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UK petroleum analyst Michael Smith - interview (1 of 2)

Peak Oil Review Team: Could you share a little about your background?

Michael Smith: I was once a geologist, and worked with oil and gas consultancies and companies after graduating from Oxford University in the UK with a PhD. I had worked in most parts of the world when, at the turn of the millennium, I started my own company Energyfiles, focusing on oil and gas production, consumption and activity. I had been noticing difficulties with traditional oil supplies for independent oil companies since 1990. My employer, Sun Oil, despite ample investment capital, could not access good reserves opportunities except in costly deep water environments or risky political environments. At the beginning of 2010 I sold Energyfiles to Datamonitor, a leading business information provider, and I am now helping Datamonitor integrate the Energyfiles database into their product, ‘the Global Oil & Gas Analyzer’.

POR: Our questions go back to the November 2006 slide presentation “Oil Depletion-Dealing with the issues, Modeling the Supply Gap,” you gave to The Energy Institute. On slide #4, you mention fields decline annually at 5% to 15%, depending on characteristics. Is that still your view?

Smith: That‘s just an average for typical fields. Of course some will decline much faster, others slower. It depends on the reservoir and its engineering characteristics - the rock formation that contains the hydrocarbons. The 5% to 15% was a general guide to model average production profiles for a typical field in a region. In this case it applied only to offshore fields. Some giant onshore fields will plateau for years and decline very slowly, as new wells are drilled and new technologies are installed. Some small offshore satellite fields may be abandoned after just a couple of years. Average decline rates across the world are in fact lower than model rates, skewed by the influence of the largest fields. Whenever possible the model I used was based on actual field profiles and how these are currently declining in an area.

POR: On your slide of countries past peak and pre-peak, you mention 64 countries post-peak and 36 countries pre-peak. Have you updated that number?

Smith: The numbers have changed a little with a few less productive countries passing peak (such as Pakistan and Japan) and one or two producing more than expected (such as New Zealand and Ghana). Some countries have split and I have added new potential production areas such as Uganda and Madagascar. Currently 67 are past peak and 45 are pre-peak.

Iran peaked back in 1974 but of course this depended not on below ground influences but on investment in infrastructure and political restrictions in output. Russia peaked in 1982 and at one time it was believed by some commentators that Russia could eventually overtake the 11.5 mm bbls per day it was managing at the time. However this was dependent on large rapid investment in infrastructure. The way demand is looking right now this is unlikely to happen fast enough.

Thus the peak depends on both supply and demand. Perhaps since 2006 that‘s the biggest change to my presentations - the need to show the importance of demand in future outcomes. I have talkedabout the supply gap, but in truth there‘s no such thing as a supply gap - it is hypothetical. As soon as a shortage of supply appears, demand must reduce to fill the gap. And of course that is what has happened in the last two years. Discussion of a supply gap gives a false impression. Demand reduction will always move to fill it. People who are predicting a future supply-led peak in oil production argue with people who deny this supply peak. But inevitably peak oil will be controlled by both demand and supply - as prices go up, demand comes down. The argument is what will be the initial driver and I am not sure if that argument is merely an academic one.

POR: You showed China as being on plateau by now. Is that still your view?

Smith: What was predicted in China was that offshore oil production would just manage to replace declining onshore oil production. However China’s large onshore fields have performed well as the country puts considerable effort into drilling and applying more modern technologies, in particular steadily increasing the amount of horizontal drilling. But I suspect the country remains near plateau and overall decline will begin before the end of the decade.

POR: They announced further discoveries in Bohai Bay several years ago, but it doesn’t seem that China’s production reality is going to match the hype.

Smith: That’s right, some large discoveries were announced but large reserves don‘t necessarily mean large production. I worked on the Bohai Bay back in the 1980s and admit I did not fully appreciate the volume of reserves in the area. The reservoirs are difficult and the oil is often heavy so that significant investment is required in shallow water platforms and wells. China is doing that but this takes time. Bohai Bay will eventually produce a lot of oil, but, of course, plateau and peak are all about rates not volumes.

POR: There’s a sense that most people following the oil supply issue don’t fully appreciate the very simple phrase you just delivered. There still seems to be a major focus on the size of the reserves and/or resources; there are arguments about the size of those, and there always will be. It seems that the shift by some within the industry to focus on the rate oil can be produced is a pivotal point that most of the industry appreciates.

Smith: I agree with you. I‘ve got to say that it frustrates me that journalists and even some professionals who should know better are driven by gross reserves numbers when a large part of those reserves won‘t be produced for decades - if they’re produced at all - and have no impact on the financial well-being of a country or company. They really are irrelevant to what will be happening over the next 20 years. Experts in the oil and oil service industries understand this, but I‘m not sure governments who set policy related to energy security and sustainability do. Of course it‘s so much easier to quote a volume than a time-dependent series of production numbers, with caveats. I have still not seen any drift towards policy makers or economists properly appreciating that peak oil depends on rates.

POR: Have you sensed that since 2007, there has been a tipping point of a small but growing number of CEOs-Total’s Christophe de Margerie, Hess Oil’s John Hess, and James Mulva with ConocoPhillips-who see world oil production not exceeding first 100 million barrels a day, then 95 mbd, then possibly less?

Smith: Total has always been ahead of the game on this subject. When I wrote my very first world oil supply report back in 2001, Total was the first to buy a copy. Generally however oil companies seem better able to argue this point since the IEA [International Energy Agency] has cut back its demand forecast. Not long ago the IEA was talking about 120 million barrels a day of demand but now they’ve dropped that number to around 100, so it‘s easier for the oil companies to talk along these lines - production rates that can be met. The concern comes when they talk about supply maxima that are insufficient to meet forecast demand.

[To maintain our continuing effort to have this publication remain suitable for time-short individuals, Part 2 of the interview will run next week. Peak Oil Review Team]

(Note: Commentaries do not necessarily represent the ASPO-USA position.)

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