The Fallacy of ‘Easy Oil’

The Oil Council's July 2010 Edition of 'Drillers and Dealers'

There is one thing on which almost all pundits, industry veterans, forecasting agencies and members of the public seem to agree. Energy, particularly hydrocarbons, is going to get ever scarcer and more expensive. The “age of easy oil” is over.

Former Shell CEO Jeroen van der Veer opined in April 2008 that, “Easy oil and easy gas…is simply depleted” and that December, his unlikely soul-mate, Russian Prime Minister Vladimir Putin, concurred: “The era of cheap energy, including cheap gas, is coming to an end”.
Oil prices remain high by historic levels, and the continuing Macondo disaster in the Gulf of
Mexico seems to confirm the belief that the oil industry is venturing into ever more-challenging frontiers.

Business plans and economic projections are founded on the belief in the end of easy oil. It predicts a rosy future for the Middle East and Russia, drives growth in renewable energy and alternative vehicles, and leads many to worry about “peak oil”, resource wars and a collapse of industrial civilization.
But what if this belief is wrong?

Resources in the ground are clearly abundant. Canadian Association of Petroleum Producers Vice President Greg Stringham, pointing to the 175 billion barrels recoverable from the Canadian oil sands, says, “It won’t be a lack of resources that causes a shift away from oil. There’s lots of oil.” The United States Geological Survey recently updated their estimates for recoverable oil from Venezuela‟s Orinoco Belt to 513 billion bbl. Compare this to BP‟s estimate of some 1200 billion bbl of global conventional oil reserves.
Some shale formations, such as the US‟s Bakken and Eagle Ford, contain substantial amounts of oil and natural
gas liquids too, a form of unconventional oil which has emerged from nowhere in the past few years.

Traditional onshore light crude, though often inaccessible to the international oil companies, remains plentiful too. We might be skeptical of Iraq‟s plans to reach some 12 million barrels per day output by 2015, despite the assistance of Shell, Total, ExxonMobil, CNPC and others. The political, security and logistical challenges are clearly huge. But most industry observers agree that, in the longer term, the technical potential is there. Iraq‟s reserves are likely to increase substantially once the super majors start work, not to mention the almost unbroken string of discoveries in the Kurdistan region.

Next door, despite sanctions and mismanagement, exploration successes in Iran suggest substantial remaining potential: at least 21 billion bbl found since 1998 in four fields near the Iraqi border. Saudi Arabia has substantial spare capacity, while Kuwait and Abu Dhabi recently updated ambitious plans for production gains.

Non-OPEC is not slacking either. Despite high taxation, maturing fields, often outdated technology and a capricious legal environment, Russian production continues to creep up. Kazakhstan‟s long-delayed Kashagan field will finally come onstream around 2013 and yield more than 1 million bbl per day. Brazil‟s enormous pre-salt play continues to deliver new discoveries and is now moving into early production. At the same time, frontier exploration is finally yielding fruit, with major finds in Ghana and Uganda, and promising signs in areas such as Mozambique, the Falklands Islands and Greenland.

And we should not forget the potential of old fields. Global average recovery factors hover around 33%, but 50- 60% is often achieved in the North Sea and onshore USA, indicating a vast, low-risk prize for better reservoir management and more systematic use of enhanced oil recovery. Mature areas such as Colombia, Egypt and Oman are rebounding impressively from some years of decline.

Instead of fears that non-OPEC production had peaked, the IEA now sees output broadly flat to 2015. Admittedly, action following the Macondo blowout may hamper US deepwater production, but elsewhere in the world, higher safety standards are to be welcomed, and probably mean only moderately higher costs.

During the decade to 2009, stimulated by high oil prices, reserves increased in every region and by 23% overall, even excluding the undeveloped portions of the Canadian oil sands. Production growth, running at 1.1% annually during the 1990s, accelerated under the stimulus of Asian demand to 1.4% per year from 2000 up to the onset of the economic crisis.

As for gas, the success of US shales has demonstrated that fears earlier this decade of a shortage were wildly pessimistic. Led by technology, the industry was able to respond to high prices, and demonstrate that

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