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March 03, 2006

Matthew Simmons: Outlook For 2006 Peak Oil

World Oil, one of the two major oil industry trade journals, each year asks Matthew Simmons to write a column giving his outlook for the coming year in oil. Simmons is head of the oil industry's largest investment bank and author of Twilight in the Desert. He's also an outspoken proponent of the view that world oil production is peaking.

Here's an extended excerpt from his outlook for 2006:

Had deepwater oil not come of age in the last decade, conventional oil would have passed peak output. Even as deepwater drilling created several million bpd of added oil, non-OPEC supply outside the FSU has struggled for half a decade to stay flat, and now seems clearly in decline. The North Sea is in steep decline, and Mexico, China, Argentina, Oman, Syria, Egypt, Yemen and Colombia seem to be experiencing irreversible declines.

Non-conventional oil from Canada's oil sands and Venezuela's Orinoco region makes up about half of both producers' output. Non-conventional oil is now commercial, but it remains extremely energy-intensive to turn into usable form. Most new oil found globally is either heavy or sour, or both. What seems to have passed peak supply is light, sweet oil — the easiest oil to produce and the simplest to refine into light, finished product.

Until 2005, OPEC had risen to the occasion and supplied constant surges in unexpected demand. Now it is clear — for anyone closely studying OPEC production announcements and other data on the true status of OPEC oil output — that the countries comprising OPEC membership are all producing at maximum levels. Over a dozen giant oilfield upgrades are underway throughout OPEC, but few will add significant new supplies before 2009.

Moreover, all these "new" projects are complex oil fields that were found years ago and lacked the ingredients to be key producing fields. Some of these projects' performance risks are high enough that nobody should assume that they will happen on schedule, on budget or at projected output targets.

The global lack of spare capacity now extends far beyond wellhead capabilities. By late summer 2005, every capable drilling rig in the world was in use...The backlog of planned, new wells that awaits an available rig is growing monthly. In the offshore market, the rig deficit by the start of 2005 was about 250 drilling months before Hurricanes Katrina and Rita took another 20 rigs out of commission; some permanently, some for just a matter of months. The resultant offshore drilling deficit compared to planned activities might now exceed 400 to 500 drilling months. Every key oil pipeline and processing facility is also at 100% capacity, as is global refining capacity. The oil system has never been so tight.

Also, 2005 will go down in history books as perhaps the poorest year for exploration success for both oil and gas since World War II. This dismal success was not for lack of effort. Record amounts of funds are being plowed into E&P [exploration & production] capital spending, which is why all the world's rigs are now in use. [...]

For oil markets, 2006 will be challenging, unless global economies quickly enter a steep recession. This is about the only event that will moderate demand growth before it outpaces supply. Already, some markets show signs of little demand growth, not because demand is low, but due to the physical limit of oil use having to stay within supply limits. One big "head fake" of 2006 will be when apparent demand seems stalled by lack of demand instead of lack of supply. The two are extremely different events, and hard to judge by a quick glance at weekly changes in EIA's oil inventory reports.

As the rig shortage worsens and rates rise to dramatic levels, many newly planned projects will not materialize. There will also be a slowdown in deepwater exploration wells or drilling of necessary deepwater development wells. Rigs are insufficient for both to happen. The lack of rigs is also an easy proxy for all other key services needed to drill and complete complex wells that comprise most new projects.

The industry is in the early stages of a people crisis. This people shortage will worsen throughout 2006. There is already widespread "stealing" of competitors' key people, or oil companies raiding the scarce personnel of their key service providers. New drilling assets coming onstream during the year will further strain the people shortage. For instance, when both land and marine rigs are added together, there are about 250 rigs on order for delivery in the next 12 to 18 months...Since an average drilling operation needs 35 to 50 people on-site on a 24/7 basis, this equates to a need to recruit and train 26,000 to 37,000 new drilling hands in a very short period. This figure assumes prompt delivery of new equipment and that the industry puts these units to use as added rigs instead of replacing worn-out, old rigs.

Adding as many as 250 new drilling rigs might sound like a big expansion until it is put in perspective. There are about 3,000 drilling rigs in the world, so this "expansion" is only a little over 8%. Because most of the 3,000 existing rigs are about 25 years old, the industry soon needs to gear up for the challenge of how to replace the entire fleet over the next decade or two. The wear-and-tear of land and offshore rigs is like running a car in a demolition derby. If the industry leadership fails to address how to renew the drilling fleet, it will ensure a serious oil supply crisis. [...]

Like it or not, 2006 will be eventful for oil. It will also be the year when the Peak Oil topic intensifies into a debate on the scale of climate change/global warming. So far, this Peak Oil debate has been muted to a very separate, small group of "extreme optimists" battling a small group of geologists, petro-physists and, on occasion, energy analysts or economists.

Optimists often do not properly understand what "peak oil" means. They dismiss any worries by saying the world is unlikely to run out of oil in the next 30 to 75 years. Instead, these optimists need to grasp the simple fact that peaking does not mean running out. It means that supply no longer can grow, and it generally means the pending arrival of a production decline.

Depending on the oil field type and the manner in which it has been produced, this decline can be either gentle or so steep that it resembles a production collapse. Optimists who scoff at peak oil also argue that new oilfield technologies will come to the rescue and make new supplies easy to create without realizing that there are few new technologies being invented today. This "embrace technology" group fails to appreciate that this same technology created the steep decline curves occurring in most oil provinces.

Many leading peak oil advocates assume that this event is still a decade away, but they argue that steps to mitigate peak oil's arrival take so long to implement that the world must create a mitigation plan today. In my opinion, the most important peak oil aspect is defining peak as "a level of oil output that can safely be produced for at least a half-a-decade or more." Whenever an oil-producing field or region begins to approach this sustained peak productivity level, the safest formula to avoid a pending steep decline is to lower field production rates. Based on this definition, the world might now have exceeded sustained safe production. [Emphasis added]

A few things to take away. People who dismiss peak oil concerns say that higher prices will naturally encourage more exploration and drilling and the problem will take care of itself. As Simmons stresses, however, the world is completely maxed out right now. There are no idle rigs. There is no idle pipeline or refining capacity. There is a serious shortage of experienced workers. There are definite limits to how quickly these shortages can be overcome.

The other thing that peak oil optimists say is that rising prices will encourage the development of new technologies that will make it possible to drain oil fields more efficiently. That's a two-edged sword, however. Advanced technologies are already in use. They are very good at squeezing most of the toothpaste out of the tube. Unfortunately, they are so good at it that when the end comes, it comes suddenly. A number of oil fields are showing alarmingly steep decline rates as a result.

Finally, as Simmons notes, when oil fields near peak the best thing to do is to ease off, slow production down. The amount of oil ultimately recovered will be greater, even if it will take longer. Unfortunately, everything today militates against such prudence. Oil producers everywhere are pumping flat out. That's why Simmons says we may already have "exceeded sustained safe production." We're pumping too fast, but we can't slow down. We're between a rock and a hard place.

Posted by Jonathan at March 3, 2006 06:18 PM  del.icio.us digg NewsVine Reddit YahooMyWeb


See http://deepblade.net/journal/2006/03/2006-energy-outlook.html

Posted by: Eric at March 4, 2006 11:37 AM