peak oil - the emerging reality

Chris Skrebowski: Trustee of the Oil Depletion Analysis Centre andEditor of Petroleum Review, Energy Institute, London

Peak Oil - the emerging reality

AUSTRALIA AUGUST 2006

Who am I?

Chris Skrebowski has spent half his working life in the oil industry and the rest as an oil journalist

Free of corporate or political pressure he brings a healthy scepticism to the problem

Not pessimistic by nature, not anti-Oil

Basic approach to Peak Oil analysis

Don’t guess, assume or hope - let the numbers talk

Observe what companies do, not what they say

An important disclaimer

In this presentation the opinions expressed are entirely those of Chris Skrebowski in his capacity as an ODAC Trustee and as such do not necessarily reflect the view of the Energy Institute for whom he edits Petroleum Review

The challenge of Peak Oil

• To meet a challenge• You first have to recognise you face a challenge• I aim to show you that:• ‘Peak Oil’ is real and imminent• That time is short• That adaptation will not be easy

So what is ‘Peak Oil’?

• It is the point when further expansion of oil production becomes

impossible because:

• New production flows are fully offset by production declines (depletion)

• You never run out of oil

• You do run out of incremental flows

• The world needs oil products to support growth

The practical realities

• The world needs oil production flows• Consumers need delivery flows• Reserves are only useful as flows• Peak oil is when flows can’t meet the required

demand• This will cause an ‘Economic Tsunami’• Worry about flows not reserves

Alaskan North Slope ProductionReserves grow -- Production falls

Peak Oil matters because oil dominates its markets

• 80-95% of all transport is fuelled by oil products• 50-75% of all oil is used for transportation• All petrochemicals are produced from oil• 99% of all lubrication is done with oil products• 95% of all goods in the shops get there using oil• 99% of our food involves oil or gas for fertilisers,

agrochemicals, tilling, cultivation and transport• Oil is the most important source of primary energy on

the planet accounting for 36.4% of all energy

A simple observation -- or why peak will be earlier than most people expect

‘Global production falls when loss of output from countries in decline exceeds gains in output from those that are expanding.’

Decline

Expansion

WTI Price $/barrel(Year average)

2000 2001 2002 2003 2004 2005 2006

What is the price telling us?

What economics really says

• Economics requires that supply and demand always balance

• Economists have assumed that supply will expand to meet demand via a high price signal

• If supply can’t expand we need the high prices to ‘destroy demand’

• How high do prices need to go?

The CIBC answer

• Assessed the likely supply shortfall and the oil price needed to reduce demand

• 2006 1mn b/d and $61/barrel• 2007 2.8mn b/d and $70/barrel• 2008 4.8mn b/d and $80/barrel• 2009 6.7mn b/d and $90/barrel

• 2010 8.9mn b/d and $101/barrel

Introducing the Gator

The Oil-a-Gator

/d Demand

Existing supply

New supply

Why are oil supplies peaking?

• We are not finding oil fast enough• We are not developing fields fast enough• Too many fields are old and declining• We are short of people and equipment• Oilfield inflation is soaring• Our societies are totally oil dependent• Oil supply will peak soon. How soon?

The Growing Gap

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Past Discovery

Future Discovery

Production

Past discovery according to ExxonMobil

The real discovery trend

Oil production flows -- all new flows take two to twenty-five years

Current supply84mn b/d or 30bn b/y

Global new field discovery (7-10bn b/y)Tar sands and Heavy oil

Biofuels + others

Known oil reservesin production (90%)

NIP10% Yet-to-find

probableYet-to-find

possible

2 to 25 years

How old are the fields?

• Of the 18 largest fields, 12 are in decline, 5 have some potential and 1 is undeveloped

• The 120 largest fields give 50% of total• 70% of production from fields 30+ years old• Few large recent discoveries

• We’re dependent on the oil equivalent of ‘Old men and young boys’

What are the BP statistics saying?

• OECD production peaked in 1997 and has now declined by just under 2 million b/d (8.8%)

• Non-Opec, non-FSU production peaked 2002• North America/Mexico peaked in 1997• North Sea - UK/Norway/Denmark peaked in 2000

now declined by 1.2 million b/d (19.2%)• Around 25 significant producers in decline• About 28% of global production from decliners

North Sea -- Fact or Fantasy

The UKCS depletion reality -- production down to 1mn b/d by 2010

UKCS oil production by month 1999-2010

Millio

North Sea production by field

Forties monthly production to date

Brent monthly production to date

The oil companies are already struggling to hold production(21 quoted co.’s account for 25% of global production)

• In 2004 and 2005 oil production growth was:• 3.8% (04) but 0.4% (05) for the top 5 (13.5% of global)• 2.5% (04) but 1.3% (05) for the top 10 (21% of global)• 3.2% (04) but 0.5% (05) for the top 21 (26% of global)

• In 2004 and 2005 gas production growth was:• -1.7% (04) but -3.0% (05) top 5 (13.5% of global)• 2.5% (04) but 1.3% (05) for the top 10 (20% of global)• 3.2% (04) but 0.5% (05) for the top 21 (28% of global

• Annual decline rates up to 5%, quarterly 8%

The top five decliners in 2005

Country Production Peak Year DeclineUSA 6.8mn b/d 1985 -5.51%Norway 2.9mn b/d 2001 -7.50%UK 1.8mn b/d 1999 -11.00%Mexico 3.8mn b/d 2004 -1.60%Syria 0.5mn b/d 1995 -11.40%

About to go into decline(More Type 3 losses)

• Denmark producing 0.4mn b/d went in 2005• Malaysia producing 0.9mn b/d went in 2005• Mexico producing 3.8mn b/d went in 2005• Vietnam producing 0.4mn b/d went in 2005• India producing 0.8mn b/d goes in 2006/07• China producing 3.6mn b/d goes in 2007/08• Collectively 9.9mn b/d or 12.3% of production

• Iran is struggling -- next to go?

So what happened in 2005?

• The world added 2.581mn b/d of capacity• 1.175mn b/d Opec, 1.406mn b/d non-Opec• Depletion was 1.261mn b/d mostly non-Opec• Then the Hurricanes cost 0.280mn b/d• So that left just 1.04mn b/d to meet new demand,

only 40.3% of gross new capacity

• No wonder prices remained high

The oil depletion balance sheet at end 2005 and by 2008/9

• In decline 28% but rising to 40% by 2008/9

• In danger 12% but declining to 10% by 2008/9

• Growing 48% but declining to 38% by 2008/9

• Russia 12% and steady at 12% by 2008/9

• The scales appear ‘balanced’ by 2008/9

• So does President Putin decide when decline starts? Or does

Saudi geology? Or can we drive it out to 2010 to 2011?

How the Megaprojects database is created and used

• All publicly available data• 2006-2012 148 Opec and 70 non-Opec projects• Unallocated by date Opec 12, non-Opec 36• Opec data (from their website)• Incremental production allocated by start up date• Production increments summed by year• Graphed to show volumes available to meet

demand

New Opec and non-Opec capacity

2004 2005 2006 2007 2008 2009 2010 2011 2012

Annual increments

total Opec Non-Opec Demand

Then we add the depletion reality(and other negative factors)

• Projects slip (typically around 20% each year)

• Companies are always optimistic (take 10% off peak)

• Depletion is already 1.2mn b/d and rising

• Enhanced recovery is slow and limited (0.5%/ yr)

• Depletion rates are rising (6%? 8%?)

• The number of countries in decline is rising

• 90% of known reserves are in production (oil higher)

This is the real new capacity to 2012 (Peak in first quarter of 2011)

-2000.0

-1000.0

1000.0

2000.0

3000.0

4000.0

5000.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

annual increment

total 20% Slip 90% Depletion Net

If we reduce the depletion rate by a third(Peak moves forward by three months)

-1000.0

-500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

4000.0

4500.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

annual increment

Massive extra production 2011-2012(Peak moves forward 12 months)

-500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

4000.0

4500.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

annual increment

If depletion accelerates by a third (Peak moves backwards by 4 months)

-2000.0

-1000.0

1000.0

2000.0

3000.0

4000.0

5000.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

annual increment

-2000.0

-1000.0

1000.0

2000.0

3000.0

4000.0

5000.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

annual increment

The wild card -- Oil producers own consumption -- subsidised & +4%/yr (Opec plus Russia plus Mexico)

Wild cards on the Supply side

• If Iraqis learn to love each other possible supply growth of 1-1.5mn b/d by 2012?

• Iran is struggling to hold production will their production grow or decline by 2012?

• Saudi is drilling like crazy and spending freely to boost production. Will the redevelopment of all those old fields really boost production and for how long?

100.00

110.00

120.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

/d Supply IEA

Capacity CS

Capacity CERA

Global liquids capacity to 2015

Six key mitigations -- but hurry

• Efficiency in use• Biofuels• Heavy oils and tarsands• Clean coal to create syngas• Gas to liquids• Renewables and nuclear for power generation

0 2 4 6 8 10 12 14 16 18 20

Vehicle Fuel Efficiency

Coal Liquefaction

Oil Shale

Years after Crash Program Initiation

U.S. Crash Program to Cut Imports2006

0 5 10 15

Years After Crash Program Initiation

Impact (MM bpd)

Coal Liquids

Heavy Oil

Efficient Vehicles

Worldwide Crash Program Mitigation of Conventional Oil Production Peaking

A Study for DOE NETL

Delay / Rapid growth.

Roughly 35 MM bpd at year 20.

My conclusions

• Supply will remain tight and prices high barring a major economic setback

• Oil supply will peak in 2010/2011 at around 92-94 million barrels/day

• Oil supply in international trade may peak earlier than the oil production peak

• Collectively we are still in denial • WE HAVE JUST 1,500 DAYS TO PEAK

By 2012

Will this be the

only practical

use for SUVs or 4X4s?

Contact: Chris SkrebowskiEditor, Petroleum Reviewcs@energyinst.org.uk+ 44 (0)20 7467 7117

ODACThe Oil Depletion Analysis Centre

www.ODAC-Info.orgAberdeen

Association for the Study of Peak Oil & GasASPO-InternationalIreland and Sweden

www.ASPO-Australia.org.auA network of professionals working to reduce oil vulnerability

Collectively Humanity is:

• Very clever, very ingenious, very adaptable

• So it is reasonable to be optimistic

• It is reasonable to anticipate fuels and solutions we cannot currently envisage

• But humanity is also greedy, competitive, short-sighted and tribal

• Concern & apprehension are appropriate

Current status of UKCS and onshore(as at May 2006)

• DTI itemises production from 329 fields• 6 growing - Franklin, Rhum, Clair, Maclure,

Broom and Farragon• 6 flatlining - Captain, Goldeneye, Hannay, Howe,

Judy? and Scoter• All others (317) in decline but, about 100

stabilising at low levels

Heavy oil -- nice to have but….

North Sea production -- the reality

• In 1999 the UK sector peaked at 2.9mn b/d• In 2005 it fell by 11% to 1.8mn b/d• In 2001 Norway peaked at 3.4mn b/d• In 2005 it fell by 7.5% to just under 3mn b/d• Denmark peaked in 2004 and fell 3.3% • The North Sea peaked (2000) at 6.4mn b/d• In 2005 it produced 5.2mn b/d (-18.8%)

You can’t just pour out an oilfield

• Only 7% of oil field reserves are produced at the fields’ peak flows

• To get a peak flow of 1 million b/d you need to develop reserves of 5.2 billion barrels

• In 2004 total world discovery was 7bn barrels• In 2005 total world discovery was 5bn barrels• The ten year average is just 11bn barrels• To meet 2004 demand would need 15-30bn b

Where will the new supply come from? In 2006? In 2010? In 2015?

• In 2006 from: Canada, Russia, Caspian, Brazil and Angola + Saudi, Iran, Kuwait, UAE, Nigeria, Algeria and Libya. Plus Iraq?

• In 2010 from: Canada, Russia? Kazakhstan, Brazil? and Angola? + Saudi, Kuwait? Iran? UAE, Nigeria? Libya? And Iraq

• In 2015 from just Canada, Kazakhstan + Iraq

Technology. Answer or illusion?

• Almost heresy to question the merit of technology

• But is it just getting round high costs?

• Just allowing faster drainage of reservoirs?

• How much new oil is it really accessing?

• Is it really opening up new opportunities?

• What is the scale of technologies impact?

• As Colin Campbell says ‘The new seismic allows you to find a needle in

a haystack, but it is still a needle’

Are there realistic substitutesfor the main oil products?

• Petrochemicals – naphtha, some gas/LPG. (Few alternatives)• Aircraft fuel – jet kerosene, some Avgas. (No realistic

alternatives)• Road vehicle fuels – Gasoline and Diesel dominant.

(Alternatives - Large Investments/capital write-offs)• Ships and boats – marine diesel and fuel oil. (No realistic

alternatives)• Lubricants and greases – (limited alternatives)• Power generation – (little oil now used)• Heating – (increasingly substituted by gas)

What are the substitutes?

•Alcohols - fuels and extenders (energy gain?) •Vegetable oils - diesel substitute/extender•Gas liquids - road fuels, feedstocks•Coal - heating, power generation

Hydro, nuclear, wind, waves and biomass can all generate power. But at what cost? Little oil is now used for power generation.

Can we make our economies all electric?

Can we make coal-to-liquids economic?

What’s the problem with alternatives?

• Oil has the greatest energy density of any fuel known to man, apart from nuclear

• Oil is the most flexible of all the energies• This means all alternatives are inferior

• You can cook sausages by collecting and burning straw but you may use more calories than you get by eating the sausages

New supply from Megaprojects (In million barrels/day)

New Oil Supply

2005 2006 2007 2008 2009 2010 2011

Non-Opec

Opec Non-Opec Infill Total2004 0.3 0.8 1.0 2.12005 0.9 1.5 1.0 3.42006 1.0 2.1 1.0 4.12007 0.7 2.2 1.0 3.92008 1.1 1.8 1.0 3.92009 1.2 1.5 1.0 3.72010 1.5 0.6 1.0 3.12011 0.1 0.4 1.0 1.5

Delaying ‘Peak Oil’

• Economic slowdown/recession

• Demand destruction via high prices

• Systems working better than expected

• Peace in Iraq

• Middle East opening to investment

• But, accelerating projects produces cost inflation rather than more oil

Advancing ‘Peak Oil’

• Project slippage (happens regularly)• Increasing taxes/tighter terms (happening)• Accelerating decline (happening)• Upheaval in major producers (Iraq, Nigeria, Venezuela

already happened)• Accelerating demand growth (China, India)

• System breakdowns, wars and revolutions, storms and hurricanes

Is there any good news?

• Our prodigality means there are plenty of savings to be had relatively easily

• A 100 mpg car is easy

• Slow planes use less fuel

• Perhaps we don’t need apples from Chile and Barbecues from China

• Will savings be enough - I don’t know

My conclusions?

• There are, at best, 1,500 days to Peak Oil• ‘Business as usual’ after 2010 is unlikely• High prices will continue• Restricted supply will continue• We are moving into a new world• It is a land without maps• We are all likely to be poorer• The developing world will be badly hit

In order to find oil you need:

• A source rock or ‘kitchen’ where the oil was created

• A trap or closure that contains a commercial volume of oil

• All the clever technology to locate the oil

So how did it get there?

• Mainly in two periods of intense global warming -- vast algal blooms

• Sealed in by sediments

• Cooked to oil (too much cooking gives gas)

• Trapped on its way to the surface

• Found and exploited by man

Who has the reserves? Who has the production?

• Current world reserves total 1188.6 80.2

• North America (inc Mexico) 61 14.2

• Central and South America 101.2 6.8

• Europe/Eurasia (inc Russia) 139.2 17.6

• Middle East 733.9 24.6

• Africa 112.2 9.3

• Asia-Pacific 41.1 7.9

Global production by region

20 companies produce 67% of global production

You can’t drink oil so how do we make use of it in Europe?

• 24.1% gasolines -- petrochemicals/petrol

• 45.3% middle distillates -- jet kero/diesel/ho

• 11.3% fuel oil -- heavy industry/ships/power

• 19.3% other-- lubes, solvents, gases

Hydrocarbons dominate - can this continue in the 21st century?

Energy Global EU 25 Range

Oil 36.8% 40.4% 35-55%

Gas 23.7% 24.4% 10-46%

Coal 27.2% 17.9% 5-48%

NuclearHydro

6.1%6.2%

13.0%4.3%

0-13%2-28%

Steady energy growth

• The 3 hydrocarbons represent 71%-98% of total energy supplied

• Primary energy Growth 2.2%/yr (last 20 years) • Oil 10 year growth rate 1.95%/yr• Gas 10 year growth rate 2.81%/yr• Coal 10 year growth rate 2.54%/yr• Slow move to gas and coal at oil’s expense?

The depletion challenge

The ODAC answer

• The oil supply available would allow• 2005 demand growth of not more than 2%• 2006 demand growth of just over 2% • 2007 demand growth of just under 2%• 2008 demand growth of barely 1%• 2009 demand growth of just under 1%• 2010 No demand growth at all

2004 was a key year for depletion

• All spare capacity used (0.5-1.0mn b/d in Saudi?)• So now we have an accurate baseline• But also in 2004:• Refinery spare capacity nearly disappeared• Sulphur removal capacity did disappear• Chinese demand exploded • Tankers were costly and in short supply• But, skilled personnel is the biggest shortfall

The oil companies are already struggling to hold production

• In the first half of 2005 oil production was:• Down 1.88% below 2004 for the big 5 • Down 1.25% for the Big 10

• In the first half of 2005 gas production was :• Up 1.2% for the Big 5• Down 0.23% for the Big 10

• Quarterly oil decline rates range up to 8%• Annual gas decline rates of up to 5%

Oil projects are slow and well publicised

• 2.5 years for an onshore rework (Saudi AFK)• 3-4 years for new onshore projects (Algeria)• 5-7 years for a major offshore field development• 8-9 years for Nigeria - Bonga, Agbami, Akpo• 5-6 years for a new refinery• Over 2 years for a new sulphur removal plant• The development die is largely cast to 2010

• That’s why the economists are misleading us

Gas discovery is also falling short

• Gas discovery peaked in 1970s• Demand first exceeded discovery in 1985 then

continuously from 1990 to 1995• Since 2001discovery has been under half of

usage• Gas production is already falling in the USA,

Canada, UK, Germany, Italy and New Zealand

Actual supply will always be lower(Remember the random factors)

• Projects slip typically 10-20% each year

• Companies are always optimistic

• Governments are always optimistic

• Enhanced recovery is quite limited

• Depletion rates are rising

• The number of countries in decline is rising

• 90% of known reserves are in production

Likely future oil demand growth(In million barrels/day)

• In 2003 oil demand grew by 1.8mn b/d (2.3%)• In 2004 oil demand grew by 2.8mn b/d (3.5%)• In 2005 4th revision is 1.6mn b/d (1.9%)• In 2006 first estimate is 1.75mn b/d (2.1%)• Twenty year average is only 1.5-1.8mn b/d (1.8%)• So 2% growth is an easy working rule• Does Chinese and Indian demand growth represent a

paradigm shift?

How does depletion work?

Three sorts of depletion:• Type 1 is ‘within field’ like different pumps in bar• Type 2 is ‘within country’ like different bars• Type 3 and most important is ‘national’ like different pubs, it is

visible depletion• Total (1,2 &3) depletion around 5% or 4mn b/d/yr but may actually

be nearer 7%• Type 3 depletion is around 1mn b/d but rising

Type 3 depletion acts like new demand

• Over 50 countries now depleting (20 large)

• In 2004 some 27.4% of supply came from countries in outright depletion

• Ten countries producing over 0.5mn b/d were in decline in 2004

• More large producers are set to decline

The Russian Enigma

• 50-95% of non-Opec growth in 2001-2004• 1.4% growth in Russian production in 1H2005• Has policy changed? Has growth run out?

Russian Production Growth

0100200300400500600700800900

2001 2002 2003 2004 2005

‘Peak Oil’ in 2008?

• Whatever approach we use the answer seems to be ‘Peak’ by 2008

• Before that, if all goes to plan, the world can, possibly, meet likely demand

• After that demand can only be met by massive demand destruction

• But, Peak could be this winter

Piper monthly production to date

Fulmar monthly production to date

Schiehallion monthly production to date

North Sea -- fantasy No 1

• ‘Technological breakthroughs such as multilateral drilling helped defy predictions of decline in Britain’s North Sea that have been made since the 1980s: the region is only now peaking’

The Economist Special Report ‘The Oil Industry,’ April 22 2006

Crude oil production

• Current production over 84 million barrels day

• That’s 42 supertankers a day

• Worth $4-4.5 billion a day or $1.5 trillion/yr

• The biggest business in the world

• But, few have ever seen any crude oil

-2000.0

-1000.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

annual increment

This is the real new capacity to 2012 (Peak in first quarter of 2011)(Ver 2)

peak oil - the emerging reality

oil price

oil industry

flowspeak oil

oil products95

oil products50

expansion of oil production

peak oil analysisdont

new production flows

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