A book that I have read and highly recommend is Twilight in the Desert by Matthew Simmons, who was a Houston-based analyst and investment banker in the energy field for several decades. He died last year. He is best known for championing the ‘Peak Oil’ thesis, which was first broached by M. King Hubbert, a U.S. geologist, who accurately predicted that U.S. oil production would peak in the early 1970’s.
The World Beyond ‘Peak Oil’
Using Mr. Hubbert’s work, others, including Mr. Simmons, have predicted that global oil production would peak around 2005-2010, or, perhaps, effectively, soon after. Any extra production would have to come from either: unconventional sources, such as oil sands or other heavy deposits, or oil shale; deepwater or arctic frontier plays; or by using extraordinary enhanced oil recovery (‘EOR’) methods in existing fields, wells or formations, perhaps to the extent of overproducing and damaging these older, or ‘legacy,’ conventional reservoirs.
It was Mr. Simmons’ contention, using what he could glean from publicly released material from Saudi Aramco (which was taken over entirely by the government of Saudi Arabia in the late 1970’s, and afterwards became secretive and did not — and does not — allow independent verification or appraisal of the magnitude or nature of its oil and gas reserves), that Saudi oil production, and most of the Middle East’s production, had peaked already by around 2000.
Simmons surmised that any further increases they showed were unsustainable, and actually the result of almost heroic and increasingly expensive EOR methods, whose marginal increases in production for increased expenditure were declining as well as damaging to the huge reservoirs, such as the immense Gawar field, several decades ago.
Natural rates of decline in producing oil fields range from 3-15% per annum, typically 5-10%, with some gains coming from the use of EOR, which can substantially lower the natural decline rate. Attempts to simply pump out more oil faster will bring up the water level laying below the oil, and increase the mix of water in the crude oil that comes out, making it less and less economic. Unfortunately for the arid Arab lands, the water is saline or otherwise contaminated, so it does not have any positive value.
Mr. Simmons also implied that the Saudi government is lying about its reserves, and has been for many years. This was recently seconded by a damning report out of Goldman Sachs (GS). It is certainly suspicious that Saudi Aramco claims to exactly replace its reserves produced each year, which no other company does consistently — they either drop or increase.
Another thing Mr. Simmons said that is being confirmed is that most additional production in Saudi Arabia, and elsewhere, is heavier, and more ‘sour’ (sulfur-containing) crude, which is lower value, as it is more expensive to refine and catalytically ‘crack’ to yield higher value gasoline and diesel fuel, rather than asphalt and fuel oil. It is also more expensive to send by pipeline, as it sometimes requires ‘diluent,’ such as natural gas liquids (‘NGLs’) or heavier liquid petroleum gases (‘LPGs’, effectively, the equivalent) to make it flow more easily. The oil from Canada’s oil sands, if not upgraded, also sells at such a discount to West Texas Intermediate (WTI) and (North Sea) Brent, which are the standards, traded on NYMEX and London, respectively.
Where Is the ‘New Oil’ Coming From?
Most of the increase in production that has come in total oil produced worldwide in the past ten years or more have come from three sources: previously underdeveloped or neglected regions such as Russia, Central Asia, and Africa; deepwaters in the Gulf of Mexico, offshore Brazil and a few other places; and really unconventional places, like the oil sands of Canada, Venezuela’s heavy oil deposits, and, most dramatically, the shale gas formations in North America, which also contain liquids.
Some of the exciting new discoveries offshore and in frontier areas like tropical Africa are large but expensive, are taking a long time to ramp up to full production — such as the deep salt sites offshore Brazil — and will only replace the declining production elsewhere, while demand in China, India, and Africa relentlessly increases. In the sense that the only net increase in production has come from heavy oil, oil sands or EOR, then indeed Peak Oil has really come to pass.
It is also little known that U.S. domestic oil production has actually increased in the past several years, partly or sometimes mainly as a consequence of the exploitation of shale gas formations, and the oil and liquids that go along with them, and partly from the Gulf of Mexico (the latter now drastically curtailed in the regulatory caution following the Deepwater Horizon blowout at the Macondo well drilled by BP (BP) in April, 2010).
The oil companies’ exploration methods have improved greatly in the past twenty to thirty years, and they are able to ‘tweak’ their efforts to accentuate the exploitation of shale gas reservoirs within the larger formations that are more ‘oily,’ if natural gas prices are considered too weak to sustain the cash flows necessary to reinvest in replacing and increasing production. Chesapeake (CHK), EnCana (ECA) and EOG Resources (EOG) are doing this, I believe. They are also prudently using hedging to protect their production costs, at the least. That their efforts to build value are appreciated by other firms in the industry is attested to by the partial sale of assets by EnCana and Chesapeake, and the outright sale of XTO Energy to ExxonMobil (XOM) last year.
In the short term, there is indeed, a ‘shortage’ of light, sweet, easily produced crude oil. However, there is an abundance of heavy, sour, and more expensive crude. We will never run out of it.
Canada’s reserves are not the ~150 billion bbl that the IEA and API state; that is just the amount exploitable and recoverable with current technology at current (actually, much lower than current) prices. The total amount of Canadian oil sands, in all four formations, is over 3 Trilion bbl. That is no typographic error. For every rise in prices, more of it becomes attractive and economically feasible to exploit.
There are only three or four large plants that use the mining extraction method, which send the oily sands to a steam plant to separate out the oil and deposit the slightly contaminated residue in tailings dikes.
The other main method is called ‘Steam-Assisted Gravity Drainage’ (‘SAGD’), which drills holes down to the oily layer, injects steam, and via other drilled holes pumps up the now-flowing oil. This is less injurious to the surrounding environment, less of a potential hazard to groundwater and wildlife, and, in many respects, more economical and less labor-intensive. Both main methods use a lot of energy, much of it natural gas. That is what makes the radical increase in shale gas reserves and production VERY interesting.
(Part 2 of this feature will be published later today.)
By: Ian Madsen