The IHS Energy View of Peak Oil
Posted by Dave Cohen on December 20, 2005 - 12:48am
Topic: Supply/Production
Tags: cera, ihs energy, ken chew, oil supply, peak oil [list all tags]
Recently, Robert Esser of CERA testified before congress World Oil Production capacity to increase up to 25% by 2015; No peak seen for decades, US Congressional Committee told.
"A detailed new audit of our own analysis and the enormous scale of reserve upgrades in existing fields, confirmed by the most extensive and complete databases on field production - the proprietary databases of IHS, of which CERA is now part - contradicts those who believe that peak oil is imminent," Esser testified.CERA was acquired by IHS Energy in September, 2004, so of course this amounts to CERA auditing itself. It seemed that the IHS Energy website might be a good source on the IHS/CERA point of view and this turns out to be a bit of a gold mine. Indeed, there are a number of presentations there that give us some insight into their thinking. There is a lot of material there to sort through. In order to narrow this story somewhat, a presentation entitled Global Oil Supply Issues: Recent Trends and Future Possibilities (pdf) seemed a good place to start--not least because it contains some slides on IHS Energy's position on peak oil. The presentation is by Ken Chew, IHS Energy VP for Industry Performance and Strategy. Let's see what Chew had to say about the peak oil issue.
The slides (44-46) deal with peak oil. Here, we'll present each slide followed by some comments pertaining to Chew's points.
Slide 44--Peak Oil Can Not Be Forecast
If you look at Chew's slides 26-28, the IHS Energy Methodology is described for estimated discovered recoverable resources.
TOD readers are familiar with these kind of numbers and can decide on their own whether these estimates, some of which are clearly marked as questionable by IHS Energy itself, are credible. And, even if they were all true, would peak oil flows in the near-term foreseeable future be affected in any significant way?
Concerning our inability to forecast how much new oil will be discovered and when, Chew (slides 2 & 3) presents a discovery curve that looks pretty normal showing that liquid resources put on-stream have outstripped discoveries since the 1981 to 1985 period. The 20 year trend seems clear--how can there be any major uncertainty about the expected discovery volumes in the future? The Earth is well-explored by petroleum geologists. There is no new magic technology which will buck the trend and find lots more oil than we already know about. However, perhaps we have underestimated knowledge growth. As Lord Bacon once said, Knowledge Is Power. I just don't see how it translates into more consumable liquids (boe) in the future.
As to the evolution of demand, that will depend on price and the economic fortunes of various countries (eg. Russia in the early 90's) but see the discussion of slide 45 below for an in-depth discussion.
Regarding "above the ground" events that will impact supply, these can only certainly be negative unless mirabile dictu, there is a magical turnaround in Iraq, Osama and friends decide to take early retirement, Nigeria insurgents make peace with Chevron, Iran has a change of heart about its nuclear program, feuding ethnic groups in the Caspian Sea region sing "Give Peace A Chance", India & China decide that ramping up energy usage is less important than climate change impacts, the US adopts a national policy to go with biofuels, solar and wind to mitigate its foreign energy dependence--you get the idea.
Slide 45--Peak Oil Is The Wrong Question
The seamless transition to alternative transport fuels? Can someone out there, anyone, demonstrate how exactly this transition is going to work? As far as oil supply & demand issues go, given overall declines, this would seem to be the biggest problem that peak oil presents. Biofuels? What's the answer? If there is one, what's the timeframe?
Now, here's an interesting point of view. The "peak" may occur a number of years after demand permanently exceeds global supply capacity! In other words, there would be a period in which oil supply capacity continues (however marginally) to grow but can not keep up with demand. This amounts to a kind of "economic" peak, not an "absolute supply peak" in which incremental flows (mbd) reach their maximum value over some period and are never exceeded thereafter. Not being an economist, Chew's key question brings up many thoughts.
Slide 46--Peak Oil May Not Be The Real Problem
We are familiar with the usual arguments about insufficient refinery capacity and the inability of existing infrastructure to deal with "heavy, sour" crude. As far as transporting oil to market goes, that is yet another kind of "above the ground" consideration, in addition to delays, geopolitical events, hurricanes, and the rest, that have an impact on the timeframe in which peak oil occurs.
But here, Chew's remarks provide some insight. Investors will be reluctant to commit to an environment in which peak production is forseen. The crisis may be in producing the oil and getting it to markets. The crisis! Well, maybe IHS Energy and TOD are not so far apart afterall. It may be simply an argument about timeframes in which the peak oil community says the crisis will be sooner than later but the IHS Energy/CERA crowd--based on some inaccurate data and optimism about "above the ground" events (see slide 44)--pushes the date out into the 2010 to 2020 period.
An Alternate Universe...
No where in Chew's presentation are decline rates from existing (including mature megafields like Burgan) mentioned. Not at all. When referring to depletion, Chew is talking in the usual sense about historical cumulative numbers as a percentage of estimated URR backdated to the start of production. (eg. slides 26, 43). It is as though we are living in an alternate universe. In this universe, available capacity only goes up and never goes down. It seemed prudent to disregard silly references to what Chew calls resource plays (slides 8 to 16, including oil shales, tar sands and Orinoco heavy crude). Or his references to USGS data (slides 33,34). Chew's presentation also clearly shows the continued failure of E&P Effort and Investment by the IOCs (slides 20 to 25).
But bringing all that up just seemed like piling on.
Slide 44--Peak Oil Can Not Be Forecast
If you look at Chew's slides 26-28, the IHS Energy Methodology is described for estimated discovered recoverable resources.
Slide 27 -- URR EstimatesSo--you guessed it--Chew bases his entire analysis on purported data about discovered resource volumes but when considering the question of "peak oil", turns around and says that we lack accurate data about such resources. Of course, a Hubbert Linearization attempts to estimate Qt for a given field, oil province or country based on its production history (P/Q)/Q. IHS Energy uses no such analysis. Chew's slide 31 indicates thatSlide 28 -- Total Recoverable Resources
- Uses a "bottom-up"approach that reflects evolution of resource estimates for individual fields
- Sum the ultimate "proven+probable"technically recoverable liquid and gas resources of each field and undeveloped discovery, by year
- All resources attributed to the year of initial discovery
- Aggregate the annual discovered resource values
Subtract country cumulative production (slide 26) from country ultimate recoverable resources [URR] (slide 27) to derive remaining resources by country (slide 28).
- Pre-1995 Resource Growth (upward revisions) = 457 billion bbl
- 1995-2003 Production = 236 billion bbl
- 1995-2003 Discoveries = 144 billion bbl (61% of #2)
TOD readers are familiar with these kind of numbers and can decide on their own whether these estimates, some of which are clearly marked as questionable by IHS Energy itself, are credible. And, even if they were all true, would peak oil flows in the near-term foreseeable future be affected in any significant way?
Concerning our inability to forecast how much new oil will be discovered and when, Chew (slides 2 & 3) presents a discovery curve that looks pretty normal showing that liquid resources put on-stream have outstripped discoveries since the 1981 to 1985 period. The 20 year trend seems clear--how can there be any major uncertainty about the expected discovery volumes in the future? The Earth is well-explored by petroleum geologists. There is no new magic technology which will buck the trend and find lots more oil than we already know about. However, perhaps we have underestimated knowledge growth. As Lord Bacon once said, Knowledge Is Power. I just don't see how it translates into more consumable liquids (boe) in the future.
As to the evolution of demand, that will depend on price and the economic fortunes of various countries (eg. Russia in the early 90's) but see the discussion of slide 45 below for an in-depth discussion.
Regarding "above the ground" events that will impact supply, these can only certainly be negative unless mirabile dictu, there is a magical turnaround in Iraq, Osama and friends decide to take early retirement, Nigeria insurgents make peace with Chevron, Iran has a change of heart about its nuclear program, feuding ethnic groups in the Caspian Sea region sing "Give Peace A Chance", India & China decide that ramping up energy usage is less important than climate change impacts, the US adopts a national policy to go with biofuels, solar and wind to mitigate its foreign energy dependence--you get the idea.
Slide 45--Peak Oil Is The Wrong Question
The seamless transition to alternative transport fuels? Can someone out there, anyone, demonstrate how exactly this transition is going to work? As far as oil supply & demand issues go, given overall declines, this would seem to be the biggest problem that peak oil presents. Biofuels? What's the answer? If there is one, what's the timeframe?
Now, here's an interesting point of view. The "peak" may occur a number of years after demand permanently exceeds global supply capacity! In other words, there would be a period in which oil supply capacity continues (however marginally) to grow but can not keep up with demand. This amounts to a kind of "economic" peak, not an "absolute supply peak" in which incremental flows (mbd) reach their maximum value over some period and are never exceeded thereafter. Not being an economist, Chew's key question brings up many thoughts.
- Liquids supply goes up but increasing demand is never met. Isn't this called resource scarcity?
- Re: #1, doesn't that mean prices can only increase if there's little elasticity in the world markets? Even in the best case, where demand can be reined in, wouldn't such a structural adjustment take some years to achieve? With supply increases that are inadequate to meet demand, how could prices ever decrease even if demand is able to eventually adjust? Supply & demand would remain on the precarious razor-thin edge we find today in the best case. Does anyone believe worldwide demand will actually decrease (without sacrificing sacred "economic GDP growth") in any timeframe worth mentioning--because that would be the only thing that will lower prices. Otherwise, it's a recession or it's a depression (whatever your preferred term).
- If there is so-called demand destruction, doesn't that mean zero or even negative GDP growth on a region to region basis? Certainly, there is a constraint on worldwide growth based on Chew's year-to-year ceiling on available supply vis-a-vis demand.
Slide 46--Peak Oil May Not Be The Real Problem
We are familiar with the usual arguments about insufficient refinery capacity and the inability of existing infrastructure to deal with "heavy, sour" crude. As far as transporting oil to market goes, that is yet another kind of "above the ground" consideration, in addition to delays, geopolitical events, hurricanes, and the rest, that have an impact on the timeframe in which peak oil occurs.
But here, Chew's remarks provide some insight. Investors will be reluctant to commit to an environment in which peak production is forseen. The crisis may be in producing the oil and getting it to markets. The crisis! Well, maybe IHS Energy and TOD are not so far apart afterall. It may be simply an argument about timeframes in which the peak oil community says the crisis will be sooner than later but the IHS Energy/CERA crowd--based on some inaccurate data and optimism about "above the ground" events (see slide 44)--pushes the date out into the 2010 to 2020 period.
An Alternate Universe...
No where in Chew's presentation are decline rates from existing (including mature megafields like Burgan) mentioned. Not at all. When referring to depletion, Chew is talking in the usual sense about historical cumulative numbers as a percentage of estimated URR backdated to the start of production. (eg. slides 26, 43). It is as though we are living in an alternate universe. In this universe, available capacity only goes up and never goes down. It seemed prudent to disregard silly references to what Chew calls resource plays (slides 8 to 16, including oil shales, tar sands and Orinoco heavy crude). Or his references to USGS data (slides 33,34). Chew's presentation also clearly shows the continued failure of E&P Effort and Investment by the IOCs (slides 20 to 25).
But bringing all that up just seemed like piling on.
> recoverable liquid and gas resources of
> each field and undeveloped discovery, by year
As an energy analyst and consultant I would like to
point out that this above is the real culprit why
IHS and CERA conclude peak is "not imminent". They
add the proven (P-95) and probable (P-50) to come
up with URR which they later use in their analysis.
What they do not tell you is that the probability
for them to be correct is 50%. If they only use the
P-95 (95% chance the URR to be what they believe)
then the peak date will be around 2007, give or take.
Everything else like transport and refinery limitations
take back seat to the fact that their principal
assumptions are correct with 50% probability.
Cheers,
Maybe it is this "unbiassed estimate" of the probabilities we are lacking in both cases.
So adding all of the individual field estimates together will not necessary reduce error dramatically, even if the field-by-field estimates are unbiased.
Combine this factor with ever increasing world demand and the result is predictable. Arguing whether accurate estimates of probable reserves peg the brunt of the shock in 2 years or in 10 years is a matter of pedantry - as much of a waste of time as arguing over the ideal placement of furniture while the house is burning down.
First, a few months ago at an oil industry meeting, the Texas State Geologist, in response to a question from me, stated that with new and improved technology, Texas, while it may not be able to equal its peak production, could substantially increase its oil production. One little problem. Texas oil production has fallen for 33 straight years. Our esteemed Texas State Geologist is pretending that three decades of declines don't matter.
In a recent interview, the Norwegian Oil Minister apparently asserted that Norwegian oil production would not peak until well after 2008. Another little problem. Norway, as predicted by the Hubbert/Deffeyes Linearization method, has already peaked.
The common connection here is that when faced with years or even decades of production declines, the anti-Peak Oil crowd still refuses to recognize the hard, cold reality of depletion, so why should we expect them to acknoledge the reality of depletion before the worldwide decline has even set in?
- We make "..narrow, and sometimes even unwarranted assumptions.."
- "They wrongly assume they know what that finite amount is" in regards to the total amount of oil
- They relegate "to mythology the recovery of new reserves from existing fields"
Of course the proof of the peak concept - the documented declines in Texas, North Sea and Kuwait etc. are not mentioned.The following are held up as the sources to trust for future energy outlooks - the USGS, IHS Energy, and CERA.
He predicts a new methane economy, especially as the source of hydrogen for the hydrogen economy, which will start sometime after the middle of this century. But at the end he notes, almost parenthetically, that during the transition to this golden age, we will consume twice our historical consumption of oil and increase natural gas consumption 15-fold.
How much of AGI funding comes from AAPG I wonder - and when will Peak Oil get the serious scientific scrutiny it is screaming for from the mainstream academic geologic community?
BTW, this is my first post - I have learned an awful lot from TOD the past 6 months
Perhaps he knows about the proposed genetic engineering of cows which will enable them to be 'milked' of their methane. Animal rights groups are outraged by suggestions that the me-cows will have to wear lead booties to prevent them floating away and becoming a hazard to airplanes.
Now where did I put those dashed di-lithium crystals? Scottie...
Thanks to OilCEO for the graph.
Do market fundamentals reflect reality now (end 2005) or were they actually out of whack in 1999 when oil dipped below $15/bbl? Fisher quotes "Pete" Stark of IHS and "Dan" Yergin of CERA (we're all buddy-buddy here) without mentioning that these two organizations are essentially the same. He also quotes his good buddy "Tom" Ahlbrandt over at USGS.
Finally, Jesse Ausubel's methane economy by 2050. My first reaction is "Beam me up, Scotty". On the other hand, I may post on this one.
Vienna airport always wanted to build a third runway by 2011 to meet demand projections. Now they outbid everybody in the privatisation of Bratislava Airport (capital of Slovakia), which is only 48 km away from Vienna airport. The concept: operate Vienna as a hub for premium passengers, move the cheap flights to Bratislava, get back to Vienna by rail.
I do think that this community and CERA are not that far apart. I'd like to remember some more things said in Congress (more or less like this):
"Beyond 15 years, we're all guessing here" - Well, ain't 15 years from now 2020? The year after which CERA predicts the "bumpy plateau".
But most important of all were the questions posed by congressman Alan from Maine:
"We've been talking here about production, but to us what matters is price. If it's going to be a sharp peak or a bumpy plateau, who cares?"
He then questioned Esser if the bumpy plateau would have the same impact in prices as the peak would have. He answered yes.
Congressman Alan : "So you're not telling us to sleep over it, right?"
Esser: "Right."
I would have liked to see a slide on this.
If anyone has had to do that dreaded project (fill in blank) you know how you put it off just one more hour, or day. You knew you were putting it off, you knew you had to do it, but yet you didn't.
This is where we find ourselves.
And the answers will be same, we will put it off, we will have people even tell us it is * OKAY * to put it off!! That was some of the talk going on in the news and in Congress, and even at the local shop where you met folks. It is OKAY to put it off it's so far away someone else can worry about the project, I can live my life like I have been. I can make a future like I had, for my kids, It'll be OKAY.
I'm tempted to make a bumper sticker for my car that says, "Burn more fossil fuels NOW! What has the next generation done for you lately?" But it would be just my luck that some enivronmentalist wouldn't realize that it was sarcasm, a fight would break out, and we'd wind up on the TV show Cops.
We are the first generation in the history of our species to be able to collectively use 300x the annual net primary productivity of the sun. We are also the first generation -in the 280,000+ generations sicne man split of from apes, that will see less people on the planet when we die than when we were born.
Intersection of thermodynamics/human genes gonna be a live experiment on a grand scale-circa 2020-2030ish.
Most of humanity died because of that volcano. Our genetic diversity shows signs of it. Cheetahs were so badly hit that they are almost genetically identical, to the extent that they can accept skin grafts from each other.
Trying to remember a show I saw on genetics and human populations:
All of present day humanity can be traced back to roughly 15-20 humans on the African coast. Do you know, is that about right?
Seems to me that every risk in their forecast is to the downside: optimistic reserve numbers, optimistic production numers, optimistic (no realistic) depletion numbers, everything being fine on the geopolitical front. Given that, I say that IHS/CERA are being grossly irresponsibe and scientifically misleading. If they were to properly model these downside uncertainties in their forecasts they would end up with a much more pessimistic picture.
It will be interesting to watch what the major oil producers do over the next couple of years. Will they buy the IHS/CERA view and step up investment in production and the supply chain or will they hold back? We can see Saudi drilling frantically, yet the major western oil companies and Russia seem to be holding back. No doubt they will all have their own analysis and reasons for doing whatever, but there will be lines to read between.
I'll stick with my previous explanation: there are really 2 Earths, and CERA are living on a different one to me.
Even if PO is not till 2010 to 2020, Hirsch's report concludes we need at least 15 years' massive action to moderate it's impact. Even the PO optimists should be arguing for that effort to be a major priority NOW. I'd guess most of us here think we'll be very lucky, unless a massive recession intervenes, to make it much past 2010 before hitting PO. It's hard not to get very angry at irresponsible fools like IHS/CERA.
I can tell you firsthand from my experience at Arthur D. Little in the 1970s that nothing is more true than what Mark Twain said on the subject: "You tell me whar a man gits his corn pone, en I'll tell you what his 'pinions is."
It is a market driven approach. So what if peak oil comes along? Be it a peak in extraction or a peak in delivery infrastructure. Whenever the supply gets scarce the demand side will just have to shrink by substitution of other energy. No big deal. Oil will continue to be viable. New technology will will take over at the margins where high cost forces a switch away from oil. The peak will be a non event whenever it shows up. Very calming.
I see this as denial in the worst way. They just can not admit that bad things could happen. A positive attitude solves all!
The very intellegent and knowledgeable posters here at TOD have shown how difficult it will be to shift to alternative energy AND keep a similar economy and standard of living. It the energy density stupid. It isn't only about energy anymore. The economy has to weather an energy crunch or the peak will cause other unwanted problems. There are way too many people just glossing over this problem and it is going to bite us when oil gets scarce.
Oil companies can actually just sit and wait - prices will rise, and their profits with them. Investors will not be a problem, as they will pile on when everything else seems to be flat or going south. Thus they should be able to fund most anything they want to sometime in the future. They should be ok with rising prices.
But the rest of the country is headed for a wall. The inflation conveyor is quickly replacing the cheap stuff we are buying today with higher priced stuff made in 2005, after this latest jump in gas prices. This decreases demand, reduces sales, lowers earnings, and results in plant closings and job cutting. Mergers have been going on for the last decade in retail and most other sectors - not much cost savings left in doing that anymore.
We really haven't felt the full impact of this latest fuel price jump. I look for it to hit sometime 2nd Q of 2006 or so. It will not bother us in the oil business, but industries where fuel is a significant operating expense have only recently adjusted their pricing to reflect the new costs. That means that the effects haven't reached the end users just yet. Even the airlines haven't digested the newer fuel costs into their fare structures. It may take bankruptcy of a few to force that.
The only industry that seems to reflect price increases instantly is the power industry. I think we can all see what is coming for most other industries next year. What happens when driving season opens and demand rises again? No new refineries yet, and another record hurricane season predicted.
It looks to me like we are heading for a very bumpy economic road, and if it isn't actually caused by the increase in price as we are approaching the peak, then the Peak may well be the end of the world economy. If this is just a small dose of what we can expect from rising energy prices, then things are very gloomy...
"A dispute over the best way to move Alaska North Slope natural gas to the U.S. market has resulted in an antitrust suit claiming BP Plc and Exxon Mobil Corp. are conspiring to withhold the fuel to drive up prices, according to a media report Tuesday."
http://www.marketwatch.com/news/story.asp?guid=%7BDA7C23ED%2DE7B6%2D4F48%2DA0C7%2DC0FB8F36B6D4%7D&am p;siteid=mktw&dist=
I mentioned earlier today that one should watch the oil producers to see which way they jump - rushing to develop their massive remaining reserves or holding back. Perhaps this is one indication. No doubt BP and Exxon will reasonably say: we'll produce for when the pipeline is scheduled to open (they haven't even decided the route yet, LOL). 'Tis a frivolous suit, methinks.
Do I hear 'nationalise them' echoing through the ether from the future?
Don't panic, don't panic, don't...
The majority of Americans today live off the discretionary income of other Americans. The problem for energy producers is that they are a minority within a minority (energy producers within a minority of producers).
I think that energy producers are making an epic mistake when they side with Peter Huber, Yergin, et al. If--as Huber and Yergin say--we have plenty of energy, then rising energy prices must be a result of a conspiracy. Thus, more and more calls for punitive taxation, virtual nationalization, etc.
In late October, the NY Times reported that retailers and manufacturers have been absorbing the costs related to higher energy prices. The article said many of these businesses have little maneuvering room at this point and another increase is energy prices will force them to pass the higher costs onto consumers.
Massive consumer debt (negative savings rate), job loss (GM, and Ford layoffs, plus predictions that a downturn in the housing market will lead to a loss of 800,000 jobs), and the specter of inflation represents a worrisome combination.
The part you have to read between the lines to see is that IHS and CERA provide services to the oil investment/infrastructure community. What happens to CERA if investors create the self-fulfilling prophesy above? CERA turns out to not only be wrong, but out of business and probably under congressional investigation. What happens to CERA if they convince enough people to keep investing in more infrastructure? They might have a remote chance of staying in business for a little while longer. If nothing else, they can pin their forecasting error on other people's lack of investment, instead of their own delusions.
I will quote from my story here. That's not to say that IHS/CERA does not make political calculations--they obviously do. But I'll stick with my remarks as quoted above.
Disagree - if stockholders are making killer dividends then they want their fearless leader (CEO) to make even more, as the whole planet clamors for more shares of stock...feeding frenzy, which means a lot of cash which has to go somewhere or the government will get it just like they did the tobacco guys. Oil companies will have no choice except investments as their reserve portfolios shrink, and as prices get stratospheric, everything becomes more economical, even the spaceships to Jupiter to scoop LNG...
Why? Because the alternatives WERE NOT READY!! The smooth transition we all hope for is out of the question, because it will minimize profits for the shareholders of these big companies. Need I remind you of Dick Cheney's vested interest? Big OilCo shareholders are waiting with eager glee for PO, because it will enrich them beyond wildest dreams of avarice.
You are right about CERA/IHS simply not being able to tell the truth - but IMO, it's not about self-fulfilling PO. What it is actually about is preventing investor panic and capital flight from everything outside energy. Once people really snap to PO, they go to gold, precious metals and oilfield stocks. That is the only positive way to position your money in the event of an imminent oil peak, outside of the small community of renewables ventures.
I really think that this is the first bump in the road for oils price climb. We got whacked with shortages from aging infrastructure, sour/heavy oil and lack of capacity, increasing heat energy in the atmosphere and associated storms and various political crap across the world (Nigeria, Iraq, etc.). Much of this is not going away, and may get worse. And all the while, depletion rates increase and it seems consumer demand is set to increase until we reach some critical energy cost number that shuts down profitability and tumbles the whole world economy.
As long as TPTB refuse to address the issue with the urgency and honesty it demands for practical management, we are looking at some kind of massive economic collapse.
As it is in their own best interest to profit from this same collapse, I would say that people should batten down their hatches over the next few years as best they can, and be ready for WTSHTF or even TEOTWAWKI. To believe that the ultra-rich do not see what is approaching is delusional - the signs are all out there .
We are reading the same tea leaves they are, and coming to the same conclusions. The only people coming to a different conclusion are the think tanks, book peddlers and talking heads who are being fed their lines to keep the public unaware. Even reading between the lines of the independent oil companies and national oil companies lays out a scary picture. Don't think that others are not reading between these same lines and reaching similar conclusions.
We could accept an estimate that has a 50% probability of being too high if it had a low probability of being very high. The estimate of 50,000 'heads' from 100,000 coin tosses has a 50% chance of being to high but less that 1% chance of being more than 1% high.
These considerations do, I accept, rest on some shaky premises:-<