rates of depletion, could lead to temporary shortages long before "Peak Oil".


Why? Because the issue is NOT how much oil do we have left in the ground. The issue is – How much oil can we produce? Sure. Calculating available reserves (proven, probable, and possible) is important because these projections give us a rough idea when peak oil production will occur. But when we talk about oil as a business, we have to include the challenges of exploration, production and transportation. It will be tough, for example, to find and pump this stuff from black holes in remote Siberia or the cold blue ice of the Artic. Emerging technologies may permit us to drill 10,000 meters below the surface of the ocean, but it's still an incredible operations headache. Producing oil from shale and sand is possible, but finding enough water and natural gas to sustain production will be difficult. And then there's another problem. Most of the world's remaining reserves and transport routes are located within the boundaries of nations that are politically unstable, have unpredictable regimes, may ignore their contractual obligations, or have a large faction of politically active extremists.


Given the seemingly infinite number of imponderable variables and assumptions, a credible forecast based on available information (facts) is impossible. That's why I developed a series of scenarios for my book - Oil, Jihad and Destiny. Each scenario provides a way to organize a set of related facts and assumptions. Because they begin as a hypothesis, scenarios can be tested against known data points. We can also estimate each scenario's probability. Although the resulting "Best Case" scenario in my model projects adequate oil production through 2020, I gave it a probability of only 40 percent. The "Production Crisis" in my book describes a more likely scenario. Oil shortages will drive intermittent periods of recessive economic activity. Recession drives down demand. Oil surpluses appear and prices decline. A sluggish economic recovery occurs until oil production again falls behind demand. Consumption then decreases or is stagnant, and the cycle is repeated.


In the final analysis, however, the pivotal point for all of these assumptions and scenarios rests on the motivations, political realities, and production capabilities of the Middle East. If they are willing to act in the selfish-best-interest of the industrialized nations, then CERA's "Best Case" scenario is possible.

If not, we are in for a long period of cultural and economic agony.


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