The Oil Drum

Megaproject contribution from 2005 to 2013, the decline rate is 4%/year with a linear transition period of 6 years starting in 2005. Historical crude oil + condensate production from the EIA.

A news imbalance exists in the reporting of supply-side developments affecting peak oil claims. Apparently, there is nothing but good news lately—actually, this is being reported as the absence of bad news. This trend has driven down oil prices since early August. Is the trend real? Today, Barrie McKenna reminds us in Those quick to deride peak oil theory also don't know Jack about the bigger picture.

A chronic pitfall for economists is that the daily deluge of data often obscures more meaningful long-term trends...

It's that old adage of not seeing the forest for the trees...

With oil now in the low $60 range, many economists are rethinking their assumptions of last year...

The problem in all this is that the peak oil theory isn't about $78-a-barrel oil. And the price of abundance isn't necessarily $63.

Let's look briefly at the forest, not the trees. There's plenty of bad news.

Jerome a Paris seems to feel that I am being somewhat hard on Gazprom, and that I should recognize that they are a good provider with a more than adequate reserve, and that I should therefore, I suppose, shut up.

At the risk of being a tad repetitive, let me therefore explain, and clarify, some of my concerns. To begin let me state that very obviously Gazprom and Russian interests are not the same as those of the West. Gazprom has every right to run their business to their own advantage, and that is not the major point of concern. However, what has to be of concern to the governments of each nation that it supplies with natural gas, is the reliability and price of the product that it is marketing. If those countries come to rely increasingly on Russian supply, then any disruption in that supply can have significant domestic consequences. Typically these shortages seem to fall in the winter, at a time where, as we learned from Colorado last spring, severe weather can limit production from gas fields. It is at those times that domestic power consumption goes up. And while not trying to teach my grandmother to suck eggs, I have to cough gently and point out, to some of our readers (though not Jerome), that electricity does not magically appear out of an outlet.

The weather is still pleasantly warm, and winter seems, as yet, to be just an unpleasant thought that can be put off until, at least, Thanksgiving. But unfortunately for those who have to look towards energy supplies for the winter, particularly in Europe, it may already be coming too quickly. To simply describe what is likely going to turn into yet another mess this winter, let me try a quick summary of what seems to be in the offing.

Gazprom you may recall has been buying into, or acquiring more control of, pipelines that carry their gas from Russia to the West. In the process, last year, it had a bit of a row with Ukraine, over the price that should be paid for the gas Ukraine was using. By offsetting the cheaper price that was to be paid for gas from Turkmenistan, the deal that was cut gave Ukraine the promise of gas at a price that would allow it to continue to function. Well, unfortunately for that agreement, Gazprom has just agreed to pay more for Turkmen gas. At a price of $100 per thousand cubic meters this is already $5 above the price that Ukraine was going to pay for a blend that also contained $230 Gazprom gas.

The BBC, on Channel 4, has just issued an analysis of oil and natural gas called Over a Barrel . Lest you feel impelled to search the dial, I should perhaps warn you ahead of time, that a favored expert is the good Dr Yergin. And so their opinion seems to be that the oil peak will not be a concern until 2020, but that the gas situation is worse. Not because there is a real shortage, but rather, as has been discussed here, because of the behavior of Russia, who supplies an increasing portion of European gas. A lot of the worry comes because Gazprom is spending more money on other investments, by a factor of three, rather than putting it into the development of their available fields, such as those in the Yamal Peninsula, Barents Sea ( mainly the Shtokman field) and in the Far East. Gazprom seems to be investing in distribution systems, and other businesses, and looking to foreign investors to help in field development.

There are few subjects regarding peak oil as important as the uncertainties around what Russia's reserves are and the mysteries of what their future production will be. J. Robinson West, chairman of PFC Energy, says in The future of Russian energy

The world needs every barrel of Russian oil. With growing Chinese and Indian demand and the insatiable appetite of the United States, markets will be tight and even more reliant on the Middle East. Given today's high oil prices, Russian companies and the Russian government believe that they can fund a good part of new developments and even infrastructure projects themselves. Additionally, Chinese and Indian companies, with the strong backing of their governments, are ready to do business with Russian companies and the Russian government. Their investment criteria are more in line with the approach favored by their Russian hosts. Skills as well as money will be crucial, however, and they bring few. If as a result Russia cannot sustain its current oil production level, this will negatively impact world oil markets.

A faltering Russian oil sector would be a disaster for the world economy as well as for Russia itself. President Putin must recognize that he needs a petroleum sector with well-managed and well-capitalized oil, gas and pipelines. He is well within his rights to want the state to dominate it, but it must be managed efficiently. The Yukos affair, as well as infighting in the Kremlin and a lack of transparency and predictability, indicates that he is going in the opposite direction and could hurt Russia's interests as well as the world's if he does not correct his course.

This post takes no official position regarding Russian reserves and predictions about their future production. Lately, there has been controvery regarding some statements made by westexas who, using some data modelling being worked up by Khebab, is predicting a rapid decline in Russian production in a pretty short timeframe. Naturally, if this does occur, the world could be in for a very rough ride. Here, I will present the best data and estimates I can find outside the world of Hubbert Linearizations to give TOD readers a chance to consider the uncertainties surrounding Russia. I should also mention that HO did a post It would be nice, but... back in October covering some of these issues but not in this kind of detail.

Here are just a couple of bits of information that you may have missed since at least one of these was in the post on oil rigs.   One of the discussions we had on CERA and ODAC predictions of supply was based on the time that it took for a field to come on line.  Well just this weekend Sakhalin Island finally started to produce oil.

If you go back to Chris Skrebowski's initial listing of projects that would contribute to production by 2010, Sakhalin Island (which is just north of Japan) was scheduled to come on line in 3 steps - Phase 1 of which was supposed to happen in 2004.  

The other thing to note is that we are not the only ones to suffer from the Hurricane.  Consider that Mexico provided a lot of the oil that went to the refineries that are still closed.  As a result it's economy is now being hurt by the delays in getting them restarted.

I noticed, over the past week, that there is some increasingly technical talk about the various ways that we get oil out from underwater in the Gulf of Mexico. And while I suspect that most of those who comment on this site are vary familiar with all the terms, some of the more general readership may not be. Since this is going to be a fairly hot topic in the near term, as the impact (spelled out in earlier posts and comments) spreads from the oilfields to the refineries and then up the pipelines to the local distributors and gas stations let me therefore explain just a bit about some of the different words that are being used here - with reference, where I can find them - to pictures of the different types of structures that are being used. And if I miss some, please chip in either to ask or answer. This is replacing a chat I was going to have about Horizontal Drilling, but that will be along at some time in the future. Earlier technical posts are listed at the end of this one (with a comment on the levee question).