Just the Facts

Jim Brown
Printer Friendly Version

Dragnet's Detective Joe Friday made that phrase famous. Sometimes we get emotional and start producing copy that obscures the facts more than explains them. Today I am going to give just the facts from Chris Skrebowski's ASPO presentation last week.

The world gets all twisted up worrying about peak oil. The majority of people don't understand the term and the negative definitions are propagated over and over and become embellished with each telling.

Peak oil does not mean the end of oil. Technically peak oil is when actual oil production or "flows" are lower than consumption otherwise known as "demand." Once flows begin to permanently decline rather than grow we have reached peak oil or actually peak flows.

We will continue to find more oil after the peak but we will never be able to find enough to grow production again. We will only be able to slow the eventual decline.

Consumer need flows. Reserves in the ground are ONLY useful as flows. Finding a billion barrels in the ground does not help if the production rate is only 10,000 barrels per day.

People claim new discoveries and new technology will push us to new highs. Unfortunately the oil industry is slow moving and predictable. Newly found fields can take 3-5 years to begin production and sometimes as long as 10 years. During that period of time millions of barrels of existing production are lost.

You can't confuse "reserves" and "flows." Found oil is a reserve and only produced oil is a flow.

Flows can be geologically constrained. (Alaska, North Sea, Cantarell)
Flows can be politically constrained. (Russia, Saudi Arabia)
Flows can be physically constrained. (Nigeria)
Flows can be skills constrained. (Lack of experienced workers)
Flows can be capital constrained. (Mexico, Venezuela)

According to Chris Skrebowski peak flows will occur on or before 2014 using current trends. Most believe it will be in 2012. Chris is allowing for "claimed" excess capacity while others are ignoring claimed capacity and only factoring in proven capacity. Individual OPEC countries can claim they have an extra million barrels per day of excess capacity but if they have never actually produced that much then the claim is unfounded until they do.

The EIA is projecting oil production will rise to 105 mbpd by 2030. What they don't tell us in those productions is where that oil will come from. Those projects accounting for the 50% increase in global production are unidentified. They are unidentified because the oil is still undiscovered. Our question is how can they count and depend on undiscovered oil?

EIA Chart

Saudi Arabia accounts for 66% of OPEC spare capacity claims.

Saudi, Kuwait and the UAE account for 77% of OPEC spare capacity claims.

Iran, Ecuador and Venezuela are in sustained decline.

Iran and Iraq have large reserves but limited flows.

Despite the recessionary conditions demand will continue to grow because population will continue to grow. Demand may not grow as quickly at higher prices but population growth necessitates increased consumption of fossil fuels. Oil is the world's primary transportation fuel. Nothing else even comes close.

There are currently 6.8 billion people on the planet. This is an increase of three billion since 1950. (60-years) At the current rate we will increase another three billion by 2050. (40-years)

Population Chart

Crude prices rose to $147 in 2008. That was triple the price only a couple years earlier. That high price did NOT spur a wave of new exploration and new discoveries because all the big fields have already been found with the exception of some ultra deepwater possibilities.

Deepwater fields are hard to produce and deplete quickly. Petrobras has found between 20-50 billion barrels offshore Brazil. At peak production ten years from now they are expecting to produce only 2 mbpd from those fields. That will come after a total investment of more than $500 billion in drilling, infrastructure and equipment.

Deepwater oil will continue to be very beneficial to the overall effort but it is not the answer to additional flows. Deepwater production will allow the total flows to decline at a slower rate.

When oil prices return to $100 the U.S. will be spending up to $1.2 billion per day on oil IMPORTS. Europe would spend another $1.2 billion per day. China $500 million, Japan $350 million. Collectively the world would spend more than $8.5 billion per day on imported oil.

Can the world spend that kind of money without falling into a deep and prolonged recession?

Peak Flows have already occurred in major producing areas.

OECD production peaked in 1997 and has declined by -3.3 mbpd (-15.1%).

Non-OPEC, non-FSU peaked in 2002 and has declined by -2.1 mbpd. (-6.13%)

North America/Mexico peaked in 1997 and now down -879,000 bpd (-6.16%)

North Sea - UK/Norway/Denmark peaked in 2000 and now down -2.32 mbpd (-36.4%)

More than 28 significant producers already in decline still account for 40 mbpd.

About 50% of our current global production comes from countries in decline.

How long can the other 50% outrun depletion of their own and depletion from those already in decline?

Depletion acts as a negative flow.

The IEA claims a 6.7% depletion rate for post peak fields.

Chris calculates 75% of the world's production capacity is post peak.

Global depletion (IEA) is now around 5.0% to 5.5% of crude flows or roughly 3.7-4.0 mbpd per year. Every year there is a new loss of 3.7 to 4.0 mbpd.

That is the equivalent of 16 Thunder Horse fields every year. That is the largest offshore deepwater oil field/platform in the world and located in the Gulf. It produces 250,000 bpd. It was discovered in 1999 and peaked in March 2009. The platform cost over $5 billion to construct and develop and it has a remaining life expectancy of 17 years.

Peak flows will create a Great Recession. Oil is the cheapest energy source on the planet and the highest density other than nuclear. There are no current alternatives cheaper than oil and none that can be replicated in the quantity needed to offset the loss of production post flows.

Once we pass peak flows many countries will restrict further exports to save the oil for their own citizens. This will accelerate the problem, increase the price for oil, deepen the recession and undoubtedly produce armed conflicts to defend and capture oil reserves.

Pick your date. Peak flows could come as early as 2012 if OPEC excess capacity claims are bogus or as late as 2015 if every claim is fully justified. Regardless of the date you pick we are right on the verge of a life changing experience. If you thought the 2008 recession was bad, you have not seen anything yet.

How would your life change if 24 months from now you were allocated only one tank of gas per month?

Jim Brown

(Charts and data from Chris Skrebowski's ASPO presentation)

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter