VHeadline.com oil industry commentarist Oliver Campbell writes: In the 15th century, it was the general consensus that the sun moved round the earth. When Galileo Galilei ratified Copernicus’ contention that it was the other way round, the Cardinals of the Inquisition judged him to be a heretic.
In June 1998, when the price of Arab Light fell to under US$10 a barrel and remained so for about nine months, the majority of analysts affirmed that prices would stay low for years to come.
But by September 1999 the price was over $20. My point is evident: just because a lot of people believe something to be true is no guarantee they are right.
In recent months, there has been much speculation again about oncoming peak production. In a study made by the Oil Depletion Analysis Centre (ODAC) of London, and quoted in a recent article entitled “New oil projects cannot meet world needs this decade”, they concluded “World oil supplies are all but certain to remain tight through the rest of this decade unless there is a precipitous drop in demand.”
In the same article, Mr Skrebowski, a Board Member of ODAC and the editor of “Petroleum Review” comments on the lack of new projects after 2007 and states “This could very well be a signal that world oil production is rapidly approaching its peak, as a growing number of analysts now forecast, especially in view of the diminishing prospects for major new oil discoveries.”
Both contentions may be correct, but then we have seen expert analysts do not always get it right. The “Sempra Energy Report,” an excellent publication on oil matters, points out in its August edition that low prices in 1998/1999 led to a slowdown in investment which then placed a brake on the growth rate of production capacity.
Another acute observation from the same source is that “People should be careful to distinguish the difference between a global resource constraint (because of insufficient remaining reserves) and the failure in the recent short term for new developments to match the sharp acceleration in global oil demand.”
The demand growth in 2004, which could be as high as 3.4% over 2003, has taken us by surprise. However, if oil supplies are “all but certain to remain tight through the rest of this decade” is a matter for conjecture. It takes time to catch up with an unusual spurt in demand but, with present high oil prices, there is every incentive for oil companies to increase production.
Despite the opinion of “a growing number of analysts,” I still believe there is room for doubt about the onset of peak production, as I explained in an article I wrote on this subject in October 2003 in which I contrasted two widely divergent opinions:
a) Peak production will soon occur. The eminent geologists Colin Campbell and Jean Laherrere, supporters of the well-known Hubbert’s Curve, believe peak production will be reached in this decade. They maintain no new huge reservoirs remain to be found. They point out oil reserves have increased more from revisions of amounts recoverable from reservoirs found a long time ago rather than from new discoveries. They also argue that technological advancement will not notably increase oil production from existing reservoirs, and that oil substitutes will not delay peak production to any extent.
b) Peak production remains some way off. This is the view of the eminent economist Michael Lynch. He believes Hubbert’s Curve is flawed because it takes no account of the effect that variables such as price, infrastructure and technology have on the amount of oil produced. He maintains technology is an important factor, that in the past production has always increased to meet demand and sees no reason why this will not happen in future, and that peak production is at least 40 years away.
So the reader is left with two quite different scenarios. Predicting the date of peak production is akin to betting on horses, but you will accuse me of being evasive if I say nothing. My personal view then is that it will not occur in this decade nor the next. This is not just a gut feeling but based on reasoning, doubtless contentious, which I set out below:
A) Demand. This is not price inelastic: demand will not be the same at $40 a barrel as it was at $20 a barrel. It will depend on each country’s particular situation and, for this analysis, I divide them into three categories.
1) Countries with high per capita GDP. This includes the 30 rich OECD countries. These countries will not like paying more for their oil imports but, as it only marginally upsets their economies, they may make little effort to reduce consumption. They can, of course, devote more research to oil saving measures and/or oil substitutes for sale to other countries.
2) Countries with low per capita GDP. Many, but by no means all, are in sub Saharan Africa. Oil price increases particularly hurt those countries with large populations such as Bangladesh and Pakistan. They will look for possible oil substitutes, perhaps using indigenous coal, and take strong measures to save on oil imports.
The “Sempra Energy Report” for November discloses Philippine commuters have been urged to pool car use, and Vietnam has asked state entities to reduce fuel use. Indonesia may reduce consumption by lowering or eliminating subsidies on gasoline, diesel and fuel oil and other Asian countries may follow suit even at the risk of causing internal dissension.
3) Countries somewhere in the middle. Some of these are manufacturing countries in East Asia which need oil to drive their economies. India has the additional problem of having a huge population of over one billion. All these countries, except the oil exporting ones, will take action, with varying degrees of success, to save on oil consumption.
The first conclusion is that high prices will lead to a fall in demand. They may also lead to the development of substitutes. The difficulty is quantifying the effect.
B) Supply. While I accept the experts’ opinion that few huge oil provinces remain to be discovered, I also accept their assertion that recent additions to reserves have come largely from upward revisions of oil in existing fields. I see no reason why the latter should not continue for some years to come.
I am optimistic that new technology will have a significant effect on oil production. Perhaps I have more faith in our scientists and engineers to develop enhanced recovery methods than most people.
The objective of these methods is to reduce viscosity and improve fluidity. The most successful methods so far involve heating the oil in the reservoir. Steam injection, which softens the oil and allows it to flow, has been around for 30 years, but improvements are being made all the time as with Steam Assisted Gravity Drainage.
A recent interesting development is Toe to Heel Air Injection (THAI). Air that is pumped into a reservoir causes combustion and, through thermal cracking, upgrades the oil in situ. In tests, it has been possible to upgrade a heavy oil of around 8ÂşAPI and convert it into one of 20ÂşAPI. It can then be pumped easily to the surface.
The method shows great promise and may more than double the present oil recovery factor in some existing oil fields. The important point to note is that this fire-flooding method is only one of a number being developed to enhance oil recovery.
The second conclusion is that advanced technology will allow more oil to be recovered from existing and new oil fields. This is particularly true as regards extra-heavy oil such as is found in the Orinoco Oil Belt. Once again, the difficulty is quantifying the amount.
My proposition is that reduction in demand (due to high oil prices and the move towards substitutes) plus an addition in supply (from new discoveries and enhanced recovery from existing reservoirs) will delay peak production well beyond this decade.
Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Campbell returns frequently to Venezuela and maintains an active interest in political affairs: “I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill … the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians.” You may contact Oliver L Campbell at email: [email protected]
