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CERA says peak oil theory is faulty

Press Release

CAMBRIDGE, Mass., November 14, 2006 – In contrast to a widely discussed theory that world oil production will soon reach a peak and go into sharp decline, a new analysis of the subject by Cambridge Energy Research Associates (CERA) finds that the remaining global oil resource base is actually 3.74 trillion barrels -- three times as large as the 1.2 trillion barrels estimated by the theory’s proponents -- and that the “peak oil” argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future.

“The global resource base of conventional and unconventional oils, including historical production of 1.08 trillion barrels and yet-to-be-produced resources, is 4.82 trillion barrels and likely to grow,” CERA Director of Oil Industry Activity Peter M. Jackson writes in Why the Peak Oil Theory Falls Down: Myths, Legends, and the Future of Oil Resources.  The CERA projection is based on the firm’s analysis of fields currently in production and those yet-to-be produced or discovered.

“The ‘peak oil’ theory causes confusion and can lead to inappropriate actions and turn attention away from the real issues,” Jackson observes.  “Oil is too critical to the global economy to allow fear to replace careful analysis about the very real challenges with delivering liquid fuels to meet the needs of growing economies.  This is a very important debate, and as such it deserves a rational and measured discourse.

This is the fifth time that the world is said to be running out of oil,” says CERA Chairman Daniel Yergin.  “Each time -- whether it was the ‘gasoline famine’ at the end of WWI or the ‘permanent shortage’ of the 1970s -- technology and the opening of new frontier areas has banished the specter of decline.  There’s no reason to think that technology is finished this time.”

The report emphasizes the importance of focusing on the critical issues.  “It is not helpful to couch the debate in terms of a superficial analysis of reservoir constraints.  It will be aboveground factors such as geopolitics, conflict, economics and technology that will dictate the outcome.”  The report also points to such aboveground questions as timing and openness to investment, infrastructure development, and the impact of technological change on demand for oil

Undulating Plateau

The new report describes CERA’s liquids supply outlook as “not a view of endless abundance.”  However, based on a range of potential scenarios and field-by-field analysis, CERA finds that not only will world oil production not peak before 2030, but that the idea of a peak is itself “a dramatic but highly questionable image.”

Global production will eventually follow an “undulating plateau” for one or more decades before declining slowly.  The global production profile will not be a simple logistic or bell curve postulated by geologist M. King Hubbert, but it will be asymmetrical – with the slope of decline more gradual and not mirroring the rapid rate of increase -- and strongly skewed past the geometric peak. It will be an undulating plateau that may well last for decades. 

During the plateau period in later decades, according to the CERA analysis, demand growth will likely no longer be largely met by growth in available, commercially exploitable natural oil supplies.  Non-traditional or unconventional liquid fuels such as production from heavy oil sands, gas-related liquids (condensate and natural gas liquids), gas-to-liquids (GTL), and coal-to-liquids (CTL) will need to fill the gap.

Critical Issue

CERA argues that understanding the difference between a plateau and a peak followed by a precipitous decline, as well as the timing of events, is critical to the global energy future.  “Corporations, governments, and other groups, including nongovernmental organizations, need to have a coherent description of how and when the undulating plateau will evolve so that rational policy and investment choices can be made,” according to the report.      

“It is likely that the situation will unfold in slow motion and that there are a number of decades to prepare for the start of the undulating plateau.  This means that there is time to consider the best way to develop viable energy alternatives that would eventually provide the bulk of our transport energy needs and ensure that there is a useable production stream of conventional crude for some time to come,” CERA concludes.

Peak Theory Shortcomings

The CERA review also finds that current “peak oil” advocacy suffers from several problems:

  • The peak argument is not presented in the context of a credible systematic evaluation of available data; its proponents have not made available a transparent and detailed analysis that would allow an objective and rational discussion.  At base “their methodology is to impute decline curves against currently proven reserves and declare that the game – and the argument – is over.”
  • The underlying analytical model formulated by the late M. King Hubbert both fails to recognize that recoverable reserve estimates evolve with time and are subject to significant change, and it also underplays the substantial impact of technological advances.  Consequently, total annual production at the high point in 1970 was 600 million barrels higher – 20 percent -- than Hubbert’s projection of peak production for the US Lower 48, although he correctly anticipated its timing within two years.  
  • Hubbert’s method requires accurate knowledge of the ultimate recoverable reserves of an area, but his 1956 analysis could never have incorporated the impact of giant discoveries in Alaska and the deepwater Gulf of Mexico, and therefore couldn’t have predicted the production profile for the U.S.  As a result, total cumulative U.S. production between the high point in 1970 and 2005 exceeded Hubbert’s predictions by the equivalent of more than 10 years of US production at present rates.
  • Hubbert-posited post-peak reservoir decline curve assumptions are rebutted by observation that the geometry of typical oilfield production profiles is often distinctly asymmetrical and does not generally show a precipitous mirror-image decline in production after an apparent peak, even without the application of new technology or enhanced oil recovery techniques.  As a result, in the US Lower 48 where Hubbert came closest to accurately forecasting a peak, oil production in 2005 was some 66 percent higher than projected by Hubbert, and cumulative production between 1970 and 2005 was some 15 billion barrels higher, a variance equal to more than eight years of US production at present rates.
  • Those who believe a peak is imminent tend to consider only proven remaining reserves of conventional oil, which they currently estimate at about 1.2 trillion barrels.  In the view of many petroleum geologists, this is a pessimistic estimate because it excludes the enormous contribution likely from probable and possible resources, those yet to be found, and plays down the importance of unconventional reserves in the Canadian oil sands, the Orinoco tar belt, oil shale and GTL projects.  CERA believes the global inventory is some 4.8 trillion barrels, of which about 1.08 trillion barrels have been produced, leaving 3.72 trillion conventional and unconventional barrels, an order of magnitude that will allow productive capacity to continue to expand well into this century.
  • The “peak oil” argument is frequently supported with data indicating that new exploration finds are not sufficient to replace annual production.  Their data sets have serious deficiencies.  The peak argument is an incomplete and therefore misleading analysis because it ignores the role of development (vs exploration) projects in expanding reserves, fails to understand economic factors that can point company and national strategies to emphasize development vs exploration work. By focusing on “discovery” and ignoring the increased knowledge and confidence about field volumes, it disregards the fact that revisions, additions and exploration together have generated resource growth of 320 billion barrels – 80 billion barrels more, or one-third more, than total production – during the period from 1995 to 2003.  CERA draws both on its own data bases and those of its parent company IHS, which has the world’s most complete proprietary data bases on oil production and resources.
  • Hubbert’s method does not incorporate economic or technical factors that influence productive capacity; most importantly, it ignores the impact of both price and demand, both major drivers of production.
  • Peakists’ projections of the date a peak would be reached continue to come and go, the most recent targeted around Thanksgiving Day 2005, give or take a few weeks.

Signposts

“It is no longer sensible to allow the issues about future supplies to be clouded in a debate grounded in a flawed technical argument,” the CERA report concludes.  “There is general agreement that a peak or plateau of sorts will develop in the next 50 years, and it is not helpful to couch the debate in terms of a superficial analysis of reservoir constraints.”  The report emphasizes the importance of the aboveground factors cited earlier.          

“There is a need to identify the signposts that will herald the onset of the inevitable slowdown of production growth and ensure that policymakers outside the energy community have a clear understanding of possible outcomes and risks.”

Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to energy companies, consumers, financial institutions, technology providers, and governments.  CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy.  CERA is based in Cambridge, Massachusetts, and has offices in Bangkok; Beijing; Calgary; Dubai; Johannesburg; Mexico City; Moscow; Mumbai; Oslo; Paris; Rio de Janeiro; San Francisco; Tokyo; and Washington, DC. 

For more information on CERA's Global Oil Advisory Service or our other service please visit our service offerings page or contact Michael Maddox at +1 617 866 5131. Obtain the report .

© 2006, Cambridge Energy Research Associates, Inc.  All rights reserved. CERA and the CERA logo are registered trademarks of Cambridge Energy Research Associates, Inc.

Editorial Notes: UPDATE: Comments at The Oil Drum Congressional peak oil caucus responds to CERA study (Reps. Bartlett and Udall) -- The recent CERA report is both frustrating and encouraging. On the one hand, CERA complains that peak oil proponents
have not made available a transparent and detailed analysis that would allow an objective and rational discussion.
And yet the short report cited by this press release is not publicly available (the 16-page PDF is sold for $1000). In contrast, a vast quantity of peak oil literature is available online for free. The Oil Drum, for example, publishes a stream of reports and analyses, many by industry experts. Most of us who work on peak oil issues are volunteers - could not CERA make more of their arguments public, so that a true discussion might be held? The Australian Senate Inquiry into Australia’s future oil supply and alternative transport fuels reached a strikingly different conclusion, stating:
Peak oil proponents have criticised official estimates of future oil supply with detailed and plausible arguments. The Committee is not aware of any official agency publications which attempt to rebut the peak oil arguments point by point in similar detail.
On the positive side, the CERA report is surprisingly open to debate about peak oil:
We respect the urgency and seriousness with which some with whom we disagree put their case. ... We invite others to join in a considered dialogue, which now seems too easily lost in the rancor. ... It is essential and more productive [than making bitter and "true believer" arguments] to build common understanding and conclusions, open to rational assessment of evidence, so that preparations can be made for the future.
I was surprised the number of points on which CERA and peakists agree. (CERA uses the term "peakist."):
  • A peak (or plateau) of oil production is coming. CERA says no sooner than 2030; peakists say sooner.
  • Both CERA and peakists seem to be agree that there will be a curve of rising production, a peak (or plateau), followed by falling production. CERA criticizes the "bell shape" of Hubbert's curve and maintains that the curve will be asymmetric. Many peakists agree. (The discussion about the shape of the curve quickly becomes very complicated - beyond the understanding of most lay people.)
  • CERA prefers to talk of an oil production "plateau." Many peakists also use the term.
  • Both agree on the urgent need to "prepare for the time when oil supply could cease to grow adequately to meet demand."
  • CERA says: "Technical innovations will continue to unlock additional oil resources not currently identified or understood, or viewed as uneconomic." The difference between CERA and the peakists lies in their estimates of the magnitude and quality of the resources to be uncovered.
  • CERA says: "we still appear to be in a phase where oil supply (deliverability) is largely determined by demand, economics, and aboveground risks rather than on any fundamental problems with resource availabily." Most peakists would agree that demand, economics and aboveground risks are important factors - especially now. However, they would probably say that these factors are exacerbated by geology.
  • CERA says: "there is still no accurate assessment of global reserves and resources." Peakists heartily agree. Matthew Simmons argues that "transparency" about oil reserves is a critical need.
Despite the many points of agreement, there are significant differences between CERA and peakists. For example:
  • CERA frequently lumps unconventional sources of petroleum together with conventional sources. Peakists tend to analyze them separately.
  • CERA takes an optimistic view of technological improvements. Peakists are more conservative.
  • CERA does not mention EROEI (energy return on energy invested) in its press release or report. Peakists are constantly talking about the EROEI of energy sources.
  • CERA does not mention global warming and the constraints it will place on energy sources (at least in these documents). Among peakists, the picture is mixed. Some peakists do incorporate global warming in their analyses, while others do not.
In sum: Discussion between CERA and the peak oil community is possible and desirable. Rational discussion about evidence and analysis is to be preferred to "true believer" dogmatism and ad hominem attacks. It would further the discussion if CERA were to make their arguments and at least some of their data public. In particular, one version of the press release contains a graph and table of projections. It would be useful if these were posted on the CERA website. -AF and BA

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