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:
- 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.
- 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.
- 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.