The Great Debate

Jim Brown
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Since the beginning of recorded history there have been debates over countless topics that have lasted for decades before one position was proven to be true. Other debates continue to last and it could be centuries before we know the winner. Coke or Pepsi, Christianity or Judaism, Evolution or Creationism? Today's debate will be settled much sooner and with lasting consequences.

A reader sent me a link to the Wall Street Journal article by Daniel Yergin, Chairman of IHS CERA. (Article Here)

Yergin and CERA are no strangers to the Peak Oil debate. Yergin has made tens of millions of dollars off his claims that peak oil is fiction and the dozens of geologists and scientists that advocate for it are crackpots.

If you are in the business of selling energy consulting reports to countries and corporations for millions of dollars a year it helps to have an adversary to rail against. If there were no claims of peak oil and the potential for disaster there would be no reason to buy his reports supposedly proving to the contrary.

The basic premise of peal oil is not that we are running out of oil as most believe but that the easy oil (cheap oil) has already been found. As exploration companies have to go to new extremes to find and produce oil the cost of that oil rises.

As the population of the world grows the consumption of oil rises. The world is on a path to add another billion people every twelve years. We hit six billion in 1999, seven billion in 2011 and will hit eight billion by 2023. After that analysts believe our population growth will slow because of the lack of food and raw materials to support additional growth. They expect the next billion will require nearly 20 years. That also takes into account the dying of the baby boomers over that same period.

As each new person is born they immediately become a consumer of products the majority of which are made with and transported by oil. Obviously they consume small quantities at first but as they become adults the consumption kicks into high gear. The billion people added between 1985 and 1999 are prime consumers today. Their demands for food, housing and transportation are fueling the demand growth for oil today. The billion people added between 1999-2011 will not become accelerated consumers until later this decade and early 2020s. Since the population addition is linear and not on calendar decades we see one hundred million people hit that high consumption level every year. How much oil do 100 million new adults consume? It depends on what country you are in but it is dramatic.

Asia and not just China, is where the majority of the population growth is occurring. Historically Asian cultures were agrarian and the population was rural. Over the last decade that has begun to change rapidly. Millions are moving to the cities. Industrialization is exploding and along with that the consumption of oil based products including transportation fuels.

Not only are the new people in Asia moving to the cities but the older population is also upgrading their standard of living and increasing their consumption. This means the number of barrels of oil and oil products consumed by roughly three billion Asians is increasing every year.

Goldman Sachs said last week that oil demand in Asia would rise by more than 9% in 2012. China already produces more automobiles than the USA and is on track to produce more than 20 million per year by 2020.

Currently China consumes about half the oil of the USA at roughly 10 million barrels per day. The U.S. consumes roughly 20 million. The U.S. has less than 5% of the world's population (312 million). China has 1.34 billion, India 1.2 billion. The U.S. consumes an average of 23.39 barrels of oil per year for every person. A person in China consumes three barrels per year. A person in India consumes LESS than one barrel per year. As those 2.5 billion people in China-India move into the middle class and begin to consume more the demand for oil will continue to rise and rise sharply.

I believe everyone reading this commentary will agree with me on those population facts and the potential for additional consumption assuming there is enough oil to consume.

Remember, I did not say we are running out of oil. We are running out of cheap oil. Why would a company like BP, Shell, Exxon, Conoco and Chevron spend $500 million to drill a well in 10,000 feet of water 200 miles from land and then spend several billion dollars building production platforms in the path of annual hurricanes if there was plenty of oil available elsewhere? The easy answer is they would not take the risk and spend the money if there was oil available elsewhere. They do not want to produce $85 oil from ultra-deepwater wells. They would rather produce $10 oil on shore in some politically friendly country. Unfortunately all of that oil has been found.

Over the last 100 years since oil usage really took off every square foot of the world has been explored in one form or another. Once geologists knew what kind of formations might contain oil it was a simple exercise to survey the world and map out all of those formations. The ones on flat land with friendly governments were drilled and those in harsh environments or under unfriendly governments were ignored.

As time passed they figured out how to drill in those harsh environments and governments rapidly decided they were missing out on billions in royalties and compromises were reached in most cases.

In the U.S. the oil explorers have known about the shale oil in places like the Bakken since early last century. They just did not know how to produce it. The oil was considered not recoverable. When horizontal drilling technology arrived for tight shale gas some enterprising explorers began to apply that technology to shale oil. As a result we have a mini oil boom in the USA and eventually it will migrate around the world to other shale oil deposits. However, even with our advanced technology today we are only able to recover 7% to 12% of the oil in place in areas like the Bakken. What has gone from 10,000 bpd 40 years ago it has now grown to 400,000 bpd and there are some estimates we could see 1.0 mbpd by 2020.

That sounds like a lot of oil but it is not. Peak oil should be called peak flows. We can find billions of barrels of oil but it we can't coax is out of the ground at a rate to overcome depletion in other fields it won't solve the problem. In the time it will take to get the Bakken to 1.0 mbpd by 2020 the world's existing oil production capacity will decline by 36 million barrels per day. Add in the 1.0 mbpd of new Bakken production and we only lost 35 mbpd.

The IEA recently did a survey of the top 800 fields in the world. They found that depletion in these 800 largest fields that produced more than 80% of our oil was much faster than they had expected. Some fields were low at 4% and some were high at more than 8% per year. Let's use a round number of 5% for discussion purposes.

This is important: At our current daily production rate of roughly 89 mbpd we are losing 4.4 mbpd to depletion every year. That means if we were not constantly adding new production our capacity would decline by 4.4 mbpd every year.

This is not hard math. Even a 4th grader could do it. The IEA and OPEC agree that demand will increase by about 1.4 mbpd in 2012 and roughly the same amount every year after that.

If we are losing 4.4 mbpd every year and demand is increasing 1.4 mbpd every year then we have to increase production EVERY year by 5.8 mbpd or we are losing ground.

Adding another 600,000 bpd from the Bakken is great but over the next nine years that only averages to a gain of 67,000 bpd every year. How does that stack up to the 5.8 million barrels we need to add every year?

When a major company spends 5-7 years and billions of dollars to drill out a deepwater field and install a production platform they are hoping to produce 100,000 to 150,000 bpd. Check out the major platform statistics for Atlantis or Thunder Horse and you will see. How many multi-billion projects have to come online every year to make up that 5.8 mbpd we are losing?

The IEA said in its recent report that 40% of the oil we need to produce to meet demand by 2025 has not even been found. We can't produce what we can't find and it takes 5-7 years from discovery to production on a major field, sometimes even longer.

I ask you again, why would a major company spend billions of dollars, incur huge amounts of risk and spend a decade worth of effort to drill a well in 10,000 feet of water 200 miles offshore if there was plenty of oil elsewhere? Are they stupid? Is this just a cleverly designed jobs program? No, it is because the oil does not exist in the quantities we need to produce in an easily producible location.

Daniel Yergin is the chairman of IHS CERA. They make tens of millions of dollars annually selling feel good reports to countries and corporations so presidents, finance ministers and CEOs can sleep well at night knowing when peak oil arrives they can point to their high dollar research report and claim they did not know peak oil was coming.

The Association for the Study of Peak Oil (ASPO) is an al volunteer organization of petroleum geologists, scientists, academics and concerned citizens trying to warn the world about peak oil. They have no money and depend on donations to keep the effort going.

ASPO has challenged Daniel Yergin and CERA more than once to enter into a wager on who was right. ASPO offered to put up a $100,000 letter credit if Yergin would take their wager. If peak oil did not arrive Yergin would get the money. If ASPO was right then Yergin would have to pay.

Yergin has millions, ASPO is donation sponsored. It would seem like a slam dunk if Yergin was confident of his position. Unfortunately Yergin has repeatedly declined to accept the challenge.

You decide who has the right set of facts. Anyone can put together a pretty article complete with pictures and graphs and submit it to the WSJ for publication. That does not make the facts correct. It actually works as advertising for Yergin and he does this annually about a month before the ASPO conference in Washington. (Nov 2-5 It is a way to get publicity and sell a few more reports.

Turn off the TV, grab a pad and pencil and consider the energy facts I supplied above. You decide who is right and who is wrong. Your future depends on it. When gasoline is $8 a gallon, when you can get it, you will wish you had done the math.

Jim Brown