More questions than answers

In following up the comment that Prof G made on the WSJ article, and a comment left anonymously I suspect I have left myself a little homework to do over the next couple of days.

Following Prof G's link I was reading the comments on Kos by tunesmith and the bit that I want to comment on is what may be considered the economist's view of the current oil situation.
Right now there is a lot of oil that SA can extract, for, say, $30/barrel. That's in their reserves. Maybe they're getting all that.

There's also a lot of oil in harder to reach places that SA can extract for, say, $60/barrel. That's not in their reserves right now, because they'd lose money extracting it when prices right now are between $50 and $55 / barrel.
The thing is that this misunderstands the production of oil from the Middle East. In relative terms it does not cost the Saudi Government that much to produce their oil (I don't remember the number tonight but it is somewhere around $1 a barrel or something of that order). Production costs have not been an issue, rather, until recently, it has been controlling supply to match the needs of the market and not flooding the market with oil that would drop the price too much.

However as demand has continued to grow, and supplies elsewhere have peaked and started to decline, so the OPEC nations have been able to produce more and more oil to meet the demand at an increasing price.

The current situation now has several features that are of concern. The first is the rate of increase in demand relative to world supply. And to give you a reference to how that is playing out I acknowledge our Anonymous commenter and draw your attention to the EIA table for this. Now that shows that, pretty much, the two will stay in balance over the next couple of years. (No one produces more than they can sell to keep the balance).

The worrying issues however lie in such items as the increasing Chinese demand - my earlier comment on the possible shortfall of 700 kbd was based on their published intent to add 650 kbd to a strategic stockpile this summer, over and above current demand as much as the table balance.

But more critically the table does not address the potentially more significant problems of declines in production. It shows, for example, Mexico holding production steady over the next two years, while they, themselves, have noted that their largest field will start declining this year and will accelerate to a rate of about 14% p.a. And their hope for help from the deeper waters of the Gulf has so far not been as successful as hoped.

When one considers these factors the only likely source for increasing production is from the OPEC nations, and as the OPEC Production (EIA) table we reference in the Blogroll shows, the only nation with significant spare capacity is Saudi Arabia. But they don't have a whole lot of wells sitting neatly capped waiting for someone to come along and buy their oil. Because they have some reserve, they do have some wells not producing (some of which have oil that currently cannot be refined), and some fields that are available to be drilled, but it takes a finite amount of time to get rigs set up to increase that production. And their plans until recently required using the drilling rigs that they have and are buying, to meet those goals. Now that demand is getting higher, to increase production further they have to get more rigs to drill the additional wells, and that takes time.

There is also another little concern. Back in 1998 when they were mainly drilling in the largest fields they had, Matt Simmons pointed out in his report on giant oil fields, that they could get over 5,000 barrels of oil a day from one of the wells in their giant fields. He has more recently, in his presentation on the Saudi Oil Miracle given a figure for production for new wells that is down to 2,000 barrels a day, as they move from the old giants to other fields. What that means is that you need to have more oil rigs drilling to get the same amount of overall increase in production. (His papers can be downloaded from the reference in the Blogroll). If, at the same time, more wells have to be drilled just to sustain production as the old giants decline, then the issue is not how much it costs, it is rather how many rigs can they get, how fast can they drill the wells, and how fast can they connect them up. The answer, unfortunately, is given in years, rather than months.

edited to add:

It appears that potential results from Crown Prince Abdullah's visit to Texas, at least as far as increased oil supplies are concerned, are not going to be encouraging, and thus their relative importance is being downplayed.

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While I agree on peak oil theory in general, I believe what will happen over the next 3 or more years is a sustainable peak. That is the peak will not rise or drop. New technologies are coming on stream today that will lower operational costs, increase flow rates, decrease the mechanical steps required from well head to refinery.

Specifically extraction or separation methods are currently advanced to lower costs and increase flow rates through the process steps. They can also, now go back to the capped older wells and open them up and economically pump the watery oil. Use of water is now at an all time high indicating lower yields of oil in the zones. I believe it was a Schlumberger official that once said 2yrs ago, that oil companies are beginning to develop into water companies
However its the recycling rates that have gone up, they can now get back into the high 90’s percentage wise the water and recycle it.

Hard to reach oil coupled with new tech will now be cheaper. So the shock absorber is in place just in case the Saudi’s open all taps wide open and flood the markets as the Alberta Tar Sands come on stream. Remember they did this in the past. So the $50/bbl oil can safely drop to $30 and most oil industries will remain profitable.

SAGD (Steam Assisted Gravity Drainage) is a technology around now for over 20yrs. After spending a great deal of money on this investment, it is paying off. Lower operational costs vs the current extraction methods used to separate the sand/tar/water. And despite what other “experts” are telling us about the Natural Gas demands for this venture are going to be high, they will actually drop. Again new technologies eliminate the Natural Gas. As a result, oil flow rates are now being measured in tonnes/hr not bbl or gallons.

In conclusion, by extending the peak oil flow rates world wide, the governments and politicians will be able to budget in (on their political agendas ) more energy options such as solar/wind/hydrogen. Typical of most Politicians is they want results during their term in office. However this problem is going to take several elections to see the results.

Some high tech companies

Thanks for the comment and references, which I will follow up on. But I think you misunderstand the concern that a lot of us have with the arrival at the peak. With older methods of recovery there was indeed a relative plateau in production before the drop. However with the accelerated methods of extraction that are now used, when oil wells run dry production drops more rapidly (Canterell in Mexico is projected at 14% for example). This means that there will likely be very little plateau before we drop.

In regards to Enhanced Oil Recovery (EOR) techniques such as the use of steam, I would agree that there are ways to improve extraction from old fields. Buf if you look at oil production per well the average oil well in the US produced 11 barrels of oil a day in 1998. (in Norway it was 5,600 barrels a day). While treating these wells will increase production obviously you are going to have to do a whole lot of them to have an impact on supply, and as a rough number there are about 1,100 rigs working in the US and 600 in Canada (my info is about a year out of date on this - hence the homework assignment). Most of the rigs, however, are working on finding new oil, rather than revisiting old wells.

Are you aware of any good analysis of how increasing use of other sources of energy offset oil usage as oil prices rise? (By professional, I guess I mean unbiased, serious etc. -- nothing from the AEI on the one hand or the Sierra Club on the other.)

It seems to me that your argument would be stronger if you could sketch out one or more likely scenarios for the world portfolio of energy sources for any given price of oil. For example, how would oil reserves/consumption look if oil stays at $50/bbl for a year or two, or $75/bbl, or $100/bbl? Surely at $100/bbl solar, wind, ethanol, tar sands, etc., have got to start getting to be viable. Not that I don't think $100/bbl oil would be a problem. It would be. And I grant that ramping up production would take a ton of money and time, but would the transition really be that catastrophic? I'm skeptical, but I don't know.

I take declining oil production to be, at some point, a certainty, but the economy is a very dynamic thing. Are there discontinuities in the supply/demand curve for oil? How fast can we adapt? And what do we need to do to make sure we can adapt fast enough?

Thanks for all your work on this blog. I'm a big fan.

One question I would like to see addressed is the relative impact of shifting from "light sweet" to "tar sands" and other heavier sources across market segment:

1) Transport
1-a) automotive
1-b) aviation
2) Feedstock for plastics, medicines, ag uses, etc.
3) Electric generation
4) Heating

I know that different segments pick up from different weights along the chain, so I'm wondering where the most impact will be.

Thanks, and keep up the good work.

Charlie, read earlier posts. These guys whole point, one I agree with, is that doing anything takes time, probably years and decades. More drilling, EOR, tar sands, coal gasification and liquefication, nuclear, anything takes time to bring online. The only thing that will can react quick enough is demand.

I particularly like this quote from the Reuters article you link to. Is this the meager beginning of a public admission by the administration? Let's hope.

But even Bush acknowledged last week there is no way to "wave a magic wand" to give Americans instant relief.

"If American consumers think this meeting will bring about a decline in gasoline prices, the answer is no," Ebel said.

Marvin: The flat peak is also known as a "bumpy plateau", and I definitely think that's where we're headed, and very soon.

Tim, thanks for your reply. I have read the earlier posts, and I understand that oil production is a difficult, capital intensive process involving infrastructure with a lot of different components that, for a lot of reasons, take years to put in place, etc., etc. I understand that. What I'm looking for is an analysis of substitution rates for various energy sources, including conservation, at various prices for oil. I'm also unclear on the impact that "demand destruction" would have on the economy.

In my career I have many, many times made the mistake of assuming that a system is basically static, then trying to evaluate the impact of possible events by changing one thing at a time (such as, here, a change in the availability of oil). I'm sure that no one here is being that naive. So, that's why I'm asking for more info. Anyway, I'll pass on any good sources I can find.

Another question I have is the extent to which producers are being intentionally slow to initiate production increases. I'm thinking, for example, of ExxonMobil's refusal to increase their exploration budget. Part of that, I'm sure, is from a legitimate concern that prices will fall and cause losses at the margin. But, if I were Lee Raymond, I would bias my spending decisions against additional investment. That way, I help perpetuate conditions of shortage and keep prices high. And it seems to me there are few enough players in the game -- particularly at such bottlenecks as refining -- that oligopolistic tactics like that would have some appeal.

the bumpy plateau it is.

Tar Sands issues

The oil in the tar sands is called bitumen, it is very thick molasses. The largest problem right now in the Tar Sands is its enormous area it covers and the labour force needed to construct all the infrastructure. The Tar sands covers three Canadian provinces, Saskatchewan, Alberta and British Columbia. This is why the Alberta government invested heavily in the SAGD concept. A lot less labour involvement when the project is up and running. The actual costs to produce a barrel of oil is only $7 to 12$ dollars ( I believe this is American $$ but may be wrong ).

EOR techniques and flow rate reasoning

The reason why we only get 11 bbl out of Okalahoma is three reasons, lack of water, EPA policy, as well as the obvious, low oil by volume. I agree fully we have milked America of oil. Flowing more water down hole will be fine provided they don’t run out of water in the arid mid west and southern states, but more importantly, it can fracture the rock bed and start flowing into the aquifer supply. That is the reason why the EPA mandated that clean water be reinjected to reduce this problem, knowing very well oil Cos are under pressure from the market to flow more oil to refineries. Another problem cropping up on the horizon is water. Albertans have learnt from their counterparts in the states that rivers do disappear and agriculture is important, therefore the local public will demand better use of water. Currently right now it takes 7 to 10 gallons of water to bring 1 gallon of oil up out of the zone. This water is called Produced Water, it is a $40 billion dollar market to treat this water before sending it down hole or surface run-off.
An old oil well is finished and capped when they obtain or milk it dry down to 200ppm, with new technology pushing 10ppm down to 0ppm levels there is a lot of economically recoverable oil laying down there depending on the formation size.

Treating this water is the heart of the flow problem at getting oil to the market. You have the cost of treating this water and the lower flow rates. There can be up to 6 or 7 different technologies treating this water and removing the oil before reinjection by reducing this area of EOR, one can speed up the flow rate by only having two or three steps. Evidence of this is happening now with the Kuwaiti Oil Gathering centers being renovated with new technology.

Membrane technology is appearing on sites but this is a slow process mandated by government policy. This topic can be long and more specific, however there is a Jan 2004 white paper on Produced Water in the oil industry, along with some mind boggling statistics.

Adapting to new Technologies

Fuel cells are all the rage right now along with the hydrogen economy. But, in the words of Clint Eastwood- “ask yourself one question”. When was the last time you heard anyone test crashing a fuel ce

great website on oil!!

I'm interested in the figure you quote for extracting saudi oil of around $1 a barrel.

I'm sure (but can't remember where I read it unfortunately) that some commentators are saying that with the more complex drill / well technology being used and with increased use of seawater to force oil out faster that the extraction costs have risen a lot (to more than $10 a barrel).

Is this just nonsense ? Do you have any idea where an authoritative source of extraction costs might be ?

Extraction costs are one big title, I do know of the treatment costs of Produced water, it ranges from .58 cents up to $6.00/bbl to treat depending on geographical location and options available to dispose.

Don't forget over their in the middle east, labour is dirt cheap, filling up a Mercedes from empty costs only .60 cents, and that came from Cooper Anderson on CNN!!