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Alexander Khurshudov: there is no need to worry about the peak of oil

Alexander Khurshudov,expert Oil and Gas Information Agency
February 13/ 13:07

Moscow. It’s been 70 years since the American geophysicist Marion King Hubbert expressed a shocking idea that the oil on the planet may run out. He forecasted the peak of oil in the US to occur in 1965-70 and it happened almost as predicted. He also predicted a global peak in production to happen in 2000, but this forecast failed. No wonder, because huge changes have happened in the years that passed. 

Offshore drilling appeared, first in shallow waters around the coast then in deep waters. Geologists started using satellite images. Drilling horizontal wells and hydraulic fracturing have become widely spread. The development in computer technology has enabled to simulate reservoirs. There have been a dozen of smaller developments in science and technology.

In general I try to ignore long-term, 40-50 year ahead forecasts. They are made to scare people. I’ve never seen a fortunate long-term forecast. We are left with the choice of overpopulation of the planet, a shortage of energy and a worldwide flood caused by the global warming. It is important to consider the motives of the authors writing the forecasts. Some of them scare us for the fun of it, but the majority tries to raise some cash.    

However, the coming shortage of oil and energy in general is often written and argued about. Most authors doubt the soon peak; here, for example, one can see a lot of different reasoning. I decided not to stay away from the hot topic. Besides, there are real trends in oil production and consumption, which need to be studied because they are unlikely to change in the nearest 10-15 years. So, let’s think about them. As usual I’d like to remark that I’m writing for the general audience. I’m asking professionals not to blame me if something seems obvious to them.             

  1. Global energy consumption

In the times bygone firewood was the main source of energy for people. We still burn it for fire, but the share of wood in the global energy consumption has become tiny. And not because all the logs have been burnt and the forests have been cut out. It’s just that people found new, more efficient ways to get energy. 

So, before we go deeper into the oil issues, let’s go through the main sources of energy. Picture 1 shows the dynamics of the global energy consumption.   

  

Pic.1

The chart shows that the consumption of all energy types is growing steadily, even though there are local minimums. Let’s see what causes them.

The first sharp decline in the oil consumption took place in 1970-80s. First, in 1973 the Arabian countries initiated an oil embargo and stopped selling oil to the US and Europe. Then in 1979 the Islamic revolution escalated the conflict between the US and Iran. The oil price in New York and London doubled, causing the reduction in the consumption in the Western countries by 19% and globally by 10.6%.   

The consumption of coal in the EU reached its maximum in 1989 and has been reducing since then. The reason here is not the increase in prices but environmental concerns. It was then that Europe got really worried about atmosphere pollution and started to switch from coal to gas. The increase in coal consumption during the recent three decades is due to the developing countries, first of all China.

The dynamics in nuclear energy consumption is curious. It was growing fast until 1986, when the Chernobyl accident happened. Then the growth slowed down. Since 2006 the consumption of nuclear energy has been declining. The 2011 Fukusima-1 accident made the situation even worse.

In 2009 the demand for oil, coal and gas declined simultaneously. The reason was the economic crisis: the decreased manufacturing didn’t need additional energy. Though, as soon as the crisis was over the demand quickly got back to its usual growth.     

Let’s briefly touch upon oil consumption in different countries (table 1).

Table 1

Canadians consume the most, the US citizens are slightly behind, combined the North America consumes 4.4 times more oil per person that the other world’s countries. 

Australia and Japan are also among the leaders; the later having no oil of its own has reduced the consumption by a third in the last decade. The European Union is doing the same thing: during 2006-2014 oil refining decreased by 18.7% from 727 to 591 mln t/year. Only recently after the sharp decline in the oil price, oil consumption in the EU increased.   

Commentators often claim that the global oil consumption is stable and almost independent of the price. This is not true. Here is a simple fact: with similar income levels in the US and the EU petrol in America is 2.2 times cheaper, and an average European uses almost 2 times less petrol.   

China is rapidly increasing its use of oil, having increased it by 3.3 times in the last 20 years. Nevertheless an average Chinese uses 2.85 times less petrol than an average European. Other poorer countries lag even further behind: Indonesia 4.5 times, India 7.5 times, Pakistan 9.2 times, Bangladesh 30 times.  It’s clear that the Golden Billion will reduce the consumption with the price increase, but India won’t ride buffaloes forever and will eventually switch to cars or at least motorbikes.  

The share of oil in the global energy consumption reaches 33%, followed by coal (28%) and gas (24%). These are all fossil fuels. The first conclusion to be made here is the following: oil is not firewood and in the nearest 15-20 years we won’t have a more efficient fuel. Now let’s find out if we have enough oil reserves. 

  1. Oil reserves is a loose concept

Note, all the oil in the subsurface is called original oil in place. The part of it which can be profitably produced with the current level of technology is called proved reserves. It’s understood that the amount of proved reserves depends on the oil price. As the price increases the previously uneconomic reserves may become profitable. 

Recently a new category of reserves called technically recoverable came from the West. They are kind of possible to extract from the subsurface though not with profit, but losses. This is a wonderful tool for brainwashing the broad audience. Proved reserves are based on many years’ experience, while technically recoverable ones – on fantasy. Let’s see how the EIA estimates technically recoverable reserves in shale formations. It is assumed that a well produces 85% of oil in the first 4 years of operation (it is not always so, but it will do at first approximation). It is believed that in the following 30 years it will somehow extract the remaining 15%. Nobody has ever checked that. And nobody will. Because otherwise they’d have to explain why in the Bakken, for instance, over 2 thousand wells have been suspended for a long time after producing for less than ten years.

I can say from my experience that a lot of oil companies produce oil at the last stage of field development even though with some losses. There can be several reasons for this. The price may have dropped but there is hope that it will rise soon. The losses may be compensated by operating other fields or by the downstream operations. Abandoning the field is also expensive, so it’s better be spread over a few years. There can be other reasons as well. Still, this charity may add another 1-2% of recoverable reserves, no more. So, further we shall focus on proved reserves only, and leave the “technically recoverable” ones and other fantasies to their authors.        

Table 2 indicates the changes in the proved reserves of oil, coal and natural gas during the last 10 years. The data is by BP, so I had to recalculate it to arrive at common measure units.  

Table 2

It appears that the reserves for all kind of fuel have grown. In the last 10 years the world produced 38 bln tons of oil and managed to add another 32 bln tons of proved reserves. The reader might think it’s due to exploration and would be wrong. Since in the US, for example 56% of the added reserves are due to reassessment, 30% due to extending previously discovered fields and only 14% account for new fields and formations. In 2015 in the US reserves from new fields amounted to as much as 2.74 mln tons, which is 0.5% of the annual production. In other countries the situation is similar, though exploration adds a little more, mainly because of the offshore.    

Reassessment of reserves is done when the prices change. Picture 2 shows the dynamics of global proved reserves compared to oil price.

Pic.2

The chart indicates 4 time periods. The first began in 1980 after the price of oil grew to $36 making offshore production profitable. The biggest deposits in the North Sea and offshore Africa, India, Brazil and the Caspian were discovered around that time. Exploration in the Gulf of Persia and Mexico continued. As a result, the global oil reserves increased 1.5 times or by 47 bln tons.    

The second period (1989-1998) was marked by the prices stagnation at $16-18. This slowed reserves increment 5 times (!!!). During the last 10 years they grew by just 11.2% (15.8 bln). 

During the third period (1999-2008) oil prices jumped from $18 to $97 for a barrel. By the middle of the period it became profitable to produce in deep waters, by its end to develop oil sands in Canada (27 bln t). On average the global oil reserves added 47.4 bln t (30.4%).

Finally, the fourth period (2009-2016) is associated with severe price fluctuations, though the average value of $83.6 for a barrel is significantly higher than that for the previous periods. Currently we are witnessing exploration in deep waters, where the price of an exploratory well reaches $120 mln and the production cost is as high as $50-70 for a barrel. The main reserves increment (34 bln tons) was due to the bituminous oil in the Orinoco Belt, Venezuela; the other world’s deposits couldn’t compensate for the increased recovery and the total reserves increment was just 24 bln tons (11.6%).    

The second conclusion is right at the tip of the tongue. There is no shortage of oil deposits, but sometimes there occurs a shortage of CHEAP reserves. Then there is an increase in the prices followed by some technical advancement and then the situation remains stable until the next shortage.

Now let’s roughly estimate how much oil the Earth may contain. We’ll take the organic theory of oil’s origin as the basis and leave behind all the theories of untraceable migrations from the Earth’s depth and the magic changes of hydrogen into oil because they are totally unjustifiable. Let’s assume that the thickness of source rocks is 30 m (like in shale fields), and oil saturation is 5%. Assuming that 1% of the crust contains such rocks we will arrive at 5.1 mln km2. With correction for density we’ll get 6.5 tln tons of original oil in place. Under the recovery ratio of 10% recoverable reserves would amount to 650 bln tons, which would cover the current consumption for another 100 years.      

These figures cause no objections. During the last 100 years the mankind has produced about 200 bln tons of oil. The remaining reserves will amount to 221 bln tons. Besides, the East of Russia, the African and American jungle, the poles and deep waters are not completely explored yet. Russia’s Arctic reserves alone are preliminarily  estimated at 20 bln tons.

  1. So what does it mean?

It means that life will go on! We shouldn’t scare and get scared, shouldn’t panic and deny the obvious. There is no point in being afraid of the peak of oil. The increase in oil prices will stimulate the development of new reserves, but if it starts slowing down the economics the later will reduce the consumption and focus on finding an alternative. And perhaps more than one. I think that energy sources will multiply and each of them will find its place on the global market. The advantage of oil is that it’s easy to store and transport. So I expect the development in the technology of processing coal, gas and other organic fuels into liquids. Naturally the energy of sun and wind and the thermal energy won’t be left out.       

It’s too early for the mankind to worry about the coming energy crisis. First we need to feed the hungry, teach the illiterate and stop killing our own kind. Only after that we’ll be up to solving global problems.

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