Re: Dangers of peak oil

From: Rich Blinne <rich.blinne@gmail.com>
Date: Fri May 21 2004 - 22:48:02 EDT

On Fri, 21 May 2004 20:42:17 -0500, Glenn Morton
<glennmorton@entouch.net> wrote:
>
> I was notified by David Tyler, a friend and YEC with whom I argue all
> the time, that the science paper was coming out. I will order it on
> Monday. Of the following article, I wll make comments interspersed.
>

Here's a preview:

Oil: Never Cry Wolf--Why the Petroleum Age Is Far from over
Leonardo Maugeri

After World War I, the United States was shaken by predictions of the
exhaustion of domestic oil. Even the head of the U.S. Geological
Survey (USGS)--among many others--delivered a verdict of gloom in
1919: The country would run out of oil within 9 years! (1) Facing
mounting hysteria, President Coolidge set up the Federal Oil
Conservation Board in 1924, to draft legislation to preserve national
resources. After the conversion of Great Britain's naval fleet from
coal to oil in 1914, the UK also feared that it would be vulnerable to
oil shortages and moved to secure its grip on the Persian Gulf. These
cycles of hysteria followed by new bonanzas have continued to the
present. Thus, it is not surprising that a new wave of "oil doomsters"
predicting imminent petroleum scarcity has gained momentum (2-4).

The worst effect of this recurring oil panic is that it has driven
Western political circles toward oil imperialism and attempts to
assert direct or indirect control over oil-producing regions. Yet the
world is not running out of oil, and catastrophic views fail to take
into account the complex reality that will allow reliance on abundant
supplies for years to come.

[Note: picture of classical bell curve peaking around '72]
The Hubbert curve (United States). Bbl, billion (109) barrels.

The current model of oil doomsters is derived from K. M. Hubbert (5).
The model is conceptually simple, but based on several assumptions.
The first is that the geological structure of our planet is well known
and thoroughly explored, so that discovery of unknown oil fields is
highly improbable. Second, to resolve problems connected with erratic
distribution and production from thousands of oil fields and
uncertainty of future discoveries, production is assumed to follow the
"Central Limit Theorem" from statistics. This theorem states that the
sum of a large number of erratic variables tends to follow a normal
distribution and assumes a bell-shaped curve (see figure above).

Starting from zero, production grows over time until it peaks when
half of the recoverable resources have been extracted ("midpoint
depletion"). Then, production irreversibly declines at the same rate
at which it grew. The area under the curve shows the cumulative
production of an oil field or the "ultimate recoverable resources"
(URR) it holds and their life-span.

Accordingly, to forecast Earth's URR, one needs to process worldwide
production and discovery trends and geological data. In 1956, Hubbert
accurately predicted the peak oil production point of the U.S. lower
48 states.

The Hubbert curves do not delineate the complex and dynamic nature of
oil production and reserves in the world, because they are the product
of a static model that puts an unjustifiable faith in geology and does
not consider technology and cost/price functions. The model's success
in predicting U.S. peak production merely reflected the peculiar
nature of this area, which is the most intensively explored and
exploited in the world. Elsewhere, the pattern of production is not
rendered by a bell curve but is marked by large discontinuities (see
figure, below).

[Note: complex non-bell curve with general uptrend from 1960 - 1995
with spikes in '72 and '95 with a steep drop off and then somewhat
flattening out at 2002]

Historical behavior of oil production in Egypt (16).

Using different versions of the Hubbert model, several geologists have
made predictions in the last 20 years of an imminent crisis in oil
availability that subsequently had to be revised. The most eminent
among them is C. Campbell, who predicted that 1989 was the year of
"peak" production (6). The estimates have been increasing steadily
(see table, below).

SELECTED UPWARD REVISIONS IN PETROLEUM URR ESTIMATES
Petroleum URR (Bbl) (year)
Hubbert Campbell USGS
1350 (1969) 1578 (1989) 1796 (1987)
2000 (1973) 1650 (1990) 2079 (1991)
1750 (1995) 2272 (1994)
1800 (1996) 3021 (2000)
1950 (2002)
 

Before looking at the real-world situation in more depth, it is
necessary to clear up some points, beginning with the distinction
between "resource" and "reserve." The former indicates the overall
stock of a mineral in physical terms, without any associated economic
value and/or estimation of its likelihood of being extracted. In other
words, there may be large quantities that can never be used because of
the high cost or the impossibility of recovery, as in the case of the
gold dispersed in the oceans. The concept of "reserves"--like that of
"recoverable resources"--involves an economic assessment of the
possibility of producing a part of the overall resources. In the oil
sector, there are additional definitions--the most important being
that of "proven reserves," which include only those that can be
economically produced and marketed at the present time according to
existing technologies and demand. Nearly all of the estimates of the
world's oil URR, including those by oil doomsters, do not take into
account the so-called "nonconventional oils"--such as Canadian
tar-sands and Venezuelan and Russian heavy oils--even though the
availability of these resources is huge and the costs of extraction
falling.

Although hydrocarbon resources are irrefutably finite, no one knows
just how finite. Oil is trapped in porous subsurface rocks, which
makes it difficult to estimate how much oil there is and how much can
be effectively extracted. Some areas are still relatively unexplored
or have been poorly analyzed. Moreover, knowledge of in-ground oil
resources increases dramatically as an oil reservoir is exploited.

For example, the Kern River field was discovered in California in
1899. Calculations in 1942 suggested that 54 million barrels remained.
However, in 1942 "...after [43] years of depletion, 'remaining'
reserves were 54 million barrels. But in the next [44] years, it
produced not 54 but 736 million barrels, and it had another 970
million barrels 'remaining' in 1986. The field had not changed, but
knowledge had...." (7). This is but one of hundreds of cases reported
in oil-related literature that underscore the inherently dynamic
nature of oil reserves. As Klett and Schmoker have recently
demonstrated, from 1981 to 1996 the estimated volume of oil in 186
well-known giant fields in the world [>0.5 billion (109) barrels (Bbl)
of oil, discovered before 1981] increased from 617 to 777 Bbl without
new discoveries (8). Indeed, many studies have proved the phenomenon
of "reserve growth"--i.e., that "additions to proven recoverable
volumes are usually greater than subtractions" (8). This occurs
because of four fundamental elements: technology, price, political
decisions, and better knowledge of existing fields--the last of these
being possible only through effective and intensive drilling.

We anticipate that this trend will continue. Consider, for example,
the most recently discovered oil frontier in the world, Kazakhstan,
and its major finding--the gigantic Kashagan field. Geological
estimates about the general area around Kashagan (the Kazakh North
Caspian Sea Shelf) have existed for decades, but they only indicated
the possibility of hydrocarbon deposits. After the first advanced
geological appraisal was conducted by international oil companies in
the second half of the 1990s, the area was deemed to hold between 2
and 4 Bbl. In 2002, after completion of only two exploration and two
appraisal wells in the Kashagan field, estimates were officially
raised to 7 to 9 Bbl of producible reserves. In February 2004, after
four more exploration wells in the area, they were raised again to 13
Bbl. This is only the beginning, because this area spans over 5500 sq
km, and six exploration wells are a modest indicator of future
potential. Moreover, there are many other oil fields yet to be
explored in this area (including Kairan, Aktote, and Kalamkas), that
have a geological structure similar to that of Kashagan.

Thanks to new exploration, drilling, and recovery technology, the
worldwide finding and development cost per barrel of oil equivalent
(boe) has dramatically declined over the last 20 years, from an
average of about $21 in 1979-81 to under $6 in 1997-99 (in 2001
dollars) (9). At the same time, the recovery rate from world oil
fields has increased from about 22% in 1980 to 35% today. All these
factors partly explain why the life-index of world reserves (gauged as
the ratio between proven oil reserves and current production) has
constantly improved, passing from 20 years in 1948 to 35 years in 1972
and reaching about 40 years in 2003. Today, all major sources estimate
that proven world oil reserves exceed 1 trillion (10^12) barrels,
while yearly consumption is about 28 billion barrels (10-13). Overall,
the world retains more than 3 trillion barrels of recoverable oil
resources (14).

Critics could note that new oil discoveries are only replacing
one-fourth of what the world consumes every year (following a
declining trend that began in the mid-1960s), and that increases in
reserves largely derive from upward revisions of existing stock.
However, the real issue is that neither major producing countries nor
publicly traded oil companies are keen to invest money in substantial
exploration campaigns. The countries richest in oil have minimized
their oil investments during the last 20 years, mainly for fear of
creating a permanent excess capacity such as that which provoked the
crisis in 1986 (when oil prices plummeted to below $10/bbl). In fact,
countries such as Saudi Arabia or Iraq (which together hold about 35%
of the world's proven reserves of oil) produce petroleum only from a
few old fields, although they have discovered but not developed more
than 50 new fields each. Moreover, in countries closed to foreign
investments, the technologies and techniques used are, in most cases,
obsolete.

Nevertheless, international public oil companies have faced two sets
of limits to their expansion in the last 20 years. The first is
inaccessibility to foreign investment in the largest and cheapest
reserves--those in the Persian Gulf. Second are the demands of
financial markets, which for years have insisted that companies
provide unrealistic, short-term financial returns that are
inconsistent with the long-term nature of oil investments. This has
compelled private operators to reject opportunities that would
normally be deemed economically worthwhile. This financial pressure
partly explains recent proven reserve downgrading by some oil
companies, starting with the amazing cuts announced by the
"supergiant" Shell Group (15). Indeed, this Anglo-Dutch oil company
has not lost its resources. This picture has nothing to do with
physical scarcity of oil.

The Age of Coal began when declining supplies of wood in Great Britain
caused its price to climb. Two centuries later, oil took the place of
coal as "the king of energy sources" because of its convenience and
its high flexibility in many applications, but coal was neither
exhausted nor scarce. Oil substitution is simply a matter of cost and
public needs, not of scarcity. To "cry wolf" over the availability of
oil has the sole effect of perpetuating a misguided obsession with oil
security and control that is already rooted in Western public
opinion--an obsession that historically has invariably led to bad
political decisions.

Notes:

1. D. Yergin, The Prize: The Epic Quest for Oil, Money, and Power
(Simon & Schuster, New York, 1991), p. 194.

2. "The end of the oil age," The Economist, 23 October 2003, pp. 11, 61-63.

3. D. Goodstein, Out of Gas--The End of the Age of Oil (Norton, New
York, 2004).

4. Deutsche Bank, "Hubbert's pique," Global Energy Wire, June 2003.

5. K. M. Hubbert, "Nuclear energy and the fossil fuels," in Drilling
and Production

6. Practice series (American Petroleum Institute, Washington, DC, 1956).
C. Campbell, Oil Price Leap in the Early Nineties (Noroil,
Kingston-upon-Thames, UK, 1989).

7. M. Adelman, The Genie Out of the Bottle (MIT Press, Cambridge, MA, 1995).

8. T. R. Klett, J. W. Schmoker, AAPG Memoir No. 78, 107 (2003).

9. International Energy Agency, World Energy Outlook 2001 Insights
(Organization for Economic Cooperation and Development/IEA, Paris,
France, 2001).

10. Oil Gas J. (December 2002).

11. Eni--World Oil and Gas Review (May 2003).

12. BP's Statistical Review of World Energy 2003 (British Petroleum,
London, June 2003).

13. World Oil (August 2003).

14. USGS, World Petroleum Assessment 2000 (USGS, Washington, DC, 2000).
PIW (Petrol. Intell. Wkly.), 19 January 2004.

15. M. A. Adelman, M. C. Lynch, Natural Gas Supply to 2100 (International Gas

16. Union, Hoersholm, Denmark, 2002).
Received on Fri May 21 22:48:29 2004

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