Shell, Hess, Petrobras Agree On Oil Shortage

Jim Brown
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Peak oil may be an often overlooked topic in the U.S. press but the heads of several of the world's major oil companies agree there will be oil shortages soon.

John Hess, CEO of Hess Corporation, has said that once the U.S. economy recovers from the after effects of the 2008 recession the conditions which caused the 2008 oil spike will return. He said the $140 per barrel spike was not an aberration, but a warning of things to come.

It is amazing how little attention everyone pays to oil prices these days. When there is a big drop the headlines are full of news but nobody is really paying attention to the real price of oil. Brent is $105 as I type this and nobody in the U.S. seems to notice. WTI dipped to $77 intraday last week and the bearish analysts were all predicting a return to the $70s and possibly the $60s. I am always amazed at the lack of research and understanding by those making the predictions.

Hess is also amazed by the claims made by other industry officials who claim that aggressive exploration and new technology will make more oil available just in the nick of time. He points out that a minimum of five years is required to bring new fields online and sometimes as much as ten years or even longer. Getting new discoveries online and producing in a short amount of time is just not physically possible.

In his speeches Hess reminds everyone that 85% of the world's transportation needs come from oil. While it is nice to think we can come up with another solution for transportation like electric cars it is not possible to make this change in less than 15-20 years. There is simply too much technology to invent, infrastructure to construct and manufacturing of millions of vehicles before the change can occur. With a billion cars on the planet it would take 20 years to replace them even if every new car and truck built today was electric. Sadly, the number of electric cars produced today is just a minuscule amount compared to the production of gasoline and diesel versions. We don't currently have the capacity to produce batteries in the numbers required for mass electrification of the fleet and that much accelerated conversion would crush the power grid. There is not enough power to charge several million new electric cars every day. Oil powered transportation will be our primary method for decades to come.

He also points out that the one billion cars will rise to two billion by 2040. The U.S. has 1000 cars for every 1000 people. China has 10 cars for every 1000 people. While China will never reach the same saturation point as the USA even a minor increase to 200 per thousand or even 100 per thousand would be an astronomical number and seriously increase gasoline demand.

Lastly he reminds everyone that we consume one billion barrels of oil every 11.3 days. That is more than 32 billion barrels per year. The press gets all excited when some oil company finds a billion barrel field. That field may not begin production for 5-7 years and then produce only 50,000 to 75,000 bpd for the next 36 years. They focus on the "billion found" and ignore the "barrels per day."

Hess reminds listeners that depletion is reducing current production by roughly four million barrels per day every year. How many new 50,000 bpd fields have to be brought online every year to make up for that depletion? Eighty new 50,000 bpd fields must be found, developed and brought online every year just to make up for production lost to normal depletion in existing fields.

The last time we discovered more oil than we produced that year was 1987. That is discovered not developed. Finding oil is the easy part. Putting it into production is the hard part. If we are failing on the easy task how much more are we failing on the hard task?

The U.K. Energy Research Center just published a report claiming conventional oil production could peak before 2020 and enter terminal decline. The report said a lack of action today would have devastating consequences in the next 5-10 years. They probably saw the future for 2015 but just to hedge their bets they expanded that time frame to 2020. Nobody wants to be caught picking a high profile date and then missing it. That is bad for careers. Even if they believe it is earlier they would likely give themselves some breathing room.

I heard an interview with the CEO of Petrobras recently and despite their new finds of which some are truly huge in the 10-20 billion barrel range, he still believes there will be shortages later this decade. He is positively ecstatic that his new oil finds will be worth much more when they start producing in volume later this decade than they are today.

The CEO of Shell, Jeroen van der Veer, has said repeatedly that peak oil will be here by 2015. Specifically he says, "Regardless of which route we choose, the world's current predicament limits our maneuvering room. We are experiencing a step-change in the growth rate of energy demand due to population growth and economic development, and Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand." That is the polite way of describing Peak Oil.

It is all about flows. The easy oil has been found. Drilling 32,000 feet deep in 6,000 feet of water, 250 miles offshore is a task no sane oil company executive would undertake if there was any other option. That oil is not cheap and it is not easy to produce. The distance offshore and the lack of pipelines requires the use of floating processing vessels and limits the amount of oil that can be produced each day. This is not the answer but these discoveries are clouding the real issue.

That issue is the 32 billion barrels of oil we consume every year and the mere 10 billion barrels we find. The countdown clock is running but nobody is watching.

Jim Brown

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