False pessimistic predictions regarding the future of oil production have been around since the mid-1850s. Though reserves numbers continue to grow, the hue and cry of ‘Peak Oil’ continues to entangle government agencies, geologists, and moneymen.
Many believe the world’s energy complex – built on fossil fuels – is unsustainable. The future availability of petroleum is of particular concern because oil has constituted a leading 35% of the world’s energy supply for decades.
“Peak oil” is predicated on the work of geologist M. King Hubbert, who in 1956 employed his now famous “Hubbert curve” to predict US oil production would peak in 1970. An echo chamber of false pessimistic predictions regarding future production dates back to the beginning of the modern oil era in the mid-1850s and has entangled government agencies, geologists, and moneymen.
In 1939, the US Department of the Interior claimed the world’s oil reserves would last for just 13 more years. Conversely, BP data indicate the world’s reserves-to-production (R/P) is now more than 45 years, compared to less than 30 years in 1970.
In 1969, Hubbert predicted world oil production would peak in 2000. In 2010, the world produced a record 82.1 MMb/d of oil, excluding biofuels and coal-to-liquids (CTL), compared to 74.9 MMb/d in 2000.
In 1999, Goldman Sachs declared that oil companies constituted a dying industry, pointing out that 90% of global conventional oil had already been found. According to data presented by BP, however, proved reserves have jumped 25% since 2000, and the global R/P ratio has been extended by 5 years to 46.
Much of today’s energy reporting labels fossil fuels usage as unsustainable. Irrefutably, fossil fuels are finite and irreplaceable, and their combustion emits the greenhouse gases (GHGs) that are adversely changing our climate. Despite claims to the contrary, however, oil and gas production have not hit their peak.
The heart of the misperception
The main reason for misconceptions about fossil fuel availability is reliance on analytical techniques that fail to appreciate oil as an economic commodity powered by the constant advance of technology. Many predictions fall short because they simply focus on reserve years or the proved recoverable reserves divided by the annual consumption rate. Proved reserves can grow over time, however, and estimates of the recoverable resource change as new information is acquired through drilling, production, and technological and managerial development.
Another factor that affects perception is that oil companies adopt short- to mid-term planning horizons. Exploration is costly, so there is no economic incentive to look for resources that will not be needed for many decades. This is why the known reserves numbers of so many producers frequently fall within the range of a few decades, regardless of how many years have passed or how much of the resource already has been produced. In fact, due to the irreversible nature of an oil project’s large investment outlays, it is more constructive for companies to err on the side of caution and under-invest in E&P until new information about future market conditions arrives. Globally, oil’s R/P ratio has hovered between 40 and 45 years since 1985.
Given the geopolitics of energy, capturing this actionable data is far more complicated for producers than is generally understood.
Not only has the world’s oil supply failed to disappear, but production has substantially expanded and will continue to do so. Since the late 1960s, production has doubled to more than 82 MMb/d, and both the International Energy Agency (IEA) and US Energy Information Administration (EIA) project output will increase to more than 106 MMb/d by 2035 – an increase of 30%. The EIA projects biofuels and CTL will boost the liquid fuel stockpile by an additional 5.5 MMb/d by that time.
The constant advance of technology
Availability of natural resources like oil can be visualized as a pyramid that has a smaller volume of high-quality, easier-to-extract resources at the top, and a larger volume of lesser quality, harder-to-extract resources at the bottom. Over time, resources near the top of the pyramid are consumed, and development of those farther down the pyramid begins. The resource pyramid offers a framework for comprehending the enormity of the world’s oil endowment – it illustrates why so much oil is still available.
The price of extraction increases as producers go lower on the pyramid, but technologies tend to reduce these costs over time. For example, the IEA states that new subsea oil production techniques “can further decrease the production costs and make a considerable number of new fields economically profitable.” Estimates indicate the world has used just 8% (1 Tbbl) of the 9.6 Tbbl resource base of conventional oil and 3 Tbbl of unconventional crude oil.
Like Thomas Malthus – the demographer who falsely proclaimed more than 200 years ago that agricultural production would not keep pace with the mounting global population – energy forecasters today have no way to predict how fast new technologies will evolve. Oil and service companies develop technologies because demand is ever-growing, and there are stiff penalties for “getting it wrong.” An industry rule of thumb, for instance, estimates the cost of drilling a deepwater “dry hole” is approximately US $100 million.
New technologies enhance the discovery process, reduce exploration failures, and help companies better integrate data and information to more efficiently manage assets. Producers can now produce several oil fields from a single platform, and with each upgrade in performance and efficiency, fewer wells are needed to recover more resources. The US Department of Energy noted, “If Alaska’s Prudhoe Bay oil field was opened with today’s technology, its footprint would be almost a third of its current size.”
Emerging technologies and innovative processes continually blur the line between conventional and unconventional energy resources. Much offshore production was deemed unconventional and too expensive only a few decades ago. Since then, drilling, exploration, and production techniques have improved considerably, and sophisticated rigs can tap deep, huge reservoirs undreamed of 25 years ago. Today 30% of all oil comes from offshore wells.
Completed in 1986, Shell’s Mensa field in the Gulf of Mexico at more than 1,500 m (5,000 ft) water depth set the threshold at the time for “ultra” deepwater production. Today the term “ultra-deep” means drilling in more than 3,000 m (10,000 ft) water depth. IHS CERA reports global deepwater capacity is more than 5 MMb/d, up from 1.5 MMb/d in 2000.
Technological breakthroughs can occur in a remarkably short period of time. Just a few years ago, US gas production was assumed to have peaked, but advancements in hydraulic fracturing and horizontal drilling have created a shale gas boom that has transformed the domestic production outlook. Companies are now looking to export excess supply.
Without drilling a single new well or making a new discovery, oil supplies could expand dramatically. At least two-thirds of the oil in a reservoir often is left behind after primary, secondary, and tertiary operations because it is too difficult or expensive to extract. The Reservoir Engineering Group estimates that a 10% boost in the global recovery rate would translate to an additional 1.4 Tbbl reserves, doubling what we have today.
As oil becomes harder to find and produce, its price will increase, triggering key supply and demand responses. Higher prices typically result in more investments that increase productive capacity and supply, especially by making unconventional projects more cost-effective.
During the oil price peak in July 2008, for instance, the US rig count was at its highest level since 1985, and higher prices prompted the uptick in global oil discoveries in the 2000s against the 1990s. On the demand side, higher oil prices curtail consumption by restraining economic growth and encouraging lifestyle changes to conserve or substitute fuel. When world oil prices averaged $92 in 2008, demand dropped for the first time since 1983.
Even under the IEA’s 2010 optimal policy projection for renewable energy (450 Scenario), where oil demand unrealistically peaks before 2020, oil is still a predominant source of energy, supplying 26% of the world’s energy in 2035.
The economics that reign in the oil industry, however, are the “marginal costs” of production, or the expense of extracting an extra barrel of crude. The EIA’s most recent “Financial Reporting System” analysis (2011) concludes that worldwide lifting costs fell from about $7/boe in 1980 to under $5 in 2005. Finding costs also substantially declined until the early 2000s, when an upward trend was gained, mostly due to a jump in E&D expenditure and a revision in reserves – in practice, finding costs are the ratio of E&D expenditures to proved reserve additions over a specified period of time. Today, a more favorable cost structure is beginning to reemerge.
The EIA reports worldwide upstream costs (finding plus lifting) decreased 16% to $29.30 from 2007-2009, compared to 2006-2008. And IHS Herold reports that despite a 40% cut in E&P capital spending in 2009, oil reserves grew 3%. E&P expenditures were up more than 10% in 2010 and are expected to increase by about the same amount in 2011.
Although oil is an exhaustible resource, the question of how much longer the world’s supply will remain sufficient is too ambiguous for anyone to answer. Evidence indicates recent price levels above $100 a barrel represent a contrived, not an actual, supply scarcity – a shortage price without a shortage of in-ground resources. With supply a function of price and technology, new plays and more intense development of existing reservoirs, allied with cost saving and innovative technologies, are offsetting resource depletion. Beyond the healthy stock of reserves, evolving economies of scale and new infrastructure also will shift today’s massive unconventional resource into tomorrow’s conventional supply category.
Looking forward, the resource pyramid reveals the world is not running out of oil, but producers and consumers are likely entering a new era of less stable costs.
Coupled with oil’s position as a major emitter of GHGs, new policies should recognize a number of energy realities: