M. King Hubbert at Shell Oil predicted in 1956 that US oil production would peak around 1965-1970 and then irreversibly decline.
His idea was not well received, and, for most Main Street Americans, not on their radar screens. In the midst of the great post-wars (WWII, Korean War) economic boom the average US Joe and Jane were more concerned about working their way into and beyond the middle class than they were about potential declines in domestic oil production.
Slowly, however, world events forced America to realize that in many ways their well-being at home was tied to events in far-flung corners of the world. Place names like Suez, Tehran, Dien Bien Phu, Cuba, Libya began to etch themselves into the American consciousness.
And as the post war years unfolded, there was PLENTY to pay attention to–and it all was felt at filling stations from Wabash to Winnemucca.
In this day and age of massive US unconventional resource play exploitation, is Hubbert still right?
Ultimately, yes. Oil is a finite resource (at least non-synfuel oil). We extract it much faster than Mother Nature replenishes it, so it’s absolutely true that our oil production will inevitably, irreversibly decline. Someday.
This is the great, fundamental geopolitical question. Modern economies run on energy, and the more energy an economy has available to it, the richer it is.
So let’s look at simple demand and supply projections, with the caveat that there is a LOT of divergence in the available demand/supply forecasts.
To illustrate this point we’ll look at two different production forecasts.
The first is IEA’s.
Their 2012 numbers imply production in 2030 of about 103 MMBOPD and look to rely heavily on ExxonMobil and BP forecasts as shown in the following chart.
So let’s use a figure of roughly 105 MMBOPD.
What about demand?
The graph below would imply demand in 2030 of about 120 MMBOPD, or a deficit in worldwide supply of about 13 MMBOPD (Exxon)- 17 MMBOPD (BP)- or, if the ASPO forecast is correct, near parity between demand and production:
If BP/Exxon Mobil are right, this calculates out to an increased production volume requirement of about 4.7 BBO/yr in 2030 and, if summed over all years from now to 2030, our world would need to produce about 701,000,000,000 barrels of oil to meet this demand.
That’s a lot of liquid. How are we going to find it?
Given all the press about US unconventional success it’s marginally tempting to say “We’ll get it from the Eagle Ford/Bakken/Utica/Permian and NGLs from plays like the Haynesville. And what we don’t get from the US, international developments in unconventional plays like the Vaca Muerte in Argentina or the Domanik shale in Russia will most likely help tote the load”.
Not so fast, Bubba.
DI Analytics forecasts the Eagle Ford and Bakken plays to produce approximately 20 billion BBLS through 2030, about 3% of forecasted demand .
Embedded in the story of the promise of unconventionals is what I will call A Tale of Two Models (thanks Dickens).
The conditions in the American oil patch are vitally different than they are in the rest of the world.
- We are politically stable with a sound rule of law.
- We have massive infrastructure to support the movement of labor and materials to where they can be best employed.
- Our mineral ownership rights, by and large, are held by individuals (4MM + royalty owners in the US). And most of these folks are signing leases with 3 year terms.
- This means that access to drilling rights is widespread and dynamic, with the result that thousands of oil and gas operators can apply different exploration and development methods in the search for acceptable ROI. And this means tens of thousands of experiments (after all, drilling a well is an experiment) that rapidly define best opportunities and best practices.
Contrast this to the international sphere.
- Nation states control mineral exploration rights, usually awarding large tracts of acreage to relatively few companies on generous (10 year) exploration licenses.
- The number of experiments (wells drilled) is a fraction of what we drill in the US. Best practices that will be defined in the US within a couple of years will take much longer to manifest themselves in the international arena.
- Unconventional exploration and development requires lots of intellectual and monetary capital. According to the IEA all E&P costs have doubled since 2000, even as the share of conventional oil production peaked in 2005.
Given that, it’s a no-brainer to assert that a lot of money has gone into US unconventionals, with total dollars flowing into unconventional exploration nearly 3X in 2014 what it was in 2009.
International spending on unconventional exploration and development has ramped up in a more modest way, with 2014 International CAPEX for unconventional work increasing from about 10 BN US in 2009 to about 30 BN US in 2014.
And since E&P has got to have a positive ROI, price considerations are absolutely vital.
According to Goldman Sachs, most of the operators in the well-known US unconventional plays need prices to stay at or above $100/bbl just in order to be cash flow neutral (given current CAPEX and dividend obligations).
With December 2013 wellhead prices between $80-100/BBL [as found on Drilling Info’s Market View search option, map below, Eagle Ford production bubbled by wellhead price] you could conclude that margins could be getting thin.
So where does this leave us?
Improved efficiencies from savvy benchmarking and business intelligence practices can cut operating costs to some extent. Mergers and JVs can deliver economies of scale.
Absolutely essential?: Operators that control large blocks of either yet-to-be drilled or HBP’d unconventional acreage need to be open to farm-ins by multiple parties. Otherwise the discovery and exploitation of “conventional” targets that can materially uplift our national production profile will be greatly delayed. An important side benefit of this approach would be to reduce some of “drill-to-hold” pressures that operators face.
Maybe, just maybe, demographics can tell us something. Specifically, since 75% of a barrel of oil is used for gasoline, diesel, or heating oil, changes in transportation demand behaviors will have a big impact on our oil needs.
Vehicle ownership in the US is declining. Fewer teens in the US are getting driver’s licenses, and estimated mileage driven per year is dropping.
Use of mass transit is increasing, Ford is now marketing F-150s that use CNG, and Tesla continues to slowly grab market share from the Big Three. As the US population ages there will ultimately be fewer and fewer people on the road. As more and more people migrate to large urban centers per capita energy needs diminish.
Developing nation economies may take different paths to economic vitality than the old “chopsticks to smokestacks” meme that the First World wants assume about the developing world. Nation after nation has bypassed copper phone lines in favor of much more efficient cell telecommunications. Brazil presciently identified biofuel resources in its sugar cane fields and now powers a large number of its vehicles on sugar cane ethanol.
Peak Oil 2014
At the end of the day we have to be mindful of and prepare for the days in which the world’s energy demands can no longer rely on produced oil to meet our needs.
Although currently drilled and forecasted US unconventional production can account for only a fraction of world oil needs, changes in international licensing laws and practices can accelerate the unlocking of prolific shale reserves. And maybe, just maybe, demographic trends in oil usage and “smart” economic growth in developing countries will carry us into to a future that doesn’t worry about oil.
What do you think? How much can efficiency both in E&P and consumer consumption drive the longevity of oil resources? Why do you think forecasts are so wildly divergent? Leave a comment below.
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