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New Oil Reports Add Confusion To 'Peak Oil' Theory

Iqbal Latif - 7/17/2007

Proponents of "peak oil" -- the theory that global crude oil production has hit its zenith and is headed for a steep decline -- are upset with a U.S. oil industry group's findings that the world has plenty of oil. Next week the U.S. National Petroleum Council -- a board of high-level U.S. oil industry executives -- releases its study titled "Facing the Hard Truths about Energy," conducted at the behest of Energy Secretary Sam Bodman. According to the report's executive summary obtained by Reuters, the world is not running out of oil but there are "accumulating risks" to securing supply through 2030. In a draft letter to Bodman outlining its findings, the National Petroleum Council says, "The world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically."

There is no shortage of rhetoric on issue of peak oil!!

According to skeptics..

Global oil production is rapidly approaching its peak, even if natural gas liquids and expensive, destructive, risky deep water and polar oil are included.

According to optimists..

Reuters reported yesterday that Daniel Yergin, chairman of oil consultancy Cambridge Energy Research Associates and the panel's vice chairman of demand issues, has dismissed the idea of peak oil. Instead, Yergin's group has predicted an "undulating plateau" of crude oil production over several decades, followed by a slow decline.

One U.S. oil executive hires people to don chicken suits and hand out flyers at peak oil conferences, calling its advocates "Chicken Littles" - most recently in Italy in 2006. "The abundance side of the debate needs something that grabs attention too," said Alex Cranberg, chairman of Denver-based Aspect Energy LLC, an independent oil company. Peak oil theorists say such findings gloss over Bodman's request to study the issue in detail. "They've labored mightily and come up with a mouse," said Randy Udall at the Association for the Study of Peak Oil and Gas, whose group dismisses the report as "petro Prozac."

In report that highlights bottlenecks for the majors and what skeptics term as a disturbing sign of lack of new discoveries last year Exxon didn't replace its reserves through the drill-bit for the first time, according to Oppenheimer research. That's because more of the world's oil reserves have become off limits to Exxon and other private drillers. Many are controlled by national oil companies, such as Saudi Arabia's Aramco or Mexico's Pemex. Expropriation by governments like Russia and Venezuela took other reserves off the market.WSJ reports that EXXON major faces super sized obstacles if it ever hopes to become the world's first $1 trillion company. Exxon Mobil this week became the first company worth more than $500 billion since the millennial stock boom burst. The Texas oil producer is now nearly twice as valuable as its nearest rival, Royal Dutch Shell. Size has traditionally been an advantage for Big Oil. As the world shrinks, the number of choice oil fields has diminished and new finds have become more expensive and complicated to tap.The trouble for Exxon chief Rex Tillerson is that to move the needle on a company bigger than most governments, he needs to broker ever larger deals.

Conflicting reports makes the entire landscape of oil predictions very murky. Sometime one feels that predictions are dime a dozen and very much Malthusian in nature. If one prediction comes out to be wrong few others can be made with ease, there is no accountability for wrong predictions, Club of Rome prophecies of doom and gloom are not talked about we have lived through those years of intended doom with greatest of comforts. Malthusian food/ population disconnect never ever materialized, although proponents of Malthus cite Somalian famine as one example but on larger scale of 'scarcity' of resources the inbuilt mechanism of natural exponential growth defy scientific limitations since the inception of known civilization short journey of less than 10,000 years. The fact is that 15 billion years of creative change cannot be explained by mere mortals who have got some understanding but not all of zillions of still unfolded truths. Lets look at the Medium-Term Oil Market Report [MTOMR] by the International Energy Agency that was just released. http://energy.seekingalpha.com/article/40982

http://online.wsj.com/public/resources/documents/iea20070707.pdf

Global energy consumption is seen rising at its fastest clip in recent years in 2008 but high oil prices persisting above $70 a barrel may steadily eat away at demand, the International Energy Agency said Friday. In the same breath the Paris-based agency, in its monthly oil market report, also conceded that it had been too upbeat in its forecasts for oil production by rival producers to OPEC, such as the U.S., Norway and the U.K.

Report takes a hard look at where the oil market is headed between now and 2012. This is an important timeframe often missed in discussions of energy: plenty of folks will tell you what's going to happen next month, and even more will sing you songs of fear and greed that start, oh, in 2020. But five years is an extremely useful time frame for investors to follow. The top line of the report doesn't ring with surprises for anyone who's been paying attention: demand is staying strong, supply is staying tight.The report..

The IEA now expects global demand to reach 95.8 million barrels per day (bpd) from 86.1 million bpd in 2007, assuming average global GDP growth of 4.5 percent annually.During 2007-2012, OPEC crude supply is expected to grow by 4.0 mb/d of installed capacity. Seventy percent of that increase will come from Saudi Arabia (+1.8 mb/d), the UAE, and Angola (+0/5 mb/d each).

Strong Demand

The IEA forcasts global demand to expand by an average of 2.2% (or 1.9 million bpd) per year and reach 95.8 mb/d by 2012. Unsurprisingly, demand growth is expected to come from Asia and the Middle East, as well as other non-OECD countries. The result of this growth will put non-OECD countries oil consumption "close to the point at which it will surpass total oil consumption in the OECD." While per capita consumption will still be lower than that of the OECD countries, the non-OECD countries will be using 46% of global oil by 2012 (up from today's 42%)

The why is fairly obvious -- the economies of these countries are, by and large, based on heavy industry and processing of raw materials, both of which are energy intensive. On top of that, average incomes in these countries will continue to rise to the point where consumers start buying cars and other modern conveniences that tax the power grid: refrigerators, dishwashers, washers and dryers, etc.. Appliances often represent real quality of life improvements, but they are energy drains.

But Asia, the Middle East and other non-OECD countries are not the only areas that are predicted to see demand rise. The IEA thinks that demand will continue to grow in the OECD as well, mostly due to North America's thirst for transportation fuel … a thirst that looks "to grow twice as fast as in Europe or the Pacific ( 1.3% per year on average versus 0.7% and 0.6% in the latter two regions)." In North America, the US carries the bulk of the demand in terms of overall volume, but Mexico is looking to have the fastest growing demand (up an average of 1.9% per year).

Outside the US, we could learn some lessons. Demand inside Japan is projected to fall by 0.1% per year. While not a big number, it is the only country with a contraction in demand. They're frankly just getting it right. The promotion of fuel efficient passenger cars ("mini vehicles") is having a noticeable impact – something not seen for the US in the near future, no matter how many Priuses you see at Whole Foods. Additionally, power generation in Japan is switching from oil to natural gas, and if Japan's nuclear facilities can keep clear of operational problems and the natural gas continues to flow, the predicted demand for crude should decline. If problems arise with either, that 0.1% yearly decrease will vanish.

Of course, all of these demand forecasts depend on myriad factors, primarily how the world economy behaves, and the report goes deep into the various risks, both on the downside (think inflationary pressures, continued high oil prices, a pronounced slowdown of the US economy) and the upside (China mostly). It's a better toolbox for understanding supply over the next few years than we've seen elsewhere.

Supply - The Other Side Of The Equation

OPEC

During 2007-2012, OPEC crude supply is expected to grow by 4.0 mb/d of installed capacity. Seventy percent of that increase will come from Saudi Arabia (+1.8 mb/d), the UAE, and Angola (+0/5 mb/d each). It's important to point out that this forecast is lower than OPEC's own numbers. The IEA has included a haircut because of security and investment risks in Iraq, Venezuela and the Niger Delta. Given the continued news flow, we think this is a prudent prediction.

Non-OPEC

Total non-OPEC supply is forecast to go up by an average of 1% annually, which is slower than the previous 1.4% average from 2000 to 2007. This runs counter to some of the hype surrounding investment in production, and indeed, the growth for 2007-2009 looks to be stronger than the years that will follow. In 2011, the forecast has been revised down by 0.8mb/d in part because of project slippage, but also to try and account for a "tendency for unscheduled field outages" -- econ-nerd speak for "stuff happens more often than you'd like to think."

The report goes into the reasons for each country's growth or decline and gives predictions for specific rates, but the factors that influence the supply side can be generalized to "above-ground" and "below-ground" factors.

Below-ground is "how much oil is there, really?" While the MTOMR does note that there will be a "leveling off of non-OPEC conventional crude supply," it states that this "is inconclusive as evidence for an imminent oil supply peak." But is does calculate net oilfield decline rates to "average 3.6% annually for non-OPEC and 3.2% per year for OPEC crude." And it warns that "aggregate levels mask much sharper declines in a 15-20% per annum range for mature producing areas and for many recent deepwater developments." All in all, the industry is going to need to "generate 3.0 mb/d of new supply each year just to offset decline."

Refineries

The report is upbeat on the midterm outlook for refineries. New investments are planned (mainly in Asia and the Middle East) which will account for 9.1 mb/d of the predicted 10.6 mb/d rise in crude distillation capacity. The rest of the rise comes from improvements to existing facilities in North America, Europe and the Pacific – what the report terms "capacity creep." In addition, the new refineries will be positioned to deal with the forecast increase in refining complexity – making cleaner and cleaner products from worse and worse feedstocks. All of this sets up a little easing in the gasoline market, possibly as early as 2008.