Peak Oil News: 11/01/2007 - 12/01/2007

Thursday, November 29, 2007

The Peak Oil Crisis: Revolt Of The Teapots

Falls Church News-Press

By Tom Whipple

In China, small privately or locally owned oil refineries are called “teapots.” Unlike the giant ones that refine hundreds of thousands of barrels each day, these little fellows typically process about 10,000, but taken together, they produce some 10-15 percent of China’s refined products. Reduce the teapots’ production and you have a problem.

In the last 25 years, China has come a long ways from its old soviet-style command economy to a rather bizarre mixture of traditional Communist centralism and free-wheeling capitalism. This bifurcated system has brought China undreamed of economic success in recent decades, but from time to time, problems turn up. Someday, the unprecedented environmental mess they are busily creating will do them in, but currently Beijing’s major concern is a nationwide fuel shortage. In other times, Chinese waiting in gas lines would be of minimal concern to most Americans so long as enough stuff was still getting through to the WalMart.

These are not “other times,” however, and shortages in China may be only weeks or months away from becoming shortages in other places— perhaps even at your favorite gas station. Thus it may be more important than you realize to keep track of gas lines in China for we are living in a globalized world.

The problem starts with China’s soaring economic growth, recently on the order of 11 percent a year. This, of course, leads to a large increase in the demand for petroleum and since China’s oilfields will no longer provide large increases in output, steadily increasing imports.

In recent months China’s impressive economic growth has been accompanied by some impressive inflation which reached an 11-year high of 6.5 percent in August and again in October. Beijing, which apparently has not yet discovered “core inflation,” allowing it to remove food and fuel from the index, is becoming worried. Not worried enough to clamp down on growth, which most in China seem to agree is the overriding national priority, but worried enough to put a ceiling on gasoline prices. That is where the current trouble started. As the world price of crude oil rose and rose, independent Chinese refiners, the teapots, lost more and more money.

For the teapots, the solution was to switch their production mix away from price-capped gasoline and diesel to non-regulated products such as petroleum coke or simply to suspend refining until the situation changed. They didn’t have to wait long to bring the mighty Chinese economy to its knees.

Prior to the shortages, it seems to have been Beijing’s policy to deny crude to the small refiners in order to force them out of business. To keep going, the teapots were importing crude oil from as far away as Venezuela and were using heavy fuel oil as the feedstock for their refineries in place of crude.

As world crude prices went higher and higher, production started to slip so that by October the situation was critical. Spot shortages broke out along the coast and imports of fuel oil for the teapot refiners dropped 29 percent. Total Chinese oil demand in October was only 2.4 percent higher than a year earlier – not much of an increase by Chinese standards. Of most concern to Beijing was the inability of all those trucks hauling exports to the coast to keep rolling.

The government sprang into action and, throwing inflationary concerns to the wind, authorized a 10 percent increase in diesel and gasoline prices. As some 80 to 85 percent of China’s oil industry is controlled by two giant state-owned oil companies, they were ordered to fix the problem.

Maintenance was cancelled and the large refineries were ordered to all-out production. Diesel imports which had been averaging 370,000 barrels a month for the first nine months of 2007 were increased to 750,000 barrels a month. The political heat must be unusually intense for the state-owned oil companies are posting reports on the progress they are making and spokesmen are making frequent announcements that all will be well soon.

By spring we should know how all this works out. As we in America should know by now, delaying refinery maintenance will come back to bite. Whether a 10 percent increase in retail prices will be enough to slow consumption and encourage increased production remains to be seen.

What should be troublesome to Americans is that during September and October, when Chinese imports were at their lowest, world prices took a rather spectacular jump. Now that China seems to be back in the world market with a vengeance, supply and demand can only get tighter still. But maybe OPEC will come to our aid. The Saudis say their production is back up to 9 million b/d. The Iraqis seem to have found the right people to bribe so that their northern export pipeline has remained operational for several months without being blown up. This alone has added 250,000 barrels a day to world supplies.

Unless a major recession that seriously slows Chinese economic growth starts soon, Chinese demand is going to keep growing and Beijing certainly has the money to pay any price. The last few months suggests that Beijing is running into an available oil ceiling that is not going away. Efforts to increase efficiency may be a great idea, but in practice, they take years to make a difference.

Even if the Chinese succeed in eliminating the current shortages, the success is likely to be temporary. A few months ago, China started importing refined gasoline for the first time. Although they have started to build new refineries, these take many years to complete and if current trends continue, in a few years, the Chinese will be selling themselves 10 million new cars a year.

Someday soon we in America will be facing shortages, gas lines, and rationing.

The chances are the revolt of the teapots is a harbinger of things to come.

Monday, November 26, 2007

Peak Possibilities

By Justin Fox

In July 2006, the world's oil rigs pumped out crude at a rate of nearly 85.5 million bbl. a day. They haven't come close since, even as prices have risen from $75 to $98 per bbl. Which raises a question of potentially epochal significance: Is it all downhill from here?

It's not as if nobody predicted this. The true believers in what's called peak oil--a motley crew of survivalists, despisers of capitalism, a few billionaire investors and a lot of perfectly respectable geologists--have long cited the middle to end of this decade as a likely turning point.

In the oil industry and the government agencies that work with it, such talk is usually dismissed as premature. There have been temporary drops in oil production before, after all--albeit usually during global economic slowdowns, not boom times. In most official scenarios, production will soon begin rising again, peaking at more than 110 million bbl. a day around 2030.

That's alarming enough in itself. Even the optimists think we have less than three decades to go? But at industry conferences this fall, the word from producers was far gloomier. The chief executives of ConocoPhillips and French oil giant Total both declared that they can't see oil production ever topping 100 million bbl. a day. The head of the oil importers' club that is the International Energy Agency warned that "new capacity additions will not keep up with declines at current fields and the projected increase in demand."

This isn't quite the same as saying that oil production has peaked and is about to start declining sharply--the view of the true peakists. In "peak lite," as some call it, the big issues are not so much geological as political, technical, financial and even human-resource-related (the world apparently suffers from a dearth of qualified petroleum engineers). These factors all delay the arrival of oil on the market, meaning that production would not so much peak as plateau. But with demand rising sharply, especially from China and India, even a plateau could be precarious.

It's not that the world is running out of oil. There are massive reserves available in Canadian tar sands, Colorado shale, Venezuelan heavy oil and other unconventional deposits. The problem is that most of this oil is hard to extract and even harder to refine, and it isn't likely to account for a significant share of global production anytime soon. Almost everybody agrees that the pumping of conventionally sourced oil outside the Organization of Petroleum Exporting Countries (OPEC) has already peaked or will peak soon, a reality that even discoveries like the recent 8 billion-bbl. find off the coast of Brazil can't alter because production from so many existing fields is declining.

The big question mark is OPEC, which represents the oil powers of the Middle East and a few other big exporters and currently accounts for 41% of world oil production. Every optimistic scenario assumes that this share will rise dramatically in the coming decades. That is, if things turn out well, the U.S. will become substantially more dependent on Saudi Arabia and its neighbors. Great!

Then there's the gloomy view. In his 2005 book Twilight in the Desert, energy-industry investment banker Matt Simmons opened up a still raging debate over whether Saudi Arabia, OPEC's top producer, really can pump much more oil than it does now. Since the book appeared, Saudi output has dropped from 9.6 million bbl. a day to 8.6 million, despite rising prices.

Saudi officials used the occasion of an OPEC summit in Riyadh in mid-November to say they could up production at any time. But that raises the pesky question of why they don't. So far, the answer from OPEC leaders has been that high prices are the fault of speculators and the falling dollar, not low production. They're not just blowing smoke. Lynn Westfall, chief economist of refiner Tesoro Corp., says there's more than enough oil for sale right now. The price pressure, he explains, "is coming from financial participants in futures markets."

If OPEC's members are not able to boost production in coming years, though, it will be impossible to keep blaming the traders as prices rise. What happens then? "If we had better data, we could hold a global summit and say, 'Gentlemen, it's nobody's fault, but we've peaked,'" says Simmons. "We've got to embrace some conservation practices that are draconian, or we will be at war with each other."

Among the peakists, war and economic breakdown are favorite themes. They figure that cheap oil is the essential fuel of modern capitalism, which will founder without it. A more hopeful take is that innovation is the essential fuel of modern capitalism and that high oil prices will drive rapid advances in conservation and alternative energy. Either way, the beginning of the end of the oil era may be upon us, well ahead of schedule.

Sunday, November 25, 2007

The Peak Oil Theory

EnerPub - Energy Publisher

The peak oil theory has a harmful impact because it focuses on the wrong problem and in doing so it shifts attention away from more vital issues, writes Robert Mabro.

By Robert Mabro

A statement of the type ‘All men are mortal; Socrates is a man; therefore Socrates is mortal’ does not constitute a prediction but the deduction of a self-evident truth.To say that an exhaustible resource will be exhausted is not a prediction but, under certain conditions, a tautology. The only qualification is that an exhaustible resource will not be exhausted if, for some reason, production ceases while reserves are still available.

The statement that the production of crude oil, an exhaustible resource, will reach a peak will not be entirely a tautology if it also told us something about the production pattern over time; something that is not necessarily implied in the exhaustibility concept. The peak story tells us, indeed, that after rising over years, decades or centuries, production will enter a phase of decline. The peak could take different shapes however. It could appear as the apex of an acute angle, or stretch out over a long period in the form of a plateau, or emerge more than once in the shape of a saddle or as a chain of dunes.

In short, it is not sufficient to say that an exhaustible resource will be eventually exhausted and that its production will decline until extinction after reaching a peak. These are not predictions. Such statements are of no interest whatsoever unless we are told the dates at which the peak will be reached, and the likely shape of the production curve before and after the peak.

Socrates knows that he is a man and as such a mortal being. What he would like to know is when exactly he will die and in which manner.

The authors and promoters of the peak oil theory clearly understand that a prediction must relate to the date at which the relevant event – the production peak – will occur. They did indeed stick their necks out and told us once that the peak will be reached in the late 1980s, then in 2000, then in 2005. They proved to be wrong on all occasions. World oil production is still rising year after year.

One major reason for their propensity to bring forward the dreaded event seems to be an eschatological inclination. Consciously or sub-consciously they are inclined to predict the end of a world economy that was fuelled by cheap oil over several decades. They also want to catch the headlines. For these reasons they need to predict an early peak. To tell us, for example, that oil production will peak in 2030 and oil resources be fully exhausted by 2080 would have little impact. The prediction has to be about an imminent event.

I do not know when the oil production will be reached. I accept as evident that unless world oil demand collapses in a significant way a peak of some shape will inevitably obtain. We need to examine the methodologies underlying current predictions about the imminent peak in order to assess their plausibility.

The first set of methodological problems relates to the definition of four relevant concepts: crude oil, production, reserves and resources.

One may think that the term ‘crude oil’ is defined with great precision. It is not. The reason is that the substance referred to as ‘crude oil’ occurs under a wide variety of physical, chemical and geological circumstances. Thus the physical nature of that substance varies along a continuum from very viscous (e.g. bitumen) to liquid, to condensates (gases that are liquid such as dew at certain temperatures). But where are the border lines between viscous and liquid, viscous and solid, liquid and gas? These questions are subject of much disagreement and controversies. The issue is important because the world holds huge reserves of tar sands, especially in Canada, and in the Orinoco belt bitumen in Venezuela. These are usually referred to as ‘unconventional oil’. Several peak oil theorists base their analysis on conventional oil (liquid and condensates) only. Yet unconventional oil is being currently produced albeit in small quantities. These volumes will undoubtedly rise over time in response to an eventual tightening of conventional oil supplies.

This takes us to the reserve/resources concepts. Production is a function of extant reserves among many other factors. It is thus important to have an idea about the volume of remaining reserves. Estimates of proven reserves by country or region are available in a number of publications such as the Oil and Gas Journal, the BP Statistical Review of World Energy, etc. These data cannot be relied upon however. The reasons are many. First, the criteria used to estimate proven reserves specify that they must be recoverable under ‘current operational and economic conditions’. These criteria are ambiguous and require judgements about which reasonable people may reasonably differ. Do operational or technical conditions refer to the technology actually used in the oilfield that holds the reserves or to the best technology currently available in the world? Economic conditions include prices, costs and taxes. Prices are volatile however; costs and taxes change over time for a variety of reasons. Did proven reserve estimates made in 1998 assume that oil prices will hold at around $12 a barrel; and are current estimates made on the assumption of a $30, or $45 or $60 oil price?

Secondly, proven reserves estimates may be understated by oil companies that are negotiating production agreement with a host country, or overstated in discourses addressed to equity analysts or fund managers. OPEC countries may have overstated their reserves estimates in the 1980s when they engaged in major revisions in the context of intra-OPEC negotiations over production quotas.

Thirdly, some countries specify the criteria that should be used in estimating proven reserves. The US criteria are particularly stringent leading to understatements by companies that report to the US regulatory authorities.

Finally, proven reserves are not the same thing as remaining recoverable reserves. The latter is the relevant concept for determining the likely points of peak production and ultimate exhaustion.

Remaining recoverable reserves involve besides the proven concept that of probable and possible reserves. They also involve views about recovery rates. Put differently the remaining reserves consist of what is left of the oil already discovered plus as yet undiscovered oil. Different degrees of probabilities are attached to the undiscovered reserves; hence the distinction between probable and possible. There is a greater probability to find the ‘probable’ than the ‘possible’ reserves.

A deterministic approach to the estimate of remaining reserves will equate them to the difference between ultimate reserves (discovered plus undiscovered) and cumulative production. One need, however, an independent estimate of undiscovered reserves to avoid circularity since ultimate reserves includes undiscovered, and undiscovered is the difference between ultimate and discovered reserves.

A probabilistic approach is to be preferred for the simple reason that much uncertainty is attached to undiscovered reserves.

Without going much further one can already see that assumptions and judgements, all subject to difference of views and debate, are involved at every stage of the exercises that lead to estimates of how much oil still remains in the ground, and of when peak production may be reached. In assessing the work and results of the proponents of the peak oil theory (by which I mean those who are predicting an imminent production peak) the following initial questions should be asked.

First, is the crude oil concept used the narrow one (liquids plus condensates) or the broader definition that includes tar sands and bituminous deposits?

Secondly, is the phenomenon of ‘reserve growth’ taken into account in the estimates of proven and remaining reserves? The initial assessment of a field reserves grossly underestimates the volumes available. As production proceeds knowledge about the amounts of oil held by the field improves, and in many cases the new information thus obtained reveals that the reserves are larger than initially thought.

Thirdly, as proven reserves are estimated on the basis of what can be produced under current operational/technical and economic conditions the potential is understated if long run changes in oil prices and technology are not taken into account. Oil prices are bound to rise with costs as production shifts from big, well-behaved fields to smaller and often more difficult formations. The question is whether the net price (that is price minus costs) will then rise or fall. In my judgement the net price will tend to increase in many instances. This provides an incentive to adopt technologies leading to rises in the recovery rate. Technical progress is a critical factor. The techniques used in exploration and oil production are being continually developed. And the remarkable progress already achieved will undoubtedly be followed by further progress. Where adopted, these new technologies improve both the rate of discoveries and the recovery rate from discovered fields.

A failure to allow for the effects of technology on the recovery rate results in a significant understatement of the volumes that can be ultimately produced. To illustrate the point: an increase in the recovery rate from the historical 25-30 per cent to 50-55 per cent that recent technology enables is equivalent to a 66-100 per cent increase in reserves from existing oil provinces even if no new discoveries are made.

The authors of the peak oil theory ignore one or several of the points made here above. This results in predictions of a more imminent production peak and an earlier exhaustion than will actually happen.

Nevertheless the peak oil theorists are right on two issues: the significant decline in discoveries which peaked as long ago as in 1961 and the recent failure of discoveries to replace the full amount of oil produced. This tells us that oil is being depleted and that exhaustibility is a real issue. It does not answer, however, the when question.

Yet time is of the essence.

Exhaustibility is not a problem if there is time available to develop substitutes, and for technological progress to proceed further and delay the peak outcome. There is no doubt that the adjustments to scarcer and scarcer (which means more and more expensive) oil will occur. The critical question, once again, is ‘when?’ Once again one should emphasise that time is of the essence. The gestation lags of R&D and energy investments are long, sometime very long indeed. And investors – be it private companies or public sector entities – are increasingly slow in their responses because the future is always perceived as uncertain.

The peak oil theory, as defined above, has a harmful impact because it focuses on the wrong problem and in doing so it shifts attention away from more vital issues.

Oil is of critical importance for the transport sector given the current technology of car, truck, plane and ship engines. But what matters is not oil as such but a liquid fuel. Alcohol, esters, vegetable oils are liquids which are indeed used to fuel motor engines. And there are technologies which yield petroleum products from natural gas (GTL) and coal (CTL). And the reserves of unconventional oil in Canada and Venezuela in particular are immense.

There is no ‘physical’ problem in the long run. There are, however, investment problems on the transition path from the oil to the ‘other liquids’ era. The ride is likely to be bumpy. And what we need to worry about now, and seek solutions to, are the investment and technical progress issues. Governments of OECD countries and private energy companies are not yet addressing these problems, worrying instead about the imminence of peak oil (a falsely alarming issue) for the security of energy supplies (a grossly misunderstood concept) and climate change (the most important about which the most significant polluters are unwilling to tackle.)

Re-focusing the debate away from the peak oil paranoia and towards the need to invest in the production of liquid fuels at the right time will put us on the road to a solution.

$100 oil: the terrible truth

The Guardian

Nearing the price barrier is a pointer to the peak of output, and the crisis the powerful want to ignore

By David Strahan

As the price of crude oil sets records almost daily, the British government remains stunningly complacent. With the $100 barrel a real and constant threat, the prime minister's website blithely proclaims "the world's oil and gas resources are sufficient to sustain economic growth for the foreseeable future". Officials refuse to define what is meant by "foreseeable", but it is clear they suffer from extreme myopia, or worse.

All the evidence suggests we are rapidly approaching "peak oil", the point when global production goes into terminal decline for geological reasons. The industry consensus is that world output, excluding that from the Opec producers, will peak in about 2010. It is also widely agreed that Opec has grossly exaggerated the size of its reserves, meaning that global output must also peak soon. Since oil provides 95% of all transport energy, as well as vital inputs to modern agriculture, this is likely to provoke a crisis.

Oil executives have traditionally avoided talk of geological constraints - no doubt mindful of the value of their share options - but now even they admit the industry is in difficulty. A growing number believe output will never exceed 100m barrels per day, compared with 86m today. At present rates of growth, demand will hit that ceiling within about a decade.

The UK position relies on the International Energy Agency, which forecasts oil production rising to 116m barrels per day in 2030. But the model that produces this forecast relies in turn on an estimate of the total oil available published by the US Geological Survey, which is demonstrably wildly overoptimistic.

For the US survey numbers to come true, the world would have to discover 22bn barrels of oil a year between 1995 and 2025. So far we have discovered just 9bn per year, only 40% of the predicted amount. Since oil discovery has been falling steadily since 1965, this deficit is only likely to widen. Even if we assume annual discoveries stick at the current level for the next 20 years, the survey resource estimate is still 500bn barrels too high: the survey numbers imply an oil production peak in 2017-21.

The US survey estimate has long been criticised as inflated, but now even the optimistic IEA is having doubts. The agency is to reappraise its reliance on the survey figures for its long-term production forecast next year. It is difficult to see how it can do this without a huge downward revision of its forecast. Britain's official position is therefore built not only on sand, but the sand of an hourglass that is fast running out.

In fact, peak oil may have arrived already. Production of crude is lower now than in February 2005, while total liquid fuel production, including marginal sources such as biofuels, is lower than in July 2006. Even if it's not peak oil as such, production is struggling. Meanwhile demand continues to surge; the soaring price sends a clear message.

Tony Blair wrote in last year's energy review that it was a principal duty of government to secure energy supply. He was right. Gordon Brown must now abandon the reliance on IEA forecasts, institute a truly independent assessment of global oil depletion and launch a massive programme of mitigation. Anything less would be dereliction.

But of course he won't. Even more than climate change, peak oil demands that governments confront voters with uncomfortable truths that will affect living standards. In Whitehall, legs will remain crossed and buttocks clenched as politicians and officials pray to God that it doesn't happen in their term of office, or before they draw their inflation-linked pension.

David Strahan is the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man