Re: Energy Policy / Junk Science Environmentalism

From: Don Winterstein <>
Date: Sun Dec 18 2005 - 02:18:01 EST

By "inside information" I was thinking more of the kinds of things one might learn from interacting with entities such as governments, which the really large companies (Exxon, Shell, BP and Chevron) are sometimes able to do at a higher level than smaller companies. These executives (Don Paul, at least) are not unaware of what's been written about peak oil, but for some reason they seem wholly unperturbed if not dismissive. You write that executives of smaller companies are behaving similarly. They aren't stupid, but are they foolish? Is there a blind spot? Is there a conspiracy? In any case, in public they seem to have confidence that any crisis over oil production, if one is to come, is not imminent but maybe will come 10-30 years down the road.

You make quite a persuasive case for a sooner arrival, but it's hard to digest this and the apparent complacency of oil company executives at the same time. That's why I wonder whether they may know things not available to the public. If your scenario holds, I'd anticipate severe shortages and rationing within a decade or so. Such developments would drastically affect all oil companies, so if they're going to happen, companies had better be preparing now. I've heard about ramping up hiring, exploration, research and ventures into alternatives. Maybe this is all they can do. Along with buying up other companies!

Incidentally, rationing is not so far-fetched. Southern Californians experienced a form of it two years ago when electric utilities rotated power cuts. If there's not enough essential stuff for people to have all they want, then some higher authority is going to dole it out in such a way as to make sure everybody gets at least some of it. Have you figured effects of rationing into your investments? : ) Remember that price controls come with it.


  ----- Original Message -----
  To:<> ; '' ' ' Michael Roberts ' ' ''<> ;<> ; '' Tjalle T Vandergraaf ''<> ; 'Don Winterstein'<>
  Sent: Saturday, December 17, 2005 5:01 AM
  Subject: Re: Energy Policy / Junk Science Environmentalism

  At the Soc. Exploration Geophysicists meeting they had a session on this topic. They had the Chairman of Schlumberger, who said there was no problem and then launched into a boring advertisement about how great his company's software is. They had a VP of exploration with Exxon who joked that he didnt' want to contradict the Saudi's who were in the audience, and then he said there was no problem with future production. And then they had a VP with Apache who said, reserves go up every year, there is no problem.

  Now, the problem I had with all these guys is that they actually didn't discuss the issues of global finding rate vs global production rate. All of these guys have reasons not to tell the market that oil is running out. Who would invest in an industry whose product is going away? At least that is the way they think. On the other hand, I think it is the greatest opportunity I have ever seen. Let me just say that I am putting my money where my mouth is and I am very happy with the result.

    The reason I have fixated upon this is because of a law of mathematics. If you have a static pile of buttons, no buttons being added to the pile, you can't remove beans from a pile of buttons without the pile getting smaller. It is a hard and fast rule of nature. Whatever the the original 'pile' of oil was, effectively it is of unknown but fixed size. We have been removing oil from it at a rate which is so much higher than that which nature can replenish it.

  As to Don Paul, maybe he should pay attention to his own company's TV adds which point out (correctly) that we have burned 1 trillion barrels in the last 150 years. We will burn the next trillion in 33 years. Then he should look at global discovery rates (not global reserve revisions for existing fields) and then he will discover that we have been finding only 3-10 billion barrels of new oil per year. Let's see, in 33 years at an average rate say of 6 billion barrels we will have 200 billion, new oil but will have burned 1 trillion. THat means that we must depend upon old fields for 800 billion barrels.

  What is the status of the old fields? The Kuwaitis have announced that Burgan can no longer produce at 1.9 million bbl/day and must be reduced to 1.7 (That field represents 2.4% of global production). Cantarell, producing 2.1 million barrels per day will be drilled like crazy next year to maintain the production at 2.1 because there is a Mexican election late next year. But after that, the predictions for that field are grim. It is expected to drop to 1 million bbl/day in 2008. The additional drilling may make it drop there by late 2007. China's Da Qing, produces something like 1 million barrels per day (1% of the worlds oil) and it is on a 4% decline according to published reports in the west. And Ghawar is said to have anywhere from a 30-50% water cut (meaning that that percentage of the fluid which comes up the wells is water). The Saud's say it will produce another 100 million bbl, but they are scrambling to bring back online old fields that have already produced and been abandoned. You don't do that if you have lots of spare capacity. And the water cuts published are in line with the amount of oil that Texaco executives said Ghawar had--60 billion bbl rather than the SAudi absurd claim of 180 billion. If you really have 180 billion in a field, you don't start having 50% water cut when you have produced 1/3 of the reserves. Looking at that number and at the reservoir model the Sauds published (<>) it would appear to me that Ghawar will produce about 70 billion bbl. It has already produced 55.

   And remember,while we are depending on old fields the pressure drops and as that pressure drops, the flow also drops. If, as 90% of all global reserve estimates claim, the true reserves for the world is 2 trillion barrels of oil, if we have produced half of them, the pressures in those fields will begin dropping dramatically. When pressure drops, the rate of flow also drops. And while we may say on a TV that we will burn 1 trillion in the next 33 years, we really can't do that because the oil will no longer come out of the earth at a sufficient rate. I suspect it will take 60 years to burn the last trillion but that means that the production rate will not be sufficient to fuel the world. Why would one not think there is a problem?

  As to why I have focused on production rather than demand? Well clearly the fundamental place where the market will change is when demand outstrips supply, which is currently happening (although I expect changes in the way we live will reduce demand a wee bit next year and the price may weaken). One can't predict economic growth, which determines demand, quite as easily as one can predict the peak of oil production. Growth in demand is influenced by governmental policys, the whimsy of the tax structure, etc. THere are too many variables. But with production peak, that is easier to pick because it is a physical system. In such a circumstance, one should go to that which is easier to predict, and that is production.

  I will say this, no one should invest upon anything I say. I do not want to be responsible, but I am betting that oil prices will go higher because the world cannot long sustain the present daily production level. Certainly, there is no way the world will produce 100 million barrels per day. We are simply not finding enough new oil fields of sufficient size.

  I want to suggest that there is no such thing as 'inside' information in the sense that you are using it, meaning that they know where there is a secret stash of oil that will save our cookies. (at least that is how I interpret your comment on inside information). There is NO upside to hiding such a secret stash of oil. If you own it, then you want your shareholders to know about it so that they will pay more for your stock. If you don't own it, someone else does and they have the same issue. Just so you will know, for two years I held a similar position to what Don Paul holds for his company. Thankfully I am back to exploration. But I doubt he has any greater knowledge of the future or knowledge of secret stashes of oil than I have. Indeed, having managed exploration on 3 continents, now, I would suggest that I might have a better perspective than he. TEchnology posiitions rarely get into the issues like this.

  I would disagree with the concept that enough new supplies will come out of the woodwork as price rises, especially post peak. If that were the case, why did the production in West Texas not rise in the early 1980s when the price went way up. If technology were capable of pulling oil out of old fields at rates sufficient to fuel the world, why are all the old UK fields, like Murchison, Brent, Magnus, and others producing only about 5% of their peak production? Why isn't modern technology making them produce like they did when they were young? It all lies in the decrease in pressure and the increase in capillary pressure in the reservoir.

  On Sat Dec 17 2:19 , "Don Winterstein" sent:

    Glenn Morton wrote:

    "...Given that we are either at or within 2 years of peak production,...."

    A couple of weeks ago I once again asked Don Paul, a Chevron corporation vice president, about this. He said the peak would be in 10 to 20 years, and Exxon believes it will be in more like 30 years. He went on to say that there probably will be no catastrophic consequences, because as prices rise, demand will fall and incremental production from a variety of sources will come out of the woodwork to partially make up the shortfall. ("We've never been good at predicting demand," he said.) As the VP for technology, of course, he's more confident of (and more likely to promote) technological solutions than most of the rest of us. That's his job.

    I'd guess I'm sorta halfway between you and him. I also suspect he's not looked into this anywhere nearly to the degree that you have. Furthermore, he has an interest in promoting the market and longer-term stability, not constraining it and inciting alarm (as does also Saudi Arabia). Nevertheless, in his position he may have inside info that few others have access to, so I think he's at least worth listening to.

    Question: Why your emphasis on peak production? Won't serious consequences start as soon as demand significantly exceeds supply, whether or not peak production has arrived?

Received on Sun Dec 18 02:17:42 2005

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