Posted by: bmeverett | March 22, 2013

Burning Ice and The Death of Peak Oil


Since the beginning of the modern petroleum industry in 1859, Americans have worried about the imminent decline of petroleum production and the inevitable severe economic consequences that would follow. In 1882, the US Institute of Mining Engineers estimated that the US had 95 million barrels of remaining oil reserves – only about four years of supply at prevailing production rates. In 1932, the Federal Oil Conservation Board estimated remaining US oil reserves at 10 billion barrels – a big increase from the Institute’s earlier estimate, but still only 13 years’ worth of production. In 1944, the US Petroleum Administrator for War estimated that the US had 20 billion barrels of oil remaining – only 12 years of production at the prevailing rate. To date, the US has produced well over 200 billion barrels of oil and the remaining reserves are still 31 billion barrels.

We see the same pattern for the world as a whole. Since 1980, the world has produced about 817 billion barrels of oil, but has found 1,787 billion barrels, thereby increasing reserves by about 970 billion barrels. Natural gas shows the same trend. Since 1980, the world has produced natural gas equivalent to 434 billion barrels of oil, but has discovered new reserves of 1,210 billion barrels of oil equivalent, resulting in an increase in natural gas reserves of 776 billion barrels of oil equivalent.

This hundred years’ experience still doesn’t dissuade people from predicting the imminent, apocalyptic decline in world petroleum production – a view known as “Peak Oil”. The term was coined in the late 1940s after M. King Hubbert, a geologist with Shell Oil, predicted based on statistical analysis that US oil production would peak and begin to decline in the early 1970s. Hubbert’s argument was that oil production peaks and begins to decline after half the oil in the ground has been produced. His forecast turned out to be correct. US field production of crude oil peaked in October of 1970. Based on Hubbert’s concept, many people, including Ken Deffeyes of Princeton and oil analyst Matt Simmons, predicted that the same thing would happen to the world as a whole. The infamous 1972 report “The Limits to Growth” published by the Club of Rome, expanded this concept to all important minerals, predicting severe economic contraction as exponential growth hit the wall of limited resource availability.

In reality, Hubbert’s success was just coincidence. US oil production peaked not because the resource base was exhausted, but because the Middle East began to produce massive amounts of oil at $2 per barrel, driving the more expensive parts of the US resource base out of the market. Furthermore, the US oil industry was subject to federal price controls, further discouraging exploration and technology development.

The problem with the “Peak Oil” concept is its confusion of the terms “reserves” and “resources”. The term “reserves” is an estimate of how much oil and gas have already been discovered that can be produced with today’s technology at today’s prices. “Proved reserves” are the amount of oil that can be produced with 90% confidence. “Resources” refers to our best estimate of oil and gas in the ground, regardless of whether we know how to access it or can do so at a profit. As we keep exploring, we keep moving hydrocarbons from the “resource” category to the “reserves” category. Second, as our exploration and evaluation tools improve, we add more and more hydrocarbons to the resource base. Finally and most importantly, improved technology allows us to produce a larger and larger share of the resource base. We can see dramatic examples of technology improvement in in the oil industry’s move to deep water reserves, particularly in the US Gulf of Mexico and West Africa in the 1990s and 2000s, the development of Canadian tar sands and the boom in hydraulic fracturing (“fracking”) of low-permeability shale oil and gas reserves in the US over the last ten years. Think of the term “reserves” as the amount of food you have in your pantry. That number will tell you how urgent it is to go to the grocery store and buy additional food. It doesn’t tell you how soon you will starve to death.

But aren’t oil and gas resources ultimately limited? Yes, but not in any meaningful way. Take copper as an analogy. Humans have been producing and using copper for over 3,000 years. We keep increasing production, yet we never exhaust the resource. When copper production gets tight, prices rise giving a signal to find more copper ore and improve the technology for exploration and production. In effect, resource extraction economics are a race between depletion, which drives prices up and technology, which drives prices down. Technology can win this race over very long periods of time. Today’s copper price is lower in real terms than it was 100 years ago.

The shale oil and gas boom in the US is dealing a serious blow to the Peak Oil hypothesis. US natural gas reserves and production in the US have increased dramatically, despite constant predictions to the contrary. Perhaps even more significantly, shale oil production in places like North Dakota has reversed the decline in US crude production. The Hubbert’s Peak experienced in 1970 may actually be exceeded in the coming years.

For a real insight into total world hydrocarbon possibilities, however, have a look at the work underway off the coast of Japan by the Japan Petroleum Exploration Company, Ltd (Japex). Methane is the simplest hydrocarbon molecule (CH4) and is the main constituent of natural gas. The ocean floor is covered with methane trapped in ice crystals – a material known as “methane hydrate” often referred to as “burning ice”. This is new technology, but Japan has a real incentive to see what can be done with this stuff. Japan has no real energy resources and has effectively lost the use of its nuclear power plants after the Fukushima disaster.

How much of this material is there? I strongly recommend reading the Department of Energy report “Energy Resource Potential of Methane Hydrate” which you can find at http://www.netl.doe.gov/technologies/oil-gas/publications/Hydrates/2011Reports/MH_Primer2011.pdf. Page 6 of this report displays what’s known as a “resource” pyramid showing estimated volumes of methane hydrates classified according to the difficulty of extraction. The easiest methane hydrate resources are found in Arctic sands where conventional oil and gas technology may be applicable. The report estimates these resources at hundreds of trillions of cubic feet (Tcf). A trillion cubic feet of natural gas contains the energy equivalent of about 175 million barrels of oil. Hundreds of Tcf are thus equivalent to tens of billions of barrels of oil.

The next layer of the pyramid is marine sands which are in deeper water and therefore more difficult to extract. The report estimates that there are 1,000s to 10,000s of Tcf of this material – equivalent to 100s of billions to trillions of barrels of oil equivalent. Accessing this part of the resource base could potentially double or triple the world’s known hydrocarbon resource base. Even lower down in the pyramid, however, we find the type of material the Japanese are looking at – much harder to extract but available in truly massive quantities. The report indicates 100,000s of Tcf, which could increase the world’s hydrocarbon resource base by a factor of 10 or more.

I often hear my students say something along the following lines, “Oil and gas will run out sooner or later, so why don’t we just go ahead and engineer a transition to renewable energy now before we run into resource constraints.” I think this argument is wrong on two counts. First, as discussed in previous blogs, the government is not capable of engineering such a transition. Second, it seems to me reasonable to expect that the global hydrocarbon reserve base will continue to grow and to support increasing levels of production for as far into the future as we can see. Oil and natural gas prices are likely to undergo cycles of increase and decrease, thus giving the industry the signals it needs to speed up or slow down its efforts. Hydrocarbons will be replaced through a natural market process when something better comes along.

We have a number of major issues in our energy economy. The first is how to provide increasing amounts of energy to a growing global population. The second is how to mitigate the environmental consequences of increasing energy consumption. The third is how to ensure that the complex and expensive transnational infrastructure required to support growing energy consumption levels is in place. A shortage of hydrocarbon molecules is not on the list.

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Responses

  1. As a long time petroleum engineer who has been involved on reservoir evaluations for both oil and gas I hope my points can be understood. Hydrocarbon reserves will continue to increase, the problem becomes will production rates continue to commercially feasible. The cost associated with shale type oil reservoirs are very high, and the initla rates decline rapidly. Let’s take an example – a Bakken well produces at a flow rate of 2,000 BOPD after frac treatment – great. Problem within two years it is likely producing at the rate of 100-200 BOPD on the pump. Now, figure out how many 200 BOPD wells it will take to cover 50% of our demand – let’s use 5,000,000 BOPD – 25,000 wells. In reality – we have to calculate the number we need to drill annually to maintain the 5,000,000 BOPD – a bit more complicated than I showed.


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