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Don’t Count on Revolution in Oil Supply

Production

This is a guest post by Sadad al-Huseini, now a petroleum consultant and formerly executive vice president of Saudi Aramco for exploration and production, and is a response to the recent article in PIW (Petroleum Intelligence Weekly) by Leonardo Maugeri on his new study Oil: the Next Revolution, challenging his optimism about future oil supplies (PIW Jul.2’12). This article originally appeared in the July 23, 2012 edition of PIW.

Leonardo Maugeri’s recent paper Oil: The Next Revolution on the presumed future abundance of oil supplies rejects the pessimistic outlook of limited increases in oil capacity over the next decade. It suggests global oil capacity will exceed 110 million barrels per day by the end of the decade, putting an immediate end to concerns regarding constrained long-term oil supplies. This conclusion is based on an assessment of new projects with a reported capacity of 49 million b/d before a downward adjustment to 29 million b/d to allow for completion risks and reserves depletion. Maugeri holds two PhDs, one in Political Science and one in Economics, and has extensive executive experience with ENI in strategies and developments and in petrochemicals.

In putting forth this optimistic thesis, Maugeri apparently sets aside a variety of technical realities, including the difference between natural gas liquids (NGLs) and conventional oil, reserves depletion versus capacity declines, and proven reserves as opposed to speculative resources.

The report mixes NGLs, which feed petrochemicals and domestic or industrial fuel applications, with conventional oil, which is the main source for transportation fuels. When fractionated, NGLs yield propane, butane and light naphtha. These products cannot replace oil distillates such as gasoline, diesel or jet fuel.

For example, NGLs grew from 7 million b/d in 2003 to an estimated 12 million b/d in 2011 but provided no relief to the demand for transportation fuels, which was surging across those years. The growth in NGLs is now forecast by the IEA to reach an ambitious 20 million b/d by 2030. Impressive as this may be, NGLs will remain at best marginally relevant to transportation applications until widespread changes occur in the technology and infrastructure of the auto and trucking industries. Given cost and complexities, there is no evidence that this is likely to happen within this decade.

In regard to capacity declines, the report appears to confuse oil reserves depletion with capacity declines. In the world of petroleum engineering, depletion quantifies residual reserves in the ground, while declines define a reservoir’s ability to sustain a given level of production over time. Incremental reserves in modern discoveries are added early in a discovery’s life while production declines are a subsequent development related to reservoir factors including changing fluid compositions and diminishing reservoir energy. Maugeri’s suggestion that incremental reserves may offset capacity declines mixes up speculative exploration variables with reservoir engineering realities.

The report takes exception to the IEA’s 2008 estimate of an average 6.7% global oil capacity decline and offers an equivalent estimate of less than 2% per year. This low estimate is apparently based on the observation of historical production rates from major oil producing countries. It is not clear how the author extracted the convoluted effects of offsetting market volatility, spare capacity utilization, natural production declines, and ongoing new capacity investments from such historical trends.

The IEA’s 2008 study, on the other hand, applies well-established petroleum engineering principles to 800 post-peak fields that make up the majority of global oil supplies. The natural decline rates of these fields were reported to average 3.4% for 54 supergiant fields, 6.5% for scores of giant fields and the 10.4% decline rate for hundreds of large fields. At the IEA’s 6.7% level of capacity declines, the current 74 million b/d of conventional oil supplies (which exclude NGLs, biofuels, nonconventionals and various other liquids) would require 5 million b/d of supplemental new capacity annually just to maintain a flat level of supply. Based on these assessments, Maugeri’s 29 million b/d of “risked” new capacity would only replace declines through 2017. Even the full 49 million b/d of new projects would only extend current liquids production on a flat trajectory to 2021.

In regard to global oil reserves, the Maugeri report highlights the opportunity to convert trillions of barrels of unconventional oil resources into proven reserves. This is hardly a simple process, as he points out, given the realities of technical, environmental and economic challenges. Industry studies based on the IEA’s published upstream oil and oil equivalent projects have shown that the capital cost of Canadian bitumen and Qatari GTL projects have averaged $97,000 per barrel of capacity. Had these prohibitive economics been otherwise, the resources alluded to in the Maugeri report would have entered into widespread development many years ago.

In regard to reserves growth and revisions to current estimates, the report needs updating. Leading oil producers only apply a low recovery factor of 20%-25% in those instances when this is in fact the limit to potential oil recoveries. On the other hand, major OPEC and non-OPEC producers frequently invoke 40%–50% recovery factors based on IOR and EOR technologies deployed within their operations or elsewhere in the world. In some advanced operations, reserves are actually estimated by complex reservoir modeling and simulation techniques which apply different production rules and investment strategies over time, not by average recovery factors.

Finally, the “explosion” in US oil shales and tight sands, which is assessed to grow to over 4.7 million b/d by 2020, is indeed a great technical and commercial success story. It is a welcome development given the constrained outlook for global oil supplies and the US’ own consumption of 18.5 million b/d of oil and oil equivalent liquids.

Maugeri’s report is right to emphasize the many risks that confront the energy industry today. Although national and international oil companies are doing the best they can to increase oil supplies, they are often operating in the shadow of profound technical challenges, adverse political restrictions and severe financial hurdles.

Not surprisingly, many oil executives have stated publicly that incremental oil supplies are now in a precarious balance with capacity declines and will remain so for years to come.

Much as all the stakeholders in the energy industry would like to be optimistic, it isn’t an oil glut by 2020 that is keeping oil prices as high as they are. It is the reality that the oil sector has been pushed to the limit of its capabilities and that this difficult challenge will dominate energy markets for the rest of the decade.

The Oil Drum



13 Comments on "Don’t Count on Revolution in Oil Supply"

  1. BillT on Wed, 22nd Aug 2012 2:00 pm 

    What is possible in the lab seldom works out in the field. What is theoretically possible is seldom possible in the real world. If it were, the oceans would be mined for the many resources floating around in the water. More gold than has ever been mined is swirling around the planet every day. Ditto most other metals and minerals.

    “Maugeri holds two PhDs, one is Political Science and one in Economics,”

    That says it all. Both are not real science or even logical. Something like a doctorate in tea leaf reading with a minor in astrology. Worthless, except to impress the even more ignorant.

  2. SOS on Wed, 22nd Aug 2012 2:18 pm 

    What works in the lab seldom works in the real world? Nonsense. There is no shortage of recoverable energy, no matter how the author attempts to confuse. There is however a political effort to create and maintain conventional energy shortages. Money that could have gone to poor people, education, space research, the national debt, etc etc has been wasted on projects like Solindra. That was a political transfer of wealth from you, if you are a taxpayer, to Obama supporters. That is the real value of alternative energy: political favoritism.

  3. Newfie on Wed, 22nd Aug 2012 2:54 pm 

    Dream on, SOS.

  4. WhenTheEagleFlies on Wed, 22nd Aug 2012 5:58 pm 

    SOS is right. The U.S. needs to stop aiding the development of wind and solar power and instead put that money toward the development of a giant crowbar that can be used to pry the earth’s mantle apart so that an endless gusher of oil can ooze from the earth’s core up to its crust, hopefully, at the surface location of Cushing, OK.

  5. Kenz300 on Wed, 22nd Aug 2012 6:45 pm 

    A monopoly is only good for the monopoly and not good for the consumer. It is time to end the oil monopoly on transportation fuels. We need to diversify our energy types and sources.

  6. Arthur on Wed, 22nd Aug 2012 8:03 pm 

    Ummm SOS, this is said by formerly executive vice president of Saudi Aramco for exploration and production. Formerly, meaning no longer obliged to conform to company information policies.

  7. Arthur on Wed, 22nd Aug 2012 9:01 pm 

    For SOS, Howard Kunstler about fracking:

    http://www.youtube.com/watch?v=NtZFtnsWDRc

  8. SOS on Wed, 22nd Aug 2012 11:42 pm 

    Saudia Arabia has little interest in telling you the truth. Propaganda perpetuated against fracking is a natural political reaction from those whose interests are not in line with affordable energy and all the benefits accrued by adequate supplies.

    Peak politics causes peak oil. There are no physical constraints preventing adequate energy supplies only political restraints.

  9. SOS on Wed, 22nd Aug 2012 11:48 pm 

    Ps. Kunstler is is full of misinformation and half truths. Truly a poor reference for you to present.

  10. BillT on Thu, 23rd Aug 2012 1:00 am 

    SOS is just one of those people who like to make people think he knows something by opening his mouth and putting his foot in it.

    When the financial system crashes, so will all of these expensive, destructive resource grabs. There will not be any fools to ‘invest’ in their losing methods, whether it be fraking, deep sea wells in the Arctic or wars.

    Obviously SOS thinks that government is the problem. Well, it is, but not the way he thinks. There should be far more regulations and over-site in the recovery of oil and natural gas. The fools think they can do anything to get the stuff and make a profit. Maybe it’s time the government nationalize the petroleum industry and take the profits? End of story…

  11. SOS on Thu, 23rd Aug 2012 8:51 pm 

    The financial system did crash in 2008. Its crashed before that too, several times in the 1900s. Did the world end?

    The concern surrounding regulation has to do with the vindictive nature of the current administration. The purpose of government regulations should be to work hand-in-hand with industry and commerece to maximize production assuring our natural resources are efficiently and effectively developed. This assures all Americans greater wealth in almost every way you can imagine.

    One of the things to think about is an energy independent America. Say by 2020 we could have it all in place. It will of course require input and expansion in all viable energy sectors as well as continuing research and development. its also going to require ongoing efforts to imporve overall efficiency of use (conservation). One of our candidates for president is supporting such a plan. I wonder which one?

  12. BillT on Fri, 24th Aug 2012 1:23 am 

    Sorry SOS, but when it goes this time, it will NOT come back…at least not in a capitalist form you would recognize…lol. You are obviously a big petro pimp who wants to blame it all on someone else.

  13. BillT on Fri, 24th Aug 2012 1:25 am 

    BTW:SOS, an “energy independent” America is not going to happen in your life time…unless we collapse back to the 1800s. You live in a fantasy world if you believe that it can happen like you say.

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