ASPO 10/07 - MP's Comments

Folks:

I guess I first started sending out these missives about two years ago, in late 2005. Some of you no doubt thought that I had fallen off my rocker. Well, that is probably true, but another reality is that the oil situation continues to unfold about as expected. Unfortunately.

Waxing a bit nostalgic, I have been studying oil and gas supply since the price plunge of the mid-1980's, when we started having "supply side" speakers at the API-Houston Chapter. I remember when Enserch found some arcane legal code with which to petition Reagan, which would absolutely force him to "do something." And when Lloyd Bentsen said 50% imports was a "peril point" and we'd "do something" if it ever got that high. (was about 35% imports then, around 65% now) Earlier, in the 1960's or 1970's a partner of mine witnessed one of the last really knowledgeable RRC Commissioners, Bill Murray, say, "You get a chance to manage a surplus, or you will have to manage a shortage." Really profound words. And of course, prophetic.

Well, no one wanted to manage the temporary surplus of the 1980's, so a huge number of rigs were cut-up or shipped away or rusted down (we had 4500 at one time; now after Herculean efforts, only slightly over 2000). The smart people became lawyers and MBA's. If I remember correctly, well over 500,000 jobs were lost in our industry. No one really cared, as John Q. Public generally loves to hate "oil companies" and anyone involved in them. Cheap gasoline was what everyone wanted, and that is what they got - for a while. Anything else (like restraining production just a little, an oil import fee, etc.) would have been price-fixing or "pandering to big oil". To wit, the recent attack on Aubrey McClendon and Chesapeake over their shutting in just a bit of production.

Interestingly, I remember my father (38 years at Shell Oil) mentioning King Hubbert one time. As a teenager, though, I didn't pay much attention. Hubbert worked in the same facility as my dad, in the 1950's. My brother (16 years older than I am) swears he remembers Hubbert coming over for dinner once or twice, probably before I was born. Dad was chairman of the API-Houston Chapter at that time, and I have his bound monograph of the papers given in 1956, including the original Hubbert article. He obviously was interested in it, as he took the time to update the curve - in pencil - sometime in the 1970's.

It has been a busy couple of years, and the last few months have been exceptionally busy for me. I've been doing my level best to try to stem the tide of Peak Oil by trying to find more of the stuff! (Well, gas anyway.) Meanwhile I serve on the board of a non-profit which is documenting "wild plants" in Texas and the surrounding areas ( www.usefulwildplants.org ). We are currently trying to raise additional funds to accelerate the project, which will serve as a catalyst for sustainable energy, food, chemical and fiber efforts, via utilization of "wild" plants. Now, as it turns out, just in time for Peak Oil. (Hopefully.)

A few weeks ago, Oct 17 - 19, I attended the Association for the Study of Peak Oil's (ASPO's) USA convention, held at the Hilton of the Americas in downtown Houston. This group was founded a number of years ago by Colin Campbell, among others. Campbell was one of the first "Paul Reveres" in the recent iteration of concern over Peak Oil. He wrote the book The Coming Oil Crisis ... in 1988. During that time of oil and gas surpluses this type of talk was regarded by many as lunacy. Even in the 2000 - 2003, Peak Oil was thought by most in the industry (who had even heard of it - which were few) to be the domain of the "lunatic fringe", pessimists, Chicken Little's. The prevailing wisdom was that the Saudis had vast, shut-in, 10,000 BO/D wells that they could crank on any time, and huge, wonderful areas to explore. Most of the misunderstanding arose (and still does) over "big versus little" (ie, scale), and RATE versus RESERVES.

Peak Oil being far from the lunatic fringe realm any more, the following groups had speakers at the ASPO conference:

City of Houston: Sponsor, and Mayor Bill White spoke at lunch.

University of Houston - sponsored and supplied a futurist

Merrill Lynch - Tom Petrie, Vice Chairman - spoke

Jeffries, Randall & Dewey - spoke

Colorado Geologic Survey - excellent presentation on India, China, mineral supply and demand by Vince Matthews, director (ex - UPRC)

SAIC - Bob Hirsch - spoke

Canadian Geologic Survey - spoke - excellent graphs

Dept of Homeland Security - Scott Pugh, ret. Navy sub commander - spoke

Tom Whipple - ex-CIA analyst and editor of the Falls Church News Press (Virginia)

Department of Energy - Oregon - spoke

Austin Energy

Toyota Motor Sales USA

T. Boone Pickens

Henry Groppe - Groppe, Long, Littell

Bob Hirsch, who, in 2005, authored the landmark, revelatory study for the DOE, was one of the speakers I was looking forward to hear at the ASPO conference. He didn't disappoint - but only made my stomach grumble a bit more. Overall, there were quite a number of really excellent presentations. All are available on the ASPO website:

http://www.aspousa.org/proceedings/houston/

I highly recommend you download and view the presentations by:

• Bob Hirsch

• Vince Matthews - Director of the Colorado Geological Survey

• Tom Petrie

• Stuart Staniford/Euan Mearns - www.oildrum.com - study of Ghawar

The "Key Take-Aways" from my notes are attached. Included in those notes are some of Hirsch's slides.

My observations and comments:

• The peak in oil production might have occurred in late 2005, and most in this group believe it will certainly happen prior to 2011 - 2012. If it hasn't occurred, my bet would be 2008, as I have believed since 2001 or so.
  
• It sure looks like Saudi has produced about half of its recoverable oil, meaning it is at or near peak, in turn meaning the world is at or near peak.
• Cantarell (second largest field in the world, in Mexico) peaked in 2004 as I previously communicated to you, and is down from 2 MMBO/D (late 2005) to 1.6 MMBO/D today. It is on a trajectory near to the "worst case" scenario, as described by Pemex in early 2005, and later confirmed by the WSJ.
• Oil Export Withholding (Hirsch) seems quite likely, and was a new one to me. Means things will happen even faster.
• Jeffrey Brown's "Export Land Model" is similar, but is a “physics” rather than an economic/geopolitical phenomenon. Namely, when consumption in exporting nations is increasing in a low, but compounding fashion (as it is), and production begins decreasing in a compounding fashion, then those nations soon have NONE to export - much sooner than if they hadn't been growing their consumption. To wit: Indonesia, UK - both exporters until very recently.
• GDP will drop about like the oil rate will decline - and continuously, year over year. (Hirsch)
• Rationing of gas and diesel are in our near (0 - 3 years) future.
• Inflation is far understated, and will rear its head soon. And at a time when the economy is deteriorating.
• There could be a series of "head fakes", ie prices drop for a time, due to new Rockies Express pipeline, LNG, Independence Hub online - or due to a rapid run-up in price causing demand destruction (for a short while) (Petrie)
• There is no simplistic "smoking gun, no reason" for Peak Oil, hence the public and the media can't "get it". So, the politicians won’t get it. (Whipple)
• Not yet a critical mass to move people and politicians.(Whipple)
• Behavior is not likely to change until there is a pronounced shortage at the pumps, hoarding.(Whipple)
• Politicians, in general have a "Don't have enough? Well, just get more." attitude.
• Although not related to Peak Oil, many minerals are now in short supply, controlled by foreign govts, either in our country or theirs. (Matthews)
• Still no battery or electricity storage solution for plug-in hybrids or pure electric vehicles.

Meanwhile:

• a huge real estate bust (and all that it entails) is in the early stages, due to a massive overextension of credit
• many of our financial institutions are being shaken to the core (Merrill, Citi, Countrywide, WaMu)
• oil ironically broke $90 the Thursday evening of the conference, now it is nearing $100.
• gold has been spiking, the dollar has been plummetting
• $250/bbl strike price calls are now available in 2010, $200 calls evidently have active trading in 12/08.
• the IEA just issued a really gloomy forecast, two weeks ago.

On the brighter side, though, is that old adage about the Chinese word for "chaos" being the same as for "opportunity".

More later,

MP