More Fun with Oil and Gas

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 …

us proven reserves and cumulative productionFigure 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.

us proved gas reserves and cumulative productionFigure 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.

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149 thoughts on “More Fun with Oil and Gas

  1. 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.

  2. “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”.

  3. 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

  4. denniswingo says:
    January 12, 2014 at 11:50 pm

    Yep, like Aluminum reserves in 1860 when Queen Victoria received an aluminum utensil set to put into the crown jewels…

    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.

  5. HLx says:
    January 12, 2014 at 11:59 pm

    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

    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:

    … 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.

    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.

  6. 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.

  7. 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.

  8. 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!

  9. 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.

  10. 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.

  11. 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.

  12. 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/

  13. 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.

  14. 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…..

  15. 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.

  16. 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.

  17. @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.

  18. 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.

  19. @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?

  20. 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.

  21. 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…

    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…

    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. __________________

    Exposing the 2 percent oil reserves myth

    Posted March 13, 2012

    “The United States holds only 2% of the planet’s proven oil reserves,” President Barack Obama.”

    According to President Obama, the United States contains only 2 percent of the planet’s proven oil reserves, Of course, he’s right — to a point. In classic fashion, he’s using a technicality to skirt the facts and keep the myth of energy scarcity alive. The reality is that the U.S. has enough recoverable oil for the next 200 years, despite only having 2 percent of the world’s current proven oil reserves

    Proven oil reserves are not all of our oil resources—not even close. In fact, proved reserves represent a tiny portion of our total oil resources. Proven (or proved) oil reserves are reserves that have already been discovered, typically through actual exploration or drilling, and which can be recovered economically. That estimate does not include oil that we know about, yet are unable to access because of regulatory barriers. For example, the billions of barrels of oil in ANWR are not included in our proved oil reserves. So let’s look at the facts.

    Currently, the United States has 1,442 billion barrels of technically recoverable oil, but only about 20 billion barrels are considered proven oil reserves…

    [...]

    Proved Oil Reserves Are Not Static

    Let’s take a look at history. In 1944, U.S. proven oil reserves were 20 billion barrels — about the same as they are today. Yet, between 1945 and 2010, the United States produced 167 billion barrels of oil. In other words, the United States produced over 8 times more oil than the amount of proven oil reserves it had in 1944. How can that be? The answer is that proven oil reserves are not stagnant because people keep looking for oil. Proven oil reserves keep changing, are officially recorded every year, tallied country by country, and published in the Oil and Gas Journal, among other publications. And due to U.S. entrepreneurship and ingenuity, more reserves are found and proven each year.

    [...]

    http://www.instituteforenergyresearch.org/2012/03/13/exposing-the-2-percent-oil-reserves-myth/

    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.

  22. 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.

  23. In the Gulf of Mexico, they are reaching out to deeper & deeper waters…and still finding oil reserves. They have currently reached water depths nearly 10,000 ft deep and area able to drill thousands of feet into the sea floor beyond that! In the South Atlantic off Brazil, they are finding and doing the same. One has to wonder, are there unknown oil/gas deposits that reach out across the Atlantic & Pacific oceans just waiting to be recovered?

  24. SideShowBob says,

    and future oil will not be able to compete with renewables sorry that’s the way it is,

    I appreciate the argument that renewables don’t need subsidy but it is not certian that the rise in oil price that coincides with the increase in demand from China will continue.

    http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp

    It may be that the new extraction techniques which are working in the US will push down the prices in the rest of the world too (when they are exported).

    Or that may not be the case… yet extrapolating the rise in crude oil prices without any limit is still folly. At some point a new technology will be economical and the oil price will settle there. About where coal-to-oil becomes profitable at most. Are renewables cheaper than that? Remember, oil is used in transportation so we have to develop batteries as well to make renewables competitive.

  25. SideShowBob:

    Your assertions of renewables replacing fossil fuels is plain daft.

    With the exception hydro (which is energy intensive and available on demand), renewables were abandoned when the invention of the steam engine enabled the greater energy intensity of fossil fuels to be available to do work.

    This freed humans from the limitations of wind power, tidal power and the muscle power of animals and slaves.

    The most efficient use of wind power is sails for powering ships: there are no mechanical losses in converting the wind power to motive force. But normal winds provide little power and only provide it intermittently. So, wind is not used to power ships or any other industrial or commercial activity which requires much and continuous and reliable power.
    If your assertions were true then oil tankers would be sailing ships.

    Richard

  26. 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.
    and
    Now, please don’t bother patiently explaining to me all of the reasons for this curious phenomenon, because I’ve heard them all.“, followed by a list of the reasons behind the reserves phenomenon.
    w, I don’t think that you have been very smart. Perhaps disingenuous is the right word. You tell people to go figure, like you’ve just exploded a myth, but there isn’t anything to go figure because, as you explain, the reasons are all well known.

    For those who still don’t get it, let me help: “known reserves” do not in any shape size or form represent the sum total of available oil on the planet. They used to be just the bits of oil that the oil companies had prepared or were preparing for production, or had examined in some detail – something they tended not to do if they had no near(ish) term plans for its production. Unfortunately, oil data has become increasingly politicised, and thus increasingly opaque, but there’s still some useful data out there. A quick search for some relevant data ….. OK ….. in 2007 BHP had stated proven ‘petroleum reserve’ of 1.35bn boe, but their total resource was 4.95bn boe. ie, they had only bothered to ‘prove’ just over a quarter of their total resource. So starting in 2007, BHP could produce all of their proven reserve three times, and still have nearly that amount left over, without having to find a single new drop.

    http://www.bhpbilliton.com/home/investors/reports/Documents/petroleumSaIrPresentation.pdf

    That’s the sort of thing you find when you ‘go figure’.

  27. Willis, muddies the water again. For instance the “natural gas” reserves haven’t actually changed. The price structure has, so natural gas will never be as cheap as it was in the past. I doubt this is a good thing. The Marcellus was well known for more than 60 years.

    FYI, the first natural gas discovered was on the Delaware river right here in NEPA. I will see if I can find the story… It involves an Indian, a doctor, an outhouse, old pipes and and explosion.

  28. The USA are not the center of the Universe even for what concerns fossil energies ; OK , they were a bit favoured from a geological point of view ; probably that is why the Colonel Drake was the first to drill for oil ; and also why they are currently the first producer in the world ; but don’t forget that they are also the first importer ; so , if the rest of the world doest not follow the USA in what concerns source rock fracking and production , there will rapidly emerge energy problems , even in the USA ; because, I suppose , nobody refuses the decline of conventionnal oil : since 1980 new discoveries do not counterbalance the production
    As you said ,the amount of natural resources depends on human ingenuity and not much else. I would say they depend on human ingenuity a little bit , but mainly on the disponibility of energy; don’t confuse resources and energy, magnesium or cadmium and oil

  29. stanb999:

    Your post at January 13, 2014 at 4:54 am claims

    Willis, muddies the water again. For instance the “natural gas” reserves haven’t actually changed. The price structure has, so natural gas will never be as cheap as it was in the past. I doubt this is a good thing. The Marcellus was well known for more than 60 years.

    NO! Willis has clarified – not muddied – the waters.

    If the price structure has changed then BY DEFINITION the reserves will have changed.

    In his above article Willis says

    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.

    So, I will not do that here. Instead I point you to a post I made on the other thread which provides a simple explanation of these matters which you proclaim you do not understand: this is a link to it

    http://wattsupwiththat.com/2014/01/11/m-king-meets-the-eia/#comment-1534338

    Richard

  30. Willis, any story on oil and gas reserves should begin with an explanation of the two totally different reporting standards employed by the oil industry. 1) the security exchange commission (SEC) standard tends to give gross underestimate of what is technically believed to be recoverable 2) the society of petroleum engineers (SPE) tends to give a more realistic estimate. A country like the USA uses SEC – the reason for perennial underestimation. Middle East OPEC countries use a modified version of SPE – so called flat reserves returns. Countries reported by BP are using both of these standards rendering BP reserves estimates as all but meaningless. You should check out the numbers for Kuwait, Saudi Arabia etc – annual production should be deducted from reserves at the beginning of the year.

    Also, Hubbert famously forecast that US oil production would peak around 1970. This turned out to be a good forecast, that still stands, but often forgotten is the fact that the quantity forecast by Hubbert was far exceeded. Hubbert was not a doomer, but simply saw scarce oil being replaced by abundant nuclear power – which given time may also prove to be a good forecast.

  31. Thanks for this Willis.
    My commendations too on your courteous and competent responses to those of us who comment.
    I know that the intemperate and irrational responses provided at alarmist blogs by (occasionally contributors, and often) commentators drives me away from them, hard though I try to fulfil my obligations as an honest man to examine both sides of the argument.

    I have a question I’ve wanted to ask a North American for some time now. I’m addressing it to anyone who knows the answer, not just Willis. My understanding is that President Carter introduced Federal Oil taxes, (under whatever name) in order to reduce demand, in the expectation that world petroleum reserves would be exhausted by the 1980′s.
    My question is, “What happened to those taxes?”
    Are you still paying them?
    Did Reagan or a Bush, or even a Democratic President abolish them?

    If you can also refer me to an article on those taxes, I’d appreciate it. I’ve wondered how much he raised, how much consumption declined, etc.

  32. The same “peak fuel” argument has been used about uranium to fuel power plants. Like magnesium, the supply of uranium in seawater is infinite, but today costs , I believe, about three times as much as conventionally mined uranium. BUT fast reactors can extract 35 to 40 times more energy from uranium than current reactors, making seawater uranium extraction more than just economically viable. And there are reasons to believe that more economical means will be
    developed to recover seawater uranium. Seawater extraction also means that uranium-rich countries will not be in a position to create monopolistic cartels.

  33. Jkrob says:
    “One has to wonder, are there unknown oil/gas deposits that reach out across the Atlantic & Pacific oceans just waiting to be recovered?”

    To some extent yes, but mostly no.

    Oil only exists where there are reasonably deep sedimentary layers. The deep ocean floor is mostly relatively young basalt with a thin veneer of largely non-organic sediment on top.
    There is a lot of oil in the continental shelves, which is relatively easy to extract (except in the Arctic and Antarctic and where it is politically prohibited (like the US east coast)). There is also a lot of oil in the continental slopes, probably rather more than on the shelves, as the slope was often once one side of a Rift Valley, somewhat like the Red Sea today, a good environment for hydrocarbon accumulation. The deep ”sub-salt” oil off Brazil is of this type. There is also a lot of methane clathrates in the slopes.
    Existing rift valley seas, and residual more or less cut-off and silted up seas are also of interest. Examples: the Red Sea, the Mediterranean, the Black Sea and the Caspian (the Tarim Basin in China is further example, though it has long been completely dry)
    A third type of sea bottom that is good for oil are large sedimentary cones of old, major river systems. The Mississippi and Niger are the best known examples (some of the oil in the Gulf of Mexico and Nigeria comes from this type of deposits), but there are other possible candidates the Ganges cone for example.
    Finally there are “microcontinents”, bits and pieces of continental crust now off by themselves out in the ocean and mostly submerged. Examples are the Rockall Plateau in the Atlantic, Madagascar and the Seychelles Plateau in the Indian Ocean, Zealandia in the Pacific and perhaps the Kerguelen plateau in the Southern Ocean. These all have hydrocarbon potential but have as yet been little explored.
    But most of the ocean has no oil or other hydrocarbons.

  34. fritz says:
    The USA are not the center of the Universe even for what concerns fossil energies

    Not for oil, but possibly for natural gas, and definitely for coal.

    nobody refuses the decline of conventionnal oil

    And what, pray, is “conventional oil”. Oil extracted by fracking (and other EOR techniques) in vertical holes since the 40′s has always been considered conventional, but oil extracted by slickwater fracking in horizontal holes is “unconventional”. Now in the Permian Basin it seems that slickwater fracking in vertical holes may suffice, because of the thickness of the Wolfcamp Shale. Will that count as “unconventional” or “conventional” oil? Will it be “unconventional” just because it happens NOW?

  35. Reserves & resource definitions are far more complicated than being discussed here. If people want to discuss the concept of “peak oil” , it should be discussed in the context of “total resource”, not reserves, which is a small slice of the total resource pie. The Society of Petroleum Engineers (SPE) has defined these in quite precise terms. If you are interested in learning more & understanding these relationships , I highly recommend the following link:

    http://www.spe.org/industry/docs/PRMS_guide_non_tech.pdf

    For those that want to dig even deeper, see :

    http://www.spe.org/industry/reserves.php#redirected_from=/industry/reserves/

    These links should give you a much better idea of how reserves are defined and give you a good idea how “resources” become “reserves” and thus keep the “proven resource” curves from declining with time.

    I also recommend re-reading David Middleton’s post above which also has good insight into the “reserve process”.

  36. 3. Deposits. How much oil can we ever hope to access. We do not know.
    2. Resources. How much oil do we know about. This is limited by exploration spending.
    1. Reserves. How much oil can we economically extract. This is based on the price of oil and has no direct bearing on the amount of oil present.

    To claim we will run out of reserves is to claim oil will become too expensive to extract, not that we will run out of oil.

  37. Willis, I grew up in geology with the M. King Hubbert theory it has been falsified particularly as we added the technology to identify huge stratigraphic traps. If you look at the North American Petroleum Reserves by region, there is a Political blank up the entire East coast. http://www.britannica.com/blogs/2010/09/opec-at-50-picture-essay-of-the-day/ Here is a report on the Mesozoic basins http://pubs.usgs.gov/fs/2012/3075/fs2012-3075.pdf.
    There is a Basin at the north east end of the Georges Bank in Canadian waters that has produced gas. There is a politically induced blank section of the maps. If you don’t allow exploration what do you expect…. SURPRISES?????!!!! Look here…it is an open secret that the East Coast will provide substantial reserves. http://aeinews.org/wp-content/uploads/2012/03/ocs-seismic.jpg Given the proximity to refineries this will be the location of significant reserves and production …….someday.

  38. Steve from Rockwood says:
    January 13, 2014 at 5:55 am

    To claim we will run out of reserves is to claim oil will become too expensive to extract, not that we will run out of oil.

    Ding, ding, ding, we have a winner. The cost of production is the only factor that matters. Of course reserves will climb forever. But so will the cost. Has oil become too expensive that it stifles economic growth? When did oil hit it’s high? When the the “recession” start?

    Peak oil isn’t about running out of oil. It’s about running out of cheap oil. We have.

  39. Hubbert could have added 3 words to his predictions, and it would have made them all valid – “Under current technology”. It’s much like the reason Malthus forecast that England was going to run out of food and fuel early in the 19th century – it’s always very difficult for anyone to understand the impacts of technological revolutions that haven’t happened yet, much less to realize that they may have order-of-magnitude level impacts on our resource situation.

    Hubble was right, under the technological understanding of his day. But the technology has changed.

  40. Steve from Rockwood:

    At January 13, 2014 at 5:55 am you conclude

    To claim we will run out of reserves is to claim oil will become too expensive to extract, not that we will run out of oil.

    Yes.
    And a substitute for oil would be adopted in the improbable event that oil became “too expensive to extract” prior to the end of a demand for oil.

    A consumer does not care whether the crude oil was extracted from the ground or obtained from something else. And since 1994 a technology has existed for making synthetic crude oil (syncrude) from coal at competitive price with crude oil; see

    http://wattsupwiththat.com/2014/01/10/natural-gas-switch-from-coal-brings-power-plant-emissions-down/#comment-1532437

    So, there cannot be a problem of ‘peak oil’.

    In other words, the hypothetical problem you suggest has already been solved by the “ingenuity” which Willis asserts can solve any such problem.

    Richard

  41. stanb999 says:
    January 13, 2014 at 6:10 am
    ——————————————
    “cheap” is a relative thing. America has not run out of cheap oil otherwise people would not be driving around in pick-up trucks and SUVs. Parts of Africa have run out of cheap oil simply by the fact they can’t afford to buy it.

    The cost of production is the only factor that matters. Of course reserves will climb forever.

    The cost of production limits overall reserves only by the price people are willing to pay. So far there hasn’t been much resistance.

  42. When your grandchildren are driving around in cars with bio reactors in the trunk that produce fuel and only need to be serviced every couple of years, they’ll look back on articles like this and grin…

  43. richardscourtney says:
    January 13, 2014 at 6:24 am
    stanb999:

    At January 13, 2014 at 6:10 am you mistakenly assert

    Peak oil isn’t about running out of oil. It’s about running out of cheap oil. We have.

    In reality we have not, and we know we will not for at least 300 years, and there is good reason to suppose we never will.

    Please read

    http://wattsupwiththat.com/2014/01/10/natural-gas-switch-from-coal-brings-power-plant-emissions-down/#comment-1532437

    Richard

    Richard, the reason nat gas is “cheap” in the article you note has nothing to do with the cost of coal and everything to do with regulation as I’m sure you know.

  44. tty
    conventional oïl , is oil that migrated into a bad reservoir or a good reservoir that has been more or less dégraded by diagenesis and or burial ; unconventional oïl is oïl trapped in its source rock; porosity and permeability of both rocks are very different as are there reactivity to stimulation

  45. As others have commented, proven reserves are a function of both price and current technology, and thus the US reserves of 20 billion barrels stays much the same whilst cumulative production is a straight line. With regard to ‘peak oil’ and alarms, it would be more useful therefore to look at known reserves and the rate of discovery of new fields, as well as global demand and rates of depletion. I have not done so recently – so maybe Willis, you can tackle this one. But I would expect little change from the time when reasonably recoverable reserves were estimated at about 1000 billion barrels, and known but less easily recoverable reserves were another 1000 billion. The rate of new discoveries has not altered this estimate – despite tar sands, oil shale, Brazilian oceanic fields etc.
    Current global demand is about 30 billion barrels per year – 85 million per day, and has been flat for about a decade – with China taking up the slack from economies that have significantly reduced their oil demand. In that time, the price per barrel has doubled and remains high. Those oil producers that can vary their production and manipulate the price do so in order to keep the price high, but not so high it reduces demand. Anything above $70 per barrel enables ‘unconventional’ oil sources (known reserves) such as tar sands, to become ‘proven’ or recoverable, and that reserves expands further at $100 per barrel, where the price currently hovers.
    There will be no ‘peak oil’ but a long plateau of production matching demand – I would guess another 10 years. The balancing act really relates to the stability of the global economy. There are financial analysts who reckon that $100/barrel is not sustainable and that the current western economies are simply living on unsustainable levels of government debt. This sort of price is already crucifying many economies in the ‘developing’ world. Technically, recoverable reserves can be expanded fro several decades at prices of $150 or even $200/barrel, but economically? Most financial analysts would say no way.
    I have argued in my own work (as ‘greenie’!) that renewable energy strategies are pie-in-the-sky. Wind is double the cost of fossil fuel electricity and ‘economic’ only with subsidy (nuclear about the same). Biofuels are 3-5x the fossil fuel costs. Solar between 5-10x. Those greens who are deluded (most of them) argue that as fossil fuel costs rise, renewables will take over – but what kind of economy do they imagine can survive those costs? Additionally, these cerebrally challenged so-called environmentalists cannot bring themselves to look at the areas of sufficiently fertile currently unused land that biofuels would require – it is simply not available.
    Those of you who ‘believe’ in nuclear salvation – such as Fast Breeder reactors – need to study the fuel cycle (I spent 20 years doing that) not only for its risks – which are considerable, but also its costs. Breeders require reprocessing technology, hot-liquid-waste storage, and eventual boro-silicate glass stabilisation (nobody has yet proven a ‘disposal’ option) – all very expensive to reduce the risk profiles and one serious release will doom the technology. Has anyone costed the thorium option – if so, I would like to see it.
    Seawater contains just about every mineral and nutrient we could possibly need – but at a cost to extract, and it does not help for techie-believers to add to the miserable world of greenie-believers. We all need to get real.

  46. Steve from Rockwood says:
    January 13, 2014 at 6:19 am
    stanb999 says:
    January 13, 2014 at 6:10 am
    ——————————————
    “cheap” is a relative thing. America has not run out of cheap oil otherwise people would not be driving around in pick-up trucks and SUVs. Parts of Africa have run out of cheap oil simply by the fact they can’t afford to buy it.

    The cost of production is the only factor that matters. Of course reserves will climb forever.

    The cost of production limits overall reserves only by the price people are willing to pay. So far there hasn’t been much resistance.

    Really? Then why is fuel usage down so much in the USA even tho we have more people? One needs not be gifted at reading tea leaves to forecast certain things, Increased cost in a limited resource is a no brainer.

  47. stanb999:

    Your reply to me at January 13, 2014 at 6:35 am demonstrates that you did not read the link I gave you. Here it is again

    http://wattsupwiththat.com/2014/01/10/natural-gas-switch-from-coal-brings-power-plant-emissions-down/#comment-1532437

    I again ask you to read the link.
    As I said, it explains that
    “In reality we have not, and we know we will not for at least 300 years, and there is good reason to suppose we never will.”
    And it says NOTHING about gas or any other of your twaddle.

    Steve from Rockwood and I have each given you good information and your only response is to refuse to read it and to post ignorant and unrelated nonsense.

    Richard

  48. Willis, I know you didn’t want to hear about reserves as a stock for a company looking out 10-15yrs, but this simple idea is exactly the crux of what is totally misunderstood by such as the club of rome and other centrally planned minds. I urge those who think it is only a technological crap shoot – new tech- new reserves to look at it as follows: Over the long haul, the tech is the ultimate of importance but meanwhile, reserves are just a company inventory. Because the oil sands are a “strata-bound” deposit, we have known for more than half a century that there is billions of barrels of likely recoverable oil (500 billion, I seem to recall from away back). However, the carefully measured reserves of extractable resources for a given plant and property are the reserves that get aggregated as the “certain” figure. We know there is much more.

  49. 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.

    Nillius in verba. Why do not more scientists and journalists get it?

  50. richardscourtney says:
    January 13, 2014 at 6:48 am
    stanb999:

    Your reply to me at January 13, 2014 at 6:35 am demonstrates that you did not read the link I gave you. Here it is again

    http://wattsupwiththat.com/2014/01/10/natural-gas-switch-from-coal-brings-power-plant-emissions-down/#comment-1532437

    I again ask you to read the link.
    As I said, it explains that
    “In reality we have not, and we know we will not for at least 300 years, and there is good reason to suppose we never will.”
    And it says NOTHING about gas or any other of your twaddle.

    Steve from Rockwood and I have each given you good information and your only response is to refuse to read it and to post ignorant and unrelated nonsense.

    Richard

    Posting drivel is you! Coal isn’t crud oil. Fuels can be synthesized from it, but it isn’t cheap and it doesn’t have near the convenience of crude flowing from the well bore. The Germans did this in WWII, not a new process or new idea.
    Your deep desire to justify your oil consumption is interesting. I frankly couldn’t careless about your conspicuous consumption or that of other Americans. Fact is fuel is more expensive today than in the past and next year it will cost more than today. That trend will continue till the cost of burning the fuel is prohibitive. Your suggestions to the contrary don’t hold water.

  51. Another inconvenient post for the “Control Crowd”, and another excellent example of that applied Human Ingenuity, Willis.

    My only concern is your use of terminology, particularly the word “proved”.

    Mining engineers generally follow the standard reserve classification of “proven, probably, and possible”, which corresponds to decreasing levels of confidence in computerized block models, each term defined by a particular value of the estimation variance associated with block estimates in the model.

    That way, block models of different deposits can be compared directly, the estimation variance being a function of the 3-dimensional spatial correlation obtained for the values of interest–for example gold or silver. While not an absolute, (drill hole spacing, block size and the nugget effect tend to cause problems, along with other factors) they are quantifiable and reproducible.

    Geologists use the standard Resource/Reserve Classification for Minerals found in the USGS Mineral Resources Program – 190 Appendix A. Starting with page 191 of that document, it gives a series of definitions—Resource, Original Resource, and Identified Resources, which is in turn divided into Measured, Indicated and Inferred, somewhat comparable to Proven, Probable, and Possible.

    Then it defines Reserve Base, Inferred Reserve Base, and so on.

    When discussing natural resources, MRP 190 has all the terminology needed to describe these various categories, and mining practices using sophisticated computer algorithms have further refined the terminology based on estimation variance.

    Energy commodities like oil and gas have their own definitions but generally use “Oil Reserves” which are calculated based on a proven/probably basis. These commodities are also modeled using sophisticated techniques.

    Hence, I’d suggest the term “proven” rather than “proved”, as in “proven reserves”.

  52. Many years ago, I used to oversee the reserves reporting for my company’s share of a large oilsands plant. The work was done by an engineering consultant but was rather simple.

    As I recall, the long term production forecast was projected for the licensed term of the project, and that was our proved reserves – subject to the whole project remaining economic.

    When the Alberta government approved our request to extend the plant license by another five years, we booked another five years of proved reserves.

    Our oilsands resource in the ground was many times larger than our proved reserves.

    Later I initiated the successful turnaround of our conventional Canadian Oil and Gas Division. We found that reserves had been booked thirty years earlier for discoveries that still were not on production, because they were too far from pipelines. Apparently overbooking of reserves was much more common up to about 1990 in Canada, when this practice was strongly discouraged after some disastrous public failures drew attention to the problem.

    More recently one of the majors (who shell remain nameless) was publicly spanked for overstating their reserves.

    The incentive for management to overbook reserves is apparently to hide lack of performance and hopefully get handsome bonuses and retire and dump the problem onto your successor. It only takes a few bad apples to spoil the lot.

  53. @ SideShowBob
    Thanks for the link you provided, http://www.smartplanet.com/blog/the-energy-futurist/the-cost-of-new-oil-supply/
    I’ve learnt a bit. Here in Australia, I hadn’t heard the term NGPL, which your link’s author defines as ‘Natural Gas Plant Liquids’; but thanks to Google I understand it to be what I call ‘LNG’ (liquefied Natural Gas) or LPG (Liquefied Propane Gas). (It was the ‘Plant’ that really threw me.)
    I may well be misunderstanding the argument you’re putting forward. Here I paraphrase it as I understand it:
    The cost of fossil fuel is set at the marginal cost of production. The marginal cost is the most expensive litre to produce. New sources of oil will have higher production costs than conventional sources. This high price will deter purchasers from buying oil.
    The first thing I note is that this is not the least bit surprising. He’s just expounding the standard supply and demand curve.
    The consequence of that curve is that the amount the purchaser wants to buy and the amount the producer is willing or able to produce will be equal to each other at only one price, the market price. And so, the producer will sell less than he’d like at a price lower than he’d like, for less profit than he’d like. The purchaser will buy less product than he’d like, at a price higher than he’d like, for more cost than he’d like. But it will be the most economically efficient allocation of resources.
    The second thing is that the supply and demand curve (and therefore his argument) is too simplistic. It assumes the last item produced will be the most expensive of all. But this ignores the difference between fixed and variable costs. Using hand-waving figures, as this is a discussion of principles rather than practicalities, a pipeline that transfers 100 kilolitres of fuel a day might be able to do so for an amortized cost of 10 cents per litre. But this doesn’t mean the next 10 kilolitres will cost $1,000.00. Those costs are already amortized. The extra cost might be one tenth of a cent per litre.
    The third point is that the argument assumes there will be no reduction in production costs. At first glance, this seems reasonable, as we pick the easy fruit first. But there are no grounds to assume economic efficiencies will not be discovered. And scientific and technological progress are not going to stop abruptly.
    I’m personally amused by the fact the last time I heard somebody claim that it would so stop was in connection with ‘peak oil’, saying words to the effect of “and there are no technological advances in sight for the next 20 years”, just before the announcement of all the techniques of ‘unconventional oil’. You can choose to take my word on that or not, as I’ve forgotten the source while remembering the comment.
    My fourth point addresses your “… future oil will not be able to compete with renewables sorry that’s the way it is”. I don’t profess to be as certain of the future as that. Certainly it might happen, and if it does, I have no problem with that. A diesel generator is more expensive than electricity from the grid, but I’m as happy to use a generator in my off the grid shack as I would be unhappy to use it in my suburban home.
    My concerns with the source of the wiggling of the electrons in my wiring are possibly the same as yours- its cost, its reliability and its environmental impact. I’ve listed them in the order of importance of those concerns. I accept others would order them differently, but that’s their privilege, as ordering them this way is mine. There’s no reason for you to say ‘sorry’ if that’s the way the economics turns out. Unless of course, you interfere with the market, thus wasting my money and society’s resources. And probably damaging the environment more than if you’d just left things alone, as the Greens have done to Germany. http://joannenova.com.au/2014/01/germanys-greens-help-the-coal-industry-while-the-us-cut-emissions-by-ignoring-the-greens/
    Those who argue that we’ll end up using renewables anyway so we should help it along right now, are obviously not as morally defunct as those who say “Since we’ll all end up in the grave anyway, we might as well help them along.” But they are wrong in the same direction, and for the same reason. Well, that’s how I see it. Your mileage may vary.
    In summary, I find the argument you link to is mistaken, but even if it turns out that I’m the mistaken one, the argument does not justify switching to renewables before it’s economically rational to do so.

  54. Fritz says:

    “conventional oïl , is oil that migrated into a bad reservoir or a good reservoir that has been more or less dégraded by diagenesis and or burial ; unconventional oïl is oïl trapped in its source rock; porosity and permeability of both rocks are very different as are there reactivity to stimulation”

    I notice that under this definition Venezuelan heavy oil in sandstone (and the Alberta Tar Sands for that matter) is “conventional oil” since it has migrated into a bad reservoir. And what is oil that has migrated into a good and undegraded reservoir?

  55. we have left about 80% of the [recoverable] oil in the ground, we are only producing the cheap oil and gas.

  56. stanb999:

    You post more nonsense at January 13, 2014 at 7:06 am.

    I have twice provided you with the link. Here it is again

    http://wattsupwiththat.com/2014/01/10/natural-gas-switch-from-coal-brings-power-plant-emissions-down/#comment-1532437

    I am providing this again so others can easily access it.

    Your failure to again read the link is demonstrated by your claiming I am an American.
    If you had read the link then you would know I am British and I worked on the research development and demonstration of the LSE process which was all conducted in the UK.

    As the link says,

    Until 1994 syncrude was more expensive than crude. The cost of drilling and transporting crude was less than the cost of mining, transporting and converting coal to syncrude. But at the UK’s Coal Research (CRE) we completed research, development and demonstration of the Liquid Solvent Extraction (LSE) process for converting coal to syncrude in 1994. And the LSE process enables syncrude from coal to be economically competitive with crude.

    We invented and developed the LSE process at CRE then proved the technical and economic performance of LSE using a demonstration plant at Point of Ayr in North Wales.

    The link explains the surprising economic competitiveness of LSE then concludes that explanation saying

    So, using LSE syncrude reduces costs of refining in two ways, and these reductions are greater than the costs of converting the coal to syncrude.

    I have had enough of you and your nonsense.

    I have better things to do than to keep providing information to an ignoramus who repeatedly refuses to read it and always responds with nonsense. So, I shall ignore anything else from you.

    Richard

  57. Brilliant!

    All we know is what we are told, and we aren’t told much at all. As long as the human mind has an infinite capacity for innovation, and it does, then nothing is finite in any practical sense. One day our inventive spirit will launch us off of this rock and into the universe. What a future beckons.

  58. stanb999 says:
    January 13, 2014 at 6:39 am

    Steve from Rockwood says:
    January 13, 2014 at 6:19 am
    stanb999 says:
    January 13, 2014 at 6:10 am
    ——————————————
    [snip]
    The cost of production limits overall reserves only by the price people are willing to pay. So far there hasn’t been much resistance.

    Really? Then why is fuel usage down so much in the USA even tho we have more people? One needs not be gifted at reading tea leaves to forecast certain things, Increased cost in a limited resource is a no brainer.

    Stan, gasoline and diesel consumption have risen virtually non-stop since 1920 as the link clearly shows. Why is fuel use “down so much in the USA”? Well since 2009 fuel use may have dropped but unless you were living under a rock there was a world-wide recession. There have also been incremental improvements in fuel mileage to offset population growth on the consumption side.

    http://energy.typepad.com/the-energy-blog/2010/01/the-history-of-us-oil-consumption.html

    While USA oil consumption for gasoline dropped (due to the recession) in 2010 and 2011, there were signs in 2012 that it was picking up again (as the recession ends).

    http://www.eia.gov/todayinenergy/detail.cfm?id=7510

    In 2013 USA gas consumption remained slightly lower than 2012 and off its peak in 2007 (the peak of the economic boom) but the reason is cited as improved fuel efficiency, particularly in fleet vehicles.

    http://www.upi.com/Business_News/Energy-Resources/2013/09/06/US-gasoline-consumption-declined-in-first-half-of-2013/UPI-35411378468013/

  59. “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.”

    “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.”
    ___________________________________

    There is no figuring needed at all. This simply reflects companies moving “resources” into “reserve” categories. See my link above to the SPE definitions – these are technical terns with defined meanings. If you want to evaluate the Hubbert theory, it can not be evaluated in terms of SPE / SEC reserves.

  60. Good job Willis. I will not get into the response aspects that you requested not to be posted. I will say that you have reminded readers of the often misunderstood and counter-intuitive concept of relative scarcity. Someone needs to start a blog on the assorted list of counter-intuitive concepts out there in science and the economy. Such a list might be valuable if it forestalled just one major policy mistake along the way in a policy landscape often littered with learning through crisis mode.

  61. A quick note about SEC requirements. You are only allowed to book as a “proved reserve” what you can effectively drill up based on your available capital in 5 years. You may have 1 TCF of proven reserves, but if you only have the capital to access 2 BCF over 5 years then that is all you can book. That is part of why the proven reserves number stays relatively flat. The amount of capital to access the reserves as a proportion of the cost has remained relatively stable. You see the dip in reserves from the 80′s to 00′s due to depressed oil prices. Subsequently, a large portion of the reservoirs became economically inaccessible and had to be removed from the books.

    Also, if you do not or cannot access the reserves after 5 years of them being on the books, they are written off. This is pretty common, but they are often replaced with other reserves to cover the difference. As companies learn more about individual reservoirs (especially in unconventionals) they can high grade targets and go after higher rate of return areas. This shift in capital is often taken from lower rate of return areas. In turn, those inaccessible with the current capital reserves are removed from the books. That does not meant the oil is gone, it simply means that it will not be accessed in 5 years.

    From Section 108 rule 4-10(a)(8) FAQ -
    If an investment decision has been made to develop only a portion of the primary, secondary or tertiary reserves, the remainder of the reserves would not be considered to be proved reserves until such time as management has made an investment decision to develop those additional reserves, the requisite level of certainty has been demonstrated from the initial portion of the development or by other means, and the additional development is within five years of being initiated. [Oct. 26, 2009]

    The last line covers the 5 year rule. After oil is produced it is subsequently removed from the proven books as well. Since it is no longer accessible. Therefore you are constantly adding reserves and taking them away throughout the process. Think of it more along the lines of, this is how much oil we can access over the next 5 years.

    My two cents and how I understand the rules. I am not an engineer and am not involved in booking of any reserves. I only understand this enough to get myself into trouble. :)

    I just thought this might help out with understanding why the proven reserves number remains the same. The graph actually shows that we are consistently adding accessible reserves in the US at about the same rate we are removing them (either through producing or removing them due to economics).

  62. These graphs confound reserves (estimated amount that can be future extracted) with rate of extraction. Balance sheet Reserves (you post EIA estimates of same) grow in three ways: new discoveries, increased estimates about remaining reserves in existing discoveries from EOR, and increased estimates from higher prices since these are economic reserves and not TRR. As an example, Monterey shale TRR is 15bbbl (EIA 2013) but economic reserves (Getty, Chevron) are close to zero for geophysical/ economic reasons posted on your previous thread. IEA makes similar distinctions in its future projections by explicitly starting with projected higher future prices.

    Peak oil is about the annual rate of extraction whichnis only loosely related to how much eventually will be. Hubert used a logistics curve; that is in orrect, as all fields follow a gamma function with a long decline tail. The prediction error is small, since the ” front half” of logistics curves are very similar to actual field gammas. As new fields become more marginal (e.g. less permeable measured in darcies), and as EOR expands, the totalannual production rate for a field, a basin, a region, and eventually the world must eventually fall far before reserves are depleted.
    For example, the max annual production of Ghawar (world’s largest and ‘best’ field with light sweet crude in permeable sandstone) was over 6mbbd in about 1980. The fields five sections have been fully reworked for EOR using water flood. As the watercut has risen, the annual oil extracted has fallen to about 4mbpd, and the Saudis will continue to reduce the production rate in order to eventually extract as much total oil as possible before the field is exhausted in about 2035-2040. It went into production in 1949.
    In the 2008 IEA survey of the worlds 800 most important fields, the actual peak in production was hit on average when just 24% of the estimated reserves had been produced. Prudhoe Bay and the UK/Norwegian North Sea basins all have about this 1/4 ratio of peak production to reserves. It appears to be a pretty constant feature of conventional oil ( correctly defined for you in a comment to your previous thread).
    Your analysis is simplistic, and in this thread compares apples to oranges. You need to read up more on petroleum engineering and geophysics.

  63. Steve from Rockwood says:
    January 13, 2014 at 7:42 am

    I cut out most of our prior posts for ease of response. I hope your ok with it.

    Claiming the recession that was aided by elevated oil prices is some how now responsible for the fall in consumption puts things in an upside down.

    Oil prices rose first. Then the markets faltered. Not the other way around. As the economy recharges, energy prices will rise to throw cold water on the ember of growth. We are in fact living what a majority of the peak oil promoters were forecasting… A slow slide in the economy till a new lower level of energy consumption is the norm.

  64. richardscourtney:

    After seeing rather large amounts of money spent on an integrated-gasification-combined-cycle plant (Edwardsport in Vigo County, Indiana), your comment about “sulphur bottoms” in the LSE process made me wonder whether burning syncrude directly for electricity generation has any emissions benefits. (Sulfur, mercury, etc.) Any idea?

  65. The key to the future of oil and gas, including hydrates is not the occurrence of hydrocarbons, but the energy cost of getting them to market. We generally call this the “cost”, meaning financial, and it is a reasonable proxy for energy cost. The future, to quote myself, is not dark, but it is expensive.

    To use just one example, the North Dakota Bakken oil production from frac’d deep zones: The Bakken oil (lately in the news due to setting fire to Lac Magantic, Quebec, and killing 47 people in a derailment of Bakken-filled oil cars), has a gross (and, I’d say, overprojected) producible reserve per well of 500,000 barrels. The drilling cost is $10+ million, with an all-in cost of perhaps $11 million/well to take into account pipelines, facilities etc. With an oil price of $100/bbl, the netback, i.e. profit after operating costs, is perhaps $60/bbl. That means that the first 183,300 bbl simply pays for the ability to get the oil to the surface pipeline. If we then include transportation costs, processing costs, still using the $60/bbl netback, we can see that the first 250,000 bbls of oil are expended simply in getting it to a useful state in a useful condition. Now one might say that we sill have 250,000 bbls left of this theoretical well well to use beyond that, i.e. the “free” or profit oil, and that is true. But what we have to remember is that as the field develops to the edges, the individual wells do not provide 500,000/well, but the costs remain the same (the cost savings through field maturity and development do not substantially drop. In theory they should, in practice they don’t. You are either efficient operators in the beginning, or you are not ever efficient operators. It is only in the discovery phase that costs are way higher.)

    So we can find these new reserves. The in-place numbers are high. But the costs of getting them in terms of what is got are higher now than they used to be. Plus the actual recovery is still uncertain. The reason that we have such high production rates in deep, tight formations like the Bakken, is that they are at very high pressure (48,000 to 56,000 kPa) AND gas charged. The gas that comes with the oil is the true driving force, and there is so much gas that it has lead to the current gas glut and low price: the gas HAS to be got-rid-of, and in an excess productivity market, you have to price it low to get ride of yours as you are in competition with others’ gas.

    But that sounds fine: get gas, get oil, we’re happy …. except that as the production goes on, the pressure drops. And then gas flow increases relative to oil production. You COULD reinject the gas, but that is not going on and for good reason: tight formations do not accept reinjection well. So as time goes on, the oil gets left behind. What will the final recovery be? Too early to tell. But I’ll bet it is less than promoted. Reality is generally a mean person compared to theory.

    The Marcellus, the Bakken, the Three Forks – all of these oily reserves are in gas-drive reservoirs. Expensive ones. GAS producers are more of the $4-$6/mcf production costs. Which means that current gas prices in the US are below cost for pure gas: the gas price is being subsidized by the oil profits. Roll them together, and the whole thing looks great. Taken ‘em apart, and the oil part is fantastic and the gas is not good at all.

    To talk of the hydrates is to talk about the Bakken three times as shrill. Again, it is not a question that the hydrocarbons are there, but that they are expensive in energy costs to get them to a useful condition in a useful place – just like the offshore wind turbines are much more expensive to get operational than the onshore ones, even if power levels are higher and more dependable.

    We are moving into a future with technology giving us access to energy supplies that was not available previously. Here in Alberta we have large oil and gas reserves in, as an example, a Duvernay Formation. But even Exxon finds the costs prohibitive. Same with all the oil and gas in the Arctic. It is there, but is is way expensive. And again, we can’t think of “expensive” in just monetary terms as, say the Soviets did. We have to think of it in terms of energy in-for-energy out.

    As time goes by it takes more molecules of hydrocarbons expended to get a molecule of hydrocarbon to use elsewhere. The oil and gas industry may become larger, i.e. the big companies become larger and involved in big projects, but the usable product as a proportion of what is found is diminishing. We have two or three times what we have already produced that is still in the ground, as well, that sits there for the same reason: the energy required to get the remaining reserves to surface is a large proportion of the energy contained in those reserves.

    I write all this as a long-term oil and gas explorationist and development geologist. I am not disputing the oil and gas reserves on the planet. I am disputing the idea that the future has cheap energy in it. We are not developing the oil sands of Alberta because it is cheap or energy-efficient, but because the costs RELATIVE TO other sources of oil are fairly equal. Which means that conventional supplies are gone in meaningful amounts, and unconventional supplies, i.e. expensive, difficult supplies, are the only option we now have.

    In Europe/Britain, energy costs are twice or more what they are in the States and Canada. But the reason for that is largely taxes. However, as the recent report on the Bowland Basin shales showed, the PRODUCIBLE and RECOVERABLE reserves are far lower than the in-place: I say this confidently because when you read the report, you see NO recoverable data, only in-place data. And not only from the British Geological Survey, but the Centrica-type public company. The actual benefit from these shale plays – mostly gas, by the way – is probably so low nobody wants to talk about it publicly. Oh, it is there, but again, at what cost?

    We live in interesting times energy-wise. Nuclear fusion was supposed to solve all our energy sourcing problems, just as efficient batteries were supposed to solve our energy storage problems. Neither has worked or looks to be moving fast enough to be working without some as-yet-unknown technolgical breakthrough. A Hail Mary solution, if you will. Not a good plan for a cilivlization. Fossil fuels are going to be with us for a very long time. And the resurgence of coal is a sign of what is going on.

    With coal, ACCESS to the coal becomes more difficult, but production does not with time. With oil and gas, access AND PRODUCTION becomes more difficult with time. With coal, more surface has to be removed, but the initial shafts have to be deeper, but after that the trucking and mining costs are the same. With oil and gas, you have to drill deeper in hotter, tighter or fractured rock, and then you have to spend more energy in fackking deep and production facilities on the surface. Once more the true energy-in-energy-out is increasing, but more so for oil and gas.

    Which is to get back to the initial dispute I have with much of the arm-waving about energy supplies in the future. It won’t be cheap and it will not, absolutely not, be cheaper.

  66. “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.”
    It’s a bit diferent from that.
    Reserves for any company doing business with the USA is a matter between it and the SEC. The company is obliged to measure reserves according to standard definitions and re-measure every year.
    Resources, the oil in place, are never known because it would cost too much to measure something no one cares about. It has happened, for insance, that an oilfield’s cumulative production has amounted to over 100 percent of the estimated original oil in place (OOIP=resource).
    One significant question: What is the rate of oil generation at an existing field that has been under production for a hundred years: Bradford, and fields in the the Los Angeles Basin, for instance?
    One significant quote: “Minerals are essentially inexhaustible. Oil, gas, coal, and copper, for example, will never be depleted. Investment in exploration and development creates an in-ground inventory of proved reserves, constantly used and replaced. If replacement cost–the investment required to find and develop new deposits–drifts so high that nobody will pay a price sufficient to justify additional investment, the inventory will not be replenished. the (sic) industry will disappear no matter how much remains in the ground–an amount unknown, probably unknowable, and ultimately unimportant.” (M.A. Adelman, 1991)

  67. stanb999 says:
    January 13, 2014 at 8:12 am

    Steve from Rockwood says:
    January 13, 2014 at 7:42 am

    [snip]

    Oil prices rose first. Then the markets faltered. Not the other way around. As the economy recharges, energy prices will rise to throw cold water on the ember of growth. We are in fact living what a majority of the peak oil promoters were forecasting… A slow slide in the economy till a new lower level of energy consumption is the norm.

    Stan. First we had a super economic boom – an over-heated economy. This led to an increase in oil prices. Then we had a banking crisis, based on greed and very poor lending practices. This led to a housing crisis which in turn led to a recession. The recession led to a drop in demand for oil which in turn led to lower oil prices.

    I think you confuse a temporary drop in the price of oil (gas etc) from a recession for a new paradigm. Oil consumption peaked in 2007, the economy collapsed at the end of 2008 and it’s taken five years to recover. But recover we have. In Canada gasoline prices (mostly tax) are back to their 5 year highs. US unemployment rate is under 7% and energy consumption is going to increase over the next 3-5 years, just like it has after every previous recession.

    Remember the energy crisis of the 1970s? The introduction of fuel efficient autos? Fast forward to 2013 and the best selling vehicles are F150s, Silverados, Sierras and Dodge RAMs – the least fuel efficient vehicles you can buy. Why? Because people are not as heavily affected by higher oil prices as many think.

    Record orders for airplanes, record highs for the stock market, record oil production in the US – not exactly a new lower level of energy consumption that I am seeing.

  68. Steve from Rockwood says:
    January 13, 2014 at 9:06 am
    stanb999 says:
    January 13, 2014 at 8:12 am

    Steve from Rockwood says:
    January 13, 2014 at 7:42 am

    [snip]

    Oil prices rose first. Then the markets faltered. Not the other way around. As the economy recharges, energy prices will rise to throw cold water on the ember of growth. We are in fact living what a majority of the peak oil promoters were forecasting… A slow slide in the economy till a new lower level of energy consumption is the norm.

    Stan. First we had a super economic boom – an over-heated economy. This led to an increase in oil prices. Then we had a banking crisis, based on greed and very poor lending practices. This led to a housing crisis which in turn led to a recession. The recession led to a drop in demand for oil which in turn led to lower oil prices.

    I think you confuse a temporary drop in the price of oil (gas etc) from a recession for a new paradigm. Oil consumption peaked in 2007, the economy collapsed at the end of 2008 and it’s taken five years to recover. But recover we have. In Canada gasoline prices (mostly tax) are back to their 5 year highs. US unemployment rate is under 7% and energy consumption is going to increase over the next 3-5 years, just like it has after every previous recession.

    Remember the energy crisis of the 1970s? The introduction of fuel efficient autos? Fast forward to 2013 and the best selling vehicles are F150s, Silverados, Sierras and Dodge RAMs – the least fuel efficient vehicles you can buy. Why? Because people are not as heavily affected by higher oil prices as many think.

    Record orders for airplanes, record highs for the stock market, record oil production in the US – not exactly a new lower level of energy consumption that I am seeing.

    We can agree to disagree as to the cause and effect, but the issue stands. More expensive energy will cost the economy. I think this is something we both agree.

    The official unemployment rate in the US is at best fully manipulated, at worst abject lies and stories. Look into the employed participation rate it’s at levels not seen since women entered the work force in the 60′s. Meaning we have a smaller percentage of working age adults actually working.

    Those F-150′s are being purchased for fleets… government fleets. Look into it.

    Planes are notoriously variable. Stock market is high due to inflation. The natural gas production is what has made the new oil boon as pointed out above.

  69. Joe Born:

    Your post at January 13, 2014 at 8:17 am asks me

    richardscourtney:
    After seeing rather large amounts of money spent on an integrated-gasification-combined-cycle plant (Edwardsport in Vigo County, Indiana), your comment about “sulphur bottoms” in the LSE process made me wonder whether burning syncrude directly for electricity generation has any emissions benefits. (Sulfur, mercury, etc.) Any idea?

    Firstly, I need to ‘declare an interest’.

    I worked on the development of Pressurised Fluidised Bed Combustion (PFBC) and the Air Blown Gasification Combined Cycle (ABGC) processes for power generation. Hence, I could be accused of bias when mentioning other advanced coal fired power generation systems such as Integrated Gasification Combined Cycle (IGCC).

    I do not have such a bias but I fail to understand why people favour IGCC. It makes no sense.

    IGCC gasifies coal (usually using oxygen – not air – for the gasification. The product gas is cleaned to remove impurities including sulphur, mercury, etc.) then using the cleaned gas as fuel in a conventional combined Cycle Gas Turbine (CCGT) power station. The gas cleaning is difficult and there is no possibility of this being as economic as burning natural gas (methane) in a CCGT.

    Other advanced coal-fired power generation systems also have possible uses. For example, Circulating Fluidised Bed Combustion (CFBC) enables old and dirty PF plants to be retrofitted with replacement boilers and flue gas cleaning. This mostly- American technology proved to be successful as the most economic way to upgrade inefficient and dirty power stations in Eastern Europe following demise of the Soviet Union.

    However, burning natural gas as fuel in a CCGT is both the most economic and the ‘cleanest’ way to provide new electricity generating capacity at present. The only systems with possibility of being competitive with it are coal-fired ABGC and coal-fired Advanced Supercritical Pulverised Fuel (ASPF). ABGC has not been fully demonstrated, and for ASPF to become competitive with gas-fired CCGT requires materials which do not yet exist.

    Oil is not an economically competitive fuel for power generation at present or for the foreseeable future. Despite this, the UK is investing in oil-fired diesel generators as back-up for windfarms (the windfarms are not economic so why not?).

    LSE syncrude has similar cost to crude so burning LSE product as fuel oil would be similarly uneconomic. However, it would have similar environmental benefits to burning natural gas (ignoring CO2 emissions). Impurities in the coal are removed as part of the filter cake in the LSE process. Indeed, this removal is one reason why LSE syncrude is economically competitive with crude (the oil refinery does not obtain sulphur-rich bottoms which have disposal costs).

    I hope this answer is sufficient and what you wanted.

    Richard

  70. HLx says:
    January 13, 2014 at 1:31 am
    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.

    So your claim is that there is something called “cumulative assets”? Curious, because I’m an accountant as one of my trades, and my last job was doing the accounting for a $40 million dollar per year company.

    If I’d gone to the company directors, and given them a profit and loss statement and a balance sheet (as is customary), plus a “cumulative balance sheet” for the last ten years, they would have fired me on the spot. Why?

    Because there is nothing in accounting called a “cumulative balance sheet”. It doesn’t exist.

    And in the same way, the proved reserves show up as assets on an oil company’s balance sheet, but there is no such category on the planet as “cumulative assets”.

    For example. Suppose I have $100,000 in assets this year. Our company makes no money for ten years, but we don’t lose any either. So every year for ten years I have $100,000 in assets … does that mean that at the end of the ten years, when I go to sell my business, that I can advertise that I have a million bucks in “accumulated assets”?

    It is the simple difference between a profit and loss statement (P&L), and a balance sheet. A P&L is a statement of the FLOWS of assets. A balance sheet (or a proved reserve” is a snapshot of the VALUES of assets at a specific time. One of these, the P&L, you can add up to get a cumulative total. The other one, the balance sheet, you can’t.

    So if I make a profit of $1,000 today, and I make a profit of $1,000 tomorrow, I can add those and say I have a 2-day profit of $2,000.

    But if I have proved reserves of $1,000 today, and I have proved reserves of $1,000 tomorrow, does that mean I have “2-day cumulative reserves” of $2,000? Nonsense. I have a thousand in proved reserves, whether you measure it one day or the next.

    It’s like your bank balance. Suppose at the end of the month, you have $10,000 in the bank. Now, during the month, you make $5,000 and you spend $5,000, leaving $10,000 in the bank. Can we add those two $10,000 bank balances together and say I have a “cumulative bank balance” of $20,000? No … but that’s what you are proposing for the proved reserves.

    I hope you can see the problem. You can add profits and losses to give cumulative profits and losses over a week, a month, or a decade. But you can’t do that with balance sheets or with assets in general. The fact that you own three cats this month, and you own three cats next month, doesn’t mean that you have 6 cumulative cats …

    w.

  71. @scf at 8:41 am
    RE: stanb999 1/13 6:10 am

    Peak oil isn’t about running out of oil. It’s about running out of cheap oil. We have.

    That statement is false, the proof is here, provided by Willis Eschenbach, showing the proce of oil has not risen for 100 years.

    That chart you refer to is “Motor Gasoline Retail Price” which is a couple of steps removed from Oil Price. Over the past half century there have been efficiencies in oil transport, oil to gasoline refining, gasoline distribution, and gasoline retail marketing.

    Here is a link to a comment of mine discussing two graphs of constant $ Oil prices, including this one from 1869-2011

    In short, there is less $2/bbl oil than 20 years ago. There is less $5/bbl oil that 20 years ago. There is probably less $10/bbl oil than 20 years ago, but there are many more $25/bbl and $50/bbl oil in RESERVES than 20 and 40 years ago. I won’t split hairs about running out of cheap oil. I’ll support the claim that the cost mix of the proven reserves is rising over time.

  72. Interesting post and comments on a subject that took me down memory lane and had me thinking of a place I once served. In the mid-1990’s I spent several years in the Sultanate of Oman. I remember at the time that the Sultanate was working very hard on diversification of its economy (too many eggs in the oil basket) out of real concern for when the petrol dollar would wane for them. Proven reserves for this Gulf State are small compared to its neighbors and at the time were calculated at about 15 years at the rate of production for the time (which had expanded each year I was there from over 800K barrels per day to over 900K barrels per day). I was curious how things looked over sixteen years later so did a quick search and found that production is still over 900K barrels per day and that proven reserves are still about 15 years. It would seem improvements in recovery technology of existing oil fields have really paid off.

  73. Willis
    Re: “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.”
    Congratulations!
    You just swollowed the most important oil sales pitch: “The future will always be better”, as enforced by rules established by the Securities and Exchange Commission.
    In reality, when you “discover” an oil field, a good geologist with a few wells can estimate the size of the overall resource” of that oil field within say +- 20%. However, SEC rules forbid declaring the entire field and only allow you to declare as “Proven resources” a conservative portion of the oil immediately accessible around those few oil wells. If you drill 5 wells in a field that eventually requires 1000 wells, the “proven resource” is only counted as a conservative portion of the resource immediately around those 5 wells. Then every year you drill a few more wells and declare further “proven reserves” for those additional wells.
    The oil companies NEVER tell the confidential full size of the oil field that the geologist knows is probably there when the field is first discovered. Thus your graph conflates Delta Xi of a portion of the field with the sum of all Delta Xi of all portions of the field over all time.
    (Another issue is the discoveries of massive “political oil” (on paper only) in the Middle East due to competition for OPEC production shares.)
    The expert who has best explained these issues is Jean Laherrere of Total (retired.) See the web site of Laherrere’s presentations as complied by Charles Hall, and the ASPO France Documents. e.g., see: Shortened world oil & gas production forecasts 1900-2100 – May 2013 (1.7 Mo) See especially Fig. 7 World remaining oil reserves from political/financial and technical sources (2010). etc.

    There is a huge difference between the political/financial proved reserves in brown, which is increasing since 1947 and the confidential technical 2P reserves in green, which is decreasing since 1980. This graph explains why most economists do not believe in peak oil. Economists rely only on the proved reserves coming from OGJ, EIA, BP & OPEC data, which is wrong and they have no access on the confidential technical data. Economists ignoring the peak oil does not think wrong, they thing (sic) on wrong data!

    This confirms Campbell & Laherre Fig. 8 (1998).

    Re: . . .”First we completely used up every drop of the proved reserves.”
    The second major issue is production in one well or field versus adding more fields by expanding areas. See James Hamilton “Oil Prices, Exhaustible Resources, and Economic Growth,” in Handbook of Energy and Climate Change, pp. 29-57, edited by Roger Fouquet. Cheltenham, United Kingdom: Edward Elgar Publishing, 2013. Working paper version here.
    For further details, I recommend studying multi-Hubbert oil analyses.

    Keep up your exploring.

  74. Mike Jonas says:
    January 13, 2014 at 4:19 am

    “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.”

    and

    “Now, please don’t bother patiently explaining to me all of the reasons for this curious phenomenon, because I’ve heard them all.“, followed by a list of the reasons behind the reserves phenomenon.

    w, I don’t think that you have been very smart. Perhaps disingenuous is the right word. You tell people to go figure, like you’ve just exploded a myth, but there isn’t anything to go figure because, as you explain, the reasons are all well known.

    dis-in-gen-u-ous: synonyms: insincere, dishonest, untruthful, false, deceitful, duplicitous, lying, mendacious

    Mike, you’ve called me a duplicitous, dishonest liar, so please give us some examples of where I lied.

    I didn’t say I’d “exploded a myth”, that is your fantasy.

    And since a) as you point out, the reasons for what I showed are well known, and b) I said the reasons were well known, and c) I said I knew the reasons, I was telling the truth about that …

    So just what are you accusing me of lying about without presenting a scrap of evidence, you slimy little man? As my mom used to say, “them’s fightin’ words”. Where I come from, if you accuse a man of lying, you damn well better have incontrovertible proof in your hand that he is a liar, and you’d better show the in-hand proof when you make the accusation … so where did you come from? Is it common practice in your home town to falsely accuse a man of being a liar with no evidence, and with nothing in your hand but your johnson?

    w.

  75. Gary Pearse says:
    January 13, 2014 at 6:51 am

    Willis, I know you didn’t want to hear about reserves as a stock for a company looking out 10-15yrs, but this simple idea is exactly the crux of what is totally misunderstood by such as the club of rome and other centrally planned minds.

    I didn’t say I didn’t want to hear about it. I said don’t bother patiently explaining it to me, I know about it already. You want to explain it to others, be my guest.

    w.

  76. RockyRoad says:
    January 13, 2014 at 7:15 am

    Another inconvenient post for the “Control Crowd”, and another excellent example of that applied Human Ingenuity, Willis.

    My only concern is your use of terminology, particularly the word “proved”.

    Mining engineers generally follow the standard reserve classification of “proven, probably, and possible”, which corresponds to decreasing levels of confidence in computerized block models, each term defined by a particular value of the estimation variance associated with block estimates in the model.

    Thanks, Rocky. I used the term “proved reserves” with its associated definition because that is the exact term, and the exact definition, from the dataset that I used. As a result, what mining engineers might do is not the point. If you use data, you need to say exactly what the data means. Not what the mining engineers or someone else might mean, but what the data means.

    w.

  77. Leo Morgan says:
    January 13, 2014 at 7:23 am

    I’ve learnt a bit. Here in Australia, I hadn’t heard the term NGPL, which your link’s author defines as ‘Natural Gas Plant Liquids’; but thanks to Google I understand it to be what I call ‘LNG’ (liquefied Natural Gas) or LPG (Liquefied Propane Gas). (It was the ‘Plant’ that really threw me.)

    Actually, Leo, the natural gas liquids are not liquified natural gas at all, I fear Google has misled you. They are the various usually fairly light petroleum liquids that come out of the ground with the natural gas. They are sometimes called “drip gas”, and form a significant part of the energy in what comes out of a gas well. In addition, because they are light, they are easier (read: cheaper) to refine than crude oil, so they are quite valuable.

    w.

  78. David L. Hagen says:
    January 13, 2014 at 9:44 am

    Willis

    Re: “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.”

    Congratulations!
    You just swollowed [sic] the most important oil sales pitch: “The future will always be better”, as enforced by rules established by the Securities and Exchange Commission.

    I didn’t “swollow” a damned thing, David, but you apparently can’t read. I said in the head post that I know the reasons for the apparent contradiction in the charts above, and I do, including the reporting rules that the oil companies work under.

    Since I knew the reasons already, I requested people not to patiently explain them to me as if I were an idiot … but there’s always someone like yourself that thinks that he knows better, and that such requests don’t apply to him.

    w.

  79. If the price of a commodity goes up and/or there is a new technology to extract it, then someone will go exploring for it. Low grade deposits, previously uneconomic, become economic.

    And that’s how capitalism works. Bring in government interference, or ownership, into the process and inevitably things get screwed up and you get shortages. Oil in Venezuela, minerals in Bolivia are classic cases in point.

    Most mineral deposits are found by junior mining companies, who are usually happy to sell out to big producers. Junior companies, not big ones, are ensuring the supply of commodities for future generations.

    The world, including the US, is full of huge, low grade, mineral deposits. For example, the world’s largest zinc deposit is probably located in Idaho. It is not economic today, but it will be one day.

  80. richardscourtney:

    Thank you very much for the response.

    As I understand it, the decision in favor of Edwardsport was made at a time of elevated natural-gas prices, although I think that favoring local miners may also have entered into the process.

    Back in the ’70s I had a client that made utility boilers, and we did some fluidized-bed work, so the current-technology taxonomy is interesting. If I can maintain discipline, though, I’m not going to go off and investigate it further. Maybe if coal ever gets out of the doghouse, though. . . .

  81. When it comes to looking for a resource (like oil), why would a company expend more money looking for it than what they can use? When I look for socks, I grab the first pair that meets my criteria. I don’t keep looking. This is part of the truth behind finding something in the “last place you looked”. Why keep looking? That would be a waste of company resources. We have no idea of how much oil is out there, because there is no incentive to look for all of it. There is only incentive to look for as much as we can use.

    Willis has shown that oil costs about the same now as it did in 1919 and 1979. That is just astounding when you consider that there are so many more expensive regulations driving up the cost of looking for and extracting oil (environmental impact studies are just the tip of the iceberg).

    Oil availability appears to be a non-issue, except for political (be it governmental or activist) intervention. We’ll know there is a real oil shortage when governments stop putting known oil resources off-limits and fast-track distribution applications. Until then, it seems clear there is an excess of “cheap oil”.

  82. 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 …

    No. You have shown the trend in proved reserves. Proved reserves != reserves.

    It is like me looking at the level gauge in my car to see if the gas station has run out of gasoline.

  83. Andrew says:
    January 13, 2014 at 10:48 am

    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 …

    No. You have shown the trend in proved reserves. Proved reserves != reserves.

    Andrew, do you truly think that I, or anyone else here, thinks that they gave the name “proved reserves” for some reason other than to distinguish them from “reserves”? I suppose it’s possible for others, but if you truly believe that I don’t know that “proved reserves” and “reserves” are very different things, I fear you’re not paying attention.

    In any case, I suppose I should thank you for stating the obvious. I suppose there might be one or two people out there unaware that something defined as “those quantities [of oil] that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions” might actually be different from say, all the oil in the ground, or all the oil we know about in the ground. So you few folks that didn’t know that, please pay attention to Andrew. He’s right when he says that “proved reserves” and “reserves” are not the same thing. Yes, I know you guessed that because they have different names, but Andrew actually puts it out there in black and white, the two are different … who knew?

    Finally, my point was that the problem with Hubbert’s statement is that in fact, we don’t know what the total of “all American oil and gas” that he refers to might be, or what definition of “the world reserves” he’s using, so there is no way to determine if we’ve used 80% of it or 50% of it.

    Regards,

    w.

  84. Willis

    Re: “I know the reasons for the apparent contradiction in the charts above” . . .“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”

    Mae culpa on using “swallowed”.

    Please reset. Then may I encourage you to reread my post, and in particular, address the difference between the current “proven resources” as shown in your graph and the cumulative production shown in your graph. Those confuse are the current increment vs the integral amount.

    Then compare that with cumulative increment vs dating the total field to the original discovery date as shown by Laherrere.

    On total reserves: The Hubbert curves apply to each given geological resource with a given recovery technology. Sum across national and global give similar curves for that resource and that technology. e.g. sandstone or carbonate crude oil resources using standard recovery.
    Then add WAG gives another level of recovery.
    Tight oil/shale oil is another geological hydrocarbon resource different from the above.
    See applying the methodology to “multi-Hubbert oil analysis”

    Re: “the amount of natural resources depends on human ingenuity, and not much else.”
    Multiple issues here:
    1) There is a finite amount of liquid hydrocarbon in a given defined “oil field” in a given strata. You cannot extract more than 100% of that. Typically 20-40% with conventional extraction. Up to 50% to 70% with Enhanced Oil Recovery, using Water Alternating Gas (WAG) with CO2.
    2) Hamilton shows the impact of extending the areas.
    3) Current “fracking” shows ways for new technology to open up new types of hydrocarbon resources. i.e. “tight” oil (aka shale oil). That is another resource, where each geographic area will again under gain its own rise and fall in production.
    4) Human ingenuity can be applied to forming hydrocarbons from nuclear, solar etc.

  85. I think it is a disservice to focus on the quantity of oil vs. relative economic impact of oil prices and supply/demand.
    There absolutely is all sorts of oil out there, but the impact on the US economy should prices rise to $200/barrel in the next decade – it would be profound.
    Were this to be the case – even the EIA’s historically suspect predictions coming true would not be enough to save the US economy from disaster. The US uses a huge amount of oil per capita – not the most, but I do believe the US does consume the most imported oil per capita (except perhaps Japan).

  86. w – Two countries divided by a common language. In English, disingenuous means ‘not speaking the complete truth’, ie. leaving out something with the result that listeners may draw an incorrect conclusion. Intention is not needed, though knowledge of the missing link is implied.

    I said “You tell people to go figure, like you’ve just exploded a myth, so you have gone a bit overboard with your “I didn’t say I’d “exploded a myth”, that is your fantasy“.

    You ask “So just what are you accusing me of lying about without presenting a scrap of evidence, [...]?”. Obviously, as explained above, I’m not accusing you of lying about anything. What I do think you did was to present the three-times production of proven reserves as if it was more significant than it really is. Given that you knew the reasons, that to my mind was a bit (English meaning) disingenuous. There was an implication for the uninitiated that three times production of proven reserves was surprising and evidence that Certain people were a lot more wrong than they really were. For good measure, I provided evidence that three times production of proven reserves is no big deal.

  87. Reserve definitions are covered at http://www.jorc.org

    A naive interpretation suggests that more oil/gas is being produced than what initially was calculated from the known deposits. So where is all this excess texas tea coming from :-)

  88. I see a problem here. We’re not consuming our reserves and that isn’t what the graph shows. We’re consuming oil at an increasing rate and leaving the reserves alone. I do that with my finances – I don’t touch my reserves (savings, investment earnings) – I spend new income.

  89. Mike Jonas says:
    January 13, 2014 at 12:47 pm

    Great points ! If a post is made, it shouldn’t be assumed that the readership has the same level of knowledge as the author – if that were the case, why bother even making a post to the blog?

    Hopefully, each blog post does something to help all readers understand the subject further and stimulate a productive discussion. Thus, no assumptions on reader knowledge should be made & information should be presented , to the best of the author’s ability, to fully represent the subject matter and not intentionally or unintentionally lead the uninformed reader to an unreasonable conclusion (such as this reserve replacement is somehow unusual or unexpected – as inferred by the “go figure” statement). Furthermore, when someone (such as yourself, Mike) tries to help fill in some gaps for everyone, they should not be scolded by the author for simply trying to help out everyone reading.

    This scolding behavior is unbecoming of this blog – it is the type of discussion-styming behavior I would expect to see on pro-AGW blogs. And don’t bother scolding me again Willis – we get your point – if I don’t agree with you on every word you print, I am somehow inferior. Enough said.

  90. Many years ago my first paying job involved pumping gas, checking oil, and washing glass at the local Mobil flying red horse station. My mother always wanted a pack of Raleigh cigarettes with the B&W coupons. The gas was about 30 cents per gallon and the pack of 20 smokes was about the same. Now the gas is $3.50 per gallon and the smokes are about 8 bucks. This indicates that we are running out of tobacco!

    Good job Willis and comments from others.

  91. This 2012 article from Forbes helps explain “reserves”:

    http://www.forbes.com/sites/timworstall/2012/11/16/what-jeremy-grantham-gets-horribly-horribly-wrong-about-resource-availability/

    The author critiques a statement made by Jeremy Grantham about potash availability, but his explanation of “reserve” is useful:

    “He’s [Jeremy Grantham] drawing his numbers from “reserves” without understanding what reserves means. It absolutely does not, at all, mean all of whatever it is out there. It is, rather, an economic construct.”

    and

    “Reserves, the numbers that Grantham is using, are the deposits that we know where they are, have drilled and tested them, we know how to extract and process them using current technology and we also know that we can make a profit doing so.”

  92. When I started working in the oil industry many years ago, an old Hungarian engineer told me what a great industry it was to work in and that proved to be true.But then he added a proviso – that in 10 years time oil will start to run out. Individual fields do run out. And every 10 years someone will make the same prediction – peak oil is only 10 years away. Eventually they will be right, as oil is not a renewable resource.
    Over the last 40 years we have seen oil prices rise from $.1.50/barrel to $100/barrel and that in large measure, along with increasing technology capabilities, explains why we have continued to discover more oil. In another 40 years will oil be $200/barrel or $1000/barrel? It depends on how much more oil will be discovered, and how much we consume – the old supply/demand equation.

  93. ‘I said “You tell people to go figure, like you’ve just exploded a myth, so you have gone a bit overboard with your “I didn’t say I’d “exploded a myth”, that is your fantasy“.

    ya that was pretty funny.

    Here is Willis’s game. He demands that you quote his words.
    But when issues the beat down on your head he breaks his own rules.
    He played the same thing with me so many times, with Roy Spenser, that it just gets
    Funny

    What you said: ” I don’t think that you have been very smart. Perhaps disingenuous is the right word. You tell people to go figure, like you’ve just exploded a myth”

    Then willis writes “Mike, you’ve called me a duplicitous, dishonest liar, so please give us some examples of where I lied.

    I didn’t say I’d “exploded a myth”, that is your fantasy.”

    1. You didnt call him a liar. you didnt even call him duplicitous. What you said, what you wrote was that PERHAPS duplicitous is the right word. To me that says your struggling to understand how to catagorize the type of statements Willis makes. Roy Spenser had the same problem.

    2. You didnt say ‘he exploded a myth”, you said LIKE he exploded a myth.

    Now, we had a similar issue a long Time ago with mr CRAVEN

    remember this post

    http://wattsupwiththat.com/2010/12/16/craven-attention/

    Now, there I provided the best synopsis I could of what the guy said. Then he complains that it wasnt a quote. sound familar?

    what is even worse here is you took the effort to not call him a liar. you took the effort to express your uncertainty. PERHAPS disengenous is the right word. Then, rather than quoting YOUR WORDS and Your meaning, willis crowbars in the dictionary ( never trust a man who tries to beat you with a dictionary) and effectively calls you a masterbating scumbag.

    Hehe.

    That kind of behavior invites drive bys. I just drove by tata.

  94. Reading some of the comments reminds me of the measure twice, cut once rule. In this case it might be more appropriate to alter it a bit… read twice, then comment.

  95. Finally, my point was that the problem with Hubbert’s statement is that in fact, we don’t know what the total of “all American oil and gas” that he refers to might be, or what definition of “the world reserves” he’s using, so there is no way to determine if we’ve used 80% of it or 50% of it.
    Thanks for clarifying. I was unsure of exactly what point you were trying to make, here. I must admit, I felt that posting a graph purporting to refute a statement, when that graph is on a completely different basis, is the sort of thing that frustrates me intensely. It is the kind of behavior typically used to misinform and mislead. The important point about reserves: you don’t know what they are for certain until they are all gone.

  96. Konrad says:
    January 13, 2014 at 12:48 am Re: all you said. I agree completely. So much of life today is fending off the communists and their stalking horses of doom intended to coax (and really, coerce) us into their vision of life.

  97. Willis – Why would you use a cumulative oil production to refute Hubbert who uses annual production to make predictions? When you compare annual US Oil production to a Hubbert curve, it really lines up:

    Yes there is a spike at the end as fracking comes online, but that is really just switching from a knife to a spoon to get more peanut butter out of the jar.

    Hubbert’s point isn’t that we will run out, it is that production is limited and will decrease over time. Looking at the annual data he looks like a lot better predictor than you.

  98. DirkH says:
    January 13, 2014 at 1:15 am: Re: all you say. Kudos. Smith and von Mises are detested and denigrated by that lot.

  99. The highest annual average inflation adjusted price of oil occurred in 1980. To understand why look at the work of the late Milton Friedman. The same thing is playing a significant role now.

  100. Mosher, we gotta luv yu:

    Steven Mosher says:
    January 13, 2014 at 2:24 pm

    Where did you learn to write English? Is it a second language? You continue, post after post, to write drivel. Why shouldn’t Willis shrivel your shorts with fire, and me mock you? The fact that something some consider important – a Best New Analysis of The World’s Temperature – is in your hands, at least in part, makes me think that perhaps the end really is nigh: “…The center cannot hold…” because rude, unlettered beasts are now able, in this fully dumbed-down culture, to hold positions and sway thought not unlike the Monkey King in Kipling’s “The Jungle Book”.

  101. David Middleton says:
    “Proved reserves have a very specific definition. In the US, publicly traded companies are required to book and report reserves according to SEC rules.”

    half tide rock says:
    “If you look at the North American Petroleum Reserves by region, there is a Political blank up the entire East coast.”

    Yep, not to mention the north slope of Alaska and the gulf coast of Florida. The planet’s petroleum reserves may well be finite, but until we explore the whole thing, we have no idea what the true reserves really are. In this country alone, three vast regions, (the north slope of Alaska, the east coast of the US, and the gulf coast of Florida have HUGE potential: The same geology that underlies Prudhoe bay extends for miles to the east under the north slope. Massive hydrate / natural gas deposits (the tip of the petroleum ice berg on the east coast) lie 50 miles off the Carolina coast, and the gulf coast of Florida has as much potential as the gulf coast of Texas / Louisiana. The government artificially inflates the price of all petroleum based fuels simply by placing these and other vast areas off limits. If you why, ask yourself “Who benefits?” Then follow the (campaign / lobby) money.

  102. The point I’m trying to make, and I think people are finally picking up on it is that extraction costs are going up, extraction of deep sea is more expensive than on land, extraction in the Arctic is more expensive still, hence soon there will be no such thing as cheap oil (unless of course we have a major extraction breakthrough not just incremental ones).

    The price of energy will be capped, the higher it is the more produces there are, including renewable, the fundamental issue with renewable is that once things are up and running fuel costs are zero, hence renewables DON’T have the same huge disadvantage of fossil fuel i.e. ever increasing cost of extraction due to diminishing easy to get at reserves… hence you can extrapolate what that means, i.e there is an energy cost ceiling meaning less and less fossil fuel projects are viable… this means that gradually renewables will displace financially viable fossil fuel projects over the next 50 years.

    The Hubbert model is dead on correct however there should be a Hubbert curve at each energy price point, hence at an oil cost of $40/barrel, I think we can all agree we are well and truly on the down slope of that curve, at a price point of $120/barrel we are still climbing up that curve… at a price point (which will never happen due to renewables) of $200/barrel there are tremendous financially viable reserves, but I hazard to say they will never be extracted

    Amen

  103. As usual SASOL gets a mention and several people repeat the meme that coal-to-liquids is ‘expensive’. CTL is not expensive. South Africa (look up the documents) created SASOL 1, 2 and 3 with a guaranteed price of $28 per bbl equivalent but a production cost of under $20. One above claims it is now $70. That is a heck of a lot less than $100.

    However that is not enough of the story. One SASOL product is polypropylene. Another is creosote. Another is sulfur-free kerosene. Kerosene without sulfur is more valuable than regular kerosene because there are maximum concentrations allowed in fuel. Those regulations have their own genesis, but there they are. SASOL sells the ‘good stuff’ to Europe and buys in higher sulfur containing fuels which are burned locally.

    When you have a CTL plant you can sell what you want, instead of having to sell what you have.

    There is a rumour of a CTL plant being build right now in Inner Mongolia that uses a ‘direct’ conversion methods, not the ‘indirect’ Fischer-Tropsch method. That will greatly reduce plant and production costs. Mongolia (Outer) has about 1 trillion tons of carbonaceous CTL inputs available. That alone is enough to supply the planet for 175 years without no (forecast) drop in population or increase in efficiency. And there is lots and lots and lots of other sources of coal. Yes the reserve is finite. No, it will not run out for many centuries. Yes, it will put lots of CO2 into the atmosphere. No, it will not double the concentration because there is not enough to do so.

  104. SideShowBob says:
    January 13, 2014 at 5:27 pm: “Renewables” do have a cost. Mostly, in that they don’t work when you need them to work. Otherwise, the destruction of bats and eagles and so forth, in the case of windmills; and the fact that you have to go out and clean off the solar panels, which by the way, just turned the Mojave Desert into an entirely new biome that eradicated all the fabulous critters that used to live there. Same for dams: bye bye salmon runs and so forth.

    When oil and gas are so rare and expensive as to be near ruinous, we may turn to “renewables” assuming that the technologies have progressed. Otherwise, we’ll do coal/nuclear and hydropower where it exists.

  105. SideShowBob says:

    January 13, 2014 at 5:27 pm
    there should be a Hubbert curve at each energy price point, hence at an oil cost of $40/barrel, I think we can all agree we are well and truly on the down slope of that curve, at a price point of $120/barrel we are still climbing up that curve…
    —————————————————————————————————————
    I love all the harping on “easy oil vs expensive oil” Again, it has always been that way—–”all the seeps have been found, now we are only left with the stuff we have to drill for”

    Good operators in these plays have cut their costs in half in just three years. Much of it would pay out at $30 oil, and 90% of the wells drilled in 2013 would pay out at $60.

  106. SideShowBob:

    At January 13, 2014 at 5:27 pm you repeat your irrational assertions concerning renewables.

    In a post in reply to you earlier in this thread I explained how and why your assertions are nonsense and are disproved by reality. That reply was in simple language that I thought even you could understand, but your repetition suggests that either you did not understand it or you missed it.

    Assuming you missed my explanation, I write to say it was at January 13, 2014 at 4:15 am and this link jumps to it.

    http://wattsupwiththat.com/2014/01/12/more-fun-with-oil-and-gas/#comment-1534318

    If you do read it, understand it, and learn from it then threads will not again obtain repeated posts from you which make such silly assertions about renewables as you have provided here.

    Richard

  107. @ Patricia
    @ Richardscourtney
    @ Willis
    @ SideShowBob
    I’m indebted to many persons here.
    I especially want to thank Patricia. I’ve been searching for that information about Carter’s fuel taxes for longer than I can recall. With your help I’ve finally discovered it. With your reference, I’ve also discovered I was wrong about almost everything I thought I knew on that topic. It’s chastening, but better than remaining in ignorance. Thank you.
    Richard Courtney, I’m grateful for your enthusiastic endorsement of my contribution. Willis has rightly pointed out it was not perfect. I myself have had second thoughts about some other aspects. Nevertheless I gave it considerable thought, and your appreciation was a terrific validation of the effort I put into it. Thank you.
    Willis, I should not acquiesce, by silence or otherwise, with your considerate suggestion that Google had let me down. They deserve credit for the fact I had access to more information than when I started; they are not to blame that I was no wiser than when I started.
    I was wrong, and now with your assistance I am less wrong. Thank you.
    I’d like to share a quote that I’m particularly fond of, with WUWT readers. ”I learn something new every day. Usually, what I learn is that what I learnt the previous day was wrong.” I have to ruefully acknowledge how very apt that quote was today.
    SideShowBob, thanks for your post January 13, 2014 at 5:27 pm. You clarify your previous post tremendously. As I mentioned to Richard I’ve had second thoughts about my earlier response. They relate particularly to the fact I felt I had not responded well to the actual point you were making. In your words, your argument is “…there should be a Hubbert curve at each energy price point, hence at an oil cost of $40/barrel, I think we can all agree we are well and truly on the down slope of that curve, at a price point of $120/barrel we are still climbing up that curve… at a price point (which will never happen due to renewables) of $200/barrel there are tremendous financially viable reserves, but I hazard to say they will never be extracted.”
    Nevertheless, I remain unpersuaded by the argument. As I understand it, it considers the price point of energy recovery to be a fixed attribute of the particular oil where it is situated. My view differs in that I see the price point as a function of technology. The ‘unconventional oil’ we are extracting today used to be the over $200.00 per barrel oil ‘that would never be extracted’. Now, it has moved to a lower price point as a result of technological advances.
    Other factors do the same thing. As I understand it, non-catastrophic climate change has moved the price point of oil in the Arctic from uneconomic to economic, to the great dismay of Greenpeace irrationalists.

    I am optimistic about the further advances to be expected as a result of nanotechnology, biotechnology, catalytic chemistry and fusion technology. I admit we don’t know how to reduce the cost of energy production at the moment, using any of those technologies, but those are the known unknowns.
    There are also unknown unknowns, some of which will be advantageous.
    For these reasons I disagree with the main thrust of your argument.
    The second leg of the metaphorical stool that is your renewables argument is that ‘once they are set up there is no fuel cost’. That used to be true of fossil fuels as well. They were so cheap you could pick them up off the ground. We’d pump them out like water and ship them to where we wanted to use them. Now it’s no longer true, and to that extent your argument is compelling. But fuel is only one of the costs associated with energy production. Infrastructure costs, opportunity costs, land costs, transmission costs and environmental costs related to renewables have all proven to be higher than Greens have forecast, and the crucial point is they have all been higher than comparable costs for fossil fuels.
    Nor is energy production that simplistic. As other WUWT posts have demonstrated, ‘fuel free wind power’ has a high, ongoing natural gas fuel cost in order to ensure reliable supply.
    I’m completely in favour of appropriate technology. But as I write here in Australia, it’s the middle of the night and there’s no wind. Right now, neither solar nor wind is appropriate technology, and it only makes sense to resist those who want to deny this self-evident fact on the basis of ideology. Amusingly to me, I am using renewable hydro-electricity. For their own reasons however, the Greens seem adamantly opposed to the only renewable that makes sense in my environment.
    You make some compelling points, and I anticipate that in the very long term future, circumstances will have changed enough that renewables will generally make more sense than fossil fuels. For the reasons Crispin in waterloo gave, the reasons I’ve covered here, plus a few others we can cover if you think it warrants it, I do not anticipate it being in the next fifty years, and probably vastly longer.
    We haven’t discussed mining methane clathrates, nor political pressures for cheaper oil by reducing taxes, nor conventional nuclear and or thorium reactors, or space-based solar power satellites, or any other alternatives that might keep the price down. Of course, the economic case for renewables will make a substantial change when or if we ever develop a vastly improved electricity battery.
    To those of you mentioned above, and the other WUWT commentators, of whatever views, whether I agree with you or not, thank you for your contributions and insights. I am better informed thanks to your efforts. Perhaps on rare occasions I might even become a little bit wiser.

  108. Resources that are sold below the total cost of production, which covers most shale in non-core areas, are not reserves no matter who claims that they are. And while tar sands are reserves they will not offset the decline in production rates from conventional sources because the cost of production in energy terms is too high. As such, the Peak Oil argument has not changed. While Willis is a very smart person he has a tendency to ignore certain arguments made by skeptics, which are easily checked by looking at the ACTUAL PRODUCTION DATA. For shale companies to claim a profit they MUST use depreciation rates that come from ESTIMATED ULTIMATE RETURNS rather that the ULTIMATE RETURNS that can be determined from the ACTUAL PRODUCTION DATA. It is easy to claim a profit when you write off only 25% of the cost of a well that has already produced more than half the oil it will ever produce. But no matter what games are played by the accountants the balance sheets and cash flow statements will tell us what is going on. And on that front we see supposedly successful and experienced shale companies continue to report funding gaps that must be closed by further borrowing, new issues of equity, or asset sales.

    The poster child for accounting gamesmanship was Chesapeake energy. It is my guess that some time in the next year or two the company will run out of cash and get taken out by a larger player or simply go into bankruptcy. And while I am at it, let me point out that the Bakken data does not look very good. All that increase that excites Willis comes from drilling many new expensive wells that have high IPs. Yet, the ND Bakken data shows that in October 2011 there were 2981producing wells that had an average rate of 142 bpd. Two years later there were 6643 producing wells but the average rate fell to 132 bpd.

    How does a region that is supposed to be prolific see a decline in daily average production when high Initial Production rate wells that are supposedly going to last 40 years or so after only two years? Willis has shown himself to be a good mathematician who can fly through temperature data and do some serious analysis. Why can’t he use those skills to look at what the real production data is telling us about shale and compare his findings with the story that is being told by the industry and the promoters in state capitals and on Wall Street?

  109. I have 1,500,000,000 barrels sitting in my back yard. It is generically known as oil shale. Estimates go as high as 40 barrels to the ton in the high grade Mahogany zone.

  110. vangelv:

    At January 14, 2014 at 9:15 am you asssert

    Resources that are sold below the total cost of production, which covers most shale in non-core areas, are not reserves no matter who claims that they are

    There is no “claim”.
    If a material is sold to gain a profit then it is a resource BY DEFINITION.

    Indeed, provision of subsidy can convert a resource to become a reserve that is sold below cost of production because the subsidy provides the profit. This is a market distortion which is often applied: e.g. for biofuels, for wind power, etc..

    Richard

  111. The old saying energy is not lost ,only converted comes to mind…

    “…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.”

    Recently, I have been trying to ‘reserve some time’ to read/study , and get up to speed on these topics of discussion. I have found out that, I cannot ‘reserve ‘ time. There is only so much to go around, and every time I reconcile the books ,I find that I have the same amount that I had when I started.I can only ‘produce’ some time by increasing my efficiency ,but can never produce extra time.
    Some lightening of my load would be nice—http://en.wikipedia.org/wiki/Nanoflares
    Thanks to the author and WUWT for the interesting articles and comments.

  112. vangelv – You make some interesting comments about the games played by accountants re write-downs etc, accounting gamesmanship by CHK, and uninspiring Bakken data. I would be grateful for any links that provide the relevant data.

  113. Sorry if I offended you Willis, as I am a big fan. It is only that proven reserves and extracted assets are two entirely different things, and that is the reason I find it peculiar that such a composite chart is shown. I believe you try to make a mockery of my previous comments (sorry, not native english speaker), but your examples can be easily be countered. The way one would count proven reserves against extracted and newly discovered reserves, would not be a case of adding the given reserves for consecutive years. It would be an accountancy where proven reserves would be discounted by the extracted amount, and finally, newly discovered resources would be added to the remaining proven reserves.

    Still, if you find my suggestion ridiculous, I recommend you choose a different benchmark when showing the folly of projections vs. expectations. Proven reserves does not make much sense, because the entire fossil community may have expected a continual rise in projections. What would make a greater impact, would be the projections of accepted papers on the subject, in which you could show that the expected total have been broken time and time again.. :)

  114. HLx says:
    January 14, 2014 at 8:39 pm

    Sorry if I offended you Willis, as I am a big fan.

    No offense taken, HLx. As I said, I just found the idea of “cumulative proved reserves” to be something I couldn’t understand.

    It is only that proven reserves and extracted assets are two entirely different things, and that is the reason I find it peculiar that such a composite chart is shown.

    They are very different things. However, many people don’t know that. As a result, they look at the extraction rate, and they look at proved reserves, and they go “YIKES! We’re running out of oil!”.

    So as the title suggests, I thought that I’d have some fun. I thought I’d demonstrate, in the clearest way that I could, that the fact that the proved reserves are small does NOT mean that we are running out of oil. I demonstrated that by showing that since 1980, we’ve extracted three times the proved reserves, and we still have the same size proved reserves.

    My best regards to you, HLx, and your English is excellent.

    w.

  115. Pathway says:
    January 14, 2014 at 10:22 am
    I have 1,500,000,000 barrels sitting in my back yard. It is generically known as oil shale. Estimates go as high as 40 barrels to the ton in the high grade Mahogany zone.
    —————————————————————————————————–

    Tough to make that one work— there are only about 7 barrels of pure oil in a metric ton

  116. vangelv says:
    January 14, 2014 at 9:15 am

    … And while I am at it, let me point out that the Bakken data does not look very good. All that increase that excites Willis comes from drilling many new expensive wells that have high IPs. Yet, the ND Bakken data shows that in October 2011 there were 2981producing wells that had an average rate of 142 bpd. Two years later there were 6643 producing wells but the average rate fell to 132 bpd.

    How does a region that is supposed to be prolific see a decline in daily average production when high Initial Production rate wells that are supposedly going to last 40 years or so after only two years? Willis has shown himself to be a good mathematician who can fly through temperature data and do some serious analysis. Why can’t he use those skills to look at what the real production data is telling us about shale and compare his findings with the story that is being told by the industry and the promoters in state capitals and on Wall Street?

    Well, thanks for the good word. Here’s the record for North Dakota Bakken Formation shale oil wells.

    I see that you are all exercised by the change from 142 BPD to 132 BPD. But when you look at the longer term record, you can see that this is the range it has been fluctuating within for the last five years, up and down and up and down and up again … so I don’t find it worrisome.

    Also, here’s the record for new wells in the Bakken:

    As you can see, the production per new well continues to climb.

    Finally, you keep claiming that people are not making money on the Shale oil play, viz:

    Resources that are sold below the total cost of production, which covers most shale in non-core areas, are not reserves no matter who claims that they are.

    I’m sorry, but oil companies are not stupid. If the cost of production gets larger than the return, they SHUT DOWN. Your idea, that the companies are selling oil that costs them more to produce than the sale price, doesn’t even pass the smell test. I asked you above for a citation to back up this cockamamie claim … so far I have nothing but handwaving at Chesapeake Energy. Now, you may be all bearish on Chesapeake, and indeed you may be 100% right … but the market certainly didn’t get your memo, it hasn’t noticed your concerns …

    So I’m left with no evidence that the companies are stupidly losing money on shale oil … and lots of evidence that they are making money. See the red line in the first figure, showing new wells? Are you seriously claiming that they are lining up to lose money?

    w.

    • There are a few issues I have with your statements. I will cover them one at a time.

      Let me begin with the HLx statement (January 14, 2014 at 8:39 pm), “It is only that proven reserves and extracted assets are two entirely different things, and that is the reason I find it peculiar that such a composite chart is shown.”

      Your response was, “They are very different things. However, many people don’t know that. As a result, they look at the extraction rate, and they look at proved reserves, and they go “YIKES! We’re running out of oil!”.”

      There are so many problems here that I have trouble figuring out where to begin. But let me give it a shot by starting with the comment that individuals that are knowledgeable of the ‘Peak Oil’ theory do not claim that we run out of oil. They simply point out that we will reach a production peak and that once that happens we will have less and less oil produced each year.

      That is a minor point compared to a much larger one that is totally ignored in the mainstream media as well as the analysts who provide most of the talking points. What matters in the natural resource game is the transformation of inferred mineral resources into proven reserves. For most sectors there are strict rules about how that happens. If I am a small junior looking for copper I begin by staking out a property, exploring, drilling, coming up with a pre-feasibility study, doing further drilling, metallurgical testing, etc., until I can produce a bankable feasibility study that will provide me with access to capital. These steps all help to move inferred resources into a proven reserve category that allows me to get a positive return.

      The oil and gas sector has very similar rules. Companies need to perform a number of activities before they move resources into the proven reserve category. All petroleum analysts know this and understand that the reserves are always understated since there is no need to do all of the work necessary to book them before they are ready to be produced. THIS IS THE REASON WHY MANY UNDERGROUND MINES HAVE ALWAYS 2-3 YEARS OF RESERVES THROUGHOUT A LIFETIME THAT MEASURES TO THE CENTURY MARK.

      If I have a field in a conventional reservoir I do not need to keep drilling past the boundary until I need the production the same as if I am following a vein of gold bearing quarts I do not need to drill more than is necessary to plan my next year or two of production.

      The trouble is that these rules were waived for shale producers. They can book reserves even though they have failed to produce a profitable product or do all of the necessary testing to prove that the average well in the formation is productive. This was done so that the fledgling industry could get access to capital. The trouble is that without a sound methodology it is easy to have misleading information that claims reserves even though extraction is not economic.

      I will continue my comments on the next posting.

    • Willis Eschenbach says:
      January 14, 2014 at 9:48 pm

      “I see that you are all exercised by the change from 142 BPD to 132 BPD. But when you look at the longer term record, you can see that this is the range it has been fluctuating within for the last five years, up and down and up and down and up again … so I don’t find it worrisome.’

      But you are the math guy. If I triple the number of wells by adding new ones that show initial production rates of around 450 bpd how can I fail to raise the average production rate UNLESS there is a huge decline rate? Note that the massive increase in production came from the huge investment in the drilling of very expensive wells. That is not a positive unless those wells can pay for themselves. And from what I see in the 10-K statements they can’t because the shale producers are not capable of self financing shale operations unless they get cash from other sources.

      “As you can see, the production per new well continues to climb.”

      Longer horizontals will do that. But notice that the new, higher IP wells cannot get the average to go up? This would not be a problem if we started off with a very high number of shale wells and the number of new wells is small but that is not the case. As I wrote above over a 24 month period we saw the number of operating wells go from 2981 to 6643. This means that an increase of more than 100% led to a decline in average well production even though the new wells have a high IP rate. Your math is far better than mine. What kind of depletion rate do you need to observe these results?

      And while you are at it, if we begin at an IP of 500 bpd and follow the depletion curve down what kind of revenue do we get when we integrate the daily production? After you account for the drilling costs, the land acquisition, overheads, etc., and after taking into account the royalty of 20-25% or so how do you ever make a profit by producing shale oil that sells at $95 a barrel? Since high IP rates but a low average means that you get most of your cash in the first two or three years why can’t the producers self finance? And what do you think happens when they run out of drill prospects in the prolific core areas and move to the marginal part of the formations?

      “I’m sorry, but oil companies are not stupid. If the cost of production gets larger than the return, they SHUT DOWN. Your idea, that the companies are selling oil that costs them more to produce than the sale price, doesn’t even pass the smell test. “

      Who said that it is stupid to produce shale oil at a loss? If I were a CEO of a tiny player I could make more in two or three years by selling off shares than I could in three lifetimes as a geologist or in middle management at a conventional player. You are under the impression that taking actions that are ultimately terrible for your lenders and investors is stupid but a series of bubbles have shown otherwise.

      If you are in Toronto during the first week in March come to the Prospectors & Developers Association of Canada conference and I can show you hundreds of CEOs who will explain patiently how they got wealthy while most of the companies that they worked for went bankrupt. Note that these guys tend to be in the business for decades and more than 95% of the companies that they worked for went under.

      “I asked you above for a citation to back up this cockamamie claim … so far I have nothing but handwaving at Chesapeake Energy. Now, you may be all bearish on Chesapeake, and indeed you may be 100% right … but the market certainly didn’t get your memo, it hasn’t noticed your concerns …”

      The market did not agree with my bearish assessment of Nortel either when I pointed out that during a massive bubble in tech spending the company failed to make a true economic profit. Like the shale producers Nortel was not depreciating assets quickly enough and wound up writing off large parts of its balance sheets. The shares ran from the high $60s into the $120 range or so (Canadian dollars) before collapsing to under $1.00. The funny thing was that the annual reports were showing that the company was worth $0.60-$0.80 when it was selling for $80. Nobody paid attention because everyone is a momentum player these days. While that is fine if one is a speculator these postings should be about longer term fundamentals so it might make more sense to stick to reality.

      PS. Perhaps you, me, and some other readers on this fine site should position ourselves for the next bubble. I am sure that after this latest bubble bursts we could make a fortune selling investors on the merits of methane hydrates as the next possible energy solution. While there are some serious technical issues they are nowhere near the level of what shale producers have to overcome.

  117. A final comment, vangelv. It is true that the fracked wells decline quickly. A typical well that comes in at 500 barrels per day declines typically like this:

    Initial, 500 bbl/day
    End Year 1, 150 bbl/day
    End Year 2, 99 bbl/day
    End Year 3, 76 bbl/day
    End Year 4, 60 bbl/day

    However, this can obviously still be quite profitable, as shown by the number of people getting in on the game. All this does is change the decline cure analysis which is routinely done for all wells, q.v.

    w.

  118. @Leo Morgan:
    January 14, 2014 at 7:52 am

    Such a pleasure to read such a response normally I get nothing about irrational emotional responses to my arguments… let me clarify a few things to mentioned

    ” My view differs in that I see the price point as a function of technology.”

    We’re not in disagreement here at all, I agree with this statement and if indeed a technology breakthrough will happen that will dramatically reduced extraction costs my view will change…

    “and the crucial point is they have all been higher than comparable costs for fossil fuels.”

    This is have to disagree with, numerous levelized cost studies have shown new wind and solar installation are fast equalling and in some countries are lower than new coal and gas and easily nuclear…

    “Of course, the economic case for renewables will make a substantial change when or if we ever develop a vastly improved electricity battery.”

    Yes I agree wind and solar are intermittent and this is a major issue, however, we’ve always had backup electricity, coal fire plants go down all the time, hence in a real sense they too are unreliable. However, these issues are not insurmountable, Spain has recently hit 50% renewables penetration, Germany is also an example as is South Aus with also have high renewables penetration, clearly – while problematic indeterminacy is not that much of an issue as evidenced by these cases.

    I believe the integration of electric cars into the grid will create a storage buffer – but not for over night – I mean just for that 2-3 hour peak before and after the solar peak, base load will still be needed but clearly much more renewables can be easily be integrated, hence there are no barriers to entry for renewables here

    What’s fascinating to me is how to solve the issue of who gets to sell power at specific times… for example I think it’s not really fair on fossil fuel generators to mandate they shut down to accommodate high solar and wind output…

    On the other hand given a free market where anyone can sell to the grid at the lowest price fossil fuel generator can act uncompetitive and simply drop prices to shut solar and wind during those times and increase prices during non- solar and win times…

    Hence how do you solve that issue? You can’t use free market, and it’s not fair governments mandate renewables, I can’t get my head around how to solve this to keep both parties happy

  119. richardscourtney says:
    January 13, 2014 at 4:15 am

    Yes I read this, however I felt no reply was required as your seemingly confident assertions are simply out of date, and can easily be disproved by example – you talk about indeterminacy and how intermittent forms cannot have high penetration without introducing issues into the grid (but you do not specify a maximum % penetration)

    Yet the examples of Spain (which has recently hit 50% renewables penetration, Germany and South Aus show high renewables penetration.

    Clearly your denial of big foot (just for an amusing example) is disproved when big foot walks up to you and shakes your hand!

    People here say electric cars can never work due to battery storage issue, yet Tesla cars is doing just fine! The cars work just fine and I dare say will be a saviour to base load fossil plants.

    People here seem to be stuck in the past – like Willis which seems to think “cheap energy is a saviour to the poor”, sure i agree with the literal mean but not the implied meaning, i.e. that the form of this energy is cheap oil – cheap oil is starting to become an oxymoron, and will be so more and more over the next 50 years

  120. Oil production in a given oil field with a given technology increases and then decreases. e.g. see Rise & Decline of UK Crude Oil
    Increasing resource must come from finding new fields, or developing new technologies to access new hydrocarbon resources, or extract more from the same resource.
    Eventually we have to develop fuels from nuclear/solar.

  121. Vangel Vesovski says:
    January 15, 2014 at 10:55 am

    Vangel, regarding the shale wells, no matter what I say, you keep coming back with the same thing—shale wells have a high “decline rate”, they lose production faster than regular wells.

    But since I posted that myself, and (unlike you) provided figures to back it up, why do you keep repeating it? Yes, they decline faster, I said that, you said that … so what? My problem is with your claim that the shale plays are uneconomical. Whether a well is economical has little to do with how fast they run out. If you invented a new well technology that could pump an entire field dry in one day … would that mean the well was uneconomical because of a high decline rate? No way. Either a well makes money for their owner/operators, or it doesn’t. Either they figure the decline rate properly, or they don’t.

    And to date, the shale oil wells do make money for their operators, and lots of it. That’s why the red line showing the number of wells drilled is going vertical.

    Now, I see that you claim that a significant number of the shale oil companies are deliberately cooking the books and defrauding their investors, viz:

    Who said that it is stupid to produce shale oil at a loss? If I were a CEO of a tiny player I could make more in two or three years by selling off shares than I could in three lifetimes as a geologist or in middle management at a conventional player. You are under the impression that taking actions that are ultimately terrible for your lenders and investors is stupid but a series of bubbles have shown otherwise.

    However, just like the rest of your claims, you haven’t provided a scrap of substantiation for that claim either. I’m sure you could find a few companies doing that, but your claim that the shale oil play is a result of companies cheating their lenders REQUIRES CITATIONS, and a whole pile of them, to be believable. Yes, there are shale companies that are gaming the system as I discuss below … so what’s new? A certain percentage of companies always game any system.

    Next, you say that:

    If I have a field in a conventional reservoir I do not need to keep drilling past the boundary until I need the production the same as if I am following a vein of gold bearing quarts I do not need to drill more than is necessary to plan my next year or two of production.

    The trouble is that these rules were waived for shale producers. They can book reserves even though they have failed to produce a profitable product or do all of the necessary testing to prove that the average well in the formation is productive.

    Well … in a word, no. You’ve got the basic idea but your details are all wrong. There were no rules waived for shale produces. What happened was a change in the rules that applied all across the oil and gas industry, to every producer. It didn’t waive anything. Instead, it created an entirely new class of reserves, called PUDs, for “proved undeveloped” reserves.

    As with any such change in the rules, two things happened. First, people took advantage of the rule, and many consumers were unaware of the change. Second, people started breaking the rules. As a result, there certainly are shale companies out there with “reserves” on their books that are “proved undeveloped reserves”, which many consumers have not actually realized yet are NOT proved reserves in any sense of the word, and whose share values are thus inflated.

    However, that can’t last long, and indeed there was a big shakeout at the end of 2012 as the size of the machinations became visible, and the SEC stepped in and started issuing warning letters to the companies that were overbooking reserves … nothing like a warning letter from the SEC to drive your stock price down.

    But that’s just folks gaming the rules, and you have to know that will happen with any new rule. Despite that, there are plenty of folks out there making plenty of money off of various tight oil and tight gas plays.

    There’s a good overview of how the companies are gaming the system at the Energy Policy Forum. As always, the public is waking up to the scam, the SEC is late to the party but is now acting, and those companies that have played fast and loose are falling by the wayside … and the black gold rush in the shale country continues.

    Regards,

    w.

    • Willis Eschenbach says:
      January 15, 2014 at 4:36 pm

      Vangel, regarding the shale wells, no matter what I say, you keep coming back with the same thing—shale wells have a high “decline rate”, they lose production faster than regular wells.

      That is not all I said. I said that when you start with the initial production rate and add up all future production based on the real world well production data you get a number that is mush smaller than the ESTIMATED ultimate reserve values that are being used to determine the depreciation schedules. This is why companies have a serious cash flow problem.

      For example, when you listen to the conference call you hear that companies like Continental argue that their AVERAGE Bakken well is going to produce for decades and will yield 600,000 barrels over its lifetime. But the USGS uses real world data to come up with a range of around 70,000 to 250,000 barrels. So what you have is a depreciation schedule that does not account for the full cost of production. And that is the reason why you can have a company report $800 million in profit even though the reported free cash flow is a NEGATIVE $1.9 billion.

      But since I posted that myself, and (unlike you) provided figures to back it up, why do you keep repeating it? Yes, they decline faster, I said that, you said that … so what? My problem is with your claim that the shale plays are uneconomical. Whether a well is economical has little to do with how fast they run out. If you invented a new well technology that could pump an entire field dry in one day … would that mean the well was uneconomical because of a high decline rate? No way. Either a well makes money for their owner/operators, or it doesn’t. Either they figure the decline rate properly, or they don’t.

      Shy do I repeat it? Because using the right depreciation schedules matter. Do you really think that Nortel shares would have gone up over $100 if its management depreciated worthless facilities to reflect the true market value of old production lines producing obsolete products? The same is true of shale. You look at a well and see a profit because you do not check to see if the EURs are realistic. I look at SEC filings and see an explosion of debt on the balance sheet and the constant negative cash flows and see the same pattern that I have seen many times in the past. You are hopeful of a revolution while I see just another scam.

      And to date, the shale oil wells do make money for their operators, and lots of it. That’s why the red line showing the number of wells drilled is going vertical.

      You have no empirical evidence that this is true. The producers can only show a profit if they use a depreciation schedule that is not derived from the actual production data. It is ironic that when it comes to shale hype you sound just like the people that you criticize for failing to understand the AGW hype.

      However, just like the rest of your claims, you haven’t provided a scrap of substantiation for that claim either.

      Of course I have provided evidence. Take a look at ANY 10-K filing and look at what happens to the balance sheets and is reported on the cash flow statements. And take a look at what has happened to the production for companies like Chesapeake. Or what happened when majors purchased supposedly good shale properties only to write most of the cost because there was no way to make the math work. It might help if you took a look at some of the analysis done by the skeptics.

      http://www.globalresearch.ca/the-fracked-up-usa-shale-gas-bubble/5326504

      http://www.desmogblog.com/2012/11/13/shale-sas-bubble-about-to-burst-say-energy-insiders-art-berman-bill-powers

      http://peakoil.com/enviroment/shale-truth-interview-arthur-berman

      http://oilprice.com/Energy/Natural-Gas/Has-the-Shale-Bubble-Already-Burst.html

      http://www.afr.com/f/free/blogs/christopher_joye/the_real_oil_on_us_shale_may_be_w07tCAT80ChWN4RYUjcgpM

      Yes, there are shale companies that are gaming the system as I discuss below … so what’s new? A certain percentage of companies always game any system.

      You are too trusting my friend. I could not find a single shale producer that is capable of self financing shale operations without using non shale cash flows. I could not find a single shale producer that uses EURs that are remotely close to what the real production data is suggesting as a valid ultimate recovery rate.

      As with any such change in the rules, two things happened. First, people took advantage of the rule, and many consumers were unaware of the change. Second, people started breaking the rules. As a result, there certainly are shale companies out there with “reserves” on their books that are “proved undeveloped reserves”, which many consumers have not actually realized yet are NOT proved reserves in any sense of the word, and whose share values are thus inflated….

      All of the primary shale producers are in the same boat. If they use realistic estimates their stock price is lower and they risk being taken out by producers that can use overvalued equity paper for acquisitions. No matter how you spin it reality is very different from what is being reported by the promoters and the companies themselves. Which is why you hear the words ‘estimated’ and ‘funding gap’ on most conference calls. Anyone who listens carefully and reads the footnotes in the Annual Reports cannot claim that the companies lied because they make it very clear that much of what is in the reports is based on guesses.

      And you are missing the point again. I am asking for a SINGLE primary shale producer that can finance its operations out of the cash flows generated by shale operations. Note that the high depletion rate shows that most of the cash is recovered very early in the game. If shale were truly profitable why would companies that have been in the business for nearly a decade still have so many cash flow issues and have to resort to more and more debt, equity issues, or asset sales just to keep their development operations going? Why wouldn’t they pause for a year and use the accumulated cash to finance operations?

      As I said, for a very smart math guy you are missing something very obvious.

    • Willis Eschenbach says:
      January 19, 2014 at 12:18 pm

      Robert, if you and Vangel want to believe that the oil companies are so incredibly stupid that they are investing billions of dollars in wells that will cost more than they produce, then hiding it with some unspecified “accounting games”, then be my guest. My advice, however, is that if [you] don’t want people to point and laugh, you might at least find a conspiracy with a believable premise.

      Wow. Do you mean to say that if 97% of the primary shale producers are bullish on shale I have to ignore the empirical evidence?

      There is no such thing as, ‘the companies are doing…” Decisions that are made regarding capital spending in shale operations do not come from companies that are investing their own money; they come from a group of primary decisions makers who are using loans to keep their operations going so that they can be compensated as much as possible. If I am the CEO of some shale outfit that discloses that the ultimate recovery rates for its wells are too low to make the extraction process economic what is the downside to using ESTIMATED ultimate recovery rates that assume that the extraction of the average well in the formation will match the extraction from a few wells in the core areas? I comply with all the regulations because they permit me to use inflated EURs for long periods of time. Note that if I admit that the process is not economic the value of the leases will have to be written down and earnings will have to be ‘adjusted’ to reflect the actual reality. If I play the game the directors, managers, and employees get a chance to earn as much money as they can until reality intervenes and the party is over. Not only do I collect high pay and bonuses I get the chance to cash in stock options before equity holders are wiped out. Note that I never lied or broke the law. My conference calls were full of comments about funding gaps that will need to be closed by new borrowing or asset sales. If you read the footnotes on the SEC filing and Annual Reports that the board approved you will find clear disclaimers that the volume of oil that is recoverable from each well may be lower than the estimates and that any divergence between the estimated and real performance would impact the financials.

      None of what I am writing about is new. The financial companies were not using the proper value for their mortgage backed paper before the housing crash and the GSE never accounted for their exposure to overvalued houses properly. In the end the taxpayer was on the hook for the losses and trillions of dollars were wasted bailing out the idiots who created the problem in the first place.

      And note that we saw this same scenario play out during the tech boom. Not only were the internet startups playing games by reporting eyeballs and users that would be monetized in the near future but we even saw the equipment manufacturers get into the accounting game by not writing off obsolete product lines and facilities. When reality intervened the skeptics who saw the problem were proven right and those that got caught holding overvalued shares got wiped out. I do not see how it plays out differently this time around.

      I hate to be so blunt, but really?? The idea that everyone is engaged in some giant scam, from the drillers on the ground to the oil companies at the top of the heap, is a joke.

      What scam? If you look at the SEC filings you find that the companies have disclosed their funding gaps. we have seen huge amounts of growing debt on the balance sheet year after year even though most of the cash flow from each well is produced in the first two to three years. We have seen Encana, BHP, Shell, Exxon, Chesapeake, BG Group, Exco Resources, and others write down billions in shale assets report that further write-offs are likely. So how exactly is it that I am wrong when we cannot find a single primary producer that is cash flow positive for its shale operations.

      While I am at it let me point out a few other things that you may not have thought about. The first is that the management of most shale companies did not want drills turning because the only way to make a profit was through high prices. The problem was that the leases that they acquired had clauses that required drilling operations to take place within a specified time. Failure to meet the conditions meant giving back the rights to the property back and having to write off a big chunk of the balance sheet. This was why companies that needed $9-$11 gas were still drilling when prices were below $3. The second point that you are missing is the reserve problems of the majors. They are now producing more oil each year than they are adding to their reserve base. To hide this problem and keep share prices up some of the major are more than happy to buy uneconomic shale assets and add inflated reserve claims to their balance sheets. Not only that but gas gets the approximately 6:1 conversion rate that is based on BTU content, not the 30:1 or higher price ratio. With a compliant Federal Reserve and SEC the stage is set for yet another asset bubble. Too bad you do not use your considerable math skills to see why the claims have to be false.

  122. Dear Willis: I once believed the AGW theory until Vangelv convinced me otherwise to look behind the IPCC statements using, in large part, articles by you. It would be fair to say that we are both big fans of your work. I just want to point out some points that you may not have appreciated, please take them in the spirit that they were given.

    I actually think you and Vangelv are in agreement about the fundamental thrust of your article

    “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. “

    [Just an aside: Your statement seems to imply that King’s peak oil/gas theory has merit for a given/current technology level.]

    I think Vangel is saying that your graphs of “proven reserves” is suspect due to the true economics of fracking. If I may summarize Vangelv arguments:

    1. you can’t rely on newspaper articles or SEC summaries, you have to go deeper into the actual numbers; and that analysis shows

    2. the cost of a well exceeds the returns from the production; and that

    3. this is being hidden in accounting games with depreciation of “the cost of a well “ at a lower level then the decline of the well.

    The depreciation (i.e. the EURs) must be at a much higher level in order to match the lower value of the assets i.e. the high decline rates of the well.

    Willis Eschenbach says:
    January 14, 2014 at 10:10 pm
    “A final comment, vangelv. It is true that the fracked wells decline quickly. A typical well that comes in at 500 barrels per day declines typically like this:
    Initial, 500 bbl/day
    End Year 1, 150 bbl/day
    End Year 2, 99 bbl/day
    End Year 3, 76 bbl/day
    End Year 4, 60 bbl/day
    However, this can obviously still be quite profitable, as shown by the number of people getting in on the game. All this does is change the decline cure analysis which is routinely done for all wells, q.v.”

    This mismatch is depreciation shows up as a “profit” on the accounting results, but as a short fall in cash flow; thus requiring new cash infusions and the lack of

    “a SINGLE primary shale producer that can finance its operations out of the cash flows generated by shale operations”.

    The “number of people getting in on the game” is not proof that the returns from the production of a well exceeds its cost. It took me awhile to figure out the effect of accounting depreciation rates on “profit”.

  123. Robert Liang says:
    January 18, 2014 at 11:10 pm

    … I think Vangel is saying that your graphs of “proven reserves” is suspect due to the true economics of fracking. If I may summarize Vangelv arguments:

    1. you can’t rely on newspaper articles or SEC summaries, you have to go deeper into the actual numbers; and that analysis shows

    2. the cost of a well exceeds the returns from the production; and that

    3. this is being hidden in accounting games with depreciation of “the cost of a well “ at a lower level then the decline of the well.

    Robert, if you and Vangel want to believe that the oil companies are so incredibly stupid that they are investing billions of dollars in wells that will cost more than they produce, then hiding it with some unspecified “accounting games”, then be my guest. My advice, however, is that if [you] don’t want people to point and laugh, you might at least find a conspiracy with a believable premise.

    I hate to be so blunt, but really?? The idea that everyone is engaged in some giant scam, from the drillers on the ground to the oil companies at the top of the heap, is a joke.

    w.

  124. Robert Liang says:
    January 18, 2014 at 11:10 pm

    Robert, a part of the problem has come from the opposite effect that you are talking about. One reason that the shale gas producers are not making the money they had hoped for is that the shale gas plays are too successful, and as an inevitable result, the glut of natural gas on the market has driven the prices way down …

    And yes, it’s not conventional oil or gas, and as a result, some companies have miscalculated the economics. However, the fact that wells continue to be drilled should give a clue about whether they are profitable.

    It seems to me that you guys are looking at cash flow as the be all and end all. Let me point out a curiosity about negative cash flow … it’s not the proper measurement of success. To illustrate why, here are some rough figures regarding the Bakken formation from above:

    A typical well that comes in at 500 barrels per day declines typically like this:
    Initial, 500 bbl/day
    End Year 1, 150 bbl/day
    End Year 2, 99 bbl/day
    End Year 3, 76 bbl/day
    End Year 4, 60 bbl/day

    Now, as Vangel and you point out, that is a very fast decline. It can be modeled quite accurately as a double exponential decline, with about 70% declining at 4.16 years (tau) and about 30% declining with a tau of about 0.4 years.

    Applying this to a ten-year lifetime of the well, we get an average production of about 72 bbls per day, and a total ten-year production of about 265,000 barrels.

    Now, these days a well in the Bakken costs about $10 million dollars to drill, although costs are dropping daily. That means the following:

    1. Breakeven cost for the well is on the order of $37 per barrel, well below current prices.

    2. Oil price today is $94/barrel … assuming a (high) pumping cost of $10 per barrel, that means that the well would recoup its capital cost in about a year and a half.

    3. Again at todays prices (and oil prices are more likely to go up than down), over ten years each well will show a profit of 10 million dollars.

    Given that … you can see why companies are investing in the wells.

    You can also see that if you want to drill say a well this year, and two next year, and three the third year, for the next ten years, you’re going to have a huge cash flow problem, DESPITE THE FACT THAT YOUR WELLS WILL MAKE YOU MILLIONS.

    For example, using that plan of drilling one well now, two the next year, at the start of the third year, you’ve made almost $30 million dollars … but you’ve drilled four wells, and spent $40 million dollars, and guys like you and Vanglev think it’s all terrible, and that it’s held up by “accounting tricks”.

    It’s not, of course. If you stopped with those four wells, you’d make a total profit of about $40 million at the end of ten years of well life … but you want to continue your expansion. So if you want to continue to drill, you’ve got negative cash flow, and you might be borrowing money for your drilling program … but so what?

    Now, you could avoid that. You could drill a single well, and then wait for years, and then drill the second well when you have not only paid for the first well, but you also have ten million in profits from the first well to drill the second well. That way you’ll have positive case flow, as you and Vangel seem to think is so important. At current prices, that would be in the middle of the sixth year … so then you’ve paid for the first well and you have ten million in profits.

    So you drill your second well in the middle of the sixth year, and then it will be about in the tenth year you can drill your third well … meanwhile, at the end of ten years, the guy next to you has drilled 20 wells or so. Yes, he had to borrow big to do it, and yes, he had no cash flow for the first six years … but he’s also going to make a PROFIT of $200 million, while your two wells, funded entirely out of positive cash flow, are going to make you $20 million.

    In other words, your concentration on the cash flow is misplaced. Every businessman knows that cash flow is an irritant that in general your bank will be happy to solve … as long as your bank is happy with your bottom line.

    w.

    • Willis Eschenbach says:
      January 19, 2014 at 12:18 pm

      Applying this to a ten-year lifetime of the well, we get an average production of about 72 bbls per day, and a total ten-year production of about 265,000 barrels.?

      But the average shale well is nowhere that prolific. The shale companies are using the classical Arps formula but the actual well data disagrees with the EURs calculated by using that formula. It is ironic that you side with models that make assumptions and overestimate recovery rates while you ignore the real data even as you attack the AGW crowd for siding with models that overestimate the actual warming observed in the real world.

      And note that the argument has shifter far away from shale because even the promoters have moved away from shale gas because it is such a capital destroyer. The fact that shale gas failed while it was hyped as the next big thing should lead you to question some of the arguments, not accept them without checking. Note that the same type of argument that you now give for oil did not work out well for shale gas.

      http://online.wsj.com/news/articles/SB10001424052702304753504579282900212162522

      I was looking for the Bakken production data and just ran into this commentary. It supports what I have argued so I am providing the link below the quotes. The paragraphs of interest to me were:

      “According to Ryder Scott in late 2011, 80% of the top 10-K oil and gas companies were issued comment letters by the SEC for anomalies in their public filings. Further, only 16% could show with reasonable certainty that their PUD’s would be developed in 5 years. That meant that 84% of the companies were not in compliance with the new SEC rule. In fact, some companies were apparently declaring PUD’s that were described as “mathematically impossible”.

      …….

      Equally problematic is that fact that such PUD’s accounted for nearly half of all reserves at companies like Chesapeake and PetroHawk. These are assets that according to company SEC filings would take almost 3 times longer than allowed to develop. So it raises the question, just how viable are such assets? And can an investor truly get a real picture of this company’s prospects and financial health? In a sense, it could be argued that this is the equivalent of smearing Vaseline over a camera lens. You can discern shapes but that is about it.

      ………..

      Let’s presume that you aggressively leased acreage in a play and then equally aggressively apply a public relation campaign to tout the enormous potential. (Note that the word aggressive is appearing on a regular basis). You drill a few wells and “prove up” the acreage. Only no one really knows at this point whether the wells are actually economically viable. Because under the new rule changes, the SEC does not require independent third party verification of reserves. (But even this would not be a fail-safe because, let’s be honest, who wants to bite the hand that feeds you if you are a reservoir analyst?). So if a company and it’s management are aggressive, they book these reserves. Indeed, we know now that they have significantly overbooked reserves.

      http://energypolicyforum.org/2012/09/11/the-magic-of-shales/

  125. In case you think my estimate of per-well profit is high (ten million in ten years), here’s the New York Times Magazine on the question …

    Production from a typical Bakken well declines rapidly but on average produces modest amounts of oil for 45 years and earns a profit of $20 million.

    My figures say less than that, but note that none of my analysis includes the inevitable technology gains that already are occurring, I’ve assumed $10/barrel pumping costs, $10 million drilling costs, and oil prices which are lower now than at the time of the NYT article..

    Well prices are dropping, from $10 million to around $8 million in a few years. And new technologies like “downspacing” are appearing all the time, including ways of using less water per well, and the like.

    So … yes, there are and will be cash flow issues with the wells … and yes, the wells are most definitely making a profit for their owners.

    w.

  126. Willis Eschenbach says:
    January 19, 2014 at 12:18 pm

    Robert, a part of the problem has come from the opposite effect that you are talking about. One reason that the shale gas producers are not making the money they had hoped for is that the shale gas plays are too successful, and as an inevitable result, the glut of natural gas on the market has driven the prices way down …

    That does not change the fact that the shale producers cannot generate economic profits. When the shale producers are forced to keep drilling to meet the terms on their leases at a time when the price for their product is a small fraction of the total cost they are destroying capital. We have seen the battle of worlds between Chesapeake, Devon, and Arthur Berman go on for years. Arthur claimed that when you added up all of the costs the shale producers needed prices around $10 giver or take a buck or two for the companies to make a true economic profit. He also pointed out that the estimates for the lives of the wells were too high. (The producers use a hyperbolic decline curve that cannot be justified by the actual production data.)

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asEUlpJcuZB4

    In 2009 the shale industry managed to get Mr. Berman fired from his job at the World Oil Journal because shale companies and Wall Street analysts did not like what he was writing about shale prospects. Since then Mr. Berman has been proven right as many of the assets had to be written down and since the real world data has shown that the actual life of shale wells was nowhere near the assumed. (That is where my depreciation argument comes in.)

    Let us look at one of Mr. Berman’s biggest critics, Aubrey McClendon, the former CEO of Chesapeake. In an interview with Jim Cramer (http://tinyurl.com/qfta6g6
    ) Mr. McClendon called Arthur Berman, “a third-tier geologist who considers himself a reservoir engineer,” who thought that he knew, “more about the shale gas revolution in America than companies that have combined market caps of almost $2 trillion and have spent hundreds of billions of dollars to develop these new resources.” That argument is the same one that you are giving right now except that it was made three years ago.

    So what has happened to Aubrey McClendon’s claim since then? Well, we now know that Mr. McClendon was given a right to participate in all of Chesapeake’s wells and that he exercised that right. He did that because the rubber stamp board allowed him participation with non-recourse borrowed money with no collateral other than interest in those same wells. Mr. McClendon lost more than $50 million in 2009, more than $100 million dollars in 2010, and yet more in 2011. Why would Mr. McClendon need to borrow to cover his losses if the shale wells are economic? Mr. McClendon was stripped of most of his power in 2012 and finally fired by the board in 2013. Although the company shares had managed to fall by more than 20% before he was stripped of his powers Mr. McClendon received more than $300 million in compensation. And when the SEC investigated his activities it found him secretly operating a $200 hedge fund that was in the natural gas futures trading business.

    http://www.huffingtonpost.com/2013/01/29/aubrey-mcclendon-steps-down_n_2577300.html

    http://www.cnbc.com/id/47410404

    Of course, there is a sucker born every minute and the discredited Mr. McClendon used the hype to start up a private equity firm that will destroy shareholder capital in Ohio’s Utica Shale formation as Mr. McClendon gets paid an obscene amount in fees regardless of performance. As Frobes points out, a great deal for him but a terrible one for investors.

    http://tinyurl.com/la98h83

    Let me repeat this again. The skeptics were right on shale gas while the promoters, Wall Street, and industry were wrong. That is not my opinion. It is documented history. Yet you still want to use an appeal to authority as the primary foundation of your position. Sorry Willis but no matter how smart you may be you are going to need facts to support your claims of economic profitability in an industry that sells its products at well below cost.

    And yes, it’s not conventional oil or gas, and as a result, some companies have miscalculated the economics. However, the fact that wells continue to be drilled should give a clue about whether they are profitable.

    Why? As was demonstrated by Chesapeake, the board of directors, kept approving activities that led to massive losses. The CEO called all the shots and the board that he appointed and paid $600,000 per year for very little in the way of work approved his actions even when they may have been illegal according to the SEC.

    Once again, companies don’t make decisions. Individuals do. And when you have a huge concentration of power the people who call the shots can get others to go along simply by paying them to agree.

  127. Vangel Vesovski says:
    January 19, 2014 at 5:32 pm

    Willis Eschenbach says:
    January 19, 2014 at 12:18 pm

    Applying this to a ten-year lifetime of the well, we get an average production of about 72 bbls per day, and a total ten-year production of about 265,000 barrels.

    But the average shale well is nowhere that prolific. The shale companies are using the classical Arps formula but the actual well data disagrees with the EURs calculated by using that formula. It is ironic that you side with models that make assumptions and overestimate recovery rates while you ignore the real data even as you attack the AGW crowd for siding with models that overestimate the actual warming observed in the real world.

    Vangel, I’ve provided two separate sources that agree with those numbers. When I posted the numbers before, you didn’t complain about them. Now that I’ve shown what they mean, you don’t believe them … but all you provide in the way of evidence is your unadorned words.

    OK, you come up with some numbers.

    While we’re waiting for your numbers, here are some more:

    First, dilling a well costs about $8.5 million. Each Bakken well will produce a cumulative 500,000 barrels or so over 10 years — about 450,000 after deducting royalty payments to landowners. That works out to drilling costs of roughly $19 per barrel.Then there’s roughly $5 a bbl in taxes and $3 a bbl for pipelines and infrastructure and a couple bucks for seismic and other overhead, for total costs of about $29 per barrel.

    At the current price of $94 per barrel, that puts the per-well profits at thirty million dollars after ten years … and I’ve estimated them much more conservatively, at $10 million profit after ten years.

    Finally, you seem to think that the companies overbooking of reserves has something to do with whether a well is profitable or not … but a well knows nothing of claims of reserves, or whether they are overbooks.

    w.

    PS—you do provide more evidence that some companies were gaming the system by overbooking reserves … but since I already agreed with that, so what? Doesn’t affect a well’s profitability by one penny.

    Oh, and you’re back on the Chesapeake bandwagon, as though the fate of one carefully selected company means something about the industry. And that’s about as convincing as someone saying “HP lost money on computers, so that means that all computer manufacturers are losing money producing computers and hiding it with accounting games”.

    I’ve provided three independent sources for my numbers, and my calculations use the most conservative of the three. Someday, perhaps you’ll provide some numbers to back up your claims … until then, they’re just hot air.

    • Willis Eschenbach says:
      January 19, 2014 at 8:04 pm

      Vangel, I’ve provided two separate sources that agree with those numbers. When I posted the numbers before, you didn’t complain about them. Now that I’ve shown what they mean, you don’t believe th em … but all you provide in the way of evidence is your unadorned words.

      Let me be clear. The numbers that you give are supposed to be for the AVERAGE Bakken well. But they do not come from real world data. They come from a model that uses the typical Arp’s formula, which is then used to calculate a decline curve that is fairly typical in CONVENTIONAL reservoirs but is NOT OBSERVED in shale wells.

      Since you asked for an example that differs from what you provided I went to Google and searched for the terms, “arp’s formula shale oil bakken decline” and looked at the top three hits.
      In the first link (http://tinyurl.com/plxn57r) we get a look at a very prolific well with a slow decline rate. This well is not typical but is not too far from the better wells in the core areas of the Bakken. As the analyst points out, This well is the kind of best performing shale wells that the industry would love to pitch to investors. When it started, it was one of the highest producing well at the time. The well decline was also one of the slowest. First year production decline was only 55%. Compare that to the 80%-85% first year decline in the latest Bakken wells!

      The analyst finds that the Arp formula is pretty good for the first three years of this particular well but after that there is no way to choose the right parameters to get the model to agree with the real world observations. I think that the reason for this are obvious; conventional oil reservoirs have very different permeability and porosity characteristics so it makes little sense to assume that shale declines will be similar. Which is why REAL WORLD OBSERVATIONS MATTER. And those observations suggest that, “the ultimate production of this well will be 280 MBOE, or roughly 44% of the EUR calculated from classical Arps formula.”

      http://tinyurl.com/nmch8ag

      Note that the example was for one of the great wells drilled in the core area of the formation. While that well should produce a nice profit even if its ultimate recovery is only 40% of what the misapplied Arp’s model predicts, the profitability of the shale industry depends on the performance of the average shale well. And on that front things are not looking so good. For one, as drillers move away from the core areas well productivity is in decline. For another, the divergence between the EURs and actual recovery rates are catching up as wells get older. As Mark Anthony points out, There are mounting indisputable evidences that critics like Arthur Berman are right. The shale industry has systematically exaggerated EUR projects of shale wells by more than a double. More over, they systematically under-calculated the armortization of the capital expenditures as the wells deplete much faster than they expected.. As I have argued many times before, everything hinges on that amortization rate. If the depreciation schedule, which is determined by looking at the EURs is right the industry should be fine. But if the EURs are higher than the ultimate recovery rates that are suggested by the real world data the industry is in big trouble. Where this will all show up is the balance sheets and the cash flow statements. If the EURs are reasonable companies will get huge amounts of cash within two or three years of the well coming on-line and that cash should be sufficient to financed further expansion. While negative cash flows and debt are not a problem early in the game a truly economic process will produce positive cash flows within a few years and will not have the need to sell off assets to deal with funding gaps.

      And please look at your own statements about how companies book PUD and what that does when they look to obtain further loans. What I see is a giant Ponzi scheme being driven by a few insiders in the industry, Wall Street analysts looking for fees, and regulators who change the rules to allow uneconomic producers to access capital. Those don’t work out very well.

      If you are interested you can find a number of references in the Hughes report below the quotes. Of particular interest may be the few takeaways that I have lifted from the report.

      “As with shale gas, tight oil plays are not ubiquitous. More than 80 percent of tight oil production is from two unique plays: the Bakken and the Eagle Ford. The remaining nineteen plays produced just 19 percent of current tight oil production. There is also considerable variability within these plays, and the highest productivity wells tend to be concentrated within relatively small sweet spots.

      ” Well decline rates are steep – between 81 and 90 percent in the first 24 months. The plays are too young to assess overall well lifetimes but production rates in the Bakken after five years are 33 bbls/d on average and after seven years will likely approach stripper well status (10 bbls/d). Eagle Ford wells could reach stripper well status within four years.”

      (http://www.postcarbon.org/reports/DBD-report-FINAL.pdf)

    • Willis Eschenbach says:
      January 19, 2014 at 8:04 pm

      While we’re waiting for your numbers, here are some more:

      First, dilling a well costs about $8.5 million. Each Bakken well will produce a cumulative 500,000 barrels or so over 10 years — about 450,000 after deducting royalty payments to landowners. That works out to drilling costs of roughly $19 per barrel.Then there’s roughly $5 a bbl in taxes and $3 a bbl for pipelines and infrastructure and a couple bucks for seismic and other overhead, for total costs of about $29 per barrel.

      First, where do you get a credible ultimate recovery rate for EACH BAKKEN WELL of 500,000 over ten years? I do not see any production data that supports that claim. But if you can find a reference please correct me and cite it. Second, you forgot to add the $4.5 billion that was paid for the rights to the leases. A good accountant would include those as part of the cost calculations.

      Note that we are exactly in the SAME PLACE yet again. All of our costs depend on the number of barrels that will be pulled out of the ground. What if we are not looking at a well in the core area but one that is in the average part of the formation? That would give us closer to 125,000 barrels, which just jacked up your drilling cost to $60 a barrel. Add the acquisition costs, overhead, royalty payments, taxes, transportation costs, etc., and you are looking at a cost that is higher than the production price.

      But suppose that you managed to eek out a small profit. Given the fact that your company took a huge bath on shale gas production you have to pay back the loans taken on for shale gas production first. It takes years to repair a balance sheet even if you are prudent and have no need to hype up your shares by taking on more leverage and risk. The trouble is that you don’t have years to fix the balance sheet because the rate of production increase is slowing appreciably in the Bakken. Some time in the next year or two even the optimists will see that the peak is either directly ahead or that it is behind us. At that time the shareholders are wiped out and creditors tighten the screws as the depreciation schedule issue comes back to bite management in its collective arse.

      And while I am at it let me point out a problem with the author of the article that you are citing. A few years ago Mr. Helman slagged Berman and some of the people cited in the NYT story when they blew the whistle on the gas problem. He took exactly the same approach that you did and cited all of the capital spending as proof that shale gas could not be uneconomic. Well, a great deal of water has passed under the bridge and Arthur Berman and the shale skeptics were proven to be correct. The production increases were very real but they were driven by lease commitments, not cash flows or profits. The EURs overstated the real recovery rates by more than 100% and the great success stories turned out to be destroyers of capital. I suspect that this is the reason why Mr. Helman is far more cautious even though he is clearly using industry EURs that depend on hyperbolic decline rates that overestimate the true returns. You might try reading the article that you cited once again and pay more attention this time. It might be appropriate to ask where the numbers that you are citing come from. What real data set shows a hyperbolic decline rate that justifies the assumptions? I can assure you that if such a data set existed it would not be hidden from view and that analysts would not be citing ESTIMATED values produced by models.

      Finally, you seem to think that the companies overbooking of reserves has something to do with whether a well is profitable or not … but a well knows nothing of claims of reserves, or whether they are overbooks.

      Correct. All the well does is produce oil and gas. Which is why you should look at the actual production data rather than estimates coming from models that deviate from reality.

      PS—you do provide more evidence that some companies were gaming the system by overbooking reserves … but since I already agreed with that, so what? Doesn’t affect a well’s profitability by one penny.

      Sure it does. If the average well in a formation produces 150,000 barrels before it hits stripper status but your use a depreciation schedule that assumes 450,000 barrels your costs are understated. That allows you to report a profit. Luscent and Nortel did this in the 1990s when they would depreciated plant and production lines that became obsolete in two years over an assumed useful life of 20 years. Many of those ‘one-time’ write offs happened because those assets had to be devalued. The shale industry has just began doing the same as many of the players have began to write off acquisition costs as acreage that used to be carried at a particular value on the books is now selling for a fraction of that value.

      Look at the article that you cited. We read, “Early this year Hess sold out of its Eagle Ford acreage for $6,000; just 18 months earlier good acreage in the region was going for $24,000. There is tons of acreage on the market right now, enough stuff to keep the industry drilling for hundreds of years. But who’s going to buy it? The problem is that oil and gas prices are simply not high enough to justify the investment; so if that acreage does exchange hands it’s going to do so at prices far below what the industry has gotten used to. Or the acreage may not sell at all.”

      That is exactly my point. What happens when assets on the balance sheet have to be written down?

      Oh, and you’re back on the Chesapeake bandwagon, as though the fate of one carefully selected company means something about the industry. And that’s about as convincing as someone saying “HP lost money on computers, so that means that all computer manufacturers are losing money producing computers and hiding it with accounting games”.

      Who said one ‘carefully selected’ company? Chesapeake is just the leader. It began hyping up shale gas first and got the most attention and the most coverage. It is not the only company that has written off assets or sold pieces of itself to cover the funding gaps. The article that you cited mentions, “$26 billion in asset impairment charges,” for the 50 biggest shale players and companies have already said that the impairment charges will continue. As I said, the empirical evidence is on the side of the skeptics. You might want to look at some of it.

    • One last reply…

      Willis Eschenbach says:
      January 19, 2014 at 8:04 pm

      I’ve provided three independent sources for my numbers, and my calculations use the most conservative of the three. Someday, perhaps you’ll provide some numbers to back up your claims … until then, they’re just hot air.

      Please do not confuse numbers coming from an industry model with actual production data. What you give me are EURs that are provided by analysts who are given the same estimates. That data is clearly not independent. All of the claims depend on an Arp’s formula that a hyperbolic decline and does not have a terminal phase that produces a curve that actually fits the real world data.

      Please see the information on the links that I have provided and look at the real world data yourself.

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