Hydrocarbon Man - The End is Nigh
Fig 1. Norway Creamin Curve
Fig 2. Paracolic Fractal
Fig 3. Peak Correlation
Fig 4. Future production of all Hydrocarbons
Click for larger image
The Imminent Peak Of Oil Production And Its Consequences
By C.J. Campbell, Petroplan Inc.
The first observation, which even the 'flat-earth' economists have difficulty in denying, is that you have to find oil before you can produce it. Discovery is the all-important event, even if at first you do not know exactly how big a fish you have caught. It seems so obvious yet few analysts relate their pronouncements on future oil production and price to the underlying discovery trend. One reason may be that it is much easier said than done because the public domain database is so thoroughly unreliable. The task is difficult but not impossible, if we start by asking three simple questions:
The most difficult is the third question because the hydrocarbon family is a large one, each member having its own endowment in Nature, its own characteristics, costs and above all depletion profile. Most oil produced to date comes from a group of hydrocarbons which, for want of a better word, can be termed Conventional. It has been relatively cheap, easy and above all fast to produce. The rest can be termed Non-conventional and comprises:
Non-conventional hydrocarbons are, for the most part, expensive and slow to produce, meaning that they can have no more than a minimal impact on the date of world peak production. In addition, we have to deal with Natural Gas Liquids (NGL), which comprise condensate, which condenses from gas on being brought to the surface, as well as the liquids that may be extracted from gas by processing. They belong to the gas domain, but are often metered with oil, confusing the statistics and analysis.
Since peak production will be driven primarily by Conventional Oil, the first task is to determine how much it can contribute.
Answering the How Much? question involves determining of Cumulative Production to the reference date and what is left to produce from known fields, namely the Reserves. Measuring Cumulative Production involves nothing more than reading the meter, yet there is a wide range in published numbers, especially in the case of the OPEC countries.
It is much more difficult to determine what is left, and the issue of Reserve reporting calls for further explanation. We may start with the estimation of the potential reserves of an undrilled prospect. The explorers can readily map the size of the trap from seismic and other data, and can use regional knowledge to make reasonable assumptions about the reservoir and recovery factor. Even if they are commonly under pressure to exaggerate, they are able to make fairly good objective estimates within a range of probability, such that any revisions following drilling should be statistically neutral.
The mentality changes absolutely in the event that the wildcat is a success. Now, the estimates are based on commercial rather than scientific criteria. The objective shifts from knowing what is there in Nature to determining how to achieve a quick payout at minimal risk. It is accordingly very reasonable to start the project with the lowest estimate capable of giving a viable plateau of production to optimise the investment. This estimate is commonly reported and enters the national database. Once payout is achieved, every effort turns to extending plateau by tapping subsidiary reservoirs and traps within the field or in its immediate vicinity. As a result, the reported reserves are progressively revised upwards. This incidentally presents a better image to the stockmarket by smoothing variations in the company's assets. It is obvious that these upward revisions diminish over time as the field approaches exhaustion when its true ultimate recovery becomes ever more evident. In many cases, the ultimate recovery turns out to be close to the estimates made by the explorers prior to drilling the wildcat responsible for the discovery.
This notion of 'reserve growth' has misled many analysts who wrongly attribute it to technology. In fact, a field contains what it contains, and nothing is actually added. Most so-called new technology, such as 3D seismic or 'horizontal' drilling, is not any longer new, having been routinely applied to most modern fields over the past twenty years.
Hopes for extracting more oil from oil fields have been expressed but most apparent reserve growth reflects the correction of initial under-reporting rather than any real improvement in recovery. In any event the contribution from genuine enhanced recovery arrives too late to have any material impact on peak. With this understanding, we can easily answer the third question - When was it found?. All the oil to be produced from a field is clearly attributable to the wildcat responsible for its discovery, with any reserve revisions being backdated to the date of that wildcat.
Having answered these three questions, we can use the information to answer the fourth question:
That in turn breaks down into two sub-questions :
We may use three simple statistical techniques to extrapolate the discovery trend in established basins. First is the Creaming Curve, which plots cumulative discovery against time or, better, against cumulative wildcats. Since the larger fields are found first for obvious reasons, the plot is hyperbolic, with asymptote equalling a theoretical Ultimate Recovery. The Yet-to-Find can be determined from such a plot by applying a cut-off at the point at which the additions are too small to be economic under any conceivable economic scenario.
The second technique is the so-called Parabolic Fractal, pioneered by J.H.Laherrère, which plots size against rank on a log-log format. Once all the larger fields have been found, their distribution sets the parameters of the parabola, which in turn determines the full distribution. The Yet-to-Find is the difference between what has been found and the parabolic projection, again subject to an economic cut-off.
The third approach is to smooth the discovery curve (or curves) and then line it up with the corresponding production curve after a time shift, determining the Yet-to-Find by extrapolation.
These are robust statistical techniques that give good results when applied to an individual petroleum system having a single source-rock, but they can also be applied within limits to basins, countries, and regions, if not the world as a whole.
We face greater difficulties in assessing the potential of new areas. In this connection, it is important to remember that the deep water domain is here treated as Non-conventional, so that we can concentrate on the chance of finding an entirely new basin onshore or on the continental shelves.
It is stressed that there has been great progress in recent years in using geochemistry to define and understand the oil-generating trends, so that the reasons why some areas are productive whereas others are barren are now well understood. The largest new province found during the last 50 years was the North Sea, which has an Ultimate Recovery of about 60 Bbbl (billion barrels). The world has now been very thoroughly explored, and it seems most unlikely that anything approaching this size has been missed, save perhaps in the offshore Caspian, which is an extension of a long-known prolific oil province which was not explored by the Soviets. It would accordingly be a brave man who would attribute any major potential for conventional oil in new areas, most of which are barren for very well understood reasons.
In order to make such a study we clearly need to input valid data, and here lies the problem Valid data are available in the industry database, but that is confidential. So far as public data are concerned, we have to rely on the material published by the Oil & Gas Journal or World Oil. (We can safely ignore the BP Statistical Review of World Energy, which simply reproduces the Oil & Gas Journal numbers). These two trade journals compile the information from a questionnaire sent out to governments and industry. In 1999, some 70 countries failed to update their reserve estimates, in some cases by simply not answering the questionnaire. The information is in any event unreliable with widespread under- and over- reporting, as for example occurred during the 'quota wars' of the late 1980s when several OPEC countries added some 300 Bbbl overnight. So the first step in an evaluation is to convert Reported Proved reserves into the best estimate of what is actually there, commonly termed Proved & Probable or P50.That is by all means a challenge.
An evaluation along the foregoing lines has permitted the following assessment of what the world's conventional oil endowment is. The numbers are quoted as computed, but should be generously rounded.
The discovery of conventional oil peaked in the 1960s and has fallen consistently to a current level of about 6 Bbbl/a, meaning that the world finds about one barrel for every four it consumes. This year we are, however, likely to see a spike with a major once-off discovery in the Caspian of perhaps double the norm.
We may now move on to consider two more questions:
The first question is easily answered. About half of it lies in just five Middle East countries (Abu Dhabi, Iran, Iraq, Kuwait and Saudi Arabia), followed by the Eurasia Region, comprising the former Communist bloc and China, with about one-sixth.
We may briefly examine the patterns of depletion imposed by the immutable physics of the reservoir. In the case of an onshore field, production commences even with the discovery well and grows to a peak as additional wells are added. Peak occurs when the decline of the early wells is no longer matched by the contribution of new wells. The profile is bell-shaped, but normally skewed to the left. Offshore, the profile is more symmetrical with a natural peak being capped by the limits of the facilities. A similar pattern applies to a basin, a country and eventually the world as a whole. Production grows as new basins are discovered, but peaks and declines when no more are found. In cases where the population of fields is large, the overall depletion is more symmetrical than in an individual field. Naturally, the profile is affected by any artificial production constraints as imposed by, for example, OPEC or the Texas Railroad Commission.
In earlier years, the international oil companies controlled the world's supply of oil. Had they retained control, they would, under normal economic principles, have produced the cheap easy oil before moving on to the more difficult and costly. But they lost control in various expropriations, mainly during the 1970s, and turned to the more difficult and costly areas, leaving the five Middle East countries to control the easy cheap stuff. In effect, these circumstances forced the five Middle East countries into a swing role around global peak, making up the difference between world demand and what the other countries could produce within their resource constraints. This position is somewhat clouded by the creation of OPEC, whereby several other countries, principally Venezuela, have contributed to the swing role of the Middle East, but even so it is convenient to treat the Middle East countries as the swing entity.
This introduces the question of Swing Share, namely the percentage of world production coming from the Swing countries. Again, considering conventional oil only, it was 38% at the time of the First Oil Shock in 1973, but fell to a low of 18% by 1985 as flush production from the new provinces, including Alaska and the North Sea, was dumped onto the market. It is stressed that these new provinces had already been found before the Shock, and were not the consequence of it, as is so often claimed. Share has been rising ever since to reach about 30% today. This time it is set to continue to rise because there are no new, already found, major provinces waiting to deliver flush production, save the Caspian, as already mentioned.
A simple, but robust, model of depletion can be built on the assumption that production in non-swing countries peaks at the midpoint of depletion, when half the Ultimate has been produced. (It is convenient for this purpose to treat the Ultimate, not as the last drop, which is hard to visualise, but as Cumulative Production at some distant future date, such as 2075). The swing countries then make up the difference between the non-swing total and world demand, for which different scenarios may be envisaged.
The base-case scenario assumes that demand rises at 1.5% a year until Swing Share passes 35%, which is taken to convey sufficient control of the market to cause a radical increase in price. That in turn curbs further increases in demand, leading to a plateau — if that is the best word for a very volatile situation — until swing share passes 50%, and the Swing countries too approach their midpoint of depletion. After that, production is assumed to commence its terminal decline at the then depletion rate.
On the above numbers, the price shock arrives in 2002 and physical shortages commence around 2009, with peak coming in around 2005. It is more difficult to estimate the contribution of Non-conventional oil and NGL, but tentatively it appears that their entry might delay overall peak by about five years to around 2010.
The foregoing discussion sought to explain the essence of the matter in a straightforward manner, stressing in particular the weakness of the public database. In conclusion, we may speculate in more general terms as to what the imminent peak of production may mean. It is a huge and very sensitive subject with colossal economic and political implications, but we may nevertheless offer a few ideas:
The world's economic prosperity during the 20th Century was largely built on an abundant supply of cheap oil-based energy. That is coming to an end which means that the 21st Century will open with a major discontinuity before it finds new ways to survive. Immense changes in the social structure of especially the more developed countries seem inevitable. The new ways may, however, be better ways, leading to a more sustainable and satisfactory planet. Hydrocarbon Man, who is now virtually the sole surviving subspecies, will be nearly extinct by the end of the Century. It is not too soon to worry about the succession.
British born Colin.J.Campbell has an extensive background in the oil and gas industry gained over a period of almost 50 years, since gaining his BA Hons degree in geology at Oxford in 1954.
Colin has also written numerous papers, latterly on oil depletion, including "The End of Cheap Oil" in the Scientific American of March 1998. He has published two books The Golden Century of Oil (Kluwer) and The Coming Oil Crisis (Multi-Science), lectured and broadcast.