The End of Oil and Gas
By Andy May
The end of oil and gas has been predicted on a regular basis since 1885, yet today we use more of both than ever before and no end is in sight in the data available. Figure 1 shows worldwide energy consumption by fuel since 1965 and projected to 2035 by BP in billion tonnes of oil equivalent, it shows substantial growth in both oil and gas.
Figure 1 shows 35% growth in oil consumption from 1990 to 2015 and projects 14% growth from 2015 to 2035. Similarly, natural gas grew 77% from 1990 to 2015 and is expected to grow 37% from 2015 to 2035. The projections of ExxonMobil, the IEA and the EIA are similar. So, how do we make sense of the recent claims that we have reached peak oil or are about to?
Ian Chapman, in a 2013 paper in Energy Policy conveniently lists recent “peak oil” dates as estimated by recent authors in Table 1 (his Tables 1 and 2) by late and early projected dates (Chapman 2014).
As we can see in Chapman’s tables there is a distinct difference between the ExxonMobil, BP and IEA projections and the earlier dates presented in some of the academic literature. Let’s review some historical predictions of the end of oil and discuss why there is so much uncertainty.
Many of the following quotes are from the post “We’ve been Incorrectly Predicting Peak Oil for over a Century,” by Matt Novak, here. Others are from Daniel Yergin’s book The Prize (Yergin 1991).
1885, the Pennsylvania State Geologist: “the amazing exhibition of oil was only a ‘temporary and vanishing phenomenon – one which young men will live to see come to its natural end.”
1885, John Archbold, partner in Standard Oil: “I’ll drink every gallon of oil found west of the Mississippi”
1909: Titusville Herald: “Petroleum has been used for less than 50 years, and it is estimated that the supply will last about 25 or 30 years longer. If production is curtailed and waste stopped it may last till the end of the century. The most important effects of its disappearance will be in the lack of illuminants. Animal and vegetable oils will not begin to supply its place. This being the case, the reckless exploitation of oil fields and the consumption of oil for fuel should be checked.” Link.
1919, Oil and Gas News: “In meeting the world’s needs, however, the oil from the United States will continue to occupy a less and less dominant position, because within the next two to five years the oil fields of this country will reach their maximum production and from [then] on we will face an ever-increasing decline.”
1920, US President Wilson: “There seemed to be no method by which we could assure ourselves of the necessary supply [of oil] at home and abroad.” Link.
In 1920 oil prices spiked to $38 (2017 $). Everyone seemed to think that the end of oil was near. Demand was going through the roof due to the popularity of gasoline powered automobiles, especially the iconic Ford Model T, which sold for $250 in 1914. At this time the Model T dominated the market and the production time had dropped to 93 minutes per car.
In 1909 the new Hughes two-cone drill bit was entering the oil field and was so successful that by 1914 it was in use in eleven U.S. states and 13 foreign countries. The new bit (see figure 2) drilled wells as much as 11 times faster than the earlier spade type “fishtail” drill bits. The current “tri-cone” drill bit was invented in 1933 by Hughes Tool Company engineers, it provides more downhole stability than the original bit.
Another early innovation that helped discover and produce more oil and gas was the invention of surface mapping to find subsurface anticlines that often form traps for oil and gas. In 1910-1915 Charles Gould, Everett Carpenter, Erasmus Haworth and others (Skelton 2012) used this technique to map an anticline that became the giant El Dorado oil and gas field in Kansas in 1914. El Dorado has produced over 300 million barrels of oil and is thought to be the first oil field found with scientific techniques (Kansas Sampler).
Not long after surface mapping became a common exploration technique, reflection seismic began to be used to find structural traps in Oklahoma. This technique was used to find the Seminole Field in 1928 (Figure 3). The final new technique to increase oil production discovered during the 1920 “oil crisis” was water flooding. This came into common use in Pennsylvania in 1921 when the state legalized the practice. It extended the life and increased the production of oil in the large Bradford oil field. Water flooding is being tried in unconventional shale reservoirs and many show a positive response, see here and here.
These four exploration and production technologies, along with advances in wellbore surveying (wireline logging) and in coring (removing rock cores or cylinders from wellbores) and rock core analysis, greatly increased the volume of oil and gas that could be found and produced. This kept prices stable for decades.
1937, Captain H. A. Stuart, director of the US Naval Petroleum Reserves (NPR): “We have been making estimates [of oil supply] for the last 15 years,’ Stuart said. ‘We always underestimate because of the possibility of discovering new oil fields. The best information is that the present supply will last only 15 years. That is a conservative estimate.”
An article on this estimate, from the time is shown in Figure 4. This estimate was widely circulated and believed at the time. It is interesting that the newspaper shown in Figure 4 also has a front-page article on the growth in oil production.
1941: US Dept. of the Interior: “American oil supplies will last only another 13 years.”
1943, Oil and Gas Journal: “There is a growing opinion that the United States has reached its peak oil production, the Oil and Gas Journal pointed out in its current issue. Since 1938, discoveries of new oil have not equaled withdrawals, in any single year, although there is a very good chance that 1943 will see enough new Ellenburger oil in West Texas to provide an excess.”
1956, Hubbert: “M. King Hubbert of the Shell Development Co. predicted [one year ago] that peak oil production would be reached in the next 10 to 15 years and after that would gradually decline.”
1957: The residents of Tulsa, Oklahoma buried a car as part of a large time capsule. They buried containers of gasoline with it because they feared there would be no gasoline in 2007 when the capsule was to be opened. Link.
May, 1972, Bulletin of the Atomic Scientists, Richard Wilson: “At any rate, U.S. oil supplies will last only 20 years. Foreign supplies will last 40 or 50 years but are increasingly dependent upon world politics.”
1977, US Department of Energy Organization Act: “As a nation, Americans have been reluctant to accept the prospect of physical shortages. We must recognize that world oil production will likely peak in the early 1990’s, and from that point on will be on a declining curve. By the early part of the 21st century, we must face the prospect of running out of oil and natural gas.” Link.
1978: Glenn Seaborg, chairman AEC: “We are living in the twilight of the petroleum age.”
1980, Dr. Hans Bethe: The world will reach peak oil production before the year 2000.
1996, Dr. Richard Smalley: “…oil production will likely peak by 2020 and start declining. “
In 1997 Mitchell Energy, in The Woodlands, Texas tried the “slick water frack” in the Barnett Shale. This was a technique, originally developed by UPR that used water, sand and small amounts of polymers for lubrication to hydraulically fracture a reservoir. UPR (Union Pacific Resources) had not used the technique in shale but had used it successfully in other rocks. Nick Steinsberger, a Mitchell Energy engineer, obtained the details and from UPR and their permission to use the technique in the Barnett shale play and it worked beyond their expectations. The first well they tried it on was the S.H. Griffin #4, which produced 1.3 million cubic feet of gas a day for the first 90 days, an unbelievable amount for the time (A North Texans for Natural Gas Special Report 2016).
They were also one of the first companies to use microseismic monitoring to evaluate their hydraulic fractures, this is a critical technology used to optimize well spacing in a reservoir. These two technologies, the slick water frack and the microseismic, were in use at Mitchell Energy when Devon Energy bought the company in 2001. In house, Devon had a very experienced horizontal well completions team and after the acquisition of Mitchell they combined the three technologies to build a successful shale gas and shale oil operation by 2005.
2002, Uppsala University, Uppsala, Sweden: “Global supplies of crude oil will peak as early as 2010 and then start to decline, ushering in an era of soaring energy prices and economic upheaval — or so said an international group of petroleum specialists meeting Friday.” Link.
2005, Chris Skrebowski, editor of the Energy Institute in London Petroleum Review: “We should be worried. Time is short, and we are not even at the point where we admit we have a problem … Governments are always excessively optimistic. The problem is that the peak, which I think is 2008, is tomorrow in planning terms.”
Massive shale gas and shale oil development had just started and would become a major source of new oil and gas by 2008, so Skrebowski’s timing was awful. Link.
The Current Oil “Crisis”
In constant U.S. dollars, oil prices peaked between 2011 and 2014 (see Figure 9) and then began to fall due to oversupply. The oversupply was primarily due to the rise in shale oil production in the U.S. and Canada, Iran’s re-entry into the oil markets and growth in offshore oil and gas production. Other important factors were the reopening of Japan’s nuclear reactors, a decline in industrial production in Japan, Germany, France and China; all in 2014 (Austin 2014).
We are hearing a lot about “Peak Oil” and “the end of oil.” These claims have always been with us whenever there are price fluctuations. However, this author thinks we are entering a period of relative price stability in the oil and gas markets. As in times past, whenever oil and gas prices rise, new technology brings more oil and gas to market. The great innovations emerging from the most recent price instability are the shale revolution and advances in deep-water oil and gas production. These have opened vast new technically recoverable reserves. The shale revolution is well entrenched in the U.S. and Canada where the technology was developed, but it is only beginning to be used in other parts of the world. As the rest of the world adopts shale production technology oil and gas production will increase and become cheaper with scale and experience.
New innovations in deep-water exploration and production may be even more important than the shale revolution. Seventy percent of the Earth’s surface is covered in water, and as oil and gas exploration and production reaches deeper water, new reserves become accessible.
Technology, Price and Oil Supply
I’ve previously written that technically recoverable oil and gas reserves (or resources, if you prefer that term) are much larger than assumed by peak oil enthusiasts. But, even that conservative estimate of over eight trillion barrels of technically recoverable oil equivalent (at prices seen recently) is probably too low. Advancing deep-water drilling and production technology has opened huge new prospective areas, as seen in Figure 5.
Additional areas will be opened as the nascent technology matures. In particular, portions of the submerged continent of Zealandia and even parts of the Ontong Java submarine plateau might be added to the list soon, see Figure 6.
In Figure 7 we see the steady march of oil exploration (green triangles) and production (red boxes) into deeper and deeper water. With current technology there may be no water-depth limit to exploration or production of hydrocarbons.
As of 2014, the deepest water-depth actually drilled in was 10,411 feet, although deeper depths are possible with existing equipment. The deepest water depth for existing subsea production equipment and pipelines was 9,627 feet and the deepest water under a floating production facility was 8,200 feet. There is no reason why these depths cannot be exceeded in the future as the technology improves. This opens a new world of prospective oil and gas reserves that is much, much larger than what we can explore today.
We have listed numerous false predictions of the end of oil, so let’s look at a successful prediction of oil and gas technology. See Figure 8.
Discussion and Conclusions
Technology drives oil and gas exploration and development opportunities and price drives technology development. It is a pattern that the world has seen time and time again. Demand increases, supply is slow to follow, and prices go up. High prices kick the oil and gas industry into high gear and it develops new technology that increases reserves and production rates and prices fall. Figure 9 compares the history of oil and gas to technology developments and to world events.
In Figure 9 we see that oil prices are quite volatile through most of the 150 years plus of the “Age of Oil,” the only period of price stability is the period from 1930 to 1973. This period includes a worldwide depression and World War II, so it cannot be attributed to politics. As seen on the graph, the period from 1910 to 1930 saw the oil and gas exploration and production industry grow from drilling near oil seeps and pumping the heck out of each well, to using well developed scientific and engineering technology to find and produce the oil and gas. This technology kept supply high and prices low for a long time. This was the period of developing what we now call “conventional” oil and gas.
There has been a great deal of debate over the definition of “conventional” and “unconventional” oil and gas. Some define conventional oil as any oil less dense than water and some define it as oil from higher permeability rocks (Höök 2014). Some writers lump ultra-deep-water production in with unconventional production, due to the high costs associated with ultra-deep-water developments (energy.gov and (Somarin 2014)). But, most writers simply define conventional oil so their prediction of “peak [conventional] oil” will be correct and, generally writers who define “conventional” in similar ways, make similar predictions:
“There is more or less a consensus about peak [conventional] oil among experts, although this haven’t [sic] seeped into the public mindset yet.” (Höök 2014)
“But the evidence is that conventional oil production has peaked, and prices will rise, though this is unlikely to benignly encourage a shift to new fuels.” (Chapman 2014)
“Given these complexities, we suggest that there is a signiﬁcant risk of a peak in conventional oil production before 2020. At present, most OECD governments are failing to give serious consideration to this risk, despite its potentially far-reaching consequences.” (Sorrell, et al. 2010)
Notice I had to add “conventional” to the first quote, although, in the context of his slide, that was clearly what Mikael Höök and the UKERC (UK Energy Research Centre) meant. In our opinion, the consensus “peak [conventional] oil” concept hasn’t seeped into the public mindset, because it doesn’t matter. Predictions of peak “conventional” oil are pointless, ephemeral academic exercises. In reality, there are economic oil and gas wells and uneconomic oil and gas wells. No one cares if the gasoline going into their car is from some arbitrary definition of conventional or unconventional oil. Unconventional oil today will be conventional tomorrow, this is truly a distinction without a difference.
Some writers claim only conventional oil matters:
“The core issue for future supply is the extent and the rate of depletion of conventional oil, since this currently provides around 95% of global all-liquids supply.” (Miller and Sorrell 2013)
One solution, offered immediately after this quote by Miller and Sorrell, is to replace the conventional oil with unconventional. Why would conventional oil continue to be 95% of global supply? When all known surface oil seeps had been drilled in 1910 similar things were said, but then geologists simply started mapping surface anticlines and using reflection seismic to look for oil. As problems are encountered, we fix them.
There are a mix of economic (i.e. profitable at current prices) wells and uneconomic wells, companies work hard to increase the former and decrease the latter, they do this for both conventional wells and unconventional wells. Experience in a hydrocarbon play, for example the Barnett Shale or the Eagle Ford shale helps a great deal, as does experience in a play type. In the early days of a play, the ratio is not very good, as time goes on the ratio improves and costs go down. The Barnett Shale can be called a mature play now, the good areas are known, the best completion techniques are known, and it is very profitable. In the Eagle Ford, which is a newer play, it is getting better, but there is still a lot of work to be done.
In short, just because 95% of the oil is from historical “conventional” field types, does not mean that will continue. Other sources of oil will be found and developed if there is demand at the price required to make the fields profitable. The limit on the supply of oil has nothing to do with whether it is conventional or unconventional. It has everything to do with demand at the price required to make a profit. Once the price reaches a level where people find another energy source preferable, oil and gas will decline. As long as the price can go up, additional resources will always be found. We agree with Peter Jackson and Leta Smith:
“We do not dispute that supply will plateau and eventually fall; the question is when, how and at what price? As the plateau approaches, oil prices are likely to increase strongly, with some very severe spikes along the way.” (Jackson and Smith 2013)
The pessimistic academic studies do not understand how the oil and gas business operates, Jackson and Smith (2013) make more sense. They do not expect the plateau of oil production to occur before 2040, but it will happen eventually. The timing will be determined by the demand response to increased oil and gas prices. Higher prices will be required to pay for new extraction and exploration techniques and prices cannot climb forever. The current large price advantage of fossil fuels must end sometime.
The pessimists are attempting to study the dynamic supply-and-demand oil and gas market as a static business. All established oil and gas companies have very positive cash flow from old fields, mostly “conventional” fields. This money is used to fund new ventures, currently these are usually “unconventional” or deep-water fields. These may not even be cash-flow positive, but they could be in the future. If they work, the company learns how to operate them profitably and is successful, this is often called the oil and gas development “learning curve.”
The learning curve in shale oil and gas wells has been very successful and the average annual production cost has dropped from around $29 in 2008 to $23 per BOE in 2016 (Kim and Lee 2017). If oil and gas prices are increasing, the learning curve will show little improvement and can be negative if a lot of new operators are entering the play. Besides new operators, new service companies can cause cost increases. But once prices are static or falling the learning curve really kicks into gear as service companies must decrease their prices to retain business. Efficiency gains by operating companies (oil and gas companies) are dramatic in a falling price environment as unsuccessful operators go out of business and only the most successful and efficient companies survive. The oil and gas business is all about managing risk and opportunity over very long periods of time, in high price environments and in low price environments.
As oil and gas prices go up, the available supply increases rapidly as expensive EOR (enhanced oil recovery) techniques (Muggeridge, et al. 2014), and shelved deep-water prospects, and unconventional fields suddenly become profitable. Project portfolios become riskier in periods of increasing prices, but managed correctly, the winners make more than the losers lose.
One thing that is always true, if you stand still you get run over. Many companies go bankrupt trying new things and we don’t hear much about them, all ideas do not work. A few try new things and succeed big, those we hear a lot about. Existing companies that stay static and don’t try new things also die, frequently. Static analysis of the oil and gas business is inappropriate.
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