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.

A snip from 2009, Mechanical Engineering magazine

Recently, in cleaning out some articles we found this piece of clarity, from the August 2009 issue of Mechanical Engineering, the magazine of the American Society of Mechanical Engineers (ASME):

excerpts from: the Oil Age, by Frank Wicks

"Most oil producing countries have passed peak production.  The United States had been an exporter until production peaked in 1970.  It now relies on imports for about 60 % of the 20 million barrels per day that the country consumes."

"Another rough estimate is that the world started the Oil Age with about two trillion barrels of recoverable oil.  About half of that has been extracted.  The remaining trillion barrels represent about a 30 year supply at the current rate of consumption and will be much more difficult to recover."  [MP Note:  Unfortunately, it won't be possible to extract the last trillion barrels over 30 years, due to the physics of flow through porous media; so the rate of consumption will have to drop, each year.  A good guess would be that the last trillion barrels might last around 80 years - and in order to do that, the rate of extraction will have to drop continuously, and precipitously, once again due to physical constraints, not due to man.]

"The fundamental problem is that oil is too good.  It is required for most things that we do.  The alternatives are mostly inferior or less acceptable.  Adapting to the next half and the end of the Oil Age may be the greatest challenge our civilization has ever had to face."   [emphasis is ours]

Mexican Oil Exports: Start Saying Adios!

Most folks are surprised to learn that the world’s second largest oil field is not located in Saudi Arabia. Nor even in the Middle East. In fact, it is located offshore Mexico, in the Bay of Campeche, Gulf of Mexico. This “giant” field, with an ultimate recovery which may reach 20 billion barrels, was discovered in 1976 by Rudesindo Cantarell. Sr. Cantarell was not a geologist, nor a geophysicist, but rather ... a fisherman. It seems that the natural oil seeps were playing havoc with his nets! PEMEX, the national oil company of Mexico, finally investigated it and the rest, as they say, is history.

Cantarell Field, as it turns out, is a real freak of geology. The porosity - or holes in the rock where the oil is located - is believed to be the result of a rubble pile from an asteroid strike which took place some 65 million years ago! And not just any asteroid strike: The asteroid which caused what has become known as the Chicxulub Crater, on the Yucatan Peninsula, is thought to have been 6 miles in diameter, and many scientists attribute this particular asteroid strike as being the “extinction event” that took out the dinosaurs! The impact energy from that strike is believed to have been some 2 million times that of the largest man-made explosion, that of the Tsar Bomba, a 50 megaton hydrogen device set off by Russia in 1961. Interesting stuff!

Cantarell was put on production in 1979. Production was 1.16 million barrels per day (1.16 MMBO/D) in 1981, and in 1995 production was still 1 MMBO/D. In 2000, PEMEX installed the world’s largest nitrogen injection project on Cantarell. In this process, nitrogen is stripped from air and injected into the upper parts of the reservoir in order to maintain reservoir pressure, and thus to increase or maintain production. Production increased to 1.6 MMBO/D in 2001, then to 1.9 MMBO/D in 2002, and then to 2.1 MMBO/D in 2003. By the end of 2005, however, production had returned to 1.9 MMBO/D. In January, 2006, a PEMEX press release unveiled their conclusion that Cantarell had peaked, and would decline down to a rate between 1.5 MMBO/D and 0.5 MMBO/D by the end of 2008. The attentive folks at the Wall Street Journal must have sensed the significance of this event, as they first ran this story on 2/9/06, and they published an update in August of 2006. Since this time it appears they have been revisiting the story about every February, with stories on 1/27/07, and most recently on 2/15/08.

As of the end of 2007, Cantarell was said to be producing 1.4 MMBO/D, or down some 600,000 BO/D (or 29 %) from its peak rate in 2004!

Why is this important? Well, Mexico is the 3^rd largest exporter of oil to the United States. Out of about 20 MMBO/D of total consumption (maybe closer to 21 MMBO/D now), we import some 60 %, or around 12 MMBO/D. Mexico makes up some 1.4 MMBO/D of that 12 MMBO/D, or about 10 % of our total imports.

So, if Mexico can’t supply that oil - just get it somewhere else, right? Well it appears that there is little or no “spare” capacity in oil production RATE, worldwide. So, if we need 1.4 MMBO/D from Mexico but they can’t supply it, we either have to get that oil instead of someone else, or do without. The oil pricing or geopolitical implications of this scenario should speak for themselves.

To put the ultimate loss of 1.5 MMBO/D out of Cantarell into perspective, consider the massive tar sands in Canada. Even though these tar sand RESERVES are huge, their production RATE is limited by the QUALITY of these deposits. Namely, one has to shovel, melt or dissolve this tar out of the ground. Today’s total production RATE from these tar sands, after huge efforts and investments of billions of dollars, only totals about 1.1 MMBO/D. And, with billions more invested, by 2015 they believe the rate can be increased by an additional 1.9 MMBO/D. So, if there weren’t any other RATE declines going on around the world, and if demand was not increasing, then the Canadian tar sands might be able to compensate for the loss of Cantarell.

Put another way, if other declines ARE present around the world, and if there are not many provinces where the RATE is significantly increasing (such as with the Canadian tar sands), and if the increases from the tar sands can barely make up for Cantarell declines, then what significant capacity increases are available to make up for the other declines?

So, Cantarell Field is a "poster child" for Peak Oil concerns.

Most recently we wondered, “If Cantarell is down significantly, and other Mexican production is up some, but not enough to compensate, what must be making up the balance?” Namely, if production is down and Mexican domestic consumption is flat or up (as is normal in a developing country), then imports must go up, or exports must go down, in order to compensate. In other words, something’s got to give.

After a little investigation, we were troubled by the conclusions.

First, using a decline profile we derived from the Oil and Gas Journal/El Financero/Sener data, we projected Cantarell to be down to 1.204 MMBO/D by the end of 2008.

Next, we arrived at the projected 2008 oil production by adjusting the 2007 figure of 2.925 MMBO/D (average of 11/2007 & 12/2007, from Reuter’s, 1/21/08, UPDATE 3-Mexico oil output, exports wane in 2007) for the projected 2008 Cantarell decline. (In doing so, we are assuming little if any increase in production from other Mexican fields for 2008. Since 2004, those other fields have only been able to increase production and make up for about 100,000 BO/D of the 600,000 BO/D drop in Cantarell production.)

We are still using the Mexican oil import number (that is, imports of oil into Mexico) of 309,000 BO/D, from the world factbook estimate from 2004. It seems likely that imports of oil into Mexico over that period have dropped, as imports elsewhere typically have done.

Additionally, for 2008 we use the Mexican domestic consumption figure of 2.078 MMBO/D (also from the 2004 world factbook estimate). This seems too conservative, and unlikely. Namely, oil consumption increased in most developing countries over the 2004 – 2008 timeframe.

As to exports, the world factbook shows 2.268 MMBO/D was exported from Mexico in 2004. And the Reuter’s article lists 1.684 MMBO/D as the amount exported on an average basis, in 2007. That’s a drop of 584,000 BO/D, from 2004 though 2007! Where was this oil going, and what are those folks doing to replace about 600,000 BO/D over that interval?

In summary, the projected 2008 Mexican oil balance of -730,000 BO/D doesn’t appear to be too far out of line with past “balances” shown by our rough calculations, but the concerns are:

• One would think that consumption in Mexico would be up, over the last 4 years.
• It is unlikely Mexico is still importing as much oil as in 2004.
• Exports show to be down 26 % since 2004! This is a significant trend!
• The “balance item” is substantial enough in relation to US imports of Mexican oil that it could materially impact that US import figure.

Once again - conservation, alternative energy efforts and domestic exploration all must be significantly increased as it appears that the days are numbered as to getting a significant amount of oil from Mexico. More specific recommendations to follow in the next report.

Footnotes for chart:

1. Prior to 2005, Cantarell produced at a flat rate of 2 MMBO/D for a short period of time. During this time the field was being injected with huge volumes of nitrogen for pressure maintenance.
2. Mexican oil production has been widely quoted as 3.4 MMBO/D in 2004 – 2005, same figure also recently used in a Wall Street Journal (2-15-08) article.
3. The Sener study, referenced in the recent El Financero newspaper article, in turn quoted by Oil and Gas Journal (2-7-08), listed specific declines for Cantarell for 2005, 2006, 2007.
4. Cantarell 2008 ending rate based on the production projection derived based on decline rates quoted in El Financero article.
5. Declines from Cantarell applied to total, initial rate in 2005, so we are assuming the other production in Mexico remains flat.
6. same
7. Imports from world factbook page, assumed flat.
8. Exports from world factbook page, assumed flat until new data for 2007.
9. Consumption from world factbook page, assumed flat. But usually consumption increases over time.
10. Balance should be zero, represents errors in one or more estimates.
11. Imports from Mexico into the US, from EIA page.
12. Same as (11), but average for 11 months in 2007.
13. From Reuter’s (1/21/08), “UPDATE 3 – Mexico oil output, exports wane in 2007”.

US Oil Imports, By Country

Although easily found on the Energy Information Administration's (EIA's) website, here for convenience are the monthly volumes of oil imported into the US from the top 20 suppliers, sorted from greatest to lowest monthly volume. We have also calculated the average daily rate of oil imported in December 2007, as well as each country's percentage of the total US imports during that month.

Note that in December 2007, Mexico fell behind Venezula and became the 4th largest exporter of oil to the US, rather than the 3rd largest. Watch the next post for more details.

Remember, the US imports about 60 % of the liquid hydrocarbons/petroleum that it consumes.