Whither Peak Oil?

"Unprecedented inelasticity in recent years."

- a comment from "Mitch"

Sorry folks, it's been a while since we've posted!  It's not that there's no more Peak Oil - rather we've been busy with other things, and we've said quite a bit about the topic in the past.  Not much has changed, if anything.  But an update is warranted in order to address comments from friends and followers - comments such as "Gee, I guess Peak Oil has been postponed?", or "I guess we don't have to worry about Peak Oil anymore!"  Often they have a smile on their face ...

These comments come in the wake of a plethora of articles like:  Sad News for Peak Oil Disciples

So what's the thesis here, what are they talking about?  The gist is that the recent application of horizontal, multi-stage completions to shale oil plays, coupled with a future increase in Canadian tar sands oil will lead to record oil production rates for North America and lessen dependence on foreign oil; some go as far as to say that the USA will become energy independent.  So, no more problems with Peak Oil, huh?

With all due respect to the smart people making those comments, you have to wonder why current oil and gasoline prices (over $95/bbl, around $4/gallon) don't make more of an impression on them, compared to a few news stories on shale oil booms.  However, many people have been touched in a positive way by the recent shale gas and shale oil booms.  Those who live in South Texas, or West Texas, or North Dakota, or the eastern Ohio (or a number of other places around the country) have front row seats to the drilling activities which are providing jobs and business opportunities to virtually everyone in those places.  It you are ever in Carrizo Springs, Texas, drop by one of the few cafes at lunch time (if you can get a seat) and notice all the smiles around the room!  What fool would worry about there ever being not enough oil when you're in the midst of booms like these?

We would have to say that the confusion we have spoken of before is once again on the prowl.  And understandably so - how can anyone, even those of us who keep pretty close tabs on the "oil patch", sort through all of the stories and statistics?
 
So, if we have so much more oil production rate available now, why is oil currently so expensive?  Granted, things are getting more and more tenuous in the Middle East, but most analysts only allocate a $20 - $30/bbl premium for that worry.   Recall  when oil was $12/bbl (we do, only too well), as recently as 1999.  So?  Well, there hasn't been that much inflation (8X) since then!  So if Peak Oil has gone away, what gives?  Big Oil conspiracy?  We think not.  Something else is [still] going on.  See the quote from "Mitch" above, which expresses Peak Oil in a very few words.

Back in June an analyst wrote an article tweaking Dr. Colin Campbell's graphs.  (As you may recall, Dr. Campbell is one of the modern fathers of Peak Oil.).  It was a good article, but our response was this:

When you consider Peak Oil on the scale that it needs to be considered,

that of a ship executing a turn, then the graph of Dr. Campbell's

estimates is remarkably correct, and still plenty scary. A few million

barrels more per day in supply due to shale oil, other discoveries, a

few million barrels per day less in demand due to the worldwide

recession - these things are "noise" in the bigger picture - which is

shown with sufficient accuracy on both Campbell's and Deffeyes' graphs.

Shale oil and shale gas are important resources that need to be

developed. Natural gas needs to be utilized in vehicles. These things

won't "fix" Peak Oil. We need a lot fewer vehicles, a lot more mass

transit retrofits. We need a focus on conservation as well as new

energy supplies, both fossil and renewable. The good news is, these

things are happening - we just need to speed the efforts. And we need

to realize that these things are not mutually exclusive. They are part

of the "all of the above, silver BB solution" that

we need to continue to pursue, but at an accelerated rate. We waste

valuable time and resources arguing that we shouldn't be doing one,

should only do the other, etc. We need them all.

So, yes, a little more oil and a little less consumption, but they

amount to "noise" in the longer term view. Consider them temporary

reprieves. Consider them not an invalidation of Peak Oil, but rather

one more chance, a little more time to ramp up the actions which

Dr. Hirsch et al said could take 20 years, if severe consequences were

to be avoided.

Recently, one of the authors over at Seeking Alpha wrote a very succinct article explaining his continued bullishness on oil, as well as why he was bullish in the first place: 
EOG's CEO Mark Papa Is Still Bullish On Oil Prices, Should Investors Be Bullish On EOG?

The above article features a nice quote from Mr. Papa's recent conference call with analysts, wherein he does a high-level vetting of the shale oil plays, and further explains why it is unlikely that international unconventional oil and gas plays will take off anytime soon:

"Now I'll provide our views regarding macro hedging and the concluding remarks. Regarding oil, we still think the global supply-demand balance is tight, and we expect prices to strengthen throughout the remainder of the year. Two recent concerns I've heard from oil bears involve horizontal shale oil. One concern is will the U.S. create enough shale oil to affect global supply. EOG's forecast is an increase in the U.S. of 2 million barrels of oil per day by 2015, which, we believe, will not impact a 90 million barrel of oil a day global market. We think there are only 3 consequential horizontal oil plays in North America: the Eagle Ford, Bakken and Permian, and that all other alleged oil plays are either inconsequential on a national scale or really NGL plays.
The second concern relates to possible international horizontal oil shale plays and their potential impact on supply. My answer there is maybe it will happen, but it's not likely for another 10 years at least. Remember, it's been 10 years since horizontal drilling unlocked shale gas in the Barnett, and no one yet has found commercial shale gas outside North America. Also, the key to commercial shale oil or gas is the ability to drill thousands of wells at low per-well cost, and whether this can be done internationally is likely problematic."

So, let's look at the two main components that are touted, currently, regarding growth in oil supply:

Consequential Shale Oil Plays (Eagle Ford, Bakken, Permian)
The production in these plays is changing (increasing) so rapidly that even when you have access to lots of data, you still get behind.  Also, we've seen recent articles published by even the Wall Street Journal (Expanded oil drilling helps US wean itself from Mideast, 6/27/2012) that are far out of date with respect to current rates.

Here are what we believe to be some hard datapoints:

Bakken:  produced 594,349 BO/D in June, 2012  
https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf


From Oil & Gas Journal, Bakken's maximum potential oil production rate explored:  This article analyzes the total Bakken resource base and the logistics required in order to generate certain peak production rates, as well as one of the leading operator's reserve estimates.  Three models look at 1.0, 1.5 and 2.0 MMBO/D peak production rates by 2020.  According to the article, rates above 1.0 MMBO/D might be difficult to achieve by 2020, due to logistical constraints. 

For comparison, Prudhoe Bay (on the North Slope in Alaska) has been the USA's largest field to date, producing 13 billion barrels, and peaking at a rate of 1.5 MMBO/D from 1980 - 1988.

Depending on which estimate you use, the Bakken has been touted at having 4 - 24.3 billion barrels of recoverable crude.  Reserve numbers on the upper end of these estimates would "jive" with peak production rates of around 2 MMBO/D, based on observations from around the world.

Eagle Ford:   According to an article published in the Wall Street Journal (1/3/2012), the Eagle Ford "produced 109,000 BO/D in August, 2011 and is expected to quadruple in next 5 years" (so that would imply around 440,000 BO/D by 2016).  But the graphs from the Railroad Commission of Texas show the total crude and condensate to have averaged about 270,000 BO/D in the first 5 months of 2012.

http://www.rrc.state.tx.us/eagleford/EagleFordOilProduction.pdf


The above link is only updated through May, 2012, currently.  Also, it shows totals for the first 5 months of 2012, rather than monthly entries.  Generating an average production from this data can be misleading, as averages are not useful in characterizing a rapidly growing series.  A Railroad Commission representative told us in July that the Eagle Ford was producing 700,000 BO/D, but that number likely included NGL's.  It's not hard data, but an educated guess would be that the Eagle Ford is producing around 500,000 BO/D (crude + condensate), currently.  It's easy to see how confusion abounds. 

Permian:  The "Permian" is the catch-all descriptor of horizontal and vertical, Permian Basin plays (not to be confused with the historic Permian plays) - namely, the Wolfberry, Avalon, Bone Springs, Wolfcamp, more. An industry source tells us they believe the Bone Spring and Wolfcamp will average about 185,000 BO/D in 2012.

Bottom-Line:

A recent analysis by the firm Wood MacKenzie may provide the most realistic estimate of current and projected production rates from the shale oil plays. This work was quoted in the Oil & Gas Journal, September 3, 2012:

• Current (2012) rate from "tight oil":  1.6 MMBO/D

• Projected 2020 rate:  4.2 MMBO/D, with 1.3 MMBO/D from the Bakken and 1.3 MMBO/D from the Eagle Ford (correctly includes condensate, but not NGL).  The balance (1.6 MMBO/D) would come from the Permian plays (440,000 BO/D), Niobrara, Utica, Mississippian, Austin Chalk and Monterrey.

So, the bottom-line is that these unconventional, aka shale oil, aka tight oil plays are believed to be capable of providing an incremental 2.6 MMBO/D by 2020.

Growth in Canadian Tar Sands Production
So, in addition to the shale oil (Eagleford, Bakken and Permian, primarily) there is the "tar sands growth" story.  Collectively, the unconventional oil and tar sands growth stories make up the overall, "North American energy independence" story. (sans Mexico, of course -  Mexico was conveniently removed from North America in the articles we have reviewed).  So, what about the tar sands contribution?

Well, back in 2009 we wrote about the dashed hopes for scaling up the Alberta tar sands, about how expectations/projections continually were "written down", year after year:

Well, that was 3 years ago.  Where are the actuals now, compared to the above predictions?  According to CAPP (the Canadian Association of Petroleum Producers, 6/5/2012), the 2011 actual production from the tar sands was 1.6 MMBO/D.  So, with billions of dollars in expansion and near record oil prices, production has increased about 0.3 MMBO/D since 2008, ie in 3 years.  This 6/5/2012 report goes on to project  far greater outputs ... far in the future (much like other long term projections done in the past), namely 5.0 MMBO/D by 2030.  Here's the CAPP table from 6/5/2012:

Remember, production has only climbed from 1.3 MMBO/D to 1.6 MMBO/D in 3 years, and this in a environment of near record oil prices.  The "at least 2 MMBO/D by 2018" from the 7/2009 prediction sounds do-able, but another 3 MMBO/D on top of that?  Recall that 5.0 MMBO/D was the prediction for 2015, back in 2008.  The rock is certainly there, it is a matter of logistics, energy sources, water and environmental issues.  They have certainly convinced the Chinese and Koreans to invest (also from the CAPP report, looks like $18.4 billion, Canadian):

Bottom-line:  An incremental 1.6 MMBO/D from the Canadian tar sands by 2020, according to the CAPP projections.  So, it appears that our oil exporter from the North is likely to be able to continue to supply the US at rates at or above those in the past.


Summary
Overall, the new shale oil plays and the Canadian tar sands appear to be capable of adding an incremental - North American - production rate of around 4.2 MMBO/D, by 2020.

Our other geographic partner in North America - Mexico - is another story.  Mexico is expected to have a difficult time maintaining its current rate of 2.5 MMBO/D, according to an article in the September 2012 issue of the Oil and Gas Investor. Mexico's production dropped precipitously in 2004 - 2009, when the giant field Cantarell declined from 2.1 MMBO/D to less than 500,000 BO/D.  A substantial and successful effort by Pemex has stemmed the declines for a time, and held production at 2.5 MMBO/D, recently.  However, they have been running their Cantarell-like field, KMZ, in a hard fashion, and there is worry it can't keep up.  Their Chicontepec onshore operations continue to disappoint, producing only 70,000 BO/D, despite $1.5 billion invested on an annual basis.  A recent deepwater discovery may have found 400 MMBO, but it may take a decade to bring this on production, based on the timeline from Shell's nearby Perdido Project.

According to the EIA, in 2011 the USA produced 5.7 MMBO/D, and consumed 18.8 MMBO/D. (The world consumes about 90 MMBO/D).  The USA imported 8.4 MMBO/D in 2011.  (The difference between total consumption and production plus imports is made up via NGL and other extraction gains.  As previously discussed, NGL is not currently comparable to crude and condensate for the purposes of solving what would be an acute transportation crisis in the USA - due to to the lack of current infrastructure and vehicles.)

So, the incremental production projected to be available by 2020 from the shale oil plays - 2.6 MMBO/D - should be able to reduce our imports from 8.4 MMBO/D down to "only" 5.8 MMBO/D.  This assumes oil production from other domestic fields is flat (ie, any declines are offset by other discoveries - not necessarily a good bet, based on the curve below), and that the market (consumption) stays the same (ie, doesn't increase or decrease).

Bottom-line:  The shale oil plays represent an opportunity to reduce foreign oil imports by 30 % or more, thereby substantially reducing the balance of payments (outflow of dollars from the USA).  At the same time these plays will provide opportunities for jobs and small businesses across the country at a time when such opportunities are rare.  The shale oil plays will reduce but not eliminate our reliance on foreign oil.  Should a supply disruption occur over the next decade, we will be better off having this production than not.  The natural gas and NGL from these plays will provide high-quality, low-carbon heat energy for electricity as well as feedstock for plastics - which could help jumpstart manufacturing.  Overall, these plays don't solve the much larger issue of Peak Oil, but they do help "buy time".  They grant us a reprieve, a short stay of execution, a chance to avoid more of the "severe consequences" outlined in the Hirsch Report.  Namely, they give us more a little more time to accelerate the implement conservation, mass transit solutions and natural gas vehicles and infrastructure, as well as to continue alternative energy and conservation research efforts, while we also continue the development of both fossil and renewable energy sources.  Our challenge will be to use this time wisely, making progress on the all of the above, while we seek to avoid the time-wasting divisiveness that has tended to characterize so many discussions about energy and conservation.

Endnote:  So what's to be expected, price-wise?  If an incremental 4.2 MMBO/D is brought to the market by 2020 and this capacity is not offset by an increase in demand or a drop in supply elsewhere, then oil prices could plummet.  Some would be further convinced there was "no such thing as Peak Oil" (but this would still not be the case).  However, much has been written about drops in exports that are likely between now and 2020, including a recent Citigroup article.  Like rust, decline never sleeps - Ghawar in Saudi Arabia is getting older by the day.  Earlier IEA forecasts counted on finding "a number of Saudi Arabias" in order to keep the world supplied over this period.  And then there is the possibility for some other severe supply disruption in the Middle East.

The Perennial Search for Perennial Grains

Most would agree that there is no single solution to the challenges brought about - currently and in the future - by inexorably declining, worldwide oil production rates, or Peak Oil.  As Steve Andrews, one of the co-founders of ASPO-USA likes to say - there are no Silver Bullets, only Silver BB's.

So, Silver BB's - also known as partial solutions - can likely be lumped into two categories:  Substitution and Conservation.  It is becoming increasingly apparent how dominant the Conservation category will be.  After only a few years, it is obvious that we can't ever produce enough biodiesel and ethanol to create what Jim Kunstler would deride as "Happy Motoring As Usual".  And even if we could produce enough, it is obvious from a food supply standpoint that we should not attempt to totally replace gasoline and diesel with ethanol and biodiesel.  Nevertheless, even these maligned fuels have niches - they are Silver BB's.  Meanwhile, cellulosic ethanol and algal oil appear to be ever on the horizon, much like fusion or better batteries.  Maybe one of these will experience a true breakthrough, but once again, trying to totally replace the current consumption of gasoline and diesel with these fuels is likely the incorrect path.

This brings us to the topic at hand, a Silver BB of both Conservation and Substitution, and the focus of various research and development efforts, namely "the perennial search for perennial grains".  Why perennial grains?  Primarily to eliminate the fuel, fertilizer and herbicide required for planting, cultivating and growing plants which must be seeded each year - also known as annual crops.  And of course there are other reasons why staying out of the pasture would be a good thing - with topsoil loss being chief among them.  Essentially all of our current grain crops - wheat, corn, oats, barely, rye, millet - require seedbed preparation, weed control and fertilization in order to become established and yield a crop - all within a few months.  The hope is that perennial crops, while they might yield far less, would require a lower energy investment per pound of food produced.

So, what's the status on this perennial grain effort?  A substantial effort is spearheaded by The Land Institute, whose principal, Wes Jackson, recently spoke to ASPO - USA.  Mr. Jackson and his group have been working this problem for decades - a dedication that deserves applause.  However, he explains that the creation of perennial wheat might take another 25 years, and that creation of perennial crops in general might require an incremental ... $1.6 billion!  Meanwhile, a recent success of theirs is Kernza, a relative of wheat, native to Turkey and Afghanistan.  Kernza is touted as currently having yields of around 15 % of wheat.  Importantly, the yield advances that have been made to date have been via selective breeding rather than genetic engineering.  Nevertheless, Mr. Jackson mentions that Kernza as a commercial crop may be ten years in the future.

So, where to find some other plants that might yield better returns, faster ... and for less than billions?  One might guess that plants that are already native or naturalized would be a good place to start looking for domestic solutions.  But what is amazing is how little we know about our native and naturalized plants.  Sure, there is a lot of information out there, but there is no central aggregation of that information such that it can be assimilated into research and development, as well as conservation, education and wise use.  What is needed is a single source which documents all known uses - from prehistoric to modern.

Enter The Useful Wild Plants Project.  For over 30 years, this effort has flown under the radar of most of the public.  To date this group has published three archive-quality volumes, and the fourth will soon go to the printer.  Much of the data is already gathered for the remainder of the volumes, however the effort must be accelerated in order to finish the 14 volume set as soon as possible.

Here's a case-in-point:  Chasmathium latifolium, common name Inland Sea Oats.  It is native in the shady creekbanks around Austin, and it ranges throughout much of the Southeastern US.  It is already a perennial grain!  And I likely wouldn't know about it if it weren't for The Useful Wild Plants Project.

Inland Sea Oats is also commonly used as a drought and shade tolerant landscape plant.  Recently, I noticed a neighbor had, over several years, established two small beds of Chasman­thium latifolium. The beds are intended as a landscape accent, not food, but they made me think, here is a place we could get a semi-realistic yield number, because it is a mature stand and the plants are about as densely spaced as possible. And one of the beds is square, the other semi-triangular, so it is easy to calculate the area.

So, a month or so ago we harvested the seedheads. We had two boys use the “walk through and scrape the seeds off between your fingers into a shoulder bag” method. It took 30 minutes to harvest 148 sq. ft.

I dried the seed heads for a few weeks, and then threshed them using the “Ellison taped blender blades” method from UWP Newsletter 19. I winnowed and screened them and was con­servative as I did not want to lose much seed. A few years ago I purchased a number of small framed screens. The 10/64" round hole screen worked best. It let some hulls through­. The secret to minimizing this is to watch what you are doing, shake it a few times, stop when you don't see any more seeds and discard the hulls. More shakes will lead to more hulls in the product. The threshing took 15 minutes, and I spent 45 minutes on winnowing/screening.  It shouldn't have taken so long - I was piddling and trying to not lose any seeds. Basically, it took about an hour for both.

We started off with 1½ gallons of seed heads, and this, by coincidence, weighed 1 lb 8 oz. The cleaned seeds occupied 6.5 oz. by volume and weighed 5 oz.

This has been a year of record heat. The owner watered to keep her oak trees alive, so the plants got some relief. Neverthe­less, the seeds were half the size of those in a normal year. The yield could easily be twice this in a normal year.

So, here is a perennial grain that is ready today! Of course, the above calculates out to only about 92 pounds per acre.  In the summer of 2011, in one area of North Dakota the wheat yield was 43 bushels/acre (or 2580 lb/ac at 60 lb/bu).  (In 2010, the wheat yield was 65 bushels.)  But, these C. latifolium yields are without fertilization or weed control and under extreme conditions. The important aspects are that this crop is already “perennialized”, it is drought tolerant and it is a native which is already accustomed to our ecosystem in general.  Further, yield improvement is likely a lot simpler than turning an annual into a perennial.

How many other prospective perennial grains might there be?  The completion of The Useful Wild Plants Project must be accelerated so that we can begin to discover and develop other potential perennial grains, as well as Silver BB solutions to other Peak Oil challenges.