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Oil majors are whistling past the graveyard

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The world’s “supermajor” independent oil companies — BP, ExxonMobil, Chevron, Royal Dutch Shell, and Total — project a rosy future, assuring us that oil will be abundant for decades to come. But in fact they’re spending record amounts to keep oil flowing, while their production is actually falling.

The BP Energy Outlook 2030, released in January 2013, confidently asserts that oil production will keep pace with demand. Through 2030, it projects, “More than half of the growth will come from non-OPEC sources, with rising production from U.S. tight oil, Canadian oil sands, Brazilian deepwater and biofuels more than offsetting mature declines elsewhere.” Indeed, BP says, the “once-accepted wisdom has been turned on its head. Fears over oil running out –- to which BP has never subscribed –- appear increasingly groundless.”

Peak oil was never about “running out.” That’s a strawman argument. The word “peak” in peak oil simply refers to the maximum production rate of oil, as I have explained ad nauseam. While oil producers constantly trumpet new discoveries and rising reserves, they tend to avoid talking about production rates.

But reserves are meaningless if they don’t amount to an increasing rate of production. If you had a billion dollars to your name, but could only withdraw $1,000 a year, would you be worried about running out of money or paying your bills?

So let’s look at BP’s forecasts versus its actual production history in the chart below by geophysicist Jean Laherrère, who worked for 37 years at the French oil company Total S.A. and headed their exploration techniques group.

(The above chart and many others are featured in this excellent March 11 post by Matt Mushalik, which I encourage SmartPlanet readers to explore.)

Clearly, BP has a horrible forecasting record, with actual production continuously sagging well below its forecasts since 2005. Not even the 2010 Deepwater Horizon disaster can account for that.

Sadly, as Mushalik’s post details, BP is hardly alone in this regard.

In its new Outlook for Energy: A View to 2040, ExxonMobil sees, with admirable candor, conventional oil declining (hello, peak oil!). But it asserts that this will be “more than offset by rising production of crude oil from deepwater, oil sands and tight oil resources.”

How’s ExxonMobil’s predictive accuracy? Again, Laherrère has the chart (below):

(Source: Matt Mushalik)

Not quite as abysmal as BP’s, but still pretty awful. Since 2004, the only Exxon forecast which undershot actual production was the one from 2009, and its 2010 forecast was correct for 2011.

A fusillade of fantasies

But do these optimistic forecasts for tight oil, tar sands, biofuels and deepwater hold water?

SmartPlanet readers know what I think about tight oil: It’s impressive, but it has been ridiculously oversold (see here, here, here, and here). I won’t elaborate on that today, but I will note that BP’s opaque forecast for tight oil to grow by 7.5 million barrels a day by 2030 is at sharp variance with the detailed, bottom-up, highly transparent forecast of veteran geologist David Hughes, who finds that U.S. tight oil could peak in 2016 at less than 2.5 million barrels per day, and then decline.

(Source: J. David Hughes, “Drill, Baby, Drill“)

Tar sands production has another long track record of failing to meet expectations. Consider the chart below illustrating wretched forecasts by the Canadian Association of Petroleum Producers and actual tar sands production, which comes from the recent U.S. State Department report on the Keystone XL pipeline.

(Hat tip to Elana Schor.)

Biofuels also seems a strange thing on which to pin much hope. According to Pike Research, the United States is the world’s top biofuels producer. Nearly all of that is ethanol produced from corn, as mandated by the Bush-era Energy Independence and Security Act of 2007. But, as I explained one year ago, the energy return on energy invested of corn ethanol is so low that it was always destined to be an uneconomic source of liquid fuel. When the federal tax credit for ethanol production expired at the end of 2011, the sector began to struggle. Now, as the New York Times reported last weekend, about 10 percent of the nation’s ethanol plants have ceased production, with dozens more “hanging in the balance.” Production has shrunk by 1 million barrels a day since the heady days of 2007. And the first commercial cellulosic ethanol plant in the U.S. went bankrupt last month.

Deepwater production may yet grow, but its future is far from certain. As we all learned in 2010, it’s risky. It’s also extremely expensive. Worse, the production from deepwater wells declines steeply, just as unconventional tight oil and shale gas wells do. The jagged production history of Thunder Horse, the flagship deepwater project in the Gulf of Mexico developed by BP and ExxonMobil, shows it’s been declining at around 4 percent per month, or 50 percent per year.

(Source: Jean Laherrère, from a forthcoming paper)

As for the much-ballyhooed “pre-salt” deepwater oil off the coast of Brazil, most analysts agree that there’s probably a good deal of oil there (as much as 80 billion barrels recoverable), but it’s very challenging and extremely expensive. One recent paper by a World Bank analyst said that the new production might permit Brazil to remain self-sufficient in oil, but will never make it a major exporter.

The faith that BP, ExxonMobil and others place on tight oil, tar sands, deepwater and biofuels seems misplaced at best.

Turning up the treadmill

Unconventional oil is undoubtedly expensive. Bringing the next tranche of supply online will require another repricing of oil, just as the repricing from $31 a barrel at the beginning of 2004 to $111 a barrel at the end of 2012 (in Brent benchmark prices) enabled the recent boom from tight oil and other unconventional sources.

But how much new production did that tripling of oil prices bring? A mere 5.4 percent increase in supply — world production in November 2012 was just 3.9 million barrels per day over the January 2004 level, according to the EIA. This is success?

As the chairman of energy consulting firm Douglas-Westwood explained in a March 2012 slide deck, $2.4 trillion in capital expenditures from 1995 to 2004 produced 12.3 million barrels per day of additional oil production. From 2005 to 2010, the same amount of spending produced a decline of 0.2 million barrels per day. Why? Because “each marginal barrel will be more expensive and will require more equipment and services to extract.”

If you don’t believe that prices need to go higher — much higher — in order to fulfill the forecasts of the oil majors, then you should go back and read my Feb. 20 post. That’s the only way to explain why the oil industry is trying to convince the United States to become an exporter of crude oil and natural gas, when it’s still a net importer of both.

Indeed, price is the one thing that the forecasts of the oil majors studiously avoid talking about. There wasn’t a single mention of it in ExxonMobil’s outlook, and although BP’s outlook did not offer actual cost figures for new supply, it did note that “High prices are also supporting the expansion of supply, and not just from conventional sources.”

What we do know is that the oil industry is spending an enormous amount of money to accomplish very little. According to a March 4, 2013 article in the Oil & Gas Journal, the supermajors have been spending about $100 billion dollars a year, collectively, on exploration and production since 2008.

And what did they get for their money?

According to another excellent post by Matthieu Auzanneau in Le Monde, they got a 25.8 percent decline in oil production since 2004. Leaving out the Russian oil assets of Tymen Oil Company (TNK), which BP acquired in 2003 and subsequently sold to pay for the damages of the Deepwater Horizon disaster, the supermajors’ production actually has been declining since 1999.

(Source: Matthieu Auzanneau)

The underlying problem, of course, is that production from the world’s old (and cheap) oil fields is continuously declining at over 5 percent per year — another dirty little fact that the oil majors studiously avoid discussing. Thus, global oil production is a treadmill, where you have to run just to stay in place.

I’m sorry, Nick Butler, but Exxon’s outlook is unimportant and worthless, and a piece of corporate propaganda is precisely what it is. And while Ed Crooks is right that Chevron “replaced through discoveries 74 percent of the resources it produced over the past decade,” another way of putting that is that Chevron failed to replace 26 percent of the oil it produced.

Who you gonna believe?

Oil company outlooks aren’t real forecasts based on known projects and costs; they’re simply projections of what those companies would like to happen, and would like you to believe. Ignoring the decline rates of mature fields, their own production declines, the costs of new production, and the price tolerance of consumers is the equivalent of a magician setting off a smoke bomb while he performs a trick. The latest outlooks from the likes of BP and ExxonMobil are just whistling past the graveyard.

To obtain a more realistic assessment of what the future of oil production might look like, one must estimate the remaining recoverable oil with some complicated “backdating” of discoveries, take into account the actual production history, and apply a lot of mathematical wizardry.

Fortunately Laherrère has done just that, to produce this three-century model (below) of global liquids production, including regular crude oil, natural gas liquids, extra-heavy oil, biofuels, and the kitchen sink.

(Source: Jean Laherrère, from a forthcoming paper)

Unfortunately, the quality of the data that anyone who attempts such a model must work with is poor. Only three countries publish reliable field data, Laherrère notes: the United Kingdom, the United States, and Norway. Without accurate field data, it’s impossible to know what the future of oil looks like.

But after a decade of studying such data, I’ve come to regard Laherrère’s work as some of the best in the world. It’s highly transparent, and based on the best available sources. In this model, world liquid fuel production peaks before 2020 and begins its inevitable decline, while the forecasts of BP, IEA, EIA, and OPEC soar through 2040 and beyond.

So. Who you gonna believe? The oil majors or your own lyin’ eyes?

smart planet

9 Comments on "Oil majors are whistling past the graveyard"

  1. J-Gav on Wed, 20th Mar 2013 10:53 pm 

    I translated some of Monsieur Auzanneau’s work last year as he seemed to be fairly reliable (except when it came to inviting the free translator for a drink, as he promised.)

    ‘Big’ petroleum, ‘Big’ gas and other ‘Big’ fossil fuels are on the way out, one way or another … Even as other sources people are expecting to replace them are lagging in the ‘effort’ to avoid a major crunch. This is all likely to disappoint anyone counting on some guarantee that the “American Way of Life” will be prolonged forever, not to mention my aunt Lois …

  2. Kenz300 on Thu, 21st Mar 2013 12:46 am 

    Big oil, big coal and big nuclear want to keep making their BIG PROFITS.

    They will say anything or do anything to try to limit any competition from ANY alternative sources.

    The era of cheap oil is over. We are paying over 100 / barrel for a reason.

    It is time to break up the monopolies and add some competition.

    Wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste are all fast growing alternatives. They are safer, cleaner and in many cases cheaper.

    Climate Change is real….. it is time to reduce our reliance on fossil fuels.

  3. BillT on Thu, 21st Mar 2013 2:56 am 

    My plans to be totally independent of any commercial ties by 2020 seems to be a good target date. Sooner, if I can. I know that everything is just going to keep getting more and more expensive and incomes are going to shrink constantly until it levels out all over the world.

    My family keeps asking me why I went to live in a 3rd world country and I keep telling them that the US is headed there and I wanted to beat the rush. The people I live with here, are already self-sufficient. Americans are at the other extreme and the change will be painful and deadly. guns, drugs (legal and illegal) and a spoiled way of life is a dangerous mix.

    There are so many black swans flying around now that the sky is almost black. Sooner or later one or more will land and the fun will begin. Are you ready?

  4. Kenz300 on Thu, 21st Mar 2013 4:46 am 

    Alternative energy sources are taking hold around the world. They are safer, cleaner and cheaper than relying on fossil fuels and do less environmental damage.

    Climate Change is real…. it is time to transition to the alternative energy sources of the future and leave the fossil fuels of the past behind.

  5. Arthur on Thu, 21st Mar 2013 9:05 am 

    As Kenz suggests with his bloomberg article, it took less than 20 years for the internet to invade nearly all homes of the West. It will not be different with kwh harvested from the roof. A group of early adopters start and the rest copies the behavior. Even in grey Holland the price for a kwh from the roof costs 7 cent, a kwh from the grid 23 cent. 100,000 roofs are now covered, the rest of the 6.9 million will follow in the coming 10 years. It makes perfect sense to take out a new loan for say 7% and install solar panels. The subsequent savings on utility payments come down to a return on investment (typically 4500 euro) of 17%, which is spectacular. Expect finance companies to enter the scene, so it will suffice to merely make a call to these companies, who next will do everything for you. The consumer merely has to pay reduced monthly payments to the finance company rather than to the utility. There is enough fossil fuel left to make sure that this kind of transition will succeed.

    You can come home

  6. Hugh Culliton on Thu, 21st Mar 2013 12:26 pm 

    Arthur: I hate to be a wet blanket but I am. Questions: when the Internet invaded our homes over the last 20 years, was the economy growing or in permanent contraction? How will finance exist to loan money if we are in a permanent condition of global capital contraction? how will people afford to get those tiles if they’re unemployed due to those same macro economic forces? How much oil is in those photovoltaic tiles? If we’re talking about a smooth transition, that means winding suburbia down gently, which means some continued investment in cars and their associated infrastructure. How much oil does it take to physically make even an electric car? How can green power replace the 7 gal (US) that are physically present in a tire? Let’s assume we just stop with cars and go public transit. There are still some big problems. What will replace oil as the feedstock for the plastic and chemical industry? How about agriculture, with approx. 10 cal of oil input for every cal of food produced? How can green electricity replace the oil required for fertilizer for the crops needed to walk back to a non-oil sustainable population from 7+ billion?

    The future’s going to be a cold, hard bitch my friend.

  7. Arthur on Thu, 21st Mar 2013 12:50 pm 

    The internet did not deliver direct money, yet large parts of the population since 1995 bought a new computer every 3-4 years, often had more than one per household. I remember paying 5000 Dutch guilders (2200 euro in 1995 money) for a simple Philips MS-DOS based computer with 640*480 pixels and, what was it, 150 kByte floppy disk. That was largely for fun. The economy might be contracting, but we are not dead yet. Electricity will be one of the last things we will stop buying; new homes, furniture, holidays, cars go first. As long as your can pay the utilities, you can more easily pay for a loan for 4500 euro that will largely eliminate your electricity bill.

    The future’s going to be a cold, hard bitch… with a solar panel on your roof.

  8. BillT on Thu, 21st Mar 2013 12:52 pm 

    Hugh, I could not have said it better. Supposedly, there is 7 barrels of oil in the typical car. I would guess that it will take almost that much for any car as the engine will be replaced by a rare earth battery system that has a life of 10 years or less. Ditto for PV solar. Those panels do not have enough NET energy to reproduce themselves. Nor do those huge wind generators. At best panel owners have some electric for the life of the panel (20 years?) and by then they will not be available.

    Deniers don’t look at the TOTAL picture. A panel is the result of a global network of products from ores to the finished product. Then there is the financial system that makes all of that possible. And the actual corporation that makes them and distributes them. And the controls that convert the electric into the form needed, and the batteries if you want electric 24/7/365. And…on and on.

  9. Arthur on Thu, 21st Mar 2013 1:54 pm 

    “Those panels do not have enough NET energy to reproduce themselves. Nor do those huge wind generators.”

    Tiresome opinions backed up without a shred of proof. Tens of thousands of people world wide are working to make this technology work, yet a premature refugee, for a desaster that will not happen, pretends to know it all better, as he cannot let go of his role as a would-be Nostradamus of the Mother of all Catastrophes. The only desaster that can indeed happen (to you) is that the ATM in Manilla will say ‘out of service’, like in Cyprus these days, after a dollar crash, forcing you to take the first plane home, as your retirement money stops flowing, that enabled you to live as king in a third world country.

    Currently a wide ranges of eroei is cited in scientific literature, like here (5-38):

    The truth is that until now PV technology is NOT optimized for EROEI but for conversion efficiency (solar radiation into electricity). This is new technology and a lot of progress is still possible and likely, just like in a somewhat comparable technology IT solid state technology. EROEI values of 10 are feasible and good enough.

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