Michael Lynch - Disputing Peak Oil

[Free]

As somebody who can't contribute to this discussion but is highly interested in following it I can only agree, please listen to the dissenting voices and don't insult them!

If we claim to follow scientific guidelines we shouldn't look for affirmation of the theories we believe in, but for falsification! (Read Popper)

Because if there is, after profound assessment, only one conclusive evidence or logic which seems to make our models unfit for reality we should change or modify them instead of brushing the counter-arguments aside and only look for affirmation!

There seems to be the point of the rate of growth of reserves - surely it would be no problem to point to sources and figures in such a fundamental matter? If they are different, why so, and what does it come down to?

Also it has been mentioned that the general dissent is not so much IF we peak but rather WHEN? So after all we are in the same PO-boat anyway?

[khebab]

Welcome! It's good to have you on board!

There is no sign that reserve growth is dropping, reserve additions are replacing production

The world had 1,188.6 billion barrels of oil reserves at the end of 2004, compared to 1,188.3 billion at the end of 2003, BP, the world’s second largest oil firm by market capitalisation, said.

The 0.02 percent growth rate was the lowest since 1990 and compares with a 10-year average above 1.5 percent per annum.

src: BP says global oil reserves growth stalled in 2004

[EnergySpin]

The world had 1,188.6 billion barrels of oil reserves

How is reserve defined here? I.e. the URR or the ones that remain to be pumped out of the sand?

[khebab]

How is reserve defined here? I.e. the URR or the ones that remain to be pumped out of the sand?

URR= cumulative production + reserve

[rockdoc123]

I found this nicely worded couple of paragraphs on an investment site written by a broker back in February....if you get past the fact he is "just a broker" I think he does a pretty good job of outlining what the main worries are with respect to reserve replacement

While supplies are gradually running out…

We believe that the market has failed to recognize the decreasing quality of oil reserve replacement as reported by the oil companies. Instead of replacing reserves with new discoveries, reserve replacement has instead come from counting, today, exploration barrels discovered decades ago. In addition to the historic exploration component, the technology element is also important, as we have been able to recover more barrels from these existing fields. This, also, has in turn led to increasing reserves – reserve additions that will not be sustained, as recovery expectations for new fields are already higher. We consider both the Exploration and the Technology elements in what follows.

Exploration
Consider. Oil companies have not replaced production with exploration-related barrels since the early 1980s . In fact, the peak performance in discovering new fields was in the early 1960s . Of the world’s top 20 fields, only one, the Kashagan Field in Kazakhstan, was discovered in the last ten years.

The oil industry has always tended to find the largest fields first, simply because these structures are more visible on seismic surveys. Oil companies found more than they could produce from the 1950s to the early 1980s. The oil companies sat on these exploration finds, only moving them forward to development when they were needed. In between, they waited for extraction technologies to improve and for the oil consumption demand to develop.

The reserve booking process only allows exploration finds to be recognized when a field is deemed commercial (usually when the decision is taken to develop that field), so oil companies have been able to live off their inventories of past exploration successes. Unfortunately, much of the remaining inventory of exploration finds is composed of heavier or sour crudes, a lower quality feedstock that the industry cannot adequately process without complex refining capacity, which is already fully utilized.

The fact that the industry has found the majority of the large, higher quality fields means that, even with technology increasing the find rates, the volumes of useable oil found per well and in total each year are decreasing, just as demand is increasing. As such, and unlike some have suggested, increasing investment in exploration will not result in appreciable new supplies.

I think he has captured much of the desperation I hear in my colleagues voices when they talk about the paucity of good exploration opportunities, the ever increasing F & D costs in places like North America and UK North Sea, West Africa etc. The movement of P3 reserves to P2 can only keep us afloat for so long....I can't help thinking that in a lot of the big fields around the world we are getting to the limit of technology when it comes to increasing recovery economically....even at 60/bbl.

[EnergySpin]

I think he has captured much of the desperation I hear in my colleagues voices when they talk about the paucity of good exploration opportunities, the ever increasing F & D costs in places like North America and UK North Sea, West Africa etc. The movement of P3 reserves to P2 can only keep us afloat for so long....I can't help thinking that in a lot of the big fields around the world we are getting to the limit of technology when it comes to increasing recovery economically....even at 60/bbl.

Rockdock since you are in the field either in academia or industry.
Is there an estimate of the % of the earth that has been mapped with 3D surveys? Is the 98% (meaning 5 contintents+sea under 3km) usually quoted accurate?
It would seam to me, that if this number is correct, then no more exploration is possible. Hope it does not sound too naive

[JohnDenver]

I think he has captured much of the desperation I hear in my colleagues voices when they talk about the paucity of good exploration opportunities, the ever increasing F & D costs in places like North America and UK North Sea, West Africa etc. The movement of P3 reserves to P2 can only keep us afloat for so long...

Your comments only apply to private Western oil companies. It's true, you are running out of oil and opportunities. That is not a geological problem per se. Fact is, you are being shut out of oil and opportunities by the National Oil Companies (NOCs), who control most of the world's reserves and promising areas. What we are seeing is the gradual Yukos-ification of the global oil industry. The West and the U.S. in particular are using too much oil, and they need to be brought under control. The NOCs are the right vehicles to achieve this. Oil is a weapon, but you don't want to wield it too overtly. Passive-aggressive slow-down tactics are probably the best approach.
The West: Hey NOCs, where's that oil increase you promised?
NOCs: Sorry, we couldn't get that on-line. We've been having technical difficulties, issues with back taxes... all these problems! (snicker, snicker)

[seahorse]

Webb,

I think ole Rocky mountain high is suggesting the oil problems we are currently facing, i.e. $60 per barrel oil, is not geologically based in OPEC. He's suggesting that NonOPEC oil is having basic peak production problems, but not OPEC, and that OPEC is using this as an opportunity to squeeze the west and gain a cultural, economic, political advantage over them.

While this may be true, I doubt it. SA and the rest of OPEC tried this in the $70s, caused demand destruction, and almost lost their collective asses to all the collective masses that they keep stomping on and, but for a few meager oil profit hand outs, would have had their heads cut off long ago. Further, the former SA oil minister has had several interviews over the last 12 months stating that SA in particular would strain to even pump 15 mbpd in short term and such rates would cause long term damage. So, I think that OPEC, just like the rest of us, is basically greedy. They obviously like their mercedes and whores, which all takes lots of money. They like selling oil, its made them what they are today. So, I think the problems are more geologic, maybe include infrastructure problems, as opposed to some big political move.

[Badger]

Extracting oil isnt easy or cheap. Its pretty simple to see theres no easy oil left otherwise why stuff around in 10,000 feet of water for a few billion barrels regardless of graphs and charts of Mike Lynch.

[Antimatter]

Welcome! It's good to have you on board!

There is no sign that reserve growth is dropping, reserve additions are replacing production

The world had 1,188.6 billion barrels of oil reserves at the end of 2004, compared to 1,188.3 billion at the end of 2003, BP, the world’s second largest oil firm by market capitalisation, said.

The 0.02 percent growth rate was the lowest since 1990 and compares with a 10-year average above 1.5 percent per annum.

src: BP says global oil reserves growth stalled in 2004

Problem is that the BP stat. review data is pretty useless - they just re-gurgitate the official figures complete with the countries with reserves unchanged from year to year. Ditto for the Oil & Gas Journal figures. I'll wait untill IHS Energy releases their report later in the year (usually in november i think?). According to IHS reserves growth is still quite strong (over 400Gb over the past 10 years, ie significantly outpacing production). IMHO this is why Campbell et al. have been wrong in the past, and may well be wrong again. We aren't seeing reserves running down yet, and non-OPEC supply is still increasing. If oil was 60 bucks a barrel and supply was flat or declining, then it would probably signal peak oil, but I don't see how high price signals peak considering that supply rising quite strongly. Its interesting how many people here decry economics, but then point to the price as evidence of imminent peak, despite the fact that supply is still increasing rapidly. (btw not aimed at you khebab)

[darren]

Doesn't it say at least one point?
Guarantees at least ONE maximum, maybe more but totally rules out a plateau as some of the economists think. It is due to the finite nature of oil. Builds up and declines.

I've said this before and I'll say it again: Economists have a lot to answer for in my view (I have a Master's in the subject and know a little of what I speak) , but they are *not* as stupid as they are made out to be by some on this board. To my knowledge there is *no* economist *anywhere* who thinks, or has ever said, that oil production can remain on a permanent plateau (implying infinite reserves).

[khebab]

Problem is that the BP stat. review data is pretty useless - they just re-gurgitate the official figures complete with the countries with reserves unchanged from year to year. Ditto for the Oil & Gas Journal figures. I'll wait untill IHS Energy releases their report later in the year (usually in november i think?). According to IHS reserves growth is still quite strong (over 400Gb over the past 10 years, ie significantly outpacing production). IMHO this is why Campbell et al. have been wrong in the past, and may well be wrong again. We aren't seeing reserves running down yet, and non-OPEC supply is still increasing. If oil was 60 bucks a barrel and supply was flat or declining, then it would probably signal peak oil, but I don't see how high price signals peak considering that supply rising quite strongly. Its interesting how many people here decry economics, but then point to the price as evidence of imminent peak, despite the fact that supply is still increasing rapidly. (btw not aimed at you khebab)

Agreed. I don't think prices are a good indicator of the supply situation. Remember the oil crash in the 80s, prices crashed down for 18 months on rumors of an oil glut that was non-existent. We could be very well in a similar situation but with an opposite maket pressure. The truth is that nobody knows the real situation, most of the reserve numbers are fishy and unreliable.

[EnergySpin]

To my knowledge there is *no* economist *anywhere* who thinks, or has ever said, that oil production can remain on a permanent plateau (implying infinite reserves).

Well relying on Cobb Douglas production curves just assumes that though, that there is infinite stuff down there. At some point the "oh explore more, invest more to get more" will hit a brick wall. If you rely on unrealistic models about the real world, you will come to unrealistic conclusions .... even if you do not explicitly state so.

[rockdoc123]

Your comments only apply to private Western oil companies. It's true, you are running out of oil and opportunities. That is not a geological problem per se. Fact is, you are being shut out of oil and opportunities by the National Oil Companies (NOCs), who control most of the world's reserves and promising areas. What we are seeing is the gradual Yukos-ification of the global oil industry. The West and the U.S. in particular are using too much oil, and they need to be brought under control. The NOCs are the right vehicles to achieve this. Oil is a weapon, but you don't want to wield it too overtly. Passive-aggressive slow-down tactics are probably the best approach.
The West: Hey NOCs, where's that oil increase you promised?
NOCs: Sorry, we couldn't get that on-line. We've been having technical difficulties, issues with back taxes... all these problems! (snicker, snicker)

I'm sorry but that is just dumb. Where are foreign oil companies completely shut out of now.......nowhere, not one single country in the world. In Saudi Arabia Russian and Chinese companies are now involved actively in gas/condensate exploration in the Rub Al Khali (although Saudis are making noises about not offering anything more), in Iran there are still lots of opportunities...the companies ponying up so-far are CNOOC, Sinopec, Lukoil, Total, Statoil etc., in Russian BP is still fairly active and the Russian government still is offering opportunities in places like the Urals to participation by foreign oil companies...Chavez may be making it difficult for foreign companies but he hasn't thrown them out....no on the contrary the world has never been a more open playing field from the perspective of oil and gas E&P.
Also why in the world would any NOC shoot themselves in the foot by not producing their own oil at maximum efficient rates? All of the OPEC countries were clammering for higher quotas a couple of years ago and are now pumping at individual maximum capacity. No I am afraid they are as capitalistic as anyone else, if not moreso given that they have a few decades of catching up to do.

[rockdoc123]

Rockdock since you are in the field either in academia or industry.
Is there an estimate of the % of the earth that has been mapped with 3D surveys? Is the 98% (meaning 5 contintents+sea under 3km) usually quoted accurate?
It would seam to me, that if this number is correct, then no more exploration is possible. Hope it does not sound too naive

No not naive at all and is a good question. The real issue is not how much has been covered by 3D surveys but moreso how much of the world's area that has a viable working petroleum system (i.e. source rock, reservoir, seal, trap and the conditions to create oil migration) has not been explored extensively. It is very unlikely that 98% of this area has been covered by 3D surveys given that one of the largest areas is Antartica and the Arctic. However if we are talking about economically viable areas say at sustained prices below $80 - $100 it might be closer to the truth. For offshore it could very well be close to that number although it seems over the top. We do know where all of the sedimentary basins are in most parts of the world, exception being Antartica. In the offshore areas all will have been covered by decent 2D data and the more attractive areas by 3D data (most shot as speculative surveys by seismic service companies). Onshore it is a slightly different story but most areas have some 2D although 3D is still only a given in much of North America and prolific exploration areas such as Algeria, Egypt, Saudi, Yemen etc.
It would be foolhardy to say we know where all the oil is or that we have found all of it, but I think it is very safe to say we have found all of the easy stuff and likely all of the moderately difficult stuff. In most parts of the world we are now relegated to chasing subtle traps....these have much higher elements of risk and success rates are going to be much lower. I need to pull out the IHS statistics but I am willing to bet average discovered pool sizes globally have been ever decreasing.

[Antimatter]

I need to pull out the IHS statistics but I am willing to bet average discovered pool sizes globally have been ever decreasing.

Page seven of this IHS presentation shows a graph of average discovery size over time: http://www.ihsenergy.com/news/presentations/seg_cairo.pdf

It was stable at ~250Mb from abotu 1955 to 1975 then fell quite sharply to roughly 50Mb (eyeballing the chart) by 1985, and has remained approximatly flat since. Interesting - does this suggest a cut back in exploration in the big Middle East producing countries after the oil shocks and demand crash may have been a significant factor as Mike Lynch suggests?

[EnergySpin]

Interesting - does this suggest a cut back in exploration in the big Middle East producing countries after the oil shocks and demand crash may have been a significant factor as Mike Lynch suggests?

What is the % of the earth surface that has been explored anyway ? (neglecting the ultra deep, ultra cold, areas unlikely to hold significant reserves due to geologic history?)
If almost all of it has, KYAGB

[JohnDenver]

I'm sorry but that is just dumb. Where are foreign oil companies completely shut out of now.......nowhere, not one single country in the world.

"While geographic preferences based on corporate presence or long-standing relationships are often factors, it is quality reserves with quality fiscal terms that the companies are after; it is that objective that ultimately guides them in targeting assets and allocating investment dollars. Of total global oil and gas reserves, only about 14% are fully open for IOGC competition, where governments regulate the activities of oil and gas companies, but do not themselves participate in the exploitation of reserves (largely in the US and the UK). A further 17% of global oil and gas reserves are held by Russian companies, both privatized and public, where the degree of openness, the nature of IOGC access and the competitive environments and terms are still evolving and basically still unclear.

Only 11% of global reserves where NOCs are present and governments own the resources are open for IOGC to have equity access to reserves. By far the largest portion of global reserves, 58%, are held by governments and NOCs where IOGCs do not yet have equity access; in part of this portion, IOGCs can have some limited involvement through service contracts or technical service agreements, but they cannot have equity access to reserves. In spite of this, out of some $180bn in capex spent in the global E&P sector in 2002, $140bn was spent by publicly traded companies. The situation is only slightly different if one considers only natural gas, where Russia becomes more dominant, holding about 31% of the global reserve base. Reserves with full IOC equity access amount to some 10% of world reserves, and only 8% of world natural gas reserves where NOC are present are open to IOGCs. When it comes to the remaining 51% of global gas reserves, IOGCs have only limited access, through service contracts, but no equity access."
http://www.mees.com/postedarticles/oped/a47n26d01.htm

In Saudi Arabia Russian and Chinese companies are now involved actively in gas/condensate exploration in the Rub Al Khali (although Saudis are making noises about not offering anything more),

The last bit illustrates my point.

in Iran there are still lots of opportunities...

So why are you complaining about the "paucity of good exploration opportunities"?

in Russian BP is still fairly active and the Russian government still is offering opportunities in places like the Urals to participation by foreign oil companies...

If Russia is so open, what was Yukos all about then?

Chavez may be making it difficult for foreign companies but he hasn't thrown them out...

That's consistent with slow-down tactics.

no on the contrary the world has never been a more open playing field from the perspective of oil and gas E&P.

IMO, the facts don't justify that statement.

Also why in the world would any NOC shoot themselves in the foot by not producing their own oil at maximum efficient rates?

Because it makes good economic sense to slow-down when the price is rising. Morgan Stanley and Goldman Sachs are hoarding oil (Source). If it makes sense for them, why wouldn't it make sense for the NOCs, who can hoard much more effectively simply by dragging their feet.

No I am afraid they are as capitalistic as anyone else, if not moreso given that they have a few decades of catching up to do.

Catch up to what? The American lifestyle? It would make no sense to spend the last dregs of natural oil to build an oil-dependent infrastructure.

[rockdoc123]

When they say 14% are fully open they are only speaking to places where there are no NOC's ....well of course the number is small but there are places such as Algeria and Libya and Egypt (and a plethora of others) which are fully open to foreign companies...the NOC's may compete with them or get back in rights but otherwise it is an open playing ground. The statement is quite misleading. When they speak about the amount of reserves held where foreign companies currently do not have access the statistical argument is abused given that much of those reserves are contained in Saudi Arabia.

So why are you complaining about the "paucity of good exploration opportunities"?

simply having access to these areas isn't good enough since oil companies are not in business to find oil to provide to consumers...they are there to make profits (ie. good exploration opportunities). Although there are lots of opportunities in Iran for gas and to a much lesser extent oil the profitability is not necessarily there for most.....larger companies need to do these projects to replace their huge dwindling resource base and NOCs need to pursue them to provide guaranteed access to energy for their home countries...their economics are different.

If Russia is so open, what was Yukos all about then?

well first off Yukos was a Russian oil company, very little different from Lukoil who have not had the same problems. Most see that Yukos President taking a political run at the heirarchy was a bad idea. Again Russia is open to foreign participation, it is just a difficult business environment.

That's consistent with slow-down tactics.

and what is your point here? If it's that he's trying to chase out foreign oil companies ....perhaps he is but it would be political and likely literal suicide.

IMO, the facts don't justify that statement.

well of course you are entitled to your opinion but in the time I have been involved in the industry (last 30 or so years) the following has happened:
-Algeria opened to foreign participation, now foreign production is catching up to Sonatrach production
-Venezuela was opened to foreign participation after the mid-seventies nationalization
-Libya was opened to foreign participation
-Russia was opened to foreign participation
-Saudia Arabia opened the doors for participation in gas/condensate acreage
-Iran was opened to participation after the long period following ousting of the Shah and nationalization
-Mexico has begun offering service contracts to foreigners
indeed I would think you would be hard pressed to state many countries where they do not invite foreign participation.

[spike]

Aha! We have a jargon problem. I presumed by "reserve growth" you were referring to the rate at which estimates of field sizes has grown. You are referring to the 'growth in reserves'.

It is important (I would argue) to avoid giving too much credence to short-term trends, up or down. The industry moves in very lumpy ways.
Mike Lynch

Welcome! It's good to have you on board!

There is no sign that reserve growth is dropping, reserve additions are replacing production

The world had 1,188.6 billion barrels of oil reserves at the end of 2004, compared to 1,188.3 billion at the end of 2003, BP, the world’s second largest oil firm by market capitalisation, said.

The 0.02 percent growth rate was the lowest since 1990 and compares with a 10-year average above 1.5 percent per annum.

src: BP says global oil reserves growth stalled in 2004