July 18, 2012
Maugeri on peak oil
Carpe Diem, Reuters, FTalphaville, and WhaleOil are among those calling attention to a new paper by Leonardo Maugeri, senior manager for the Italian oil company Eni, and Senior Fellow at Harvard University, which concluded:
Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.
Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd. [After factoring in risk factors and depletion rates of currently producing oilfields], the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date.
Here I take a look at some of the details of Maugeri's analysis.
About half of Maugeri's calculated 17.6 mb/d in net additional production capacity comes from two countries-- the United States and Iraq (see his Table 2). I have earlier discussed the situation for the United States. To briefly recap, more than half of the increase in total U.S. oil production since 2005 has come from biofuels and natural gas liquids, neither of which should be added to conventional crude production for purposes of calculating the available supply. Another important contribution to recent U.S. production gains has come from shale/tight oil. I agree with Maugeri that this will be an important factor in the future, but it is not cheap, and there are some big uncertainties in extrapolating recent gains, about which I will have more to say below.
But first let's take a look at Iraq, which by itself accounts for 5.1 mb/d, or 29% of the net combined global gains that Maugeri is anticipating. His starting point for these calculations (see his Table 1) is the "production target" associated with a dozen oil fields for which the Iraqi government has signed contracts with oil companies. These targets call for these fields to reach maximum levels of production which, when added together, come to 11.6 mb/d. To win a contract, oil companies had to specify two key parameters: a "target" level of production and a remuneration per barrel, with awards going to the companies that specified the highest target and lowest remuneration. Some have characterized the announced targets simply as propaganda. Once awarded, there seems to be a separate process in which the production targets get renegotiated. Maugeri acknowledges the logistic and security challenges in meeting the targets, and accordingly cuts the official estimates in half. Doing so would still be a stunning achievement, requiring an Iraq that would be substantially more stable and successful over the next decade than it has been over the last three.
A separate issue is that new production from places like the U.S. and Iraq are needed in part to replace declining production flows coming from mature fields. A key question in any study like this is the assumed magnitude of that decline. As Stephen Sorrell notes, Maugeri does not state his assumed rate, and confuses the issue by mixing discussions of the depletion of an existing reservoir (for which purposes Maugeri is correct to raise the offsetting factor of additions to reserves) with the declining production flow rate from a given field (the relevant number for purposes of calculating the net addition that new fields bring to annual production). Sorrell suggests we can infer the implicit assumed decline rate from Maugeri's Table 2, which reports a difference between his adjusted gross additions and adjusted net additions of 11 mb/d. That seems to imply that Maugeri is assuming that the total decline in production from existing fields between now and 2020 will be 11 mb/d, which I calculate to correspond to a 1.4% annual decline rate (ln(82/93)/9 = -0.014). As Sorrell notes, this compares for example with the IEA's (2008) substantially less optimistic numbers:
Based on data for 580 of the world's largest fields that have passed their production peak, the observed decline rate-- averaged across all fields and weighted by their production over their whole lives-- is 5.1%. Decline rates are lowest for the biggest fields: they average 3.4% for super-giant fields, 6.5% for giant fields and 10.4% for large fields. The average rate of observed post-plateau decline, based on our data sub-set of 479 fields, is 5.8%.
To get another feel for this issue, the figure below plots annual production rates for the four most important U.S. oil-producing states. Note that this graph includes all of Gulf of Mexico's production in the panel for Louisiana. Despite the tremendous technological gains and new fields developed offshore, the Louisiana + GoM production level in 2011 was 53% lower (as measured by difference in natural logs in order to allow calculation of average annual compound decline rate in the next step) compared to its peak in 1971, for an average annual decline rate of 1.3% per year. In other words, we would have had to find new fields to produce an additional 1 mb/d (over and above the new fields and new production that in fact were added in Louisiana + GoM since 1971) just to keep LA + GoM production from falling from its 1971 levels.
One encounters the same basic facts in every U.S. state except North Dakota (see my recent survey article). The table below summarizes the net average annual decline rates-- again, already inclusive of all new production-- for each U.S. region from that region's production peak.
|LA + GoM||-1.3%|
A particularly important question is the decline rate to assume for the new shale/tight oil production. Maugeri (page 50) states that he used the following assumption for this:
A combined average depletion rate for each producing well of 15 percent over the first five years, followed by a 7 percent depletion rate
I agree with Maugeri that new production from places like the United States and Iraq is going to be very helpful. But I think he substantially overstates the case for optimism. If we are counting on sources such as shale/tight oil, oil sands, and deepwater to replace production lost from mature conventional oil fields, the days of cheap oil are never going to return.
Posted by James Hamilton at July 18, 2012 11:16 AMdigg this | reddit
Today we're working on forecasts for so-called SURF installations. SURF means subsea umbilicals, risers, and flowlines--essentially the pipes and cabling used in offshore oil fields. We're doing the analyses by water depth. Essentially, all the growth comes from ultra deep water--greater than 1500 m water depth. Yes, there is some growth here and there in shallower waters, but in many cases investment there is declining or at best holding steady. The growth is all in the very deep segment. It is much a peak oil story, just as Jim's state by state analysis shows above.
Posted by: Steven Kopits at July 18, 2012 12:53 PM
Considering the price of natural gas has fallen below breakeven for many wells and oil production is unlikely to rise to levels that could substantially lower pump prices, is there a way to arbitrage the difference?
At scale, Celanese can produce ethanol from natural gas at parity with $60 oil, or around $1.50 to $1.75 per gallon...
So, where is Celanese heading to commercialize this US-developed technology? Why, China. As Celenese’s Mark Oberle points out, “China has the half the world’s demand for industrial ethanol and is growing fast on the fuel side – it’s a country that will have the largest energy demand complexes.” Why risk the dark waters of deploying highly-advanced technology in China, given the technology piracy and international partnership perils, instead of the comfortable home waters of Texas?
“It’s faster to work through the commercial discussions [elsewhere], than the US policy discussion,” said Oberle. “On the US side, there’s been a significant amount of interest in this economically viable, technology proven, ready now option. We continue to have discussions with folks across a broad spectrum of interests: those that have raw material, those in states that have high impact from corn for ethanol, those concerned about water supply. There, our technology can be a very legitimate part of an energy portfolio. But, outside the US, we have quickly moved from exploring the technology to substantive commercial discussion with multiple customers in multiple countries. In China, for example, not using a lot of arable land and water is important.”
The scale and cost of the Celenese technology? They can build a 350 million gallon (1.1 million tonne) facility for less than $600 million.
Celanese’s TCX® ethanol production technology is an innovative, advanced process to produce fuel and industrial-grade ethanol from basic hydrocarbons such as natural gas, coal and pet coke by integrating elements of Celanese’s leading acetyls technology with new proprietary advancements.
“We are excited to begin construction on our first commercial scale ethanol plant utilizing our breakthrough TCX® ethanol process technology to capture the growing demand for industrial ethanol in China and provide increased value to our stockholders,” said David Weidman, chairman and chief executive officer. “The company’s continued advancements to the technology allow us to produce 30 to 40 percent more capacity from this unit than originally announced.
Additionally, our technology advancement unit in Clear Lake, Texas, which is scheduled to be completed in mid-2012, will provide further enhancements to our TCX® ethanol process technology.”
(January 18, 2012) – Celanese Corporation (NYSE: CE), a global technology and specialty materials company, applauds Representative Pete Olson (R-Texas) for introducing House Bill 3773 yesterday on the floor of the United States House of Representatives.
H.R. 3773 would amend section 211(o) of the Clean Air Act to allow fuel blenders to use Domestic Alternative Fuel to satisfy their obligations under the federal Renewable Fuels Standard (RFS).
Specifically, Rep. Olson’s bill, titled the Domestic Alternative Fuels Act of 2012, would allow ethanol produced from domestic hydrocarbons other than petroleum to satisfy the RFS requirement to use conventional biofuel (corn-based ethanol) to reduce the quantity of petroleum used in transportation fuel.
Posted by: colonelmoore at July 18, 2012 01:00 PM
I agree that Iraqi and US production will not appreciably increase hydrocarbon production NET of production declines elsewhere. However, I do see the possibility of a significant price collapse as austerity bites into western economies burdened by excessive credit and impaired securities.
Posted by: MarkS at July 18, 2012 01:09 PM
Good thing there's no drought affecting the corn crop.
Posted by: jonathan at July 18, 2012 04:24 PM
Who cares about oil; we can become energy independent by simply burning compressed natural gas in our current gasoline engines(but we must get rid of the republican party first).
Posted by: bmz at July 18, 2012 05:47 PM
Thanks for the careful analysis of a very important issue.
Posted by: Bryce at July 18, 2012 07:02 PM
But I think he substantially overstates the case for optimism. If we are counting on sources such as shale/tight oil, oil sands, and deepwater to replace production lost from mature conventional oil fields, the days of cheap oil are never going to return.
I agree. The estimates are way too optimistic as usual. It was not that long ago that the EIA and IEA were giving us an assumed decline rate that was 80% lower than the one that they calculated when real field production data was used. Sadly, all of the hype about tight oil and gas in shale formations is distorting the market and preventing serious actions that may bring about a viable solution.
Posted by: VangelV at July 18, 2012 07:36 PM
Who cares about oil; we can become energy independent by simply burning compressed natural gas in our current gasoline engines(but we must get rid of the republican party first).
In what universe can you find enough gas in the US to allow the transition from liquid fuels to take place? Anyone who buys into this type of argument either has a bridge to sell or is ignorant of the history of exploration and production in the US.
Posted by: VangelV at July 18, 2012 07:38 PM
colonelmoore - Celanese is heading to China also because it has the world's largest reserves of brown coal.
It's good to see that you and I both read The Oil Drum, Professor Hamilton.
Posted by: jtf at July 18, 2012 08:39 PM
Vangeiv: Try Googleing "natural gas transportation fuel"; and welcome to the 21st century.
Posted by: bmz at July 19, 2012 04:49 AM
In the following essay, I tried to put slowly rising US crude oil production in the context of the ongoing post-2005 decline in Global Net Exports of oil (GNE) and in Available Net Exports of oil (ANE, or GNE less Chindia's net imports).
America’s new energy reality - A bidding war for declining global net oil exports:
In the linked essay, I discussed the discrepancy between the Texas Railroad Commission (RRC) and the EIA regarding Texas crude oil production. Note that if we use RRC annual data for 2011 Texas crude oil production and use EIA data for the rest of the country, there was no year over year increase in US annual crude oil production from 2010 to 2011.
The RRC seems to be promptly updating the production reports at the following link:
I am going to see what kind of updates we see through the year.
The June RRC update puts 2011 annual Texas crude oil production at 1.13 mbpd, and January, 2012 as 1.21 mbpd.
The July RRC update puts 2011 annual Texas crude oil production at 1.14 mbpd, and January, 2012 at 1.23 mbpd.
Meanwhile, currently the EIA puts 2011 annual Texas crude oil production at 1.47 mbpd, and January, 2012 at 1.77 mbpd.
Note that the RRC sums reports from Texas producers, while the EIA estimates Texas production, using a sampling approach. The RRC reports do tend to show higher production as late reports are received, but this tends to be a diminishing factor with time, since late reports would seem to be generally from smaller producers.
In any case, the EIA is, in effect, asserting that the Texas Railroad Commission, which has been tracking Texas crude oil production since the 1930’s, is missing, as of early 2012, the equivalent of virtually the entire Bakken Play in North Dakota.
Incidentally, I estimate that about 23% of all the crude oil ever consumed globally was consumed in the 10 year period ending in 2011.
Despite the fact that the EIA shows that global annual crude oil production has been flat since 2005 with an ongoing decline in net exports*, versus a doubling in annual crude oil prices, the emerging conventional wisdom is not that our rate of consumption of a finite fossil fuel resource base is too high.
On the contrary, the emerging conventional wisdom is that our rate of consumption is too low, and we should, and we will be indefinitely able to, increase our rate of consumption of our finite fossil fuel resource base.
*We have seen small increases in natural gas liquids production and in biofuels, causing annual total liquids production to increase at about 0.5%/year from 2005 to 2011 (EIA), however, the volume of Global Net Exports, which are measured in terms of total petroleum liquids, that are available to importers other than China & India fell from 40 mbpd in 2005 to 35 mbpd in 2011.
Posted by: Jeffrey J. Brown at July 19, 2012 05:54 AM
GNE/CNI Vs. Total Public Debt:
GNE = Global Net Oil Exports*
CNI = Chindia's Combined Net Oil Imports
*Top 33 net oil exporters in 2005, total petroleum liquids, BP Data + Minor EIA data
In 2002, there were 11 barrels of GNE for every barrel that Chindia net imported.
In 2005, there were 8.9 barrels of GNE for every barrel that Chindia net imported.
In 2011, there were 5.3 barrels of GNE for every barrel that Chindia net imported.
At the 2005 to 2011 rate decline in the GNE/CNI ratio (8.6%/year), the ratio would be down to 1.0 in 2030. In other words, at the current rate of decline in the GNE/CNI ratio, in 18 years China & India alone would be consuming 100% of GNE. Of course, I don't think this will actually happen, but it's important to note that the rate of decline in the ratio accelerated from 2008 to 2011, versus 2005 to 2008. There are signs of (relative) weakness in both China and India; however, there are also indications that China's domestic oil production may be peaking, which would increase the demand for imports.
In any case, this trend would make, and in my opinion has made, debt service, shall we say, "Somewhat difficult." Note that global annual (Brent) crude oil prices have doubled twice over this time frame, from $25 in 2002 to $55 in 2005 and then from $55 in 2005 to $111 in 2011 (with a year over year decline in 2009).
In my opinion, most oil importing OECD countries around the world, in a determined effort to deny the reality of resource limits, have gone massively into debt in an attempt to keep their economies going, waiting for what they believe will be an inevitable decline in oil prices, as a result of the resumption of the robust increases in global oil supplies that we have seen in previous decades.
Posted by: Jeffrey J. Brown at July 19, 2012 07:52 AM
VangelV and bmz,
Here's some of what natural gas extraction companies that would benefit from nat gas at vehicle have to say about that:
"CNG vehicles are ... nearly 10 percent more expensive than hybrids, based on equivalent models... ExxonMobil’s Outlook for Energy projects that the average new car on U.S. roads in 2040  will get 45 miles per gallon, compared to 22 MPG today, with hybrids and efficiency accounting for most of that improvement....A single CNG station costs anywhere from $300,000 to $3 million more than a regular gas station" and takes substantial time and approval to install, while a plug-in vehicle charging station costs anywhere from free (existing outlet, no additional installation required) to around $5,000 or substantially less for a level 2 quick charger that includes networked services, billing and other consumer desired bells and whistles.
"ConocoPhillips COP CEO Jim Mulva says global energy demand will require all types of solutions in the future. 'Electric and plug-in hybrid cars are building a following. The electricity to recharge these cars must come from somewhere. Here again, natural gas can help.'"
Plug-in hybrids ARE already natural gas vehicles at will, but the nat gas comes through the plug, possibly in an energy mix, easily changeable as desired if the plug-in vehicle owner is using a partial solar offset or utility wind subscription or some other additional energy source, for example.
One size doesn't fit all, though a plug-in hybrid (with any choice/mix of liquid fuel, bio blend if desired, and/or nat gas) easily provides the greatest energy flexibility through any structural changes or transition periods and also provides maximum torque off the line, instant responsivness and liquid smooth, strong acceleration.
Posted by: EVO at July 19, 2012 08:17 AM
To make CNG work, not all vehicles must convert from gasoline. The US could reasonably put 1-2 mbpd equivalent of CNG vehicles into the market.
No one really knows the cost differential of a CNG tank. It's $200 in India, $2000 for a retrofit in Argentina or Brazil. The price difference here in $10k in many cases.
If stations sold as much CNG as premium gasoline (10% of total, or about 2 mbpd), this would account for about 60% of retailing retailing profits, including convenience store sales.
So, CNG is a potential game-changer, depending on the price of the CNG tank, and that in turn is heavily dependent on regulation. ARPA has recently awarded a series of contracts to develop lower cost CNG tanks.
Posted by: Steven Kopits at July 19, 2012 08:55 AM
Maugeri totally misrepresented actual natural decline rates in his paper. Mature oil field declines are being offset by horizontal drilling. Future oil production will be an undulating plateau. The shape of the plateau will be a function of price. Give the shale guys $70 oil and they must cut capex; give them $110 pricing a production will boom.
Posted by: JJ Butler at July 19, 2012 11:01 AM
I think the issue of Peak Oil rapidly fades to an irrelevance if we consider the amount of fossil fuel available, and the amount we can use in the foreseeable prior to a disaster that cannot be mitigated.
The question is not how much is there - but how can we be motivated to leave it in the ground
Posted by: James Ferguson at July 21, 2012 07:37 AM
I think the truth is probably somewhere in the middle. A case can certainly be made for optimism in the oil world now compared to 5 years ago, primarily in North America and in Iraq...but I think people can too quickly return to over-optimistic forecasts simply because it suits their expectations, or fits into their world view or some such thing. Sadly, for such a crucial question which is attended by so many smart and supposedly rationale people, the characterization of this issue tend to get very fuzzy.
A major wall street bank had a forecast for 2020 North American production by one of the best and most knowledgeable oil experts around and I felt it fell into this category of arguing from an overoptimistic viewpoint, even though the author probably knew it was a theoretical exercise - i.e. there was no chance that his "what could happen" would actually happen.
Ditto can be said for current expectations of Iraq.
Proof is in the pudding - we are still going after ultra-deep, expensive, oil in unfriednly places all around the world. That should tell you all you need to know.
My $0.02 on natty is that it is a game changer for the US. We should benefit from this ultra-cheap and bountiful supply...look at natty production lower 48 and translate it into BOE. Mindblowing increase in production over the past 5 years. mindblowing. Long story short US should do pretty well from a fuel standpoint over the next decade...rest of the world will suffer through continued high oil prices.
Posted by: Matt Millar at July 21, 2012 07:25 PM
Fantastic post and good discussion.
Leonardo Maugeri is correct that global oil supply capacity is growing at rates that have surprised many. Probably one of the worst things that could happen to America would be for oil prices to be cut in half. Americans are like adolescents in front of a constantly replenished bowl of free cocaine or crystal meth. No discipline.
In the meantime, I would be most surprised if supply growth can get ahead of growing consumption in emerging economies.
Posted by: westslope at July 22, 2012 11:36 AM
Ft/alphaville posted an article by Chris Nelder about this Maugeri paper, and his conclusion is very much in lilne with Jim's:
Posted by: Pu Shen at July 24, 2012 12:57 PM
You all give Maugeri far too much credit. His report rests on a mathematical howler:
Posted by: David Strahan at August 2, 2012 06:30 AM