Predicting A World Oil Production Peak/

Possible Price Trajectories

Presented at theCalifornia Energy Commission

Workshop on World Oil Supplies April 28, 2003

Sacramento, CAAlfred J. Cavallo, Consultant

289 Western WayPrinceton, NJ 08540

OUTLINEBackground• Increasing Demand, • Finite Supplies

The Debate: When will oil production peak?(What Debate?)

New Approach: New Model/ Model ValidationResultsPossible Price TrajectoriesConclusions

BACKGROUNDIncreasing demand driven by:· Population increase· Industrialization of China, India

Projected world annual demand increase: 2%/year

Exponential growth: 2%/year over 20 years: x 1.5 increase.

75 Mbbl/d (2002) => 110 Mbbl/d (2022)

History: 1.5% increase over last decade

THE DEBATEConventional petroleum reserves are finite.Production has peaked in the US, UK, Egypt or isflat in many non-OPEC oil plays

When will world oil production peak?What are the reserves?Where are the reserves?What are the alternatives?

Except there is no debate.Why?????

WHAT OIL PEAK?Public interest groups:Greenhouse effect will limit consumption, not

resource constraints.(The stone age didn't stop because people ran out

of stones.)EIA (Annual Energy Outlook 2003):Business As Usual Through 2025 (Peak in 2037?)

EC (2001): No problem through 2025

CIA (2002): Peak in 2025 (Not widely reported)

REASONS FOR NON-ISSUECry wolf too often.· PA geologist in 1874 stated that the US would

run out of oil by 1878.· Club of Rome (1972)· USGS (1981)· Campbell (Scientific American, 3/98); oil price

drop to $10/bbl in 12/98.

Reasons for difficulty with predictions:Market price decoupled from production cost: =>

wild price fluctuations.[Market price not now a reflection of fundamental

resource limits.]

ContinuedReserve estimates problematic (until recently:

back of envelope calculations).

No error bars on reserve estimates.

Proprietary reserve estimates

Poor ModelsNo analysis of assumptions or limitationsHubbert's Peak: No geophysical or physical reason

for production to follow a logistic growth curve.

QUESTIONCan a forecast be made that is useful to consumers

and producers, one that will alert them to problems so that alternatives might be put in place?

[Useful vs useless predictions]

Requirements:

· Believable Reserve Estimates· Transparent (econometric) Model

Understand Market Rules

UNDERSTAND THE RESERVESSupplies are now abundant due to profound

advances in geosciences and in petroleum engineering and technology:

1. Plate tectonics2. Oil formation (source rock), migration,

trapping2a. All major sedimentary basins explored, more

remote, or deeper deposits developed.3. Three dimensional seismic surveys4. Lateral drilling5. FPSOCorollary: Much better reserve estimates can be

made (not widely appreciated).

UNDERSTAND THE MARKETS

How profitable is this business?What are production costs?· Now· Future

"Non-OPEC finding and development costs dropped from $22/bbl in 1981 to $6/bbl in 2001 (2001$)."

E. Baird, President and CEO, Schlumberger Ltd.Fossil Fuels, The Key to Sustainable Development, World Energy, 2003, Vol 6, No. 1, p 34-41.

Marginal Lifting Cost, Existing Fields

05

1015

1998 Dollars/Barrel

Mill

ions

of

Barr

els/

Day

Non-OPEC

OPEC

Expolration, Development and Operating Cost, New Fields

0

500

1000

>20 15-20 10-15 5-10 0-5

1998 Dollars/Barrel

Billi

ons

of

Barr

els OPEC

Non-OPEC

PROFITSWhat is the market price??

OPEC "price band" of $28-$22/bbl

CONCLUSION:Market Price decoupled from production cost (OPEC,

non-OPEC)Market equilibrium does not exist.

Delectable Margins!!!! (OPEC and non-OPEC Producers)

US Wellhead Price (1996$) 1919-2000

0102030405060

1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

Year

Dol

lars

/Bar

rel

CONSEQUENCES

· Market Price gives no indication of how rapidly reserves are being depleted.

· Market rules favor maximum rates of current production (OPEC and non-OPEC).

· More expensive non-OPEC reserves are being depleted much faster than low cost OPEC reserves.

· Prices may decrease as production approaches a peak.

THE MODELModel Assumptions: · Market Stability: OPEC rules (swing producers)· Decision Criterion: Production Plateau or Peak when

USGS Proven plus Undiscovered Reserves to Production Ratio (Rp+u/P) drops to between 10 years and 20 years.(Economics: Nobody will increase production after this point since the future of the enterprise is threatened.)

· Aggregate/disaggregate reserves/producers· Assume all undiscovered oil is discovered and marketed

as rapidly as needed· Assume 2% demand growth (1%, 3%).

HORSEFEATHERS!

Predictions always wrong before …. (so they always will be wrong..) The USGS is a bunch of armchair geologists...

Trust the good ol’e boys to find all the oil you need...

Model ValidationNow have many more years of experience, many more non-

OPEC oil plays are well-developed and have plateaued or peaked production.

Using available production statistics (Petroleum Economist, World Oil), examine production trends relative to USGS Rp+u.

0102030405060708090

100

UK

*

Nor

way

*

Egyp

t

Gab

on

Arg

entia

Syria

USA

*

Ecua

dor

Yem

en

Indi

a

Mal

aysi

a

Om

an

Chi

na

Aus

tralia

Den

mar

k

Ang

ola

Bra

zil

Rp+

u/P

(200

1) y

ears

Non-OPEC Reserves vs Time

01020304050

1995 2000 2005 2010 2015 2020

Year

Rp+

u/P

(yea

rs) 2% Growth

1% Growth

3% Growth

World Oil Reserves vs Time

010203040506070

1995 2000 2005 2010 2015 2020 2025 2030

Year

Rp+

u/P

(yea

rs)

2% Growth

1% Growth

3% Growth

BEST CASE SIMPLIFYING ASSUMPTIONS

1. “Aggregate Producers, Full Cooperation”Unrealistic, especially as one approaches a peak (OPEC and non-OPEC).

2.“All undiscovered oil found and produced as rapidly as needed.”Unrealistic, especially for FSU, as more remote fields are developed.

World Recoverable Oil

0500

100015002000250030003500

Hubbe

rt (1

962)

Despr

iaire

s (19

80)

Nehrin

g (19

78)

Halbou

ty (1

979)

Bois (1

980)

Bois (1

980)

FGS Ham

burg

(198

0)

Campb

ell (1

998)

USGS (200

0)

B b

bl O

il

POSSIBLE PRICE TRAJECTORIES

Old (OPEC domination)· Long production plateau after 2010, gradual

price rise

New (US dictated)· Price decrease ($15-20/bbl), rapid increase in

consumption· Market collapse and desperate search for

alternatives (GTL, heavy oil, tar sands).

ADVANTAGES OF NEW SYSTEM TO THE US:

· Buy support (cheap gas) for war(s) from US voters

· Remove resources from those likely to challenge US domination.

· Full control of oil allows US to dictate the rules for the world economy

ALTERNATIVE POLICY

SURCHARGES AND REBATES

SURCHARGE: Phase in a $3/gallon (minimum) surcharge on gasoline

REBATE: Surcharges immediately recycled to consumers to help them cope with new world.

CONCLUSIONS

· Science (Reserve Estimates) plus Understanding of Market Rules allow credible predictions to be made

· Production peak in near future (2010-2020)· Sooner under US, later under OPEC· Cheap gas until the peak is clearly visible· US-dictated production rates will lead to a

much more chaotic transition to a sustainable economy.

* Alternatives are technically feasible and affordable