June 10, 2011

A Total View of the Oil Prospect

Of all the major oil companies, French giant TOTAL has come closest to accepting the peak oil case. In its latest report, detailed at The Oil Drum, it sets forth again a view of the impending collision of supply and demand, with the latter outstripping the former.

Rembrandt's explication of the TOTAL presentation is worth reading in its entirety; there is a detailed demonstration of how different kinds of oil fields deplete. After an exhaustive study of existing fields, TOTAL reached the following conclusion: “Whatever the size of the field, . . . there is some physical law that after a recovery of about 25% - 30% of the Oil Originally In Place (OIIP) in the reservoir oil production will begin to decrease.”

Here are a few other key points, as summarized by Rembrandt:
Since 2006, . . . TOTAL has consistently voiced warnings about the future inability of the oil industry to meet continued oil demand growth. In 2006, then CEO Thierry Desmarest stated that maximum oil production lies between 100 to 110 million b/d, reached potentially by 2020. Only a year later the new CEO Christophe de Margerie announced that it would be difficult for the industry to produce beyond 100 million b/d, a message that became and remained 95 million b/d in subsequent years (1), (2), (3), (4).
[Pierre Mauriaud, who gave the presentation for Total,] mentioned that their key message is not one of a lack of resources. According to the company there are plenty of resources left including conventional oil. The problem lies in turning these into reserves due to the need for advanced technology, large scale investments, and a lack of resource accessibility of international oil majors.
Mauriad emphasized that the only remaining low cost oil is in the Middle East--"the time of cheap oil is finished and has been for some time." While there is lots of "highly technical" oil, "such as deepwater, extra heavy oil, arctic oil," it can only be produced if the price is right.
To underline this view he presented a highly interesting graph [below] with data on TOTAL’s expectation for production costs of different types of oil, denoted in the break even oil price in 2010 at an Internal Rate of Return (IRR) above 10%. The more technical projects, including enhanced oil recovery and extra heavy oil, require an oil price range between 60 to 90 dollars to give a decent return.

TOTAL does not see the international oil majors able to sufficiently increase production by the more complex technical projects. The new detail beyond previous statement’s from Mauriaud’s presentation is the relative quantification given of which regions will be the major producer in the future, as shown in the chart [below] . . . .TOTAL sees oil production as stagnating and declining in all regions except for the Middle East.  . . . It can be inferred from the chart that TOTAL expects 45% to 50% of the 95 million b/d will come from the Middle-East in 2030. 


Recall that ten years ago the prevailing expectation among the IEA and EIA, as the other major oil companies, was that production would rise to above 120 million barrels a day by 2020, as the EIA forecasted in 2002. Official estimates have fallen by 10 mbd in the intervening years. The EIA now says 110 mbd by 2030, much lower than before but still 15 mbd above the estimate from TOTAL (95 mbd).

So we've got 15 mbd to account for. TOTAL discounts the geological constraint and instead places emphasis on the costs of the technology, the huge capital investments needed, and the practical lack of access of the international oil companies to the 70 to 80 percent of world reserves held by NOCs. But the other major oil companies and CERA acknowledge those themes in their presentations, so it is difficult to understand the basis for the huge differential.

If you put together TOTAL's projection of oil supply with the IMF's recent projection of oil elasticities (which showed oil consumption rising with economic growth and falling little in response to price increases), you've got a big collision coming. Under tight conditions, prices are vulnerable to shooting skyward until such time as they flatten the economy, whence they may be followed by vertiginous collapses that imperil investments and dry up sources of capital. That was the pattern of 2008, of which there's been a certain echo in 2011. Over the next several years, I think it is likely that oil will press its limits on the upside, and that the long term path for prices is a jagged march upward.

The feature of this outlook most worth emphasizing (though not especially novel) is the projection that 45 to 50% of production in 2020-2030 will come from the Middle East, presumably driven by substantial increases in both Saudi Arabia and Iraq. Unfortunately, there is no exact estimate given of the assumed Saudi and Iraqi production, but Total appears to credit the more optimistic scenarios about the ability of the two states to raise their production.

Be that as it may, there is no escaping the dependence of the world energy system on the Persian Gulf. All that increased production will be gobbled up by China and other Asian states, making anomalous America's ostensibly protective role. It was one thing to protect the oil supplies of Western Europe and Japan during the Cold War, but to do the same for China in the post-post Cold War? From the standpoint of the national interest, the whole arrangement seems positively idiotic.

It would, however, take a brave man to predict a U.S. disengagement from the region. The interests of the empire, as opposed to those of the nation, dictate that a consuming interest be taken in how the wealth generated by oil gets used. As the $60 billion arms package for Saudi Arabia shows, one thing it feeds is the military-industrial complex. But U.S. interest in the region stems from other factors as well, including the desire to maintain global military dominance, ensure support for Israel, and promote "the general purposes of our greatness."

The world's "indispensable nation" seems drawn, ineluctably, to the world's indispensable resource. I would like to encourage a separation, if not a divorce, between the two, but such a prospect would cause howls in respectable society.

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