The WSJ article on a CERA oil decline study
On January 17, The Wall Street Journal published an article entitled New Fields May Offset Oil Drop, reporting and commenting on a study by CERA entitled, “No Evidence of Precipitous Fall on Horizon for World Oil Production: Global 4.5% Decline Rate Means No Near-Term Peak: CERA/IHS Study.” Here are some WSJ article highlights and related comments / questions:
- "Output from the world's existing oil fields is declining at a rate of about 4.5% annually."
Comment: Because of CERA's established record of marked optimism in oil and natural gas, a prudent observer might assume 4.5% as a lower bound on this extremely important parameter.
- "This study supports a view that there is no impending short-term peak in global oil production."
Comment: What does short-term mean? The world has been on a liquid fuels production plateau since mid 2004, when viewed in the framework of a 4% fluctuation band, which was independently developed. Because years of data will be required to establish an unambiguous break from the current fluctuating plateau, a clear break trend cannot be quickly identified, whether it be up or down.
- "The CERA study, however, asserts that fewer than half of the fields scrutinized were in decline."
Comment: Without detailed information on the status and outlook for the non-declining fields, this statement is without value. What matters most is which giant fields are now in decline, how fast they are declining, and how close other giant fields are to going into decline.
- "This is a daily, hourly and minute-by-minute challenge for the world's oil industry."
Comment: If world oil production is as robust as CERA claims, why make this rather ominous statement?
- "Andrew Gould, the longtime chief executive of oil-services titan Schlumberger Ltd., has estimated that the industry's average decline rate is closer to 8% a year and growing."
Comment: Schlumberger may have better data than anyone else on oil fields throughout the world, because they operate almost everywhere that oil is produced. This includes the OPEC countries, where most data are considered state secrets. For IHS or CERA to have better data, they would have to have a competent, far-reaching spy network, which IHS/CERA has not claimed and couldn’t claim without significant repercussions. Indeed there is no indication that IHS/CERA has better oil field data than anyone else. Schlumberger and Gould have been too responsible for too long to believe that they would off-handedly estimate an 8% decline rate without knowing the facts. An 8% world oil production decline rate means that the world is in for very serious oil shortages almost any time now. It must be stated that Schlumberger is contractually obligated to not divulge customer proprietary data, so they cannot be audited on their statement. So it’s a question of which organization to trust. [Ed. note: Gould apparently has cited ExxonMobil’s Harry Longwell as being a source for the 8% figure; Hirsch writes elsewhere that ExxonMobil is also on the record opining about depletion rates of between 4% and 6%.]
- "If we can get field-by-field data for the last five years for the top 250 oil fields, we could answer this once and for all," says Mr. Simmons."
Comment: This is an excellent idea, but where is the inducement for countries to give up their sacred, state secrets, possibly exposing past untruthful claims?
- "According to CERA's own rate of decline, the world's existing fields by 2017 will be producing about 33 million fewer barrels a day than they are now. So hitting a production level of 112 million barrels a day within a decade would require adding 59 million barrels a day in new capacity -- or more than six times today's daily output from Saudi Arabia, the world's largest oil exporter."
Comment: To suppose that this is remotely possible is to imply that the world oil industry has been incredibly inept for decades. Indeed, the statement suggests that large numbers of giant oil fields, usually the first to be discovered, have been overlooked by the world’s best oil field technologists.
- "CERA argues that nearly half of that output will come from non-conventional sources such as biofuels and natural-gas liquids."
Comment: How is this credible without a worldwide crash program, which has not yet been seriously considered, let alone initiated?
- "However you spin it, a 4.5% decline rate is a very sobering fact," says Thomas Petrie, a veteran Denver-based oil banker and Merrill Lynch & Co. vice president. "People are running hard to find new sources of oil, and that's just to keep even. When was the last time we discovered another Iran?"
Comment: Such a statement indicates a genuine understanding of the significance of decline rates. Is peak oil beginning to emerge on Wall Street?
In Conclusion, if CERA were to open up its database to careful outside review, the veracity of its data and conclusions could be independently judged. But CERA, like others, considers its database to be proprietary, so an outside audit is unlikely. Furthermore, we do no know the sources of CERA funding, so we do not know if they have any serious conflicts of interest related to their oil analysis. Finally, CERA, like others, has made a number of incorrect forecasts in the past, so why should their work be taken at face value now? CERA asks the world to trust it, but with the risks of error being so large, would that be prudent?
Robert L. Hirsch co-authored the US DOE-funded study, “The Peaking of World Oil Production: Impacts, Mitigation & Risk Management” (Feb. 2005), among many other energy papers and studies.. He consults with MISI and serves on ASPO-USA’s advisory board.
(Note: Commentaries do not necessarily represent ASPO-USA's positions; they are personal statements and observations by informed commentators.)