Higher Global Output Forecast As Peak Oil Debate Continues

By Mike Byfield
Nickle's Daily Oil Bulletin
8 December 2005

The debate over global petroleum potential continues to bubble, with Cambridge Energy Research Associates, Inc. asserting yesterday that daily capacity will rise as high as 108 million bbls by 2015 from 87 million today. Several decades from now, CERA said, production will move into an "undulating plateau" rather than plunge drastically.

Robert Esser, CERA's director of global oil and gas resources, made that forecast to the U.S. Congress, addressing a hearing to examine peak oil theory which is being conducted by the Energy and Air Quality Subcommittee of the House of Representatives. Esser's forecast is based on a new field by field analysis of global reserves. [Esser's full testimony is here.]

Regarding Saudi Arabia's pivotal reserves, Ross Smith Energy Group has assessed Twilight in the Desert: The Coming Saudi Oil Shock and The World Economy, a best-seller by Houston banker Matthew Simmons. The Calgary consulting group concluded that Twilight incorrectly "posits a crisis where none exists" due to the author's misinterpretation of engineering studies.

Simmons, whose book is now being translated into Chinese, Japanese and Korean, is not backing off. Instead, he claimed that Saudi Aramco insiders have privately expressed relief to him in recent weeks that the worrisome possibility of a production collapse in that country has been publicly aired. [view Simmons' presentation of "Twilight in the Desert" to the Hudson Institute here.]

Like Ross Smith, CERA disagreed with Simmons. Esser testified, "While there has been much debate about Saudi Arabia's ability to expand production capacity, we see no comprehensive justification of claims that production is about to `fall off a cliff.' We anticipate an expansion of crude and condensate capacity from 11.1 million bbls per day in 2005 to as much as 13.2 million by 2015."

"We see no evidence to suggest a [global production] peak before 2020," Esser stated, "nor do we see a transparent and technically sound analysis from another source that justifies belief in an imminent peak."

For the period 1995-2003, CERA said world production was replaced by a ratio of 4:3 due to exploration plus upgrades of previous discoveries. That analysis was based on field figures compiled by its parent firm IHS Inc.

CERA pegged global production for that period at 236 billion bbls. On the supply side, exploration success reportedly added 144 billion bbls and field upgrades accounted for 175 billion bbls, for a total of 319 billion bbls.

Esser said that much confusion has been created by the U.S. Securities and Exchange Commission, whose reporting regulations still reflect technology current in 1970. For example, SEC regulations do not permit American producers to include Canadian oilsands properties in their reserve figures.

CERA acknowledged that non-traditional sources will continue their dramatic rise, constituting 35% of global production capacity in 2015 compared to 10% in 1990. Its report indicates that reliance on OPEC sources will increase only slightly by that time.

Included in the expanded supply figure is an increase of heavy oil capacity in Canada and Venezuela to 4.9 million bbls per day by 2015 from 1.8 million this year. NGL capacity is projected to reach 23 million bbls per day from 14 million.

Esser warned that the more serious threats to global supply come from above-ground factors such as warfare, political turmoil, and inadequate development of a skilled workforce and petroleum infrastructure.

In stark contrast to CERA's optimism, Simmons told the DOB that by 2020 global production is likely to be approximately 60 million bbls per day, creating massive strains in a world economy that is currently headed toward daily demand of 120 million bbls.

His firm, Simmons & Company International, has 126 employees in Houston and Aberdeen, billing itself as the largest investment bank dedicated to the oilfield service sector. The banker noted that improvements in oilfield productivity in recent decades have come entirely from service firms.

"Petroleum producers must be optimists by the nature of their business," Simmons commented. "They are masters of expounding the best possible case in the most conservative-sounding vocabulary. In their eyes, I'm just a banker and a rig guy who doesn't know what he's talking about."

Even so, Simmons said, he publicly predicted in 1995 that North Sea oil production would peak between 1998 and 2000. "At that time, a roll call of the world's best producers forecast that the North Sea would peak in 2010 at eight million bbls per day. In reality, the North Sea peaked at almost 6.1 million bbls in 1999."

The banker commented that North Sea output will dip to about 3.5 million bbls during next summer's workover period, and that the summer low has become the annual production average within a year or two in recent times.

In a similar vein, Simmons pointed to Oman's giant Yibal oilfield, which declined from a peak of 250,000 bbls per day in 1997 to less than 40,000 bbls currently. "The field watered out," he recalled. "Yet just months before the production collapse began, Shell's best technicians had made plans to increase Yibal's production by 30%."

The Houston entrepreneur said his critics wrongly state that his book predicts an imminent collapse of Saudi production. "Twilight explains why a Saudi drop could occur unexpectedly, we can't know exactly when but it might be soon, and the decline could be relatively rapid when it hits, like Oman and the North Sea."

Fundamentally, the author said, no one can rely on the Saudi Arabia's production forecasts until the kingdom releases data on a field by field basis, which its government has consistently refused to do.

Simmons is not yet a believer in oilsands, coal liquefaction and most other non-conventional resource plays. "With alternative sources, be careful that you don't put more energy in than you get out," he advised, postulating that Alberta oilsands operators should weigh the use of nuclear power to preserve natural gas.

The banker suggested that higher oil prices will force profound transportation changes. "Long-distance trucking will be drastically curtailed in favor of trains and ships." In his calculation, ocean freighters are 30 times more energy-efficient than trucks, while a single Mississippi tug can move barge-borne tonnage equal to about 350 semi-trailer truckloads.

The banker believes that rising transport costs will mean that most food will be grown much nearer to consumers, that far more goods will be manufactured locally and that a massive work shift will occur from central offices to computer-networked home offices in order to reduce commuting expense.

"Wages for home-based workers will be based on productivity more than time, and as a result we'll see a huge surge in productivity," the Texan financier prophesied.

Jim Jarrell, president of Ross Smith, said his firm's clients are investors who were alarmed by Simmons' intensively publicized forecasts. The Calgary consultancy's reservoir specialists reviewed Twilight's analysis of Saudi output, which was based on about 235 technical papers published by the Society of Petroleum Engineers (SPE).

Ross Smith contradicted Simmons' claim that Saudi Aramco's reporting data is exceptionally skimpy, commenting that the state oil company's "practice of assigning reserves appears to be as conservative as any we have seen among North American companies."

Jarrell said Twilight's interpretation of SPE engineering studies is professionally unorthodox, at times technically uninformed and inaccurate in terms of its conclusions.

For example, Ross Smith pointed to the best-seller's heavy reliance on a 1979 U.S. Senate subcommittee paper which predicted an irreversible decline in the giant Saudi Ghawar field due to water breakthrough and decreasing pressure. In reality, the Calgary consultant said, Ghawar's water cut peaked at 37% in 1999 and no such production decline has occurred.

While Twilight expressed concern that Saudi exploration has yielded few new oilfields for decades, the Ross Smith study countered that little Saudi wildcat drilling has occurred because the existing fields remain so ample and healthy.

http://www.nickles.com/brn.html

CERA's Robert Esser's full testimony to the Energy and Air Quality Subcommittee of the House of Representatives, is here.

Matthew Simmons' presentation of "Twilight in the Desert" to the Hudson Institute is here.