The Emerging Reality of Oil Depletion

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The Emerging Reality of Oil Depletion

• Where theory and practise meet

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Who am I?

• Chris Skrebowski has spent half a working life
  working in the oil industry and the other half as
  an oil journalist.
• Free of corporate or political pressure he brings
  a healthy scepticism to the problem
• Why speak out?

3
An important disclaimer
In this presentation the opinions expressed are
entirely those of Chris Skrebowski in his
capacity as an ODAC Trustee and as such do not
necessarily reflect the view of the Energy
Institute for whom he edits Petroleum Review
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The practical realities of oil depletion --
aproduction and project based analysis

• The world needs oil production flows
• Peak oil is when flows cant meet the required
  demand
• This will cause an Economic Tsunami
• Theres not much time to accommodate

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As Peak Oil approaches we can movefrom
reserves based analysis to production and project
based analysis

• Reserves based analysis has served us all well
  but the reserves data is weak
• New project flows can be monitored
• Outright, visible, depletion can be listed
• The demand that can be met established
• The likely date of Peak Oil determined

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A simple observation

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

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Psychology -- Nobody likes a party pooper

• Cheap oil has given us the greatest economic
  party in history. Of course we dont want it to
  end
• We see what we want to see and we hear what we
  want to hear (Nilsson 1971 LP The point)
• Thats why it is hard to be objective about the
  evidence
• Its also why we must be objective about the
  evidence
• Hopefully youll ask lots of tough questions
• If you can find fault Ill be delighted

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What is at risk? History shows us that supply
shortfalls lead to high oil prices and high oil
prices lead to economic recessions

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

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Can oil demand be met until 2010?

• Demand growth has been very strong
• More of world population are consumers
• Supply is tight and straining to keep up
• There is virtually no spare capacity
• New capacity takes a lot of time
• The economists tell us theres no problem

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We ask to see the industry leaders to see if we
can make it to 2010

• They look worried but tells us they have always
  made it before
• And explain there are four key dials
• Oil prices -- the most accurate dial
• New oil supplies -- pretty accurate
• New oil demand -- a bit unpredictable
• Outright depletion -- pretty accurate

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What does the pricing dial tell us? (In
2005 Dollars)

• If prices are under 20 the world booms
• A price jump to over 40 gave us the 1973/74
  recession
• A price jump to 80 gave us a 5-year recession
  1980/85
• Prices over 100 will give recession
• Were now at around 50, and rising?

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What does the new supply dial say? (In million
barrels/day)
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What does the new oil demand dial show?(In
million barrels/day)

• In 2003 oil demand grew by 1.8mn b/d (2.3)
• In 2004 oil demand grew by 2.8mn b/d (3.5)
• In 2005 3rd revision is 1.8mn b/d (2.2)
• Twenty year average is only 1.5-1.8mn b/d

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What does the new oil demand dial show?(In
million barrels/day)

• Is Chinese and Indian growth a paradigm shift?
• Have we forgotten compound interest?
• 5 of the world population, the USA, uses 25 of
  the worlds oil production.

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What does the depletion dial tell us?

• Three sorts of depletion
• Type 1 is within field like different pumps in
  bar
• Type 2 is within country like different bars
• Type 3 and most important is between countries
  like different pubs, it is visible depletion
• Total (1,2 3) depletion around 5 or 4mn b/d/yr
• Type 3 depletion is now 1.1mn b/d and rising

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There is a fifth dial for global depletion

• Its very accurate on the oil weve used
• Weve used roughly half of what is proven
• Its like a speedometer generally accurate but
  the top speeds are problematic
• Colin and Jean are the experts
• Im sticking with the others dials because my
  analysis is production based

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Alaskan North Slope ProductionReserves grow --
Production falls
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Lets have a look at the UK North Sea(Production
change in thousand b/d)

• In 1999 it grew by 3.58 or 100 kb/d
• But in 2000 it fell by 8.15 or -236 kb/d
• And in 2001 it fell by 6.81 or -181 kb/d
• But in 2002 it fell by just 0.52 or -13 kb/d
• But in 2003 it fell by 8.85 or -218 kb/d
• And in 2004 it was 10 down or -230 kb/d
• Norway peaked in 2000, Denmark in 2005

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Lets have a look at the UK North Sea(All you
need to know about depletion)

• Go to http//og.dti.gov.uk
• Click on Information
• Click on List of fields
• Click on Production history
• Then just click through the list of fields in the
  left hand column

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North Sea production by field

• Forties monthly production to date

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North Sea production by field

• Fulmar monthly production to date

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North Sea production by field

• Piper monthly production to date

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North Sea production by field

• Tern monthly production to date

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2004 was a key year for depletion

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

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Oil projects are slow and well publicised(Few if
any surprises)

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

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Type 3 depletion acts like new demand

• Over 50 countries now depleting (18 large)
• In 2003 some 28.8 of supply came from countries
  in outright depletion
• Ten countries producing over 0.5mn b/d were in
  decline in 2003
• More large producers are set to decline

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The top five decliners in 2003
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About to go into decline(Increasing Type 3
losses)

• Denmark producing 0.4mn b/d goes in 2005
• Malaysia producing 0.9mn b/d goes in 2005
• China producing 3.4mn b/d goes in 2005/06
• Mexico producing 3.8mn b/d goes in 2005/06
• Brunei producing 0.2mn b/d goes in 2006/07
• India producing 0.8mn b/d goes in 2006/07
• Collectively 9.5mn b/d or 12.3 of production

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Oil companies will also peak

• According to J S Herolds recent analysis
• Totals production could peak in 2007
• In 2008 production from ExxonMobil, BP and Shell
  could reach a peak
• In 2009 it could be Chevrons turn
• The companies have not commented
• In 1Q 2005 their production declined by 3

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The Russian Enigma

• Has policy changed? Has growth run out?
• 50-95 of non-Opec growth in 2001-2004
• No growth at all in Russian production in 1Q2005

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Some good news(production by end 2005)

• Rapid production growth from
• Kazakhstan (1.3mn b/d) and Azerbaijan (0.5)
• Gulf of Mexico (1.7) and Brazil (2.1)
• Sudan (0.4) and Equatorial Guinea (0.3)
• From 5mn b/d in 2003 to over 8mn b/d in 2010

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A simple observation

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

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The oil depletion balance sheet at end 2004

• In decline 28(2004) but 40 (by 2006/7)
• In danger 12 (2004) but 10 (by 2006/7)
• Russia 12 (2004) and 12 (by 2006/7)
• Growing 48 (2004) and 38 (by 2006/7)
• The scales are balanced by 2006/7
• So does President Putin decide when decline
  starts? Or does Saudi geology?

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The new Supply/Demand balances accounting for
Type 3 depletion(In million b/d)
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What economics really says

• Economics requires that supply and demand always
  balance
• Economists encourage us to believe that supply
  will expand to meet demand
• If supply cant expand we need high prices to
  destroy demand
• How high do prices need to go?

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The CIBC answer

• Assessed the likely supply shortfall and the oil
  price needed to reduce demand
• 2006 1mn b/d and 61/barrel
• 2007 2.8mn b/d and 70/barrel
• 2008 4.8mn b/d and 80/barrel
• 2009 6.7mn b/d and 90/barrel
• 2010 8.9mn b/d and 101/barrel

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The ODAC answer

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

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Are there realistic substitutesfor the main oil
products?

• Petrochemicals naphtha, some gas/LPG. (Few
  alternatives)
• Aircraft fuel jet kerosene, some Avgas. (No
  realistic alternatives)
• Road vehicle fuels Gasoline and Diesel
  dominant. (Alternatives - Large
  Investments/capital write-offs)
• Ships and boats marine diesel and fuel oil. (No
  realistic alternatives)
• Lubricants and greases (limited alternatives)
• Power generation (little oil now used)
• Heating (increasingly substituted by gas)

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Whats the problem with alternatives?

• Oil has the greatest energy density of any fuel
  known to man, apart from nuclear
• This means all alternatives are inferior
• You can cook sausages by collecting and burning
  straw but you may use more calories than you get
  by eating the sausages

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What are the substitutes?

• Alcohols - fuels and extenders (energy gain?)
• Vegetable oils - diesel substitute/extender
• Gas liquids - road fuels, feedstocks
• Coal - heating, power generation
• Hydro, nuclear, wind, waves and biomass can all
  generate power. But at what cost? Little oil is
  now used for power generation.
• Can we make our economies all electric?

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Peak Oil in 2008?

• Whatever approach we use the answer seems to be
  Peak in 2008
• Before that, if all goes to plan, the world can,
  possibly, meet likely demand
• After that it is hard to see how demand can be
  met without demand destruction
• But, there are no guarantees

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Delaying Peak Oil

• Economic slowdown/recession
• Demand destruction via high prices
• Systems overperforming
• Peace in Iraq
• Middle East opening to investment
• But, accelerating projects produces cost
  inflation rather than more oil

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Advancing Peak Oil

• Project slippage (happens regularly)
• Increasing taxes/tighter terms (happening)
• Accelerating decline (happening)
• Upheaval in major producers (Iraq, Nigeria,
  Venezuela already happened)
• Accelerating demand growth (China, India)
• System breakdowns, wars and revolutions

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What are my conclusions?

• There are, at best, 31 months to Peak Oil
• Business as usual after 2008 is unlikely
• High prices will continue
• Restricted supply will continue
• We are moving into a new world
• It is a land without maps
• We are all likely to be poorer

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By 2010
Will this be the only practical use for SUVs or
4X4s?
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Contact

• Chris Skrebowski
• Editor, Petroleum Review
• cs_at_energyinst.org.uk
• 44 (0)20 7467 7117