Exxon, and the Implications of 8%
Posted by Stuart Staniford on November 17, 2005 - 3:44am
Topic: Supply/Production
Tags: decline rate, gas prices, hubbert peak, oil prices, peak oil [list all tags]
In the past, peak oil projections have used fairly low decline rates for FIP - 3%-6%. There are now several pieces of evidence that the FIP decline rate might be more like 8%. Adding that to Chris Skrebowski's list of new projects makes for a very rough ride:
Production projection with 2005 ODAC Megaprojects plus various average decline rates of existing fields and the supply required to maintain "business as usual".
...the industry is dealing with a phenomenon that is exaggerated by the lack of investment over the past 18 years. This phenomenon is the decline rate for the older reservoirs that form the backbone of the world’s oil production, both in and out of OPEC. An accurate average decline rate is hard to estimate, but an overall figure of 8% is not an unreasonable assumption. The maintenance required to slow the rate of decline, and increase the overall recovery, is a key element of the supply picture going forward.He also notes what has been extensively discussed here at TOD:
Finally, the oil service industry is not in particularly good shape to meet the needs of a rapid worldwide ramp up in activity. A lot of the rig fleet, and much of the equipment are old. Very little spare capacity exists. This combination will compromise the service response, but the most disturbing shortage by far is the lack of specialized E&P professionals. A lot of skilled people have either been laid off, or have retired from the industry in the last 18 years. This shortage is as acute on the service side as it is on that of the operators. Training their replacements takes time, and there is already a great deal of evidence to suggest that the industry is fighting over the core of professionals that remain.It's also been noted by the EIA that Saudi fields are declining by 5%-12%, and that Iran's fields are declining by 8%-13%. So OPEC countries appear to generally fit what Andrew Gould is talking about.
Today, I got email from Kyle Swanson, a Professor of Mathematics and Atmospheric Sciences at the University of Wisconsin-Milwaukee. Kyle looked into what would happen if one did a MegaProjects style analysis on Exxon circa 2001. (Exxon being the most optimistic of the big oil companies - eg. the one not yet running ad campaigns asking the public for help in producing enough oil). Kyle's conclusion:
Looking over Exxon's annual reports for the past 5 years, I think that a reasonable case can be made that Exxon's internal liquid decline rate is actually about 10%.I didn't quite do it the same way as Kyle, but I come out in the same ballpark. Let's replicate and extend his analysis graphically so that we can see exactly what's going on. Here's Exxon's oil production (including NGL and tar sands), over the last five years from their annual reports:
Recent Total Exxon Liquids Production (dark green) with 2001 projection (purple).
The 2005 number is actually the 2nd quarter, taken from Petroleum Review. As you can see, the dark green line is basically flat, with very slight fluctuations. They certainly haven't been growing production in any significant way. However, if we follow Kyle's advice and take a look at their 2001 annual report, we see that they certainly thought they would - they estimated that they would grow at 3% annually through 2007. That's the purple line.
Now, let's take a look at how they expected to do that. A complete list of projects is on page 32. The planned (as of 2001) capacity additions reaching first oil in each year, are shown, along with what actually happened:
Exxon planned and actual additions to capacity reaching first oil in each year.
You can see there's a certain tendency for things to get delayed (as in 2002), and then catch up (as in 2003, where they actually got a little ahead of schedule). The dip in early 2005 production is probably accounted for by the large fraction of new capacity for 2004 that got delayed.
Now, given all this, we can compute a decline rate for FIP from subtracting out the new projects. However, there's one tricky point here. As I have noted in the past, a project which hits first oil in year X, probably doesn't hit peak production until some time in year X+1, and year X+2 might well be the first year to see peak production for the entire year. So assuming a new project in 2001 creates it's peak capacity for all of 2001 creates a significant error. As a rough approximation, I'm going to treat all these projects as though they add nothing in the first year, but the full capacity in the following year. With that assumption, we can make the following picture:
Exxon production together with production computed from various constant decline rates plus actual new projects that reached first oil the prior year. Y-axis is millions of barrels per day, and is not zero-scaled.
Clearly, if there had been no decline in FIP, Exxon would be in seventh heaven, with production up 1mbpd over the last four years, instead of down slightly. That's the power of depletion. Also clearly, a model of constant depletion rate plus new project peak capacity cannot perfectly account for the data. The 8% and 10% curves mostly bracket the actual line, but not perfectly. In fact, if we work the other way and ask what non-constant decline rate would have been required to exactly fit the actual production, we get this:
Exxon estimated annual decline rate in fields in production.
Now, the exact numbers shouldn't be taken too literally here. Remember we have this slightly crude model for the onset of new production in there and the 2005 number is only half way through the year - it could decline more, or some more of the delayed projects might come on and push production up (and thus the decline rate down). My average of these decline rates is 9.4%, not too different than Kyle's 10%. However, clearly the extrapolation of a curve this bumpy by it's average taken as a constant has to be viewed with a little caution.
Before we leave Exxon, one last graph. Let's look at what would have happened to production if they'd had the exact same declines, but all projects had come on exactly as planned in 2001. That would be the middle blue curve here (more-or-less between what they hoped for, and what actually happened).
Exxon production, production goals in 2001, and the prodution they would have achieved with no new project delays, but otherwise identical decline rates. Note that the graph is not zero-scaled.
Clearly, the bulk of Exxon's failure to grow their supply as they hoped does not come from project delays, but rather than from somewhat underestimating the decline rate in their existing fields. Indeed, for the last eight years, all of the very considerable new capacity that Exxon has bought on at great expense and enormous trouble has only gone to offset declines. They have not managed to grow their production or market share one iota. So when Exxon CEO Lee Raymond says
When oil's at $60 a barrel, at least $20 of that is speculative and not supported by the fundamentals.one has to wonder why he feels so confident when his own company is running with Alice and the Red Queen: going hard at it just to stay in the same place.
At any rate, all of this evidence - Saudia Arabia, Iran, Exxon, is reasonably consistent with Ray Gould's 8% number. What does that mean?
Well, if we take Chris Skrebowski's list of projects, this years production of around 84mbpd, and add various decline rates, we get this picture.
Production projection with ODAC Megaprojects plus various average decline rates of existing fields and the supply required to maintain "business as usual".
- Chris Skrebowski has missed most of the volume of new projects in his analysis.
- Andrew Gould is smoking dope, Exxon, Iran, and Saudi Arabia are an anomalously bad piece of the production mix, and the average decline rate is really much lower.
- Life is about to get less fun, pretty quickly.
I think we'd better focus on figuring out whether there's any possibility of 1) or 2) being correct.
Are there models that suggest rate of decline might accelerate from year to year as more aggressive extraction mechanisms are brought on line?
I modelled the world oil production logistic curve with normal distribution given the following:
PO production = 30.9 Gbbo/year
Total URR = 2400 Gbbo
The standart deviation for this is 31 years.
Here is what I got:
Year Production Change Cummulative change relative to year 0
0 30.88049825 0.10% 0.00%
1 30.88049825 0.00% 0.00%
2 30.84838404 -0.10% -0.10%
3 30.78425576 -0.21% -0.31%
4 30.68831322 -0.31% -0.62%
5 30.5608548 -0.42% -1.04%
6 30.40227596 -0.52% -1.55%
7 30.21306715 -0.62% -2.16%
8 29.9938113 -0.73% -2.87%
9 29.74518084 -0.83% -3.68%
10 29.46793426 -0.93% -4.57%
11 29.16291223 -1.04% -5.56%
12 28.8310334 -1.14% -6.64%
13 28.47328974 -1.24% -7.80%
14 28.09074164 -1.34% -9.03%
15 27.68451269 -1.45% -10.35%
16 27.25578415 -1.55% -11.74%
17 26.80578925 -1.65% -13.20%
18 26.33580732 -1.75% -14.72%
19 25.84715776 -1.86% -16.30%
20 25.34119383 -1.96% -17.94%
21 24.81929652 -2.06% -19.63%
22 24.28286831 -2.16% -21.37%
23 23.7333269 -2.26% -23.14%
24 23.17209914 -2.36% -24.96%
25 22.60061485 -2.47% -26.81%
26 22.02030097 -2.57% -28.69%
27 21.43257571 -2.67% -30.60%
28 20.83884299 -2.77% -32.52%
29 20.24048703 -2.87% -34.46%
30 19.63886723 -2.97% -36.40%
31 19.03531332 -3.07% -38.36%
32 18.43112077 -3.17% -40.31%
33 17.82754659 -3.27% -42.27%
34 17.22580534 -3.38% -44.22%
35 16.62706559 -3.48% -46.16%
36 16.0324467 -3.58% -48.08%
37 15.44301593 -3.68% -49.99%
38 14.85978596 -3.78% -51.88%
39 14.28371276 -3.88% -53.75%
40 13.71569384 -3.98% -55.58%
41 13.15656684 -4.08% -57.40%
42 12.60710849 -4.18% -59.17%
43 12.06803397 -4.28% -60.92%
44 11.53999651 -4.38% -62.63%
45 11.02358743 -4.47% -64.30%
46 10.51933641 -4.57% -65.94%
47 10.02771211 -4.67% -67.53%
48 9.549123056 -4.77% -69.08%
49 9.083918785 -4.87% -70.58%
50 8.63239124 -4.97% -72.05%
Probably the real picture will be much worse because of the increasing political tensions, the shift to faster depleting oil sources (smaller standart deviation) etc. If you can notice the "tension" percentage gets to 5% in the first 10 years; then almost doubles in only 5 years; and then almost doubles again the next 5 years. This speeding of the worsening trend goes up to the standard deviation year +31. I would suggest that years 10-15 will be most critical because of the sharp rise of the pre peak production drop.
Any comments on this will be very much welcomed.
P.S. Is it possible to place an Excel graph here?
initial production. Then the producers tend to invest in expanding production depending on market conditions (which are rather unpredictable). When the field reaches its peak, in most cases it is much more reasonable to maintain a sustained decline than to fight the peak - nobody would pour huge money in a declining field, because the investments are not likely to pay off. For example I am sure that if they drill more wells in West Texas they can temporary rise the production to say 1.2 mln.bbd but then it is inevitable that the production will again slowly slide down (following the logistic curve) and the slide will soon become uncontrollable. That's why they preffer to have a long controllable decline than making unfeasable investments. In short the logistic curve is what we can expect from a field if we target maximum production all the while during its lifetime.
I think that in the short term we will see the West Texas pattern world wide - the first several years will be of significant constant decline rates (3-4%?). But after that the shortages will attract huge investments and in the medium turn the production curve will start to follow closely the logistic curve as producers scramble to boost production by all means.
Of course all of this is too speculative for me to bet on... If the producers start chasing their long-term interest they will probably abandon the "maximum production" goal and even allow temporary free fall of production to preserve it for the future. This is what may cause the real trouble and why we need sufficient energy independance now.
Why again does it follow the logistic curve?
In the past, peak oil projections have used fairly low decline rates for FIP - 3%-6%. There are now several pieces of evidence that the FIP decline rate might be more like 8%. Adding that to Chris Skrebowski's list of new projects makes for a very rough ride:
Most of us thinking about peak oil have been aware for some time that the central uncertainty is the decline rate on fields in production (FIP). This dramatically affects when one believes peak will be, and seems to be the main difference between more pessimistic projections such as Chris Skrebowski's , and CERA's. It's also critically important in assessing the economic impact, since the faster total production declines, the harder it will be for the economy to adjust, and as we go further and further past peak, the fewer new projects there will be to add to the declining bulk of production.
In the past, peak oil
initial production. Then the producers tend to invest in expanding production depending on market conditions (which are rather unpredictable). When the field reaches its peak, in most cases it is much more reasonable to maintain a sustained decline than to fight
I presume similar analysis could be done for BP who have grown their total production and Shell who haven't?
All oil executives are talking down the future oil price in public. Even our local one, Mr Ruttensdorfer from OMV. The reason is simple. They want to be left alone. No windfall tax, no post peak planning, no substitution projects, no hassle with -god beware- forced consumption restriction (driving on alternate days, etc).
Buisness as usual keeps the American dream alive.
It is psychologic: A popular saying in the german wehrmacht 1944 was: Comrades, enjoy war, peace will be terrible.
But actually there is a possibility that he genuinely believes this, as OMV has a very interesting record of offsetting decline. They have very few and small fields but alledgedly manage to squeeze them to the last drop, at least if one can trust an article published in the German magazine "Der Spiegel" not so long ago. (They also raved about new technologies such as a new kind of 3D-seismographic)
"Der Spiegel" also hinted that this record of managing to keep up a plateau could give hope to the rest of the industry. However, what they totally forget in my opinion, is that the OMV-operations can't be compared to the majors neither in scale nor in quality.
So Ruttensdorfer might really think all is rosy, at least if he is dumb enough not to look beyond his own company...
There's something I don't quite understand about your analysis - is 8% a decline rate for a typical individual field after peak, or a typical decline rate for a collective of FIPs past (collective) peak (some of which may individually be at plateau or even pre-peak rather than yet declining)? I guess this is like the distinction between Skebowski's type II and type III depletion.
The Exxon analysis is clearly for a collective of Exxon fields but the 8% figure quoted above from the Schlumberger looked like an attempt to give a typical figure for an individual field.
Even if the individual field depletion rate is high, the collective depletion rate of a groups of FIPs would presumably also depend on the time distribution of production starting in different fields and so might not be as high if not all the individual fields of the collective are declining (I'm just thinking out loud here ...)
The post-peak global decline may well mirror the typical decline rate of individual fields while we still rely on a small number of long-lived big fields for the bulk of our production (and when most of these are in decline). However, in the future when most production comes from small fields (or mopping up projects) with short lifetimes, presumably the global decline rate will increasingly mirror the decline rate in discoveries (with a few years lag). This may give us a longer shallow tail, especially when coupled with the slow ramp-up of LQHCs.
Doesn't help us in the near term though :-|
In the long run, it will probably all look roughly logistic as Hubbert said. But what happens over the next five years will just be a little jog up or down on the Hubbert curve, but might make quite a bit of difference to our experience of it.
As Brazil is making the sugarcane ethanol thecnology disponible to other third world countries it is possible that these countries will not have need to use coal. IMHO almost all South America, all Central America and India can try go for sugracane ethanol. They will produce less grains and sugar for export, but they will need import less oil or coal. So, it is possible that these third world countries be less affected than USA by the Peak Oil. However, some economic effect will be visible.
Sorry my bad english, my native language is portuguese.
Brazil's sugarcane ethanol - better buy now while we not use it all - see you, Germany and Japan want make comercial contracts with Brazil government to buy our ethanol...
What Carlos is saying is easily proven - if you use a source that is high in simple sugars, the ethanol yield should be higher and less energy intensive to extract. Corn never made sense to me in the first place, other than we happened to grow a lot of it in the midwest that we were having trouble selling.
The real energy comes into play when you distill the cane, because standard distilling methods use heated fermentation. However, this isn't necessary - you can do a normal standard fermentation and then do distillation and reduce the energy input quite a bit. And the energy for distillation can be anything that produces heat - corncobs, old tires, anything that will burn.
Traditional thinking and distillation processes accept the energy inputs as "required", yet they do not have to be from oil or gas, and the primary ferment doesn't have to be heated due to the high native sugar content. It's not corn - we aren't converting starches to sugars here. It's just that when a process engineer gets hold of something like this, they always use the same input heat energy (NG) and opt for the highest yield in the shortest time. But even this could be offset by using the leftover cane leaves and waste to make biogas to self-power the distillation, if standard fermentation were used as a first step.
Why worry about the EROEI too much anyway - if gas continues to climb (as most here are sure it will), then there is nothing out there that will substitute into the existing transportation fleet EXCEPT ethanol and biodiesel. Nothing else is transportable and will work in a standard IC engine except these two alternatives. The real issue is using coal or other less expensive means to heat the distillation process, where the energy input is highest in the ethanol process. Using lower cost heat inputs changes everything in the EROEI equation, but requires engineers to step outside their box a bit.
This is the last thing you want on any land - it grows over a foot per day in the summer, has a 20-30' deep tap root which is nearly impossible to kill, and it absolutely grows over everything else.
The "red weed" in War of the Worlds was mild in comparison. State agencies have spent literally millions trying to get rid of this weed. It can pull down electric utility poles and pry shingles from roofs it grows so fast. And it doesn't even make anything useful - just cellulose, which is energy intensive to use at this time. It's also a booger to harvest - wraps around any and everything, and sends down roots wherever it grows over and touches the ground again.
I think cane or sugar beets would be lots easier to deal with...
Goats and Sheep are being used in some areas of the USA to get rid of it after they killed it the year before. The goats and Sheep eating all new sprouts, hoping to kill it! It has not happened yet.
Drive alone almost any southern Rural highway, or back road and you will see it growing!
What is nice, is that Kudzu is edible to humans. Large leaves steamed and used like grape leaves. Last night's stem shoots cut and put in stir fries. Roots used for teas and other things, even some form of bread flour.
But low in sugar content! If it were used to fuel the Fementation process of the SugarCane, Then great! Otherwise Know where you local supply is for the edible parts and try to keep it out of your yard.
It kills everything in its path within several years, even big old oaks, and fast growing pines.
Looking at the various decline percentage graphs for Exxon, we can certainly see that the optimistic 2-4% decline rate is utter nonsense. It's not even close!
What I find particularily funny is the 2001 prediction by Exxon, after several years of flat production they expected production to grow almost exponentially! But I guess you have to be optimistic, otherwise you'd lose your shareholders.
If we are indeed riding the green line in your last graph, then we can say that April 2005 was indeed the peak of oil production (as was suggested in a previous post).
Unfortunately this line does not match any predictions made by any of the commentators (even the really pessimistic ones like ASPO). How can that be? Has everyone underestimated FIP decline rates?
He says a lot of new fields today are exploited using high-tech methods from the beginning. Many oil industry experts assume that means total recovery will be greater. Simmons says that's wrong. You may get the oil out faster, but total recovery will be the same or worse. Which means the backside of the curve will be much steeper for these modern oil fields than they were for the old U.S. ones.
This analysis suggests that Simmons is correct.
What makes this confusing is that there are other rates involved which get mixed up with the pure extraction or depletion rate. Besides extraction rate, you have average construction rates and what I call fallow and maturation rates, which delays the outflow of oil from recently discovered fields.
If you need a mathematical model that you can actually reason about (unlike the logistic curve), I refer you to my oil shock model here:
http://mobjectivist.blogspot.com/2005/10/oil-depletion-model-posts.html
So my model should do prediction better than the logistic. Just like Kirchoff's law does prediction of electrical circuit behavior better than not using Kirchoff's law. Primarily because it is based on stochastic first-order rate behavior, which the logistic curve does not do. The logistic curve does a model of homogeneous discrete-entity dynamics which does not match oil depletion dynamics.
If you were to rephrase the question, does the logistic curve do a better heuristic than a model developed from first principles? Ask the software gaming industry that one.
Again, if you want to argue that the logistic model is no good, the only argument I accept is a quantitative evaluation showing that some other model has lower residuals than the logistic on future data that wasn't used to fit the parameters (for a few different countries where the logistic does ok). If you can come up with such an evaluation, I shall be delighted to accept that you have advanced the state of the art and we can all start using the WebHubble model instead of the logistic model. In the meantime, further words are just methane in the wind.
If the problem is that you aren't familiar with the problem of overfitting, there is a simple explanation here.
In regard to best case scenarios, Texas has seen an average net decline rate of 2.3% per year over the past 33 years. Note that this is net, after very intense drilling. This intensity of drilling, for a number of reasons--such as personnel and equipment shortages--is unlikely to be matched worldwide.
In regard to the cornucopians assertion that "technology will save us," I have started asking what technology can do for fields like the East Texas Field, which once was the largest oil field in the Lower 48. Today, East Texas is producing about 1.2 million bpd of water, with a 1% oil cut. How can technology increase oil production from a field that has watered out? East Texas is to Texas as Ghawar is to Saudi Arabia.
http://www.neb.gc.ca/energy/EnergyReports/EMAGasSTDeliverabilityCanada2005_2007/EMAGasSTDeliverabili tyCanada2005_2007_e.pdf
I think that this is profound for a quasi-government agency. As for the natural gas, what is not clear to me is how much of it is needed to run the oil sands extraction operations in Fort McMurry?
muhandis
Dear Sir,
Your astute response to Stuart's excellent 8% post on theoildrum led me also to more closely read many of the comments which followed. In doing so, I caught you using the superb word "cornucopians," which I believe should be widely used. Were you its most recent recoiner, in this context?
I have added a copy below of a post I made today to Chris Lydon's site BOP, one which features this word, and I always like to give credit where credit is due, especially when I think that this characterization of the pagan Pollyannas as Cornucopians will follow them to the grave.
Sincerely,
John O'Brien
Peak Oil: The Blissful Cliff
the only reason the smart Chinese continue to fund this corrupted administration is that the Chinese "pickle market" bankers are betting on what they see as: we are on the road to driving off the very road, and in the ensuing crash our capital and our control is passing onto them.
We are committing happily collective suicide --as a democracy, a culture and as a business --waving to God, maybe, as we fly over the blissful cliff, power steering engaged. Only Permaculture, sunlight, and getting to know one another pretty quickly may save us.
But it looks a lot llike the smart money's against us.
Down with the Cornucopians!
the cubist
However, there are a number of qualifiers - if these are indeed old reserves, the R/P of 10 is probably high - witness the US experience, where R/P has been growing. Also, they are oil equivalent, so there presumably gas there as well. All in all, I still think we are looking at Exxon decline rates in the 8% range minimum.
I think in general we need to acknowledge there is significant uncertainy in this analysis, just based on the fluctuations year to year in the apparent decline rate. We are probably at something like 9+-3 for Exxon.
My company (Anonymous Oil International) has a decline rate exceeding 15% because we push to maximize production. We do this because offshore operating costs are high, and by getting it out as fast as possible, we reduce the operating overhead over time quite a bit. Many offshore operations do the same thing, and it is likely to become the norm as lifting and finding costs are rising to stratospheric heights. Thunderhorse is a prime example of this, where the injection wells are actually in place before first oil. But as much as that monster cost them, the only way to get your money back and then make more is to move the whole thing to the next big project...
When you leave for the next field - how easy is it for a small company to come in after you to try and mop up the dregs?
How many fields are being produced in a similar manner to deep sea? I believe Dave has mentioned already that there are two opposite models running on peak and depletion - West Texas vs North sea.
It has appeared to me reading TOD posts over the last 6 months that most production of the last 20 years and going forward is like Thunder Horse. Fields are mapped, brought online with strategic well locations and pressures are maintained right from the start with CO2 or water.
Won't this force a Hubbert's peak that would be (relatively) wide and flat to be more of a spike. That is, narrow in time, but high with respect to maximum production in bpd. Won't this extraction technique make small fields look larger, at least short term? In aggregate won't this result in short term higher production that will be harder to maintain over time, due to shorter life span of fields? And won't this give everyone false data on field size (if my assumptions are true) when stating reserves? I want to understand the effect of these different approaches on peak production of fields.
Wait a second. I'm not a bright guy or an oil industry insider, but doesn't that imply that the foundation of the oil industry depends on the kind of growth dependent economics that is so frequently viewed negatively at this site?
If a large fraction of producers are depending on new fields ("the next big thing") to recover the costs of their current infrastructure investments, what happens to those company's ability to continue operating when ROI drops to the point they are operating at a loss? To stay profitable and in business, wouldn't you have to get the oil out faster and faster by increasing production rates as GeoPoet's company is doing? What happens at the tipping point when companies can no longer:
- Increase production by expanding the number of production fields year to year, either by exploration and develpment or mergers and aquisitions.
- Reduce production costs by making improvements to recovery rate.
- Cover the cost of bringing new assets on line with their current financial resources.
- Grow their bottom line to maintain the confidence of their investors.
Forget geology for a minute. What's going to happen to the economics of the industry when it can no longer maintain existing profit margins? Clearly the majors aren't at that point, but how much production is in the hands of more economically vulnerable companies? How long post-peak will the smaller producers be able to stay in business? Aren't most of the ones that haven't been bought out doing the kind of production the majors won't touch?Someone, please, point out why this shouldn't keep me up at night. Give me some numbers to show how little impact production loss due to small company failure is going to have. :-(
No, we cannot reasonably expect to grow exponentially as the reserve prospects dwindle. There will be further consolidation in the independent oilfield - no way to avoid that. People will cash out as well if they cannot find decent prospects. It wouldn't surprise me to see half the independent oil companies here in the US gone in 10-20 years, as their resources deplete and they cannot afford to buy into the international market. They will have to sell out or sit and watch their reserves dwindle unless new domestic areas get opened up, and even then the bidding may be fierce.
It will be interesting...
I haven't heard anything about Thunderhorse since BP said it had suffered, during Katrina, 10% damage. That would be about $100 million.
Could you tell me where it is being repaired and how long it will take to repair?
Thanx,
James