Comments on comments below the blog “The crash in the price of oil may change the oil market – …..”

Posted on March 12, 2015


USGS 2000

Johnny has made a very good comment below my blog: ”The crash in the price of oil may change the oil market – a look at the IEA’s “Oil Medium-Term Market Report 2015”. A long answer is needed and I have given one in Swedish before and now we have the English translation below. This is from Johnny’s comment:

Johnny: “It is interesting that you reference Colin’s Scientific American 1998 article but not his Noroil article from 1988…proclaiming peak oil in about 1989/90 (depending on post peak decline). Taking that peak oil call as a beginning of the modern peak oil mantra, and the roundly derided EIA estimate of 2037 based on the work of Long and Woods using the best available resource estimates available in the world at the time (the USGS 2000 global conventional assessment), leads to an interesting conclusion.”

Here is the link to the EIA’s “Long-Term World Oil Supply Scenarios”. In the mid 1980s Colin J. Campbell was Executive Vice President of the oil company Fina and placed in Norway. In collaboration with the Norwegian Petroleum Directorate he began to study the future of oil production. In order to make predictions of future production one requires a database of reserve data. The database Colin used was the one that Oil&Gas Journal usually presents at the end of December each year with information on national production. This is the database accepted by BP and published in their “Statistical Review of World Energy” half a year later. It is the only database with reserve data available to the public. We now know that this database, mainly during the 1980s, was based on 1P data that various oil producing nations reported to Oil&Gas Journal. When this database with 1P data is used to calculate Peak Oil the date obtained is too early. These 1980s calculations are included in Colin’s book, “The Golden Century of Oil”.

When the head of Petroconsultants read Colin’s book he thought that it was interesting but he also realised that using this publicly available database would give an incorrect prognosis of future oil production. At that time, Petroconsultants was the owner of the only industrial database of the world’s oil reserves. Colin was invited to become a Senior Consultant with them. They wanted him, and Jean Laherrère who was also a Senior Consultant with Petroconsultants, to make new estimates based on their industrial database. Colin and Jean put together a very detailed report that was offered for sale to customers at the price of $50,000 (fifty thousand dollars). The oil industry was distressed at this and the report was withdrawn. With Petroconsultant’s permission, Colin presented what we can describe as a summary of the report in the book “The Coming Oil Crisis” that was published in 1997. In that book he described why the calculations from 1988 were incorrect. This is the reason that I do not mention the article from 1988.

The reserve database of Petroconsultants was usually purchased by various oil companies annually. In 1996, when the owner of Petroconsultants died, the database was purchased by IHS, that then upgraded it with new information. It is this database that the oil industry uses today. When the article in Scientific American was published, the oil price was around $10 per barrel and it was commonly thought that the oil price in 2020 would be around $20 or lower, i.e. cheap. It was the production profile for reserves of cheap oil (including some unconventional reserves) that Colin and Jean presented in 1998 in “The End of Cheap Oil”. These can be regarded as the 2P reserves of that time. In my book “Peeking at Peak Oil” I show reserves as declared in 1994 and that IHS updated in 2005. These were crude oil reserves. There are various ways of estimating how large future new discoveries of crude oil will be but relative to the discoveries made during the 1960s and ‘70s the errors in these various estimates are marginal. An important change in reserve estimates is due to new technology that can increase the accessible oil in old oilfields.

USGS 2000
The calculations presented by John H. Wood, Gary R. Long, and David F. Morehouse (see the image above) in the article “Long-Term World Oil Supply Scenarios” are valid for crude oil that is also termed conventional oil, i.e. in principle the same oil that Colin and Jean discussed. It is that oil that the IEA and others are now agreed reached maximal production in 2006. In the figure above you can see where the year 2037 mentioned by Johnny comes from. Johnny writes, “using the best available resource estimates available in the world at the time (the USGS 2000 global conventional assessment)”. According to the figure above conventional oil should peak in 2037 at 53 billion barrels per year or 145 million barrels per day. The methods that the EIA use are not realistic and we have discussed this issue in an article in Energy Policy.

Jakobsson, K., Söderbergh, B., Höök, M., Aleklett, K. (2009)
How reasonable are oil production scenarios from public agencies?
Energy Policy, 37(11):4809-4818

Abstract: According to the long term scenarios of the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA), conventional oil production is expected to grow until at least 2030. EIA has published results from a resource constrained production model which ostensibly supports such a scenario. The model is here described and analyzed in detail. However, it is shown that the model, although sound in principle, has been misapplied due to a confusion of resource categories. A correction of this methodological error reveals that EIA’s scenario requires rather extreme and implausible assumptions regarding future global decline rates. This result puts into question the basis for the conclusion that global “peak oil” would not occur before 2030.

Fig 5-5 growth 1000
In my book “Peeking at Peak Oil” I analysed the levels of conventional oil production and consumption presented by the USGS in 2000 and from the figure below you can certainly see how unrealistic they are. It is the USGS’s reserve estimate of 3,345 Gb in 2025 that gives a production peak of 145 Mb/d. It is these reserves that the International Energy Agency used in WEO 2004 when they estimated the completely unrealistic production level of 122 Mb/d for 2030.
Fig 5-4 USGS 1000

Johnny: “We are about 26 years out from Colin’s call, and only 22 years away from the EIA estimate. Closer to one than the other. Of course, we can also pretend that the peak was at about any point in time we wish, by choosing to exclude oil we don’t like, for any reason. From a geologic perspective, there is no difference between a 42API sweet oil from a reservoir 3000′ down onshore versus off. It is a distinction without a difference to the refinery, and used primarily to shift around claims of peak. Most of them invented AFTER it became obvious that prior claims of a peak oil were discredited by time and production rates.”

I have explained that the EIA’s estimates were for conventional crude oil, i.e. not shale oil, oil sands or NGL. Johnny, from your comment it seems that you do not think these components are included in the EIA’s calculations. I hope that you can accept that Colin himself has said that the calculations from 1988 were based on an inaccurate database. The conventional oil that has already peaked includes oil from down to 3,000 metres underground. In the calculations that ASPO presented in 2002 and that Colin and I published in 2003 this component is included.

Johnny: “Some day a peak oiler will approach the topic appropriately and provide a resource cost curve which can be compared to the 2008 IEA work (2008 WEO I believe, page 218 or 219, Fig 9.10 if memory serves). It is the proper way to answer this question, and yet one never referenced, built, discussed or even considered by peak oilers. Things that make you go mmmmmmm…..”

In WEO 2008, shale oil is not mentioned and crude oil production for 2030 was estimated to grow to over 70 Mb/d. Four years later in 2012 the WEO prognosis for 2030 had decreased to 65 Mb/d. You are correct that they do not discuss Peak Oil.

IEA 2014

GS breakeven
The fact that production of conventional oil is currently in decline and has passed Peak Oil means that production of expensive oil will be more important in future and your comment that the oil price will be important is relevant. As an example I can give the cost analysis that Goldman Sachs has made. In the figure below are all the projects under discussion two years ago. From the IEA’s Medium Term Report I have made calculations that 20 Mb/d of new oil are needed by 2020. The new oil must come from the projects presented in the figure. At a breakeven price of between $30 and $40 per barrel we can see Johan Sverdrup that I have mentioned in a blog. At an oil price under $70 per barrel it is theoretically possible to obtain 15 Mb/d in new production. The questions is which projects will now become reality now that the oil companies are reducing their investment budgets.

Thank you Johnny and Desmond for your comments. I hope that my answer has cleared up some questions.

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