The Peak Oil Myth

[ThatHawaiiGuy]

The great oil output race

http://www.thenational.ae/article/20090221/BUSINESS/756548730/1005

* Last Updated: February 21. 2009 8:19PM UAE / February 21. 2009 4:19PM GMT

In the past decade Russia was briefly the world’s largest oil producer, but production has slipped in recent years because of the decline of older fields and low levels of private investment. Science Photo Library

From the deep waters of Brazil to complex and expensive projects in Canada, oil companies are in a desperate – some say losing – race to raise output from new projects faster than old ones decline.

“Peak oil”, a peak in world production, could still be decades away, according to the most optimistic forecasts, but a peak in non-OPEC production is already upon us, many experts say.

About two-thirds of the world’s oil comes from countries that are not part of OPEC and official energy forecasts indicate that an increase in production in this area will prove crucial to meeting growing demand in the developing world. Yet many experts say the combination of the economic crisis and natural depletion of reserves means there is little possibility that the total amount of crude produced outside of OPEC will grow at all in coming years, if ever.

Without more production in non-OPEC countries, dependable suppliers such as Saudi Arabia and the UAE will have to build up multibillion-dollar capacity expansions faster than planned, or risk a new “super spike” in oil prices after the global economy recovers.

Analysts have long warned of a looming peak in non-OPEC production that could occur as soon as next year, but in a recent report, analysts at Merrill Lynch say the peak may already have happened.

Merrill argues that production of crude in non-OPEC countries will not increase and, fuelled by the current slowdown in investment, could even decline by as much as two million barrels per day (bpd) by 2015.

The investment firm’s views have widespread support among oil experts.

“Non-OPEC crude production is probably about as high as it’s going to get,” says Michael Rodgers, an upstream expert and partner at PFC Energy, the Washington-based consulting firm. “We’ve been in a bullish oil price market since 2000. When companies were going 110 per cent on everything, we still weren’t able to increase our non-OPEC supply.”

Over the past decade, international companies have tapped some of the most difficult and costly sources of oil in the world. In the Gulf of Mexico and offshore Brazil, firms have drilled the deepest holes on record. The next frontier will be the waters of the Arctic, experts say.

In its long-term energy forecast, released last year, OPEC expects conventional crude production outside of its member states to increase by 3.4 million bpd by 2015, from 2006 levels.

In western Canada, most of the major international firms each have at least one project to transform bituminous oil sands into crude at significant cost to the environment. An additional slice of demand for liquids is being met by biofuels made from agricultural products.

Such “non-conventional” crude sources will play a key role in ensuring the supply and demand balance in the oil market, OPEC says, as will an output increase by 3.4 million bpd in non-OPEC countries by 2015. More product will also come from natural gas liquids, high-quality hydrocarbons extracted from gas deposits.

Pessimistic experts should not discount the ingenuity of the oil industry, says Nansen Saleri, who leads a reservoir consulting firm in Houston, Texas, and was formerly the head of reservoir management for Saudi Aramco.

“You cannot only look at the negatives and say that in the coming decades only those factors will come into play.”

As the economy recovers, it will push up oil demand, which will be met by new investments and technology on the part of producers.

“The fundamentals in the long run are that projects will pick up and oil will continue to play a principal role. The non-OPEC [operators] would start responding to increasing prices and would start reinvesting,” Mr Saleri says, adding advances in enhanced oil recovery techniques allow engineers to get more oil out of reservoirs. Even a small increase in the yield of the average reservoir, say from 40 per cent up to 45 per cent, could have a significant impact on world oil supplies.

Nonetheless, few doubt that oil producers outside of OPEC face their toughest period in decades. The resources are in the ground, but many wonder whether they can be extracted faster than production from existing fields declines.

In a landmark study released in November, the International Energy Agency (IEA), a Paris-based group of major energy consuming countries, concludes that production from existing oilfields worldwide is declining by 4.1 per cent per year. In non-OPEC fields, the figure is 4.7 per cent.

Every two years, the oil industry must introduce new production equivalent to Saudi Arabia’s capacity in order to make up for reservoir depletion and satisfy growing energy demand, the IEA says. More of the world’s oil is coming from smaller fields, which decline faster than larger reservoirs.

The problem is compounded by the economic crisis that has dried up investment in oil projects and threatens to create a supply crunch next year, when demand should pick up, warns the executive director of the IEA, Nobuo Tanaka.

“We are already seeing that decline rates are increasing, but if we don’t invest now it will start to increase even more,” he has told Reuters. “The resources underground are there if we are prepared to invest.”

Merrill Lynch says the credit crunch has hit the industry harder than expected and decline rates are expected to accelerate as investment drops. Allocations for capital expenditures are dropping at the big international firms and enhanced oil recovery and deepwater drilling will be hit hard.

“Broadly, oil production decline rates are a function of the size and age of the fields and investment rates,” Merrill writes. “In our base-case scenario we see non-OPEC oil production pretty much stuck in the current 49 million bpd to 50 million bpd range until 2015... Should production decline rates accelerate to 6 per cent, however, non-OPEC production could decline precipitously towards 47 million bpd.”