Oil depletions are not created equal

The comments, at Ianqui's post re Senator Schumer, led me to Econbrowser's discussion in the Wall Street Journal Online. In it he makes the comment
I think one such externality is related to the geographic location of the remaining world's reserves. As the U.S. and North Sea reserves get depleted, the world is increasingly reliant on places like Saudi Arabia, Iran, and Venezuela, whose governments are actively using the oil revenues they receive from us in ways that are very fundamentally contrary to the interests of most OECD nations....
. The problem with discussing historical truths in today's world, is that they are changing. One can no longer, for example, say that it is a wasted effort to take coals to Newcastle. Similarly the historic reliance on fuel from Iran and Venezuela is going to change as their oil supplies deplete, in Iran's case at 400,000 bd per year, little better than the 500,000 bd depletion occurring in the North Sea. And in Venezuela's case , they are now about 1 mbd behind their OPEC quota, a drop of some 500,000 bd this year. Which also means that when we need them, they won't be there. Sorry, sir! (Though sometimes I get the feeling that arguing geology against economics is a bit like a discussion on evolution - but perish the thought!)

This brings the discussion back to depletion, on which I quoted Skrebowski , who used an average depletion rate of 5%, with other sources using 7% for a well in depletion.

These are averages used until now to estimate how long fields will last, and how much new oil is needed to replace such losses in a market where supply exceeded demand. This average held up, where conventional methods of oil removal (primary recovery using vertical wells, then secondary and tertiary recovery) were used. However, there has been a recent change in the way oil was recovered, initially in the Middle East. Rather than get the oil out in a three-step process, as horizontal drilling came into favor, it was combined with the concurrent injection of water below the oil layer to maintain reservoir pressure and more rapidly recover the oil. (For a sectional view of such a field in late development see here , and for a greater discussion here).

The method was very successful and has been adopted in other countries, and in the North Sea, as a way of getting more oil out faster. But here is the rub, because of the success in producing the oil, when the field depletes it drops at a much faster rate. The first place where this was seriously realized was in the Yibal field in Oman, and the picture I repeat was initially posted by Jean Lahererre, who has studied this more than most. (For more on Yibal see Green Car Congress).

The results for Oman have been significant
The oldest independent state in the Arab world, Oman has an economy which, like those of many of its neighbors, is heavily based on oil production. While recent high oil prices have driven state revenues well above predictions, production levels - currently at 750,000 barrels per day - have actually fallen considerably in recent years, dropping 8.9 percent between 2002 and 2003 alone.
And they are not alone, the production drop in the North Sea is now running over 11% a year. This is of concern because the projections have been used as the basis for British investment plans
Current oil and gas investment is expected to hold the rate of production decline at 6-7%/year for 5 years. But challenges remain if the industry expects to slow the long-term decline rate, UKOOA said. The UK offshore oil and gas industry spent £4.7 billion in 2004 on operations and £3.7 billion on exploration and capital expenditure. During 2005, the industry expects to invest £5 billion on operations and more than £4 billion on exploration and capital developments.

During 2004, the number of new project approvals doubled from 2003 to 27 project approvals, and exploratory drilling increased 40% from the previous year with 63 wells drilled.
Thus if the deletion rates are greater than anticipate, then the gap between supply and demand will develop and grow that much faster than exists in Skebowski's comparison into the next five years.

There is also another worry that goes back to Jean Lahererre's paper at the Lisbon Conference run by ASPO this May. There are a couple of paragraphs in that paper that are of interest - the first is this:
SPE/WPC rules define "proven" value as being at least a probability of 90% to exist. I have shown already that the USDOE annual reports allow computing the probability of the proved estimates, which were for oil about 75% in the 70s, but trending towards 50% now, as in 2001 the negative revisions were larger than the positive revisions.

The rest of the world report proven + probable (Canada starting to do so in 2003) so now the technical values are close to the mean values, except in the OPEC countries where quotas are based on reserves which became political with the increase from 1985 to 1990 of 300 Gb by OPEC countries without any significant discoveries. In the past there was only one worldwide source of field reserves, being Petroconsultants funded by a geologist (bought by IHS in 1999). Now IHS, who bought recently CERA, has lost its geological background and uses more and more political data. A new competitor Wood Mackenzie (WM), which uses more economical and technical data than IHS, is completing its country database and can be compared. The difference is very large, higher worldwide than the undiscovered estimate. The difference varies with the countries as seen below.
And I quote it to point to CERA's ownership and the switch to political rather than geological numbers. The second paragraph discusses Saudi Arabia's reserves:
To increase the country cumulative oil discoveries by 80 Gb form last year to this year, IHS has increased the estimate of large fields by simply increasing the recovery factor. Ghawar last year IHS 60% was increased to 70% (from 122 Gb to 147 Gb), which seems difficult to get when knowing that the aquifer is inactive, but WM increase was from 108 Gb to 131 Gb. But Manifa field discovered in 1957 and which has been on production since 1965 and has produced only 0.3 Gb is now reported by IHS to have 23 Gb with 70 % RF (17 Gb last year with 52 %), but 4 Gb by WM. The difference between IHS and WM is given below. For the country IHS has increased from 314 Gb to 395 Gb, when WM has increased from 196 to 239 Gb
I have quoted these paragraphs to lead into one line from the table on current Saudi reserves that follows. It lists the major oilfields and their current estimate of reserves by the two sources described above, and in almost every case the IHS number for this year on recovery factors is significantly higher than the year before, There is only one field where the numbers go the other way - here is the line that reads
Abqaiq (discovered) 1940 (IHS reserve - 2005)19 Gb (IHS 2004) 22 Gb (Recovery factor 2005) 60% (Recovery factor 2004) 72% (WM 2005 reserve) 16 Gb (WM reserve 2004) 15 Gb.
And this is a lot of ink to make the point that Abqaiq is the largest field that, as it dies, is being recognised as being able to produce much less than estimated. And while this is conjectural, one would suspect that this is because they have accelerated the extraction of oil, and as Matt Simmons commented in "Twilight in the Desert" this has ultimately hammered overall recovery. The result is admitted because it is an ongoing event that is hard to deny and it is a likely precursor to a similar change in numbers for Ghawar and similar fields as they also enter their final years.

Technorati Tags: ,

Of course the narrative that we are being fed is that the evil Chavez government is pissing away its oil revenue on the unwashed peasants when it should be reinventing that money in new petroleum projects. That is why their production numbers are going down. Right thinking people just might be forced to do something about that....

Never mind that fact that it might make sense for them to intentionally reduce the rate of production in order to make the resource last longer, while using the proceeds to fund social programs. In other words it makes both social and economic sense to do exactly what they are doing.

HO - Did you get bitten by an economist as a kid? Where is all this hostility coming from?

Even after a closer read, I am puzzled by your reaction to James Hamilton's remarks. First, he explicitly states that there will be a peak. Second, the comment about increasing dependency on Iran, Saudi and Venezuala seems indisputable, at least in the short run. Non-OPEC oil is running out faster than OPEC oil. Production may be down in the two countries you cite, but it is not the same as depletion, especially in Venezuela's case. On the other hand, drops in much of non-OPEC production (and some OPEC countries such as Indonesia) is depletion. In any event, I think he is on safe ground in saying that the proportion of global reserves in the three countries, and hence our dependence on them, will increase.

There is a lingering prejudice against economists in peak oil circles, based on a dated generalization about the two sides in the debate: economists vrs. geologists. I have a feeling that if you would let your guard down, you might be surprised to learn that economists aren't attacking you or peak oil.

Grin - no I don't have any hostility to economists, my feeling there is that we are often talking past each other, however. And the point I was trying to make wasn't with his argument, in this particular case, but specifically with his use of Iran and Venezuela as fall-back suppliers of oil. There is a reality to depletion which sometimes gets hard to explain, and this seemed like a good example at the time. Just as, in the past 30 years coal mines have disappeared from England (where there used to be hundreds) so the oil reserves are disappearing from the historic sources.

I intended my choice of his words as a way of illustrating the point I was making about the impact of depletion. My point is that you can't rely on a country to supply you with oil if they have run out. If Iran is depleting at the same rate (roughly) as the North Sea, then you can't replace one declining production with oil from the other. Thus his model is wrong. This is the frustration in the discussion - there appears to be some of Prof G's denials in recognizing the finality of depletion, and not being willing to recognize that places, such as Oman, that once were sources, are now running dry. (And my point could not have been made if he had used Kazakhstan, Libya or Angola as his fall-back sources).

And the problems of Venezuela would take a better man than I to sort through, but I do seem to remember that the EIA figures seemed to suggest that they had peaked (with conventional oil) even before the current problems - though I would be glad to be proved wrong on that.

Ahh...The rationales for our so-called "Open Door" "Free Trade" policy of the past 100+ years: We want what you've got--you can't not "sell" to us or not allow us to "sell" something to you so we can "pay" for the resources you're "selling" us.

In a "restaurant" I went to, there was a sign that read: "We reserve the RIGHT to refuse service to anyone" (my emphasis). Clearly, the choice of those countries was political, not economic. It's a spinoff of what the Brits did to Chiina: You WILL "allow" us to "sell"opium ("free trade" was given as one rationale at the time to justify the Opium Wars).

An observation of some Asian cultural dynamics--from the Med to Pacific. The people and elites in most cases are resiliant, resourceful and patient, and they DON'T forget the past. In short, this means the USA has screwed itself.

With the power of today's PCs, it should be possible to track EVERY exising well's production, current proven and most potential resrerves, and thus their rates of decline.

As for Venezuela, the USA has more people lacking healthcare and auto insurance than ALL Venezuelans, who have both provided by their oil partimony.

The USA uses exhorbidant amounts of "excess energy carrying capacity." The amounts of all three main fossil fuels will continue to decline, thus ensuring ever rising energy costs.

Next: Natural Gas Crisis.


Could you recommend an authoritative citation on this phenomenon of steeper declines following advanced extraction techniques? I'm actually in the middle of writing a preliminary dissertation proposal in a social science field and was looking for a citation on this very point last night.

"The rules of the monetary system are different from the science-energy system. There is the matter of earning compound interest dollars, which is fundamental to the system. “Interest can go to heaven.” Oil and gas supplies can’t do that. "

from http://www.aspo-usa.com/news.cfm?nd=1358

M. King Hubbert: Highlights from a Previously Unpublished Interview
from ASPO-USA posted: Tuesday, August 02, 2005

Also check out there half-globe filled logo

From Skrebowsk: forecast on producer countries going into net (his type 3) depletion.

Denmark producing 0.4mn b/d goes in 2005
Malaysia producing 0.9mn b/d goes in 2005
China producing 3.4mn b/d goes in 2005/06
Mexico producing 3.8mn b/d goes in 2005/06
Brunei producing 0.2mn b/d goes in 2006/07
India producing 0.8mn b/d goes in 2006/07

Concerning IHS and WM, if you look through the Laherrere presentation, there is a consistent difference between the two with IHS always higher than WM with regard to cumulative oil discoveries or production. Concerning political data--I assume that means data from political sources? From his conclusions

"Technical field reserves are gathered by scout companies as IHS and WM but they differ widely, IHS seems moving towards political data, considering Middle East national companies as the future."

So (state-owned) Aramco is a political source?

I actually don't think that there is an authoritative citation yet on the steeper declines. This is something that is just emerging as the first fields that used the new technique are starting to run down. It may be that Lahererre's paper at the ASPO meeting in Lison in 2005 may be the best data out there but I don't think that he addresses this issue particularly. He does have the Abqiaq decline plotted that looks a lot like that at Yibal.

Simmmons says (page 300-301) that Yibal was the first field where they used horizontal wells with the waterflood (which had been going on for at least 30 years prior) and that they started it in 2000.

Dave -

Exactly right - Aramco is the only source for their own numbers, but if you read their technical papers, the numbers within are often lower than the numbers given in their official releases. Engineers write them for each other, and management approves them, but it is usually middle, not upper-most, management. So things sometimes leak out that contradict the official position. This is what got Simmons interested in working around their officially released numbers.

Similarly, major oil companies make "forward looking" statements. Always remember that every press release is designed to bolster investor confidence and demand for shares. The quarterly reports are also "forward looking", and thus they are ALWAYS best-case scenario with best-case data. If you are loking to make your stock worh more for your retirement, what would YOU do?

Scout companies usually garner their data from government documents for each well drilled and completed. Aramco and other state oil companies have ultimte control of what data is made public. Private oil companies have rules they must go by, but they can always choose the "forward looking" estimates.

If you were running either type of company, what would you release to the public? If your yearly bonus was predicated on reaching a production or reserve goal, what would you do to insure you got your bonus?

Because that is EXACTLY why every number out there that we are using is OPTIMISTIC, not realistic...

It's not about conspiracies, collusion or anything except the every-day executive or engineer trying to make sure he gets that big bonus. If there is any wiggle room in the way things are calculated or interpreted, employees will find a way to use it to insure their bonuses. CEO's and other upper management will mimic this, but as they have final control, their machinations to reach their goals can be even more extreme. This is cumulative too. Each year builds on the previous one for the bonus targets!

Nothing sinister, nothing overt - business as usual ALWAYS gurantees optimistic numbers on the production and reserve fronts.

Don't ever leave the human out of the math - you will find yourself wrong at every turn. This is what frustrates economists so very much...


This is why I will ALWAYS opt to use the most pessimistic numbers. They will usually turn out to actually err on the high side anyway. I have been through enough corporate acquisitions to know that what you buy on paper is NEVER what you actually wind up owning....so why on Earth would anyone take any reserve or production numbers at face value, when we ALL know how the real world works?

Thank you, Heading Out.

I don't know how many people realize that horizontal drilling was the main bone of contention between Iraq and Kuwait that led to the Iraqi occupation of Kuwait, and then the Bush-I Iraq war. Iraq was of the thought that the Kuwaitis were drilling horizontally into Iraqi territory, and therefore stealing Iraqi oil.

Spooky -
I was getting my ducks all lined up in a row preparatory to a merciless, no holds barred, take no prisoners, all out nuclear attack on the IHS/CERA numbers as reported in Laherrere but you did it for me. Thanks. 8)

I think the latest data is showing that Mexico might have tipped already.

Which will be the first oil exporting country to cease exports and use them strictly internally?

Something that harkens back to a comment I made earlier (referencing a Campbell document, a version of which can be found at: http://www.odac-info.org/ - look under the assessments tab). Maybe someone in the know can explain to me why this is done in the industry... If there is a 95% probability of extracting so much black gold from a given field (the gold standard for scientists), why do I read the following:

"USDOE annual reports allow computing the probability of the proved estimates, which were for oil about 75% in the 70s, but trending towards 50% now"

To keep the scenario as rosy as possible, not only do they take the best estimates of the day, but they keep lowering the bar (to the currently laughable 50% probability). Or the mean value of all probabilities between 5% and 95% which seems to be a common practice as well.

Any ideas or knowledge from the group?

One more comment from the peanut gallery:

I don't think the fact that Iran and Venezuela are mentioned as alternatives to North Sea should go unnoticed. Words have the power to define reality and when people think of where to invest our strategic interests that fact that these two countries come up may reflect the current strategic scripts of those-in-the-know.

Iran and Venezuela may not be able to make up for lost crude, but they ARE already in the well rehearsed script for where to allocate resources in preparation of future resource conflicts. Too bad, after spending so much blood and treasure in these two areas, the West will find that there is nothing there but an already spent resource and a teeming pissed off mass of unemployed young people.

Tedman -- "... they take the best estimates of the day..."

Its always interesting to spend some time with EIA over at DOE. Here's part of the EIA Iran report:

During 2004, Iran produced about 4.1 million bbl/d of oil (of which 3.9 million bbl/d was crude oil), up about 200,000 bbl/d from 2003. Iran's current sustainable crude oil production capacity is estimated at around 3.9 million bbl/d, which is around 100,000 bbl/d below Iran's latest (March 16, 2005) OPEC production quota of 4.037 million bbl/d. Some analysts believe that Iran's capacity is lower, and that it could fall even further until new oilfield developments (Azadegan, Bangestan - see below) come online in a few years. Iran's existing oilfields have a natural decline rate estimated at 8-13 percent per year (300,000-500,000 bbl/d) and are in need of upgrading, modernization, and enhanced oil recovery efforts (i.e., gas reinjection).

With sufficient investment, it is widely believed that Iran could increase its crude oil production capacity sgnificantly. Iran produced 6 million bbl/d of crude oil in 1974, but has not surpassed 3.9 million bbl/d on an annual basis since the 1978/79 Iranian revolution. During the 1980s, it is believed that Iran may have maintained production levels at some older fields only by using methods that have permanently damaged the fields. Despite these problems, Iran has ambitious plans to increase national oil production - to 4.5 million bbl/d by the end of 2005, more than 5 million bbl/d by 2009, and 7 million bbl/d by 2024. The country is counting on billions of dollars in foreign investment to accomplish this, but this is unlikely to be achieved without a significant change in policy to attract such investment (and possibly a change in relations with the West).

[on Azadegan]

In February 2004, a Japanese consortium led by Inpex signed a final agreement on the $2 billion Azadegan oilfield development project. Azadegan was discovered in 1999, representing Iran's largest oil discovery in 30 years, and is located onshore in the southwestern province of Khuzestan, a few miles east of the border with Iraq. Reportedly, Azadegan contains proven crude oil reserves of 26 billion barrels, but the field is also considered to be geologically complex, making the oil more challenging and more expensive to extract. In January 2001, the Majlis approved development of Azadegan by foreign investors using the so-called "buyback" model (see below). Inpex, which has no upstream experience of its own, hopes to bring in an international partner - possibly Total, Statoil, Sinopec, or Lukoil (Shell has indicated that it is not interested) - as the field's operator. Initial production of medium-sour crude oil from Azadegan could come in 2007, ramping up to 250,000 bbl/d by 2009. At its peak, Azadegan production could account for as much as 6 percent of Japan's oil imports.

[emphasis added]

See what I mean?


Here's how Campbell ends his ODAC piece:

"In short, there is no way on earth by which the EIA notion of world production rising to 121 Mb/d by 2025 can be fulfilled. It is hard to believe that are oblivious of the facts and inferences explained above, which are self-evident from examination of the relevant data. The likely explanation is that they consciously or subconsciously deliver what their masters expect of them. Those in power want the bland illusion of “business as usual”, so that they may continue to extract support from their traditional constituencies, rather than face the reality of natural depletion imposed by Nature. In this, they underestimate the resolve of the deprived electors, who would much prefer to be told the truth. “Put your trust in the people”, said Winston Churchill, when facing an earlier crisis."

It would be better if we were told the truth, rather than what could or might happen if the planets all line up just right. Then we could get on with the business of debating what can be done, rather than the endless debate over what might (or might not) happen or when the inevitable will happen.

For the skeptics: Oil is a limited resource, it WILL become too expensive to produce for profit. Our society is built on CHEAP oil. Never mind WHEN peak oil happens, we need to debate alternatives for living in the age of expensive oil, not whether or not the sun will rise tomorrow, just as it has today. We need decades to make the transition (even the optimists say we only have a decade or two left).

It's worse than simply the end of cheap oil. In the long run, as I read OVERSHOOT by Catton, we are going to face what haven't had to face since 1492 - a world in which one person gains at the expense of another, because the human population is at the earth's capacity. Since 1492 we've found a new hemisphere and then fossil fuels, all essentially providing an expansion of earth's carrying capacity. When all that comes to an end, life could be different from what we're used to.

My wife says Ehrlich's THE POPULATION BOMB was the scariest book she ever read. It's on my list.

I remember Ehrlich from my undergraduate days and often think of the idea of carrying capacity during PO discussions. But, here we have something more than the ecological notion of carrying capacity. And, something a bit more worrying. Petroleum. as an energy source represents a species peak. of sorts, in the exploitation of stored carbon through the use of rather ingenious technologies that got rolling about nine or ten thousand years ago. First corn (grains generally) for a long long time, then coal, and then petroleum. Each of these had their own malthusian scare in there time (Malthus for corn, William STanley Jevons for coal (in the 19th century) see: http://www-dse.ec.unipi.it/luzzati/italiano/didattica/jevonsparadox.htm, for more info on Jevons). And Hubbert for oil.

We have achieved so much because of our capacity to exploit the energy stored in carbon-based sources and the have refined that technology over the millenia to the present. Now, we have about 6 billion people, all here because the of unique carbon-based energy storage characteritics of petroleum and related products and our technoligies for exploiting them. Carbon-based energy technologies have greatly expanded our ability to support ourselves, to a level well beyond that of the notion of an ecological carrying capacity (as applied to all other species).

Will there be a carbon-based energy source to replace carbon and allow an even more intensive exploitation of the human ecosystem (what's left of it)... I have yet to see any suggestions that there is.

As for gaining at the exense of others, as a species we are already only gaining now only by killing off most other mammals and many non-mammals as well.