Guest Post by Willis Eschenbach
Dramatis Personae:
The “EIA” is the US Energy Information Agency, the US agency in charge of data about energy production, consumption, and use. It has just released its January 2014 Short Term Energy Report, with current and projected oil production figures.
And “M. King” is Marion King Hubbert, the man who famously predicted in 1956 that US annual oil production would peak in 1970, and after that it would gradually decrease.
——–
So why is the King meeting the EIA? Figure 1 shows why.
Figure 1. US crude oil production. Data from 1965 to 2013, projections for 2014 and 2015. As is customary, “crude oil production” includes what are called “natural gas liquids”. Data from the BP Statistical Review of World Energy and the EIA.
Now me, I see that as a testament to human ingenuity, as fantastic news for the planet, and as another example of the futility of betting against said ingenuity. As my dear dad used to say, “Imagination is free.”
I don’t really have much more to say about this great news, other than I see it as a huge opportunity for the poor. The implications are clear. Cheap energy is the salvation of the poor, and this can only be good news for them … not to mention good news for the rest of us as well.
Best regards,
w.
PS—Folks, don’t bother telling me it is “unconventional oil”. That is a meaningless distinction, invented by supporters of Hubbert’s peak oil theory, to try to salvage Hubberts moribund claims. For example, when fracking was done in vertical wells for fifty years, it was counted as “conventional oil” … but now that the drilling is done horizontally, suddenly fracking produces “unconventional oil”. And given that for many centuries oil was collected from surface seeps, in historical terms all modern oil production is “unconventional”. See my post Conventional Wisdom, Unconventional Oil for a full discussion.
PPS—If you disagree with something that I or someone else said, please QUOTE EXACTLY WHAT THE PERSON SAID in the comment where you discuss your objections. I can’t tell you how many times I’ve been attacked over things that I never said … so quote it if you want to discuss it. I’m going to get more hard-headed on this one, I’m tired of picking spitballs off the wall. I’m happy to defend my words if I know which ones you are talking about … but I can’t defend your interpretation of my words. Quote it or lose it.
No one likes agro talk just ignore anyone who does so the best policy always mate! …don’t start talking agro yourself…just ignore them or you will be like them! Calm and peaceful is what is needed, life is too short for agro stuff! cheers
Steven Kopits made a point that needs to be emphasized a bit more. Oil and gas production from shales and tight sands typically declines from initial rates by about 70% in the first, year, 50% in the next, etc. Production rates are only increasing because of increased drilling. Eventually, we will reach a limit on the rate of drilling that can be sustained. Drilling is a very capital intensive activity and sweet spots to drill become increasingly hard to find. When we reach a limiting rate, production will soon reach a peak that will only last as long as the peak level of drilling can be sustained. It is for this reason that EIA and others project that shale oil production in the U.S. will peak about 2020 and then decline thereafter.
It should not be forgotten that even at peak production, the U.S. will still be importing a large fraction of the oil that we use. If our production rate was larger than that of Russia or Saudi Arabia today, we would still be importing about 8 million barrels per day, counting finished products and crude. Keep that in mind when you hear some idiot say that we will soon become a net oil exporter.
Doug says:
January 12, 2014 at 9:29 pm
Actually, fracking and re-fracking also brings the recovery factor up, producing oil which would have been left behind. I hear that argument over and over, usually on some internet forum. I never hear it from a reservoir engineer. I have an interest in wells in North Dakota which are producing more than they did thirty years ago. Without modern techniques they would have been plugged by now.
There’s also steaming, water pressure plus other techniques.
Many wells long abandoned have had life breathed into them again by alternate extraction methods.
The point is : the cheap oil from those wells has been recovered. The residual oil is now being recovered by more expensive methods – methods that may have been not economically viable a few years ago.
Any new discovery well has a quantity that can be recovered relatively “Cheaply” then it’s the harder methods.
The existing known world reserves consist of product which is
(a) easy and cheap to get
(b) harder to get by using more expensive methods now regarded as economical
(c) some reserve which a re not yet economically viable to extract.
What’s needed in the future is not yet discovered oil – Trillions of barrels of it.
This will be expensive. – all the easy oil has been already discovered.
No use in arguing though. There are lot’s of lies about oil.
JFD says:
tty, I gave you the proper URL. You used a table showing liquefied products from refineries which includes imported crude oil, which is about 40% of the total. Hubbert was talking about crude oil for USA fields not from refineries.
You won’t give up will you? Let me cite from the EIA report I linked to:
“U.S. Liquid Fuels Supply
EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.5 million bbl/d in 2013 to 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015. The highest historical annual average U.S. production level was 9.6 million bbl/d in 1970.
Production from the Bakken formation in North Dakota and Montana averaged 0.88 million bbl/d in 2013, and surpassed 1 million bbl/d in December 2013. Production in the Eagle Ford formation in South Texas surpassed 1 million bbl/d in May 2013, reaching an estimated 1.23 million bbl/d in December 2013.”
The figures I gave was for US <i<domestic crude production plus US domestic production of gas condensate.
There’s none so blind as those who will not see.
“Infinite” in pragmatic terms in this context means 100s of years of reserves at probable use levels. There’s also the very real possibility that oil is abiotic, and will seep up from deeper sources for as long as we care to pump it.
Hubbert’s theory was and is good for analysing the potential rate of flow (production) from a process like emptying a oil drum.
A KNOWN fixed QUANTITY, extracted over time.
Oil production is NOT that process. Hence his abysmal failure.
Hubbert shares much with Malthus, whose own scarcity theory was far to simplified and hence made some fatal assumptions.
Friends:
It is clear that some people do not understand that “reserves” is an economic term. For example, at January 12, 2014 at 11:24 pm Les Francis refers to
If they are “not yet economically viable to extract” then they are NOT “reserves”.
This matter is important.
Resources are the total amount of a material which is known and can be obtained using existing or imagined technology.
Reserves are the total amount of a material which is known and can be obtained economically.
A known source of a material is NOT a reserve (it is a resource) when it has a recovery cost higher than the sales price for such a material available from elsewhere.
Hence, when existing reserves exhaust then parts of the resource become reserves. Indeed, new technology may reduce the cost of obtaining part of the resource so that part becomes reserves.
The total amount of reserves is defined by the balance of supply and demand: it is NOT a function of the total resource.
Both reserves and resources increase when people search for them. And reserves usually INCREASE as reserves are depleted: this is because large amounts of uneconomic resources become reserves as cheaper reserves exhaust (low hanging fruit are picked first).
The amount of reserves of oil have been less than about 40 years of future usage for over a century. And this will remain the case. Oil companies have a planning horizon of about less than about 40 years so they pay for people to find additional reserves if they have less reserves than their future need. But they do not pay people to look for more when they have the reserves which they need.
The entire ‘peak oil’ issue is a misunderstanding of economic terms. It is not relevant to availability of oil.
Richard
@richardscourtney at 4:56 am
A+ Richard.
Reserves are the total amount of a material which is known and can be obtained economically.
To which I want to add:
and for which there are facilities to extract them (Proved Developed Reserves) or a approved plan to extract them (Proved Undeveloped Reserves).
There are known hydrocarbon resources that are economically extractable in NPR-A (West of Prudhoe Bay) and ANWR (East of Prudhoe Bay) But until you get a permit from the US Dept. of Interior and Dept of Energy to extract those resources they are not Reserves on anyone’s books.
Stephen Rasey:
For the record, I write to say I completely agree your post at January 13, 2014 at 9:57 am which adds detail to an earlier post of mine.
Of course, much more additional detail could still be added. But I was trying to explain that failure to understand that reserves is an economic term and not something else.
Thankyou for adding your important clarification.
Richard
Doug said:
“Actually, fracking and re-fracking also brings the recovery factor up, producing oil which would have been left behind. I hear that argument over and over, usually on some internet forum. I never hear it from a reservoir engineer. I have an interest in wells in North Dakota which are producing more than they did thirty years ago. Without modern techniques they would have been plugged by now.”
I don’t see anything from the above which disputes that a significant fraction of the increase in oil production is in fact accelerated existing production, not new production.
This matters because oil isn’t like water – once it is used, it is gone. Oil which might have trickled out for another decade is instead being extracted all at once now.
I’d also note that the ongoing production from older wells isn’t just a function of technology – let’s not forget that oil is near $100/barrel when it was hovering around $20 for decades.
Lastly, the present production is still in the 7 to 7.5M barrels/day. We’re still not even to the 9M barrels/day of just a few decades ago – much less the 19+ million barrels/day of actual consumption. The impact of shale oil has been significant – I’d estimate it be around $50B/year injected into the US economy as opposed to sent abroad – but thus far is only an adjustment to national economics. Not a game changer, in other words.
It seems we have a temporary reprieve from peak oil doom. That’s good.
Unless I’m mistaken, however, King’s point was about energy return on energy invested (EROEI). All minerals, while remaining plentiful, become increasingly harder and more energy intensive to extract. Once it takes the equivalent energy in a barrel’s worth of oil to extract a barrel’s worth of oil, then you are finished. There might still be plenty of oil left in the ground, but if extracting it costs the same energy as the extracted oil will deliver, or more, then there’s no point.
Alternative energy sources are absolutely essential for a secure energy future, but not wind and solar, except in small, local applications. What is desperately needed in the short run is nuclear, followed by every other technology currently known, and those not known.
Unfortunately, we’re not building any nuclear plants these days.
Hey Willis:
What people don’t seem to get is that unconventional reserves are NOT reserves which were considered unrecoverable at some time in the past (although most of them were). An unconventional reserve is one in which the source and reservoir are THE SAME FORMATION. It makes no difference whether that formation is tight, loose, limestone or shale. A conventional formation is one in which the provenance of the hydrocarbon was in some formation at a different location than the reservoir formation, and the hydrocarbon subsequently migrated through various formations and accumulated in the reservoir as the result of one or another form of petroleum traps.
In re: to ‘unconventional’ formations and fracing let’s be even more clear. The VERY FIRST oil well was frac’ed. True, Colonel Drake frac’ed it with dynamite, but it was frac’ed all the same. And that formation was NOT an unconventional formation.
BTW: M. King Hubbert was a brilliant man who conducted pioneering work in many fields of geology as unrelated as groundwater flow and allocthonous transport along tectonic overthrust sheets. That he was wrong on this issue is forgivable to a degree. Heck, even Charles Darwin and Albert Einstein were famously and spectacularly wrong about some things.
And one last thing about petroleum – we will NEVER actually run out. As we ultimately (a long time from now) begin to see a decline in the resource, the price will increase according to the laws of supply and demand, at which point demand will decrease. As that flip flop occurs over a number of years and the dwindling supply really dwindles, the price will become so high that only specialty uses which absolutely can not be replaced by some substitute will use it – and, it being a rare commodity, will have the earnings-based revenue to pay the price. And so on…..
Jbird:
At January 13, 2014 at 1:54 pm you assert
Rubbish!
As Willis, I an others have repeatedly explained there is no reason to think ‘peak oil’ will ever be a problem, and there are good reasons to think it won’t.
Your assertion concerning EROEI is nonsense.
Electricity has a very negative EROEI.
Generating electricity converts energy from one form (e.g. chemical energy stored in fossil fuels) into another form of energy (i.e. electricity). The result is electricity which has less than a third of the energy used to obtain it. The important point is that electricity is a form of energy that people want.
People do not consider the EROEI of the electricity they purchase for their homes or the fuel they purchase for their cars. They only consider whether their need is sufficient for them to pay the purchase price.
Richard
Willis: Wow! This is always bait to bring out the most vociferous, run on sentence writing fear-mongers among us. To them I say Calm Down, go listen to the BBC audio production of “Hitch-hikers Guide to the Galaxy”.
Free-flowing or pump-able oil is in diminishing supply; we geoscientists figured out how to find and extract it way back when (oil seeps and “sheep-herder anticlines” and then reflection and refraction seismic work, augmented by damned good geological/geochemical work paid off in finding most of the obvious targets). Now, all those myriad “wet” but not flowing indications in the zillion drill logs are being re-evaluated as directional-drilling fracking targets – a veritable bonanza of new producible oil that the geologists of the past simply shrugged off (they weren’t producible then, and economic geologists mostly focus on what can be produced economically).
But guess what? Most of those new reserves (and the greatest part of the old school “free flowing or pump-able” oil) won’t yield much more than about 30% of the total hydrocarbon contained. The next stage in the oil game after fracking is to go underground and mine it. There might even be a couple of phases of this, one in which a new kind of drilling and pumping inside the wet formation is involved, and a second in which all the “ore” is removed, brought to a metallurgical plant, and stripped of its hydrocarbon content. End result? Maybe total production that measures in the quadrillions of barrels of oil. And hopefully, when burned, will stave off the next, almost certain, glacial episode (and provide some CO2 for corals to exploit and provide us with beautiful places to go and see).
@Willis Eschenbach 8:15 pm
Oh, really? I’m going to come back to this, but I’m pressed for time at the moment. I’ll just post this exerpt from Forbes. But Why Did Julian Simon Win The Paul Ehrlich Bet?
So it wasn’t about oil. In fact, they were all metal resources.
The bet would not have been won at any time period. It was over a particular decade. The outcome of the bet depended upon the start year, as well as the commodities. Simon would have lost most of the bets since a 1990 start date.
The key question is, would Simon have taken the bet upon reading Hubberts’ prediction of US 48 peak oil prod with a start year of 1970?
Shoot. There should be a close bold after “Paul Ehrlich Bet?”
[Fixed. -w.]
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.
Willis writes:
“Vangel, given the chart in Figure 1 your claim that shale oil production is “not economic”, that the US oil companies are stupidly throwing good money after bad, and that it is all being financed by loans are what I would term “extraordinary claims”. As such, they necessarily require “extraordinary evidence” to establish their veracity.”
The evidence is in the 10-Ks. Shale wells have their highest IP rates in the first few days and decline rapidly afterward. This is not unusual since conventional wells do the same thing. The problem with shale is the extraordinarily high decline rate and the extremely high costs. In the good old days we could spend around $500K in today’s dollars and produce a well that would produce more than 1,000 bpd on day one. The decline rate for that well was small and the well would produce for decades. Today you are looking at a well that costs $5 to $11 million, starts off around 450 bpd and is down to 150 bpd by the end of the first year. It produces for only 5 to 7 years because most of the oil in the rock is trapped inside pores that are not connected to a flow path that can get the oil (or gas) to the well. While you can report a profit by assuming a long life and a high ultimate return you cannot hide the fact that reality indicates a recovery rate that is a fraction of what the accountants and engineers assumed. That shows up as negative cash flows and the need to fill funding gaps by loans, new share issues, and asset sales.
“However, in place of extraordinary evidence to back up your claims, you’ve given us … well, no evidence at all. Zero. Bupkis. Nada.”
That is strange. I claim that if you take any primary shale producer and look at the 10-Ks you will see that the producer has relied on debt and equity sales to finance operations that are not self financing. The poster child for shale development was Chesapeake, which was hyping up the shale gas miracle for years even as a few of the skeptics, including me, were predicting disaster. It looks as if the party is now over for the company as all those attempts to plug the funding gaps failed to solve a problem created by costs that are greater than the market price for the product.
http://online.wsj.com/news/articles/SB10001424052702304753504579282900212162522
The analysts seem not to have noticed because some still have it as a buy or rated a hold. Event though the company is going to have to pay all kinds of penalties and still cannot produce its product at an above market cost the analysts still cannot recommend that investors sell. This is exactly what happened in tech and in real estate. Too bad you have yet to notice.