Guest Post by Willis Eschenbach
Well, having had such a good time with M. King Hubbert meeting the EIA, I thought I’d toss out another puzzle. This one is inspired by a statement from the King himself that someone quoted in that thread, viz:
“A child born in the middle 30s,” Hubbert told reporters, “will have seen the consumption of 80 percent of all American oil and gas in his lifetime; a child born about 1970 will see most of the world’s [reserves] consumed.”
Since M. King Hubbert was concerned about how most of the world’s reserves were going to be consumed, I thought I’d see how much of the US reserves have been consumed over the last third of a century. It’s an interesting answer …
Figure 1. A comparison of the annual estimates of the US proved oil reserves (red line), and the US cumulative oil production (blue line), for the period 1980-2012. Data from the 2013 BP Statistical Review of World Energy. “Proved reserves” in the dataset are defined as follows: “Proved reserves of oil – Generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions.”
It appears that since 1980 we’re totally out of luck. First we completely used up every drop of the proved reserves.
Then we used them all up again. Then we used them all up for a third time … and the proved reserves are still about where they started. Go figure.
Since the King was also concerned about using up the US and global natural gas reserves, I thought I should look at that as well.
Figure 2. A comparison of the annual estimates of the US proved gas reserves (red line), and the US cumulative gas production (green line), for the period 1980-2012. Data from the 2013 BP Statistical Review of World Energy.
Well, it’s about the same story. We started in 1980 with 6 trillion cubic metres of proved reserves of gas. Since then we produced almost 18 trillion cubic metres, about three times our original reserves. The main difference between the gas and oil is that the proved reserves of gas are about a third larger than they were in 1980 … go figure indeed.
I bring this up for a simple reason—to show that we don’t know enough to answer any questions about how much oil and gas we’ve used, or to determine if the King was correct in his claims. According to all the data, since 1980 we’ve used three times the proved reserves of oil and gas, and despite that, the proved reserves are the same size or larger than they were back in 1980. So how can we decide if Hubbert was right or not?
Now, please don’t bother patiently explaining to me all of the reasons for this curious phenomenon, because I’ve heard them all. I assure you, I understand the difficulties in estimating proved reserves, and the fact that the numbers come from the oil companies, and that technology improves, and that the companies tend to explore until they’ve got maybe twenty years in the bank, and the fact that the reserves numbers are sometimes radically revised, and that economics plays a huge part, and the rest … I know all the reasons for what I showed above.
I’m just pointing out that it is very, very hard to say what will happen to future reserves, or what their total extent is, or how much recoverable energy the world contains.
The underlying problem is that the proved reserves represent the amount of economically recoverable gas and oil … and that, of course, depends entirely on the current price and the current technology. In other words, the amount of “natural resources” in the world is not really a function of the natural world—it is a function of human ingenuity. For example, in the 1930s, the big concern was “peak magnesium”, because the proved reserves of magnesium were dropping fast. Or they were, until a clever chemist realized that you can extract magnesium from seawater … at which point the proved reserves of magnesium became for all purposes infinite.
Now, did the natural world change when the proved reserves of magnesium went from almost none to almost infinite? Like I said, the amount of natural resources depends on human ingenuity, and not much else.
Best regards to all,
w.
PS—Again, if you disagree with something that I or someone else said, please QUOTE THEIR EXACT WORDS and state your objection. That way we can all understand just what you are objecting to, and the nature of your objection.
Bank on Willis – the oil sand in Alberta and fracking in the US are two examples of what you mentioned. One time neither was worth the time, effort, or cost to access – price and human technology change the course of history. Moreover, here in the oil sands we have hundreds of gas wells shut down because of low gas prices just in my area alone.
“Proven” does not include reserves hoarded in secret. Sleep easy GenX, you will be consuming cheap energy from “fossil” fuels until you and your grandchildren “drop off the twig”.
Yep, like Aluminum reserves in 1860 when Queen Victoria received an aluminum utensil set to put into the crown jewels…
I’m afraid the graphs do not tell the whole truth, since you do not represent the cumulative reserves – regular reserves are continually corrected for already extracted, and it also depend on year
denniswingo says:
January 12, 2014 at 11:50 pm
Thanks, Dennis. When it was built in the 1880s, the peak of the Washington Monument was crowned with a pyramid of that most expensive, special, and precious material, aluminum.
At the time aluminum was $1 per ounce, and a skilled workman made $1 per 10-hour day. Today a skilled workman makes maybe $30 an hour, which would put the current dollar value of the aluminum at around $300 per ounce …
w.
HLx says:
January 12, 2014 at 11:59 pm
Thanks, HLx. I don’t understand what you mean by “cumulative reserves”, because there’s no such thing.
From the definition above, proved reserves are:
As such, a “proved reserve” is something that can be measured or estimated at any given instant, but yesterday’s reserves can’t be added to today’s reserves. They are an estimate of an asset given conditions at a specific time (technology, economics, costs) and they are not combinable with any other instantaneous estimates.
“Proved reserves” are like a balance sheet. A balance sheet is the snapshot of the assets at a given instant.
But if your balance sheet this Jan. 1 shows you have $100,000 in assets, and your balance sheet last Jan.1 also showed you had $100,000 in assets, you cannot add them together to give you “cumulative assets” of $200,000. Doesn’t work that way.
w.
Look a Mann to me. Strange that you always look for an hockeystick if you see a upward trent.
Telling the world there is nothing under the counter would keep the price high but it’s barely a secret to anyone who doesn’t bother with the msm.
The few oil rigs of cheap easy to get oil that literally gushed out of the ground are being replaced by more rigs that are drilling ever deeper for less these days. Gas rigs out to sea near me are like feasting mosquitoes. They feed and move on. Coupled with fracking they can also extract ever more that had to be previously left behind but at a greater energy cost. My bro’ in law is in the piping industry and his business load has been growing year on year since we helped set him up in the ’90’s.
A slight omission in the graph is a present day line for the cost of extraction in KWH/KWH.
Ingenuity on its own is not enough. You need a combination of reserves which are unknown at the margin plus price to bid for the capital investment plus the ingenuity thing. Price also determines demand. We get much more GDP per barrel than in 1980. So ingenuity (and price) works on the demand side too. That said, the peak oilers will tell you that what matters is flows, or rate of production, and not reserves. Brick clay can contain 20% organic matter which can be cooked into oil if the price is right. Coal and shales can be turned into oil or gas. There is lots of buried hydrocarbons out there but its hard to do it at tens of millions of barrels a day.
If anything Life has got far too good at burying carbon. We are actually helping by counteracting that. OT but human agriculture may have helped stabilise the Holocene. The NH would be covered by dense forest by now instead of grasslands (which includes crops). Forests leading to cooler temperatures plus more evaporation leading to increased snowfall near the pole would bring on the next ice age.
Hubert wasn’t a bad scientist given the information he had available. His greatest weakness was in not understanding the price mechanism. The same applies to the peak oilers. Demand is not fixed.
There’s something screwy going on here. I was born right slap-bang in the middle of the ’30s, so according to the King, I should have seen a depletion in US oil reserves from about 38 x 10^6 BBO to about 5 x 10^6 BBO. However that has not happened, the reserves seem to have scarcely budged.
I smell (as well as oil), a plot by Big Oil!
Something must be done!
I would say the idea using “peak energy” as a stalking horse for global socialism is pretty much dead and repeated flogging is unlike to revive it. There’s too much natural gas and thorium to get that old nag up and trotting. There’s also a Chinese moon rover currently sniffing at the He3 in the lunar regolyith. And there’s the tiny problem of the moon Triton. Lots of natural gas. No known biology. Did someone say “Fossil”?
“Bio-crisis” and “Sustainability”, the UN backup plans for AGW, will crash and burn on take-off. All the NGO’s and activists they need as “useful idiots”are already covered in the putrescent slime of global warming advocacy. In the age of the Internet that doesn’t wash off.
So what’s next?
I’m hoping they will go with “peak fresh water”. But this may not be the next move. The fellow travellers in the global warming inanity will shortly be less concerned about advancing their aims and more concerned with their very political survival. I fear that their next move will be “kicking up some dust” and hoping to slink away to fight again another day.
The basic problem is the general misunderstanding about what is meant by “reserves”. For the part of the world where oil and gas is not a nationalized resource, the term “reserves” is meant to describe an asset on a companies balance sheet. It should not be suprising for most companies to hold no more than 8 to 15 years worth of reserves when you think it through. Management needs to decide how to apportion its finite resources between 1. Generating revenue (from production from reserves) and 2. Replacing reserves either by going out and exploring, or buying reserves which someone else has discovered. It would not really be consistent with the capitalistic way to keep spending effort looking for oil if you have many years worth already booked (shareholders would revolt) Then again, if you managed a company that had produced most of your reserves and you were down to your last 2 years worth, shareholders would likewise become quite concerned. The whole reserve business is really just a reflection about how management of exploration and production companies manage resources. Some social scientists have simply misunderstood reserves and took them to be an estimate of the total.
For nationalized oil companies (OPEC members), estimates of resources and reserves are essentially state secrets, puplished estimates might be inflated (or deflated) for reasons of national interest.
Proven reserves are those that we know about and have measured. But we also know that there is more oil and gas underground. It’s just that we don’t know how much so we don’t include any guesstimates about this unknown quantity in the published figures. Some of the unknown oil and gas is also uneconomic to extract with known technology. The reason why reserves never seem to run out is that the unknown quantities are investigated and quantified and new techniques and technology used to extract it and they are included in published figures.
Steve R says:
January 13, 2014 at 12:50 am
“The basic problem is the general misunderstanding about what is meant by “reserves”. For the part of the world where oil and gas is not a nationalized resource, the term “reserves” is meant to describe an asset on a companies balance sheet. It should not be suprising for most companies to hold no more than 8 to 15 years worth of reserves when you think it through. ”
Yeah but. M King Hubbert should have known.
It might be of interest in this regard that M King Hubbert was a cofounder of Technocracy, the short lived central planning movement in the 1920ies that planned to power all of North America (the “TechNat” for Technocratic Nation) with water power – which was the “renewable” panacea of the day- think Hoover dam or the unrealized Atlantropa.
In the 20ies, many still expected socialist / centrally planned systems to work better than and overtake capitalist systems (those who hadn’t read their von Mises / Adam Smith).
see for instance
http://mkinghubbert-technocracy.blogspot.de/
Proved reserves is only one category of reserves.
Willis:
I’m afraid you misunderstood me. Let me use your analogy:
If i have $100.000 in reserves 1.jan 2010, and I extract $50.000 of those reserves in 2010 (let us not bother with interest rates and such), and I still have $100.000 in reserves 1. jan 2011 – clearly I must have discovered $50.000 of reserves in addition to the first $100.000 – giving a cumulative reserve of $150.000. My point is not that your graph is “wrong”, but one should be very careful to compare “snapshots” with a cumulative growth curve.
It is hard to believe that anyone would expect the proven reserves (the snapshot at one specific time) to be the real future reserves – as one has continually explored and expanded the projections. A better benchmark would be comparing individually accepted papers written on the subject at different times during the 19-hundreds – which would better show the mockery of future projections.
And people also worry about there not being enough copper (amongst many others) left, and you can kick a rock in the backyard and it is pretty likely it will have at least some copper in it. It is simply a function of technology, energy, and the demand to extract it.
As for oil and gas, then there is also the methane clathrates……which I’ve heard are bigger in size than all the world’s oil and gas resources combined…..
Thingadonta
“It is simply a function of technology, energy, and the demand to extract it.”
I have a theory that the price of ANYTHING is a pretty good measure of the energy that has gone into producing it.
I invest in oil & gas. I own stock in a company operating in the North Sea that has spent two years developing a field with 40 million barrels of recoverable oil.
That is 1/2 of the world’s *daily* demand. An entire field, drilling, floating production platform, licensing, 2 years of development….all for 12 hours worth of oil.
It is NOT sustainable.
@HLx: Willis’ graph shows exactly what it was intended to show, and very clearly so. If the alarmist proposition at the very start of the post were true, one would expect the reserves to have DIMINISHED, in a curve mirroring that of the extraction, heading for zero, at which point extraction also must drop to zero. The fact that this hasn’t happened, but on the contrary, “proven reserves” are growing in recent times, is quite sufficient to show that the figures reported as “proven reserve” have no value whatever for estimating how long the resource will last. Possible explanations for the discrepance between “proven” and actual reserves have been quoted by previous commenters, but *don’t matter* for the present argument: Those that say we have “proven reserves” of only so-and-so many tons of oil and therefore are doomed to run out of the stuff in the near future either have no idea about the (non-)significance of the term, or are lying in our face.
HLx, I think most readers would have realised that when the reserves remain almost flat despite continuous extraction, this means that new reserves are being identified at all close to the extraction rate. And in the gas case, where reserves increased despite extraction, clearly new reserves are being found faster than they are being used.
All of which I beleive Willis explained, at least to my satisfaction, with the statement that “the companies tend to explore until they’ve got maybe twenty years in the bank”.
So I think you are either missing the point or just nit-picking.
@rokshox
…That is 1/2 of the world’s *daily* demand. An entire field, drilling, floating production platform, licensing, 2 years of development….all for 12 hours worth of oil.
It is NOT sustainable.
I have a pencil on my desk. I use it occasionally. Every time I use it, some of the graphite rubs off.
Do you think that this means that humanity will never be able to create documents again?
Lew Skannen says:
“I have a theory that the price of ANYTHING is a pretty good measure of the energy that has gone into producing it”
I might agree, except with a few significant caveats, from e.g. the field of mineral exploration.
Very often a deposit such as a copper deposit might take many years to find, so perhaps a better statement might be the ‘energy which has gone into finding and producing it”. The ‘finding’ is an important component. If it doesn’t get ‘found’, it doesn’t get produced at all, (which may or may not average out in the final ‘price’, not really sure about that).
Then there is the political component, if a government delays a project for whatever reason, or wants an increase in taxes or ownership, this is also a cost, but I’m not sure this has much to do with ‘energy’.
The recent gold price rise is an example of this sort of thing, (and note that Bernanke admits he doesn’t understand the gold price); the cost of producing an ounce of gold went from around $400/ounce in 2005 to around $1100/ounce in 2013. Now this wasn’t because the energy required to produce it increased in price, it was largely a function of 1) market interference, by e.g. the US bond buying program and others, and 2) governments around the world wanting a bigger piece of the gold pie; ie increases in taxes and other factors to appease the never -ending and insatiable need for governments to try and steal private resources, with mining (and also oil and gas) always seeming to be the one to get the raw end of the deal. Not sure if these two factors-monetary policy and government nationalism- have much to do with energy though. Gold is also unusual in that it is both a commodity to be used (industrial use and jewellery), as well as a currency (can, and often does, substitute for money, particularly where people don’t trust government monetary policies).
The whole thing with the gold price though is a different story to that of oil and gas, for another day.
Proved reserves have a very specific definition. In the US, publicly traded companies are required to book and report reserves according to SEC rules.
In order to be proved, the reserves have to be penetrated by a wellbore and unequivocal, with at least a 90% probability of recovery under existing economic and political conditions, using reliable technology. Proved reserves have to be identified in a wellbore and/or supported by production data.
Here’s a very simplistic example…
In this scenario, a well is drilled up-dip to a dry hole with an oil show. The entire volume can be booked as proved because the down-dip well has an oil-water contact…
http://i90.photobucket.com/albums/k247/dhm1353/Proved.png
In this scenario, the down-dip well has no oil show, just wet sandstone. If the oil well was drilled on the basis of a seismic hydrocarbon indicator, the volume down-dip of the lowest known oil has to be booked as probable…
http://i90.photobucket.com/albums/k247/dhm1353/Probable.png
When the production from the well exceeds the original booked volume, the operator can increase the proved reserves on the basis of cumulative oil production vs. water cut or pressure decline, depending on the drive mechanism. __________________
Suggestions that the oil industry willfully under-reports proved reserves in order to drive up prices are bizarre, to say the least. Each and every year, most of us have to “do battle” with our independent auditers in order to book reserves. Proved reserves (bbl) translate to proved value ($). The only thing worse than under-booking is over-booking because taking value off the books is not a “good thing” and no one enjoys the attention of the SEC. The purpose of reserve rules is to enable investors to accurately value oil & gas companies.
To some degree, companies would drill to prove up the resource to a sufficient size and confidence level to obtain financing. 20 years is quite a normal order of magnitude for the amount of reserve that is “proved up” – this is really due to the effects of discounting in NPV calculations, which make cash flows beyond 20 years small – or even immaterial to project value, depending on discount rate used. However as another reader pointed out, proved reserves is only one of the various subsets of the total resource estimate. Future “proved” reserves may sometimes have been recategorised up from a lower confidence category, through drilling or some other exploration technique; or as technology, or price improves, without any additional “discovery”. Rarely, the reverse will occur (e.g. http://www.energy-pedia.com/news/general/hell-re-categorizes-proved-reserves-that-wipes-£8bn-from-company-value-). It would be useful to do the same analysis including down to the “contingent resource” estimate.