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Commentary: Is Peak Oil Dead?

Q: The industry deserves major kudos for the largest year-over-year increase in US oil production during 2012. What’s your sense for how long that type of gain might continue?

A: Both the Bakken and Eagle Ford are wonderful and economic shale oil plays. It doesn’t mean they don’t have uneconomic wells that may be drilled on their peripheries or in areas that aren’t sweet spots. But the rate of production increases in the Bakken has already slowed somewhat. And the exploration and development efforts look like they’re slowing a little bit, as well. The Permian is the third major shale oil play, but it’s more of a margin play in many cases.

Meanwhile over the last two years oil production from the Eagle Ford increased by 600,000 barrels a day while roughly half of that was eaten up by declines in the Gulf of Mexico. So it’s a forest and trees situation where you have to look at both. Former CEO of EOG Mark Papa said those three plays are likely it for the US, in terms of major black oil plays. So we’ve got to keep things in perspective. In terms of the forest and the trees, the Bakken and Eagle Ford are trees; they’re big trees, but they’re not the forest. The forest is the world oil supply situation; on a world-wide basis, how do the trees scale in to everything else in the world?

Q: Yet for the most part the discussion at the national level makes little or no note of that slowdown. It’s all about covering the boom. And don’t we all hear that the boom is just going to keep growing?

It’s hard not to get caught up in the boom. In Houston and Midland and South Texas and North Dakota, the boom is real, people are doing well, and it’s floating a lot of boats. But you have to go back and look at the big picture, look at the scale of these plays. These are "trees" — blessings in a way — and they give us a temporary reprieve from what Bob Hirsch called the severe consequences of not taking enough action proactively with respect to peak oil. The question is will these plays “fix” peak oil? The answer is no.

Q: So, in your opinion, M. King Hubbert more or less had it right, at least in the big picture, not down at the granular level?

A: Some have mentioned that, “well Hubbert….back in the 1950s and 1960s he didn’t have access to the concept of unconventional oil or shale oil plays. He did good work, but it was only applicable to the conventional oil he knew about.” I would propose that it doesn’t really matter and that in hindsight, after a couple of more years, it will be more evident that effectively he did take unconventional oil into account because the unconventional oils are not easy oils.

Conventional oil--which was found in huge quantities, in giant fields in the 40's and 50's - well those giant fields had huge reserves and high porosities and permeabilities - meaning they would flow at very high rates for decades. This is in contrast to a relative few shale oil plays which have very low porosity and perm and which must be hydraulically fractured to flow. Conventional oil is just a different animal than unconventional oil; some unconventional oil wells have high initial rates of production, but all of these wells have high decline rates. Yet it’s essential that we produce this oil. Without unconventional oil, what we wind up with is essentially Hubbert’s cliff instead of a Hubbert’s rounded peak.

I think Hubbert anticipated a lot of incremental efforts by the industry to make the right-hand or decline side of his curve a more gradual curve rather than a sharp drop. He was thinking about secondary recovery, though perhaps it was too early for him to think about tertiary recovery, but those are the types of incremental efforts that he would have anticipated. Likewise, I would say that unconventional oil is another incremental type of recovery, at least compared to conventional oil.

Q: So the peak oil problem isn’t dead yet, as has been shouted in a few headlines?

A: Our bottom-line problem here is that if we ignore peak oil as a result of these plays, we ignore it at our peril. This is no time for complacency.

Peak oil is still a looming transportation problem—a huge one. I would suggest that we’ve made some progress…some things have been done. We’ve made several years worth of efforts collectively, whether it is more movement towards electric cars, mass transit, scaling down our vehicle purchases, or driving less due to price signals. But we’ve only just begun and we have a long ways to go in order to deal with the still-looming Hubbert’s peak, in order to not deal with the severe consequences that Bob Hirsch wrote about in his 2005 research for DOE.

The big problem is that it’s hard to be proactive when there’s no current crisis. We’re a country of optimists. That’s helped us do what we do, including the development of new technologies to create, innovate and develop better than anyone else in the world. I think it’s imperative to maintain a positive outlook. At the same time, peak oil is something unique. Peak Oil is not reflective of optimism or pessimism, or positive or negative; it’s just the result of the finite volume of oil the Earth was endowed with, and the rate at which that oil can be produced. Some way or another we’ve got to get to where we can be proactive, and we’ve got to work together.

Q: What about the notion we hear that the US will be energy independent by roughly the end of the decade?

A: There are some, not many, who promulgate the idea that we’re going to be energy independent. Bob Tippee, editor of the Oil and Gas Journal, wrote an editorial about that, criticizing the boosters. “Energy independence is an appealing idea. So is perpetual youth. The problem in both cases is achievability.” For me, it’s really hard to understand how the independence crowd could possibly be right; so it’s just not the right message to convey. We need to press on with conservation and efficiency improvements, natural gas vehicles, development of a better way to store electricity for use in a vehicle. We don’t need to slow down any of those efforts.

Just as it might be better if the industry folks touting energy independence toned that down, likewise those who nitpick every shale oil or shale gas play should perhaps let the people who spend the money—or their shareholders—worry about the economics and just be glad that we have these plays to develop in order to create some more time. There has been a bit of a war between the folks who do things, in terms of discovery and development, and then the folks who review that—the doers vs. the reviewers. The reviewers have been pooh-poohing these shale oil and gas plays, which actually represent a lot of oil and gas…but not enough to solve the long-term problem.

There are also those out there who believe you have to kill off the old paradigm before you can have a new paradigm take its place. Unfortunately, killing off the fossil fuel paradigm is not something anybody wants to do, if they really understand the ramifications. You can kind of feel their pain, though, as you hear the energy independence chatter that may persuade us to relax and cease to be concerned about the finite oil supply. In a sense you can understand their frustration with shale oil and shale gas plays because the broader public hears the optimistic news and says “hey, this isn’t any issue any longer.”

So I can see both sides here. But we need to work together, not fight one another. Let’s all get along. These shale oil and gas plays are stop-gaps and blessings and we need them. We don’t need to be fighting against them, but at the same time we don’t need to be jumping on the energy independence bandwagon because the numbers just don’t seem to add up. There’s no way that energy independence can happen when we’re producing up towards 8 million barrels a day of crude oil now plus between 2 and 3 million barrels a day of other liquids and we’re consuming over 18 million barrels of liquid fuels a day. The idea that we’re going to come up with another 7 or 8 million barrels of black oil plays doesn’t fit.

There will be other incremental plays: the Niobrara, maybe the Utica, but we know about the three big ones—the Eagle Ford, the Bakken and the Permian. I need to study the Cline more. Devon Energy is going wide open on the Cline, but they quickly saddled up with major outside capital by joint-venturing with foreign companies to pay for it. It’s a lot different when somebody else is footing the bill. We’ve gotten a little negative feedback on the Cline ... I've read where it can have a high clay content, at least in some areas.

Q: I’ve heard that the Monterey field in California seems to be the one that’s the least ready to give up its very large oil-in-place resource. Do you read it that way?

A: The Monterey gets brought up all the time because it has a huge in-the-ground number. It’s another question mark. There’s a good chance the clay content may be the issue. It gets back to the fact that to work, the rock in an unconventional play needs to break like a piece of glass; it needs to be that brittle to work really well. The presence of ductile clay in high percentages prevents that from happening. So with a high clay content you can’t create the necessary spiderweb network of fractures and microfractures to provide exit routes for the oil.

I liken it to a highway system: dirt roads feeding county roads, feeding state highways, feeding interstates that eventually go into 12-lane freeways when you get to downtown…where downtown is the wellbore. You can’t create that underground highway network unless the rock breaks well. I’m pretty sure that’s the problem with the Monterey.

The Conasauga is a quickly forgotten example of a shale gas play that didn’t live up to expectations. There were thousands of feet of low TOC rock, but the bottom line was that due to clay content there wasn’t a way to fracture and keep the rock sufficiently open in order to make the play economic. So even though the numbers were huge on an in-place basis—just like the Monterey, but in gas instead of oil—you couldn't create the highway system, so it wouldn't work.

Q: How does the nagging high price of oil fit with your understanding of the viewpoint of the oil optimists?

A: This seems like a huge no-brainer. So I’m confused: If we’re awash in crude, after being several years in the big three shale oil fields, why is oil $105 a barrel? Most people say there is a $10 premium for the turmoil in Egypt and/or Syria situations—general tension in the Middle East. That’s still $95 oil. So if we’re going to be energy independent in the foreseeable future, why is the price so high? One gentleman expressed it as "unprecedented inelasticity in recent years". In other words, despite the price increase the world supply hasn't risen to reduce that price increase - as would the price of an "elastic" commodity or product. That sums it up. That is peak oil!

Raymond James’ forecast made in 2012 for the oil price this year was $65 a barrel. They were way off. That’s why a friend of mine wrote that "oil price forecasting is like a leaky lifeboat". The reason for that is that oil and gas are priced at the margins. If you have a little bit too much, it may end up getting dumped on the market because zero is what’s pulling on it. If there’s not quite enough, and everybody has to have it, then the price is pulled by infinity. That all helps make predicting oil prices a real dismal science.

Q: What’s happening to your costs in your areas of operation?

A: Costs may have come down a little, but not much. The supply of oilfield services has kind of caught up with the demand, but prices haven’t come down much. Water still remains in great demand and disposal costs are still high; the good news is that folks are recycling a lot more and working solutions for using brackish water. Fuel costs are a large component and they’re high. So costs just haven’t come down too much. Frac sizes continue to increase in size and cost.

Q: Is it fair to say that the anti-fracking crowd isn’t having much impact on drilling in Texas?

A: Some reporting rules have changed. Some of those folks are genuinely concerned about the scenario for leaks into clean water tables. I think they might be misinformed as to the distance between the producing formation and the water formations, and about the casing and cement isolation that goes on, and that those must be in place to have successful fracturing jobs. I think some folks are just looking for the perfect emotional vehicle to advance whatever "anti" agenda they might have - because who can be against clean drinking water and preserving our limited supply? An impactful, emotion-inspiring movie can be the perfect vehicle to use to try to stop the development of shale oil or shale gas.

Martin Payne has 32 years of experience encompassing most every aspect of the upstream oil and gas industry, was past chairman, Houston Chapter of the American Petroleum Institute, and member Society of Petroleum Engineers. He is also a believer in solar, wind and biomass - and all renewables. In addition to active conventional and unconventional exploration he operates a small grass-fed beef business, experiments with wood gasification and sits on the board of the non-profit Useful Wild Plants Inc. (www.usefulwildplants.org).

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