Peak Oil

Don’t Count on Revolution in Oil Supply

This is a guest post by Sadad al-Huseini, now a petroleum consultant and formerly executive vice president of Saudi Aramco for exploration and production, and is a response to the recent article in PIW (Petroleum Intelligence Weekly) by Leonardo Maugeri on his new study Oil: the Next Revolution, challenging his optimism about future oil supplies (PIW Jul.2’12). This article originally appeared in the July 23, 2012 edition of PIW. Originally published on the Oil Drum.

Leonardo Maugeri’s recent paper Oil: The Next Revolution on the presumed future abundance of oil supplies rejects the pessimistic outlook of limited increases in oil capacity over the next decade. It suggests global oil capacity will exceed 110 million barrels per day by the end of the decade, putting an immediate end to concerns regarding constrained long-term oil supplies. This conclusion is based on an assessment of new projects with a reported capacity of 49 million b/d before a downward adjustment to 29 million b/d to allow for completion risks and reserves depletion. Maugeri holds two PhDs, one in Political Science and one in Economics, and has extensive executive experience with ENI in strategies and developments and in petrochemicals.

In putting forth this optimistic thesis, Maugeri apparently sets aside a variety of technical realities, including the difference between natural gas liquids (NGLs) and conventional oil, reserves depletion versus capacity declines, and proven reserves as opposed to speculative resources.

The report mixes NGLs, which feed petrochemicals and domestic or industrial fuel applications, with conventional oil, which is the main source for transportation fuels. When fractionated, NGLs yield propane, butane and light naphtha. These products cannot replace oil distillates such as gasoline, diesel or jet fuel.

For example, NGLs grew from 7 million b/d in 2003 to an estimated 12 million b/d in 2011 but provided no relief to the demand for transportation fuels, which was surging across those years. The growth in NGLs is now forecast by the IEA to reach an ambitious 20 million b/d by 2030. Impressive as this may be, NGLs will remain at best marginally relevant to transportation applications until widespread changes occur in the technology and infrastructure of the auto and trucking industries. Given cost and complexities, there is no evidence that this is likely to happen within this decade.

In regard to capacity declines, the report appears to confuse oil reserves depletion with capacity declines. In the world of petroleum engineering, depletion quantifies residual reserves in the ground, while declines define a reservoir’s ability to sustain a given level of production over time. Incremental reserves in modern discoveries are added early in a discovery’s life while production declines are a subsequent development related to reservoir factors including changing fluid compositions and diminishing reservoir energy. Maugeri’s suggestion that incremental reserves may offset capacity declines mixes up speculative exploration variables with reservoir engineering realities.

The report takes exception to the IEA’s 2008 estimate of an average 6.7% global oil capacity decline and offers an equivalent estimate of less than 2% per year. This low estimate is apparently based on the observation of historical production rates from major oil producing countries. It is not clear how the author extracted the convoluted effects of offsetting market volatility, spare capacity utilization, natural production declines, and ongoing new capacity investments from such historical trends.

The IEA’s 2008 study, on the other hand, applies well-established petroleum engineering principles to 800 post-peak fields that make up the majority of global oil supplies. The natural decline rates of these fields were reported to average 3.4% for 54 supergiant fields, 6.5% for scores of giant fields and the 10.4% decline rate for hundreds of large fields. At the IEA’s 6.7% level of capacity declines, the current 74 million b/d of conventional oil supplies (which exclude NGLs, biofuels, nonconventionals and various other liquids) would require 5 million b/d of supplemental new capacity annually just to maintain a flat level of supply. Based on these assessments, Maugeri’s 29 million b/d of "risked" new capacity would only replace declines through 2017. Even the full 49 million b/d of new projects would only extend current liquids production on a flat trajectory to 2021.

In regard to global oil reserves, the Maugeri report highlights the opportunity to convert trillions of barrels of unconventional oil resources into proven reserves. This is hardly a simple process, as he points out, given the realities of technical, environmental and economic challenges. Industry studies based on the IEA’s published upstream oil and oil equivalent projects have shown that the capital cost of Canadian bitumen and Qatari GTL projects have averaged $97,000 per barrel of capacity. Had these prohibitive economics been otherwise, the resources alluded to in the Maugeri report would have entered into widespread development many years ago.

In regard to reserves growth and revisions to current estimates, the report needs updating. Leading oil producers only apply a low recovery factor of 20%-25% in those instances when this is in fact the limit to potential oil recoveries. On the other hand, major OPEC and non-OPEC producers frequently invoke 40%-50% recovery factors based on IOR and EOR technologies deployed within their operations or elsewhere in the world. In some advanced operations, reserves are actually estimated by complex reservoir modeling and simulation techniques which apply different production rules and investment strategies over time, not by average recovery factors.

Finally, the "explosion" in US oil shales and tight sands, which is assessed to grow to over 4.7 million b/d by 2020, is indeed a great technical and commercial success story. It is a welcome development given the constrained outlook for global oil supplies and the US’ own consumption of 18.5 million b/d of oil and oil equivalent liquids.

Maugeri’s report is right to emphasize the many risks that confront the energy industry today. Although national and international oil companies are doing the best they can to increase oil supplies, they are often operating in the shadow of profound technical challenges, adverse political restrictions and severe financial hurdles.

Not surprisingly, many oil executives have stated publicly that incremental oil supplies are now in a precarious balance with capacity declines and will remain so for years to come.

Much as all the stakeholders in the energy industry would like to be optimistic, it isn’t an oil glut by 2020 that is keeping oil prices as high as they are. It is the reality that the oil sector has been pushed to the limit of its capabilities and that this difficult challenge will dominate energy markets for the rest of the decade.

6 Comments

  1. I take exception to this paragraph in the opinion piece above:

    ‘Finally, the “explosion” in US oil shales and tight sands, which is assessed to grow to over 4.7 million b/d by 2020, is indeed a great technical and commercial success story. It is a welcome development given the constrained outlook for global oil supplies and the US’ own consumption of 18.5 million b/d of oil and oil equivalent liquids.’

    No mention is made of the environmental destruction that accompanies this process.

  2. Hi Pat

    I take exception to it also. But, please note the italicised paragraph at the very top of the post. It makes clear who the writer is – an oil executive. I put the opinion piece up, not because I endorse all his views, but just because he has insights on the reality of conventional oil production. He was formerly a “executive vice president of Saudi Aramco for exploration and production”, and is telling us his view that optimistic forecasts on increasing oil production via conventional methods are not realistic. This is significant when you consider that some consider Saudi Arabia as still having a lot of room for expansion. If this guy is pessimistic about conventional production increases, then it gives us clues about the state of Saudi oil fields, which many believe have actually peaked or are about to peak. It’s significant, since Saudi Arabia had the largest deposits.

  3. Craig – why didn’t you publish the original optimistic paper when it came out? PRI may not claim to be “fair and balanced”, but are you being careful about confirmation bias?

    Let’s keep in mind that the Peak Oil story of around 2005 has not played out as predicted, meaning that some of the original assumptions or reasoning were wrong. In 2005, I would have said there was no way we’d be at 2012 experiencing “business as usual” (ie. no severe oil crisis). Here we are. Luckily, none of the decisions I made based on that view had much of a down side.

    To have the best operational information, we need to visit both sides of what is a disputed view.

  4. Hi Greg. Why do you say that the peak oil story of around 2005 has not played out as predicted?

    My predictions have played out as far as I can see:

    https://www.permaculturenews.org/2008/11/17/staring-at-the-future-from-the-top-of-the-slippery-slide/

    https://www.permaculturenews.org/2009/10/01/oil-concerns-slowly-rise-to-surface/

    Particularly note the following from the latter post:

    So, this is the roller coaster cycle we’re looking at:

    – increasing demand causes a surge in oil prices, which causes recession
    – The resulting economic slowback then reduces demand and so oil prices sink
    – Reduced oil prices reduces investment in energy infrastructure (fossil fuel, alternative, whatever). We’re here
    – Reduced investment in oil exploration and development means reduced supply, which means increased oil prices
    – Increased oil prices mean more recession

    On top of the cycle above is another parameter as well. Where the recession has meant negative growth for many industrialised countries, it has merely meant a reduction in growth for others, like China, which ‘dived’ from a scorching 11 percent growth in 2007 to a ‘disastrous’ 7 percent in 2008. Recession or otherwise, international demand will inevitably overtake supply – regardless.

    Economists and politicians who are currently gleefully welcoming signs of an upturn plainly don’t understand what it portends. They say to be careful what you wish for, because you may get it.

    Essentially, we are facing a perpetual recession.

    Things are playing out just as I expected – with oil prices going up until our complex industrial society starts to collapse, and then demand shrinks, and oil prices go down. When oil prices go down, it gives the economy an inch of breathing room, which leads to more oil consumption, and prices go up again, and the cycle continues – but the zig-zag is ever downward.

    If we burst out of this recession, and have five straight years of growth, I’ll renounce my stand…

    In the meantime, considering how long it takes to transition society off the teat of our oil fields, I don’t think posting overly optimistic views is very sensible at all. As Dr. Hirsch found, it would take 20 years of preparation just to avoid the worst problems caused by peak oil, and that’s using the easiest, cheapest, and dirtiest of alternatives to replace it:

    https://www.permaculturenews.org/2008/08/16/last-days-of-ancient-sunlight/

  5. Thanks for posting this-Craig. From my perspective, your comments are right on. I am thankful that this post supports my understanding of the depletion of world oil capacity. However, I wish that we would wise up in our collective understanding that even if oil were of infinite supply, the CO2 release which is driving climate change is destroying life on earth as we know it.

  6. Hi Craig,

    The story has not played out as I thought it would, reading the likes of Savinar, Simmons, Heinberg, Hirsch, Campbell, et al. around 2007. You were obviously more prescient but I think the experts were calling for more severe trouble by now.

    Though, from your articles, I would suspect the boom in natural gas surprised you too – this was the exact sort of techno-fix that ridiculous economists and technophiles were predicting would “solve” the peak oil problem. Of course, it hasn’t solved the problem, but it did seem to come just-in-time, and has allowed worldwide liquids production to keep ticking up. Huh.

    Now, I’m fully versed in ERoEI and all of the energy issues, but, again, I think the number of people in the peak oil community that would have expected that in 2012, at least 6 years post-peak, we’d be looking at oil ~$100/b [1] and production has continued to grow [2] would have been small indeed. The US has even reversed the decline in their *crude* oil production [2].

    In 2009, I ditched my lucrative career and headed for the hills, yet here we are in 2012 and there’s economic chaos in spots around the world (isn’t there always?) yet here in Australia, we still have people taking needless car trips, and we’re still inundated by cheap plastic products.

    I expected more changes by now, that’s all I’m saying. I was wrong, and I’m considering myself a proxy (a sponge?) for the general PO community. I didn’t believe the faith-based predictions of a techno-fix (fracking, shale) or econo-fix (high prices driving innovation and exploration). Yet, they *are* greatly influencing the unfolding of this story. So you may have called it perfectly, but I think, broadly, how the story has developed shows the larger PO community needs recalibrating.

    [1] https://www.oil-price.net/
    [2] https://www.theoildrum.com/node/9106

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Articles

Back to top button
Close