Debunking The "Peak Oil" Theory

Yet Again, One Might Add

By Pejman Yousefzadeh Posted in | Comments (49) / Email this page » / Leave a comment »

Jerry Taylor says that you really need to check out this piece on the coming oil age. He's quite right:

How much oil lies beneath the Earth's crust? The only thing we know for sure is that history is littered with estimates so far off the mark--usually below the mark--that they border on the comical. In the 1920s, for instance, the Anglo-Persian Oil Co. (now BP) refused to take a stake in Saudi Arabia, thinking that the country didn't hold a single drop of oil. In 1919, the U.S. Geological Survey predicted that the United States would run out of oil in nine years. Yet by the time nine years had passed, huge discoveries, topped by the Black Giant field in Texas, had created a massive oil glut that almost destroyed the industry. In the 1970s, the consensus turned grim again: oil production would peak in the mid-1980s and then drop precipitously. A famous CIA report predicted the "rapid exhaustion" of accessible fields, while President Jimmy Carter warned that oil wells were "drying up all over the world." Instead, in 1986, oil prices collapsed in the midst of a huge supply boom, as they had done many times before.

Now doomsday forecasts are back, predicting the end of oil in this decade or the next. The verdict of the new catastrophists may appear more convincing because they use statistical and probability models that appear to penetrate the mysteries of our planet's subsoil. In fact, they do no such thing. In sum, what little is known about the world's underground resources justifies a positive view of the future.

Don't stop there. More awaits if only you would take the trouble to click on the link. In general, scarcity of resources is certainly a possibility--and perhaps more possible with some resources than with others--but perhaps it is high time that we demand a little more from various and sundry Malthusians before we start believing them.


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. . . accept science that doesn't agree with the liberal viewpoint?

But that would mean that fuel cells are a better option than battery-powered cars, that global warming isn't all that and a bag of chips despite the rantings of a former V.P., and that democracies don't breed terrorism!

We just CAN'T believe all that, can we?!

------------------------
Cordially,
Andrew Quinn

If you like my writing, please check out http://www.ZenithBlog.com and the accompanying Zenith Podcast. Thanks!

The greenies and Democrats are helping oil companies make a fortune with Peak Oil™.

...

pause

...

BWHAHAHAHAHHAHAHAHAHAHAHHAHAHAHAHAH

Two thirds of the world is covered by water, the other third is covered by Champ Bailey

The Greenies own bocoup stock in oil companies. Do you think this happens accidentally?

Praise the memory of Gerald Ford.

Two thirds of the world is covered by water, the other third is covered by Champ Bailey

Thomas Gold's abiogenic theory of oil's origins is far more scientifically credible to me than is Peak Oil Theory.

http://www.wired.com/wired/archive/8.07/gold_pr.html

That's a nice feel good article, but a quick google produced this report from the US Department of Energy that seems to debunk his debunk. http://www.evworld.com/library/OilShaleStategicSignificant.pdf

The report isn't all doom and gloom, but it does point out that,

"The foreseeable peaking and decline of
global oil production will reduce the availability
of foreign oil supplies to meet U.S.
oil import requirements and drive up global oil prices, at a high cost to the U.S. and
World economies."

It also states that,

"Worldwide competition for oil could result in
ce escalation and supply disruptions similar
those experienced in the 1970s. Unlike the crisis of the 1970s however, this time relief by
simply finding more conventional oil will not
be possible."_

The report does mention 1 trillion barrels in shale that can be retrieved, and it passingly mentions tar sands, but the point it makes is that getting oil out of shale and sand is very exspensive, and has a long lead time before getting up speed.

And of course there is also China to consider. Currently the chinese use 1/20 per capita of the oil americans use. What if that goes up to say.... 1/10? Or 1/5?!

Maybe the greens aren't so silly after all...

is profitable to extract if oil prices remain significantly ahead of $50 a barrel. Startup costs are steep but not insurmountable, and its tough to put a price on the security of not having to kowtow to Islamic extremists to meet your country's energy needs.

Investing now in developing industry to extract oil from shale could help down the line. I also don't think that investing in conservation and other alternative energy sources is a bad idea either.

And of course not having to funnel tons of our money into these problematic middle eastern countries is a big plus.

Extraction costs are not as high as you seem to think. It is profitable at way less than $50. Currently, however, planning assumptions are for prices much lower than at present. The oil companies keep these very closely guarded, but my contacts suggest that somewhere in the $30-35 region is the current figure at one of the majors. This was only raised from $20-25 within the last year.

Recall that oil companies are investing in infrastructure with an expected life of several decades, and want to earn big returns (c. 15%) over the life cycle of the investment. They do this knowing that prices will fluctuate widely during the period, so they test their assumptions against a series of planning prices.

They were steering very much away from major investment in tar sands when I worked in the sector - but then their lower end planning assumption was $8 a barrel, a price achieved the following year. Nonetheless there was experimental investment in the field at the time. Direct costs were around $12 a barrel.

The cost of extracting from tar sands is likely to fall as experience of actually doing so rises, but there are inherent costs - physically moving a lot of rock and sand - that mean it can never be as cheap as sinking a hole in Saudi Arabia.

Quentin Langley
Editor of http://www.quentinlangley.net

I wonder if someone could enlighten me as to when debunking ‘Peak Oil’ theory became a conservative issue.

Is it Global Warming debunking in disguise?

I would have thought the lotus eating; wooly-headed, pleasure-obsessed liberals would be the ones in denial, not conservative, hard-nosed realists.

No need to panic of course. We need to remain rational. Oil has a while to run yet, that‘s for sure, especially at the current price points.

The facts should still be addressed, not anecdotes from a previous century. I’m sure I can dig up references to the never ending supply of Cod from the Grand Banks too.

Quoting the article…

“high prices are … boosting innovation and efficiency while encouraging conservation”

Sounds a bit gas-tax-green, eh, wonderful if you are an Italian oil executive and have oil to sell. You have to admit, he does have a personal interest in keeping oil consumption high.

The man is not saying prices will drop, nor that the US will magically discover huge new traditional oil fields. In fact he implies the opposite.

The growing US dependency on historically high priced foreign oil is not something we can choose to believe or disbelieve. There are facts…

From the DOE, “Total Net Imports as Share of Consumption”

1960 16.5
1961 17.5
1962 18.4
1963 17.8
1964 18.7
1965 19.8
1966 19.7
1967 17.8
1968 19.5
1969 20.8
1970 21.5
1971 24.3
1972 27.6
1973 34.8
1974 35.4
1975 35.8
1976 40.6
1977 46.5
1978 42.5
1979 43.1
1980 37.3
1981 33.6
1982 28.1
1983 28.3
1984 30.0
1985 27.3
1986 33.4
1987 35.5
1988 38.1
1989 41.6
1990 42.2
1991 39.6
1992 40.7
1993 44.2
1994 45.5
1995 44.5
1996 46.4
1997 49.2
1998 51.6
1999 50.8
2000 52.9
2001 55.5
2002 53.4
2003 56.1
2004 58.4
2005 59.8

It is simple, really. Liberal believe we are running out of everything because they don't understand the operation of the market. It is inherent in their make up. They think in terms of a fixed quantity that is running down. Oil reserves are, in fact, not a fixed quantity. They are the proven reserves that are economically extractable using current technology. Whether any given reserve is economically extractable depends on your assumption about prices (see debate on shale oil and tar sands above). Technology is also not a constant, therefore there is always more oil than estimates of reserves suggest.

There is, of course, a total (and diminishing) quantity out there. No-one knows for sure what that that quantity is, since oil companies simply do not invest the millions of dollars it takes to look for oil they cannot possibly sell for 20 or 30 years. This total quantity, however, should NOT be confused with proven reserves, which are calculated on much more restricted criteria. The level of proven reserves is nearly always around 20 years supply, since that is the policy of the oil companies. Estimates as to the total quantity of oil on the planet are closer to 20,000 years supply. And no-one believes we will be using oil for that long. Technologies change WAY faster than that.

So you can see why Sheikh Yamani said "the stone age did not end because we ran out of stones and the oil will not end because we run out of oil".

Quentin Langley
Editor of http://www.quentinlangley.net

If your point is that we have become dependent upon inexpensive imported oil, just as we have become dependent on inexpensive imported everything else, then I agree.

As to debunking peak oil. we should debunk it because if people in the government believe it they will make inappropriate
policy decisions.

Your dismissal of anecdotes from the past is unfortunately. We learn from the past or continue to make the same mistakes.

There are people who want to frighten us about something which is not happening. If one researches the oil industry you will see that going back to it's very beginning with whale oil. It has been characterized by wide swings in price, and wild predictions as to its depletion. Therefore if one knows this, then you are no longer easily moved when you hear someone scream peak oil.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

If your point is that we have become dependent upon inexpensive imported oil, just as we have become dependent on inexpensive imported everything else, then I agree.

Or, to put it another way, does America get a prize for being the first country to run out of oil?

Peak oil is not the end of oil. For those who believe in it, it's the point at which we will have produced one barrel more than half of all the oil there is. If you view oil production as a bell curve, it's the top of the bell curve.

That's not the end. Half way is a long way from the end, even if rates of oil consumption are a lot higher today than they were fifty or even fifteen years ago. Even the most pessimistic peak oil activists predict decades of continued oil use, albeit at continually higher prices and in declining quantities.

For most geologists (that is, those who believe in the traditional sedimentary deposit theory of oil creation) the issue is not whether we will reach peak oil, since under that viewpoint it's an inevitability, but when. The folks most aggressively pushing the peak oil theory, such as financier Matthew Simmons, guesstimate a fairly near term number within the next ten years. The folks who are more bullish push the peak oil point out to about fifty years.

One thing they all agree on is that they don't actually know. No one knows what oil is going to be discovered. Beyond that, we don't even know how much oil we already have discovered. The people who have oil reserves are often under no obligation to release accurate or audited reserve figures, and some don't. The Saudis release vague figures, but allow no independent auditing, and some people think the governing oligarchy has reason to overstate the reserves and hence future revenues so as to preserve political stability. Other countries are similarly reticent to share real numbers. Every serious discussion of peak oil that I've read starts with some variation of the words, "I don't really know."

The folks who make a living finding oil nearly all dismiss the abiogenic theory as crankpot science, but you have to remember that that often happens with scientific breakthroughs. Geologists also rejected continental drift as crankpot science until the evidence became overwhelming. Maybe Gold is right, although so far no one has discovered commercially viable quantities of oil applying his theories. Given that he predicts deep creation of oil and gradual ascent to the surface, it's also not to be assumed that, even if he is right, that it means cheap and easy to get at oil in the quantities we need in the near term. The test well he persuaded the Norwegian government to drill was hugely expensive (several miles through granite can use up a lot of drill bits) and produced nothing of commercial value.

Here's one takeaway point - even if oil is not running out, it's getting more expensive to produce and there's a longer lag time between discovery and production. When Colonel Drake drilled his well in Titusville, Pennsylvania, in 1959, it was a shallow well in a location where oil was already seeping to the surface. Recent large discoveries tend to be several miles offshore and tens of thousands of feet deep, which require time-consuming development of a significant infrastructive and have much higher costs of production. There is a lot of oil shale, but it's expensive to mine, and takes nearly as much energy to convert to oil as the oil yields. Squeezing more oil from existing wells also requires, by definition, higher prices than have existed to make it economically worthwhile, and even then technical and environmental issues make it expensive and dicey work. There will be peaks and valleys in the prices, but you probably will not see $30 oil again, and might live to remember nostalgically $60 oil.

Here's a second takeaway point - if you are a long term investor, this is a very important issue. I think that if oil declines and prices go up, we will find ways to work around that and keep the economy working, but it's going to require new technologies and new industries, and it also will mean the decline of some existing technologies and industries. There's money to be made and lost by analyzing this issue from a clear-headed, non-ideological viewpoint.

Third takeaway point - there's a geopolitical dimension to this debate. If oil does get scarce, and if we don't find workarounds fairly quickly, more than one country will find its economy dependent on getting control of such oil as exists. China has been inking long term deals with third world producers. Russia, after using western investment and technology to find and develop fields, is now kicking the western oil companies out of the deals and effectively nationalizing its oil and gas. We all know what the story is in the mideast. It was a slander to call Iraq a war for oil, but wars for oil could happen in the 21st century.

Much of what you say makes sense, but you omit the role of changing technology in several key places.

EG:

>>For most geologists (that is, those who believe in the traditional sedimentary deposit theory of oil creation) the issue is not whether we will reach peak oil, since under that viewpoint it's an inevitability, but when.

Not so. We may well, and in my view probably will, stop using oil before that point arises.

>>Squeezing more oil from existing wells also requires, by definition, higher prices than have existed to make it economically worthwhile, and even then technical and environmental issues make it expensive and dicey work.

Also not true, and demonstrably so. One way in which abandoned fields can become economic is that prices rise, but another is that technology changes. Current (temporary) price peaks stem from the oil companies cutting back investment in exploration in the '90s which, in turn, was caused by the development of 'silver bullets' which allow them to extract up to twice as much from an existing well as was previously economic.

Quentin Langley
Editor of http://www.quentinlangley.net

I agree with both your corrections. Thanks for the dialogue.

On the technology issue, it perhaps bears emphasizing that while we use oil for energy, there are a lot of other energy sources. Implicit in what you say is that technology is helping to develop totally new energy sources. While the existing alternative energy sources are not, by themselves or in the aggregrate, going to replace oil as they now exist, they can contribute to the overall energy mix, and thus help prolong our oil supplies and mitigate prices rises. Beyond that, there are new technologies coming on that could change the whole ballgame - the most dramatic being nuclear fusion, which could be commercially important by mid century. There's also interesting work being done with generating electricity from the up and down motion of ocean waves, which is a functionally inexhaustible source of energy, as well as some very different types of solar electric generation that are far more efficient than existing technologies. Fusion alone could put us into an era where energy is not a scarce resource.

In short, technology means that we are least as likely by mid century to have an abundance of cheap energy as to have chronic shortages. You may well be right that technology will mean we won't even get around to using the oil we have.

are indeed pretty weak. Shell seems to assume that most cars will be hydrogen powered in 50 years or so. I am not so sure. I think battery power is more likely.

People tend to laugh about battery powered cars: the range is limited; the power is limited; the weight of the batteries is tremendous. But batteries are changing. Look at the year on year development of cell phones and laptops. If you apply the same developments to larger batteries, electric cars begin to look realistic.

Electricity, of course, does not mean alternative power. It might even be more polluting than oil, depending on how it was generated, and how much loss of efficiency there has been in converting the primary source into electricity that can be stored in a battery. But this does have a huge impact on local pollution - particulates, smog, etc. etc - because the site of generation is likely to be removed from population centres.

The alternative energy source that I think has real potential is solar. Currently we don't know how to convert it efficiently into usable power. Your guess is as good as mine how and when that problem might be solved. But when it is, it might enable poorer countries to completely skip the process of building an electricity infrastructure, just as some have skipped straight over land lines to cell phones. If each house in India was built with solar panels, the occupants might not need to buy energy at all.

Quentin Langley
Editor of http://www.quentinlangley.net

.. electric cars recharged with solar energy :)

The power grid is neither a reliable nor efficient source of power for recharging electrical vehicles - especially not as a large scale solution. Imagine all of Cleveland just home from work and charging their cars all at once.

Thinking, I assume.

You would be nearly right about the power grid being unreliable and inefficient, if everything that could possibly be invented already had been. Nearly right because changes in technology have already taken place, but have not yet been applied on this scale.

In five years batteries for cell phones have shrunk to half the size and a tenth of the weight while doubling their power and increasing their lifespan fivefold.

Quentin Langley
Editor of http://www.quentinlangley.net

I recognize that electrical vehicles are a viable technology and that solar power is getting better (but still expensive).

1) No matter how good the battery is, the battery still has to charged from a primary power source such as the electrical grid.

2) Solar power is slow, it can not be used to directly power a family sedan with a reasonable load.

Well, what does that mean? Here's an idea: collect energy all day while sun light is available and then transfer the energy to the car battery at night while the car is parked.

Apology accepted in advance, but I'm not concerned either way :)

What if all of Cleveland didn't have a car in the first place? Give that a moment's thought before you reject it.

At CURRENT prices it has become profitable to convert coal into petroleum products. Economies of scale will make this even more profitable. Coal is something the world has in great abundance.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Thanks for pointing that out. Coal to oil technology has been around since at least WW2, although the technology has gotten a lot more efficient since then. China, which is coal rich and oil poor, is making a big push into it. The US is another coal rich nation, but so far we are not pushing it the way the Chinese are.

All of these alternative sources of energy will help put a cap on oil prices over the longer term. There will be significant lag times, because it takes a long time to plan, permit, fund and build a coal gasification plant, but it will happen once people are persuaded prices will stay high enough to make it a good investment.

Here's what I posted about legislation sponsored by Ed Markey that would would forever put ANWR drilling off-limits.

Only a liberal would think that taking hundreds of millions of barrels of oil out of circulation is the fast-track to energy independence.

Closing off ANWR means we keep sending an ever-increasing amount of money to countries that are not free and sponsoring terrorism. No frozen wasteland is worth that.

---
Internet member since 1987
Member of the Surreality-Based Community

But other than that, you're right. It's not worth it...

"The person who has nothing for which he is willing to fight, nothing which is more important than his own personal comfort... has no chance of being free unless made and kept so by the exertions of better men than himself."
--John Stuart Mill

...would think that protecting a few caribou is more important that producing the gasoline that Americans need to drive our cars.

It's a question of values. Environmentalists and caribou are more important than jobs and American families and the cars they depend on.

And the caribou population on the North Slope has increased since the oil industry arrived, but you can't reason with environmentalists. They worship at the church of "Alternative."

Both sides in the Peak Oil debate are right - to a point.

The original theory was based on a similar technique from hard rock mining. Normally, the peak production in a given geologic province occurs when half the ultimate recovery of the mineral, say silver, has been recovered. For the technique to be meaningful, you need to have a good estimate of the ultimate recoverable quatity of the resource, or you need to have already passed the peak.

In the '50's, M. King Hubbert made the startling (and accurate) prediction of a peak in U.S. production in 1971. The U.S. followed the peak oil curve almost perfectly. Recently, other authors have extended the technique to forecast a global peak (about Thursday of next week, I think) based on an estimate of ultimately recoverable oil of 2 trillion barrels.

Just about all of the oil produced to date has been conventional oil, meaning (relatively) light oil contained in (relatively) porous and permeable rocks in sedimentary basins. The 2 trillion barrels is the estimate of ultimately recoverable conventional oil.

The difference between oil and metallic mineral resources like silver is that marginal products can be converted to oil, thereby extending the "definition" of the resource base. In other words, you can't make silver out of "almost silver". In the case with tar sands and oil from shale, you can make petroleum from lower grade products. Deepwater drilling has also rasied the possibility of extending the resource base to basins that were not included in the original resource estimates.

Domestic oil production peaked when it became cheaper and more efficient to find and produce an incremental barrel of conventional oil overseas than it was to extend the domestic resource base. If we're now finding the limit of global conventional resources, economics will drive the search toward unconventional sources.

So in what sense are Matt Simmons and other Peak Oilers "right"? Unconventional sources will be slow and expensive to develop. It will be difficult to build production levels from new supplies fast enough to offset the natural decline from conventional sources.

One of the posters brought up the abiogenic theory of hydrocarbon generation - the idea that hydrocarbons are naturally self-replenishing. Some assume that means they are inexhaustable. That would only be true if depleted reservoirs were being recharged as fast as we deplete the resource, something which clearly is not the case.

Re: Unconventional sources will be slow and expensive to develop.

How do you know this? If you have an accurate crystal ball showing the future may I please use it for a while too?
Seems to me though when there's good money to be made in something it happens pretty darn fast.

...but thanks for asking. My C.V. is available on request. No crystal ball.

The large potential resources have one or more of the following characteristics:

  • remote geography, no infrastructure
  • unproven technology (Shell's oil shale project, offshore Lower Tertiary Trend)
  • unfavorable reservoir characteristics making recoveries less efficient than "conventional" sources
  • environmental objections (ANWR, oil shale, tar sands, US Federal Offshore)
  • extreme capital costs (offshore Lower Tertiary Trend)
  • extreme capital risks
  • high operating costs
  • All the comments upthread about "Technology X is economic at $Y dollars per barrel", you can pretty safely ignore. Oilfield costs (drilling, equipping and operating costs) have a funny way of tracking the cost of a barrel of oil. I'm not saying these projects are not significant, I'm saying that if they are to make a meaningful impact, it will be over a long (7-10+ year) time frame. Meanwhile, conventional resources inexorably decline.

    I'd like to be proven wrong, but I think it would take a wholesale shift in public sentiment & government policy (like a Manhattan Project) to encourage domestic exploration in areas presently off limits, and to streamline permitting requirements. With gasoline plentiful at $2.25/gallon, there is no public groundswell to force this to happen.

    As the reference Newsweek article points out, 90% of the world's proved reserves are in the hands of state-run oil companies, largely in regimes that are hostile to the U.S. Given that we've already painted ourselves into a corner with our dependence on foreign sources, that's perhaps our biggest hurdle.

    It turns out if you slowly raise the temperature on a frog in a pot of water it will actually jump out the idea that it wasn't is a myth. For people apparently not so much.

    Veritas magna est et praevalet.

    Re: remote geography, no infrastructure

    Then we'll build it. See: North Slope oil

    Re: unproven technology

    At one time every technology in existence was "unproven", even fire and the wheel. So what? Moreover most of things I hear people talking about (coal to oil, solar, wind etc.) have been proven, at least to the point that we know they work. The issue is not technology but economics: these alternatives are not (yet) competetive with oil. Should oil prices increase to the point where they are competetive, we will move into them, fast. And then economies of scale will bring down their prices too, making oil increasingly obsolete. (Examples of the last part abound just about anywhere new and better technologies are introduced. It generally takes less than a decade for a new technology to largely replace an old one.)

    Re: unfavorable reservoir characteristics making recoveries less efficient than "conventional" sources

    I'm not sure what you mean by this. Again, it boils down to economics: is it cost-competetive to extract the resource? If yes, the resource will be extracted.

    Re: environmental objections

    If people are frustrated enough these objections will be overridden in a hurry.

    Re: extreme capital costs (offshore Lower Tertiary Trend)

    Not sure what this is about. If the peak oil theory is correct however then the chances of oil prices falling dramatically would be just about nill, thus removing the element of risk that has precluded alternative full development in earlier times.

    Re: extreme capital risks

    See above

    Re: high operating costs

    Many technologies have this. Getting the whole country (rather the whole world) online was extremely expensive. IT professionals don't come cheap. So what? We still did it, because it was to our advantage to do so.

    ... the history of the North Slope illustrates my point perfectly.

    Seismic exploration began on Alaska's North Slope in 1963.

    The first lease sale for the Prudhoe Bay structure was in July, 1965.

    The Prudhoe Bay State #1 (discovery well) was spud in April, 1967.

    First production from Prudhoe Bay Field came online in 1977, fourteen years after exploration began.

    I, too have faith that smart, greedy capitalists will find a way to solve just about any problem; all's I'm sayin' is, given the time frames, costs and obstacles (political, technological and otherwise) involved, don't count on it to happen overnight.

    The higher the price spikes, and the longer it stays there, the quicker the answer will come.

    "If people are frustrated enough these objections will be overridden in a hurry." Heh. See ANWR. Ditto the U.S. Outer Continental Shelf. Apparently it will take more than 6 months of $3.00/gallon gasoline to make that one happen.

    In light of your analysis of the long-term investment profile of the existing (conventional) resource base, I get an intuition that some completely new players will get into the game to develop unconventional oil. (I'm calling this hypothetical because we don't know if the unconventional resources will get developed at all, or on what time scale.)

    Seems to me that none of the existing players (exploration, downstream, integrateds or services) will want to step too far out of the risk profile of their respective competitive groups. But I'm basing that on general business experience, not oil-business experience. If I'm right, then some companies that are either not known as energy players or perhaps don't even exist yet will become major players someday. (And the corollary is that the capital sources will also be unusual.) Does any of this make sense to you?

    I can see your point for resource plays like tar sands and shale oil. The key success factors relate not to geology and exploration technology (which the major integrated companies are good at), but to construction, logistics, planning etc., that would play more to the strengths of a KBR or a Bechtel.

    OTOH, the majors are vertically integrated. A lot of their motivation revolves around keeping uninterrupted supplies for their refineries & downstream marketing. I think this factor will keep non-industry outsiders at a disadvantage, or perhaps as participants in projects as an equity partner of a major.

    For new basin exploration, that's pretty much a game for the majors and the largest independents. That's what they're good at, and it would be difficult for a small company or an industry outsider to compete technically.

    Smaller companies can be less risk averse and the lucky ones can exploit niches (geological, geographical or technological) to outpace their bigger competitors in terms of growth. Examples would be Anadarko (deepwater U.S.), Apache (U.S., Egypt), Cairn Energy (North Sea, India). Some of these companies grow into small majors; others, especially if they stumble, get snatched up by bigger companies who find it easier to grow on Wall Street than via the drill bit.

    [As another aside,] the amount of consolidation in the industry during my career has been mindboggling. One industry publication, the Oil and Gas Journal, publishes an annual survey of domestic public companies. Twenty years ago it was the "OGJ500", as in 500 companies that made up the list. Now, the list is just over 100 companies. The list probably has an annual attrition rate of 10% due to mergers.

    ...result in product streams that are technically suitable for feeding into the existing refining and marketing infrastructure?

    Regarding new basin exploration, it sounds from your description that no one would try to build out such a complicated technical capability since it already exists within the majors. As an investor, I'd always prefer to buy rather than build something like that. Does it then follow that this is an unlikely area for growth because the long-term capital costs and risks are unfavorable from the majors' point of view?

    ...to Wikipedia:

    Technically speaking, the bitumen is neither oil nor tar, but a semisolid, degraded form of oil which will not flow toward producing wells under normal conditions, making it difficult and expensive to produce. Oil sands are mined to extract the oil-like bitumen which is upgraded into synthetic crude oil or refined directly into petroleum products by specialized refineries. Conventional oil is extracted by drilling traditional wells into the ground whereas oil sand deposits are mined using strip mining techniques, or persuaded to flow into producing wells by in situ techniques which reduce the bitumen's viscosity with steam and/or solvents.

    The kerogen (a waxy precursor of oil) recovered from shale by mining would be similar. Shell's process is exciting in that they propose to cook the kerogen in situ, effectively accelerating the natural maturation process with external heat. That obviates the mining method's need to dispose of the "tailings", requires a lot less water, and produces a product more like a conventional crude oil.

    As for new basin exploration, the majors and large independents will do it when it makes sense for them. They need to find new reserves in big chunks so they can say they're "replacing production". I never meant to imply that they won't do it, just that bringing new supplies on line will take plenty of time.

    Basically, all the easy & obvious stuff has been found. Remaining basins to be explored are remote geographically (such as the Arctic), or controlled by hostile regimes, or have high perceived geologic risk.

    And amidst the mass suicides and panic and murder and mayhem, those of us with multiple functioning braincells recall several key points that make the "Peak Oil" fearmongers look immensely stupid:

    ANWR
    Shale Oil
    Tar Sands
    Coal to Oil
    Improving technology making previously inaccessible oil deposits profitable to exploit
    Increasing prices making the same profitable
    And untold millions, perhaps billions, of barrels of oil that have yet to be discovered yet.

    Not to mention the fact that at the current rate of advance, technology is going to outpace the need for oil LONG before we run out of what we Currently can produce economically.

    "The person who has nothing for which he is willing to fight, nothing which is more important than his own personal comfort... has no chance of being free unless made and kept so by the exertions of better men than himself."
    --John Stuart Mill

    It would be nice if we could get the congress to actually get behind these instead of demonizing oil.

    Veritas magna est et praevalet.

    Perception can be divorced from reality. Perception drives markets. Perception matters. If the market thinks we are short on oil we'll behave like it and prices will follow suit. If the market believes there is plenty of oil prices will fall.

    I have thought about 2 scenarios that I haven't yet resolved.

    1. Oil companies have the best information and think long term strategic for their own survival. It is their long term strategic survival. If they knew we were in for a serious decline in recoverable oil supplies wouldn't they be investing in alternatives like no tomorrow? After all they want to survive longterm and oil makes up nearly all of their earnings for now. America's energy needs are aligned w/ today's energy companies' long term success.

    2. Oil companies are generally public companies made up of individuals wanting to maximize their own payday. Many public companies are not long term strategic at all. They run their business to meet or beat expectations every 90 days. A long term strategic train wreck waiting to happen. An oil company CFO or CEO will not come out and say we are running out of oil in 10 years and we are going to invest in alternatives(killing stock price/payday) but don't know if one of more of them will ever replace oil products at all or at an economically feasible price for consumers. That'd be career suicide. But the American public does need the best information on the reality of the energy supplies. My concern in this scenario is executives just riding out their career making money and not worrying because it "won't be in my lifetime."

    If you always find yourself arguing the exceptions rather than the rule you just might be rapidly sliding down your own slippery slope to irrelevance. -CommonCents

    is a myth.

    ONLY public companies invest for the long term. Governments, especially in democracies, are obsessed with short term timescales (dependent on the electoral cycle). Banks are unwilling to fund the scale or timeframe suitable for oil exploration and production. Stock markets, on the other hand, are usually flush with money for long term investments. After all, the biggest players on stock markets are pension funds, usually looking for returns over several decades. Most of the big long term investors such as the oil companies are criticised by shareholders for building cash mountains - ie they have more funds to invest than they can find outlets for.

    In passing, the second most efficient way of funding oil companies seems to be as family-owned businesses. For that, see the nationalised businesses of the gulf states. They also invest on decades long timeframes.

    Quentin Langley
    Editor of http://www.quentinlangley.net

    ...deserve to be rewarded for the risk.

    For a company to place hundreds of millions to billions of dollars in a project that may not generate any cash flow for 7 to 10 years takes a lot of guts. Given the volatility of oil prices, how much would you be willing to bet that the average oil price 7 to 10 years out would be in excess of $35? $50? $75?

    Instead, populist gasbags decry the oil firms' "obscene profits".

    The energy industry had subpar returns for the period 1983-2003. Commodity prices for oil and natural gas remain incredibly volatile; they get a lot of attention when peaking to new highs but precious little when they fall, or when the companies report large operating losses.

    The oil companies are planning for prices in the $30-35 range. Shell was predicting in 2000 that short term capacity problems caused by the overreaction to new technologies in the 1990s would produce a crunch with prices peaking in 2006. Obviously, they were not accounting for additional crunches on capacity such as the Iraq war and hurricane Katrina.

    Quentin Langley
    Editor of http://www.quentinlangley.net

    Re: For a company to place hundreds of millions to billions of dollars in a project that may not generate any cash flow for 7 to 10 years takes a lot of guts.

    And yet, companies do this all the time. Pharmaceutical companies, for example. Very few new technologies spring into existence ready to market. If a years-long lead time to market was a barrier I'd still be using a typewriter and only a few techno-geeks would be online.

    I've worked/consulted with plenty of Fortune 500 and avoided them for personal investing that are very short term. Announce restructuring after restructuring (many of which are reactionary and provide time/excuses and are not long term strategic.) Many decide to play w/ the numbers to make their quarterly numbers instead of increasing revenue and investing in the future. Building up a rainy day account on the balance sheet(inventory levels etc..) or hiding losses to come out in earnings later on.

    I'm not saying public oil companies are doing this but I've seen it often enough to raise the question.

    If you always find yourself arguing the exceptions rather than the rule you just might be rapidly sliding down your own slippery slope to irrelevance. -CommonCents

    The Newsweek article is a good example of how low the editorial standards are in the US MSM. It is a poorly written feel-good piece.

    Oil resources do peak. The article does not mention that US domestic oil production peaked in the 70s and has declined steadily ever since. The peak oil crowd is taking an analysis which predicted the peak in US production and is trying to apply it on a global scale. Despite a lot of spending in oil producing countries we are not yet seeing the kind of production growth which would debunk peak oil theory.

    The article also does not mention that US natural gas production peaked in 2000. Nobody saw that coming and the experts at the time predicted that there was a lot more gas to be found. Not so!!! Industry experts said that a surge in drilling would bring down prices and lead to a glut. Prices did fall but they rapidly bounced back. Maintaining our gas output has required a tripling in our drilling effort since 1999. Three times the wells for the same amount of gas!

    With US natural gas it was obvious that production had peaked when the surge in drilling yielded very little additional gas. There is currently a global surge in oil drilling under way and we have yet to see wether that will yield significant additional oil. If oil production capacity doesn't surge in the next 2 years then peak oil is here.

    Peak oil does not mean the end of oil production, but it will mean the end of cheap, affordable oil. There are other technologies that can produce liquid fuels, such as coal-to-liquids, tar sands, oil shale and ethanol but none of them are cheap and most of them will be slow to build. Take a look at the labor shortages in the tar sands region of Canada. Take a look at the cost increases up there.

    Washington politicians have completely failed to prepare the country for peak oil. They have neither raised fuel economy standards for cars nor have they opened up Alaska and the offshore so that our oil companies can produce more oil and gas.

    ...or as we call it in Louisiana, a threadmill.

    As Matt Simmons points out, industry has used technology to exploit ever smaller accumulations. Other technology advances allow producing those discoveries at much higher rates than 30 years ago. Consequently, the producing life of a new well may be measured in months, not years.

    And for the producer, every barrel that comes out of the ground is a barrel that must be replaced; otherwise, you're going out of business.

    That's why the regulatory/permitting cycle needs to be shortened.

    ...from Cambridge Energy Research Associates, Daniel Yergin's consulting firm, is this informative report, which supports Pejman's conclusion.

    I found this link via the American Petroleum Institute website, BTW, so it probably represents the "official" industry position.

    My sense is that both the forecasts for conventional & unconventional sources are optimistic. I read Matt Simmons's Twilight in the Desert; his conclusion that the Saudi's reserves and spare production capacity estimates are inflated seem well supported to me.

    As an aside, I recently got an email from an acquaintance who works in Saudi for ARAMCO; he said the Saudis' goal is to build up 2 million barrels/day of production capacity over & above current production to offset future global supply disruptions. Drilling activity is 3 times what it was 5 years ago. ARAMCO's work force is also more geographically diverse, less dependent than in the past on American expats.

     
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