THE IMMINENT PEAK OF WORLD OIL PRODUCTION

Mark Jones jones118 at SPAMlineone.net
Wed Jun 14 02:55:22 MDT 2000


Transcript of Presentation to a House of Commons All-Party Committee on July
7th 1999

(Web version includes PowerPoint slides, at
http://www.hubbertpeak.com/campbell/commons.htm)

by C.J. Campbell

Title

The title of my talk is The Imminent Peak of World Oil Production. I would
like to provide the evidence. It is of course a very large subject. There
are colossal economic and political consequences. Indeed the very future of
our subspecies – Hydrocarbon Man – is at stake. But I think that you are
better qualified than I to assess these matters. I will therefore
concentrate on the technical assessment.

My qualifications for taking up your time are that I have spent the last 45
years studying the subject both directly and indirectly. I have evaluated
hundreds of oil prospects around the world. I have drilled many dry holes
and even made a few discoveries. I have observed the oil industry from many
angles, including its senior management. I have published two books and
several papers on oil depletion.

I will start by giving you a short explanation of petroleum geology.

If you go to the coast near the village of Kimmeridge in Dorset, you will
find a black clay which smells petroliferous and sometimes even catches
fire. It was deposited 140 million years ago near the end of the Jurassic
Period.

Chemical analysis shows that it contains up to 10% organic material, which
itself contains various compounds characteristic of plankton and algae.

It is a truly remarkable clay, only about 100 metres thick, which was
responsible for almost all the oil in the North Sea. It was deposited under
unique conditions not found before or since in NW Europe over 600 million
years of recorded history.

Geochemical and geological advances over the past 20 years have made it
possible to understand the origin of hydrocarbon source rocks such as this
Kimmeridge Clay. It was deposited in warm sunlit waters that allowed
prolific blooms of algae. The Jurassic was a period of global warming.
Britain was then closer to the tropics than now, due to plate tectonic
movements.

Stagnant Trough

Normally, the remains of the algae are destroyed as they sink to the seabed.
But great rifts, analogous with the Red Sea, were developing in what is now
the North Sea as the North Atlantic began to open. Stagnant conditions
developed in the depths of these rifts, which preserved the organic
material. Furthermore, relatively little other sediment was being washed in,
so that the organic material was concentrated.

Let’s now look at samples from this same Kimmeridge Clay taken from a
borehole in the eastern side of the North Sea. We will notice a difference.
The organic material now contains admixtures of other organic substances
that have the isotopic signature of plants. The area was closer to the
Jurassic coast and more vegetal material was being washed in.

Tests in the laboratory show that if you heat the algal material you get
oil, whereas if you heat the other stuff with plant remains you get gas.
Furthermore, if you heat the oily rock too much it breaks down into gas.

Let’s now track the later history of this Kimmeridge Clay in the North Sea.
The rifts were covered by several thousand metres of younger sediment which
were laid down in a broad basin.

As the Kimmerdige Clay was buried, it became heated by the Earth’s heat
flow. At a certain point, chemical reactions occurred similar to those
observed in the laboratory. They led to the conversion of the organic
material into oil and gas.

The conversion involved expansion so that the each droplet of oil and gas
was born under a very high pressure. The pressure increased as the rocks
continued to subside. Finally the droplets burst and the oil and gas forced
its way upwards to zones of lesser pressure. It was an episodic movement. It
occurred only briefly in geological time when the temperature and pressure
thresholds were passed. In the North Sea, oil generation commenced when the
source rock was buried to about 2000 m

We now have to study where it moved to. The subsidence I have described was
periodically interrupted by earth movements, even volcanic activity. The
basin was folded and faulted into complex structures. They can now all be
mapped in extreme detail thanks to advances in seismic surveying. It is as
if we had a very high quality X-Ray of the earth, showing every feature in
three dimensions.

We have to unravel geological conditions of great complexity. I will
simplify to consider three different situations.

Oil Migration

First, let’s consider the case where the source-rock is buried under a thick
sequence of uniform clay. The oil and gas will move upwards along the hair
line fractures until pressure equilibrium is reached. The result is an
un-exploitable disseminated deposit.

Second, let’s look at the case where the oil, as it moves upwards,
encounters a porous sandstone, rising to the surface at the edge of the
basin. The pores in this carrier bed contain water. The oil is lighter than
the water, and floats upwards to the surface where it escapes and is lost.

Lastly, we come to the third case where the carrier bed has been folded or
faulted. The oil floats upwards, but this time it cannot escape, being
trapped in the highest part of the structures. Such traps form oilfields.
But we are not quite home yet, because the trap has to be sealed by the
rocks above it. Such seals are never perfect so that the oil and gas leak
over time.
A very rare combination

This slide is an illustrative map of an oil province. It explains why
oilfields depend on a very rare combination of circumstances. There are many
structures shown as white blobs. The yellow belt shows where there is a
reservoir. The purple belt shows where there are generating source rocks.
Only structures where the essential ingredients coincide can contain oil. It
is of course still more complex than this.

I think I can summarise the position into a few key points.

We now have a comprehensive understanding of petroleum systems. It has
become relatively easy to identify and map them, once the critical
information has been gathered from seismic surveys and exploration
boreholes.

The prolific generation of oil and gas was a very rare event in both time
and place in the geological past. Furthermore, much that was formed was lost
by leakage. As I said, in the North Sea, we rely on one unique event 140
million years ago.

The world has now been very thoroughly explored with the benefits of this
new understanding and the high resolution seismic surveys. About 90% of the
world’s oil endowment lies in just 30 major petroleum systems.
North Sea Generating Map

This shows where oil was generated in the North Sea. It was generated in the
coloured areas and nowhere else. Similar maps are now available for
virtually the entire world. All such provinces have been subject to at least
some exploration. All the promising areas have been thoroughly explored.
There are good reasons why other areas receive little attention. There are
of course details to fill in, but the general picture has become very clear.
Some oil economists claim that if all the basins of the world were drilled
as intensively as Texas, they would yield a huge amount of new oil. They are
utterly mistaken for well understood scientific reasons.


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Now, I would like to go to Norway and explain the pattern of discovery
there. I choose Norway, because the Norwegians publish reliable information.

Norway Hyperbolic

This plots cumulative discovery against cumulative wildcats. These are the
exploration wells that either do or don’t find new fields. By plotting
discovery against wildcats we overcome the distortions from external factors
such as government policy. The large fields were found first and discovery
follows a hyperbolic model fairly closely. Exploration will end when the
discovery curve becomes almost flat. This plot suggests that Norway’s total
is just under 28 Gb.

Parabolic Fractal

This is a plot of the size distribution of the fields. We can see the close
correlation with the theoretical parabolic fractal distribution. It gives a
slightly lower total of 26 Gb

These models – and there are other statistical techniques – suggest that the
total of Norway’s known basins is between 26 and 28 Gb. But I think that
some of the more recent fields will prove a little bigger than currently
estimated. I accordingly use judgment to slightly modify the theory, giving
Norway an Ultimate Recovery of 29 Gb. Note how critical it is to have good
data of past discovery both by quantity and date.

Similar plots have been made for every productive area.

It is also interesting to plot a company’s record

Shell

This shows Shell’s record. It has drilled about 3600 wildcats since 1885,
finding 60 Gb oil. The fit with the hyperbolic model is remarkable. It
suggests that if Shell drilled as many wildcats again, it would find only
about 16 Gb. The falling discovery is despite a large budget, the best
available technology and a deliberate policy to find the largest fields. The
short explanation is that there has been progressively less left to find.

Amoco

We might look at another company, Amoco. It was much less successful because
it was late into the international arena. It found about 15 Gb with 900
wildcats, but hardly anything with the last 600. It is no surprise that it
was forced to sell out to BP.

The point is that all discovery curves are flattening.

The growing gap

Looking at the world as a whole, we see this growing deficit. Discovery
peaked in the 1960s with a 60 Gb surplus. But that has given way to a
deficit of almost 20 Gb We now find one barrel for every four we consume.


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The general situation seems so obvious. Surely everyone can see it staring
them in the face. How can any thinking person not be aware of it? How can
governments be oblivious of the realities of discovery and their
implications? How is it possible, given the critical importance of oil to
our entire economy.

There are several possible explanations, including denial, but one of the
main reasons relates to the reporting of reserves. It is a huge subject, but
I will try to reduce it to three cardinal issues

Explanations of confusion

First, we need to distinguish all the many different categories of oil and
assess their endowment in nature, their characteristics and above all
depletion profile. Obviously, a Middle East well flowing at 20 000 b/d is
very different from extracting a few barrels a day from a tar deposit.
Deepwater and polar oil is different from oil in Texas. We need to know how
each category can contribute to peak.
Second, we need to define the probability ranking of our estimates so as to
get the best estimates of what a field will actually deliver, such that
statistically any revisions will be neutral.
Thirdly, we have to backdate any reserve revisions to the discovery of the
fields containing them.
Unfortunately the public database is extremely unreliable. I might here
refer to BP’s Statistical Review which many people consider a valid source
of information given its reputable author. It is in fact exceedingly
unreliable. It simply reproduces data from a trade journal and does not
reveal the Company’s own considerable knowledge. It is very unfortunate that
a company of this standing should put out such misleading information. I don
’t know why it does so.

There ae several reasons why the public database is so unreliable and
misleading..

First, companies systematically under-report the size of discoveries for a
host of good regulatory and commercial reasons. They refer to what they call
Proved reserves which are much less than what the field will eventually
deliver. They treat reserves as an inventory to be booked as suits their
commercial and financial needs.
Spurious

Second is the unreliable reporting by the major OPEC countries. This table
shows two obvious flaws. First is the huge increase in the late1980s,
underlined in red. The sudden increase resulted from the so-called quota
wars: quota being partly based on reserves. The second is shown in green. It
is absolutely implausible that reserves should have remained so constant
subsequently given the high production rates. Incidentally, 60 countries
reported unchanged numbers last year. No right thinking person could accept
such a data-set, yet it is embodied un-noticed in the public database.
But there is a third less obvious, yet much more important, factor. Clearly,
nothing happened in the reservoir in these countries in the late 1980s. The
reserve revisions — whatever the right reserve number is — should be
backdated to the discovery of the fields containing them. They had been
found up to 50 years before. Backdating has a huge impact on the discovery
plot.

Popular image

This illustrates the popular image of growing discovery, based for example
on BP’s public numbers. It fails to backdate revisions and has misled many
analysts. They see reserves growing which they attribute to technology. In
reality the growth was just in the reporting.

Real Discovery

This shows the true position with more realistic numbers properly backdated.
It shows that discovery is flattening not growing.


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It is fashionable to accuse oil companies of conspiracy, but I think the
deception has more to do with differing mind-sets and objectives than
conspiracy. Oil companies are in business to make money not plan the world’s
future.

Backdating is obvious to an explorer. But the engineers who develop the
fields over a long period of time soon forget the original discovery and
report the revisions when they occur having no particular reason to
backdate. The management takes the revisions as best suits their commercial
image. Reserve growth makes a much better story than a dwindling asset,
which is the reality.

Mostly, this lax reporting does not matter. But if we want to use the record
of the past to extrapolate future discovery, we need to insert the right
amounts and the right dates.

I should say something about getting more oil out the reservoir. You will
hear a great deal about that. Now that falling discovery is widely
recognized, hopes are pinned on getting more out of what has already been
found.

I am sorry to say that reports of improved recovery are largely an illusion
reflecting the reporting procedure rather than any particular technological
achievement.

Prudhoe Bay

I might illustrate this by Prudhoe Bay. It is by no means exceptional. This
plots annual production against cumulative production to show the end point.
The operator internally estimated its reserves in 1977 at 12.5 Gb. But for a
host of good commercial and regulatory reasons reported 9 Gb. The depletion
curve has been as straight as an arrow since 1991. It shows that the field
will barely make the original estimate, despite all the considerable
technology that has been applied. Yet many analysts are misled by the rise
in the official numbers from 9 to 12.5 Gb.

Of course it is possible to go back to an old field developed long ago with
poor technology and extract a little more oil from it by a range of well
known methods, such as steam injection. But this is a phenomenon of the
dying days of old onshore fields of the United States, Soviet Union and
Venezuela. Most modern fields are developed efficiently from the beginning.
In any event the addition contributes little in global terms and has no
impact on peak.

Technology serves mainly to hold production rate as high as possible for as
long as possible. That obviously makes the most profit. But it adds little
to the reserves themselves and clearly accelerates the rate of depletion.
The high depletion rate of Norway shows how efficient they have been at
extending plateau production. The decline slope now becomes a cliff.

I hope I have explained why it is so difficult to obtain valid numbers and
dates. It is hugely complex subject.

Essential Parameters

If we hired a detective to somehow penetrate the smokescreen, I think he
would come up with numbers like this for what we can call "narrowly defined
conventional oil". This is the stuff that has provided most oil to-date. It
will also continue to dominate supply until long past peak. It excludes oil
from

coal and shale;
heavy oil and tar,
deepwater and polar areas,
synthetic oil and
natural gas liquids.
The contribution of these non conventional categories has to be added to get
total supply, but their impact on peak is small.

The bottom line is that there is a rounded one trillion barrels left to
produce.

Distribution

It is most unevenly distributed with about half lying in just five Middle
East countries, due to that region’s unique geology, including particularly
the widespread occurrence of salt which seals the reservoirs, preventing the
escape of oil.


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No one can dispute that you have to find oil before you can produce it. The
curve of discovery clearly has eventually to control the curve of production
that follows it after a time lag.

Discovery curve

Experience has shown that the exploration of a new province follows a
standard pattern. It starts with the learning period. Boreholes have to be
drilled and seismic shot to find out if the new area has the necessary
geology. If it does not, it will never deliver no matter how much investment
and technology is thrown at it.

But if it does have the ingredients, the larger fields are found first. They
are too large to miss. These large fields give a natural peak.

This natural discovery curve has to be reflected in the production curve
that follows. Production, like discovery, starts and ends at zero, and
reaches a peak around the midpoint of depletion when half is gone.

US-48

The US-48 is a good example. Discovery peaked in the 1930s and production in
1971, despite ample technology, money and incentive. In the North Sea, peak
discovery around 1980 is now being followed by peak production. It should
surprise no one.

We can use this general curve to model depletion in most countries,
adjusting for any special circumstances.

But it is not quite a simple as that because we have to recognize the swing
role of the Middle East countries around global peak. They have large
reserves and a low depletion rate. So they can make up the difference
between world demand and what the other countries can deliver within their
resource base.

Swing Share

Swing share was 38% at the time of the first oil shock in 1973. It fell
to18% by 1985 as flush production from new provinces, such as the North Sea,
that had already been found before the shock, was dumped onto the market. I
say dumped because had the major companies not lost control through
expropriation, they would probably have managed things better.

Since then, share has been rising to around 30% to-day. This time it is set
to continue to rise because there are no new provinces ready to deliver
flush production, save perhaps the Caspian and that seems to be turning
sour.

This allows us to develop some scenarios about future production. I will
describe in a moment what seems a reasonable base case.

But before coming to that, I should say something about the International
Energy Agency. It was established in the aftermath of the oil shocks of the
1970s, under a treaty signed by most OECD governments. It has a mandate to
study oil supply and alert the OECD governments to dangers to supply. Note
that the governments are treaty-bound to react and coordinate their
response.

It is naturally a highly political institution. But nevertheless it did
succeed this year to deliver a coded message. I am glad to say that the
media is decrypting the message, as I gather the IEA intended.

IEA

I would say that this message from the IEA, the highest world authority on
the subject, is dynamite. I am sorry to say that the European Commission
remains in blissful ignorance; and I don’t have any confidence in the DTI
either.

Scenarios

I will now explain what I think is a reasonable scenario

1) Oil demand will grow at 1.5% a year – slightly below the IEA estimate of
1.8% – until Swing Share reaches about 35% in 2001.

2) The Middle East countries will then have the confidence to impose much
higher prices, realising that they have no competition. They may even get
such confidence sooner.

Norway Official

For example, they might read an official report showing that Norway’s
production is set to halve by 2006. Norway is the world’s second largest
exporter. The impact on Swing Share is obvious.

Look again at Scenarios

3) I think prices may briefly soar to very high levels due to the working of
the market that sets prices on the marginal barrel. I believe that the
market itself may be manipulated by hedge funds and similar insiders, who
are in a position to talk price up and down. They must have made huge
fortunes when prices recently rose 80% over a few weeks. Most forecasts now
predict falling stocks by the last quarter as the insiders talk price up
again.

4) I think that a price shock around 2001, if not before, from Middle East
control is inevitable and will probably trigger a stockmarket crash

5) I think that demand does become elastic above about $30/b, reacting to
normal market forces, so higher prices may curb demand.

6). Nevertheless, I think it will be a time of great political and economic
tension as Europe, America and Japan vie for access to Middle East oil. More
missiles can be expected. The third world will be badly hit, being unable to
afford imports. Agriculture is very dependent on oil.

7). But I expect that somehow a plateau of production, however volatile,
will unfold around $30 a barrel. But the end of the plateau will soon come
into sight.

8) It may have a fundamental impact on investment. Up til now, the
investment community has believed in perpetual growth on which cycles are
superimposed. The bottom of each cycle has been higher than its predecessor
making capital appreciation the primary goal of investment. But the tensions
of the oil shock and related events, including the colossal financial
transfers to the Middle East, may create a new view.

After the many years of growth we may then experience a new downward trend,
however cyclic. Share prices may sink to more realistic levels as the main
focus will be on yield not growth. Capital will be destroyed.

9) The plateau has to come to an end by around 2008 when Swing Share will
have passed 50% and the Swing countries in the Middle East will be
approaching their depletion midpoint too. Production will then start its
inevitable long term decline at about 3% a year. Increasing shortages will
develop, and agriculture and transport will be seriously affected. The
global market will come to an end because of high transport costs.

That is a scenario. There are of course many alternatives, but the range of
possibility is limited given the resource constraints. These constraints are
facts not scenarios. If by some miracle we could add 500 Gb of reserves –
more than half as much as produced so far – it would delay peak by only ten
years.

One indisputable fact stands out. Discovery peaked 30 years ago. It takes no
feat of intellect to conclude that we now face the corresponding peak of
production.


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All hydrocarbons

But there are solutions. Gas and non-conventional oil production can be
stepped up giving an overall peak around 2015. Gas will be useful but needs
special management because it depletes very differently from oil on account
of its greater mobility. The controlled plateau ends abruptly. The open
market is not designed to deal with depletion.

Nuclear energy and coal production can be stepped up. The environmental
hazards can presumably be solved by technology if efforts are made..

Renewable energy and above all energy savings can make really important
contributions.

One problem is that all of these things take time to implement. Nothing is
likely to be done without proper fiscal or price incentives.

I think it is absurd that the management of the depletion of the world’s
supply of its most important fuel should be left to a few feudal families
controlling the Middle East. The consuming governments should recognize
where their interests lie.

They could for example ameliorate the tensions by introducing a Depletion
Protocol such as I proposed last year.

Protocol

But it is easier for them to react to a crisis than anticipate one. My hope
therefore is that this talk will have helped you understand the nature of
what is about to strike even if in practice you are unable to prepare.

Summary

I close with a simple diagram. Think of it as two tanks. The top contains
what is Yet-to-Find and it is flowing into the second tank at a falling rate
of about 6 Gb/a. The second tank contains what it left from past discovery.
This tank is being drained at about 23 Gb/a rising : much faster than it is
being filled. We take out four barrels for every one we put in.






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