Oil supply optimists don’t have to think very long to find plenty of examples of government-owned oil companies that have failed to keep pace with technology, engaged in lethargic exploration and development of their oil resources, and/or purposely restricted production. The aim of OPEC, after all, is explicitly to limit production to maintain prices in the international oil market. Saudi Arabia, the largest producer in the cartel, keeps hundreds of thousands, if not millions of barrels of oil that it could produce off the market.
Pemex, the Mexican national oil company, has done such a poor job in developing new capacity that its production has declined from more than 3.8 million barrels per day in 2004 to just under 3 million per day in October 2009, the latest month for which figures are available. Venezuela has deposits of heavy oil thought to rival the huge conventional deposits of Saudi Arabia. Yet the country’s overall production is down from 2.9 million barrels per day in 2004 to just under 2.5 million barrels in October 2009. The sorry state of the Russian oil infrastructure, the renationalization of part of the Russian oil industry, and heavy taxation of oil have all served to keep a lid on Russian oil production at around 10 million barrels a day.
Given this record it would seem that private development of these resources would provide incentives for improving the infrastructure, lead to increased exploration and production, and apply the best available technology. But would such a move actually overcome the recent worldwide plateau in production and create the glut of oil that the optimists predict?
Texas oilman Jeffrey Brown doubts it. Brown is also known in oil circles for his Export Land Model which suggests that declines in oil available for export over the next decade or so will create enormous problems for importing nations. The first thing one has to know about current conventional oil supplies is that about 60 percent of them come from 500 so-called giant fields, that is, fields containing more than 500 million barrels of oil. The top 20 fields produce 25 percent of the world’s total. The problem is that production from giant fields is declining overall. Many of these fields are more than 50 years old, and very few giants have been discovered in recent decades. (For a good discussion of giant oil fields and production, see “Giant oil field decline rates and their influence on world oil production.”)
Experience shows that once giant fields turn down in any oil producing area, subsequent and usually smaller discoveries do not make up for the decline, contends Brown, a Dallas-based independent petroleum geologist who manages a joint-venture exploration program. Brown says that private development, new technology and unlimited access to drilling–the desiderata of the oil optimists–can realistically only soften any decline in oil production. And, he cites as his evidence the experience of Texas and the North Sea, two areas where private development was combined with the best available technology and virtually unlimited access to drilling.
“You tend to find the big oil fields first,” Brown says. And, that’s precisely what happened in Texas and the North Sea. Texas peaked in 1973 and the North Sea in 1999. And, despite the application of the best available technology for both exploration and production, despite virtually unlimited access to prospective areas, and despite entirely private development under free market conditions, production sank year after year. And, lest readers think that these two areas don’t represent a very big sample, Brown explains that these two oil provinces alone represent 9 percent of cumulative world production to date.
“If all our bag of tricks did was slow the rate of decline, why would it be different in any other post-peak place in the world?” Brown asks. And, when he says “post-peak,” he is talking about all those giant and supergiant oil fields that have already seen their rate of production turn down.
Brown’s not saying that better technology, private development and better access won’t allow the world to pump more oil than it otherwise would have. He’s just skeptical that these things by themselves can ultimately overcome the enormous losses currently being experienced in the giant fields that are past peak or those that soon will be. And, that means that even if the optimists could wave a wand and make conditions ideal worldwide for oil development from this day forward, it might not save us from a nearby peak in world oil production followed by a relentless decline. We have only to look at Texas and the North Sea to understand why.