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Running Into Oil

“Some commentators hope that new technology will lead to important deepwater finds.  Some new deepwater areas with giant potential, such as the Perdido Trend in the western Gulf of Mexico, will no doubt be found, but generally, the geology of most deepwater tracts is not very promising.” 

- Colin Campbell (founder: Association for the Study of Peak Oil),  Noroil, December 1989. 

The past week was a bad one for peak oil enthusiasts, as three separate announcements indicated the abundance of undiscovered petroleum.

First, BP announced that it has found a field in the Lower Tertiary basin in the deepwater Gulf of Mexico, named Tiber, containing something on the order of 3 billion barrels.

Next, Petrobras announced another discovery in the pre-salt basin, this one Guara, containing about 1 billion barrels of recoverable oil.

And in the Bakken Shale, a new zone was proven to be productive and possibly capable of producing another billion or so barrels.

While some (like Matt Simmons and Jeremy Leggett) have pointed to these developments as evidence of the ‘need’ (sic) for going to extremes to find more resources, in fact it highlights the manner in which better technology and knowledge are making previously uneconomic resources viable.

Others have argued that the discovery size of ‘only’ (sic) three billion barrels suggests resource scarcity, since that amount represents only a couple of weeks of consumption. Which is a typical context-free remark: few discoveries amount to more than a small portion of the resource. The super-giant Prudhoe Bay field, for instance, only represents about six months of global oil consumption.  During the 1980s and 1990s, large amounts of production came online around the world in areas like Yemen, Oman, Colombia, where the discoveries were smaller than what is now being found.

More important, each of these recent developments shows progress in a new geological area, and progress can be expected to advance sharply as activity increases and knowledge improves.  This is only the beginning of a long process of exploitation which will see large-scale resources developed; any given field typically represents only ten percent or so of the play’s resources.

But it also discredits the oft-repeated argument that there are no new plays left.  Years ago, when new technology made it possible to perform seismic studies of the large subsalt area of the Gulf of Mexico, I noted to my mentor M. A. Adelman that this was being described as the ‘last new play’ to be exploited. I asked him how many times he’d heard that before.  He said, “all my career” (which began in the 1950s).  Since that time, new plays included the presalt in Brazil and the Lower Tertiary in the Gulf of Mexico.

The assertion by resource pessimists that there are no new areas is based on the false assumption that geological knowledge of the Earth is so extensive that every area must be already identified.  But in fact, while most are identified, at least in a general way, many remain untested for the simple reason that they are difficult to access for political, legal or geographical reasons. 

The recent discoveries in east Africa are a clear demonstration of this:  the government of Uganda had simply been too preoccupied with its political troubles to seek exploration until recently.

The reality remains that the conventional petroleum resource appears so extensive as to satisfy the world’s needs for decades to come, with the primary obstacle being the imagination of the pessimists. And with enough statism and dulled minds in place of vibrant free-market entrepreneurship, the pessimists will be ‘right.’ As David Osterfield wrote: “Perhaps the kernel of truth in the catastrophist position is that a completely closed or controlled society would, in fact, face the ominous prospect of resource depletion.”(1) Well said.

(1) David Osterfeld, Prosperity Versus Planning:  How Government Stifles Economic Growth (New York:  Oxford University Press, 1992), p. 102.

9 comments

1 Richard W. Fulmer { 09.21.09 at 12:06 pm }

I agree that lack of imagination is the primary obstacle to energy abundance, but a close second is government control of oil reserves and other resources. Peak oil may well be artificially created through the action (and inaction) of governments around the world.

2 Donald Hertzmark { 09.21.09 at 12:11 pm }

Mike, thanks for pointing out that the approach of the resource catastrophists represents a view of the “end-times” whereby oil and gas reserve measurements represent all that there is (and there ain’t gonna be no more!) with the concomitant that every user must secure his supplies today or pay more for less later. Who does not remember the panicked view of many commentators in 2005-08 – “China! India! Russia! oy vey! – that added pure hydrogen to an existing conflagration that centered around “peak oil.”.

On the other hand, most normal people do not keep 5 or 6 years worth of food in the pantry. They expect that as long as society continues to function in some reasonable manner there will be food stores from which one can purchase the recent harvest.

If we look at estimates of recoverable oil and cost of extraction in the North Sea from the end times crowd, then we would have abandoned that resource in the early 1980s (see, for example, http://www.foreignaffairs.com/articles/26604/amory-b-lovins/energy-strategy-the-road-not-taken). Back in the real world the (real) cost of extraction from the North Sea is far lower than it was 25 years ago. The costs of drilling in very deep water or to great depths are much lower than they were just a few years ago, and the cost of figuring out where to drill has been assisted significantly by modern computer simulation methods, which is a lot less costly than drilling wells.

The end timers who don’t know what they don’t know ignore order of magnitude improvements in the upstream technologies, and even in refining, where previously unusable feedstocks are now routinely processed. All that, without even looking at shale, tar sands, and other unconventional resources, which are not in any realistic sense, geologically scarce.

3 Paul Davis { 09.21.09 at 7:03 pm }

All who are interested in the truth:

After several years of reading off-the-wall articles and absolutely false and misleading statements made by Michael Lynch, I now know what the problem might be – he is an economist and not an oil man 0r mathematician. He doesn’t know how to calculate oil depletion rates (6%-9% per year) or add up the small number of new promising oil finds. He probably doesn’t read the Annual IEA Report. He shoots from the hip and doesn’t care that he is doing great harm to the world by debunking Peak Oil The truth is that debunking Peak Oil is like railing against gravity or aging.

In 8-10 years maybe some of the new “great oil finds” (Gulf of Mexico, Brazil, Iran etc.) will start to produce some amount oil at a much higher recover cost – (working at 33,000 feet does have its challenges). Also, only 35% of the original oil-found-in-place can be recovered – a “potential” 3 billions barrels is really a “potential” 1 billion barrels. However, it still only a potential.

Many of today’s so called giant oil fields are experiencing serious annual oil production decline rates. The Cantarell Oil Field, located in Mexico is the third largest oil field in the world and it is experiencing a 16% decline in oil production in 2009. Soon Mexico will go from being a net exporter of oil to a net importer of oil.

Now if you know some math you have to added the annual increase in oil needed by countries like China and India (7% to 5% respectively) to the world’s needs and suddenly you realize that there isn’t enough oil to meet demand. Some say this is the definition of Peak Oil. I prefer “when oil production reaches its maximum level and then starts an irreversible decline.”

I am a very disappointed when it comes to Lynch and his preaching that we have enough oil for another 100 years – so don’t worry. We might not run out of oil for a 100 years, but there will be MUCH less oil and MUCH more expensive oil – the day of $10 oil is over forever. This will lead to “oil wars” and a lot of suffering by billions of people.

The world must start today to find and invent alternative sources of renewable energy to replace oil. The answer is not tar sands, shale oil, ethanol, bio-fuels, etc.

The answer is to stop listening to people like Lynch and Yergin and start doing something that will mitigate the hard landing when countries and people will not longer be able to afford oil.

Paul

4 Donald Hertzmark { 09.21.09 at 8:41 pm }

Paul,

There will always be enough oil to meet demand. If your geological forecast is correct then the price of oil will rise and demand will fall. Even in the short period from 2006-2008 the rise in the price of oil was sufficient to reduce demand by about 10% in the US and 5% in Europe, prior to the financial crisis.

But you ignore a lot of modern technological developments in the oil business. The industry routinely goes back into old fields and reworks them, often extracting as much as the original exploitation of the field – for example, Spindletop. Advanced simulation methods certainly improve both discovery and recovery, even at 11,000 meters.

Finally, you assume that the problems that Mexico has maintaining production at Cantarell are independent of the policies of the Mexican government with regard to foreign technology and companies. This is not even remotely plausible. How can the US side of the maritime boundary be so prolific and the Mexican side so unpromising? Similarly, Venezuela’s disastrous production decline since 2000, losing more than 1 million b/d of output, reflects bad geopolitics, not bad geology. You can always bring in CNPC to highgrade your oilfield after you have kicked out the IOCs, but that will not improve your production profile for long the way good technology mated to good policies can do. If Ghawar really hits the skids in production terms do you really believe that the Saudis will not bring in XOM or Chevron to rework the field, restoring it to previous production levels (the Mother of all Steamfloods!)?

One hundred fifty years ago oil was refined just for the kerosine, about 6-7% of the crude input. Today we crack oil and extract everything but the drill bit. This same technology is also used to process heavy oils and tar sands, so they join the continuum of liquid fuel resources. One reason we won’t know when we have hit “Peak Oil” is that the distinction between conventional and unconventional, as with gas, is increasingly indistinct. And speaking of gas, there is more of it that there ever was conventional oil, and it is producible at prices that are well inside current ranges, and you can do everything with it that you can do with oil except fly airplanes.

By the way, nobody earns an advanced degree in economics these days without a lot of math

5 Richard W. Fulmer { 09.21.09 at 9:31 pm }

Paul,
I think that this discussion is a good example of why the peak oil debate goes in circles. Geologists and economists have such different ways of looking at the world that they end up talking past each other. Geologists (and other scientists) see that the quantity of oil must be finite. They point out that even if the Earth were a hollow sphere filled with oil, the amount would still be limited.

Currently, there are about 1.2 trillion barrels of proven reserves of oil in the world. (The term “proven oil reserves” means oil that can reasonably be expected to be recovered from known reservoirs with existing equipment and techniques.) Worldwide, we’re using about 90 million barrels per day or 32.85 billion barrels per year. That means the world has about 36.5 years of proven reserves remaining.

So, that’s it, right? In early 2046, the tap runs dry. Numbers don’t lie. I’m a mechanical engineer, I like numbers and these numbers look good. Except that 10 years from now, if history is any guide, we’ll probably be “down” to 40 years of proven reserves left.

How can that be? Well, first, the definition of “proven” keeps changing. It will depend not only on only what we find in the next ten years, but also on changes in oil production technology. As you point out, we can currently get only about 35% of the OOIP (Original Oil In Place) out of the ground. But in 10 years, we’ll be able to get more because our technology will have improved. Also, if the price of oil rises, then techniques that are technologically possible now but too expensive at the current price of oil will be economically feasible at the higher price.

Ultimately, we can even mine oil as we have done in some shallow fields in Oklahoma. Miners tunnel under the reservoir, drill up into it, and then let gravity do the rest. With such techniques, 90% recovery rates are possible.

Meanwhile, as oil becomes harder and harder to find and produce, its price will rise. As that happens, alternatives that are now uneconomic will become competitive. We have maybe 100 years worth of heavy oil and oil sands and perhaps as much as 400 years of oil shale that, right now, are too expensive to produce. After that, we have gas, coal, and uranium. Then, maybe fusion which could last for something on the order of a billion years.

Now consider how far technology has advanced in just the last 100-150 years. My grandfather was born in 1876 and died in 1975. In his lifetime, he literally went from horse and buggy to the landing on the moon. He was born in the same year that Alexander Graham Bell invented the telephone. He was three years old when Thomas Edison invented the light bulb and 27 when the Wright brothers made their first flight at Kitty Hawk. Colossus, the first electronic computer was built in 1943 when he was 67, and he was 93 when Neil Armstrong stepped onto the lunar surface.

What will we see in our lifetimes? What will our children see? Just as the Stone Age didn’t end because we ran out of stones, the oil age won’t end because we run out of oil. It will end because we find something better.

It’s a mistake to confuse a resource with the service that it provides. When I make a phone call, I don’t care whether it takes a hundred tons of copper wire for me to make the call or whether the call is transmitted through the air. What I’m interested in is the phone call and not the copper. Similarly, when I drive to work, I don’t care if I’m burning gasoline or hydrogen – just as long as I get where I’m going.

When I was in school, I took an environmental engineering course and it was really depressing. According to the textbook, we were going to run out of oil in 1979. If that didn’t kill us, then we would run out of food, and if that didn’t do it then we would drown in our own pollution. Finally, if we dodged all of those bullets, overpopulation would usher in the end of the world. What saved me from terminal depression was Julian Simon’s book, “The Ultimate Resource.” The book helped me stop looking at the world’s future from the point of view of an engineer and let me see it from the point of view of an economist. Check it out.

6 Andrew { 09.22.09 at 9:34 am }

Anyone else notice that any criticism of the peak oil crowd seems to stir up cries of the “horrible horrible things” the critics are doing by being, uh, critical?

I must say I’m disturbed.

7 Kenneth Chilton, Ph.D. { 09.22.09 at 11:06 am }

I hope the readers will forgive a comment that is tangential to the peak oil resource issue. I just wanted to say how much I appreciated seeing the quote by David Osterfeld. David was an outstanding thinker and an outstanding person. He passed away at far too young an age. Nonetheless, he certainly made good use of his God-given intelligence and the time he was allowed to enlighten the rest of us on the vast divide between free markets and free people versus collectivist economic and political systems.

8 rbradley { 09.22.09 at 11:38 am }

I second Ken Chilton’s comment.

Osterfeld’s is one of the better books I have ever read on the subject–and I wondered where he came from and went to.

Maybe, Ken, you can write a tribute on him for MasterResource!

9 rbradley { 09.22.09 at 12:16 pm }

Regarding Dick Fulmer’s comment.

Dick was instrumental in preparing our book, Energy: The Master Resource. I have found out in recent weeks that this book is being used as a text at two places:

1) the University of Texas’s law school course (main reading), Energy Law & Policy (Fall 2009) taught by John R. Hays Jr.

The “upper level class” (43 credit hours to register) is described: “This seminar on energy policy, transactions, litigation and regulation will cover both conventional energy sources such as oil and gas as well as newer alternative sources such as wind, solar, and biofuels. This seminar will emphasize the practical application of common principles across energy boundaries.”

2) Texas Tech’s introductory class for Energy Commerce majors taught by Professor Terry McInturff.

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