How Much Is Left?

One of the key uncertainties associated with the potential for an imminent peak in global oil production is how much petroleum remains to be discovered, on top of identified resources and proved reserves. A respected oil and gas consultancy, Wood Mackenzie, has just released a study on Arctic oil and gas that will bolster Peak Oil concerns and confound those who believe that there are still trillions of barrels left to find. Although smaller than many had hoped, however, the resources identified by Wood Mac and their study partners, Fugro Robertson, are still significant at 166 billion equivalent barrels . But their work contains two bitter pills: most of these hydrocarbons are gas, not oil, and bringing them to market will take decades, because of technical and logistical challenges. This figure would also push downward the estimates of total global undiscovered oil, reducing our options for future non-OPEC supply. If accurate, this report could change the way the industry looks at its future opportunities for growth and profitability.

There's something here for everyone. To those worried about Peak Oil, this is confirmation that we will encounter the limits of conventional oil production sooner rather than later. Environmentalists and other advocates of alternative energy will see further justification for aggressive development of biofuels that can provide liquid fuels to substitute for petroleum products, and for a crash program to improve the efficiency of the entire transportation sector. Geostrategists will see confirmation of the centrality of the Middle East in the world's energy future, for at least the next twenty years. At the same time, oil and gas companies will see opportunities.

As a Wood Mac VP makes clear in an interview covering the study, oil and gas companies will find attractive opportunities in the arctic regions of Alaska, Canada, Greenland, Norway and Russia. These oil and gas fields won't be easy to access and develop. Their peak productive potential of 3 million barrels per day or so makes them important potential contributors to global oil supply, but hardly large enough to impede the looming dominance of OPEC. And if the best conventional oil and gas projects to which the Supermajors have access in the arctic and ultra-deepwater are expensive to find, expensive to develop, and expensive to transport, then it will make the massive unconventional hydrocarbon resources locked in oil sands and oil shale more attractive. We're already seeing this in the oil sands boom in Canada.

I'm sure there will be a lot more commentary on this report in the weeks and months ahead, but it tends to confirm something that Chevron's CEO has been saying for a while: the era of cheap oil is ending. The technical challenges of extracting the remaining oil in the parts of the world to which access is relatively open will make that oil more expensive to produce than the sources we've relied on for the last century. In combination with higher demand in more countries, as a result of globalization, this will put increasing pressure on oil, and create increasing incentives to find practical alternatives. However, it doesn't rule out occasional periods of lower prices, as economic cycles and lumpy supply additions interact unpredictably to produce price dips such as the one we're experiencing now.