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A peak in conventional oil production is likely before 2030 and quite possible before 2020 [ClearOnMoney]
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A peak in conventional oil production is likely before 2030 and quite possible before 2020

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Commentary

A peak in conventional oil production is likely before 2030 and quite possible before 2020

28 Jun 2012 by Jim Fickett.

For investors, the main conclusions are that (1) we are unlikely to return to the days of much cheaper oil, and (2) the lack of strategy in dealing with the peak of conventional oil, together with the controversial environmental cost of unconventional sources will likely keep volatility of energy costs high. In other words, with cheap oil prices gone forever, there is a floor to protect investors, and with volatility likely to remain high, there will be opportunities to buy low and sell high.

Many discussions of peak oil involve little listening and much shouting by people with very different goals and assumptions. In August 2009 the UK Energy Research Centre produced a comprehensive set of documents evaluating data, assumptions, models, and scenarios behind predictions of peak oil; the UK ERC study seems to be quite objective, well-informed, and cautious not to jump to conclusions without very strong evidence.

This study was confined to conventional oil (i.e. no oil from shales, sands or bitumen). Their conclusion is that, although no one can predict exactly when the peak of production for conventional oil will occur, it is quite likely to occur before 2030. Considering that large project lead times in the energy industry are on the order of 10 years, and that the US, for example, has no clear energy strategy at all, that is not very far off.

Here are some key passages from the executive summary of the main overview report (Global Oil Depletion: An assessment of the evidence for a near-term peak in global oil production).

1. The mechanisms leading to a ‘peaking’ of conventional oil production are well understood …

  • … fundamental features of the conventional oil resource make it inevitable that production in a region will rise to a peak or plateau and ultimately decline. These features include the production profile of individual fields, the concentration of resources in a small number of large fields and the tendency to discover and produce these fields relatively early. … the peaking of conventional oil production can be observed in an increasing number of regions around the world.
  • Given the complex mix of geological, technical, economic and political factors that affect conventional oil production, anticipating a forthcoming peak is far from straightforward. However, supply forecasting becomes more reliable once access is available to the appropriate data and the range of ‘possible futures’ becomes more constrained once the resource is substantially depleted. This is increasingly the case at the global level.

2. Despite large uncertainties in the available data, sufficient information is available to allow the status and risk of global oil depletion to be adequately assessed. …

3. There is potential for improving consensus on important and long-standing controversies …

  • The distribution of conventional oil resources between different sizes of field is increasingly well understood. Although there are around 70,000 oil fields in the world, approximately 25 fields account for one quarter of the global production of crude oil, 100 fields account for half of production and up to 500 fields account for two thirds of cumulative discoveries. Most of these ‘giant’ fields are relatively old, many are well past their peak of production, most of the rest will begin to decline within the next decade or so and few new giant fields are expected to be found. …
  • Estimates of the recoverable resources of individual fields are commonly observed to grow over time as a result of improved geological knowledge, better technology, changes in economic conditions and revisions to initially conservative estimates of recoverable reserves. This process appears to have added more to global reserves over the past decade than the discovery of new fields and it seems likely to continue to do so in the future. …
  • Reserve growth tends to be greater for larger, older and onshore fields, so as global production shifts towards newer, smaller and offshore fields the rate of reserve growth may decrease in both percentage and absolute terms. …
  • The oil industry must continually invest to replace the decline in production from existing fields. The average rate of decline from fields that are past their peak of production is at least 6.5%/year globally, while the corresponding rate of decline from all currently-producing fields is at least 4%/year. This implies that approximately 3 mb/d of new capacity must be added each year, simply to maintain production at current levels - equivalent to a new Saudi Arabia coming on stream every three years.
  • Decline rates are on an upward trend as more giant fields enter decline, as production shifts towards smaller, younger and offshore fields and as changing production methods lead to more rapid post-peak decline. As a result, more than two thirds of current crude oil production capacity may need to be replaced by 2030, simply to prevent production from falling. At best, this is likely to prove extremely challenging.

4. Methods for estimating resource size and forecasting future supply have important limitations that need to be acknowledged.

  • The ultimately recoverable resources (URR) of a region depend upon economic and technical factors as much as geology and can only be estimated to a reasonable degree of confidence when exploration is well advanced. …
  • … given the potential for political, economic, or technological disruptions, no model can provide estimates [for the timing of peak production] of great precision. …

5. Large resources of conventional oil may be available, but these are unlikely to be accessed quickly and may make little difference to the timing of the global peak.

  • Contemporary estimates [for total ultimately recoverable conventional oil] now fall within the range 2,000-4,300 billion barrels (Gb), compared to cumulative production through to 2007 of 1,128 Gb. …
  • The timing of the global peak for conventional oil production is relatively insensitive to assumptions about the size of the global resource. For a wide range of assumptions about the global URR of conventional oil and the shape of the future production cycle, the date of peak production can be estimated to lie between 2009 and 2031. Although this range appears wide in the light of forecasts of an imminent peak, it may be a relatively narrow window in terms of the lead time to develop substitute fuels. … Delaying the peak beyond 2030 requires optimistic assumptions about the size of the recoverable resource combined with a slow rate of demand growth prior to the peak and/or a relatively steep decline in production following the peak.
  • Although more optimistic estimates of the global URR of conventional oil appear plausible, much of this is located in smaller fields in less accessible locations. If (as seems likely) these resources can only be produced relatively slowly at high cost, supply constraints may inhibit demand growth at a relatively early stage. Demand growth may also be constrained if the national oil companies that control much of these resources lack the incentive or ability to invest.

6. The risks presented by global oil depletion deserve much more serious attention by the research and policy communities. …

  • The short term future of oil production capacity, to about 2016, is relatively inflexible, because the projects which will raise supply are already committed. …
  • For medium to long-term forecasting, the number and scale of uncertainties multiply making precise forecasts of the timing of peak production unwarranted. Nevertheless, we consider that forecasts that delay the peak of conventional oil production until after 2030 rest upon several assumptions that are at best optimistic and at worst implausible. … On the basis of current evidence we suggest that a peak of conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020. Given the lead times required to both develop substitute fuels and improve energy efficiency, this risk needs to be given serious consideration.

[emphasis added]

A major limitation of the above study is that it covers only conventional oil. There is a large amount of unconventional oil in the world as well. For example, the Baker Institute of the University of Texas, in a paper entitled, THE STATUS OF WORLD OIL RESERVES: CONVENTIONAL AND UNCONVENTIONAL RESOURCES IN THE FUTURE SUPPLY MIX, says,

The assessment for technically recoverable unconventional oil is incredibly large at over 2.1 trillion bbls.

The existence of a possible large unconventional oil resource does not ensure long-term supplies at a reasonable cost. Instead, it introduces uncertainty. Since unconventional resources are largely uncharacterized and most experience has been with conventional resources, it is unclear what the financial and environmental costs of developing unconventional oil will be (though both will be higher than with most conventional sources).

It is fairly clear that the era of cheap oil is over, and that conventional oil is likely to peak fairly soon and to get more expensive. It is unclear how fast unconventional oil will be developed and how much of it can be developed at a reasonable cost. It remains very unclear how prices will change as production of unconventional oil ramps up.

For investors, the main conclusions are that (1) we are unlikely to return to the days of much cheaper oil, and (2) the lack of strategy in dealing with the peak of conventional oil, together with the controversial environmental cost of unconventional sources will likely keep volatility of energy costs high. In other words, with cheap oil prices gone forever, there is a floor to protect investors, and with volatility likely to remain high, there will be opportunities to buy low and sell high.