Dry Holes?

One of the persistent themes of this blog is my interest in Peak Oil, not just as a technical issue but as a phenomenon of media and public perception. Recently I suggested it might be the new Y2K, on several counts. One of the best articles I've seen on the subject of imminent oil depletion appeared in The Economist a couple of weeks ago. I've waited to write about it until it was available to non-subscribers. (You may still need to register on their site.) I'm not merely highlighting it due to my natural affinity for the Economist's point of view, or because the article's conclusions align with my own. Rather, it's an accessible and comprehensive view of a complex subject, and it identifies several issues that ought to loom larger than depletion, particularly with industry leaders and policy makers.

In a nutshell, the Economist concludes that concern about "peak oil" is overdone, or at least premature. They see supply continuing to grow, at least for the next decade or so, from both conventional and non-conventional sources, including oil sands. Probably the biggest vulnerability here is that their conclusion relies on one of the few industry analyst firms to come out strongly against the notion of an imminent peak in oil supply, Cambridge Energy Research Associates. CERA's findings are based on what I believe to be the most thorough field-by-field estimates available, but that doesn't mean their assumptions about decline rates and other technical elements are bulletproof. I'd feel a lot more comfortable if more industry experts agreed with their analysis.

Here are the key takeaways from this article:

1. Even if the recent doubts about the size of Kuwait's oil reserves reveals that all the reserves around the Persian Gulf have been systematically overstated--something that I've always suspected, based on the pattern of reserve restatements and the rules of OPEC's quota system--it does not imply that OPEC is approaching a peak in production. After discounting them by 50%, the Reserves-over-Production ratios (R/P) for the key producers would still exceed 35 years, compared to less than 10 years for mature provinces like the US, Mexico and the North Sea.
2. The reserves and production of major western oil companies, adjusted for merger effects, are stagnating because they are finding it increasingly difficult to gain access to it on commercial terms, not because the oil isn't out there. Recent news out of Bolivia, Venezuela and Ecuador reinforces this view. If the majors can't gain greater access to the high "R/P" provinces, they will enter a cycle of escalating capital requirements and diminishing returns from extraction.
3. The oil industry is on the cusp of a transformation from a "discovery model" to a "manufacturing model", referring not to the role of refineries, but to the application of capital and technology to making the most of hydrocarbon reserves that have already been discovered, however challenging these might be. This has profound implications for future oil supply, with natural decline becoming less relevant to future supply projections. It will also change the long-term profit potential of the sector. Grinding out synthetic crude from oil sands and ultra-heavy oils is a fundamentally different economic proposition from finding and producing a billion barrel light crude oil field, such as Nigeria's Agbami field, the last great discovery of my former company.

The distinction between Peak Oil and the factors above may seem subtle, but it affects the focus and urgency of our response to the current situation. If oil supply is about to peak, whether due to geology or geopolitics, then a crash program to develop alternative fuels and constrain demand for oil becomes a matter of survival. But in the world outlined by the Economist, alternatives play a very different role, competing on economics and stretching our oil supplies, even as they make the fuels derived from them greener. Alternatives also become a key point of leverage over OPEC, more or less in the manner advocated by the GeoGreens. Peak Oil is a two-by-four between the eyes, but the factors outlined above are actually things we can do something about, through a combination of clever investments and patient diplomacy.