Monday, May 21, 2012

The controversy over peak oil, oil prices & technological advances

            Much has been made in the past few years of the triumph over peak oil theorists, courtesy of the higher prices, which made the extraction of a higher proportion of oil in place possible, and also provided incentives for a robust unconventional petroleum industry to develop and flourish.  Canada’s oil sands projects have been going for a while now, but the much trumpeted shale oil industry is new and higher oil prices are credited with its development from a marginal industry in the US to now a significant play.  Many were quick to pronounce that peak oil theory has been disproven, and we never have to worry about this again, at least for our lifetimes.

            What I want to do here is to move beyond the rhetoric and slogans from both sides of the argument, and dig in to the meaning of the recent developments and trends in the oil industry, and try to gain a better understanding of what this all means to us.  I want to focus on conventional petroleum, because it is currently 80% of total liquid fuels supply, so it is therefore the part that is the most relevant.

Basic Facts:

-  According to most studies done, total global conventional original oil in place amounts to somewhere between 5 and 7 trillion barrels.  For our purposes, I chose the middle ground, so I assume that we have 6 trillion barrels of oil in place, that has either already been discovered, or is yet to be discovered.  This number seems to be what the USGS thinks is the most accurate approximation, as a result of its year 2000 study of the world’s oil info available[i].  Since this study, the USGS assumption on new oil discoveries has been proven to be slightly overoptimistic, when compared to actual discoveries over the past decade, so the 6 trillion barrel figure is likely the more realistic figure, rather than the highly optimistic 7 trillion upper bound estimate.

-  Using Current technology and price, we can produce about 40% of total original oil in place.  So out of the total 6 trillion barrels, 2,400 billion barrels are recoverable presently.  About 1,100 billion barrels have already been produced, so about 1,300 billion barrels are yet to be recovered if current prices and technology were to remain static.

-  Technological advances in the past century allowed us to move from only 15-20% of oil in place being recoverable, to the current figure of about 40%.  So, average yearly gain in recoverability rates has been .2%.

-  According to M. King’s Hubbert’s theory of peak oil, which he formulated in the 1950’s, while he worked as a geophysicist for Shell Oil, individual fields as well as regions, or the entire world will experience a maximum peak in production, and an eventual decline around the point where half of the recoverable reserves were produced.  His prediction gained much credibility due to the fact that his calculation for the US peak in crude oil in 1970 was proven to be correct.  US crude oil production is currently less than 2/3 of that peak production year.  World is currently producing about 25-27 billion barrels of conventional oil per year[ii].  Given that fact, we are about four years away from reaching the halfway point of the reserves produced to reserves remaining ratio. It is fair to say that we are close to peak oil territory.  We in fact have been experiencing a plateau in conventional oil production since about 2005, if we go by the EIA statistics on global oil production.

Technology and human ingenuity to the rescue?

            The voices of optimism claim that we need not worry, because aside from unconventional oil supply growth, which currently makes up 20% of total liquids supply, conventional fields will not peak for many decades yet, because the higher price environment, and new technological advances should push the point of peak and decline forward constantly.

            What we should do is quantify the claim, and see exactly what would be needed to stave off this inevitable decline, and also find the estimate of when exactly this decline would become inevitable. 

            A study of the latest methods of enhanced oil recovery, claims that of the conventional oil in place, eventually, 60% will be recovered[iii].  I take this estimate for granted, which I think is reasonable enough.  I don’t think there is much chance of surpassing this 60% figure, because at some point, the efforts needed to push past, will take more energy than we will recover from the field.

            In order to keep production from conventional fields from declining from this point on, our only chance is to keep the current proven reserve base from shrinking.  In order to do that, we need reserve replacement rate to be at least same as production.  So we need technology to do its magic and increase recoverability, about .5% per year.  I should note here that I am not including in my calculation the fact that quality of reserves produced and reserves we are adding as replacement is not the same in terms of potential production ratio. 

6000 billion barrels x .005 (.5% yearly increase of recoverable reserves) = 30 billion barrels, which is just slightly more than yearly conventional oil production of about 27 billion barrels per year as reported by the EIA.

            Now the thing that you may have already noticed is that we have an estimate of the percentage that will ultimately be recovered, we have the minimum percentage increase in recovery rates needed, and we have an estimate of current recovery rates.

60% ultimate recovery - 40% current rate of recovery = 20% gains potentially still to be achieved x .5% minimum yearly gain needed to stave off decline = 40 years maximum that we can keep conventional production on the current production plateau.

40 years of smooth sailing?

            Forty more years on a production plateau might sound great; especially since most forecasts now assume that unconventional liquid production can be relied on to continue giving us gains in total liquid production for many decades to come.  So a plateau in conventional production, in conjunction with the above mentioned increase in unconventional liquids might on the surface seem like we should stop worrying.

            There are other details however that we need to consider.  First of all, unconventional liquids on average have a much lower return on energy invested than conventional fields.  Conventional fields have a rate of 20/1, while unconventional liquids are at only 5/1 (this is a rough estimate in both cases).  Conventional fields used to have a rate of 50-100/1 a century ago, but despite all the technological improvements, we still have this spectacular decline in net energy return.  This decline will continue, and it will be exacerbated by the growing ratio of unconventional liquids in relation to conventional.  Currently we use about 4 mb/d of energy equivalent to produce about 88 mb/d in total liquids.  By 2050, which is the maximum we can do in terms of staving off the decline in conventional supplies, we will most likely have a maximum total liquids production of maybe 120 mb/d.  But it will probably require about 24 mbd (at a ratio of 5/1) to produce those supplies.  So, net energy increase available to the end consumer will be a much more flimsy 12 mb/d as opposed to the headline increase in liquid fuels of 32 mb/d.  12 mb/d of extra liquid volume is also a misleading number, because many liquid fuels, such as ethanol only have 2/3 the energy per volume unit as crude oil does.  Same goes for NGL.

            We also have to remember that in my calculations, I made many assumptions that are rather optimistic.  For instance, I assume that unconventional supply of liquids will grow from about 12 mb/d currently as measured by the EIA, to 45 mb/d.  There is no guarantee that this will materialize.  I also assume that we will increase recovery rates from conventional fields at a historically much faster rate than we have done thus far (.5% as opposed to .2% during the past century).  I also assumed that this advance in recovery rates will be constant from year to year, while in reality it will likely come in bursts, making our lives very miserable in between those bursts.  There is in fact nothing out there to guarantee that we will ever reach 60% ultimate recovery rates, while there is little chance that we can go much above, because of the simple fact that energy return to energy invested ratios are deteriorating fast, and at some point, these fields will become net energy sinkholes.  There is also the very real danger that during this period, the global financial economy will deteriorate so much that we will simply lose the ability to pay $100 or more for a barrel of oil.  This is in large part due to the continued drag that price inflation of crucial commodities has on the financial economy.  Remember that technology alone will not suffice at this point.  If prices would drop bellow $50 right now, and stay there indefinitely, we would loose at least 20% of current oil supplies on the global market.

            So on balance there is a lot more downside risk than the likelihood of upside surprises.  Meanwhile demand for oil keeps going up worldwide.  The only dampener on demand at this point is a recession prone economy.  The reality is that the debate over whether peak oil is now, or a decade of five decades from now is not as relevant as most people want to make it out to be for various reasons.  Truth is that the economic world changed as of 2006, which was the year after the EIA, and IEA recorded plateau happened for conventional oil[iv].  We can never go back to doing things the way we did up to then.  We can try, and I do believe that we will try, but we will only find disappointment, pain and frustration.


  1. Thanks Zoltan
    For further EROI details see:

    New Studies in EROI
    (Energy Return on Investment) 2011 Charles A.S. Hall and Douglas Hansen

    EROI declines with depletion. eg. US is now down to about 11.

    1. Thank you. It is always good to have more info.

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