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CERA's productive capacity ruse

Oh what a tangled web we weave, When first we practice to deceive
    —Sir Walter Scott

On January 17, 2008, Cambridge Energy Research Associates (CERA) fired another salvo in the direction of those concerned about peak oil. Their press release No Evidence of Precipitous Fall on Horizon for World Oil Production: Global 4.5% Decline Rate Means No Near-Term Peak struck some ASPO-USA members as so outrageously optimistic that they have offered the energy consultancy a $100,000 bet that the oil supply projections CERA made will never pan out. See the ASPO-USA press release for details of the wager.

CERA Liquids Productive CapacityThe wager focuses on CERA's reference case for productive capacity in 2017. “The results of this new study reinforce CERA’s existing bottom-up global liquids capacity model showing that liquids capacity of around 91 million barrels per day, [b/d] in 2007 could climb to 112 million b/d by 2017,” Peter Jackson said in CERA's public comments.

The alert reader will have noticed that world liquids production—as opposed to productive capacity—was nowhere near 91 million barrels per day in 2007. Sorting out this discrepancy is not as straightforward as it may first appear. ASPO-USA's bet hinges upon understanding the difference between the two concepts.

The IEA's latest Oil Market Report (January 16, 2008) states that global liquids production was 86.95 million b/d in December, 2007. The 2006 report Expansion Set To Continue — Global Liquids Productive Capacity To 2015 states what CERA defines as oil—

We continue to include conventional oils and unconventional oils comprising heavy oils (Canadian oil sands and Venezuelan Orinoco), NGLs [natural gas liquids], condensates, and deepwater oils (from water depths greater than 2,500 feet). For the first time we have included gas to-liquids (GTLs) in our outlook because of the growing volumes expected to come onstream in the next 10 years.

CERA does not include biofuels. A rough calculation1 shows that global biofuels production was 1.23 million b/d in 2007. Assuming that CERA includes processing (refining) gains, as the IEA does, global liquids production stood at 85.72 million b/d in 2007 without biofuels. Subtracting this number from Jackson's capacity estimate of (around) 91 million b/d in 2007 yields 5.28 million b/d of "unused" capacity.

CERA defines2 productive capacity in its 2005 report Worldwide Liquids Capacity Outlook to 2010: Tight Supply or Excess of Riches.

... productive capacity [is] the maximum sustainable level at which liquids can be produced and delivered to market. This number is independent of economic or political factors and temporary interruptions such as weather or labor strikes. Productive capacity is different from production, which is the actual amount of oil produced at any time.

The important phrase is "independent of economic or political factors and temporary interruptions." This means that CERA is counting oil that could be produced if MEND chose to stop blowing stuff up in Nigeria, or if everybody on the take in Iraq was suddenly overcome by a fit of honesty. ("All parties, without exception, steal and smuggle oil [in Iraq]. I mean all of them," a Mahdi Army fighter told a researcher for the International Crisis Group, reported in Harpers' The Black Box: Inside Iraq's Oil Machine, December, 2007).

The Excess of Riches report states Iraq's productive capacity as 2.96 million b/d in 2007. Nigeria has 3.27 million b/d in 2007. Both numbers are far below actual production, of course. It is heartening to see in the report that CERA is aware that there are rebellions going on in both countries. It is disheartening to see that Iraq's productive capacity is raised to 3.57 million b/d in 2010, while Nigeria's is listed as 4.08 million barrels. CERA does not provide an explanation that justifies these numbers, saying about Iraq—

Following the recent elections, potential investors will be looking for signs of stability and wait for a hydrocarbons law to be adopted before committing to any long-term investment. The major signs of interest so far are the technical evaluation contracts that several supermajors have committed to for the Kirkuk and Rumalia fields. Even if the hydrocarbons law is adopted by mid-2006, it is unlikely that field development activities will start until 2008. Once political stability is restored, CERA believes that Iraq has the resources to expand capacity significantly to as much as 5.5 mbd by 2015, assuming sustained investment starts well before the end of this decade.

Potential for 5.5 million b/d in 2015. The sky's the limit! Back in the real world, there is no hydrocarbons law. There are a few new small contracts in Kurdistan. Relations between Turkey and Kurdistan are tense. Access through the Ceyhan pipeline is unreliable. That's it. See Iraq — Land of Opportunity and Adventure? for an uninflated view of the situation in Iraq (ASPO-USA, May 9, 2007).

Frictionless PlaneThe productive capacity numbers CERA quotes for public consumption describe an ideal world that they alone have created. Just as it is not possible to stand up on a frictionless plane (graph left), a theoretical construct in physics that does not exist in the real world, it is also not possible refine oil that you can not get your hands on. Unlike the frictionless plane, a necessary theoretical abstraction, CERA's notion of productive capacity serves no useful purpose.

Determining how much surplus productive capacity the world has affects the world market price for oil. It is a very important issue. The EIA defines spare capacity as the "maximum sustainable production capacity, defined as the maximum amount of production that: 1) could be brought online within a period of 30 days; and 2) sustained for at least 90 days." The importance of the concept is obvioushow much oil can be brought on-stream in a timely manner if there is a serious disruption in the world's oil supply?

Although it is often reported in the press that OPEC can simply open up the spigot and let the oil flow, OPEC does not appear to have much spare capacity. See Living On the Edge: OPEC Spare Capacity for the complicated details (ASPO-USA, September 19, 2007).  And who said recently that "oil is a commodity, it isn't something that you just turn on a tap. It requires investment, exploration, a lot of capital"? It was none other than President George W. Bush, talking to reporters in Riyadh, Saudi Arabia.

Outlooks Global Oil Production CERA performs a disservice to the publicnot to mention their paying clientswhen they trivialize and confuse the concept "productive capacity" on venues like National Public Radio. The graph (left) accompanying NPR's Experts Ponder Peak of Global Oil Production (Morning Edition, May 2, 2006) has the caption "forecasts for the future of oil production around the globe can vary widely. The [EIA] and energy analyst Daniel Yergin share an optimistic outlook that sees output continuing to increase for the next decade and beyond."  The EIA is forecasting production by 2015. CERA is forecasting their own version of productive capacity by 2015.

NPR's confusion is understandable. Perhaps if reporter Scott Horsley had known the facts revealed here, he could have asked Yergin why CERA states all of their forecasts in terms of a made-up category which bears no meaningful relationship to how much actual oil is available for refining at any given time to meet world demand.

During the NPR interview, Yergin repeats his two favorite arguments: 1) this is the "fifth" time that nay-sayers have said the world is running out of oil, the last time being the 1970's; 2) if the world does run short on oil flows, it will be because of "aboveground" factors, the very factors that his definition of productive capacity excludes.

Let us state for the record for the umpteenth time that those concerned about peak oil evaluate the ability of the world to lift oil out of the ground or synthesize it for actual consumption, taking into account all of the factors that may affect how much oil can be produced now and will be produced in the future. No one cares about CERA's theoretical oil, nor should they.

The ASPO-USA press release contains the following note—

Because “production capacity” is hard to verify, and since it might require access to and disclosure of proprietary information, the wager proposes an alternative threshold: Since world oil production at the end of 2007 was roughly 87 mmb/d, a ratio of (87/91) X 112 would be an equivalent production threshold. That threshold would be 107 mmb/d.

CERA's notion of productive capacity is an idealized fiction. If production is less than 112 million b/d in 2017 or 107 million b/d or whatever, CERA will say then, as they say now, that global demand for oil is less than their assessment of the world's capacity to produce it. Such an assertion flies in the face of reality. The IEA has made it perfectly clear that burgeoning demand in China, Saudi Arabia and elsewhere is outstripping production gains. Ironically, CERA could sneak in the backdoor on the potential supply versus demand question. Soaring oil prices will probably crush global demand for oil long before 2017, but that will be because there won't be enough "real oil" to go around then just as there isn't now.

The alert reader will again note that there is has been no mention of the bettor's chances up to now. CERA will never take this bet, of course. Next week is CERAWeek 2008, a time of great rejoicing for the energy consultancy. Abdullah Jum'ah, Nobuo Tanaka and Alan Greenspan will all be there. Nothing untoward would be allowed to interrupt a party where, for a mere $5000, you can hobnob with these elite players. As to the bet, no additional comment is required because the ASPO-USA participants can't lose should CERA actually accept the wager. There is a zero chance the world will produce liquids at a rate of 107 million b/d in 2017.

Contact the author at [the original article on the ASPO-USA website].

Notes

1. The IEA includes a figure for "other biofuels" that does not take the U.S. and Brazil into account. Numbers for the U.S. are taken from the Renewable Fuels Association. Numbers for Brazil are taken from the Reuters report Brazil Local Demand to Drive Ethanol Production (January 14, 2008). Doing the conversions (litres, gallons to barrels of liquids per day) and adding the three numbers together yields the total given in the text. Remarkably, the IEA does not give a single total for global biofuels production.

2. CERA's private reports include a disclaimer that says in effect that the author can not quote from their reports without authorization. Judiciously selected quotes have been used here to clarify the crucial distinctions under discussion. The author refuses to play some game where CERA makes misleading public pronouncements with one hand, and with the other hand, disseminates private reports for paying clients that clarify what this subsidiary of IHS Energy really means when they make public statements. The author will not operate with one hand tied behind his back. People ought to know this stuff, which has been disclosed pro bono publico.

Editorial Notes: UPDATE (Feb 6, 2008). At author Dave Cohen's request, we replaced his text with a more current version which has some minor changes. UPDATE Dr. Larry Hughes points out that the first line of the article and the previous UPDATE were dated 2007, when they should be 2008. Corrected! -BA

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