The Sceptical Observer

1
The Sceptical Observer

• Does reality accord with theory in the oil
  depletion story?

2
Who am I and what knowledge do I bring?

• A lifetime working in the industry
• Half the time as an oil journalist
• Editing Petroleum Times, Petroleum Economist and
  now Petroleum Review
• The other half as a planner and analyst for BP
  and for the Saudis in London
• Old enough to have seen the 1st and 2nd oil
  crises and experienced the impact at first hand

3
What does a journalist bring to the problem?

• Free of corporate pressure
• Free of political pressure
• A healthy scepticism
• Access to lots of information

4
Meeting Dr Colin Campbell

• In 1995 it all seemed pretty fantastic
• Tried hard to prove him wrong
• Have failed for 9 years
• Now think hes a bit of an optimist

5
Now, theory is nice

• But
• What is actually happening?
• What are the oil companies really doing?
• What does the data actually tell us?
• How long do projects really take?
• How fast can things change?

6
The UK North Sea a clear warningof just how
fast depletion impacts

• In 1999 it grew by 3.58
• But in 2000 it fell by 8.15
• And in 2001 it fell by 6.81
• But in 2002 it fell by just 0.52
• But in 2003 it fell by 8.85
• And in 2004 (so far) it is 10-11 down

7
Peak oil is counter intuitive

• No need to panic when the jam pots half full but
  halved oil reserves crimp supply
• Bucket with holes
• Ancient plumbing
• Strawberry fields
• 1973 and 1979 - contrived shortages

8
Most economists deny depletion but have little
useful to say

• It doesnt fit with their theories
• But economics is reactive Not predictive
• Economics ignores time lags in responses
• Supply and demand will always balance, but the
  price might be disastrous.
• Substitution is thought to be the key

9
This economists observation

• High prices simply signal that more supply is
  needed and may be profitable or that substitutes
  may be attractive and profitable. Economists
  effectively believe a rapid supply response is
  always possible and that constrained supply
  cannot occur for any significant length of time
• But new supply may not be available (failure to
  discover)
• Or it may take a long time to materialise
  (extended project times)
• Or all the substitutes may be uneconomic (wind,
  solar, PV) or environmentally unacceptable
  (nuclear, coal)
• Then all economics and economists can tell you is
  use up all the oil while the going is good.

10
So how are the oil majors doing on production?

• Keeps promising production gains
• Keeps talking about Russia, deepwater
• But, output mostly flat in last 5 years
• Still they keep reporting bigger reserves (with
  some setbacks)
• So how is this magic achieved?

11
Alaskan North Slope Production
12
The Three Wise Monkeys?

• see no depletion.

• The Oil Companies -
• Governments and International Agencies -
• And all agree it would be best to -

• hear no depletion.

• speak no depletion.

13
The Data Providers - All faulty but in different
ways

• The IEA - a victim of politics
• The EIA - a victim of optimism
• The USGS - an academic answer to a practical
  question
• IHS -knows the answer for 1million
• Oil companies - lots of data and some of it is
  true (honesty of the stock option holder)

14

Three reasons for denial

• Do you really want to
• Kill your career?
• Head the redundancy list?
• Be blamed for starting the panic?

15
The first depletion experienceNorth American
gas supply

• US and Canadian gas production now falling by
  4/year
• Prices at three times the 1990s average
• Government is in denial
• LNG the salvation? But few permits and ports, so
  2006/07 before much arrives
• Tar sands and Northern pipelines?

16
Back to oil - The drama of 2003

• Production increased by 2.7mn b/d (3.8)
• The third biggest gain on record
• New capacity around 1.2-1.5mn b/d
• Outright depletion 1.1mn b/d
• Drawing down spare capacity and stocks
• By around 1mn b/d

17
The drama of 2003 (continued)

• On the four previous production surges
• Opec had significant spare capacity
• Depletion affected only 1 or 2 countries
• In 2003 around18 large producers in decline
• Lost production some 1.14mn b/d (4.9)
• So the other 32 had to expand by 3.82mn b/d or
  7.5
• Is this actually sustainable?

18
Oil - The drama of 2004

• Latest oil growth estimate is 2.6mn b/d
• This is 3.3, the fourth highest on record
• In Nov 2003 the estimate was 1.4mn b/d
• Why so wrong? China, India, depletion?
• But the effect is there is now no spare, turn on,
  capacity anywhere
• All additional demand needs new capacity

19
The resolution so far in 2004

• WTI Crude. Last 12 Months.

20
Oil - the simplest business modelBut, new supply
poses challenges

• Two gigantic problems - the scale of the
  investment and very long project times
• We just need to look at finding, evaluating and
  developing

21
Finding oil or rather not finding it

• No one goes looking for small fields
• Looking everywhere but finding less
• Companies can destroy value by looking
• A probability game rather than treasure hunting
• If no discovery then no future production

22
Worse to come - dwindling discovery

• In 2000 there were 16 discoveries of oil and gas
  of over 500mn boe
• In 2001 there were 9
• In 2002 there were just 2
• In 2003 there were 9, oil-dominant in 6
• In 2003 70 of discovery was in 200 metres of
  water but 65 in 1000metres

23
Evaluating and dreaming

• Whats left in - North Sea, GoM, Angola, Brazil,
  Caspian area
• Hoping for more success in Central Asia
• Dreaming of access to Mexico and Saudi
• Praying for better terms from everyone
• Hoping for access to the largest, cheapest,
  undeveloped reserves on the planet Iraq

24
Mega-projects - new productionThe fat years
2003-2007

• 2003 - 10 projects - peak 1.2 million b/d
• 2004 - 16 projects - peak 1.2 million b/d
• 2005 - 17 projects - peak 2.5 million b/d
• 2006 - 19 projects - peak 2.9 million b/d
• 2007 - 11 projects - peak 2.9 million b/d
• Depletion will cost 1.1-1.4 million b/d/yr

25
Mega-projects - new productionThe lean years
2008-2012

• 2008 - 8 projects - peak 1.6 million b/d
• 2009 - 3 projects - peak 1.7 million b/d
• 2010 - 2 projects - peak 0.86 million b/d
• 2011 - 2 project - peak 0.2 million b/d
• 2012 - 1 project - peak 0.2 million b/d
• Depletion now faster 1.4-1.7 mn b/d/yr

26
Key discoveries - Tomorrows Mega-Projects

• 30 projects listed
• 11 in Middle East, 8 in Russia, 5 in Caspian,
  Canada 2, 4 other
• Typically 6 years discovery to first oil
• Only onshore (18) onstream before 2008
• More likely 2010 onwards

27
But what about gas?

• Lots of gas outside North America
• Lots of LNG and some GTL coming onstream
• Most has a market so doesnt substitute oil
• Fairly hard to switch fuels
• Easy substitutions have all been done
• UK more gas than oil in fuel mix

28
What about tar sands/heavy oil?

• Current - 1mn b/d tar sands, 0.6mn b/d Orinoco -
  just 2 of global production
• No new Orinoco projects at moment
• Tar sands growing slowly - to double by 2015
• Unlikely to reach 4 of total oil by 2020
• Nice to have but little more

29
What about alternatives?

• Oil has the greatest energy density of any fuel
  known to man, apart from nuclear
• This means all alternatives are inferior
• You can cook sausages by collecting and burning
  straw but you may use more calories collecting
  the straw than you get by eating the sausages
• The energy cost of energy

30
A crisis in less than 4 years?

• If the economic recovery continues
• Supply will get very tight from 2008/9
• Prices will soar
• Theres very little time
• There are lots of heads in the sand
• Governments will be blamed

31
Future oil supply -- a tightening cap on economic
growth?

• Oil demand in 03 grew 3.8, in 04 by 3.3
• Supply
• In 2005 1.7-2.1 will be possible
• In 2006 2.0-2.5 will be possible
• In 2007 1.8-2.3 will be possible
• In 2008 0.3-0.4 is all that is possible
• In 2009 0.4-0.5 is all that is possible
• After 2010 oil supply growth will be negative

32
So what can be done?

• Invest to boost production and slow depletion
• Increase use of alternative blendstocks,
  preferably renewables
• Ensure government has the relevant powers and
  controls for when the going gets rough (Remember
  the UK fuel dispute)
• Boost energy efficiency by every means
• Start planning now

33
Contact

• Chris Skrebowski
• Editor, Petroleum Review
• cs_at_energyinst.org.uk
• 44 (0)20 7467 7117