Saturday, 23 August 2008

Megaprojects - Are we on plateau?

The people working on the Oil Megaprojects wikipedia database have published an August update. The work is supposed to tabulate and add together all major new oil production coming online in the next few years (time horizon of c. 5 years from now).

There is one image taken from the MP data that bears repeating here. Otherwise those interested in the issue can go and read the whole discussion at TOD.

It is crucial to understand that oil fields deplete as they are produced, and the production from all existing mature fields starts to decline at some point.

The current global decline rate from all mature fields combined is c. 5.1% per year. This means that we need a c. 4 million barrels/day of new production capacity each year, just to stay on current production level. This plateau type of production level does not allow for economic growth in our current paradigm.

Currently, based on production date, demand growth, price trend and upcoming megaprojects data, it looks very much like we are on an undulating production plateau.

This is crucial to understand. Peak projections based on reserves are one thing. This is real data from the real world now. Not a projection, but what is happening in the world now.

This gives strong weight to near peaking hypothesis which are based on projective models.

What about the potential effects of this plateau - even without a final peak and decline?

There are two ways to think about this. If this is true, will it ease when the world goes into recession next year and world demand growth shrinks? Or, will this be the final nail that drives the world into a deep recession, as world economy needs increasing amounts of oil in order to grow?

Tuesday, 19 August 2008

R/P ratio is completely useless

One of the favorite argumentative tools used by people who do not understand oil production limits is R/P ratio. R/P ratio is the supposed magic number that tells how many years of oil we have left. However, in reality it tells us nothing useful about either how many years of oil we have left, what is our production rate or when we should start worrying about oil.

Consider post the very basic primer on reserves and production, which after you have read it, you should feel completely at ease to ignore the whole R/P number and concentrate on data and models that really matter.

What is Reserves to Production supposed to tell us

Reserves to current production rate is a completely theoretical number, which gives a number of years current reserves would last IF we had as much reserves as projected and IF we could produce them at a steady constant production rate (and by implication: IF that constant rate was enough for us).

Three simple facts tell us why this number is completely meaningless and should not be used, unless one is deluded, a bit simple or wants intentionally to mislead:

  1. Our consumption growth is tied to economic growth and both must grow in the current paradigm that is based on increasing amount of debt. We cannot stay at current level of consumption, it must grow if the economy is to grow (i.e. employment, banks don't go bankrupt, companies keep investing, etc). There goes the ratio. Growth rate would theoretically dictate how long the reserves would last, if we could produce them at an increasing rate. However, we can't produce them at will.

  2. Our production cannot physically stay at the same current level until we run out of resources. It will drop as time goes by, because geology, technology and resources available make it harder to get each new barrel out. So production will go down.

    This raises the R/P ratio, but it is completely meaningless. What's the point of having a gazillion dollars in your bank account, if you can draw $1000 today, $950 tomorrow, $900 the day after tomorrow, etc (approaching zero). After 20 days or so you've gone being able to withdraw near zero amount of money out of the bank. End results: you starve with lots of money left in the bank.

    This flow of money in this example is roughly similar to how flow of oil happens. Reserves in the ground do not matter at all. Only getting them out at an increasing flow rate (barrels/day) matters and this is physically impossible to accomplish, regardless of money, technology or manpower.

  3. Reserves are funny numbers. They may be Proven (1P), Proven + Probable (2P), Proven + Probable + Possible (3P) and even Proven + Probable + Possible + Pulled-out-a-hat (4P). With each successive P, you get a smaller likelihood that the reserves actually exist in the real world, instead of being only numbers on a paper conjured up by some obscure mathematical model.

    We already know it is very likely that OAPEC resource numbers are of the last variety, i.e. pulled out of the hat and do not really exist. Then there's unconventional oil, which is another completely different type of resource altogether and cannot be simply calculated together with current oil reserves.

So, these three things alone should make it really easy to understand, that R/P means nothing and that it guarantees nothing about business as usual (BAU) continuing for any number of years.

Only ever increasing flow rate at c. 1.8% per annum (minimum) guarantees currently any sort of BAU scenario (with our current consumption model, economy and energy infrastructure). Anything less than that and we are in a worldwide recession (or worse).

Peak oil is about flow rate becoming really hard to increase (e.g. past 3 years) and the time when that flow rate starts to shrink (currently looks very likely to happen within a few years).

That completely destroys any and all BAU scenario for liquid fuels consumption and starts a non-BAU scramble for natural gas and coal demand as well, destroying BAU for those fuels as well.

So, repeat after me:

I shall never ever use R/P figures again, they are meaningless
I shall never ever use R/P figures again, they are meaningless
I shall never ever use R/P figures again, they are meaningless

So, the next time somebody argues about R/P ratios, remember that the number gives us no useful estimate as to how long our oil might last - either altogether or in any meaningful daily quantity. As such, R/P tells us nothing about BAU possibility in the future. To repeat: nothing.

As such, R/P really is a useless yardstick for oil reserve sufficiency and should not be used. If you want a better substitute, look at flow rate models compared against economic growth dictated consumption models, like the one below.

Monday, 4 August 2008

"Rationing coming to OECD by 2010"

Some people have mistakenly think that a fall in oil spot prices is signaling the return to happy times.

Not so.

While US and OECD demand is indeed shrinking, Asian demand is still growing faster.

As long as the whole world economy doesn't go to a deep recession, it is very unlikely that oil prices will hit the previous very low levels.

In fact, in a recent report released by a fairly conservative Dutch Clingendael International Energy Program, the price floor is is at $110 USD.

Further, the study states that:
  • Oil crunch may hit the world by 2010 (not in 2015 as IEA originally warned)
  • Oil price is very inelastic in short term (Bank of England is reporting the same)
  • Production maximum is at 100-105 Mb/d (this is optimistic, 100 Mb/d is likely to be the absolute ceiling in even the most optimistic case. More likely it'll be near 90 Mb/d)
  • Demand rationing will become effective in OECD countries, esp. in the USA (read: you can't buy all you want, even if you have the money - volumes will be limited)
  • Developing countries will have to cut their subsidies (expect a consequential price rise in their exports like food, clothing, electronics, commodities, etc)
  • Geopolitical tensions will continue to grow (Iran, Venezuela, Syria, Algeria, Nigeria ... take your pick)
So there you have it. The Peak Oil news is becoming mainstream even in the political analyst circles.

This is not that far anymore from a direct and public peak oil admission. We are being fed the truth in small doses, in order to make sure that patient doesn't die of treatment shock.

Friday, 1 August 2008

EU Natural Gas Forecast

An excellent graph from Rune Likvern:

Click to see a larger version of the image