Peak Oil News: �Peak Oil� Perplexities Test the Nerves of Major Oil Companies

Wednesday, March 01, 2006

�Peak Oil� Perplexities Test the Nerves of Major Oil Companies

Resource Investor

By Adam Porter

‘Peak oil’ has well and truly grabbed the oil agenda if latest figures and pronouncements are anything to go by. Whether major oil companies, state or private, like it or not, peak oil cannot be ignored. The subject, ridiculed just three years ago, now sits centre stage.

When Lord Browne, head of BP [NYSE:BP; LSE:BP], spoke to a dinner at the Energy Institute in London, he was forced to confront the theory head on.

“We’re at a point of great change in this industry,” said Lord Browne. “Demand is growing, but we have to meet that demand in different ways from different sources.

It is impossible to predict the future, except to say that it won’t look like the past.”

One thing that may not look like the past is the way major oil companies replace their reserves. Or rather do not replace their reserves.

Only Exxon Mobil [NYSE:XOM] and Conoco Phillips [NYSE:COP] managed to replace their reserves without buying out other companies or fields in 2005. Even BP appear to have failed to replace their oil pumped last year, although final figures are not yet out.

Other companies like Chevron [NYSE:CVX] came in at 175% of reserve replacement. A stunning figure until you realise that Chevron bought Unocal. If it was not for the controversial buy out they would have failed to get anywhere near 100% of reserve replacement, closer to 80% was more likely.

The same can be said of companies like Amerada Hess [NYSE:AHC] and Marathon [NYSE:MRO], whose return to Libya boosted their reserve replacement over the 100% mark. The same cannot be said of a company like Repsol [NYSE:REP]. It is rumoured that the downgrade of their reserves by 25% in January might be added to when they produce final figures for 2005 expected in March - possibly by another 2.5%.

As Resource Investor has reported, there are some unusual figures concerning OPEC production as well. According to latest figures from the Middle East Economic Survey (MEES). Iran’s OPEC quota is 4.1 million barrels per day (mbpd). After producing 3.89 mbpd in December the MEES figures for January saw that production at 3.65 mbpd.

Both Platts and MEES have now reported declining OPEC production for the last three months. The production figures were 29.73 mb in December, declining to 29.27 mb in January.

Of course this does not mean peak oil theory is correct. It could easily be that OPEC countries see the market well supplied in terms of inventories. US NYMEX crude inventories are some 26% up on this time last year at 22.4 mb for example. This would allow some countries to rest tiring fields or individual wells that have been running at full tilt since last summer.

On the other hand the opacity of OPEC supply and reserve figures mean these statistics will be instantly seized upon. That very opacity is now being openly challenged by men like Lord Browne.

“The reality is that we have a serious problem,” admitted Browne.

“Unless the geologists succeed in finding new and so far unidentified provinces…we will all be dependent on supplies from just three areas – West Africa, Russia and, most important of all, the five states around the Persian Gulf, led by Iran, Iraq and Saudi Arabia.

“The resources on which we are going to rely are closed to investment by any private company. The decisions on investment and production are controlled by Governments…which may not always be aligned with the interests of international consumers.

“I believe it is natural for individuals and governments to distrust such dependence, and in recent weeks we have seen that distrust expressed in many different ways…I believe the response to that distrust is the next great challenge facing the industry,” Browne said.

So Browne is arguing for those countries to be opened up to major oil companies. This, he says is not a product of ‘peak oil’ but instead about demand growth. He used the speech to make his strongest attack yet on the subject, one he calls “a myth.”

“[Peak oil] is a myth you will find reinforced in most newspapers every day… [that oil and gas are running out, and that we are walking towards the edge of the cliff.] I went into one bookshop here in London and found that there was a special display of 14 different books published over the last year with titles such as ‘The End of Oil’ and ‘Twilight in the Desert.’ The idea that oil is running out is simply untrue. There is no physical shortage of oil or gas. The reality is that the physical resource base is strong, and the amount which we can recover from that base is being expanded by technology all the time,” he said.

However this pronouncement by Browne does not seem to tally with latest reported figures. New technology is not increasing reserves every year for the major oil companies.

So is it peak oil, or is it a combination of sudden demand growth and an industry time lag? What side of the agenda are you on?


At 3:43 AM, March 02, 2006, Anonymous KenOath said...

I'm wondering how anyone could choose which side to be on when the facts of peak oil are not clear?

At 7:20 AM, March 02, 2006, Anonymous Anonymous said...

The only "fact" about peak oil that is not clear is when. Otherwise, suggesting that peak oil is a myth is somewhat akin to calling gravity a myth. You can disbelieve all you like, but if you jump out that window, your going to hit ground before to long.

At 1:56 PM, March 02, 2006, Anonymous KenOath said...

It's like saying peak sunshine is a reality not a myth. We may in fact be going through the plateau period of peak sunshine with the final day of reckoning some billions of years into the future.

There is still some debate as to the "when" of peak oil.

Look, I don't disagree with very close approach of peak oil (if not already passed), but I cannot demonstrate it beyond reasonable doubt. And I hate religious belief systems - so what does one do?

(What about peak universe?)

At 3:59 PM, March 02, 2006, Anonymous Anonymous said...

From the many sources which I have read I feel confident that the effects of peak oil will be felt some time in the next five to six years. This is not something I rigidly believe as such but at least that gives me a rough handle on this worrying issue.
However, in saying that, I have to be quick to add that it is not the when or even the why of peak oil that is really the contentious issue. What is more under question are the effects. Will it lead quickly to worldwide economic crash as a commentator like Jeremy Leggett has hypothesised? Or will it merely lead to a time of mild recession which is quickly overcome? It's easy of course to take the middle ground and say somewhere between the two but I don't think there is any sure way of knowing. Previous oil shocks have caused economic dislocation and it seems sensible to assume this will too. Economic commentators have suggested that the economy is less dependent on energy, citing GDP to energy use ratios which have improved markedly over the last few decades.
I don't really buy into that argument myself because even though society may have become more efficient at producing profits it doesn't negate the effects of severe energy cuts. An example of this is a small taxi company who replace their one gasoline taxi with two hybrids. In effect they double their profits while using the same amount of energy. Yet if the price of that energy increases significantly, while the cost is 'shared' between both taxis there is still a significant hit on profits. In fact because they have now structure their company around having two taxis on the road their dependence on affordable energy costs is actually just as high as when they had one taxi.

At 8:29 PM, April 12, 2006, Blogger Online Trading said...

I would think oil companies would love the current environment. Everyone knows oil won't last a great deal longer, and attempted to find a replacement. If oil production has peaked it is because demand has continued to grow not that a replacement was found. I think the oil companies are extremely lucky that oil is still such a necessity. On top of this oil demand may continue to grow in the long term, especially when you look at counties like China, with it's huge population developing it's oil use could easily skyrocket in the next decade. It will also be interesting to see if Exxon(XOM), Conoco(COP), (BP), Marathon(RMO), etc... will exploit Iraq.

At 5:28 AM, April 25, 2006, Anonymous Dr T explorer said...

It is not just reserves but rate that is important. The new reserves that are being booked either produce at a lower rate or have high decline rates. Thus I believe that while the reserves may be there the rates at which the reserves can be produced are going to decrease.


Post a Comment

<< Home