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Hit the Road Jack

To the austere headline reader, the latest test results coming from Chevron’s Jack oil well in the Gulf of Mexico is beyond optimistic. Examples include:
New Oil Field in Gulf May Yield Billions of Barrels
- The New York Times
and…
U.S. Oil Reserves Could Grow by 50 Pct.
- Houston Chronicle

And the initial resource estimate currently being touted by the talking heads on CNBC and other main-stream financial outlets -- somewhere between 3 and 15 billion barrels of oil and natural gas liquids -- seems monumentally positive.

But before we break out the noise makers and tequila to celebrate, let’s take a look at the big picture.

First, we should realize that a successful test well does not prove how much oil is actually in the ground. Determining an in-place reserve takes a highly skilled team of petroleum geologists several months to calculate.

As it stands today, the field is nowhere near having a proved oil reserve and I’m surprised that there are those who are so bold to place a reserve figure on it. So please realize that the 15 billion barrel figure that has been so loosely thrown around is simply speculation -- overzealous speculation if you ask me. Quite frankly, I believe this type of smoke and mirrors campaign is irresponsible at best.

Moreover, it’s incredibly important to note that a successful test well doesn’t mean a huge supply of cheap oil will be hitting the market anytime soon. It will most certainly take several years and tens of billions of dollars to bring this oil to the open market. This is a deep sea well, and it’s going to cost a lot of money to get it.

The bottom line is that it’s highly unlikely that 15 billion barrels actually exist in the reservoir and, depending on how much more exploration drilling the companies want to do, it could take up to five years to begin production.

And I hate to rain on the parade, but the way I see it, the new discovery isn’t even close to being what we’ll need to stop the peak oil crisis.

In fact, even if there was 15 billion barrels in the ground down there, a reserve that size would only slightly delay the impending catastrophe.

Here’s why I say that…

Just for argument’s sake, let’s assume that the Chevron-led consortium is able to bring the field into production by 2010. And let’s also assume -- and this is quite an optimistic assumption -- that they’re really able to suck 15 billion barrels of crude out of the new field.

How long will that oil last us?

First we need to consider oil consumption in 2010.

There’s little debate over the future of global oil consumption. The consensus among the world’s leading experts is that global crude demand will only continue to rise over the next few decades.

As it stands today the world consumes about 85 million barrels of oil per day (MMbbls/d). The International Energy Agency (IEA) -- a Paris-based institute that acts as an energy policy advisor to 26 countries worldwide -- predicts global crude demand to rise to reach 93.7 MMbbls/d in 2011.

The Energy Information Administration (EIA) -- a similar organization to the IEA -- reported similar findings. The agency recently estimated that global oil demand will increase nearly 2% a year to 103 MMbbls/d by 2015.

To make it simple, let’s assume global demand will be 90 MMbbls/d in 2010, about the time Chevron and friends will have the 15 billion barrel oil field into production.

With global oil consumption at 90 MMbbls/d, the 15 billion barrels from that field would last the world less than six months!

Ok. So we probably won’t be supplying the rest of the world with this oil. Rather we’ll likely keep the oil for domestic use as it is very close in proximity to many of the nation’s refineries and carries zero geopolitical risk.

But it still won’t help us out all that much.

Today the U.S. consumes about 22 MMbbls/d. By 2010, we’ll likely be consuming about 25 MMbbls/d. At that consumption rate, those 15 billion barrels of crude would only give the United States a 21 month supply!

I’m not trying to take away from the importance of this discovery or the work Chevron and team have done in the Gulf. Like I mentioned earlier, the test results are truly noteworthy.

The discovery is highly valuable to the entire oil and gas industry and to the country as a whole as Western oil and gas firms are finding fewer and fewer opportunities in the politically unstable parts of the world.

In addition, Chevron said that the Jack well set a variety of records, including the deepest well successfully tested in the Gulf of Mexico, drilling about 5.3 miles below sea level. This may inspire other oil and gas firms to drill even deeper and potentially find more oil.

Nevertheless, despite all the enthusiasm, this single oil discovery is not our salvation from peak oil.

One significant discovery in 30 years doesn’t help the crisis much. And extraordinarily high crude prices are still on the horizon.

Fact is, deep-sea operations like the Jack drilling can easily cost over $500,000 a day, meaning Chevron and crew are betting that oil prices are going to stay at current levels or go higher. Quite frankly, I’m anticipating and preparing for the latter.

What do you think? Leave a comment below.

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