Peak Oil Demand: Near or Far?

An article from yesterday's Washington Post "Is peak oil demand just around the corner?" is, in part, a summary of an article that appeared recently in The Economist ("Yesterday's Fuel").

Citi recently predicted that world oil demand may peak by 2013 because of increased transport efficiency among other factors.

The Washington Post piece features a discussion with Stanford's Adam Brandt who is skeptical about predictions of oil demand peak.

Brandt thinks the demand story is more complex because of the rise in unconventional sources for transport fuel including natural gas, biofuels and oil from tar sands, not to mention electric vehicles.

Brandt doubts that auto fuel efficiency will continue to increase has it has in the recent past and sees a potential explosion of transport demand from Asia.  

He further invokes Jevon's Paradox to suggest that easier and more pleasant driving from Google autonmous vehicles and driving errand outsourcing may in fact increase transport fuel demand.  The past is not necessarily the key to the future.

Wood Mackenzie Says Bakken & Eagle Ford Will Produce More than the Two Largest Fields in North America Combined

Wood Mackenzie reported on July 30, 2013 that U.S. shale plays will produce 5 million barrels of oil per day by 2019, at least half coming from the Eagle Ford and Bakken shale plays.  Naturally, most people believe this without asking the obvious question, "How does this huge volume of oil compare with present U.S. production or the largest fields in the world?"

The U.S. produced 7.3 million barrels of crude oil per day in May, 2013 and reached peak production of just over 10 million barrels of oil in 1970.  WoodMac would have us believe that U.S. oil production will exceed peak production by about 2 million barrels per day, and will increase present production by almost 70%.  That would be awesome but seems highly unlikely based on the history of oil production decline in countries and basins around the world.

This is like telling the average American whose life expectancy is 79 that, by some miracle, we can all now expect to live to be 115 years old.  Never mind that only one person is known to have lived to be this old, it's still reasonable that everybody will live this long! Hmm.

Back to oil production, Ghawar, by far the largest oil field in the world with 74 billion barrels of reserves, produces 5 million barrels of oil per day and never produced more than 5.7 million barrels.  We are, however, supposed to believe that shale plays--the Bakken and Eagle Ford, in particular--will equal Ghawar.

Cantarell, the largest oil field in North America with 19 billion barrels of reserves, produced 2.1 million barrels of oil per day at its peak.

Prudhoe Bay, the largest oil field in the United States with 13 billion barrels of reserves, produced 1.5 million barrels of oil per day at its peak.

WoodMac would have us believe that the Bakken and Eagle Ford will almost equal production from the two largest oil fields in North America combined.  I certainly hope that they are right but history and facts suggest that this estimate is at best highly optimistic and, at worst, exaggerated.

As far as I know, the WoodMac report is not publicly available so I cannot comment on how they arrived at the numbers.  How could they be wrong?  I would first look at the per-well reserves and decline rates used in this estimate because these have been unrealisticallly optimistic for all shale plays so far.  Second, I would look at the size of the commercially productive area they assume for these plays because these have also been unrealistic for other shale plays.

Everybody likes good news but we all hate disappointments.  In a world of dwindling oil resource opportunities (that's why we are drilling shale, after all!), it is time to start changing our behavior and using less oil.  Reports like this give people the message that there is no reason to change our wasteful practices.  Don't worry, be happy!

Shale Plays Not Working For Big Oil

Recent revelations and write-downs of shale assets in North America by Shell, ExxonMobil and Chevron support our research that big companies cannot make money on low rate-low volume shale wells.

The majors exited North America in the 1980s because they could not support the operating costs associated with managing this kind of production even though the wells were profitable.  They went to the overseas arena where things worked for a few decades as deep water plays emerged.

In the last 5 years, international opportunities have been exhuasted and national oil companies hold all the cards.  This means that remaining international opportunities carry onerous production-sharing agreements or other difficult contractual obligations (note the deals that Shell, etc. have entered in Iraq where they must spend $billions to get a $2/barrel payment for incremental added production--these deals are being re-considered.

So, the majors jumped back into North America with the lure of large reserves from shale.  This trend began when ExxonMobil acquired XTO Energy in early 2010.  At the time, this was viewed as a validation of shale plays and their economic viability.  I refer you to my comments about this acquisition in February 2010:

"The mainstream belief that shale plays have ensured North America an abundant supply of inexpensive natural gas is not supported by facts or results to date. The supply is real but it will come at higher cost and greater risk than is commonly assumed. The arrival of ExxonMobil and other major oil companies on the shale gas scene is positive because they will not follow the manufacturing approach, and will do the necessary science that should make shale plays more commercial. This does not, however, ensure success.

"ExxonMobil has come late to the domestic shale party. They may have overvalued XTO's existing wells without fully taking high production decline rates into account. It is also possible that XTO has already drilled the best areas in more mature shale plays, while the potential of newer plays has not yet been established. It is unclear how ExxonMobil’s enormous overhead structure and its associated cost will fit with operating thousands of relatively low-rate gas wells."

Now that the shale plays are not working at least for the major oil companies, what next?

I believe that we are seeing the slow liquidation of these organizations but they cannot let the investment public know that this is what is occurring, hence the cornucopian rhetoric about the shale revolution and North American beoming the next Saudi Arabia--pure poppycock, of course.  Will the recent write-downs and announcements affect investors?  Probably not for now.