My point (the one I'm attempting to make, however imperfectly) is that (according to resource economics and historical experience), you never suddenly fall off a table from cheap to expensive resources. Rather, there is a large continuum of deposits and the movement is relatively gradual, from $2 oil to $2.15 oil, not $2 oil to $25 oil. (Costs, not prices.)

So if costs are rising gradually, you have lots of warning and time to invest in other things (including slightly more expensive oil).
Mike Lynch

Ok, I can buy this, it’s logical and the facts back it up. Offshore, unconventional qualify as examples.

But I have an issue with this. Maybe the costs are only slightly higher, but the problem is still production rate, which means the demand (and thus price) for the product may still be skyrocketing. (Or more likely the price hits an upper barrier and we have demand destruction blowing up all around us.)

What are the most commonly referred to forms of “slightly more expensive oil”. The oil sands, for one. But the oil sands have many weaknesses, the biggest problem being production rate. Everyone goes ga-ga at the resource size and are so intoxicated by it they forget to ask what the production rates are. So, even if the cost may only be marginally higher (and this assumes they finally get off their asses and start using MSAR, THAI, nuclear, something other than NG in the process), we still have the fundamental problem of rate. Even with most monetary and political constraints removed, it’s highly suspect that they are ever going to get significantly high enough production rates out of the oil sands.

So we’re back to square one. You have depletion from conventional wells really starting to bite hard and what we’re left with is asking these other slightly more expensive oil supplies to step up to the bat. The odds are high they are going to strike out.

Rate must be maintained, don’t you agree? In fact, rate MUST increase. How are these expensive resources going to do it?

I think you're missing the point. It's a gradual scale. We've peaked on $5 oil. We've also peaked on $10 oil - although the Saudis are evidently still sitting on quite a bit more of each. We've probably peaked on $20 oil too. But what about $25 oil? That's what the oil majors were baselining their production plans on three years ago, so we don't know. Even if we're near peak on $25 oil, that doesn't mean that we've hit peak on $26 oil. And that oil is everywhere - onshore, offshore, Texas and Nigeria and some of it may even be in Canadian tar sands.

And we're still a LONG way from $60. It's true that we've extracted all (most - again, the Saudis have a lot left) of the easy stuff. But why must there necessarily be LESS $20 oil than $10 oil, or less $40 oil than $20 oil? No reason at all.

Published on Tuesday, October 4, 2005 by ASPO-USA

Sadad al Husseini sees peak in 2015
By Steve Andrews

Sadad al Husseini, recently retired head of exploration and production for Saudi Aramco, offered very insightful comments during an interview with Peter Maass in Saudi Arabia. Maass reported Husseini’s perspective in his August 21, 2005 piece “The Breaking Point” (posted under “Articles” on this site) in the New York Times Magazine . In a follow-up email exchange with ASPO-USA’s Steve Andrews, Husseini said he would be unable to attend and present at the November 10-11 Denver peak oil conference, but he did offer pointed commentary about peak oil production. While his comments are more optimistic than those of Colin Campbell, Matt Simmons, Chris Skrebowski and a host of others, they certainly strike a vastly more realistic chord than the typical fare from Saudi Aramco press releases and presentations.

Q: My question to you, and I would like to share your answer with attendees at the conference as well as with our state’s Energy Office here in Colorado: Do you have an approximate range when you estimate that world oil production might peak? Given that you won’t be able to join us [at the November 10-11 Denver peak oil conference], your comments on this point would be tremendously appreciated.

A. Thank you for your e-mail. In response to your question, the answer is a little long winded but this is an important matter that needs a clear response.

Oil capacity today is not production limited but rather processing limited. That is to say, the DOE reports the world's refining capacity has leveled at around 83 mmbd for some time and refinery expansions are slow and costly. We have seen new downstream capacity investments average 300 mbd/year over the last several years. Doubling that rate would still put major changes in refinery expansions well into 2010 and beyond. Therefore the refinery capacities are now the effective ceiling for oil production.

The DOE shows oil demand (presumably after refining) is increasing at something like 1.5 - 2.0 % per year. This was doable in the past because of the excess refinery capacity that prevailed until 2003/2004. From here forward, satisfying oil demand will require 1.2 - 1.6 mmbd of new refinery capacity per year or 4 to 5 new world-scale refineries every year. These normally require 4 - 5 years to execute at a cost of no less than $ 2 B per 100,000 b/d of capacity. With deep conversion and petrochemicals, the investments are even higher.

Because of these massive requirements, I believe the production outlook will be gradual production increases over the next ten years limited by slow refining capacity expansions.

Given the current outlook in terms of global exploration and development, the rate of investments in the oil value chain, energy prices, and the prevailing legal and political investment climate, I believe oil production will level off at around the 90 - 95 mmbd by 2015. This plateau can be sustained beyond 2020 at continuously higher oil prices and with rapid improvements in overall energy efficiencies throughout the world.

A rapid global refinery expansion program that eventually matches an increasing oil demand rate of 1.5 - 2.0% per year cannot be achieved before 2015 at the earliest and is highly improbable in any case.

Therefore my answer is: under the current circumstances and outlook, oil is likely to peak at a 95 mmbd plateau by 2015 and can then be sustained well beyond 2020 at increasing real oil prices.

Best wishes with your conference and I hope to read more about it in the forthcoming weeks.
Article found at :
http://www.energybulletin.net/newswire.php?id=9498

Original article :

No, I think you're missing the point

You're looking at cost to extract, which is not the thing to be looking at when we're at peak or on the downside of the curve. Demand always plays a part, but when we're at peak or after, demand is the controlling factor of the price of oil. The Canadian oil sands is a terrific example. There's gobs of it. The cost to extract it is below $25. But the rate at which we can get it out is pathetic compared to what is required to replace the easy flowing conventional crude.

But my point is that there's a continuum of costs, and oil sands are sufficiently far along the continuum that there's a lot of oil to go through before we get there. And, barring that, we can pay more until the oil sands come on line.

Apropos, Shell is thinks $65 is unsustainable and expects oil to fall to $50 next year. If that's an exra $20 per bbl on oil sands, well, its not gonna take long for the other majors to want a piece of that action, especially if their conventional and deepwater reserves aren't being replenished fast enough.

The Canadian oil sands is a terrific example. There's gobs of it. The cost to extract it is below $25.

Spike, there appears to be a lack of refinery capacity. The Saudi's are saying this, Bush is saying this, and it is spelled out pretty well in a report by ICF (I started a thread with the report on this peak oil discussion forum).

Basically, ICF says that to meet IEA oil demands by 2010, the world needs an additional 9 mbpd in refinery capacity. The problem noted is that we are currently operating at almost 100% capacity, with few new refineries scheduled to come on-line by 2010. The report does not a few projects to be built in the ME and elsewhere, but also notes these are not even in the engineering stage. Further, there was a report last week that the Saudis will be increasing their refinery capacity, but that it will not be online until 2011 and will only bring an additional 2.4 in refinery capacity.

Do you see a refinery bottleneck and if so, what will be the effect on oil/gas prices demand from now until 2010?

Ok, I can buy this, it’s logical and the facts back it up. Offshore, unconventional qualify as examples.



But I have an issue with this. Maybe the costs are only slightly higher, but the problem is still production rate, which means the demand (and thus price) for the product may still be skyrocketing. (Or more likely the price hits an upper barrier and we have demand destruction blowing up all around us.)

What are the most commonly referred to forms of “slightly more expensive oil”. The oil sands, for one. But the oil sands have many weaknesses, the biggest problem being production rate. Everyone goes ga-ga at the resource size and are so intoxicated by it they forget to ask what the production rates are. So, even if the cost may only be marginally higher (and this assumes they finally get off their asses and start using MSAR, THAI, nuclear, something other than NG in the process), we still have the fundamental problem of rate. Even with most monetary and political constraints removed, it’s highly suspect that they are ever going to get significantly high enough production rates out of the oil sands.

So we’re back to square one. You have depletion from conventional wells really starting to bite hard and what we’re left with is asking these other slightly more expensive oil supplies to step up to the bat. The odds are high they are going to strike out.

Rate must be maintained, don’t you agree? In fact, rate MUST increase. How are these expensive resources going to do it?

Spike, what do you think of the theory raised a few pages ago that the market will increase energy investment such that the oil peak is pushed way back from the depletion midpoint?

http://www.peakoil.com/post185794.html#185794

Well, yes. But there's more than that! If we're drilling for $40 oil, we're drilling for $40 oil everywhere: offshore AND on shore, in the North Sea AND Angola. And when we move on to the $40.50 oil, we'll drill for that onshore and offshore as well.



I think the problem is actually with the RATE of the increase in production - not, "can we increase productio?" but "can we increase production fast enough?". Prices will rise to the point that, over a five year period (lag time for very large projects), sufficient investment will be made to deal with rising demand.



I think you're missing the point. It's a gradual scale. We've peaked on $5 oil. We've also peaked on $10 oil - although the Saudis are evidently still sitting on quite a bit more of each. We've probably peaked on $20 oil too. But what about $25 oil? That's what the oil majors were baselining their production plans on three years ago, so we don't know. Even if we're near peak on $25 oil, that doesn't mean that we've hit peak on $26 oil. And that oil is everywhere - onshore, offshore, Texas and Nigeria and some of it may even be in Canadian tar sands.

And we're still a LONG way from $60. It's true that we've extracted all (most - again, the Saudis have a lot left) of the easy stuff. But why must there necessarily be LESS $20 oil than $10 oil, or less $40 oil than $20 oil? No reason at all.

No, I think you're missing the point
You're looking at cost to extract, which is not the thing to be looking at when we're at peak or on the downside of the curve. Demand always plays a part, but when we're at peak or after, demand is the controlling factor of the price of oil. The Canadian oil sands is a terrific example. There's gobs of it. The cost to extract it is below $25. But the rate at which we can get it out is pathetic compared to what is required to replace the easy flowing conventional crude.

So whether or not there is MORE $20 oil than $10 oil is irrelvant. It's all about production rate.

To make things really simple, say the top 5 producing wells in Saudi Arabia collapsed. Total available supply drastically drops. The cost to get oil out of the oil sands hasn't changed. The rate at which oil is coming out of the oil sands is still very constrained and hasn't changed. Are you still going to tell me you think we don't have a problem?