energy vision 2007

8/14/2019 Energy Vision 2007

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W O R L D

E C O N O

M I C F O R U

M

E N E R G

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V I S I O N

U P D A T E

The Future of Oil :Meet ing the Chal lenges

World Economic Forum

in partnership withCambridge Energy Research Associates

Spring 2007


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About the World Economic Forum

The World Economic Forum is an independent international organization committed to improving thestate of the world by engaging leaders in partnerships to shape global, regional and industry agendas.Incorporated as a foundation in 1971, based in Geneva, Switzerland, the World Economic Forum isimpartial and not-for-prot; it is tied to no political, partisan or national interests. (www.weforum.org)

About CERA

Cambridge Energy Research Associates, Inc. (CERA), an IHS company, is a leading advisor toenergy companies, electric power companies, consumers, governments, nancial institutions,and technology providers. CERA delivers critical knowledge and independent objectiveanalysis on energy markets, geopolitics, industry trends, and strategy. (www.cera.com)

CERAs expertise covers all major energy sectorsoil and rened products, natural gas, coal,electric power, and renewableson a global and regional basis. CERAs team of expertsis headed by Daniel Yergin, Chairman, author of The Prize: The Epic Quest for Oil, Money and Power for which he won the Pulitzer Prize, and author of The Commanding Heights: The Battle for the World Economy . IHS is the leading source for the critical information anddata on which the upstream oil and gas industry operates worldwide. ( www.ihs.com )

About the Energy Industry Partnership

The Energy Industry Partnership (IP) programme of the World Economic Forum provides the CEOsand senior executives of the worlds leading companies as well as select energy ministers with theopportunity to engage with their peers to dene and address critical industry issues throughoutthe year. Identifying, developing and acting upon these specic industry issues is fundamental tothe Forums drive to deliver sustainable social development founded upon economic progress.

The Energy Vision Update is published twice a year and provides in-depth analysis of energyissues identied by the Energy Governors Community of the World Economic Forum.


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CONTENTS

Executive Summary 2

Energy Community Survey 4

Chapter 1: Introduction 8

Chapter 2: A Critical Debate Between Two Views 11

Chapter 3: Exploring the Differences 14

PERSPECTIVES

The Challenges of Measurement of Conventional Oil Reserves 24Peak Oil How Quickly Must We Start to Mitigate? 25

Expanding the Denition of Oil 26

How Much Oil Is Left in the Ground? 27

Beyond Conventional Oil and the Role of Technology 28

Chapter 4: Meeting the Deliverability Challenge 29

PERSPECTIVES

How to Postpone Peak Oil Production While Reducing the Threat of Climate Change 37

Beyond Conventional Oil Realizing the Potential of New Technology 38

Peak Oil and Global Economic Uncertainty 39What Is the Role of OPEC and Can It Keep Pace? 40

List of Key Contributors 41

1


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Executive Summary

Are we running out of oil? This is a commonlyheard question and seems to arise especially whenoil prices are high. Today, the question is linkedto a vigorous debate about the risk of peak oil.That is the point at some time in the near or not-so-near future when global oil production hits itslimit, begins to decline, and countries begin toshift to other energy sources. Emotions run higharound the issue of future supplies because oil isso fundamental to the global economy. The worlduses 86 million barrels of oil each and every day. Ifcurrent demand growth rates continue, we will beusing more than 100 million barrels of oil per day(mbd) by 2015. Can the oil industry continue to meetgrowing demand? There are two schools of thoughton the answer to that question. Their argumentcan be summarized as peak versus plateau.

Two Competing Points of View

Although there is a range, the peak oil viewcenters on the idea that we have exhausted halfof our oil resources. Supporters of this outlookbelieve that we have crossed over the peak orwill do so soon and will face a rapid decline in oil

production, leading to a global shortage of oil thatwill, in turn, lead to massive economic disruption.This view has a primarily belowground focus andemphasizes the nite nature of oil resources. Thisperspective assumes that price, market responses,and technology will have limited impact on theability to deliver more oil to global markets.

Proponents of this view base their argumentson the methodology of M. King Hubbert (1903-89), a prominent American geologist. Hubbertbelieved that production output from an oil eldfollows a bell-shaped curve. That is, the declinein production after the peak production level

has been reached will mirror, in its shape,the growth in production prior to the peak.

There is a second view that is more market oriented.Although this market-based view concurs thatoil is a nite resource for which volumes arepredetermined by geology, proponents of thisview argue that the signposts for a decline in oilproduction have not been observed. In addition,they believe that when the peak is reached, thedecline in production will be gradual, following apath that looks more like an undulating plateauas the oil industry applies new technologies toaccess more of the ultimate recoverable reserves.

These two views of the world of oil arefundamentally different, based on the differentassumptions described above. They alsolead to very different perceptions of what canbe done, what needs to be done, and whatshould be done to ensure that adequate energysupplies are available for economic growth.

What Counts and How to Count?

Geoscientists estimate the amount of hydrocarbons oil and gas that might be available as well aswhat they believe can be produced in the future.There is no universal measuring tool; nor is therea standard for what can be labeled oil reserves,although there is increasing convergence.Currently eight governmental and internationalorganizations, including the US Securities andExchange Commission (SEC), have developedreserves or resource classication systems. Thegold standard, to which they generally all refer, isthe system created by the international Society ofPetroleum Engineers (SPE). Resource is the termused for hydrocarbons that are, or could be inthe future, commercially produced. Reserves are

hydrocarbons that can be commercially produced.There are three categories of reserves, oftenreferred to as the three Ps proven,probable and possible. All have a technicaland economic dimension to them. Provenreserves have a 90% probability that the totalcommercially recoverable resources producedwill equal or exceed the estimates. These are thehigh condence resources. They are referredto as P1 or P90 reserves. Probable reserveshave a 50% probability and are referred to asP2 or P50 reserves. Possible reserves P3

have a 10% probability that the total resources

recovered will equal or exceed the estimates.

Moreover, yesterdays resource that could notbe commercially produced can become todaysreserves, thanks to technology that allows the oilindustry to explore, develop and produce oil inplaces that were not previously possible or to extractmore than previously anticipated from a producingeld. In 1982 the ultimate recoverable resources inthe Permian Basin, a supergiant oil province in theUnited States, were estimated to be 28.5-30.5 billionbarrels. The basin has steadily produced oil overthe past 25 years, and yet the ultimate recoverableresource estimates have almost doubled. They are


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Executive Summary

Christoph Frei, Director Energy Industry & Strategy,World Economic Forum

Daniel Yergin, Chairman,Cambridge Energy

Research Associates

now estimated at more than 50 billion barrels. Theincrease is the result of both better understandingof the elds over time and technological advances.

The more conservative peaking perspectivemainly takes into account P1 or P2 estimates.Researchers who adhere to this viewpointtend to limit their production calculations toconventional oil produced in conventional ways.That leads to estimates of global remaining oilreserves of approximately 1.2 trillion barrels.

Proponents of the market-based view believe that oilmarkets will be able to adjust to changing demandrequirements and deliver the proven, possible andprobable reserves as well as many resources thatare not currently commercially viable. Those includehydrocarbons from unconventional sources, such asCanadian and Orinoco oil sands, natural gas liquidsand ultradeep water. Within 10 years, almost 40% oftotal productive capacity approximately 45 mbd will be available from these unconventional sources.This broader view leads to estimates of remaining oilresources that could be as high as 3.7 billion barrels.

Peak oil advocates mainly make the case in terms

of discoveries, arguing that discoveries are notreplacing production. The market-based viewargues that estimates made at time of discoverygenerally tend to grow much larger over timeas elds are produced, knowledge is gatheredand applied, and technology advances.

The IHS data for discoveries for the period 1995 to2003 show relatively low levels of new discoveries,certainly providing fuel for the alarm about the peak.On the other hand, if reserve additions are included,then the total growth of reserves in this period isabout 313 billion barrels, 75 billion barrels above the238 billion of actual production. Altogether, some

86% of the reserve growth in the United States since1950 is the result of additions, not discovery.

The Deliverability Challenge

The world appears to have sufcient resources tomeet liquid fuels demand for decades. Thus, ratherthan asking Are we running out of oil? , perhapsthe more relevant question is, Are we running out of liquids capacity? The answer is no, butsignicant deliverability challenges will need to beaddressed, and the anticipated patterns of demandare not assured.The geography of production isshifting, leading to a new set of aboveground risks

for energy investors. In addition to questions ofaccess to reserves, there are rising capital costs,political considerations, the environmental impactof extracting both conventional and unconventionalresources, and expectations that oil companiescan help convert oil and gas assets into long-termsustainable economic growth for host countries.

A separate, but related, challenge is risk of climatechange and greenhouse gas (GHG) emissions.The primary manmade source of GHG emissionsis the use of fossil fuels to produce energy. Some

argue that we are too dependent on a niteresource that will eventually run out, and that weshould accelerate the time when we move to alower-carbon economy. Others are concernedthat if an abrupt switch to lower-carbon fuels ismade to address climate change risks, the resultwould be a severe jolt to the global economy.

Development of adequate liquid fuels conventional,unconventional and biofuels requires substantialinvestments on the part of the oil industry. Althoughsecurity of supply looms large, security of demandis no less signicant for those investing tens ofbillions of dollars to supply oil to markets. A keyquestion arises as to whether climate changeconcerns mixed with security-of-supply worriesmight inuence future oil demand patterns.Governments and societies continue to strugglewith the best way to respond to environmental andclimate change risks. If this uncertainty persists andgovernments fail to negotiate the best way forward,the climate change challenge may become moresignicant than concerns about peak oil. Indeed,technological development and shifts to higherefciencies through policies or consumer choice

may well chip away at expected oil demandgrowth, delaying the onset of peak oil production.

The energy industry is poised to ensure that liquidfuels are accessible to markets and consumers whenthey are needed. However, deliverability challengesshould not be dismissed. They are linked to risingcapital costs, environmental costs of unconventionalfuels and concerns about climate change.


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Energy Community Survey

Figure 1

Energy Community Issue Map 2006 07: Global Issues

Key Issues for the Energy Industry

The key issues selected and their priority arebased on a survey conducted with 35 CEOsof the worlds leading energy companies, 17of whom (48%) responded. The responderswere asked to rank global cross-industry

challenges (see Figure 1) and issues specic tothe energy industry (see Figure 2), accordingthe degree of their impact on the industry,their uncertainty and their urgency.

The Issue Map Explained

Key issues are positioned accordingto three parameters:

The horizontal axis indicates how large animpact the issue is expected to have on theenergy sector.

The vertical axis indicates the degree ofuncertainty surrounding an issue.

The size of the bubble indicates distance intime to when the issue becomes pressing.

Immediate concerns are shown by larger bubbles,while smaller bubbles indicate issues that willbecome important only in the longer term.

How to Read the Issue Map

High impact/low uncertainty issues requireimmediate action by industry associations,political decision-makers, etc.

High impact/high uncertainty issues wouldbenet from multistakeholder dialogue.

Low impact issues are either consideredunimportant or they have not yet registered

Source: World Economic Forum, Energy Industry Partnership Programme 2006.61111-6

Impact

Level of Uncertainty

LOW

HIGH

HIGH LOW

NEED FOR MULTI-

STAKEHOLDER DIALOGUE

WEAK SIGNALS

NEED FOR ACTION

Issues Important

in the Short Term

Issues Important

in the Long Term

Corruption

Trade

ScientificLiteracy

Shiite -SunniRift

FinancialDerivatives

Recession

Cities

SME

Mobility

InterestRates

Ageing

EconomicFlows

Innovation

Global/LocalTensions

CommodityPrices

Talent

VisualCommunication

Environment

SkillDevelopment

Migration


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on CEOs radar screens. Where the surveyreveals sharp differences over the impact of anissue the second interpretation is more likely,in which case the World Economic Forum mayseek to raise awareness.

Setting the Agenda. Issues that lay on theupper-right corner of the Issue Map dene theAgenda of the Energy Governors. This agendais balanced with respect to short- and long-term issues.

Most Urgent IssuesOn the industry-specic agenda, CEOs considerthe aboveground risks (terrorism, uncertainty inthe Middle East) as challenges requiring urgentaction, similarly to the results of last yearspoll. The urgency of energy securityrelatedissues has again outranked technology and

sustainability-related concerns such as energypoverty, alternative energy, biofuels and newtechnologies. Among the energy marketquestions, the issues of carbon economy,institutional capacity (OPEC/IEA) and economicnationalism are likely to have a high impact onthe industry, whereas the outcomes of the newwave of mergers and acquisitions and the IOC-NOC power shift appear highly uncertain. Thecarbon economy issue has grown signicantlyin urgency compared to last years results.

On the global agenda, corruption hasmaintained its high-ranking position. The needto reconcile global business interests with localagendas as well as the challenge of attracting,honing and retaining skillful and talentedmanpower have been ranked as most requiringmultistakeholder dialogue and joint efforts.

Figure 2

Issue Map 2006 07: Energy Industry Issues

Source: World Economic Forum, Energy Industry Partnership Programme 2006.61111-5

Impact

Level of Uncertainty

LOW

HIGH

HIGH LOW

NEED FOR MULTI-

STAKEHOLDER DIALOGUE

WEAK SIGNALS

NEED FOR ACTION

MiddleEast

CarbonEconomy

CarbonSequestration

Nuclear Power

EconomicNationalism

CleanCoal

PeakOil

OPEC /IEA

Terrorism

AlternativeEnergy

Russia

M&A:New

WaveVenezuela

India/China

SystemOverstretch

Energy

Poverty

WorldBank/

IMF

Biofuels

CentralAsia

IOC-NOCPower Shift

Fanaticism

EU

FuellingMobility

Issues Importantin the Short Term

Issues Importantin the Long Term

Energy Geopolitical Focus Energy Market Focus Energy Vision



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Issue Survey Questions

GLOBAL ISSUES

Recession Potential global downturn?

Interest rates Rising global interest rates

Financial derivatives Potential international capital market crisis caused by complex nancialderivatives

Trade More bilateral trade agreements in the absence of successful DohaRound

Scientic literacy The need for greater scientic literacy among decision-makers and thegeneral public

Visual communication Need for improved visual communication for complex problems

Mobility Increasing mobility in peoples lives

Ageing Demographic trends: ageing populations and falling birth rates

Skill development New models for education and skill development

Talent Retaining talent

Siite-Sunni rift A potential deepening Shiite and Sunni rift

Cities Growing importance of cities as innovation systems

Global-local tensions Reconciling your global business agenda with local political agendas

SME Importance of small and medium size rms to global business

Economic ows Shifting global ows (capital and production)

Migration Migration and national interests

Innovation Creating a favourable business climate for innovation

Commodity prices High commodity prices

Corruption Impact of corruption on innovation and investment decisions

Environment Consumer pressure on businesses to solve large-scale environmentalissues


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Issue Survey Questions (continued)

INDUSTRY-SPECIFIC ISSUES

Energy Geopolitical Focus

Middle East Window of opportunity versus risks

Central Asia Societal changes destabilizing the region

Russia Political uncertainty affecting investment opportunities

European Union Over-reliance on Russian energy

Venezuela Socialist Venezuela: United States out, China in

India/China Competing for investment opportunities

Terrorism New forms of terrorism: inuence on global energy markets

Fanaticism Impact of religious conicts on geopolitics

Energy Market Focus

OPEC/IEA Changing challenges

World Bank/IMF Role in nancing energy infrastructure

Carbon Economy Post-2012 framework

Economic Nationalism Protectionism and re-nationalization in the energy sector

IOC-NOC Power shift

Mergers and acquisitions New wave

System overstretch Power: trend towards system overstretch

Energy Vision

Peak oil Oil peak or merely the end of easy oil

Carbon sequestration Acceptable sustainable solutions

Clean coal Affordable CO 2-free technology

Nuclear power Old dogmas and new horizons

Fuelling mobility Infrastructure challenge

Alternative energy Speeding pace

Biofuels Mixed blessings

Energy poverty Electrication for the energy impoverished



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The Future of Oil: Meeting the Challenges

Chapter 1: Introduction

focus to the adequacy of resources. Concernsrose to a new level with the demand shock of2004, in which two and one-half years of whatis regarded as normal demand growth werecrammed into a single year.

Growing impact of India and China. Theintegration of China and India into the worldeconomy and their high rates of economicgrowth portend dramatic, sustained long-termgrowth in oil demand from these countries.China became the world's second largest oilmarket, replacing Japan, in 2004. Chinas oildemand is currently growing at the rate of 7%per year. The potential growth is highlighted bythe disparity of the penetration of automobilesacross countries. In the United States, forinstance, there are 1,148 automobiles forevery 1,000 citizens. That compares to 702 forFrance, 608 for Japan, 11 for India and 9 forChina.* As the economies and standards ofliving in China and India grow, these will drivetheir demand for energy.

Resource competition. With the newrecognition that more than 2 billion peoplewill be demanding substantially more energy,there is a fear that commercial competition willturn into mercantile rivalries among nations forlimited resources.

Energy security. Energy security has becomea pervasive concern in both consumingand producing nations. This further focusesattention on the availability and adequacy ofenergy resources.**

Memory. The consequences of the oilshocks of the 1970s and the early 1980s werevery severe, measured in terms of recession,unemployment, ination and global tensions.This memory persists and fuels the currentanxieties of the economic impact of a battlefor resources.

*See the CERA Special Report, Gasoline and the American People .**See The New Energy Security Paradigm , World Economic Forum, Spring 2006.

Peak is the word used to describe the top of amountain or an inexion point. In the oil industry,peak is usually considered to be the point atwhich production of an oil eld begins to decline.But the term has taken on a larger meaning andnew signicance that puts it at the centre of acritical global debate. For, in this new context,it means that point in history when global oilproduction begins to decline and economies

begin to shift to other energy sources. Indeed,the current debate is about whether that pointis close at hand or further into the future.

The debate is also about the long-termglobal production prole. Using the mountainmetaphor, does the top of the mountain risefrom a broad plain, with a sharp upward slopeand then descend steeply after the peak hasbeen reached? Or after reaching the top of themountain, is there an undulating plateau beforea gradual drop to the plain on the other side isreached? That prole and the timing, whetherreaching the sharp peak or undulating plateau, will

determine the risk prole for the world community.The peak oil debate is, in fact, really a dialogueabout the adequacy of resources primarilyoil to fuel economic growth over the nextseveral decades. (Although natural gas demandis currently 60% of oil, when measured on anoil-equivalent basis, its long-term future supplygets much less attention.) This peak debateis one of the most controversial issues bothin the international oil industry and among thewider public that is concerned about resourcesand the environment. Although peak-versus-plateau has been the subject of discussion for

some years, recent developments are creatinganxieties that have pushed the topic to the fore.

Surge in demand. In a few short years theworld oil market has gone from low oil pricesand a large surplus to a tight balance that hastripled prices from those of only seven yearsago. This surge in demand has brought a new


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The peak oil debate also acts as a vortex thatdraws in several other critically important issues.

Global climate change and the timingto make the transition to a lower carbonfuture. Climate change refers to the highconcentration levels of GHG emissions in theatmosphere and the impacts this will havearound the world.

Adequacy, scale and timing ofinvestments, as well as geological

challenges. The need to nd and developnew resources and even the ability to accessand develop resources will face many hurdles.

Environmental impacts. Many of the newresources are located in fragile ecosystems.Others use technologies that require the use ofextensive resources or are energy intensive.

Geopolitical risks. These risks are changingas the centre of gravity for both world oilproduction and energy demand shifts,leading to questions about the stabilityand realignment of political and economic

relationships among nations. Role and pace of technology. The debate

includes discussion on whether technologicaldevelopment will keep up with growingdemand.

Although, in contrast to the 1970s, the higherprices have not led to a global economicdownturn, at least so far, the continuinganxiety has led to renewed calls for energyindependence and diversication in theUnited States and other countries.

Amid greater concern about the impact ofincreased concentrations of GHG emissions inthe atmosphere, some have begun to questionwhether the age of oil is nearing an end. There isno direct connection between climate change andthe timing and scale of future world oil supplies.The connection is in the response to thesetwo sets of concerns. Those most concernedabout climate change want to accelerate thetransition to a lower carbon future. The peakview reinforces that prospect with its argumentabout the need to accelerate the transitionaway from oil because of lack of availability.

The debate about peak versus plateauraises a number of questions. How muchoil do we have left in the ground? Can it befound and developed economically and inan environmentally appropriate way? Can itbe delivered to markets where and when it isneeded? Is there risk to the global economy ofrelying on an energy source that may, indeed, berunning out? Should we accelerate the searchfor economic alternatives to fuel our economies?Or will fears of running out prompt conictamong consumers for access to supplies?

The peak can have a wide variety of impacts.It can accelerate a shift away from oil evenif the direction that shift would take cannot beclearly dened. It can stimulate development ofnew industries. It could also lead to oversizedinvestments in alternatives and oversizedexpectations. If the peak eventuates, or iswidely believed to be likely, it can aggravatecompetition and conict among nations as theyscramble to preempt supplies. It can also beused to justify other policies. For instance, Iransnational security adviser recently explained thatIran needs its nuclear programme becausefossil fuels are coming to an end. We knowthe expiration date of our reserves.

The question of timing looms large becauseglobal economies are heavily invested in thecurrent hydrocarbon infrastructure. Being toolate can have very adverse consequences.Doing too much too soon would requiregovernments and corporations to shiftinvestment priorities in uneconomic directionsthat can lead to disillusionment. Either way,investment and policy decisions will have long-term implications. These decisions need tobe made in an atmosphere of understandingabout the scale of remaining oil resources, theassociated uncertainties, the challenges thatthe oil industry faces in extracting and deliveringthose resources when markets demand themand the opportunities to expand the denitionof liquid fuels for the transportation sector.

There are other key questions, of course,which are beyond the province of this particularreport, including the potential for efciency,renewable energy and other alternatives.


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Yet there is also a fundamental conceptualquestion that haunts the whole peak-versus-plateau debate. For underlying all of this isconfusion over the denition of reserves,resources and reservoirs a sense of murkinessabout what counts and how to count it. Theresult is multiple perspectives and denitionsthat fail to provide the clarity needed to makecritical decisions about the way forward.

The purpose of this Energy Vision Update is to provide that clarity. The report isdivided into three additional chapters.

Chapter 2: A Critical Debate BetweenTwo Views. Oil continues to be one of thecornerstones to global economic growth.Therefore, it is essential to understand the keydifferences in the views around the questionof future oil resources. Although there isa spectrum of views, a basic difference isbetween the primarily belowground resourcefocus of those woried about an immenentpeak and the more aboveground risk focusof the market view.

Chapter 3: Exploring the Differences. Manyof the key differences noted in Chapter 2

come from two questions: What counts? Andhow do you count it? Three issues emerge.They are understanding discoveries versusreserves growth; the shape of the declinecurve (peak versus undulating plateau); andthe signicance of oil from conventional andunconventional sources. The chapter alsopresents the perspectives of ve researcherswho have analyzed oil resources, presentingsignicant differences in view on the future ofoil exploration and production.

Chapter 4: Meeting the DeliverabilityChallenge. Although there are differencesof opinion on whether we are running out ofoil, there is general agreement that criticalchallenges lie in the ability to develop liquidhydrocarbons in sufcient quantities to meetgrowing demand. Five aboveground riskstest the ability of the oil industry to meet thatchallenge: commercial opportunities, securitysituation, political conditions, environmentalimpact, and social benets. These risks arediscussed along with questions related towhether and how climate change policychoices t into the equation. Four researcherspresent their views on these questions.

Ras Tanura Plant in Damman, Saudi Arabia


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Chapter 2: A Critical Debate Between Two Views

few more years, but beyond that oil productionmust begin an irreversible decline and civilizationis in trouble It is not a question of if but whenthe world economy will be confronted with amajor shock that will stunt economic growth,increase ination, and potentially destabilizethe Middle East. It will make the Great SecondDepression look like a dress rehearsal.*

The result of the inability to meet globaloil demand would be, in the peak oil view,catastrophic. It looks as if an unprecedentedcrisis is just over the horizon, writes ProfessorKenneth Deffeyes. There will be chaos in theoil industry, in governments and in nationaleconomies The year 2000 may be theyear of maximum world production, and themathematical midpoint will be 2004 or 2005.There is nothing plausible that could postponethe peak until 2009. Get used to it.** Acrash mitigation programme is needed, saysCongressman Roscoe Bartlett, chairman of theUS Congressional Peak Oil Caucus. A crash

programme will need the total participation ofthe American public like we had with World WarII Victory Gardens, the technological focus ofthe Apollo Moon programme and the urgencyof the Manhattan Project. The heart of the peakoil argument has three critical assumptions.

First, it assumes that when global oilproduction reaches an inexion point, thedecline in production follows the samepattern as the growth in production,forming a symmetrical prole. Thisassumption draws its inspiration from the lateM. King Hubbert [1903-1989], prominent US

geologist who in 1956 predicted a peak in USoil production and was off by only two years.Hubberts analytical technique is widely usedto support the peak oil view.

The second critical assumption is that theworld has already produced half of theglobal resources. There are hard and softviews on this second assumption. The classicpeak oil view is that we have consumed

*Alex Kuhlman, Peak Oil Survival Guide: Preparing for the Coming Global Crisis , www.oildecline.com/index.htm, page 1.**Kenneth S. Deffeyes, Hubberts Peak: The Impending World Oil Shortage , Princeton: Princeton University Press, 2001, page 10.

Emotions run high in discussions about theadequacy of resources to fuel economicgrowth. Much is at stake. The pessimistic view,referred to as the peak oil view, has a primarilybelowground focus. It believes that physicaloil resources are sharply limited and alreadyhalfway to exhaustion. According to this view,between 2005 and 2015 the world will run intoan oil peak with these characteristics: an inexion

point, followed by the rapid decline in oil outputon a worldwide basis that will, as a curve, lookvery much like its buildup in production.

The more optimistic view, referred to as themarket-based view, has a more abovegroundfocus. It believes that although oil supplies maybe constrained, the oil industry will be able torespond with sufcient liquid hydrocarbonsto meet global demand for the next severaldecades. Moreover, it tends to see themajor constraints as not being physical, butdened more by investment, access, politicsand geopolitics. It recognizes that there

can be signicant constraints and risks.These two views of the world are based onfundamentally different assumptions; and theylead to different perceptions of what can bedone, what needs to be done, and what shouldbe done to ensure that adequate energy suppliesare available to drive global economic growth.The two perspectives have very different riskproles. Each argument is described below.

The Peak Oil View of the World

The fundamental concern of the peak oil view isthat in the very near future, world oil output willnot be able to keep up with demand and indeedwill start falling while demand rises. It is nowclear that the rate at which world oil producerscan extract oil is reaching the maximum levelpossible, one advocate of the peak view writes.This is what is meant by Peak Oil. With greateffort and expenditure, the current level of oilproduction can possibly be maintained for a


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approximately half of the worlds total reserveof about 2.5 trillion barrels of conventional oilin the ground, with only another 1.2 trillionbarrels remaining.* A modied view is thatthere may be more resources that mightbe called theoretical oil it may exist, butin highly uncertain and even problematicenvironments.**

A third assumption is that these processesare relatively inexible and that theworking of economics price and market

responses will be only of limited impact.

Researchers who share the peak oil viewargue that discoveries are getting smallerand the volumes of new oil discovered eachyear are not keeping up with consumption.They assert that discovery rates are fallingand not keeping up with production.

Both timing and impact are also signicantcomponents of the peak view, with expectationsthat geologically determined peak will occurbetween now and 2015. Colin Campbell,founder of APSO, commented in an interview

that the consequences could include war,starvation, economic recession, possiblyeven the extinction of homo sapiens.***

This pessimistic view is in part due to skepticismabout the potential of technological innovation tomake a major difference in terms of expandingreserves or even just stemming decline.Proponents also point out that more than half ofthe remaining proved conventional oil reservesare in the Middle East, and reports of estimatedreserves there do not necessarily follow therigorous standards of the Society of PetroleumEngineers (SPE). They further argue that the

resource levels reported by many exportingcountries are inated and too optimistic.

The Market-based View of the World

The market-based and peak oil viewof the world agree on many signicantpoints. They both acknowledge that

Oil is a nite resource for which volumes arepredetermined by geology. The world willeventually need to shift away from its use.

Strong demand growth can be expected foroil, particularly in Asia.

The oil industry is increasingly movingto frontier areas that are more difcultto access, technically challenging andcostly. The denition of frontier continuesto change, and the market-based view

incorporates these changes more readily.For instance, the deepwater frontier in the late 1970s was about 180 metres (600 feet)of depth; t oday it is 3,660 metres (12,000feet) or more.

More than half of the worlds oil resources arein countries that are part of OPEC.

Fossil fuels, including coal, oil, and naturalgas, are a major source of greenhouse gasemissions. How to move towards lowercarbon economies is now rmly on theinternational agenda.

As noted above, the peak oil view believes thatdiscovery rates are falling rapidly, and that we arenow producing two to three barrels of oil for everyone we nd. Supporters of the market-basedview would challenge that statement in two ways.First, the discovery rates are actually rising, notfalling. It is the volumes that are falling. Second,although the industry is, indeed, producing twoto three barrels of oil for every one it nds throughexploration, those supporting the market-basedview would observe that the industry is ndingmore oil in current elds through improvedproduction methods, better understanding of

the elds and continuing application of newtechnologies. When additions are added todiscoveries, the world growth in reserveshas exceeded production in recent years.

The market-based view does not assumea world of endless abundance. Rather, thesupporters of this view argue that the signposts

*Kenneth S. Deffeyes, Hubberts Peak: The Impending World Oil Shortage , Princeton: Princeton University Press, 2001, page 1.**Paul Roberts, The End of Oil: On the Edge of a Perilous New World , Boston: Houghton Mifin Company, 2004, page 46.***Michael C. Ruppert, Colin Campbell on Oil: Perhaps the Worlds Foremost Expert on Oil and the Oil Business Conrms the EverMore Apparent Reality of the Post9-11 World, http://www.fromthewilderness.com/free/ww3/102302_campbell.html, October 2002.


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for a decline in oil production have not beenobserved. In addition, when the declinecomes, it will be gradual an undulatingplateau with no sharp drop-off of supplies.

This viewpoint is based, in part, on a belief thatcommercially available resources will continueto grow in volume in the next few decades,for two reasons. First, technology will continueto facilitate expanded output of conventionaloil. Second, technology will enable thegrowth of unconventional sources, including

deeper water and frontier areas that have notbeen previously exploited. By including theseunconventional sources Canadian and Orinocooil sands, ultradeep water, natural gas liquidsand Arctic oil, along with an estimate of likelyeld upgrade volumes and exploration potential

proponents of the market-based view believethat the remaining endowment of resources ismore on the order of 3.7 trillion barrels, nearlythree times the volumes that proponents ofthe peak oil view believe are available.

Supporters of the market-based view also donot focus on dening a specic peak of oil

production or oil reserves. They believe thatidentifying a peak in terms of volumes andtime period requires an accurate knowledgeof the global resource base, which in their view,is not known at the present time. Even with thebest data and analytical techniques available,it may remain unknowable. They also believethat technology will almost certainly open up

new horizons, expand recoverable reserves ofexisting elds and improve overall recovery rates.

Finally, the market-based view takes a moremeasured approach to the governmentpolicy actions. Because this view does notanticipate an immediate crisis, proponentstend to focus on ways that aboveground riskscan be addressed and mitigated in order tomeet the global demand for liquid fuels.

One of the most contentious issues is thequestion of what actually counts? whengeologists add up oil reserves and assessfuture oil production. A corollary question ishow do you count it? In Chapter 3: Exploringthe Differences, we take a closer look at theissues that cause the most confusion.

Both views use history. Those with the peakoil view cite production histories of variousregions and invoke the turmoil of the 1970s asthe model for the instability that would followthe imminent peak. The market-based viewobserves that there have been four previousperiods of running out peak-like views.The last was indeed the 1970s. But worldproduction has increased 60% since then.

Both peak oil and market-based proponentstalk about millions of barrels per day ofproduction and billions and trillions of barrelsof reserves. But what they count and howthey count are very different. And that iswhat we explore in the next chapter.

Semi-submersible Driling Rig in Baku, Azerbaijan


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reserves consulting rms, and from industry.They periodically review experience, the state ofknowledge and the technological advances thatimprove understanding of resources beneaththe ground. After considerable consultations,the SPE issued denitions in 1965. It hasupdated and revised them three times since,and is in the process of revising its guidelinesyet again to take in account technologyadvances and changing commercial issues. Itis doing this in collaboration with the AmericanAssociation of Petroleum Geologists (AAPG),the World Petroleum Council and the Societyof Petroleum Evaluation Engineers. The newguidelines will be released early in 2007.

The SPE denes nine categories ofhydrocarbons which range from provenreserves to undiscovered, high risk prospectiveresources (see Figure 3). With time, many ofthe eight organizations are adapting, to onedegree or another, to the SPE standards.

Of the nine categories, the peak oil debatetends to centre around a subset of thoseresources that have been discovered and arethe least risky to recover. These are the ThreePs proven, probable and possible. All havea technical and economic dimension to them.Proven reserves have a 90% probability thatthe total commercially recoverable resourcesrecovered will equal or exceed the estimates.

Source: Society of Petroleum Engineers.61111-10

Figure 3

Society of Petoleum Engineers' Resources Classification System

U n

d i s c o v e r d

P e

t r o

l e u m

I n t i a

l l y - i n - P

l a c e

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Provedplus

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l

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b - C o m m e r c

i a l

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These are the high condence resources. Theyare referred to as P1 or P90 reserves. Probablereserves fall to a 50% probability and are referredto as P2 or P50 reserves. Possible reserveshave a 10% probability that the total resourcesrecovered will equal or exceed the estimates.

These categories may appear clear, but thereis no worldwide standard either for estimatingthe reserves or for reporting them. The bestknown reserves estimates are the reservedisclosures that companies report to the SEC.Companies that list their securities publicly inthe United States must comply with the specicset of very conservative rules set by the SEC.

These SEC rules promulgated in the late 1970sand not signicantly revised since then are verynarrow in their denition of reserves that canbe reported. They are based on the 1965 SPEdenitions and technological status of the 1970s.They do not take into account the signicanttechnological changes that have accrued in theyears since they were implemented and thatpermit a much better understanding of resourcesunder the ground. Nor do they recognize that theSPE has developed three new sets of guidelinessince then, with the fourth imminent. As a result,the SEC disclosures do not provide a reliableguide to future development or global resourcelevels. (Revising the denitions is on the agendafor the SEC, but that regulatory agency has ahost of other issues to deal with as well). Theserules are based on the 1965 SPE denitions andtechnological and market situations of the 1970s.*

In addition, national oil companies (NOCs) andcompanies that are not publicly held are notrequired to report their hydrocarbon reserves.Some of the NOCs work at world standards intheir reserve estimation; others do not. Somecountries may categorize proved reserves thatwould be considered as probable reservesin the United States, Norway and Canada.

The result of these various factors is that itis impossible to add up individual estimatesof reserves, using company data, to gain areliable understanding of the worlds total oilendowment (This also holds true for natural gas).

The lack of common reporting standards or acommon, publicly available data base has ledto widely differing estimates of remaining oilreserves. Robert Hirsch in his Perspective: Peak Oil: How Quickly Must We Start to Mitigate? argues, A fundamental problem in predicting oilpeaking is the poor quality of, and the politicalbiases in, world oil reserves data. Some whoare concerned that oil production may bedeclining rapidly worry that the NOCs may haveoverestimated their remaining resources, anargument that cannot be proven or disprovenbecause the data are not publicly available.

There is no one way to estimate world oilreserves. Researchers who take the mostconservative approach use proven reservesthat are currently commercially accessible. Thatleads to an estimate that the world has remainingreserves of approximately 1.2 trillion barrels.That gure excludes the contribution likely fromprobable and possible resources, yet-to-ndresources and unconventional resources suchas extra heavy oil. This approach is based onthe view that estimates should be made on thebasis of proved reserves only because thereis no certainty that the probable and possiblereserves are there. They warn about the whatifs that is, what if the global market cannotdeliver these probable and possible reserves.Others who share the peak oil view expand thedenition of reserves to include both provedand probable reserves the 2P estimates,but incorporate only recoverable already-discovered conventional oil, according to RogerBentley in his Perspective: The Challenges of Measurement of Conventional Oil Reserves .Moreover, this viewpoint does not take intoaccount some contributions from 3P reserves,

likely eld upgrades and exploration potential.Proponents of the market-based view believethat oil markets will be able to adjust tochanging demand requirements (which over timebecome more elastic) and deliver the probableand possible reserves as well as many of theresources that are currently not commerciallyviable, at least for the next few decades. This viewhas more condence in continuing technological

*See the CERA Special Reports In Search of Reasonable Certainty: Oil and Gas Reserve Disclosure, April 2005, and Modernizing Oil and Gas Reserves Disclosure, February 2006 .


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Source: Cambridge Energy Research Associates.*Unconventional liquids as a percentage of total capacity.**Includes LPG (propane and butane), ethane, and natural

gasoline derived from processing natural gas.61111-11

Figure 4

Unconventional Liquid Components of World Productive Capacity(with shares of total liquids productive capacity)

0

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20

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2000 2006 2011 2016

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advance and in the ability of market signals toguide supply (and demand) responses. Thisperspective also leads to estimates that are muchhigher. The USGS, for example, estimates thatthe world may well have 2 trillion barrels of oilof conventional recoverable reserves remaining(see Peter McCabes Perspective: How Much Oil Is Left in the Ground? ). CERA estimates thatthe number may be as high as 3.7 trillion barrels,when both conventional and unconventionalresources are considered (see Peter JacksonsPerspective: Expanding the Denition of Oil) .

CERA estimates that by 2016 nearly 40% ofworld productive capacity will come from whatcan be considered unconventional liquids, upfrom 25% in 2006. These include condensates,natural gas liquids derived from processing naturalgas, oil from deepwater reservoirs, ultra heavyoil and gas-to-liquids produced from natural gas(see Figure 4). Those numbers do not include

biofuels. These varying differences amongcategories of reserves and between conventionaland unconventional oil can explain part ofthe debate about the future of oil production.

Conventional and Unconventional Resources

As already noted, 40 years ago offshore oilwas considered unconventional. A relativelyfew years ago, Canadian oil sands (otherwiseknown as tar sands) were considered fringe

that is, marginally economical with a limitedfuture. Today, they constitute 40% of Canadiansoil production, with expectations that thevolumes may grow four-fold by 2020. Yet oilsands are still considered unconventional and,therefore, are not normally represented intraditional global 2P oil reserves estimates.


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Oil located in ultradeep water in the Gulf ofMexico has conventional properties, but thetechnical challenges in its development areclearly not conventional. And yet in 2006 Chevronsucceeded in a production test from the Jackeld in the Gulf of Mexico through 7,000 feetof water and another four miles beneath theseabed. Farther out on the spectrum, oil shaleis certainly considered unconventional and mustovercome substantial research and developmentchallenges to become part of the picture.

Each decade of technological advance enablesthe oil and gas industry to gain a clearerpicture of the hydrocarbons underground, toaccess them and to bring them to the surface.Technology also brings the unconventionalsfrom the fringe into the mainstream.

In the United States and Canada, for example,conventional oil production is in decline. Butthe total productive capacity in North Americais reasonably stable because the gap fromdeclining conventional oil is being lled bysuccessful development of Canadian oil

sands, natural gas liquids (NGLs), and wellsin the deep water of the Gulf of Mexico. Yetboth oil sands and NGLs are excluded fromtraditional reserves estimates (see Figure 5).

Confusion Between Production Peak and Reserves Peak

Much of the debate about peak oil focuseson estimates of global oil reserves andwhether we have produced more than half

of those reserves. In an ideal world, wewould know and report global oil reservesalong with annual production. That wouldprovide a clear picture of the remaining oilthat would be available to global markets.

Reserves estimates continue to change overtime. For example, the total ultimately recoverableresources from the Alaskan North Slope wereestimated, for some years, at 9.6 billion barrels.Now, the estimates are 13.7 billion barrels morethan 40% greater. Much of the oil in deep wateroff Africa and Brazil and in the Gulf of Mexicowas not accessible until relatively recently.

Figure 5

United States and Canada Productive Capacity to 2016

Source: Cambridge Energy Research Associates.61111-3

Canada Oil Sands

Canada Conventionalanada ConventionalCanada Conventional

US Conventional Rest

US NGLsS NGLsUS NGLs

US Deepwater

20052000

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Analysts who are concerned about animminent peak argue that once individualbasins have reached peak production, theirdecline is almost as rapid as the climb to thatpeak. When a strong exponential decline isplotted against rising demand of 1.5-2.0%,the resulting graph can appear alarming.

The most famous production curve is the bell-shaped curve produced by the geologist M.King Hubbert. Hubberts work has becomethe foundation of the peak oil perspective.His signicance is reected in the titleHubberts Peak by Kenneth Deffeyes, oneof the foremost advocates of the peak oilpoint of view, and the extensive discussionof Hubberts work in Deffeyes book.

Similarly, Richard Nehring observes, Discussionof a peak in world oil production, in both narrowtechnical circles and the broader public, hasbeen dominated by one method of prediction:the method developed by M. King Hubbert ina series of articles 40-50 years ago.* Using oilproduction data from the lower 48 states of theUnited States, Hubbert predicted the point atwhich peak production would be reached aswell as how the elds would decline. He arguedthat production peaks when approximatelyhalf of the resource base has been depleted.

Hubbert predicted the US lower 48 peak wouldoccur in 1968, within two years of the actualUS peak in 1970. But his estimate of peakproduction for 1968 was nearly 600 millionbarrels per year of oil lower than the actualpeak production number of 3.5 billion barrelsin 1970. That is, actual production of the peakwas 20% higher than Hubbert predicted.

The shape of the curve varies eld by eld andregion by region, depending on the geologicalformation and the technology applied to maintainits production levels. That view is put forward,for example, by Michael Lynch in his analysis of21 UK elds where peak production was morethan 40,000 barrels per day. Only seven showedthe sharp bell curve decline of the peak; the

remaining 14 showed clear-cut characteristics ofthe undulating plateau. The production curves ofthree of the latter elds Forties, Murchison andNorth Cormorant are illustrated in Figures 6, 7and 8.** The difference between the bell-shapedcurve and the asymptotic curve is crucial to thedebate. The bell-shaped curve is the one thatheralds the sharp decline of the peak view, withproduction falling away as fast as it went up. Theother points to the slower decline of an undulatingplateau the signicance of which is highervolumes of output over a longer period of time.

The Critical Issue of New Discoveries versus Reserves Growth

When a new oil eld is discovered, it is listedas a new discovery. Although these newdiscoveries gain the headlines, bringingproduction from these new discoveries to marketis often a long-term effort. That effort involvesextensive eld development, laying pipelines,something establishing export facilities, or tyingin to current pipelines and working with localcommunities to ensure that the developmentcan be achieved without environmentaldamage and with positive social impact. It alsoinvolves experience and buildup of knowledgeabout how the eld actually performs.

When oil companies prepare their capitalbudgets, they allocate a portion towardsexploring for new discoveries. However, thatrepresents only a relatively small percentageof their capital expenditures. They allocate amuch larger portion of their capital budgettowards appraising and developing the eldsthey have already discovered. That is themost capital intensive part of the process. Aselds and basins mature, this second type ofinvestment may well lead to reserves growth

an increase in the estimated ultimate volumeof oil that can be produced from the eld.

As noted earlier in this chapter, ultimaterecoverable resources of the Permian Basinin 1964 were estimated to be 19-27.5 billion

*Richard Nehring, Hubberts Unreliability, Oil and Gas Journal , April 3, April 17 and April 24, 2006.**Michael C. Lynch, The New Pessimism about Petroleum Resources: Debunking the Hubbert Model and Hubbert Modelers.Minerals and Energy, 18, 1, 2003.


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relatively low oil prices as low asUS$ 10 per barrel and high levels of mergersand acquisitions, which focused attentionon restructuring and integration. Explorationactivities were not emphasized. If reserveadditions are included from a combination ofresource growth and new data from previouslydiscovered elds, the total growth of reservesin this period is an estimated 313 billion barrels

which is 75 billion more than actual production.

The impact of resource growth on production canbe signicant and is often underappreciated oreven ignored. In the case of Hubberts analysisof production in the US lower-48 states, forexample, he could not have predicted the impactof technology that had not yet been invented

nor the impact of the development of newareas such as the deepwater Gulf of Mexico. By

2005, US lower-48 oil production was some 66%higher, and cumulative production since 1970was some 15 billion barrels greater than Hubbertpredicted, representing more than 10 years ofUS production at present rates. Technologicalinnovation and an expansion of exploration andproduction activity outside traditional areas hadallowed new reserves to be discovered andproduction to be enhanced from existing elds.

Yet Hubberts inuence continues to be strongover the half century since his rst article. ColinCampbell and Jean Laherrere have commented,Predicting when oil production will stop rising isrelatively straightforward once one has a goodestimate of how much oil there is left to produce.We simply apply a renement of a techniquerst published in 1956 by M. King Hubbert.*

Source: Lynch, Michael C., The New Pessimismabout Petroleum Resources: Debunking theHubbert Model and Hubbert Modelers.Minerals and Energy, 18, 1, 2003.61111-9

Figure 7

Production Curve: Murchison Field in the North Sea

5.5

AnnualProduction

(milliontons)

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0 10 15 20 25 30 35

4.0

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*Colin Campbell, The End of Cheap Oil, Scientic American ; March 1998, Vol. 278 Issue 3, page 78.


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Others, however, point out that Hubberts analysiswas limited by the fact that he was doing hiswork during a time of low oil prices, productionrestrictions by the Railroad Commission ofTexas (the regulatory agency overseeing oiland gas production in the state of Texas) andrelatively little technological innovation. Hisperspective reected his time. Growth inthe ultimate recovery of older elds creates aback-breaking challenge to proponents of theHubbert Method, observes Richard Nehring.The experience of the industry since 1970,in a different economic and technologicalenvironment, provides overwhelming evidence

that massive growth does occur The problemwe face is that of accurately predicting theresources and production of all types of liquidhydrocarbons, not simply predicting a steadilydiminishing component of world oil such asthe so-called conventional resources.*

This chapter explored the differences betweenthe peak oil view and the market-basedview. In the next chapter, we will examinethe critical questions of the abovegroundrisks to delivery of oil to markets in a timelymanner and the relationship between theclimate change debate and the future of oil.

*Richard Nehring, Hubberts Unreliability, Oil and Gas Journal, 3 April, 17 April and 24 April 2006.

Figure 8

Production Curve:North Cormorant Field in the North Sea

6

AnnualProduction

(milliontons)

10 500

5

0 20 30 40

4

3

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1

Cumulative Production(million tons)

Source: Lynch, Michael C., The New Pessimismabout Petroleum Resources: Debunking theHubbert Model and Hubbert Modelers.Minerals and Energy, 18, 1, 2003.61111-8


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Perspective 1

The Challenges of Measurementof Conventional Oil Reserves

by Roger W. Bentley, Visiting Research Fellow, University of Reading, United Kingdom

The amount of recoverable conventional oil in a region is given by the proven plus probable reserves, referred toas 2P reserves. Some eld 2P data are in the public domain, but aggregate 2P data are held in the databasesof companies such as IHS Energy, PFC Energy, Energy les and Wood-Mackenzie.

Many analysts assume the amount of oil within a country is given by the proven, or 1P, reserves. This is erroneous.For countries where reserves are reported under US Securities and Exchange Commission rules, proven reservesare conservative inventory gures, recording only the oil that is close to market.

Over time, 1P data naturally grow towards the more realistic 2P gures. But analysts who think 1P proven reservesare a meaningful indication of oil quantity mistakenly see such growth (for example, the sixfold growth in provenreserves of US onshore elds) as proof of technology accessing new oil.

The proven reserves data for the big Middle East producers are, by contrast, overstated and are larger than thecorresponding 2P reserves data held in the industry datasets.

For the majority of countries in the world, proven reserves data are not updated regularly, and for some countriesthe gures stay constant for many years at a stretch.

For all these reasons, proven reserves data cannot be used to forecast oil production.

Global Quantities of Oil and GasWhen measured in 2P terms, the worlds original endowment of recoverable conventional oil lies probably inthe 2-2.3 trillion barrel range. Of this, about half has been used. The original endowment of conventional gas isroughly the same as for oil, in energy terms. Of this, about one-third has been used.

The world contains very large quantities of unconventional oil as well. Currently recoverable Canadian tar sandsand Orinoco heavy oil total about 600 billion barrels. A much larger amount of these oils exists, but this will be verydifcult to recover, and some is probably negative in energy terms. Likewise, the world contains several thousandbillion barrels of shale oil; but again the real costs and energy balance of recovering this oil are problematic.

Unconventional gas includes coalbed methane, tight gas, gas in deep brine aquifers and methane hydrates. Thesize and extractability of the latter are questionable.

Calculating Future Rates of Oil and Gas SupplyMany analysts assess the future supply of a regions hydrocarbon supply in terms of its reserves-to-production(R/P) ratio, calculated as proven reserves divided by annual production. This calculation is completely misleading.First, as explained above, proven reserves data are very unreliable. More importantly, production in a region goesover a resource-limited production peak well before the end-date indicated by the R/P ratio. Peak occurs whenabout 60% of what has been discovered has been produced; or when about 40-50% of the regions ultimatelyrecoverable reserves (ultimate) have been produced.

This peaking occurs when production from the large early elds is sufciently into decline that this is notcompensated by production coming onstream from the later, smaller elds.

Past 2P discovery data are key to predicting future production. Some 60 countries are now past their resource-limited peak in production of conventional oil. Many are small producers, but large producers past peak includethe United States, Indonesia, Norway and the United Kingdom. Russia is past mid-point, if not technically pastpeak. China and Mexico will soon go past peak.

Some published data on apparent reserves growth in industry datasets are misleading. The global discovery ofoil in new elds has been declining since about 1965. Detailed analysis in a number of studies, such as those ofPFC Energy, Energy les, R. Miller at BP, Germanys BGR, Frances IFP and the 1995 study by Petroconsultants(now part of IHS), shows that the global peak of conventional oil production is to be expected between about2010 and 2015. Most of the same studies nd that the expected increase in global production of unconventionaloil will not be adequate to offset the global decline in conventional oil.

For conventional gas, the global production peak is expected between about 2020 and 2030. This date dependson the amount of gas-carrying pipelines and ships that the world builds.


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Perspective 2

Peak Oil How Quickly Must We Start to Mitigate?by Robert L. Hirsch, Senior Energy Program Advisor, SAIC, United States

The peaking of world conventional oil production will be unlike any energy problem yet faced by modern industrialsociety. Without timely mitigation, the economic, social and political costs will be dire and unprecedented. Viablemitigation options exist on both the supply and demand sides, but to have substantial impact, they must beinitiated well in advance of peaking, because the scale of liquid fuels mitigation is extremely large.

When world oil peaking will occur is not known with certainty. A fundamental problem in predicting oil peakingis the poor quality of and political biases in world oil reserves data. Some experts believe peaking may occursoon, while some think later, but rarely beyond the time required for effective mitigation.

The problems associated with world oil production peaking will not be temporary, and past experience will providerelatively little guidance. Oil peaking will create a severe liquid fuels problem primarily for the transportation sector,not an energy crisis in the usual sense that term has been used.

While greater end-use efciency is essential, increased efciency alone will be neither sufcient nor timely

enough to solve the problem. Product ion of large amounts of substitute liquid fuels will be required. A number ofcommercial or near-commercial substitute fuel production technologies are currently available for deployment,so the production of vast amounts is feasible with existing technology.

An analysis for the US Department of Energy considered a worldwide crash programme in physical mitigation themost optimistic, limiting case. Because peak oil will present a liquid fuels problem, only liquid fuel conservationand production options were considered vehicle fuel efciency, enhanced oil recovery (EOR), heavy/oil sands,and CTL and GTL. Using a simplied, transparent model, the sum total of the contributions shows a pattern ofdelay followed by rapid build-up of impact. Mating these results with a model for world conventional oil peakingshowed that worldwide crash programme mitigation must be started on the order of 20 years before the peak,which is very difcult, since the date of conventional oil peaking is not known with certainty and there may notbe 20 years available for action.

To determine the possible shape of world oil peaking, we examined the peaking proles of four very large oil-producing regions, for which the period around peak oil production was not affected by war or cartel action(Texas, United States as a whole, Norway and the United Kingdom). What the related experience shows is that

peaking can occur with little advance notice and that post-peak declines can be relatively steep. Although it isby no means clear that world conventional oil peaking will occur in a similar manner, the proles do indicate whatactually happened in a number of relatively free-market situations.

To manage the peaking of world oil production, intervention by governments will be required, because themarket alone will almost certainly not act rapidly enough on its own. The experiences of the 1970s and 1980soffer useful guides as to government actions that are desirable and those that are undesirable, but the processwill not be easy.


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Perspective 3

Expanding the Denition of Oilby Peter Jackson, Director, Oil Industry Activity, Cambridge Energy Research Associates, United Kingdom

The greatest risks to oil production growth are above ground rather than subsurface. The four subheadingsbelow focus on reserves issues. That is only a part of the problem.

Expanding the DenitionThe geological habitat and composition of crude oil is complex and highly variable. Although oil is a nite resource,we still dont know accurately how much is ultimately recoverable. With time we continue to nd new resourcesin more complex environments. But recently, as oil has become more difcult and expensive to nd and extract,companies have shifted emphasis away from conventional oils. The unconventional liquids are more expensive tond and develop and include the extra heavy oils in Canada and Venezuela, natural gas liquids that are strippedout of the rapidly expanding stream of global gas production and crude produced in ultradeep water (morethan 2,500 feet [762 metres]) and more recently GTL and even biofuels have been included. Technology andeconomic factors have contributed to the drive towards exploitation of unconventional oils. Importantly theseunconventional oils represent a huge proportion of the global oil resource base, currently estimated to be 4.8trillion barrels. Canadian oil sands alone represent some 175 billion barrels.

Proven Reserves versus Proven + Probable (+ Possible)The classication system of the Society of Petroleum Engineers describes nine separate categories from provenreserves to undiscovered, high risk prospective resources. The peak oil debate should revolve around at leastthe three least risky categories of reserves which are proven, probable and possible discovered reserves. Provenreserves have a 90% probability that the quantities actually recovered will equal or exceed the estimate, probableshow a 50% chance of equaling or exceeding the estimate and possible a 10% chance. The proponents of thepeak theory focus on proven reserves only, which is a pessimistic view of reality. CERA considers all three aswell as exploration potential.

Resource calculations are imprecise, and there is no systematic global compilation of reliable estimates thatis freely available. In addition, these published numbers generally refer only to conventional oils and ignore thehuge potential volumes of unconventional liquids. While those with the peak oil view consider that there are 1.1trillion barrels of proven conventional resources remaining, CERA believes that some 3.74 trillion barrels remain

to be recovered, but we incorporate conventional oil (1.2 trillion barrels), eld upgrades (592 billion barrels), tarsands (444 billion barrels), shale oil extracts (704 billion barrels) and exploration potential (758 billion barrels).With these global reserves and resource estimates it is important to think in terms of order of magnitude ratherthan absolute numbers. Different reserves estimates for an individual eld can easily vary by 50%. We know theglobal oil resource tank is large and nite, but we dont know yet exactly how big.

Production Peak versus Reserves PeakOn a global scale we have seen a reserves peak that predates the onset of the much heralded, but so far neverseen peak in production. Although we have likely discovered a large proportion of global resources, we shouldnot assume that production curves will reach their peaks and fall off a cliff to zero soon thereafter. CERA believesthat the global production curve will follow an undulating plateau for a number of decades before declining.Unconventional resources will begin to play an even greater role, eld upgrades will continue on a massive scalewith adoption of new technologies and exploration will contribute new resources for many decades to come.Our detailed eld-by-eld analysis shows no imminent danger of a peak before 2020, but we might anticipatereaching the undulating plateau during the current century. The large resource inventory discovered in the 1960s

and 1970s, and the reserves/production ratio of more than 40 years at present production rates are key.New Discoveries versus Reserves GrowthIn the past ve years between 8 and 18 billion barrels of new resource were found annually through exploration,which is not enough to replace recent production of 30 billion barrels per year. However, this low level of successis not because of limited prospectivity, but rather because E&P companies spend a small proportion of their capitalon exploration, rather focusing on appraisal and development projects during these times of high oil price. Thisis reected in the high levels of reserves growth in existing elds seen in the last few years. Globally resourceshave been replaced in recent years. Backdating reserves growth is cosmetic and should not detract from thefact that new, previously unknown reserves have been identied in the global reserves tank.


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Perspective 4

How Much Oil Is Left in the Ground?by Peter J. McCabe, Research Geologist, US Geological Survey, United States

As a petroleum geologist I am often asked, How much oil is left in the ground? It is a question that is impossibleto answer precisely. In addition to geologic uncertainty, the remaining amount of extractable oil depends on futureprices and on future technologic advances. Reported reserves (discovered) and estimated resources (discoveredand undiscovered) identify only a fraction of the global abundance of oil, based on selected criteria and subjectiveclassication. For example, the USGS estimated the original recoverable resource base to be approximately 3trillion barrels of oil (http:/ /pubs.usgs.gov/dds/dds-060). By the end of 2005, 1 trillion barrels had been produced,and it would be easy to conclude that one third of the worlds oil has been produced. However, it is only correctto say that one third of the USGS assessed oil has been produced. There is a large volume over and above thisamount including small oil elds, oil in unexplored or underexplored frontier basins (in regions such as the Arctic,the Indian Ocean, and offshore Australasia), oil that may be recovered from reservoirs with the application of newtechnologies (reserves growth) after 2025, and oil that may be extracted from oil sands and oil shales. Most of thisadditional volume of oil was not assessed by the USGS because it cannot be produced economically using currenttechnologies. History, however, shows that resources regarded as inaccessible or uneconomic can eventually

be produced as technological advances reduce costs. The ultimate amount of oil produced could, therefore, farexceed 3 trillion barrels.

Advocates of peak oil reject the possibility of signicant reserves growth through technological innovation andarbitrarily dene a subset of the Worlds oil as conventional, usually excluding deepwater oil, Arctic oil, heavyoils and oil sands, although it is precisely in the development of these resources that the major technologicaladvances are occurring today. Extrapolation of production of that nite amount leads to prediction of a peak withinthe foreseeable future. The amount of available oil may be reduced still further because of a belief that certaincountries and companies overestimate reserves and because of a reluctance to accept uncertainty in geologicassessments. Although it is probably unrealistic to hope for worldwide uniformity in calculating reserves, over thelong term it is the total resource, not reported reserves, that is important. Moreover, reserves growth is clearlyan important worldwide phenomenon. For example, in the past 20 years, 86% of the addition to reserves withinthe United States and the North Sea came from reserves growth rather than from discovery of new elds. Tobackdate these additions to reserves to the original time of eld discovery, as peak-oil advocates recommend,serves only to deprecate the importance of new technologies in enlarging the oil resource base over time.

An understanding of the global geographic distribution of oil is more critical to consideration of future energyscenarios than is the production curve of a subset of the worlds oil. Like other geologic-based commodities,oil is widespread but enriched in a small number of locations where the geologic history has been particularlyfavorable for accumulation and preservation. Although oil is produced in more than 110 countries, over 50%of the remaining economic oil lies within just ve countries: Saudi Arabia, Russia, the United States, Iran andIraq. This geographic concentration has profound geopolitical implications, especially if there is instability withina major producing country or disruption in the supply routes. In this regard, it is worth noting that much of theoil that was not assessed by the USGS may have a distinctly different geographic distribution. The majority ofthe worlds oil sands and oil shales, for example, lie within North America. Technological advances could makemuch of this resource economically viable. Already oil from Albertas oil sands accounts for 39% of Canadas oilproduction and is forecast to quadruple by 2020.


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Chapter 4: Meeting the Deliverability Challenge

What are the aboveground risks that the oilindustry faces?

What role, if any, will climate change mitigationplay in ensuring that global energy needs aremet and that hydrocarbon resources are usedwisely?

What will be the timing of investment, andwhat will be the political, nancial and material

constraints?The starting point for the oil industry is thebelowground risks. Is the oil there? Is it insignicant enough accumulation to extract incommercial quantities? How difcult will thatextraction be? What are the technologicalchallenges? Its a big and challenging partof the story. But its only part of the story.

In this chapter of the Energy Vision Update ,we focus on aboveground risks to set theframework for the questions noted above.IOCs face ve categories of abovegroundrisks when they are exploring, developing andproducing hydrocarbons. Some, but not all,of these risks are also faced by NOCs. Anyanalysis that examines the future of oil needs

Figure 9

Pyramid of Issues: Layers of Complexity

Source: Cambridge Energy Research Associates.Data source: Based on conversations with oil industry executives. The pyramid is in line withthe "Energy Policy Needs" pyramid in Christoph W. Frei's The Kyoto Protocol A Victim of SupplySecurity? Or: If Maslow Were in Energy Politics. Energy Policy, 32, 11, July 2004, 1253 56.60804-14

Commercial Opportunity

Security Situation

Political Conditions

EnvironmentalImpact

SocialBenefits

In previous chapters of this Energy Vision Update , we explored the critical differencesof view surrounding the question of whetherwe are running out of oil. We also analyzedthe issues around what constitutes oilresources, reserves and production, andhow these are measured and counted.

As noted in Chapter 2, the peak oil view

has a belowground focus, projecting arelatively limited supply. The market-basedview recognizes the geological challenges,but believes that the oil industry will be ableto respond from a resource point of view withsufcient liquid hydrocarbons to meet global oildemand for the next few decades. This secondview focuses on the major constraints that couldaffect the deliverability of those oil resources.

The question of deliverability is critical to thedebate. In addition, concerns about the potentialimplications of climate change, although notdirectly related to deliverability, have entered

the discussion. Finally, there are clearlyinternational economic implications if oil supply/ demand fundamentals become unbalanced.


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to take into consideration these risks and howthey can be mitigated. The ve categoriesare described below (see Figure 9).

Commercial opportunity. The bottom layerof the pyramid or the foundation of anyproject is the commercial opportunity. Arethere opportunities to nd and access the oil?Is there a market for the oil at a price that issufcient to make an economic return? Aretransportation systems and reneries capableof processing the oil in place, or can theydeveloped economically?

Security situation. The next layer ofaboveground risk relates to the basic stateof the host countries. Domestic securityrequirements are preconditions for energycompanies to ensure that companies cansafely develop the resources and transportthe oil to market. Are the countries in a civilwar or involved in regional conicts? Are therephysical threats? How secure are the supplychains from producers to consumers?

Political conditions. Geopolitics, regional

politics and the degree to which institutionalcapacity exists or can be built provide the nextlayer of complexity. Is there a basis for theinternational cooperation and dialogue that arenecessary to facilitate foreign direct investmentand to strengthen the investment regime?

Environmental impact. Althoughenvironmental and social issues are an integralpart of investment decisions, questions ofenvironmental impact are normally not raiseduntil the commercial, security and politicalsituations are clear. Are there viable solutionsto environment impacts that are of concernto local communities, lenders and non-governmental organizations?

Social benets. Increasingly, companiesare asked by host governments to assist

with economic development. At the sametime, companies face criticism that they aredisrupting the lives of local citizens. Are thereopportunities to improve the lives of localcitizens and avoid human rights conicts andaccusations of unfair treatment of indigenouspeople?

The remainder of this chapter looks at eachof the three major questions in the context ofthe ve aboveground risks, with a particularemphasis on commercial opportunity, politicalconditions and environmental impact.

How Will Shifts in Global Demand andLiquids Capacity Affect Deliverability?

Global oil demand is expected to increaseat an annual rate of between 1.5 to 2.0%.However, the distribution of that demand

Perspectives on the Deliverability Challenge

The discussion in this chapter is based, in part, on the perspectives of four individuals who consider the roleof oil in the global economy, the implications of climate change and the role of technological innovation inaboveground risk assessments. These perspectives are located at the end of the chapter.

Fatih Birol, Chief Economist and Head, Economic Analysis Division, International Energy Agency, France

Neil Hirst, Director, Energy Technology and R&D, International Energy Agency, France

Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy, Harvard University,Cambridge, Massachusetts, and former Chief Economist, International Monetary Fund

Adnan Shihab-Eldin, OPECs Former Acting Secretary General and visor to Kuwait PetroleumCorporation, Kuwait.


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is shifting away from the OECD countriestowards emerging economy countries,particularly China and India (see Figure 10).

Over the next two years, CERA estimatesthat non-OPEC countries will contribute 3.3

million barrels per day (mbd) of additionalcapacity compared with 3.0 mbd for OPECcountries. Over the next 10 years, however,the pendulum will swing in favour of OPECcountries, which are expected to add 13.3 mbdof additional productive capacity comparedwith 9.2 mbd for non-OPEC countries.

Adnan Shihab-Eldin, in his Perspective: What Is the Role of OPEC and Can It Keep Pace? ,comments that the changing demand patternscombined with the extensive oil resources inOPEC countries lead to the conclusion that

an inevitable structural change in oil supplyis looming. That is occurring, however, atthe same time that questions arise aboutclimate change concerns. The risk forOPEC countries is that they will invest in oilinfrastructure that will not be needed.

The risk for IOCs is that they will not haveaccess to new resources. They are increasinglycompeting with NOCs (some with internationaloperations) from importing countries. TheseNOCs often have government mandates to lockup oil resources to ensure that domestic energydemands can be met. In addition, the shifts inthe geography of world liquids capacity illustratehow hydrocarbon productive capacity will beincreasingly concentrated in Russia, the Caspianand Central Asia, Africa and the Middle East (see

Source: Cambridge Energy Research Associates,Dawn of a New Age: Asian Phoenix Scenario .61111-12

Figure 10

Change in World Refined Product Demand by Region, 2005 to 2020

0

1

2

3

4

5

6

7

Africa LatinAmerica

MiddleEast

NorthAmerica

Eurasia Europe OECDAsia

China Non-OECDAsia ex-

China

MillionBarrelsper Day

4.5%

2.4%

11.6%

7.2%

4.6%

27.3%

20.1%

5.0%

17.3%

China and Other Non-OECD Asia Pacific

account for 45% of theincrease in demandfrom 2005 to 2020.


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Figure 11). With resource nationalism increasing,IOCs are also concerned that they will not gainaccess to resources on a competitive basis.

What Are the Aboveground Risks thatOil Companies Face?

Belowground potential is the starting point forany oil exploration and production activity. Then,companies move to address the abovegroundrisks. Commercial opportunity is the cornerstonefor all aboveground risks. Oil companies require

access to resources, but also the technology,equipment and skilled personnel to extract anddeliver the oil to market. Fatih Birol commentsin his Perspective: How to Postpone Peak Oil Production While Reducing the Threat of Climate Change that capacity additions couldbe slowed by shortages of skilled personneland equipment, regulatory delays, costination, higher decline rates at existing elds,geopolitics or a deliberate strategy on the partof producing countries to curb output to supportprices. Today such constraints are evident.

Figure 11

Shifts in World Liquids Capacity (million barr

energy vision 2007

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