Secretary of Energy Samuel Bodman has asked THE question. Will we have enough oil and natural gas to keep our economy going? In a letter to Lee Raymond, Chairman of the National Petroleum Council (NPC), Bodman has asked the Council to predict the future:
- “What does the future hold for global oil and natural gas supply?”
- “Can incremental oil and natural gas supply be brought on line, on time, and at a reasonable price to meet future demand without jeopardizing economic growth?”
- “What oil and gas supply strategies and /or demand-side strategies does NPC recommend the U. S. pursue to ensure greater economic stability and prosperity?”
Energy Secretary Bodman’s letter describes several key issues: “Perspectives vary widely on the ability of supply to keep pace with growing world demand for oil and natural gas, the point in time at which global oil production will plateau and then begin to decline (“peak oil”), the implications these may have for the U. S. and world economy, and what steps should be taken to achieve more positive outcomes.”
The oil and natural gas industry has been asked to provide us with a candid evaluation of the world’s oil and natural gas resources using internal industry data. The NPC, a federally chartered advisory committee to the Department of Energy, has accepted the request. Lee Raymond, who is also CEO of ExxonMobile, has the task of documenting the industry’s views on whether or not supplies can keep pace with growing world demand, and if such supplies can be provided at price points low enough to ensure continued economic growth.
Framing this report will be a tough challenge. The issues are complex and there is a dearth of reliable data. Nonetheless, the NPC’s data, analysis, and conclusions must be irrefutable.
If we were to list the most important issues facing humanity, oil and natural gas depletion has to be in the top three. The economic and cultural destiny of mankind is inexorably tied to the availability of fossil fuels. It is impossible to address the problems of famine without oil and natural gas for fertilizer, cultivation, and processing. Oil provides the feedstock for thousands of products, including cosmetics, medicines, plastics, heating and cooking fuels, and mobile fuels for transportation. Natural gas is essential for the production of fertilizers, electricity, and heat.
The NPC is essentially being asked to characterize the size and direction of the worldwide market for crude oil and natural gas, including supplier exploration and production, the eventual depletion of reserves, and – finally – the impact such depletion will have on consumers.
Each issue raises multiple questions. Finding credible data will exacerbate the challenge of thoughtful analysis. Although we know NPC member corporations have better data than is generally available to the public, are they willing to make it available to the study team? How will the NPC deal with the paucity of credible data from OPEC? How will collected data be organized and synthesized? How will each hypothesis be developed and tested? Is there one highly probable response? Or will the study team be forced by uncertainty to offer a series of possible scenarios?
Of the more than 100 research projects I have done, depletion has been – by far – the most complex. In the spirit of being proactive and constructive, therefore, perhaps it would be helpful to offer a few suggestions.
Your first problem will be to identify the key issue. Take my advice. Although defining and quantifying reserves will be an important component of your task, the key issue is NOT how much oil and natural gas is left in the ground. Going forward, the key issue is: How much oil and natural gas can we produce? And that is an entirely different and very dicey question. If you want to evaluate how much oil and natural gas we humans can produce over the next 20 years, then you will have to examine the entire supply chain – from exploration through consumption – and then factor in the impediments of potential disruption.
One of the most confusing aspects of the Peak Oil debate is embedded in the definition of what constitutes reserves. Every agency and nation appears to have its own method of accounting. We hear about identified, proven, probable, and possible reserves. Reserve volumes are estimated using 95 percentile, mode, mean, or 5 percentile recovery data. Reserve “growth” increases probable recovery. Emerging technology changes the definition of what constitutes physically recoverable reserves, and volatile crude oil prices change the definition of what is – or is not – economically recoverable oil.
But in the end, there is one definition that takes precedence over all others. Proven or identified reserves are less important than accessible reserves. –
“Accessible reserves are those reserves of oil and natural gas that can actually be found, produced, transported, refined, and distributed without material disruption at a price the consumer can afford to pay.”
This definition, or one like it, is important. Although we have inherited a lot of oil and natural gas on this planet, it would appear that only a small fraction is accessible. The practical value of oil and natural gas deposits will change over time in proportion to the probability they can be physically recovered and transported to a refinery at a cost commensurate with world market prices. While the Monte Carlo simulations of probability used by the USGS in its studies are interesting, we need to know how much oil and natural gas you believe you can find and produce by poking a hole in the ground. Then you need to factor in the supply chain challenges of transportation, refining, and distribution. You will also have to determine the price points against which oil and natural gas prices begin to impede the American economy (and by inference – the world economy). And finally, you will have to determine the probability all this can be done without material disruption.
Chose your definitions carefully. Not only will they frame your entire study – and its ultimate credibility – they will also set the world standard for oil and natural gas reserve definitions.
We need better information. But it’s not available. Nations tend to treat resource statistics as classified information. That leaves us with published reserve data of unknown quality, causing confusion and mistrust. What methodology will be used to improve the quality and quantity of the data you plan to use in your report?
Your next task will be to frame the relevant questions. At a minimum, you should be prepared to respond to the following:
- How will you define and describe conventional oil and natural gas resources by type?
- How will you define and describe non-conventional oil and natural gas resources by type?
- Can you characterize future conventional and non-conventional oil and natural gas exploration, production, transportation, and refining by resource type, by year, and by producer region?
- How much oil do we have left? Where is it? Do you actually know where these deposits are, or do you still need to drill holes in the ground to confirm the availability, quantity, and quality of the world’s petroleum resources?
- Do we know how much of the world’s oil resources are technically and physically feasible to produce? For example, what is the recovery outlook for the world’s enormous deposits of oil sands and shales? Deep sea and artic deposits?
- How do you resolve the enormous shortfall between oil consumption versus oil discovery since the 1980s?
- How do you resolve the contention that increased drilling has not provided significant mega-field reserve discoveries since the 1970s?
- How much natural gas do we have left? Where is it? Do you actually know where these deposits are, or do you still need to drill holes in the ground to confirm the availability, quantity, and quality of the world’s natural gas resources?
- Do we know how much of the world’s natural gas resources are technically and physically feasible to produce? For example, what is the recovery outlook for the world’s enormous deposits of stranded natural gas?
- What is the estimated minimum annual oil and natural gas production by producer region?
- What is the estimated maximum annual oil and natural gas production by producer region?
- What are the odds that oil supplies will not match demand on multiple occasions (surplus or shortage) between now and 2025?
- What are the odds that natural gas supplies will not match demand on multiple occasions (surplus or shortage) between now and 2025?
- Can you project world refinery raw material product costs by resource type, and by year through 2025?
- Given the costs described in question 14, can you project refined product prices by type, and by year through 2025?
- Cultural conflict, environmental concerns, and national selfish-best-interest are potential barriers to maximizing world exploration and production. How do these challenges figure into your supply chain equation? What is the probability that regional conflict will disrupt exploration, production, and transportation?
- As oil and natural gas becomes more difficult to produce and transport, the amount of energy required to exploit each resource will increase. Given the conventional and non-conventional resource definitions described above, at what point do you estimate the EROEI of each oil and natural gas category will drop below 1?
- Given a definition of consumer regions, what is your projection of regional oil and natural gas demand by year?
- Will we be able to see adjusted data that includes 20 years of history, and a forecast period of 20 years (to 2025)?
- For each of the above questions, will your report discuss the underlying assumptions used to reach your estimates?
- Given the results of the above questions, what oil and gas supply strategies and /or demand-side strategies do we need to pursue in order to ensure economic stability and prosperity? When do these strategies need to be in place?
There are, of course, many more questions that need to be addressed, and the NPC must certainly improve the quality of publicly available information. Never-the-less, a clear and unambiguous response to the above questions would provide sufficient information for the development of proactive public policy.
Samuel Bodman’s letter shows two concerns: the estimated availability and price of oil and natural gas versus demand; and the projected economic impact of availability and price on America’s economy. This bilateral apprehension encourages the NPC to flirt with economic judgments. It will be tempting to compare future oil and natural gas price points with the consumer’s ability to pay for gasoline, diesel, propane, heating oil and other refined products. If you conclude there will be restrictions in the supply of oil and natural gas versus consumer demand, then these shortages will also impact every economy on this planet. Disruptive changes to either price or availability will change the outlook for GDP, unemployment, and inflation.
But avoid the temptation to make economic judgments. Although you have been asked to identify the economic implications for the United States (and by inference the economies of other nations), that highly controversial exercise properly belongs to those of us who seek truth by laboring over incredibly complex spreadsheets and econometric models. Since the economic “implications” involve social judgment, the NPC would do well to avoid the ensuing controversy. Just give us the facts, the assumptions, and the caveats.
We long for credible data.
The Use of Scenarios
My guess is that the NPC and its consultants will be compelled to characterize a series of possible scenarios in the final report. There are simply too many variables and too many unknown quantums to permit one to establish, test, and conclude a report on oil and natural gas using a single hypothesis.
Scenarios are not predictions. Rather, they permit us to make, and then test, a hypothesis. They become a tool that gives our evaluations focus, permit us to deal with the unexpected, and characterize the results of dynamic circumstances. You will achieve greater credibility if you use the scenario approach to organize internally compatible data sets.
With his letter to the NPC, Energy Secretary Samuel Bodman has initiated a fourth Federal study of oil and natural gas supplies. We have already read Joseph Riva’s 1995 report “World Oil Production After Year 2000: Business As Usual or Crises?”, and the February 2005 report “Peaking of World Oil Production: Impacts, Mitigation, & Risk Management.” by Dr. Robert L. Hirsch et al, for the Department Of Energy (DOE). In addition, The Government Accountability Office has started work on a report tentatively entitled “World Oil Reserves and Production Peak” that should appear in 2006.
I expect an even-handed, relatively optimistic, response from the NPC. The oil and natural gas industry will give us its view of the relevant resource and supply chain issues through the National Petroleum Council’s report. When this document has been completed, we will have in-depth reports on the world’s oil and natural gas resources from four American institutions and multiple independent authors. The public will be encouraged to understand the challenges of growing resource demand versus emerging supply limitations. Our political institutions will be confronted with the need to establish responsive public policy.
The cumulative wisdom of these reports will describe reality.
Will it be a truth that Congress chooses to ignore?
Ronald R. Cooke
The Cultural Economist