Jul 192016
 
 July 19, 2016  Posted by at 3:13 pm Finance Tagged with: , , , , , , ,
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M. King Hubbert

It’s been a while since we posted an article by our friend Euan Mearns, who was active at The Oil Drum at the same time Nicole and I were. Is it really 11 years ago that started, and almost 9 since we left? You know the drill: we ‘departed’ because they didn’t want us to cover finance, which we said was the more immediate crisis, yada yada. Euan stayed on for longer, and the once unequalled Oil Drum is no more.

On one of our long tours, which were based around Nicole’s brilliant public speaking engagements, we went to see Euan in Scotland, he teaches at Aberdeen University. I think it was 2011?! An honor. Anyway, always a friend.

And there’s ono-one I can think of who’d be better at explaining the Peak Oil Paradox in today’s context. So here’s a good friend of the Automatic Earth, Euan Mearns:

 

 

Euan Mearns: Back in the mid-noughties the peak oil meme gained significant traction in part due to The Oil Drum blog where I played a prominent role. Sharply rising oil price, OPEC spare capacity falling below 2 Mbpd and the decline of the North Sea were definite signs of scarcity and many believed that peak oil was at hand and the world as we knew it was about to end. Forecasts of oil production crashing in the coming months were ten a penny. And yet between 2008, when the oil price peaked, and 2015, global crude+condensate+NGL (C+C+NGL) production has risen by 8.85 Mbpd to 91.67 Mbpd. That is by over 10%. Peak oilers need to admit they were wrong then. Or were they?

 

 

Introduction

 

It is useful to begin with a look at what peak oil was all about. This definition from Wikipedia is as good as any:

Peak oil, an event based on M. King Hubbert’s theory, is the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline. Peak oil theory is based on the observed rise, peak, fall, and depletion of aggregate production rate in oil fields over time.

Those who engaged in the debate can be divided into two broad classes of individual: 1) those who wanted to try and understand oil resources, reserves, production and depletion rates based on a myriad of data sets and analysis techniques with a view to predicting when peak oil may occur and 2) those who speculated about the consequences of peak oil upon society. Such speculation normally warned of dire consequences of a world running short of transport fuel and affordable energy leading to resource wars and general mayhem. And none of this ever came to pass unless we want to link mayhem in Iraq*, Syria, Yemen, Sudan and Nigeria to high food prices and hence peak oil. In which case we may also want to link the European migrant crisis and Brexit to the same.

[* One needs to recall that GWI was precipitated over Kuwait stealing oil from Iraq, from a shared field on the Kuwait-Iraq border, leading to the Iraqi invasion of 1991.]

The peak oil debate on The Oil Drum was a lightning conductor for doomers of every flavour – peak oil doom (broadened to resource depletion doom), economic doom and environmental doom being the three main courses on the menu. The discussion was eventually hijacked by Greens and Green thinkers, who, not content with waiting for doomsday to happen, set about manufacturing arguments and data to hasten the day. For example, fossil fuel scarcity has morphed into stranded fossil fuel reserves that cannot be burned because of the CO2 produced, accompanied by recommendations to divest fossil fuel companies from public portfolios. Somewhat surprisingly, these ideas have gained traction in The United Nations, The European Union and Academia.

It is not my intention to dig too deeply into the past. Firmly belonging to the group of data analysts, in this post I want to take a look at two different data sets to explore where peak oil stands today. Is it dead and buried forever, or is it lurking in the shadows, waiting to derail the global economy again?

 

 

The USA and Hubbert’s Peak

 

The USA once was the poster child of peak oil. The Peak Oil theory was first formulated there by M. King Hubbert who in 1956 famously forecast that US production would peak around 1970 and thereafter enter an era of never-ending decline (Figure 1). Hubbert’s original paper is well worth a read.

Figure 1 From Hubbert’s 1956 paper shows the peak and fall in US production for ultimate recovery of 150 and 200 billion barrels. The 200 billion barrel model shows a peak of 8.2 Mbpd around 1970 that proved to be uncannily accurate.

Looking to Figure 2 we see that Hubbert’s prediction almost came true. US production did indeed peak in 1970 at 9.64 Mbpd while Hubbert’s forecast was a little lower at 8.2 Mbpd. The post-peak decline was interrupted by the discovery of oil on the N slope of Alaska and opening of the Aleyska pipeline in 1977 that was not considered in Hubbert’s work. Herein lies one of the key weaknesses of using Hubbert’s methodology. One needs to take into account known unknowns. We know for sure that unexpected discoveries and unexpected technology developments will occur, it’s just we don’t know, what, when and how big.

Figure 2 In red, US crude oil production from the EIA shows progressive growth from 1900 to 1970. The oil industry believed this growth would continue forever and was somewhat aghast when M. King Hubbert warned the party may end in 1970 which it duly did. The discovery of oil in Alaska created a shoulder on the decline curve. But apart from that, Hubbert’s forecast remained good until 2008 when the shale drillers and frackers went to work. Hubbert’s 1970 peak was matched by crude oil in 2015 and exceeded by C+C+NGL that same year.

Following the secondary Alaska peak of 8.97 Mbpd (crude oil) in 1985, production continued to decline and reached a low of 5 Mbpd (crude oil) in 2008. But since then, the rest is history. The shale drillers and frackers went to work producing an astonishing turnaround that most peak oil commentators, including me, would never have dreamt was possible.

Before going on to contemplate the consequences of the shale revolution, I want to dwell for a moment on the production and drilling activity in the period 1955 to 1990. 1955 to 1970 we see that total rigs* declined from 2683 to 1027. At the same time crude oil production grew from 6.8 to 9.6 Mbpd. It was in 1956 that Hubbert made his forecast and in the years that followed, US production grew by 41% while drilling rigs declined by 62%. No wonder the industry scoffed at Hubbert.

[* Note that Baker Hughes’ archive pre-1987 does not break out oil and gas rigs from the total.]

But then post 1970, as production went into reverse, the drilling industry went into top gear, with operational rigs rising sharply to a peak of 3974 in 1981. But to no avail, production in the contiguous 48 states (excluding Alaska) continued to plunge no matter how hard the oil and its drilling industry tried to avert it. Hubbert must surely have been proven right, and his methodology must surely be applicable not only to the US but to the World stage?

The oil price crash of 1981 put paid to the drilling frenzy with rig count returning to the sub-1000 unit baseline where it would remain until the turn of the century. The bear market in oil ended in 1998 and by the year 2000, the US drilling industry went back to work, drilling conventional vertical wells at first but with horizontal drilling of shale kicking in around 2004/05. Production would turn around in 2009.

Those who would speak out against peak oil in the mid-noughties, like Daniel Yergin and Mike Lynch, would argue that high price would result in greater drilling activity and technical innovation that would drive production to whatever level society demanded. They would also point out that new oil provinces would be found, allowing the resource base to grow. And they too must surely have been proved to be correct.

But there is a sting in the tail of this success story since drilling and producing from shale is expensive, it is dependent upon high price to succeed. But over-production of LTO has led to the price collapse, starving the shale drilling industry of cash flow and ability to borrow, leading to widespread bankruptcy. In fact informed commentators like Art Berman and Rune Likvern have long maintained that the shale industry has never turned a profit and has survived via a rising mountain of never ending debt. Economists will argue, however, that improved technology and efficiency will reduce costs and make shale competitive with other sources of oil and energy. We shall see.

Herein lies a serious conundrum for the oil industry and OECD economies. They may be able to run on shale oil (and gas) for a while at least, but the industry cannot function properly within current market conditions. Either prices need to be set at a level where a profit can be made, or production capped to protect price and market share. This of course would stifle innovation and is not likely to happen until there are queues at gas stations.

 

 

2008-2015 Winners and Losers

 

BP report oil production data for 54 countries / areas including 5 “other” categories that make up the balance of small producers in any region. I have deducted 2008 production (barrels per day) from 2015 production and sorted the data on the size of this difference. The data are plotted in Figure 3.

Figure 3 The oil production winners to the left and losers to the right, 2008 to 2015. The USA is the clear winner while Libya is the clear loser. About half of the countries show very little change. Click chart for a large readable version.

What we see is that production increased in 27 countries and decreased in the other 27 countries. One thing we can say is that despite prolonged record-high oil price, production still fell in half of the world’s producing countries. We can also see that in about half of these countries any rise or fall was barely significant and it is only in a handful of countries at either end of the spectrum where significant gains and losses were registered. Let’s take a closer look at these.

Figure 4 The top ten winners, 2008 to 2015.

The first thing to observe from Figure 4 is that the USA and Canada combined contributed 7.096 Mbpd of the 8.852 Mbpd gain 2008-2015. That is to say that unconventional light tight oil (LTO) production from the USA and LTO plus tar sands production from Canada make up 80% of the global gain in oil production (C+C+NGL). Iraq returning to market in the aftermath of the 2003 war makes up 18%. In other words expensive unconventional oil + Iraq makes up virtually all of the gains although concise allocation of gains and losses is rather more complex than that. Saudi Arabia, Russia, The UAE, Brazil, China, Qatar and Colombia have all registered real gains (5.258 Mbpd) that have been partly cancelled by production losses elsewhere.

Figure 5 The top ten losers, 2008 to 2015.

Looking to the losers (Figure 5) we see that Libya, Iran, Syria, Sudan and Yemen contribute 2.828 Mbpd of lost production that may be attributed to war, civil unrest or sanctions. I am not going to include Venezuela and Algeria with this group and will instead attribute declines in these countries (0.979 Mbpd) to natural reservoir depletion, although a slow down in OECD technical assistance in these countries may have exacerbated this situation. That leaves the UK, Mexico and Norway as the three large OECD producers that register a significant decline (1.687 Mbpd) attributed to natural declines in mature offshore provinces. Let me try to summarise these trends in a balance sheet:

Figure 6 The winner and loser balance sheet.

We see that these 20 countries account for 8.463 Mbpd net gain compared with the global figure of 8.85 Mbpd. We are capturing the bulk of the data and the main trends. In summary:

  • Unconventional LTO and tar sands + 7.096 Mbpd
  • Net conventional gains + 2.592 Mbpd
  • Net conflict losses -1.225 Mbpd

The sobering point here for the oil industry and society to grasp is that during 8 years when the oil price was mainly over $100/bbl, only 2.592 Mbpd of conventional production was added. That is about 3.1%. Global conventional oil production was all but static. And the question to ask now is what will happen in the aftermath of the oil price crash?

One lesson from recent history is that the oil industry and oil production had substantial momentum. It is nearly two years since the price crash, and while global production is now falling slowly it remains in surplus compared with demand. This has given the industry plenty time to cut staff, drilling activity and to delay or cancel projects that depend upon high price. In a post-mature province like the North Sea, the current crisis will also hasten decommissioning. It seems highly likely that momentum on the down leg will be replaced by inertia on the up leg with a diminished industry unwilling to jump back on the band wagon when price finally climbs back towards $100 / bbl, which it surely will do one day in the not too distant future.

For many years I pinned my colours to peak oil occurring in the window 2012±3 years. Noting that the near-term peak was 97.08 Mbpd on July 15 2015 it is time to dust off that opinion (Figure 7). The decline since the July 2015 peak is of the order 2% per annum (excluding the Fort McMurray impact). It seems reasonable to presume that this decline may continue for another two years, or even longer. That would leave global production at around 92 Mbpd mid 2018. It is nigh impossible to predict what will happen, especially in a world over run by political and economic uncertainty. Another major spike in oil price seems plausible and this could perhaps destabilise certain economies, banks and currencies. Should this occur, another price collapse will follow, and it’s not clear that production will ever recover to the July 2015 peak. Much will depend upon the future of the US shale industry and whether or not drilling for shale oil and gas gains traction in other countries.

Figure 7 The chart shows in blue global total liquids production (C+C+NGL+refinery gains+biofuels) according to the Energy Information Agency (EIA). The near term peak was 97.08 Mbpd in July 2015. The decline since then, excluding the Fort McMurray wild fire impact, is of the order 2% per annum. In the current low price environment, it is difficult to see anything arresting this decline before the end of next year. In fact, decline may accelerate and go on beyond the end of 2017. The dashed line shows the demand trajectory and scheduled balancing of supply and demand by the end of this year. By the end of next year the supply deficit could be of the order 3 Mbpd which on an annualised basis would result in a stock draw of 1.1 billion barrels. But remember, forecasts are ten a penny 🙂

 

 

Concluding Thoughts

 

  1. M. King Hubbert’s forecast for US oil production and the methodology it was based on has been proven to be sound when applied to conventional oil pools in the USA. When decline takes hold in any basin or province, it is extremely difficult to reverse even with a period of sustained high price and the best seismic imaging and drilling technology in the world.
  2. On this basis we can surmise that global conventional oil production will peak one day with unpredictable consequences for the global economy and humanity. It is just possible that the near term peak in production of 97.08 Mbpd in July 2015 may turn out to be the all-time high.
  3. Economists who argued that scarcity would lead to higher price that in turn would lead to higher drilling activity and innovation have also been proven to be correct. Much will depend upon Man’s ability to continue to innovate and to reduce the cost of drilling for LTO in order to turn a profit at today’s price levels. If the shale industry is unable to turn a profit then it will surely perish without State intervention in the market.
  4. But from 2008 to 2015, oil production actually fell in 27 of 54 countries despite record high price. Thus, while peak oil critics have been proven right in North America they have been proven wrong in half of the World’s producing countries.
  5. Should the shale industry perish, then it becomes highly likely that Mankind will face severe liquid fuel shortages in the years ahead. The future will then depend upon substitution and our ability to innovate within other areas of the energy sector.

 

 

Related reading:

 

From Rune Likvern:

The Bakken LTO extraction in Retrospect and a Forecast of Near Future Developments

Bakken(ND) Light Tight Oil Update with Sep 15 NDIC Data

Are the Light Tight Oil (LTO) Companies trying to outsmart Mother Nature with their Financial Balance Sheets?

From Enno Peters:

Visualizing US shale oil production

Home Forums The Peak Oil Paradox -Revisited-

This topic contains 14 replies, has 10 voices, and was last updated by  TonyPrep 9 months, 1 week ago.

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  • #29378

    M. King Hubbert It’s been a while since we posted an article by our friend Euan Mearns, who was active at The Oil Drum at the same time Nicole and I w
    [See the full post at: The Peak Oil Paradox -Revisited-]

    #29380

    Ken Barrows
    Participant

    Although I certainly cannot prove it, I’d say the net energy from global oil extraction peaked around 1998-99. Why? The answer is in the double digit per annum capital expenditures (h/t Steve Kopits) since 2000 and that debt.

    As oil production rises, the question to ask may be “how much debt does it take to do it?” The Hills Group has some thoughts: http://thehillsgroup.org/

    #29381

    jal
    Participant

    If we did not use the carbonates that we use, what would Mother Earth do with it?
    It’s a hot and slippery question.
    😉

    #29382

    steve from virginia
    Participant

    Not that it matters but North Slope Prudhoe Bay play contained 25± billion barrels proved whereas US shale plays (EIA) = 13 bn barrels. At current rate of consumption shale plays would provide the world with about 2 months of supply. That this makes any sort of difference other than in the most speculative sense is irrelevant.

    The problem is the absence of any real returns — of any kind — for the majority of end users. Yet someone must pay somehow: that is by way debts that have become so large they cannot be retired (even serviced) except by taking on even more debts … overly indebted is where we are right now.

    As debt increases, finance capitalization deteriorates, so does the ability to finance more fuel extraction as well as to roll over maturing loans.

    This absence of return for the hundreds of millions of end users is the black hole in the center of the industrial economy that nobody — including economists and policy makers — dares to discuss. The implications are too profound … that we are bankrupted by our precious toys. That trying to expand the economy by increasing (fuel) demand is suicidal.

    #29385

    E. Swanson
    Participant

    As a one time Oil Drum “greenie”, I was not surprised to find that Euan is still seriously anti-AGW. At the time the Oil Drum shutdown, I didn’t understand that it was done because of the repeated concerns voiced by some (me?) about AGW and Climate Change. There are still people who post on Euan’s web site who are rabidly opposed to doing anything about our CO2 emissions, even though the science has become even more solid in the intervening years.

    A little over 2 weeks ago,a letter regarding AGW and Climate Change was sent to every member of the US Congress. The letter was signed by 31 major US scientific organizations. Do you think the RNC members in Congress listened? Well, I notified my Congress critter, who happened to also be a Co-chair of the GOP Convention Platform Committee, which was approved yesterday. Read it and Weep (see p17-22). Naturally, those folks are even more adamant that they aren’t going to do anything except promote the increased use of fossil fuels, even as the latest weather reports indicate that June was the warmest June on record, adding to a string of 13 record monthly readings.

    I hope these RNC geniuses all end up holding bonds when interest rates start to rise. As David Stockman and others have pointed out, bonds and stocks are both in bubble territory, which is likely to end badly. Both could go down the tubes as the debt bubble implodes.

    #29387

    Nassim
    Participant

    “… who are rabidly opposed to doing anything about our CO2 emissions, even though the science has become even more solid in the intervening years”

    How about some data?

    Signatures are easily bought by those who dispense bursaries and favours.

    #29395

    TonyPrep
    Participant

    It’s hard to believe that Euan is really surprised that the idea of stranded resources that can’t be burned caught on. After all, 190-odd countries signed an agreement in Paris, recently, and we’ve just had 14 months in a row of record monthly surface temperatures. I realise that Euan is something of an AGW contrarian but he really can’t be surprised by that notion catching on. He should stick to the strict analysis of Peak Oil and not offer unfounded opinions.

    On Peak Oil, I had always thought that the peak discussed last decade was about conventional crude oil, without adding all the bits and pieces that get added these days (including tight oil and deep offshore oil). It would be interesting to know how the BTU value of oil production has changed over the years (with the BTU costs of producing the oil removed), though I don’t think there has been any serious study on this aspect.

    #29396

    Nassim
    Participant

    “… and we’ve just had 14 months in a row of record monthly surface temperatures”

    I guess someone must have forgotten to tell the trees in Europe.

    “Scientists Can’t Figure Out Why Leaf Unfolding In Europe Not Happening Earlier”

    Scientists Can’t Figure Out Why Leaf Unfolding In Europe Not Happening Earlier …(Pssst, It’s Not Getting Warmer)

    #29397

    E. Swanson
    Participant

    Nassim wrote: How about some data?

    Here’s an example of a rabid commentary. While I understand her distress, having experienced unemployment thru most of my career years, I think her rejection of the scientific facts is a classic example of denial. Besides, who is to say “her” post is genuine, as it contains no identifying information.

    I take it you didn’t look at the post from the Weather Underground, which points to the surface data from NOAA. There’s lots more data, especially Arctic data, such as declining sea-ice extent and record high temperatures in Alaska. It’s no surprise that the scientists who have studied the AGW problem are seriously worried.

    #29399

    Jb
    Participant

    “It seems highly likely that momentum on the down leg will be replaced by inertia on the up leg with a diminished industry unwilling to jump back on the band wagon when price finally climbs back towards $100 / bbl, which it surely will do one day in the not too distant future.”

    Inertia? Inertia from where? The consumer? Wall Street? The Pentagon? In what context will we reach $100 / bbl that can entice and sustain the industry?

    #29401

    Ken Barrows
    Participant

    Nassim,
    If you want, you just can go to the National Climatic Data Center. But, if you reject their data, then you don’t.

    #29404

    TheTrivium4TW
    Participant

    Hi all AGWers, what about the data rigging?
    Remember, “hide the decline?” What about the manipulation of temperature sensors?
    You guys do know about this, right? Yet you don’t address it.
    IMHO, your emotional bias is revealed in the subject grammar you omit, omission being the most efficient form of lying according to George Orwell.
    This is a tremendously complicated subjected due to enormous inputs and effects. I’ve argued that nobody has sufficiently proved either side of the false dichotomy correct – that humans are mostly responsible or not responsible at all.

    But here is what I do know… THE ROOT CAUSE OF CO2 EMISSIONS IS DEBT-MONEY MONOPOLIST EXPONENTIAL DEBT-MONEY EMISSIONS INTO THE ECONOMY.
    Read that about 10x because you haven’t been programmed to see that kind of absolute truth in such a simple, straightforward way.
    Without the exponential debt-money growth carried out by the Debt-Money Monopolists who control the MONEY CENTER banks, there wouldn’t be the MONEY available to create industries to burn fuels to generate CO2. Oh, did you make the connection?
    WHO funds government? THE VERY SAME PEOPLE.
    SO THE PEOPLE WHO FINANCED THE CREATION OF CO2 EMISSIONS ARE ALSO FUNDING THE PEOPLE CALLING FOR THE REDUCTION OF CO2 EMISSIONS USING GOVERNMENT FORCE.
    Ruminate on those facts for a while…

    What do those “connected dots” mean for ordinary people?

    Cui bono – how do the Debt-Money Monopolists benefit from this set up and deception?

    #29425

    Brisvegas
    Participant

    There is a false dichotomy between “doomers” and “greenies” in this debate. As evidenced by the great work of The Automatic Earth, focusing on only one of the LtG factors (energy, environment, finance etc) to the exclusion of the others is seriously flawed because they are all inter-related.

    See for example this post on ToD, based on a 2008 letter to Professor Ross Garnaut, pointing out the flaws in his landmark AGW report that provided the basis for the Australian Government’s policy response to AGW. Among Garnaut’s assumptions was that global oil production would be unconstrained for at least 50 years. As a neo-classical economist, he explicitly rejected the idea of peak oil.

    The policy responses to AGW are in tatters due in no small part to the fact that most of them ignore or outright reject the reality of LtG, which is bizarre given that AGW concerns are also based on the physical sciences.

    #29428

    TonyPrep
    Participant

    TheTrivium4TW, please check multiple sites that have dealt thoroughly with all of the denier arguments. I won’t rehash them here but if you really want to understand the world then look at the science. From being a fervent denier, 15 years ago, I started to look at the science and realised I’d been really stupid and ignorant about the issue.

    Nassim, look at the totality of the scientific evidence and research, not single snippets which you think support your desired opinion. By the way, a study last year showed Spring in the US is coming earlier. Doesn’t prove anything long term but there is plenty of other evidence. Plenty, even if 14 monthly records in a row doesn’t impress you (and try calculating the odds of that happening without global warming).

    #29431

    TonyPrep
    Participant

    By the way, Nassim, that study that you linked to (or rather, you linked to a blog post about it) does not show what you (or the blogger) think it shows; perhaps you should read it.

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