Is it time to start exploring again?

Forgive me if this has been discussed in depth recently—I haven't always been able to keep up with everyone's extensive comments lately. But the most recent post from Environmental Economics might be of interest:

Incentives for Oil Exploration

Last month I posted a list of predictions from the simple economics models of depletable oil stocks. Those predictions were:

INCREASING OIL PRICES create the incentive to invest in transitional technologies.  PRICES OF ALTERNATIVES FALL with investment.  CONSERVATION OF EXISTING STOCKS will ease the transition.

Well, I forgot one.  Higher oil prices create the incentive for existing producer to INVEST IN EXPLORATION.

Read the rest of the post.  

Front page of this morning's FT print edition headlined "Search for oil stepped up as price rises."  Not good news, as it seems even the Euros are not wanting to face the facts; I guess rioting farmers and truckers sharpen the urge to shift blame and hope the knife falls on the next guy in your job.

There were 248 rigs operating in the Middle East in August, the most since November 1988 and 100 more than the average during the 1990s, according to oil services company Baker Hughes. Opec's news came as consuming countries sought to deflect the blame for high oil prices from their own lack of investment in refining capacity and slow progress in curbing demand for large, fuel-inefficient cars.
(Emphasis added.)

Gee, let's see if we can blame the Man in the Moon.

This summer's world oil crunch adds new significance to Monday's national elections in Norway, where most last-minute polls show the sitting government trailing a leftist coalition looking to curb oil and gas exploration.

At stake is whether Norway, the world's third-largest crude exporter, can replenish its dwindling oil reserves with fresh exploration in the frigid Barents Sea and around the Lofoten Islands in the Norwegian Sea, Norway's most sought-after acreage...

Two of the three parties in the left coalition are opposed to development in the Barents Sea and in the areas around the Lofoten Islands for environmental reasons. Environmentalists say both regions are extremely fragile ecosystems, some of the last pristine waters in Europe.

"The Barents Sea is Europe's food chamber for fish, and you don't want to gamble on that," said Hallgeir Langeland, Socialist Left, or SV, energy spokesman and vice chairman of Parliament's environment and energy committee.

Langeland said SV, the member of the leftist coalition most opposed to exploration, doesn't want any more activity in the Barents, and will even negotiate to prevent the 19th licensing round - already announced and expected to be awarded in early 2006 - from going forward...

http://www.rigzone.com/news/article.asp?a_id=25194

Guess what! The centre-left won the elections!

He's what the environmental economist says
Same [fruit] goes for oil. It's relatively cheap to poke a hole in the ground and extract the big pools of oil. But as stocks deplete it requires more and more investment to extract the deeper, harder to find stocks. What creates the incentive to extract these tough to extract oil stocks? Higher prices of course.
It must be nice for Tim Haab to live in such a conceptually simple world. I wonder if he's ever looked at the discovery curves. Does he know discoveries peaked in the 1960's? What does he think of the fact that the oil companies spend more time consolidating than exploring? Has he ever listened to an oil geologist talk about new prospects? Does he know that we use roughly 4 times as much oil as we discover year to year? Does he know about EROEI with respect to so-called unconventional sources? Can he distringuish between oil sands (we'll get some oil) and oil shale (we're unlikely to ever get any oil)? There's no end to questions like this.

I suppose I should comment on Haab's own blog but maybe he'll take the time to read over here at TOD where he might actually learn something.
EROEI of marginal extraction is estimated by a variety of authors to be currently around 10:1.  And that's just for the publicly reported information from Western oil companies, not the ME NOCs, which presumably have cheaper oil left underground than the West does. That means that oil extraction has to get TEN TIMES more energy intensive than it is currently for the EROEI to slip below 1.

That's not gonna happen for a VERY LONG time, no matter when the peak is.

Sources of your information? Previous discussions at TOD would indicate what you wrote here is a bunch of nonsense. What do you mean by "marginal extraction"? Of what? From what type of source? And don't say oil shales if you want to maintain any kind of credibility whatsoever.
Heinberg's "The Party's Over", 2003, lists two major studies of EROEI, Cleveland et al 1984, and Odum 1996.  Cleveland et al calculated pre-1950 oil EROEI at over 100, and 1950-1970 at 23 for production, 8 for new discoveries.  Odum 1996 calculated ME oil at 8.5 (including transport to N.America), and Alaskan oil at 11.1 (benefits of a single pipeline!).

Shales and tar sands are, as you suggest, horribly inefficient, with EROEI near 1.  Oil shales are not relevant to the discussion, and I did not mentione them.

As for marginal extraction, I mean "marginal" in basic economic sense of "the last and least profitable barrel extracted and sold on the market for the market price at a given time".  If oil demand rises, and supply responds by extracting additional oil, the cost of that marginal barrel sets the market price.  Econ 101.

Other sources: Savinar's absurd LATOC site cites convetional oil EROEI at 30:1, with tar sands at 1.5. http://lifeaftertheoilcrash.net/SecondPage.html  Wikipedia's EROEI says domestic oil is 3, Saudi oil is 10, but provides no cites.  http://en.wikipedia.org/wiki/EROEI  Wikipedia does link to oilanalytics.com, which provides a detailed examination of the concept.  A chart gives EROI of oil c.2000 by thermal measures as 17, by Divisa measures as 11.  The chart is cited to Cleveland, 2001.  http://www.oilanalytics.org/neten/fgn14.html

But thanks for asking!

As for TOD discussions,

The number of oil wells drilled per year in the US went up by a factor of 4 between 1973 and 1980.  The production of oil went down by roughly 25% between 1973 and 1980.   If we are at/near the peak, the number of wells drilled won't matter...
One item that most economists fail to take into consideration in their modelling is the increased risk associated with deeper wells and remote locations. Another is lack of infrastructure.

People need to realize that this is a drilling boom for the oil patch. Rig utilization is hovering at 90% of available rigs or even higher. We can draw up all the plans we want, but in the end, drillers are limited by rig and material availability. Prices are still not high enough for everybody to pile on in wild abandon - the threshold is probably around $100-$125 a barrel sustained. That will draw money into the industry via the stock market, and these companies will have to spend it or return it as dividends.

The remaining oil on this planet is in difficult to reach places - geologically, politically and geographically. This means the risk is higher for these areas, and in many cases, new technology is required to get the oil out of the ground and into production. Oil prices will not only need to be high, but to remain high for these areas to be drilled.

Oil prices will not only need to be high, but to remain high for these areas to be drilled.

They are.  They will.

Prior to the oil shocks, prices averaged $10 (constant 2000 $US).
After the oil shocks ended and the taps opened again in 1985-6, prices DOUBLED, averaging roughly $20 until 2000.  

Since 2000, the've been going mostly up. For a while OPEC talked about a $30 target; now even CERA foresees 'equilibrium' prices around $35-40.

Basically, prices have doubled again.  Whatever the costs and risks of the new exploration, a doubling of oil prices will more than cover it.

Another thing economists miss as they do their deep drill into the spreadsheets is the ability to step back and see the big, global scale picture. Our species is migrating towards the continental shelf "cliff" by step wise moving our oil rigs from the easy on-shore sites towards the ever more treacherous deep off-shore sites. At some point, like lemmings, we are going to fall over the edge.
I posted this on another thread. It may fit in better here

Couple of interesting articles in the Energy Pulse

The Impact of Oil Supplies on World Peace

and

Insidious Inflation

Does anyone have the figures on how many producing oil wells there are right now in Saudi Arabia? I seem to recall that it was a surprisingly small number. If so, couldn't they just drill more and increase their production?
EIA reports ~1000 wells in Saudi Arabia.

So, yes - there's LOTS of room for "infill" and "extension" drilling to increase reserves, even in existing fields.  By comparison, the US has literally hundreds of thousands of wells.  To be sure, the vast majority were drilled more than 30 years ago when drilling was much more of a hit-or-miss affair, especially the tens of thousands of wells in Pennsylvania, Ohio, and Texas drilled before 1950.  Michigan, for example, allegedly has over 40,000 wells!

I think the reason for this is the extremely high permeability of the big Saudi carbonate reservoirs (such as North Ghawar). So their wells produced unheard of volumes of oil flow compared to the rest of the world, but it also takes fewer wells to drain the thing. That's also why their costs of production were so low historically. However, the smaller fields, and South Ghawar which is apparently much less permeable, may benefit from more wells. There are interesting numbers on Ghawar permeability here. However it's apparently an extremely inhomogeneous reservoir even locally (which is what has kept their technical people busy as water breaks through to the oil wells on the channels of high permeability.
It's a good deal more than 1000 (although try to find an exact number on the internet - good challenge).  The most recent I have come up with is 1430 producing wells in 2001
( http://www.unitedstatesaction.com/eia-june-2001-oil.htm ), although this seems a bit low since Chevron (operates in the neutral zone between Saudi Arabia and Kuwait) has 779 production wells online there alone (google chevron neutral zone).   Also, note that this source suggests 3400 have been drilled into Ghawar alone ( http://home.entouch.net/dmd/ghawar.htm ), although some of those have been converted into water injection wells undoubtably.   ARAMCO publications state the number drilled "in the thousands" ( http://www.saudiaramcoworld.com/issue/198803/well.done.well.seven.htm )

Of more interest, perhaps is the number of wells drilled per year.  The same article states 246 drilled in 2001, 292 drilled in 2002, to 325 in 2004.  Note that the last number was the beginning of the year projection - the annual report has 260 actually completed, so I have no idea if their dry hole rate is 25% or if those wells were never drilled.   Note that they recently signed contracts with 5 off-shore rigs, outbidding ultra-high rates in the Gulf of Mexico.  Given those numbers, and an inferred decline of 800,000 bbls/d, new well rates at best are probably in the 2000 barrel/d range.  Given that ARAMCO was boasting about a 3300 bbl/d light oil discovery in the press ( http://www.adnki.com/index_2Level.php?cat=Business&loid=8.0.165089657&par=0 ), I am of the opinion that not everything in SA smells like roses on the drilling front.  For example, from early 2004, the claim was that production would increase by 1.1 million barrels by the end of the year ( http://www.washingtonpost.com/wp-adv/specialsales/spotlight/saudi/art4.html ), but exports have been stuck at 9.5 million barrels per day.  In my view, 2005 should be a landmark year - if they have 90 rigs working and can't produce more, the writing is on the wall...

They may have ordered the rigs, but it takes a finite amount of time to get them.  At the beginning of the year they had about 30 actually working Baker Hughes Rig Count They currently have 25 oil and 12 gas wells being drilled.  (It is a big 5.6 meg Xcel spread sheet if you want to go look and lists the rigs in all countries).  They had 30 more on order for delivery by the end of this year, but have since increased the size of the order to get to a total of 90.  Though as you say they could just rent from others.

I would suggest they are still more at around 3,500 bd per well, rather than 2,000 bd, since that would tie in more with the projected numbers for their original planned expansion.  However while you might accelerate production with infield drilling you often can cut the amount coming out per well if you are drawing to lower relative pressure. (Something the Russians already found out about). ( On the other hand as I commented the other day we do have that reduced production from the Abu Sa'fah development). (And I think Matt Simmons didn't see them getting down to around 2,000 bd/well for a couple or three years yet.

OPEC just released their Annual Statistics Bulletin 2004. In there you can find numbers for completed wells, running rigs and producing wells 2000-2004. I was just compiling the data this evening!

Here's the interesting stuff (pags 47-50 from the pdf, 3,73MB):

OPEP

Active Rigs
2000 253
2001 281
2002 243
2003 229
2004 272

Wells Completed
2000 2805
2001 2542
2002 2905
2003 2827
2004 2579

Producing Wells
2000 35719
2001 35659
2002 33454
2003 32315
2004 33580
Saudi Arabia (Saudi-Kuwaiti Neutral Zone not included)
Active Rigs
2000 27
2001 32
2002 33
2003 31
2004 34

Wells Completed
2000 257
2001 265
2002 250
2003 330
2004 335

Producing Wells
2000 1550
2001 1575
2002 1525
2003 1780
2004 1757
Hi all,

Thanks for the great discussion.  I didn't know I could get so many people world up with simple post.  Anyway, just wanted to address a couple of points from Dave's comments.  

"It must be nice for Tim Haab to live in such a conceptually simple world."

My world is conceptually simple and I like to keep it that way.  The amazing thing about economics is that conceptually simple models have amazing explanatory power.

"Does he know discoveries peaked in the 1960's? What does he think of the fact that the oil companies spend more time consolidating than exploring? Has he ever listened to an oil geologist talk about new prospects? Does he know that we use roughly 4 times as much oil as we discover year to year?"

Yes, Yes and Yes.  But that's not the point of the post.  The point is simple.  Higher prices create incentive to try to get at that hard to reach oil.  As the article suggests, that is exactly what oil companies are doing.  I said nothing of whether they would be successful or whether this was an efficient long-run solution.  Just very simply, we would expect that higher prices would generate profit opportunites for oil companies if they invest in exploration and lo and behold the prediction is right.

"I suppose I should comment on Haab's own blog but maybe he'll take the time to read over here at TOD where he might actually learn something."

Come on over (www.env-econ.net).  I do read the oil drum and have learned a great deal.  Maybe if more people came over to read Environmental Economics, we might be able to start to develop a solution together.  Understanding the science and the incentives seems to me would go a long way to providing feasible solutions.

Thanks again for the great discussion.  Glad I could provide fodder.

so, at some point, I would think the risk/reward ratio probably will get fairly wild and some of that hard to reach oil, will stay in the ground.  This model did work well for the last oil boom in the 1980's but the results today, will probably not scale to the results of yesterday.  The price is rising, and yes, this will motivate the oil industry to explore and consider risky developements, but we should not expect the same results from the last time oil hit these highs.  
Tim, have you seen the 2001 Energy and Resource Economics (V.23, N.2) paper by Y.H. Farzin of UC Davis about oil price rises and reserve growth?  A mere 1% rise per year in oil prices, sustained over 10 years, should result in a 44% increase in proven reserves, BEFORE considering improvements from any new technological advances in those 10 years.

I'll look for a link...

Have you got any Valium or other tranquilizers? If yes, take some. This is recommended for Y.H. Farzin as well.
Dave, if you'd like thoughtful debate and discussion - which I am sorely intersted in - please respond thoughtfully.  I'm not sure what I said that got you so pissed off, but if you know (or can point to) any criticisms of Farzin's work, I'd like to see it.

I should note straight off that Farzin is NOT an idiot.  He's got an Econ  Ph.D from Oxford, and he's a professor in the Ag & Natural Resources department at UC Davis, one of the best in the country.  Further, his work on sustainability and the economics of resource development and extraction are widely cited in a LOT of the Environmental Economics literature.  Do a search for Farzin 1984 and see what comes up...

Look, the company I work for, which you have all heard of, is exploring for oil (and gas) all over the world, in 9500 ft of water under numerous oceans, in the arctic, in politically unstable areas, and on land under 10,000 ft of basaltic lava flows.  We are involved in oil sand development and oil shale research.  We use the most advanced tools available, but we aren't finding much new oil, and what we find is very difficult to produce (e.g. very low permeability reservoirs in the deep water, or very viscous oil at very shallow depths in deep water).  If we doubled our forecasting premise it would matter little as 1) there are not enough capable rigs in the world to explore where we want to explore 2) there are not enough trained geologists, geophysicists, engineers, and experienced operators to dramatically ramp up activity 3) doubling the forecasting premise will not double the number of investment opportunities - it will likely just cause a bidding war for rigs, staff, and leases/concessions.  

The price ramp up in the 1970's and early 1980's created a windfall of cash that was very difficult for most companies (and participating foreign governments) to invest.  That is why Mobil bought Montgomery Wards, and Exxon created Exxon Office Products.  

I don't expect even sustained $60+/bbl oil to do anything on the supply side of the oil equation.  However, it will affect the demand side.  Today was my first day experiencing a $50 fill up.  Quite a shock.

I have wondered where you've been, Bubba. Thanks for weighing in here.
I'm glad you responded, Tim, since I basically called you out.
The point is simple. Higher prices create incentive to try to get at that hard to reach oil. As the article suggests, that is exactly what oil companies are doing. I said nothing of whether they would be successful or whether this was an efficient long-run solution. Just very simply, we would expect that higher prices would generate profit opportunites for oil companies if they invest in exploration and lo and behold the prediction is right.
The issue is, where is that oil? In addition, exploration from the major oil companies is decreasing, not increasing. Maybe they know something you don't know.

I am sympathetic to an "environmental" economist. I would assume that this means the "hidden" costs of CO2 emissions with respect to climate change would be part of the general equation. I would also assume that traditional subsidies (tax breaks) to the oil & gas industry would be similarly be taken into account. Therefore, we could start to calculate the real costs of oil which are not reflected in the day-to-day (or futures) prices on the traders markets. But ultimately, real costs and therefore prices will be based on scarcity in relation to demand. Unfortunately, the shortsighted nature of the current markets and the vested interests that cause oil corporations and state-run industries like Aramco to lie about reserves, production and other meaningful numbers makes our job all the harder as we move toward the peak (or undulating plateau, take your pick).

Finally, I find in the general case that not acknowledging the problem endangers our civilization and so I can not abide glib "conceptually simple" thinking at a time when we all need to work hard to alert the world to and solve the problem of peak oil. But thanks again for responding, a dialogue is better than nothing.
"The issue is, where is that oil?"

In the ground.  And most of it is right there, where we already think it is.  There's four sources, really.

  1.  New discoveries.  You're right - these peaked long ago.  No more Super-Giants, maybe no more Giants (unless in Antarctica, just to make the Zipf curve fit :) ).  Most new fields are TINY.  But there's also a LOT of them out there and they add up to quite a bit.  It's not sexy gushers and a bazillion-barrel desert riches, but it's steady and it's still oil.  But even in the US, new discoveries account for only 8% of reserve growth each year.

  2.  Technology lowers costs to allow increased extraction under current market conditions, and may also increase total recoverables.  But this is quite small - perhaps 0.6% growth per year.

Far larger than those two are the bean-counter's two favorites, 'reserve growth'.

  1.  Development of a field leads to "extensions" as the boundaries of the field are fully explored and "infill" drilling allows greater exploitation.  As a result, more oil is "found" - simply because the earliest estimates of total recoverable are conservative.

  2.  "Proven reserves" are actually just the small fraction of total in-the-ground reserves that could be economically brought to market TODAY at CURRENT prices.  If prices rise, more of the oil in the ground can be  brought to market.  This effect is HUGE and frequently overlooked - if prices rise 1% per year, reserves will grow by 4%!  We've just seen prices triple over the last five years.  Reserve growth will be immense.
 "Proven reserves" are actually just the small fraction of total in-the-ground reserves that could be economically brought to market TODAY at CURRENT prices.  If prices rise, more of the oil in the ground can be  brought to market.  This effect is HUGE and frequently overlooked - if prices rise 1% per year, reserves will grow by 4%!  We've just seen prices triple over the last five years.  Reserve growth will be immense.

Nothing in this sentence is true.  "Proven reserves", as stated by OPEC countries are anything but "a small fraction of the total".  Most likely they are wildly inflated.  For companies who trade equities or debt in the US and are regulated by the SEC, an argument can be made that their reserves may understate their total likely-producible resource base.  However, it is a gross overstatement to suggest that, even for these companies, their "proven reserves are a small fraction" of their total resource base.

Moreover, as I stated above, the supply response to even large price swings, much less 1%, will be minimal.  This has been proven several times in the past.

Huh?  We all agree that discoveries peaked in 1948, and fell sharply after the 1970s.  But reserves keep growing - and it's not just from new discoveries.

"Moreover, as I stated above, the supply response to even large price swings, much less 1%, will be minimal.  This has been proven several times in the past."

Source?  When?  When was it proven that a sustained rise in prices did NOT lead to a rise in production or reserves?  Didn't this very thing happen in response to the oil shocks of the 1970s?!

Some history - all of it AFTER the peak of discovery:

  • 1950 -- American Petroleum Institute says world oil reserves are at 100 billion barrels. (See Jean Laherre, Forecast of oil and gas supply)
  • 1966 - 1977 -- 19 billion barrels added to US reserves, most of which was from fields discovered before 1966. (As M.A. Adelman notes: "These fields were no gift of nature. They were a growth of knowledge, paid for by heavy investment.")
  • 1973 -- Oil price spike; supply restrictions due to Midde Eastern politics.
  • 1978 -- Petroleos de Venezuela announces estimated unconventional oil reserve figure for Orinoco heavy oil belt at between three and four trillion barrels. (More recent public estimates are in the one trillion range).
  • 1979 -- Oil price spike; supply restrictions due to Midde Eastern politics.
  • 1980 -- Remaining proven oil reserves put at 648 billion barrels
  • 1993 -- Remaining proven oil reserves put at 999 billion barrels
  • 2000 -- Remaining proven oil reserves put at 1016 billion barrels.

Consumption is rising, from less than 20Bby to 31Bby and more.  
Discovery is falling rapidly.
Campbell always points out that we are extracting 4x more oil than we find in new discovery.
But still reserves have been growing even faster than they are being consumed - we haven't even reached the point where total proven reserves have started to decline - and that is something that must happen before we hit the Peak.

Note that, even if you discount the 50%-150% ME increases of 1985-87, during the 10 years of 1990-2000 (when there were no such suspicious increases), and even if "proven reserves" for ME NOCs were inflated, the world used over 250 Bb - yet proven reserves remained constant.

New discoveries and technology improvements produce more real barrels of oil--but they are offset by whatever degree of depletion is occurring. Hence, the marginal increase in output will always be lower than discovery + enhanced recovery combined. At some point, these increases will be smaller than depletion effects, and total output will fall despite new discoveries and better recovery.

Your points 3 and 4 bring Ken Deffeyes quote to mind: "Economists think that if you roll up to the cashier's cage with more money, God will put more oil in the ground." Lots of people don't believe reserve numbers are either reliable or conservative. Consider the issues of political restatement with no depletion of reserves(OPEC), or the writeoff of billions in fictitous reserves (Shell).

I don't know what sort of lag time you expect for reserve growth. Surely, after price increases from $10 to nearly $70 since 1999, we should be seeing enormous increases in stated reserves by now. How enormous? If you really expect a 4% marginal increase for each 1% increase in price, reserves should have grown by 28 fold.

So, peak oil is obviously an urban myth. We'd better build more rigs, fast!

Surely, after price increases from $10 to nearly $70 since 1999, we should be seeing enormous increases in stated reserves by now. How enormous? If you really expect a 4% marginal increase for each 1% increase in price, reserves should have grown by 28 fold.

Farzin's paper (cited above) got those numbers from an analysis of the US industry from 1950-1995.  As such, the growth in proven reserves was easy to track, as was the market cost and the estimated contributions from technology.

Your points 3 and 4 bring Ken Deffeyes quote to mind: "Economists think that if you roll up to the cashier's cage with more money, God will put more oil in the ground." Lots of people don't believe reserve numbers are either reliable or conservative. Consider the issues of political restatement with no depletion of reserves(OPEC), or the writeoff of billions in fictitous reserves (Shell).

I agree that the OPEC revisions are a problem.  But while OPEC numbers have been unchanging since the 1985-7 revisions, so are everybody else's.  Total Non-OPEC reserves have also grown or been flat, despite the obvious consumption of LOTS of oil.  

Even in the US, reserves in 1990 were 26.4 Bb, dropping to 24.8 in 1991.  From 1991 to 2000, a period with largely flat prices, reserves dropped to 21.1 Bb, or 15%.  From 2000 to Dec 2004, when prices were rising sharply, US reserves grew to 21.9 Bb, or roughly 4%.  I expect them to rise again this year, although Katrina may affect that.  US production was seriously affected last year by Hurricane Ivan as well, but through 2003, production was still 2.7Bby, down from roughly 3.2 Bby in 1990.  

The US is a mature oil produce.  In 1991, reserves were 21 Bb.  In the following ten years, the US extracted over 30 Bb - and reserves STILL  
only declined 15%.  Since 2000, even though the US has extracted over 12 Bb, reserves have actually GROWN.

So perhaps the problem with OPEC's numbers isn't so large?

As for Deffeyes, I think the geologists have got to get over their hang-ups about economics.  PRICE matters.  How else does a geologist explain RISING US reserves?

Alright I'll bite again...

"Economists think that if you roll up to the cashier's cage with more money, God will put more oil in the ground."

No economist I know thinks that (and I know a lot of economists, we're funny that way).  In fact, I don't know of a single economist who finds fault with the argument that eventually oil will be depleted to the point that it is economically infeasible to continue to extract.  The difference between what most economists believe and what I am reading here is that we believe that increasing prices will smooth the transition to alternative sources of energy.  

Higher prices create incentives for both consumers and producers to react.  In the original post over at Environmental Economics (http://www.env-econ.net/2005/08/energy_research.html-- more shameless self-promotion) I list the following predictions from the conceptually simple (and glib) economic models:

--INCREASING OIL PRICES creates the incentive to invest in transitional technologies...
--PRICES OF ALTERNATIVES FALL with investment...
--CONSERVATION OF EXISTING STOCKS will ease the transition...

In the latest post I added:

--Higher oil prices create the incentive for existing producer to INVEST IN EXPLORATION.

Nowhere do I argue that we will find more oil (although that is entirely possible) or that oil is unlimited.  We economists really are reasonable people with a grasp of the science.  Speaking for myself, I believe that a knowledge of the science combined with a knowledge of what drives producers and consumers to act (greed--yep I said it) can lead to solutions, not panic.  We just have to get the incentives right.  What are the right incentives?  HIGHER PRICES.

As for Valium--no need, I'm perfectly calm.  I just right in caps for emphasis.  

Here are the links I mentioned to the Farzin paper I found while trawling the web for more info on this subject:

A multi-page summary:
http://www.agecon.ucdavis.edu/uploads/update_articles/v6n3_1.pdf
The article can be downloaded here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246686

Oops--I just WRITE in caps for emphasis (it's much funnier if I spell correctly).
Hey guys,

Deffeyes explained pretty clearly (at least in "Beyond Oil") that we should expect increased price volatility as oil peaks, not necessarily continuously higher prices. The oil companies likely know this too - that's why they're being very cautious about expanding to more expensive fields: those investments may never produce any profit if the oil price drops again. I heard elsewhere that they are only considering drilling where it will pay out with oil at $25/barrel right now. If they thought they could make big profits with more costly oil, they'd be doing it.

The explanation I'd read was that the oil companies are terrified of $10 oil - of a re-occurrence of the price crash of 1998-9, when their $18-bbl projects were bleeding money all over the sand and seas.  So they're being cautious.  While a booming world economy today is driving up oil to $65, when the next recession comes (and there's always another recession) within the next 3-5 years, it will depress demand and could drop prices back to $40 or even $25.  By planning with a market cost of $25, they are ensuring that even if prices fall the oil companies won't go bankrupt.

They're probably also worried about each other: there's a herd effect in oil, just like any other industry, so that if they all make the same $40 projections without considering their competitors' plans, they'll end up over-producing and prices will crash.  At the same time, there are a lot of political variables that might raise production quickly: will Russia recover from the Yukos disruptions?  Will Chavez be able to restore Venezualan production?  Will Iraq finally pick up speed?  Any of those could be major market movers - much better to be cautious.

J asked me to post this:

    I called 6 different people last month, with 6 different companies. We all work in the oil field as drillers or geologists or petrophysicists. We all operate in various domestic and international areas. Everybody has the same outlook, and Bubba summed it up, but let me explain it once more for those new to the site.

    We have basically spent the last 20 years honing our business model for maximum efficiency due to low oil prices. We are very efficient at finding oil and gas, very efficient at drilling no matter where it is, and very efficient at extraction. New technology is something we deal with on a daily basis, often inventing on the fly as circumstances dictate in new areas or for unforeseen problems.

    Over the last 20 years, we have produced almost no replacements for the curent gray haired oil field engineers and geologists. Nobody wanted to enter an environmentally challenged industry (per the MSM) or enter a depressed industry. Infrastructure expansion was limited by this same oil price, and thus for every 3 retired rigs, we built one new modern one. Instead of building our own pipelines, we rented or leased existing ones. We cut every corner we possibly could to maximize efficiency in the face of low oil prices.

    We have run satellite and aerial gravimetric surveys, used chemical sniffers, 3-D visualization, 4-D interpretation, shot uncounted miles of seismic surveys, and put our people in harms way in West Africa and other politically difficult areas. Everybody knows somebody that has lost his life working in this industry. We are a very close-knit group, because there are so few of us. I don't know who Bubba is, but I bet I have heard his name or already know him anyway. That is how under-staffed we are.

    We have found almost everything there is to find of consequence. What we are doing now is scraping the bottom of every known reservoir, and drilling almost any prospect that might have a shot. Our dry hole rates are all rising in spite of the new technologies. The real warning shot to the world should have been the mergers of the majors - the only logical reason to do this is because it is easier to buy reserves than to find them!

    The only areas we haven't been able to explore heavily lie in US coastal waters. But even these areas were looked over in the 1970's, albeit rapidly. What we saw wasn't anywhere close to what we have in the Central and Western Gulf of Mexico, so we remained there. The Eastern Gulf of Mexico is structurally disconnected from the West - the geology is totally different. The Atlantic Coast has some prospects, but the wells already drilled there were ALL dry. The Pacific Coast has oil, but also has the single largest concentration of environmentalists and NIMBY'ers in the nation, and the highest drilling and production expenses in the country. This offsets the marginal amount of oil there. ANWR is a total joke - the structures are not big enough to be of consequence globally.

    Is there more oil to be found? Yes, but not enough to prevent Chevron and Texaco from buddying up, or Exxon and Mobil or BP and ARCO. Those facts, in and of themselves, should make any thinking person realize that this industry has limited extraction options. When we got to places like Colombia (1992), where we have to fence in rigs and put up razor wire around the perimeter and hire mercenaries to secure a drilling site - it means this is the most economical field we can find, and THAT should tell people the state of exploration. When we go to places like Angola (1995), where you can have your throat slit for being the wrong color or because someone is having a bad day, THAT should tell people how difficult it is becoming to find oil.

    The response you are seeing today is it. It is all we can do, as rigs and competent, trained people are the issues. The price of oil can hit $150 and we will not be doing anything differently, because we simply cannot. $200 a barrel oil WILL NOT MAKE OIL MAGICALLY APPEAR in the world market - anybody espousing something along those lines is a complete idiot.

    If you want to get real about the reserve picture, subtract 20% from it and you may be close to the truth. It is in the interests of oil companies, Reserve Bankers and entire governments to OVERSTAE PROVEN RESERVES! At every step, proven reserves are inflated. Take these numbers to the bank at your own risk. Oil people know this intuitively, as we buy and sell properties every day and have to wade thorugh all the smoke and mirrors.

    As far as depletion is concerned, the UK is the best model. It used all the new extraction and reservoir technologies available in the last few decades. Other areas using the same technologies should follow similar curves, providing reservoir characteristics are basically similar. And as the UK has both sandstone and carbonate reservoirs, it should be a reasonable assumption.  --J

I'll be bringing this to the Peak Oil Awareness meeting tonight.
I may be alone in my thinking, but I am much more convinced by the positions of Bubba and J than by any report from some think tank or university. We actually have people working within the exploration industry telling us that our worst fears are their own. They give rationales, they give you percentages they work with every day, they explain things in logical fashion, and yet people here often choose to believe sources very far removed from the actual exploration effort simply because it provides them the fodder necessary to reaffirm their existing beliefs.

To choose instead to believe a university research publication or a report from a think tank that is paid for by some special interest group rather than OUR OWN CONTRIBUTING OIL INDUSTRY PEOPLE...well, it's kind of like choosing to believe the moon is made of cheese when the astronauts are sending rocks back....

For my part, at least, I like the insight from the oil industry pros - it keeps the discussions grounded.  But I also think that the economic case provides a lot of information that needs to be reconciled with the geological information.

For instance:
Prof. Goose and Bubba report that rig counts are up.  Rig prices are up.  There's a shortage of rigs and qualified people.  Fees for those experts and rigs are being bid up quickly.  That means demand for new development and exploration is very high - and that it is substantially higher than it was just a few years ago.  Demand is rising so fast that the market has not had time to respond by building more rigs and training/hiring more teams.

That'll take time to change.  Over the next few years, oil will probably be a magnet for college students and engineers again.  Oil and the oil patch will be big business, and Houston will forget all about Enron.  Although I hope we don't need to live through "Dallas" and "Dynasty" again.

But the point is that if there was no more oil to be developed, why would oil companies want more rigs?  If we've explored everything there is, why keep looking?  Sure, returns are declining - we'll have to drill twice as many wells to find as much oil.  But since the price doubled, we can afford to do it.

Finally, the oil companies are still evaluating new production at $25 per bbl.  That tells me they're cautious.  But it also tells me that the price DOES matter substantially for new production - otherwise, they wouldn't care about the price baseline, because there'd be no need to evaluate projects at all: you'd just go ahead and do it no matter the cost, or you'd just plug in the current market price, whatever it was, and be done with it.  The fact that the baseline value is important - and now VERY far below the market price - makes me wonder that there may be quite a bit of room for production to rise.

-- Silent E

"Finally, I find in the general case that not acknowledging the problem endangers our civilization and so I can not abide glib "conceptually simple" thinking at a time when we all need to work hard to alert the world to and solve the problem of peak oil."

I don't see `Peak Oil' as a problem.  `No Oil' would be a problem--a very solvable problem if prices rise high enough.  Sorry for being glib.

First of all, there is nothing that J wrote that I don't totally agree with.

Secondly, in response to Eroie's comments that there are many reasons why major oil companies are using price forecasts in the mid-20's.

  1. They don't want to scare the shit out of everyone.  The price premises that companies use are supposed to be company-proprietary.  But in fact they become open secrets very quickly.  The financial press knows them almost as soon as they are issued.  If these major companies jumped there price forecasts to $40/bbl from $25 that would send a shock wave through the finanical markets.
  2. Companies like Exxon, ChevTex etc. are cognizant of the hyper wage, service, and supply inflation that happened in the late 70's and early 80's the last time prices skyrocketed.  They are having enough time right now retaining staff and dealing with rig shortages.  If Exxon jacked up their premise then Shell and BP would follow and the bidding wars for staff would begin immediately.
  3. Although these companies supposedly have planning premises in the mid-20's, look at where a lot of the money is going.  There is no way that all that capital would be pouring into Alberta for oil sand mining projects if the people running Shell, ChevTex, ConocoPhillips, and Exxon (through Imperial) truly believed in $25 oil.  
  4. For new projects, in my company, we are being told to bring them forward even if they are not profitable at the planning premise price.  
Bubba,

  1.  If the companies price premises' are leaky, wouldn't the fact that the price premises are no longer relevant also be leaky?  At a minimum, the first project announced that exceeded the 'official' premises by a factor of two (which is what you'd see if they were assuming market prices above $50, as opposed to baselines of $25) would set off alarm bells all over Wall Street.  It'd be the same shock-wave you refer to.  

  2.  The bidding wars are beginning already, allegedly.

  3.  The major tar-sands projects don't look like they need much over $25-bbl.  Shell announced a "multibillion dollar" project to produce 100,000 bd for 30 years.  Quick math: that's 36.5 mby, which at $25 is just shy of $1b per year.  I'm not an expert on the present value of a 30 year income stream, exchange rates to Canada, or distribution costs from Alberta, but that's $30 billion in revenue at $25/bbl - looks like that could cover a "multibillion dollar" capital outlay.

  4.  Bringing forward new projects regardless?  How much new production does that result in - but I'd understand if you can't say :)
Eroie,

In response to your assertions in 3 above please see:

http://www.shell.ca/code/investor/presentation6/img008.jpg

This is from an investor presentation found on Shell Canada's website.

As you can see, the average unit cost per barrel in 2004 for the Athabasca Oil Sands Project was $33.47.  In Q1 of 2005 it was $24.21/bbl.

So you see, these projects don't fly at $25/bbl.

Yeah, but that chart shows their long term costs target is about $15/bbl, and except for anomalously high costs in Q4 2004, total costs including natural gas stayed below $25/bbl in all other quarters - i.e. that even if they are not hitting the $15 target, they are staying under $25.  So if the baseline is $25, perhaps the expansion does make sense?

We'll have a better idea when the total cost of the new expansion is announced, but the news reports say it will be under $5 bn.

1. Technology drives cost and politics drives price. When bright spot seismic was developed in the seventies the cost of gas (and oil) discovery went down while the price went up. Now we know where the oil is if it has associated gas. We don't know whether the gas is N2, CO2, H2S, or CH4, but we know something is there and we drill.
When oil companies act as if there is no more oil, they probably know what they are doing.
2. With the coming collapse of the dollar we may see gasoline at ten dollars a gallon and ten euros a barrel. US synfuel plants will supply China with methanol and dimethylether after US demand is satisfied. This means that we have to build iron ore mines, coal mines, steel mills, etc. Figure on as long as it took to build up our capacity for World War II, ie, about four years.
When oil companies act as if the price of oil is not going up, they probably know what they are doing.
"They don't want to scare the shit out of everyone." I for one would have preferred to have the shit scared out of me a lot earlier when it wouldn't have been so messy. If indeed oil companies have known this very well on the inside, I think more public communication about it earlier would have been good. I guess marketing was scared of rocking the boat, huh?

I really appreciate you insiders who are taking the time and risk to share your perspective.

Thanks J and Bubba for confirming every single thing I said to Tim Haab, especially when J says
The response you are seeing today is it. It is all we can do, as rigs and competent, trained people are the issues. The price of oil can hit $150 and we will not be doing anything differently, because we simply cannot. $200 a barrel oil WILL NOT MAKE OIL MAGICALLY APPEAR in the world market - anybody espousing something along those lines is a complete idiot.
But, since Tim says
I don't see `Peak Oil' as a problem. `No Oil' would be a problem--a very solvable problem if prices rise high enough. Sorry for being glib.
it would appear that I was wasting my time anyway.

Also, Tim, it wasn't you I was suggesting take a Valium :)
If you were an oil company exec, and you knew that EVERY SINGLE TIME oil prices rise, the economy tanks and demand recedes..what would your strategy be? Because that is exactly what has happened historically. The big difference this time is that we are hiding inflation because we pay for foreign oil with inflation adjusted dollars. If you remove oil related and housing related industries from the market, it tanked two months ago. If you use unadjusted numbers for inflation, it's around 15%...so where is purchasing power headed? And there follows the economy, right? So, if you're the CEO, what would you plan for??
Thanks to all for a very interesting post.

A thought puzzle, because I side with Bubba and J on difficulty in finding more CHEAP oil.

Assume we have only extracted 40% of all the oil contained in the earth.  But that oil was in the largest contiguous fields.  Was the thinnest flowable oil.  Was in the shallowest fields below surface.  Was under the highest pressure when initially drilled into.  A lot of assumptions I know, but having read the excellent posts by HO, Bubba, J and others it seems like this is what happened over the past 100 years.

Now assume that consumption is at an all time high of around 84 mbd.  Supply needs to meet this or go up significantly and there is still 75% of all the oil known still in the ground (based on my model above).  Does this mean there is no barrier to matching and increasing supply over 84 mbd for the next 50 years?

I agree that economic incentives will empower the removal of a lot of that oil.  But it seems to me that the limit is not on how MUCH oil is still in the ground, the limit is on how FAST that oil can be removed per day.  If all the technology and money that can be brought to bear can not remove the remaining oil as fast as the previous oil, supply will go down on a daily basis.  This will occur on ALL old wells.  Only new wells will produce at the highest rate expected regardless of iincentive price.

I have not seen enough discussion here about the technical hurdles involved in maintaining production rate from existing wells in regard to cost to maintain that rate.  Maybe this is an assumption in all the depletion models.  Rates go down so improved technology (CO2, water, horizontal drilling, etc) is used to maintain as high a rate as possible.

My thought puzzle is that on a well by well basis doesn't the EROEI goes down pretty quickly and continue to go down forever?  But I don't know if this is a linear line or exponential drop.  

And isn't this why deep wells decline so much faster?  As soon as the initial pressure drops the costs go up much faster than shallow wells.  Lots of oil left in those deep fields but getting it out of the rock AND to the surface takes more and better technology.