Oh, I think the counterargument to that would be that the "oil people" who build/hire think that prices will go back down to former levels, and so are reluctant to invest in long term projects that mayturn out to be uneconomical. But your point that we've been moving away from the days of cheaper oil is a valid one. As for the refinery issue, I get the feeling that the oil companies have no economic motivation to build any, and if they did, the sites in the US have too many NIMBY/permitting issues to attempt. Maybe it's just me, but I have trouble using this "let's read the oil companies' minds" as evidence. Temporary shortage, maybe, but not a real indicator of peak.

I'm not trying to read minds, just look at facts. Its impossible to know what is under the ground. All this argument about Saudi reserves or any reserves is, ultimately, uknowable. However, current demand versus current production is knowable. That's why I've quit worrying about the arguments as to what's under the ground and looked to things that we can see and measure, such as rig counts and refinery issues.

What we know is that there aren't enough rigs to increase production and there aren't enough refineries to produce it even if there were the rigs. What we also know is that no one is building the refineries even though they can be justified, economically, in light of known forecast for demand increases.

So, if demand projections show a need for new refinery capacity and more rigs, why aren't they building them? I don't buy the traditional argument that they are afraid of a crash back to the 90s. Wal-Mart became the biggest retailer in the world by selling lots of stuff but at reduced profit margins. Same is true of any product. I think it was Getty that said he became rich after he realized that he made more money buy taking 1% of 100 men's work than 100% of his own. This is essentially the modern way of making profits. The demand is out there and will be for a long time with the growing Asian economies. Even if prices did drop back to $25 per barrel, they would still make a profit based on today's forecast models which have a built in $20-$25 cost.

If the oil companies can make a profit even at significantly reduced barrel prices, why don't they build the necessary downstream infastructure? In economic terms, they don't they try to increase their market share? Doesn't make sense economically not to do so. Therefore, its not reading people's minds, its trying to make sense out of the available data. Again, that's why Boone Pickens argument has some basis to it. He says they don't bc there isn't the oil in the ground to justify building it. If the oil was there, they would do it, because they would make money at it. They aren't doing it, bc they don't believe the oil is there. Case in point, if I remember correctly, the Saudis have said they want to increase the number of rigs they have. Most of these new rigs would be for offshore oil. If they had all this oil still to be developed onshore, it would be cheaper to use the rigs there than offshore. Again, this is what the pessimist are saying. The Saudis don't have significant onshore finds left. Any oil will be in the deep waters, most costly, deplete faster.

Again, all this is evidence that, despite what people say, the URR is not as high as has been publicly estimated. Actions speak louder than words. Despite higher oil prices and repeated promises to produce more oil, Saudi Arabia produces the same amount of oil per day that they were producing last year at this time. Check the OPEC monthly oil report.

some of what you say is correct but much treats complex issues far too simply. As an example you seem to be someone who believes oil companies make wild profits and would continue to do so at low prices....not so. The average return on investment for upstream oil and gas companies is 6%...there is unlikely any industry with this sort of low return. This is simply because as the product prices rise so do the extraction prices. If oil prices drop rapidly many companies will be caught out...ie. service companies that paid large to build wellheads, casing etc. and are faced with no market at a price that would even allow them to break even. Oil companies that entered into projects that are capital intensive but do not reap immediate returns (deepwater, ultra deepwater, in-situ heavy oil etc.) are caught ....most would go under in a years time. We saw this back not that long ago when oil prices dropped to $10/bbl.

As well the issue with rig availability has to do with the simple fact that it is only recently oil prices have been high.....it was only a couple of years ago we were sitting in the low twenties. At those prices many projects such as heavy oil and ultra deep water are completely uneconomic. For the last number of years drilling companies have had a hard time of it...there has been considerable consolidation in the industry. Now that prices are high and a bunch of projects are suddenly economic all of the available rig capacity is used up. It is going to take awhile before more rigs are available....it takes months to build them....mill runs on casing along are now delayed by 6 to 9 months worldwide.

With regards to the Saudis the issue seems to be that for the last number of years they have had spare capacity....why bother producing hydrocarbons that you can't sell given you are the swing producer trying to keep prices stable? Suddenly with high prices, higher demand they find themselves without the necessary capacity. This is not so much the fact they need to drill a lot of new wells (exploration or development) but moreso that they do not have the necessary production facilities, including water and gas separation facilities. As production rises so does water and gas and more facilities are needed. These take time to build.

As to why no one is building refineries....again it is both the expense, the initial low returns and the danger that there will be a quick drop in prices at exactly the wrong time (just after they have finished spending and before payout). Also as all the major have said the delays due to gov't and regulatory approvals are too onerous....why invest a bunch of money in planning stage when the various regulatory bodies are going to hold your application in limbo for 5- 10 years, which is what has happened in the past.

the issues you speak of control the flow of product over the short term but not the long term ....that is controlled ultimately by what can be extracted from the ground at economic rates. This is why it is important how much is in the ground in Saudi.

I don't buy the argument that "regulations" are stopping the building of refineries worldwide. This may or may not be true for the U.S. now, but its not true for the rest of the world. The Saudis, for example, could build all the refineries they wanted without any regulator hassle, same with the Chinese, Indians, etc. There are any number of countries without the regulatory framework that could build refineries and operate at a profit, but they don't. Further, refineries in these countries could be built and operated with cheaper labor. So, the NIMBY argument doesn't apply to the world as a whole.

Further, refineries made profits in the 80s, 90s, and make record profits today. They could make profits tomorrow.

As for drilling, if Saudi Arabia has the undeveloped onshore to drill, they would. Its cheaper. Tellingly, most of the rigs they are planning are for offshore oil. So, I don't buy the argument the Saudis have a lot of unexplored, undeveloped onshore oil potential.

Again you oversimplify.....the oil quality is different in the fields onshore they plan to bring on stream and ramp up ....according to the Saudi press releases they are putting their investment dollars where it makes the most sense with respect to marketability, which explains the current increased activity at Shaybah due to the demand supply gap for superlight crude. As well there is even less onshore rig availability currently than there is offshore. My understanding is the Saudis picked up 5 jackup rigs at long term high spread rates. They have plans to acquire several land rigs which they will need for bringing some of the old fields back on stream.

Again why in God's name would they go drilling a bunch of wells onshore when they don't have the facilities to handle the water and gas? If you've been following the press reports there has been a number of contracts assingned for facility constructions, the work suppossedly beginning this year. It is not as simple as ....Oh we need more oil....lets just drill some wells....it takes considerable planning around handling capacity and pipeline infrastructure which doesn't just appear suddenly.



Profitability as measured in the oil industry (return on investment) was pretty much nil for the refinery industry until this last year. You confuse profits with return on investment. Oil companies are not going to put their money into an industry where they see 2% return on investment (pretty much what refineries were making for years) when they could take that money and put it in the bank and get 3-4%. Shareholders would run off any CEO who made that decision. And if you think it is easy to build a refinery somewhere outside of the US you are living in a dreamworld. If it is a place like the Middle East a company will have an extremely hard time getting financing to build a refinery...simply because of the risk premium. Notwithstanding that even if they could get financing they would need government approval which is often as mired in beaurocracy as it is in North America....just ask anyone who has tried to get approvals to do something like build a pipeline in a place like Indonesia or Angola. In terms of China, India and Saudi...all three have announced the building of refineries (if you think there is no regulations in India let alone necessary Baksheesh for non-government companies you are mistaken)....but as long as there is healthy demand for unrefined product what is the point of doing more? Do you have any idea how long it takes to build a refinery???

It astounds me that some people think it is as simple as pulling out your checkbook and starting to build.

No, I don't think anything in life is as simple as pulling out the checkbook. I wish it were, but human nature isn't that simple. However, if what you are saying is true, then we are nearing the end of the cheap oil days, which is what the pessimist are saying. If these complex oil/gas issues can't be solved with the checkbooks of the oil companies and the Saudis in particular, then we have a serious problem on our hands.

If I'm following you, your simply saying the oil is there, but its getting more and more expensive to get it out of the ground. For example, the Saudi's are moving to offshore oil development b/c the expense of building the necessary water/gas infastructure for onshore development makes it less economical than going offshore. Traditionally, onshore development should be cheaper, but since the Saudis are forced to use water/gas injection to get the oil out of the ground (I assume due to field depletion issues), its cheaper to go offshore. If I'm understanding you, your saying the complex issues plaguing the Saudis are true world-wide. These oil/gas issues are complex, expensive, and time consuming. These issues are not solved simply "by pulling out check book out." Bottom line, your saying its expensive to develope the oil and gas, whether we are talking onshore development, refineries, rigs, etc.

It sounds to me like you are essentially saying the same thing as the pessimist, which is, oil and gas is getting more expensive to produce. In the end, whether its due to ever more complex oil production issues or depletion, this is the "end of cheap oil." Isn't the end of cheap energy what the whole peak oil debate is really about? As I understand the pessimist side, they are arguing that our whole economy is based on cheap fuels. How are they wrong on that point? Wasn't it the cheap oil that led to the 90s boom or was that a mere coincidence that the world economy boomed when gas prices crashed? If the pessimist have missed anything here, it is depletion may not be the issue. The issue was and always will be expensive fuel, whether its caused by diminishing supply or rising cost to produce, we've recently learned our society cannot even bare $3 in gas (American). We start breaking at that point.

If its getting so expensive to develope the oil and gas, the oil and gas industry will go the way of GM. Already, we see this happening with the moves to coal and nuclear. The oil and gas industry is losing market share to other fuels, and unless they can find a way to do it cheaper, they will continue to lose market share. If the coal and nuclear energy cannot replace expensive oil, then the economy will not grow. Either way, its not good for anyone.


You continually say that I oversimply these issues, however, I think that you overly complicate them. Time will answer these questions, though, not me.

Why don't they have the facilities to handle the water and gas? There has been a steady increase in world oil consumption. Surely they could project that there would be a rising need for oil. So, why didn't they think ahead? Were they expecting higher rates of discover than actually materialized?

I think everyone seems to forget how recent the latest energy crisis is. It was only a little over a year ago where OPEC was cutting production to keep price up. Saudi being the swing producer is the one who often takes the biggest hit when production has to be shutin. It is only this past year where Saudi has been incapable of providing enough oil to meet world demand.

It takes time to build these facilities. The intial tenders for construction on additional facilities for Ghawar went out about a year ago....I noticed just recently the the winning bidder has started work. Assuming this will take at least another 6 - 10 months to construct you get an impression of the sort of delays involved in a regulatory free environment.

I think the world needs a little more of that mystical quality the Rev. Bob Dobbs called "slack". Else, we may soon face the "stark fist of removal". (See the Church of the Subgenius at www.subgenius.com .)

Hi Rockdoc,

I don't know much about the refinery business, but what you say is true in spades for the power industry. I work at a two unit coal fired plant, and there is an effort to have a third unit built. We have been working on getting permits, commited buyers for the power and determing coal availability for over five years. Right now the talks are underway on the design goals - build a highly redundant plant ( more cost up front) or a cheaper plant and pay for it later in decresed availability.

Then there is the problem if actually getting the materials. You wouldn't think that steel would be so hard to get, but we have to import most of it now, and for the special high temperature and corrosion resistant (stainless and better) alloys, the lead time is months upon months. Just-in-time production and stocking has made it really diffucult to build what you want, when you want it. And this is all before Peak Oil complicates our whole economy and chain of procurement.

Even getting the necessary concrete will require special arrangements. Then there is the copper to wire the whole darn place and all the valves (again, long lead time - and there are tens of thousands in a power plant). So it is a challenge. Most people haven't been involved in industry, and don't realize what a hole we are in.

A market economy might be efficient when things are running well, but long term planning is a casuality I think sometimes.

And this lead time you cite is precisely why we need to look at where the oil companies are really putting their money. Given the current demand shows no signs of slacking and is even projected to get worse due to further Indian and Chinese economic growth, the economy has a clear need for more oil.

So where are the projects? I realize they can't be built today but where are the start points? That is the point that several people are making, rockdoc, and it's a valid one. Either the oil companies believe demand is about to collapse (economic reasons maybe?) or they don't believe the oil is there to develop. The "megaprojects" analysis done by various people doesn't even appear to keep pace with projected declines worldwide. And strangely enough, since July 2004, we've been hanging around this 84.5 mbpd production level, give or take a few hundred thousand barrels. That's 18 months at the same level of production with no end of demand in sight and growing demand (and rising prices) around the world.

In fact, all the big investment announcements are in unconventional fuels. We have coal-to-liquids projects, tar sands expansion projects, and now I am reading about Shell's oil shales projects in the Rocky Mountains. I don't even see equivalent projects in conventional oils but I do see lots of small projects. Worse, I see stagnant exploration budgets even as costs are documented to have risen. What does that mean? It means less actual research since it costs more per exploratory well.

I think 2005-2010 are going to tell the tale. If we see significant growth over this period towards the 108 mbpd projection that IEA says to expect for 2015, then we'll have a better picture, won't we?

But what are you and others going to say if we're only pumping 85mbpd or 86mbpd in 2010? That would constitute a "plateau" of almost 6 years running at that point. What would a plateau that long signal to you?

Actually there are a lot of projects in construction or early phase planning now....not just in Saudi where my understanding is they are planning on a fairly hefty investment in both facilities and drilling next year but also in other parts of the world....Angola, GOM, Kazachstan. These are the production wedge that pushes IHS energy's non-Saudi included peak out to 2012 - 2014....it is also largely why Yergin has this view that with conventional proven projects coming on stream and non-conventional heavy oil and LNG plugging the gap later on that the peak will be pushed out to 2020. We hear more about the heavy oil mega projects simply because they are more expensive, employ more people and are obviously sexier than say something like Thunderhorse.

One of the regular posters on this site has a good document out there on his own view of peak oil based on information he has gathered from press releases and company regulatory releases...these numbers include upcoming new oil on stream and overall seem to point to a 2010 - 2015 scenario. Sorry I can't remember his name...but great piece of work.

That poster is Taskforceunity. I think his paper is publised on the depletion forum as well as on the "The Oildrum" website.

Here you go something Aramco let slip at IP week back in 2004 plotted against cumulative oil recovery.
The original:
http://www.myfilehut.com/userfiles/15798/ghawarwor1.gif
Clearer version:
http://www.myfilehut.com/userfiles/15798/Ghawarwor2.gif
More details
To supplement the above graphs I would like to point your attention to the April and May 2004 ASPO newsletters:


ASPO newsletter
Do note that the 50-55% recovery figure excludes tertiary recovery such as artificial lift which will extend the production tail and recover an additional 8-10%.

ASPO newsletter
More details
More hearsay of course

In addition here is the future production profiles for OOIP of 145Gb and 200Gb plotted by this engineer. What is most striking is not their overstatement (the real figure is nearer 110Gb) but the little difference between the decline profiles (2nd graph):
http://www.myfilehut.com/userfiles/15798/Ghawarwor3.gif
Of course we wouldn't want to jump to conclusions based on one source (especially one that is anonymous). So we next to turn an obscure local scottish newspaper's December 2005 monthly energy supplement where the following startling revelations were made by an executive who has been to these fields and is attempting to prevent the situation from getting worse. First some general industry comments to set the context:


Now the juicy part:
Refering to produced water reinjection (PWRI) (a common EOR technique) in the North Sea:The Press & Journal
For more on PWRI see this pdf presentation from BP. I would add that PWRI is used at most of the Saudi giants including Ghawar, Abqaiq and Safinaya and can cause formation damage.

Some general comments from Schlumberger in relation to water production back in 2000:

Schlumberger
Aramco Water it is then , Simmons:

Barrons Interview
This is seven million barrels of water a day just to begin with as Khurais does not have sufficient aquifier support to produce at the desired flow rate vis a vis Ghawar and Abqaiq. That level of relevant water injection is likely to induce water to be "recycled" and lead to an extremely high initial water cut (reservoir pressure at Khurais has previously been supported via gas reinjection) that I have said previously indicates they will produce at most 300kbd of oil (an initial WOR of 3:1!) which will only decrease over time as MRCs with automatic shut off valves are being used exclusively from the beginning and we all know how that ends don't we?
It thus becomes clear Aramco really are scraping the bottom of the barrel and this time its all watery. The water cut hysteria turns out to be true after all and the decline is being covered up. The Saudi's PR sham is evidently blown open.

RockDoc, while you are pondering an(other) answer for BobbyBoy, I'd appreciate some thought on something that has been puzzling me:

You highlight an interesting market-failure effect, whereby oil companies could proceed with projects but they don't out of fear that the oil price will fall and leave them holding the baby. This of course interferes with the "purist" vision of a Peak Oil peak assuming all fields that can be developed are developed.

On the other hand, we hear that many countries are embarking on investment programmes. You highlight Saudi and several other countries, I have seen references also to activity in Kuwait.

Could you explain the difference of approach taken? Is it just a matter of marginal return? ie, the ME countries still have projects that remain viable even with the oil price falling back to $30/barrel?

On a completely different point, I am intrigued by the extraction of oil using water. What actually comes out of the ground at a water:oil ratio of 5 - 7? Is it a kind of milky emulsion? Does oil dissolve in water at high pressure? I have this image of trying to wash oil out of a sponge with water - not a profitable exercise. But clearly something else is going on to encourage the oil and water to mix.

Would it increase recovery to inject detergent, to "clean" the reservoir out more thoroughly? Or would that lead to foaming and separation problems? These questions maybe seem kind of dumb, but I've no particular knowledge of this issue.

Thanks + thanks to anybody else who responds.