Showing posts with label ASPO. Show all posts
Showing posts with label ASPO. Show all posts

Monday, October 19, 2009

Oil Plateau



The recession has taken the oil industry out of mind, so we are over due for a refresher course on the subject. The problem is very simple. We are technically unable to fully replace the oil resources we are consuming and this appears to be largely price insensitive.



We are discovering and perfecting ways to do a lot, but that will be not enough. We simply consume way too much because several mega fields empowered a global expansion of consumption over the past five decades. Their general decline must contract supply. The only mega field in existence with the ability to replace a part of the pending production decline is the Canadian Tarsands under THAI production provided it succeeds.



As Nelder comments, the change that has taken place is the silencing of the dream spinners. As I have posted several times, it is most probable that industry production will decline over several years by as much as forty percent, Over the past two years we have watched conditions deteriorate with a few discovery announcements fueled by the natural uptick in drilling.



The industry can sustain production levels at about half present rates for a long time, certainly decades. It is the pending loss of the mega fields that is the problem. I personally think that a great deal of expensive conventional oil exists but it is mostly behind political barriers and will as a result tend to trickle out. I am not so sure that is not a good thing.



As I have also posted, we are about ready to transition from oil to electric transportation. This alone will nicely offset the drop in supply.




The Next Oil Crisis Is Just Ahead



By Chris Nelder Friday, October 16th, 2009


I have just returned from the annual conference sponsored by the U.S. contingent of the Association for the Study of Peak Oil (ASPO-USA) with a wealth of new information and perspective to share, so this will be the first of a series of reports.


I look forward to the ASPO-USA conferences all year, because they consistently deliver good, solid data on the state of energy and afford an opportunity for vigorous and stimulating discussion with some of smartest and up-to-date experts in the world-particularly over dinner and drinks late into the night. This year was typically outstanding.


I begin with some high-level updates on the key aspects of the peak oil study.


Past the Peak?


Perhaps the thing that struck me most was how much the outlook on peak oil has changed since the first conference in 2005.


Those who thought conventional oil had probably peaked back then were considered extremely pessimistic, where the consensus view saw the peak another 5-10 years off, and the optimists put it 20 years away or more. Some thought the peak rate of "all liquids" would be around 100 million barrels per day (mbpd), up from 85 mbpd at the time. Most thought non-OPEC production would increase up through 2010. Biofuel boosters were sunny about their future.


Four years later, the view on oil and biofuel has grown considerably worse.


We now know that conventional crude did in fact hit its peak-plateau in 2005, having remained around the 74 mbpd level ever since. The expected growth from non-OPEC mostly failed to materialize, as depletion of mature fields took its toll and the cost of new projects soared—especially for deepwater and production from marginal sources. More pessimistic observers now think the 87 mbpd all liquids peak recorded at the height of the 2008 boom was the peak, and the more optimistic ones have cut their expectations to under 100 mbpd, with 90 mbpd looking more likely.


Biofuels now have a black eye from the corn ethanol frenzy of 2007-2008, which has all but collapsed. Ethanol from algae and cellulose still looks about as far in the distance as it did in 2005, as no one has figured out how to produce either one at commercial scale or with an acceptable net energy return. And biodiesel has remained a minor player, with little expectation for it to scale up any time soon.


But the most surprising change has been the outlook for North American natural gas. In 2005, the majority of observers seemed to think it had peaked for good, and saw gas prices remaining in a high range of $11-15/Mcf. I don't think any of them expected the recent boom in North American shale gas, and there was certainly no suggestion that gas prices would crash to nearly $2 this year.


In fact the main worry about gas now seems to be that the shale gas boom will prove to be short-lived, and sucker us into building more vehicles and infrastructure to use it just as it sputters out. We only have a couple of years of data to work with on shale gas wells, and the only good data is from the Barnett Shale.


Running down the depletion numbers on shale gas, analyst Arthur Berman found that in the first year of production decline rates have been in excess of 50% for Barnett wells, and 90-95% for Haynesville Shale wells. The average well in the Fayetteville Shale is "profoundly non-commercial" he said, and predicted that most shale gas wells will be abandoned in less than five years after their first production because the output will be so low.


There is also a fear, which I have articulated previously, that with an average production cost of $7-8/Mcf for shale gas and prices through most of 2009 staying around $4 or less, new wells simply haven't been getting drilled. The effects of that lapse should show up next year and cause our "glut" to disappear quickly, taking prices much higher.


Supply Decline Rates


With the end of growth in the rate of global oil production now either in the past or looming in the next few years, attention is progressively focused on the depletion rates of mature oil fields and the rate and date of overall decline.


Most observers believe the globally averaged depletion rate has risen from 4.5% per year in 2007 to about 5 - 5.5% now, which will accelerate to around 6.5% per year by 2014. This is more or less in line with the average rates from IEA's report last year. Petroleum geologist Chris Skrebowski pointed out that a 5% per year decline rate means a loss of 4 mbpd per year, equivalent to all the volume of biofuels, tar sands and heavy oil combined, or losing the entire North Sea in about 14 months, and that it would be a huge challenge to replace those lost volumes.


Analysts using the Megaprojects database (of large oil projects started up after 2005) generally agree that production will peak in the 2009 - 2010 time frame. Net new supply each year is expect to begin declining around 2014 - 2015 as depletion overwhelms new projects. Supply may reach as high as 92 mbpd in 2010, then plateau to around 89 mbpd in 2014, then decline to 84 mbpd in 2020 and 78 mbpd in 2030.


That view was generally in line with comments from oil consultant and former head of exploration and production for Saudi Aramco, Sadad al-Husseini, in a video interview clip. Seeing insufficient large new projects in the next 5 - 6 years to compensate for decline rates of 6.5% in non-OPEC and 3 - 4.5% for OPEC, he expects a shortage of capacity in the next 2 - 3 years.


The poster child for decline rates is, of course, Mexico with its crashing Cantarell field. Matthew Simmons projected that its decline would end Mexico's long era as an oil exporter in 18 - 36 months. David Shields, an author and expert on Mexican oil production, delivered a devastating indictment of the country's political leaders and its oil company Pemex, asserting that Pemex officials knew exactly what Cantarell was going to do as far back as 2002, but said exactly the opposite in public. A chart that Pemex shared with the Mexican Senate showed that production from its largest fields would fall to 1 mbpd by 2017, a full 1.8 mbpd lower than the official forecast of about 3 mbpd. If political manipulation is distorting the public impression of Mexico's near-term oil potential (and I believe Shields on this point) then it could be very bad news for the U.S., for which Mexico is the #3 source of oil imports.


Demand Growth Rates


On the whole, I would say there is now a strong consensus (at least among analysts who prefer data to faith) that global oil production will begin to decline in the 2012 - 2015 time frame. The later-dated estimate is based on the notion that the global recession of the last two years has probably given us that much longer before terminal decline sets in.


Peak oil deniers who have projected continued growth for many decades hence and ultimate peak rates of 120 mbpd or more have obliquely capitulated in the face of the recent evidence and switched to a "peak demand" argument: It's not that supply couldn't keep up for geological reasons, it's that demand wasn't strong enough to support high enough prices to raise supply further.


It's a classic tactic to try to change the game if you can't win it, but the peakers aren't buying it. As Skrebowski pointed out, the peak demand argument only really holds for the OECD, where demand is off a few percent from the peak.


The real demand story is shifting quickly to the developing world, particularly China. Analyst Steven Koptis projected that China would overtake the U.S. as the top consumer of oil by 2018, and if supply is available, would double U.S. consumption by 2025.


Indeed, as petroleum geologist Jeffrey Brown pointed out in his presentation of the Export Land Model, the U.S. has already been outbid by Kenya for oil. According to the model he developed with Dr. Samuel Foucher, the top five oil exporters in 2005 will in aggregate reach zero net exports by 2032, and most of that will be shipped early on. In just three years, they shipped 1/5 of their total expected net exports after 2005.


Petrobras' Promise


As a counterpoint to the generally gloomy data on global oil supply and demand, a razzle-dazzle keynote was given by Dr. Marcio Rocha Mello, president of HRT Petroleum and a 24-year veteran of Brazil's oil company Petrobras (NYSE: PBR). He asserted that the recent pre-salt finds in very deep formations off the shore of Brazil, like the much-hyped Tupi field, indicated that there was a great deal more oil in the pre-salt layers—we just need to drill deeper.


In an extremely animated presentation that at times seemed more like a carnival sideshow than a serious analysis, Dr. Mello served up combination of stratigraphic charts and contrarian theory to make the case that between the pre-salt of Brazil, West Africa, the Congo basin and the Gulf of Mexico, there are another 500 billion barrels yet to find.


While entertaining and humorous, I don't think Dr. Mello made too many converts in the room. As former BP oil exploration chief Jeremy Gilbert pointed out the following morning, none of the alleged pre-salt oil is yet proved, and in fact he'd be surprised if there were 5 billion barrels of proved oil there. "Don't confuse passion with precision" he warned, and noted that it would take 20 - 30 years to prove the resource. In short, it doesn't change the peak oil story at all. By the time pre-salt barrels come online, we'll be well down the back side of the production curve. Rising resource nationalism in Brazil also bodes poorly for very many of those new barrels to make it to foreign markets.


I'll conclude this report with a brief comment on oil prices. As I mentioned in my update three weeks ago, the outlook for oil prices has been murky for months as they traded in a $60 to $75 range. I was long oil but cautiously bearish, and watching for signs of a new signal. This week, that signal came as oil breached the $75 level and touched $78 this morning. It's a decidedly bullish move and I think it portends higher prices to come, at least in the near term.


I took the opportunity to beef up my oil exposure with positions in EOG Resources (NYSE: EOG) and, naturally, Petrobras. Even if Dr. Mello is wrong about the pre-salt, Petrobras is one of the most sophisticated and aggressive oil companies in the developing world, and they are positioned better than most to mint money for years to come. And if he's right...well, it will be a great position to hold long term.


Stay tuned to this space for much, much more from the cutting edge of peak oil analysis in the coming weeks.


Until next time,



Chris Nelder


Energy and Capital


Monday, December 29, 2008

Oil Reality Check by Nelder

Chris Nelder once again serves up a reality check on the global oil supply situation. It continues to be awful. That is because we have not added a major new resource for decades and the last and best is passing through peak onto the way to decline.

The only offset is the Alberta Tarsand arriving with pending THAI production and it is certainly never going to be cheap oil. At least that supply can realistically displace a third of global demand in a declining environment.

As I have already posted, I expect the global oil industry to downsize from the current 85,000,000 barrels per day to 50,000,000 barrels per day over the next few decades with a third coming from Alberta, a third from the Middle East and a third from everyone else. It will simply become too valuable to simply burn as fuel in all but the most critical applications. At that rate of consumption, costly oil will be readily available for many millennia.

This blog has investigated many alternative options that can successfully displace this missing oil, so there is no need to rehash them here.

It is worth explaining why the oil industry is shrinking. We currently produce around 85.000.000 barrels per day. All the sources are in decline or about to enter decline. Been incredibly generous, let us pretend that we will only need 2,000,000 barrels per day of new production turned on each year. That way we can replace our current production in forty years. Makes sense?

That means that we need to find a resource able to support this level of production for at least twenty years every year. That translates into a resource of 20X365X2.0Mil. = 14.6 billion barrels of oil in the ground. We have to find one each and every year just to stand still. We have not found such resources for decades. Yet we need to find one in 2009 and every year thereafter.

The bottom line is absolutely clear today. Conventional oil is not able to come up to speed and this was clear to the industry for decades because they have been looking wherever they have been allowed to look. A seven billion barrel field in deep water off the coast of Brazil is a very poor reward.

In light of this developing scenario, one thing becomes clear. Economic expansion based on oil energy is now impossible and must henceforth rely on alternative energy and that really means solar.

In the short term, the global financial system will swing back into operation after the current time out has ended and most everyone has figured out that they are still alive. The first price to respond will be that of oil because of its still central role in the global economy. And another year of peak oil has gone by. It is now like waiting for a heart patient to have a heart attack. As time progresses, it takes a smaller and smaller clog to hurt us.


Oil Prices are Wrong--Very Wrong

By Chris Nelder Wednesday, December 24th, 2008

Everybody seems to have the same question for me lately: What's the deal with gasoline prices?

How could it go from $2 a gallon to over $4 and then back to $1.66 in a single year? Was it speculators?
The evil machinations of OPEC? Badly-timed fills and draws of the Strategic Petroleum Reserve (SPR)?
A financial calamity engineered by the masterminds of a shadowy wealth conspiracy?

It's never an easy question to answer, but I can easily say "none of the above."

The price of oil and gasoline is set daily and globally by a complex interaction of many factors, including the relative valuations of currency, speculation in oil futures, the fact that oil is "priced at the margins," delayed supply and demand feedback to the market, economic growth rates, money flows of hedge funds and big institutional investors, geological factors, geopolitics, and many more.

Oil shot to $147 this year because of a particular highly-leveraged alchemy of those factors, and it fell as the leverage unwound. It's down now because the world is heading into a major recession and traders are, as usual, overdoing their bearish reaction.

OPEC's responses this year have been mostly late to the game, so they were regularly ignored by the market. Last week's production cuts by the cartel, and the subsequent sell-off in oil, was a fine example of this.

Filling the SPR is too negligible to move the markets either. In May, the debate over filling the SPR raged on with hardly anyone seeming to realize that its 68,000 barrels per day of demand is a mere blip against the US consumption of 21 million barrels per day. Traders ignored it.

Much more to the point is an analysis of over 100 studies on gasoline price elasticity by the trade magazine Energy Journal, which found when gas prices increase 10%, they cut demand by 2.6%. When prices fall, consumption picks back up.

Anatomy of a Frenzy

Oil and other commodities shot up in the first part of the year as investors sought a safe haven against the financial calamity stemming from the subprime meltdown and levered up their bets with wild abandon.

That trend reversed course in June as the world's central banks began cutting interest rates and the US flooded the markets with dollars. The global deleveraging that ensued caused a rout in the commodity markets, and absolutely everything was sold indiscriminately as money managers scrambled to meet redemption calls and raise cash.

The progressively worsening news about the health of the global economy has only fed the selling frenzy, pushing down oil prices further still. It's now more profitable to store oil than to sell it immediately, and OPEC has made yet another belated and ineffectual move to curb a supply glut.

The Asian tigers that were widely expected to support demand, even as OECD demand fell, have reported extremely bearish numbers in the last week as their economic growth stalls.

Oil consumption is off 3.2% from a year ago in China, the world's second-largest consumer of oil, and its crude imports are now at their lowest levels this year.

Japan's oil exports fell to record lows in the sharpest monthly decline since such records have been kept;
meanwhile, imports to the world's third-largest oil consumer are down 17% year over year. South Korea's oil imports are also down 6.5% year over year.

Oil consumption by the world's top oil consumer, the US, has led the global decline with an expected 1.2 million barrels per day decline from past levels through 2009, according to the latest EIA report.

And voila: after thirteen straight weeks of price declines, gasoline is back to $1.66 a gallon.

Some have even suggested that oil in the $40s, and the current glut of oil supply, is proof that fears about peak oil supply were wrong.

Nothing could be further from the truth.

A False Sense of Complacency

A sub-$40 fill-up only lulls us into a false sense of complacency. As I have written repeatedly in recent weeks, we are setting ourselves up for a serious supply problem in the future with oil prices now below their replacement costs.

The facts are sobering:

· Current petroleum stocks in the US are still within the average range for this time of year, according to EIA. They're now about 8% higher than this time last year, but that's really nothing to write home about, and it's not much of a "glut."

· In a recent interview with Jim Puplava, energy analyst Robert Hirsch commented that a 1 million barrels per day decline in world demand would only move back the global peak of oil production by one month. By that metric, the allegedly huge cutback in oil consumption has bought the world about one month more before we peak—whoop-de-do.

· Oil production in Canada, the US's top source of crude imports, is faltering as prices are now too low to justify new projects that tap its large-but-costly and difficult reserves in tar sands and heavy oil.

· Our number-three source of imports, Mexico, is in serious trouble. Crude output from our southern neighbor has fallen 7% over last year, and exports are falling much faster, at a 20% decline, according to Pemex. (As I wrote back in June, exports fall faster than overall production. See "
The Impending Oil Export Crisis.") Production from its largest field, Cantarell, one of the four "supergiant" oil fields in the world, is crashing at the rate of 33% per year. At the current rate, Mexico's oil exports will cease altogether in just seven years.

· Experts at the ASPO and elsewhere believe that, within the next two years, world oil production will go into permanent decline, with depletion removing 2.5 million barrels per day from the world market— that's roughly equivalent to the total oil imports of Germany. There are no oil projects that can overcome a decline rate like that. And yet, no major economy is even preparing for this inevitability.

· Saudi oil minister Ali al-Naimi has warned that the world needs $75 oil to ensure future supply, and that current prices "are wreaking havoc on the industry and threatening current and planned investments."

· With gasoline now well below $2 a gallon, hybrids and other higher-efficiency cars are staying on the dealer lots. According to an analyst at Edmunds.com, a new hybrid would pay for itself in gasoline savings in two or three years with gasoline at $4 a gallon; but, below $2 a gallon, it's more like seven to eight years. Less than a year ago, you had to get on a waiting list and pay a premium over sticker to buy a new Prius. Now dealers have lots full of them, and Toyota has experienced such a sharp decline in sales that it posted its first operating loss in 70 years. Hopes that we will quickly replace a large percentage of our rolling stock with higher efficiency vehicles are now on hold, along with the hopes for a massive campaign of drilling shale formations and deepwater reservoirs.

· A steep contango condition in oil futures is still in place, reflecting the market's near-term oversupply and long-term uncertainty.

Given the evidence, the price of oil is wrong. Very wrong. Crude for under $65 a barrel is a bargain, and crude in the low $40s is a steal. I would not be at all surprised to see a sudden and violent move back up for oil prices within the next year, once the current extreme market conditions revert to the mean.

I am still long oil (United States Oil Fund LP ETF, NYSE:
USO) and will add to my position if it goes lower. My expectation is to hold it for a year, in case it further overshoots to the downside before recovering.
I'm also on the hunt for top-notch oil companies with low production costs, sizable reserves, and balance sheets healthy enough to let them acquire smaller competitors at basement prices.
I know it's been a tough year for most investors; but, we're nearly done with this turkey, and I'm setting my sights on profits for 2009. The buying opportunity of a lifetime is upon us. All we have to do now is wait for the right moment to pull the trigger.