Peak Oil: Investment Issues

Several months ago, I discussed the issue of “Capex compression.” When decreasing oil industry revenues cannot keep up with the increasing exploration and production costs of unconventional resources such as deep-water and shale fields, investments decline. Not exactly rocket science….

 

GETTING LESS = HAVING LESS

 

As I noted in that post, and as common sense suggests, when they invest less, we wind up with less. We now live in a world where demand is forecasted to increase [see this] and conventional crude oil  production continues to decline by 3-4 million barrels per day—depending on which source is referenced. Lower investments and thus lower supply from resources harder to find, extract, and produce to begin with, means that we’re confronted with some legitimate supply and demand issues most fifth-graders would understand: Less supply and higher demand = a problem.

Of course, prices at the pump could increase so that investments can be maintained or even increased, but most consumers will tell you that paying more for the same product or service isn’t their first preference.

 

FINDING MORE, BUT….

 

Despite all the hype about increased production from shale formations here in the United States (a fact not in dispute by those of us concerned about peak oil production), the part of that story omitted in all the Happy Talk hype is that a prime characteristic of deep-water fields (with all of their inherent extraction challenges, being in deep water and all) and tight oil wells is that they have very rapid decline rates. You get a lot at the start, and then … not so much after that.

The solution: drill more wells. The problem: that’s very expensive, for one thing. The other important factor is that the good stuff gets tapped first, so the Plan B drilling efforts are occurring in places where it’s even more expensive to find the stuff that’s harder to find and extract to begin with

By the way, another overlooked factoid is that production doesn’t exactly provide supply in a week or two, either. Start to finish time is measured over a period of several years. Stuff happens in between start and end, so it’s not a guaranteed, effort- and challenge-free process.

Companies are CAPital EXpenditure (CAPEX) constrained and will favor the developments of sources with the least associated risk that simultaneously offers good returns and capital flexibility….
Companies that both hold tight oil acreage and have small deep water discoveries in their portfolios will find that these developments are in competition with each other for CAPEX. The developments that show the greatest prospects for returns, best predictability and offers investments scaling (employment of capital) is likely to see most of the companies’ CAPEX flow their way. This consideration is now believed to weigh more heavily in the near term as many companies will find their future CAPEX under pressure…. [1]

So while no one argues that we’re running out of oil (other than cheerleaders who keep raising this phony straw man argument to lend credence to their cheerleading efforts), what we’re confronted with from this point forward is an ever-diminishing supply of the energy supply which has powered and sustained us for more than a century. The Plan B options have short-term benefits and enjoy a level of optimistic notoriety now, but what’s available now is not the answer for decades to come and beyond.

No one likes that part of the story, but our children will thank us if we start engaging in more realistic and fact-based discussions about what to do. Starting soon would be an ideal strategy.

Peak Oil Matters